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Transfers Or Loans To Relatives
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
If a taxpayer transferred (the transferor) or assigned to a person who is non-arm's length to the taxpayer, the right to an amount which would otherwise have been included in the income of the taxpayer, the amount transferred must be included in the income of the transferor-taxpayer. The only exception to this rule arises where the income is from property and the property itself was also transferred (or substituted property). 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.
Even in cases where property is transferred, the income or loss from the property is attributed back to the transferor if the property is transferred directly or indirectly through a trust or otherwise to:
Capital gains and losses are not subject to attribution except in the case of spouses.
Loans
In cases of loans to a spouse or minor non-arm's length person such as a brother, sister, child, niece or nephew, income earned on the loan or property substituted for it is attributed back to the transferor. An exception exists for loans made at prescribed rates and interest is paid within 30 days of the calendar year (i.e. January 30 of the year following the loan). Again, there is no attribution on capital gains or losses except in the case of spouses.
There are additional rules with apply to non-arm's length loans not discussed above. Any loan made by a taxpayer to a non-arm's length person and one of the main reasons for the loan is to reduce or avoid income tax to the taxpayer, the income is attributed back to the taxpayer. In this case, non-arm's length persons include parents, brother, sisters, children, grandparents and grandchildren but exclude nieces and nephews. An exception exists for loans made at CRA prescribed interest rates and interest is paid within 30 days of the calendar year (i.e. January 30 of the year following the loan). Again, there is no attribution on capital gains or losses except in the case of spouses.
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 to the Transferor 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.
Click HERE for further discussion on attribution on Investment Income.
Click HERE for a discussion on attribution involving corporations.
Click HERE for a discussion on spousal attribution.
There are planning points to avoid general income attribution discussed HERE.
There are also specific exemptions to the spousal income attribution discussed HERE.
Income Splitting techniques are a complicated area and a Chartered Accountant should be consulted. Contact Keith Anderson CA at (780) 447-5830 if you need advice.
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