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Income Splitting New Era
2-06-2019
Families that function as a single economic unit can benefit from tax savings if income can be shifted to lower-income family members. This is referred to as income splitting. The Income Tax Act contains several measures related to income splitting. Some are permissive; most are restrictive.
New “tax on split income” (TOSI) rules are effective commencing 2018. Implications of the new TOSI rules are far-reaching and punitive. Consequently, many former structures and plans will no longer achieve the intended results and may trigger adverse income tax consequences. Further, some situations may be caught when income splitting was not an objective.
Attribution Rules
Various provisions contained in Income Tax Act (ITA) are intended to eliminate a tax benefit from income splitting with transfers or loans of property. Generally, if these rules apply, income and losses generated from transferred/loaned property are included in the income of the transferor/lender.
Capital Gain or Loss
Where an individual has lent or transferred property, either directly or indirectly, to or for the benefit of a person who is the individual’s spouse or who has since become the individual’s spouse, any taxable capital gains or allowable capital losses realized on the disposition of the property or substituted property are attributed to the individual.
There is no equivalent provisions to the ITA that applies to attribute capital gains or losses realized on a disposition of property that has been transferred or loaned to a minor child. On the disposition of such property , any capital gains or losses realized will be taxed in the hands of the minor and not in the hands of the individual who transferred or loaned the property.
With respect to income on income, in such situations where income (nor capital gains) earned on transferred property is used to acquire another property, which produces a capital gain or loss when disposed of, such gain or loss will not be subject to attribution. However, if capital gains earned on the transferred are used to acquire additional property, subsequent gains or losses will be subject to attribution.
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