Spousal Attribution - Avoid Income Splitting Problems

Income splitting is a complex area and proper planning with your chartered accountant is essential.

The main purpose of income splitting is to take advantage of the fact that Canada has a graduated income tax system. Whenever you can shift income from a higher bracket family member to a lower bracket family member you have reduced your overall income tax burden and derived a tax savings. Click HERE for a summary of the various tax brackets in Alberta.

There are tax rules to prevent excessive income splitting. Collectively, the rules are generally known as the Attribution Rules. The attribution rules will attribute income from property (but not income from business) back to an individual who may have transferred or loaned the property to split income. For example, transfers or loans of property to a spouse (also common-law spouse) will result in attribution of income and capital gains back to the spouse who transferred the property. A taxpayer transferring or loaning property to his or her spouse is still accountable for any capital gain, or loss, on the sale of the property (including money). Also, transfers or loans of property to a minor who is a non-arms-length person (for example, your child) will also result in attribution of income (but not capital gains). Transfers include gifts or a sale, even if the sale is at Fair Market Value. Gifts are considered dispositions for income tax purposes and therefore any gift may trigger capital gains to the Transferor. However, capital losses on gifts may be denied under the Stop Loss Rules.

Click HERE for a discussion on the specific problem with Spousal Attribution.

There are general exceptions to the attribution rules (which includes transfers to spouses) discussed HERE.

For Spousal Loans and transfers, attribution can be avoided using one of the following techniques:

1. The Transferor elects in his/her income tax return to have the transfer occur at Fair Market Value. This could create taxable income to the Transferor. The Transferee will record their cost base at the Fair Market Value. Please note that this option does not remove the joint and several tax liability problem discussed HERE. Nor does this option result in the Transferor recording a capital loss on the disposition discussed HERE and HERE. In this case the Transferor's loss is denied until final disposition of the property to a non-arm's length party. Additionally, the spouse must either pay the Fair Market Value of the property being transferred (cash or other property) to the Transferor or incur debt at CRA prescribed rates discussed in 2. below to the Transferor in order for this exception of the attribution rules to apply. 

2. In cases of a loan of cash to the spouse, reasonable interest was charged on the loan. The minimum amount of interest that can be charged is the CRA prescribed rates discussed HERE. In this option, the interest (but not necessarily principal) need to be paid by the Transferee within 30 days of the end of that calendar year (i.e. January 30 of the year following the transfer). 

Careful planning with a Chartered Accountant is warranted. Contact Keith Anderson CA at (780) 447-5830 if you need advice. 

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