Income Splitting... allowed or nay?

Generally, Canada's tax laws are set up to prevent income splitting. The Canada Revenue Agency (CRA) frowns upon income splitting because it has the potential to dramatically reduce revenues from income tax. As such, all Canadians must file independant income tax returns; a non-earning spouse can be named a dependant, but not assigned any income:

"...most would-be attempts at income splitting are doomed to failure — short-circuited by the Income Tax Act and its attribution rules. Basically, those rules state that most attempts to transfer income from a higher income spouse to a spouse with little or no income will not be allowed."

Source: http://www.cbc.ca/news/background/personalfinance/income-splitting.html

However, there are a multitude of techniques used by Canadian couples to mitigate their tax liabilty by pooling some of their resources. Spousal RRSPs, loans for family businesses, fair market value loans to a child or spouse, and student loans made from a family business are some of the methods that are used.

All of the above methods of income can be legally applied but the CRA has the recourse, on a notwithstanding basis, of reversing any income splitting maneuvers made for the purpose of splitting income:

1. The general anti-avoidance rule (GAAR) under section 274 of the Excise Tax Act is intended to prevent persons from benefitting from transactions undertaken primarily for the purpose of avoiding, reducing or deferring the payment of tax, or increasing a refund or rebate or other amount, where no other anti-avoidance provision is applicable. Such a transaction is considered to be "an avoidance transaction" and includes an arrangement or an event. The GAAR applies to all persons, e.g., registrants, persons claiming rebates, etc.

Source: http://www.cra-arc.gc.ca/E/pub/gm/g500-6-9/g500-6-9-e.html

Opinions as to whether Canadians are better off with more laws favourable to income splitting depends entirely upon whom you ask. This blogger has faith that political expedience, as ever, will be the arbiter of the winds of change in this matter...

Altered Mind