Income splitting is an effective tax planning tool to take advantage of the different marginal personal income tax rates at different income levels. By splitting income amongst individual family members, tax savings results by taking advantage of multiple lower personal tax bracket rates. Click HERE for tax rates at various personal income levels.
There are tax rules to prevent excess income splitting. General attribution rules are discussed HERE and some tax planning to avoid attribution is discussed HERE. In those discussions, it was assumed that income splitting involved individuals directly. However, there are also tax rules to prevent the same sort of income splitting indirectly, through the use of corporations and are found in Section 74.4 of the Income Tax Act.
Section 74.4 extends the general attribution rules to certain situations where an individual has transferred or loaned property to a corporation, other than a Small Business Corporation, either directly or indirectly by means of a Trust or any other means and one of the main purposes of the transfer or loan may reasonably be considered to reduce the income of the individual who loaned or transferred the property and to benefit directly or indirectly a person who is a Designated Person who is a Specified Shareholder of the corporation. A Designated Person is the individual's spouse, a person who is non-arm's length who is under 18 years of age, and a nephew or niece who is under 18 years of age. A Specified Shareholder is defined as a person who owns directly or indirectly 10% or more of the issued shares of any class of the corporation at any time during the year.
If Section 74.4 applies, then the individual receives a taxable interest benefit each year. The calculation of the benefit is very complex as follows:
On July 1, 1988 an individual transfers property having a fair market value of $120,000 to a corporation that is not a small business corporation in exchange for preferred shares of the corporation. The sole holder of common shares of the corporation is the individual's spouse. On December 1, 1988 the corporation pays a dividend of $3000 to the individual and the prescribed rate of interest is 10%.
Assuming that the transfer was made for the purpose of reducing
There are tax planning opportunities to mitigate or avoid these attribution calculations HERE. Careful tax planning with a Chartered Professional Accountant is necessary. Contact Keith Anderson, BCom, CPA, CA-IT, CITP at (780) 447-5830 if you need advice.