Splitting Investment Income

Income splitting makes sense when investment income can be taxed at the lower tax rate of a spouse or child. However, income attribution rules prevent income splitting with most family members. Depending on the relationship, there are varying tax consequences to making interest-free, or below-prescribed-rate loans and gifts to a spouse or to children.

• If you give or loan an asset to your spouse, you pay tax on any income or capital gains it generates.
• If you give or loan an asset to your child under 18, generally you pay tax on the income it generates but not on the capital gains.
• If you loan an asset to your child 18 or older and the main reason for the loan is to shift income, you pay tax on any income it generates but not on the capital gains.
• If you give an asset to your child 18 or over, your child pays the tax on any income or capital gains generated after the transfer.
• Any gains inherent in the asset you have given would have to be recognized by you at the time of transfer except in the case of a transfer to a spouse.

Because of these rules, certain strategies make sense from a tax point of view. For instance, it may be appropriate to give or loan capital gains generating assets to your children.

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