One of the keys to tax planning in Canada is the concept of income splitting. This is the process of maximizing income taxed at lower rates and minimizing income taxed at higher rates.
While the federal government has already eliminated some forms of income splitting, and is currently exploring actions to further limit this, there are still many legitimate ways to shift income from one tax rate to another.
However be careful! If you don’t understand the complex rules around what is and isn’t allowed when it comes to income splitting, be prepared for a costly audit and tax battle. It is important to carefully map out your income splitting strategy with your chartered professional accountant well in advance of tax season to make sure you are following the tax code properly.
Here are some income splitting strategies for you to consider:
Family Income Splitting
This involves transferring income between family members, especially to those in the lower tax brackets. This can be achieved using RRSPs, loans, dividends, and salaries.
Personal Income Splitting
Income can be transferred from one year to the next by using RRSPs, reserves, losses, and by timing discretionary expenses.
Corporate Income Splitting
Since a corporation is often taxed at a lower rate than you would get personally, it can be advantageous to defer income in a corporation and save tax by smoothing out your personal income year-over-year.
Income splitting is a very complex subject with many rules that must be followed. Contact us today to discuss how you may be able to incorporate forms of income splitting into your tax planning strategies.