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Attribution Of Income

 

Income splitting is an effective tax planning tool to take advantage of the different marginal personal income tax rates at different income levels. By splitting income amongst individual family members, tax savings results by taking advantage of multiple lower personal tax bracket rates. Click HERE for tax rates at various personal income levels. Income can be any property income such as interest, dividends, and rents. But capital gains and losses are excluded except in cases of spouses.

 

There are tax rules to prevent excess income splitting. Collectively, the rules are generally known as the Attribution Rules. Simply stated, if a taxpayer has at any time transferred or assigned to a non-arm's length person the right to an amount which would otherwise have been included in your income, the amount transferred must be included in the transferor taxpayer's income for the year. 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.

 

The attribution rules will attribute income from property back to an individual who may have transferred or loaned the property to split income. Transfers include gifts and sales (even if at Fair Market Value). 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). 

 

Additionally, any transfer or loan to a non-arm's length person results in joint and several tax liability on the property transferred. An exception exists where the transferee actually pays Fair Market Value for the property transferred (in cash or other property) or is paid for with debt at CRA prescribed interest rates where the interest is paid within 30 days of each calendar year to the Transferor. For partial payments, the joint liability is reduced to the extent of the payment. 

 

See the Tax Planning section HERE for more discussion on attribution and tax planning to avoid attribution problems.

 

Click HERE for discussion on transfers or loans to Spouses.

 

Click HERE for discussion on transfers or loans to Relatives.

 

Click HERE for further discussion on attribution on Investment Income.

 

Click HERE for a discussion on attribution involving corporations.

 

A quick guideline to see if loans or transfers (gifts or sales) of property are subject to attribution is as follows:

 

Rule of Attribution:

Loans

Transfers

Spouse

Yes

Yes

Minor Relatives (Note 1)

Yes

Yes

Adult Relatives (Note 2)

Yes

No

Non-relations

No

No

 

 

The Attribution Rules are far more complex than just discussed and caution should be exercised when doing any tax planning in this area. There are however, several opportunities to do some tax planning to obtain some benefits of income splitting. All of the following tax planning opportunities should be discussed with your chartered accountant before implementation.

 

One income splitting strategy is to transfer income otherwise taxable in the hands of a high-marginal tax-rate earner, to a taxpayer liable at a lower marginal tax-rate. But, CRA’s Attribution Rules will attempt to deter higher income earning taxpayers from lending sums of money to spouses. Click HERE for tax planning to avoid attribution problems.

 

There are some more tax planning opportunities to avoid these problems. Contact Keith Anderson CA, for more information.

 

 

Note 1

Minor relatives in this case are one’s children, stepchildren, grandchildren, great grandchildren, brother or sister (including in-law "siblings"), nieces and nephews.

 

Note 2

Adult relatives in this case include parents, brother, sisters, children, grandparents and grandchildren but exclude nieces and nephews.

 

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Keith Anderson, BComm, CA-IT Copyright September 9, 1999 Last Modified :10/17/13 12:22 PM