Page 26 - INSIGHT MAGAZINE_Oct2025

ADVERTORIAL
DOLLARS & SENSE

Family Income Splitting

There are two reasons why income splitting is so important in A common investment income-splitting strategy with a low-income
Canada to reduce the family’s tax burden: spouse is the prescribed rate loan strategy. A high-income spouse
loans capital to a low-income spouse for investment at the CRA-
1. Canada’s tax system is based on graduated tax rates prescribed interest. All future investment income will be taxed to the
2. Everyone in Canada has a tax-free basic exemption amount low-income spouse. However, the high-income spouse must declare
the interest on the loan.
A graduated tax rate system basically means that there is a higher
marginal tax rate on taxable income as income increases. Furthermore, Gifting funds to minor children and earning capital gains on the
each Canadian resident can earn approximately $16,000 funds is still an effective income-splitting strategy that
(varies by province) of taxable income tax-free due to the many high-income parents with low-income children
basic personal tax credit which increases annually. As a should consider. A child with no other income can earn
result of these two factors, if income can be shifted from a approximately $15,000 - $22,000 of capital gains every
high-income parent to a low-income spouse or child, then year tax-free (varies by province) due to their basic
the family can realize tax savings up to approximately personal exemption. The capital gain income can then be
$16,000+ per year (varies by province). If there are used for various expenses for the child’s benefit such as
four members in a family, then family tax savings of up private school, camps and lessons. If you are concerned
to aprox $64,000 per year can be realized. Due to this about gifting monies to your child, then consider loaning
amount of potential annual tax savings, families earning the funds to a family trust on an interest-free basis. This
a high income should strongly consider family income- will accomplish the same capital gain income-splitting
splitting strategies. Erica Tennenbaum, CFP, FCSI benefit as an outright gift if the trust and loan are set up
Senior Portfolio Manager properly, and you can call back the loan principal any
To prevent abusive income-splitting arrangements, the & Wealth Advisor time.
Income Tax Act can apply income attribution rules. These
rules will attribute taxable income back to the high-income family The above article highlights just a few ideas for income splitting
member that actually supplied the capital for investment, should this and not all of which will apply to your financial circumstances. The
process not be done correctly, thus achieving no tax savings. information in this article is not intended to provide tax advice. To
ensure that your own circumstance have been properly considered
For business owners, you can split income by paying reasonable and that action is taken based on the latest information available, as
salaries to lower-income family members based on the services they well as in line with CRA rules, you should obtain professional advice
perform. However, if a low-income spouse or child is not actually from a qualified tax advisor before acting on any of the strategies.
working in the family business or their services are minimal, then
paying them a salary or bonus that is in excess of the services rendered If you would like to receive the full article entitled Income
simply for income-splitting purposes is not permitted. Splitting Checklist, please feel free to send me an email at
erica.tennenbaum@rbc.com
If you own a Canadian corporation, there are a number of creative
strategies to split income with family members. One such strategy, is
an Estate Freeze in order to restructure ownership of your corporation
and transfer future growth to other family members. The Estate freeze
limits the value of your assets and transfers the tax liability back to
future generation and upon sale the opportunity may be there to
multiply your Lifetime Capital Gains exemption.

RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank
of Canada. â / ™ Trademark(s) of Royal Bank of Canada. Used under licence. © RBC Dominion Securities Inc. 2025. All rights reserved.

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