Q: I purchased a Guaranteed Investment Certificate (GIC) in the name of my eight-year old son. He will receive all the interest and report this on his 2007 tax return. In 2007, my wife and I purchased a real estate property investment that we collect rent. I expect positive cash flows from the property. Because I earn twice as much as my wife, can I report the entire amount on her 2007 return?
A: As the holiday season quickly fades from memory, so does the spirit of giving. With tax season a few weeks away, our thoughts look for ways to save and not give more than is due to the Canada Revenue Agency (CRA) or other taxing authorities. Although, recent announcements offered individuals few tax savings such as; a one percent reduction to individual’s lowest tax rate; An increase to the basic personal exemption; Pension income splitting; a one percent GST reduction on goods; exemption to capital gains tax for eligible charitable donations. Unfortunately, some of these tax savings were eradicated by municipalities such as; New land transfer taxes; New auto fees; increase to community activities; community centre closings and reduction in services etc. The right hand “giveth” while the left “taketh” away. The rhetoric sounds familiar.
Income splitting is one method of reducing income taxes, provided it is done correctly. Attribution rules prevent certain transactions by spouses or parents to simply income split. Attribution rules require that investment income attribute back to the person that made the investment. Simply put, an investment in your son’s name will not prevent CRA from taxing the interest to you. The GIC interest is attributed back and should be reported by you. Similarly, rental real estate income must be reported by you and your wife in proportion to your investment. Therefore, if the down-payments were fifty percent each, rental income must be subsequently reported equally between both.
Generally, to minimize taxation, household expenses should be paid by the higher income earner and investments should be done by the lower income earner. The lower income earner gets to report investment income and pay at the lower tax rate without concerns of a reassessment by CRA.
April 30th, income tax deadline is not that far away. Good tax planning should attempt to keep as much money for as long as possible in your hands.
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