On October 30, 2014, the federal Government announced a new federal tax credit that will allow a higher-income spouse to transfer up to $50,0000 of taxable income to a spouse in a lower tax bracket. However, the tax relief provided by this transfer is capped at $2,000.
At Davidzon Burshtein LLP, we help set up income splitting arrangements which help our clients to share income with lower income family members, resulting in overall tax savings to the family. Fortunately, the value of our services is not capped at $2,000. The best time to do this is at the start of a new business by issuing preference shares to a lower income spouse. Income splitting can also be achieved through a family trust as part of an estate planning arrangement or by simply employing the lower income spouse, as long as the income they receive is reasonable in light of the services provided.
What is the benefit of traditional income splitting arrangements? To simplify things, let’s take an Ontario business owner who earns a salary of $200,000, but would like to split $50,000 with a spouse that is currently not earning income. In the absence of an income-splitting arrangement, the business owner would pay $72,541 in combined federal and provincial taxes. As a result of an income splitting arrangement where the business owner earns $150,000 and the spouse earns $50,000, the business owner would pay $48,556 in taxes and their spouse would pay $8,695 in taxes for a total of $57,251 and savings of $15,290. Similarly, splitting $50,000 from a total of $150,000 of income would result in savings of $13,421.
The government’s new income splitting arrangement is fine for splitting low levels of income, but is no substitute for traditional income splitting arrangements.