Tax Lesson 17 YOURLOGO Start Lecture Note: This screen has no script. Static page. YOURLOGO Start Lecture

Income Splitting and Attribution Income splitting, if possible, can produce significant tax benefits due to marginal tax rates and personal tax credits. Attribution rules are designed to restrict income splitting. Income spitting can be accomplished with adult family members other than a spouse (such as children aged 18 and over) and with capital gains (other than with a spouse). Attribution can also be avoided for loans that charge interest equal to the prescribed interest rate at the time the loan was made (as long as the interest is paid) Pension income splitting- Limited income splitting involving pension income is allowed for married people earning eligible pension income. Up to half of a married taxpayer’s eligible pension income can be allocated to his/her spouse (and hence be subject to tax in the spouse’s hands). For individuals 65 or older, most forms of pension income qualify as eligible pension income. For individuals under 65, only income from a work registered pension plan is eligible pension income. (Lump sum withdrawals from an RRSP are not considered eligible pension income) Attribution will apply when: Assets are transferred (typically by gift) or lent to a spouse. Any income and/or capital gains earned on the assets transferred or lent will be included in the transferor’s income

Income Splitting and Attribution (cont) Assets are transferred (typically by gift) or lent to a related minor or a minor niece or nephew. Any income earned on the assets transferred or lent will be included in the transferor’s income. Attribution stops in the year that the minor turns 18. Unlike with spouses, there is no attribution of capital gains A minor child receives dividends from a private company (i.e., the kiddie tax). If the kiddie tax applies, the minor child reports the income (there is no attribution) but the minor is subject to tax at the top marginal tax rate The kiddie tax also applies to partnership and trust income flowed through to a minor child relating to a business carried on (or a rental property owned) by a related person The kiddie tax applies when a minor has a capital gain on the disposition of shares to a non-arm’s length person if any dividends on those shares would have been subject to the kiddie tax (if dividends were paid)