| ||||||||||||
 | ||||||||||||
| ||||||||||||
| ||||||||||||
 |  |
|
| ||||||||||||||||||||||||||||
|
Transfers Or Loans To Spouses
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.
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.
Income attribution problems can occur in cases where taxpayers transfer or loan property to or for the benefit of a Spouse in order to try to accomplish income splitting. A spouse includes common-law partners. The general income attribution rules are discussed HERE. The rules include both direct and indirect (through a trust, etc.) loans and transfers and to persons who subsequently become your spouse or common-law partner. Additionally, the attribution applies to not only the property loaned or transferred but to substituted property (example, cash transferred and the spouse uses the cash to buy investments). 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.
Transfers or loans to spouses are a little different than for other non-arm's length transfers or loans. The transfer or loan is a disposition for income tax purposes, but spousal transactions are treated for income tax purposes as a non-taxable transaction. This means that the transferor records the disposition at his/her adjusted cost base which results in no tax being incurred. Similarly the spouse records the purchase at the transferor's adjusted cost base. Any income the property transferred (or the substituted property) earns is attributed back to the original transferor. This means that interest, dividends, rents, etc. will be taxed in the original transferors' hands. The attribution of income also includes subsequent capital gains or losses on an eventual disposition to an arm's length party.
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. For partial payments, the joint liability is reduced to the extent of the payment.
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.
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.
|
|
