We all want to pay less tax. If you are in a high tax bracket and your spouse or child is in a lower one, you might think: “Why don’t I just give them some of my investments so the profits are taxed at their lower rate?”
This strategy is called income splitting. While it sounds simple, the Canada Revenue Agency (CRA) has strict guidelines called income attribution rules to stop taxpayers from doing this [CRA Income Attribution].
Here is a plain-language guide to how these rules work and how you can legally split income.
The Golden Rule: The Money Stays Yours (For Taxes)
The basic rule is simple: If you give or loan money or assets to a close family member, the CRA pretends the transfer never happened. Any profits made from that money are attributed back to you and taxed at your higher rate.
However, the rules change depending on who gets the money and how the profit is made.
How the Rules Apply to Your Family
The CRA looks at two types of investment profits: property income (interest, dividends, rental income) and capital gains (profit made from selling an asset like stocks or property).
Here is how different family members are treated:
- Your Spouse
This is the strictest category. If you give or loan money to your spouse, all profits—both regular investment income and capital gains from selling the asset—are taxed back to you.
- Minor Children (Under 18)
This category includes your kids, grandkids, nieces, and nephews.
- Investment income (like dividends or interest) is taxed back to you.
- Capital gains (profits from selling a stock) are taxed to the child.
- Note: All attribution stops the year the child turns 18.
- Other Relatives (Adult Children, Siblings, In-Laws)
If you give a low-interest or interest-free loan to an adult relative to help them invest, the regular investment income is taxed to you. Any capital gains from selling the investment belong to them.
The Legal Loopholes: How to Split Income Safely
You can bypass these strict rules if you structure the transfer properly. The two most common exceptions are:
- The Fair Market Value Sale: You don’t give the asset away; you sell it to your family member for what it is actually worth. You must report and pay tax on any capital gains triggered by the sale immediately.
- The Prescribed Rate Loan: You loan the money officially [CRA Prescribed Rate Loans]. You must charge the official interest rate set by the CRA at the time of the loan [CRA Prescribed Rate Loans]. The family member must physically pay you this interest by January 30th every year, and you must declare that interest on your taxes.
The Bottom Line
Income splitting can save your family thousands of dollars, but the CRA watches these transactions closely. Doing it incorrectly can result in a surprise tax bill.