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INCOME SPLITTING     Income splitting refers to the means currently available in this country, for a husband and wife to split income between them, and pay less taxes.  I was at a tax seminar back in the fall when I heard a curious comment made by a colleague of mine,  he said "the government has squashed all the income splitting opportunities that used to exist". Upon hearing this it became obvious that this colleague didn't have a clue. True the Income tax act makes it difficult to split income with a spouse. The income attribution rules of the Canadian tax act say: "any income, (interest, dividends, & capital gains) earned off money that was gifted to the lower income spouse from the higher income spouse, "ATTRIBUTES" back to the higher income spouse", thus killing any benefit.  However, there are several ways to get around this; See following example:  SCENARIO - MR. & MRS. H.  Fred & Judy are husband and wife. Fred pays tax at the highest marginal rate in N.S. of 48.25%  Judy has no income, & thus is in the lowest tax bracket.  Fred has $200,000 saved.  Fred loans $200,000 to Judy at the current CRA prescribed Min. tax rate of 4%.  Judy invests this money in an investment that yields 10% annually, (ie. mutual funds, bank stocks, etc.).  RESULTS  Fred:  Interest income received from Judy, ($200,000 x 4%)  $8,000  Tax @ 48.25%       $3,860  Judy:  Investment Income ($200,000 x 10%)    $20,000  Interest expense paid to Fred, (tax deductible)   ($8,000)  Total Income          $12,000  Less: basic personal tax credit       ($9,600)  Taxable income            $2,400 Tax @  23.79%       $571 Total taxes paid by Fred & Judy      $4,431  IF Fred invested the money directly:  Investment income ($200,000 x 10%)    $ 20,000  Tax paid by Fred @ 48.25%          9,650          =============  Total tax savings if Judy invests: $5,219 EACH YEAR!  This savings is reduced slightly because Fred can no longer claim Judy as a spousal tax credit.  The tax savings in the above example are greater if amount loaned is greater or return on investment is higher. For CRA to OK this, the interest MUST actually be paid by Judy to Fred, within 30 days of the end of year, (i.e. by Jan. 30th of the following year).  ALSO:  Second generation income, (income on income) is NOT attributable. Therefore any income Fred makes on his investments, that he's already paid tax on, can then be put into an investment in Judy's name and then she claims any further income on that  money, and it won't attribute back to Fred.    back to Money Matters index