Q: Every year, we pay several thousand dollars in taxes on our investments. We own stocks and investment trusts. In order to lower my income taxes, can I transfer the investments to my 14-year-old daughter? A colleague said I must be creative.
A: Income splitting with family members is excellent for reducing income taxes. There are many opportunities available to the average taxpayer to reduce their over-all family tax liabilities. Family income splitting maybe as simple as contributing to a spousal RRSP to more complex corporate and trust tax planning.
Although you may legally transfer the investment ownership to your daughter it will trigger “attribution rules” — these apply whenever property is gifted or loaned for no interest whatsoever in order to circumvent greater taxes by another individual. The income from the investment will be attributed back to you and therefore you will have to pay the taxes. However, capital gains on the appreciated investment will be taxed in the hands of the child.
The Attribution rules apply in the following circumstances:
- Spouse: “Individual A” loans or gifts of property to spouse. The income and capital gains from the property is attributed back to “A.” Therefore, “A” will pay the income taxes on both the income and capital gains. No family income tax savings.
- Minor child: “A” gifts property to minor child (under 18 years old). Once again, the income from the property is attributed back to “A” but capital gains are taxed in the hands of the child. Taxes are saved on the capital gains but not the yearly income.
- Adult child or relative: “A” loans property to an adult child or relative. Income is attributed back to “A” while capital gains are taxed in the hands of a relative. No savings on annual income but will save taxes on capital gains.
Here are some average family income-splitting tips:
- Contribute to a spousal Registered Retirement Savings Plan (RRSP).
- Higher income spouse pays all household expenses and lower income spouse saves.
- Contribute to Registered Education Savings Plan (RESP) for your children.
- Gift property to children over 18 years old.
- Split Canada Pension Benefits between spouses.
- Spouse and child should draw salaries from business.
- If invested jointly, lower income spouse should report all dividends.
- Set up a Trust if the need arises.
Creativity is appreciated if it creates wealth by saving income taxes. Proper tax planning can avoid many costly pitfalls.
Henry Choo Chong, CGA provides accounting and tax services to individuals and businesses in the GTA.
He can be reached at: 416-590-1728, ext. 304. Any questions to Money matters should be e-mailed to firstname.lastname@example.org.