HERE ARE YOUR REMAINING INCOME-SPLITTING OPTIONS

OTax Expert n Monday, Jan. 1, the ability of small business owners to sprinkle income among family members was greatly curtailed. Draft legislation introduced last month proposes to extend the current “kiddie tax” anti-income sprinkling rules to a spouse or partner as well as to adult children who are not “actively engaged on a regular, continuous and substantial basis in the activities of the business.”

While there are some limited exceptions to the new rule (e.g. a spouse of a business owner over age 65 or related adults of non-professional corporations who meet certain share-ownership criteria), for the most part, income splitting via a private corporation is dead.

That being said, with top marginal tax rates for highincome earners over 50 per cent in more than half the provinces in 2018, there are still a bunch of perfectly legal income-splitting strategies you may want to consider for this tax year.

But before we launch into what you can still do in 2018 to split income, here’s a quick refresher on income splitting.

Income splitting can be defined as the transferring of income from a high-income family member to a lower-income family member to reduce the overall tax burden of the family. Since our tax system has graduated tax brackets, by having the income taxed in the lower-income earner’s hands, the overall tax bill of the family can be reduced.

Of course the Income Tax Act has a series of longstanding anti-avoidance rules, known as the attribution rules, that generally prevent us from income splitting by attributing the income back to the splitter. But, there are a few notable exceptions.

Seniors can still split eligible pension income with a spouse or partner. Any pension income that qualifies for the federal pension income credit also qualifies to be split. Specifically, this would include annuity-type payments from an employersponsored registered pension plan, regardless of age, and also includes Registered Retirement Income Fund (RRIF) or Life Income Fund withdrawals, but only upon reaching age 65.

Another opportunity for income splitting in retirement is to contribute to a spousal RRSP. This is particularly beneficial if you think that, upon retirement, you will have a higher income or have accumulated more retirement assets than your spouse. By contributing to a spousal RRSP, you can accomplish post-retirement income splitting, since withdrawn funds are taxed in one spouse’s (the annuitant’s) hands instead of the other’s (the contributor’s). If one spouse is in a lower tax bracket than the other in the year of withdrawal, there may be an absolute and permanent tax savings.

Note that with a spousal RRSP, you can effectively have all of your RRSP/RRIF withdrawals taxed in your spouse’s or partner’s name, whereas with pension-income splitting, you are limited to 50 per cent of RRIF withdrawals.