Question

Tax Planning Strategies-Income Splitting

Splitting of income for tax planning purposes is permitted in certain circumstances.

REQUIRED:

1. Explain why income splitting results in an overall decrease in taxes payable for the family when one spouse makes significantly more income than the other.
2. Lisa is a single parent with one child over the age of 18 and two children under 10 years old. List and describe two (2) income splitting strategies that would be permitted for Lisa to use for tax purposes.
3. From a tax perspective, explain the difference between income earned from the sale of your shares and business income?
4. List and describe three (3) factors used by CRA to determine if income earned by the investor is considered capital gains or business income.

Answer 1

1).When your marginal tax rate differs significantly from those of your family members, it’s worth considering
some income splitting strategies. Retirees may be able to use pension income splitting to reduce their overall
tax burden, and may want to convert some RRSP(registerd retirement service plan) to RRIF(registerd retirement income fund) to take advantage of this opportunity. Spousal
RRSPs can also be an effective method of income splitting in retirement.
When the higher-income spouse holds or is expected to accumulate significant non-registered investments,
consider having the higher-income earner pay all the household expenses or make a prescribed rate loan to
family members, possibly with a family trust.
And finally, when you own a business, consider employing family members or asking your tax and legal
advisors if it may be beneficial to include family members as shareholders of your corporation. The result could
be thousands of dollars of annual tax savings.

2).

You can lend money to your under 10 year old or a minor child for making investments and you charge them interest as Government’s prescribed rate. Your child or spouse can write off interest as an expense and you will have to report interest as an income. This technique can save significant taxes. However, if interest is not paid to you, investment income will be attributed to you.
You and your family should be able to accept the risk involved in such an investment. Gains in this case are taxed to minor children.
If you invest child tax benefit in children’s names, it will save you lots of tax.
If you pay a reasonable salary to your family member, you can deduct it as a business expense which will reduce your business liability.

3).a)The distinction between them is business income gets included in income at 100% whereasin come from sle of share are only included in income at 50%.

b)In case of business ,deduction can be claimed . In case of capital gain on shares only cost and expenses incurred to earn the income can be claimed

4).Usually, you have a capital gain or loss when you sell or are considered to have sold capital property. The following are examples of cases where you are considered to have sold capital property:

• You exchange one property for another.
• You give property (other than cash) as a gift.
• Shares or other securities in your name are converted.
• You settle or cancel a debt owed to you.
• You transfer certain property to a trust.
• Your property is expropriated.
• Your property is stolen.
• Your property is destroyed.
• An option that you hold to buy or sell property expires.
• A corporation redeems or cancels shares or other securities that you hold.

Business income

  

A business is an activity that you intend to carry on for profit and there is evidence to support that intention.

A business includes:

• A profession
• A trade
• A manufacturer
• And undertaking of any kind
• An adventure or concern in the nature of trade.

Business income includes income from any activity you do for profit. For example, the income from a service business is business income. Include all your income when you calculate it for tax purposes. If you do not report all your income, you may have to pay a penalty of 10% of the amount you did not report after your first omission.