Tax Savings by Income Splitting

Canadians Paid over $188 Billion dollars in personal income taxes in 2011. Income splitting is a great way to reduce a families overall tax bill and leave more money for investment purposes or living expenses.

Someone with a taxable income of $100,000 a year, like Homer as you will read below, pays $7,000 to $10,000 more in personal income tax than two individuals who earn $50,000 each.

The Canadian Revenue Agency have had policies in place for years to dismember any attempts to shift ones income to someone else. Income earned by that one person is generally claimed by that person. But, there are exceptions to those rules and taking advantage of them can result in thousands of dollars in tax savings.

Basically, you have to Loan the money instead of Give the money. And the perfect way to do this is by Income Splitting.

Income Splitting:
The strategy of shifting income from the higher-income earner to a lower-income earner, whether it be a spouse or child, in order to reduce the overall taxes paid by the family.

How it works:
The higher-income earning spouse lends a sum of money to the lower-income spouse or child under a written loan agreement. Under the agreement the lower-income earner agrees to pay interest at the current prescribed rate of one percent to the higher-income earner in the family to make this strategy as tax effective as possible.

Example:
Homer and Marge's tax rates are at 45% and 20% respectively. If homer loaned Marge $100,000 at a prescribed rate of 1% to invest, and Marge earned 5% Return On Investment (ROI) or $5000 on the $100,000, Marge would be left with $4000 of taxable income after deducting 1% ($1000) paid to homer.
Taxes Payable by Marge are subject to $800 ($4000 investment taxed at 20%), Homer would pay $450 ($1000 investment gain taxed at 45%). Totaling $1250 of tax paid.