As a health care professional, your personal income may be high enough to be taxed at Ontario’s highest personal marginal tax rates. For example, in 2022, the rates applicable to income above $221,708 are:
- 53.53 percent on salary and interest;
- 47.74 percent on non-eligible dividends, and
- 39.34 percent on eligible dividends.
It is reasonable for you to ask whether there are legitimate ways to transfer income to your spouse or children, whose tax rates may be significantly lower than yours so that the transferred income is taxed at their lower rate.
Challenges
In the past, if your governing professional college allowed shares to be issued to other shareholders, it was possible to transfer income by allocating dividends from your company to other family members. However, the Federal Ministry of Finance has enacted strict dividend splitting rules that eliminate the ability to allocate dividends, except in very narrow circumstances.
Currently, Canada does allow pension splitting with spouses, which can be useful for sharing this income in future. The opportunity to split pension income may be many years into the future, and the tax savings could vary significantly, depending on the mix of your retirement income.
Some may suggest that transferring your income to your spouse and minor children is to gift them investments. Again, there are attribution rules that cause most income transferred to your spouse and minor children to be added back to your income.
Good News
That said, there are some specific arrangements, referred to as “income splitting”, which are still allowed. Three of these strategies are described below:
Prescribed Rate Loans To Spouse:
Under this arrangement, you lend your spouse a fixed sum of money. Your spouse can then invest the borrowed funds.
Your spouse must pay you interest on the loan. The interest rate is permanently set at an amount equal to the lesser of a commercial lending rate and Canada Revenue Agency’s (CRA’s) prescribed rate of interest at the date the loan is made. Given that CRA’s prescribed rate is currently very low if your spouse’s investments earn more than the CRA’s prescribed rate, the spousal loan strategy is advantageous.
The rules for this arrangement are straightforward, there should be a written promissory note to show a bonafide loan arrangement was entered into and the interest must be paid to you within 30 days of the calendar year-end. If payment by this January 30 deadline is missed, the income from the investments will be added to your income for the remaining period of the loan.
You must include the interest in your taxable income every year and your spouse can deduct it from their taxable income.
Contributions To a Spousal RRSP:
You can contribute to a spousal RRSP to the extent of your spouse’s own RRSP room and claim the deduction in computing your taxable income. While this spousal RRSP contribution reduces the room available for contributions to your own RRSP, it is worthwhile if your spouse will be in a lower tax bracket when he or she begins making withdrawals from the RRSP.
Note that if the spousal RRSP funds are withdrawn in the year of the contribution or either of the two following years, the amounts will be added to your income and taxed in your hands. The early withdrawal effectively eliminates the income splitting benefit and as a result, this should be considered a longer-term planning strategy.
Pay A Reasonable Salary for Work Performed
You can pay your spouse or child a “reasonable” amount as a salary for administrative or other work they performed for your company. In general, “reasonable” means the same amount that would be paid to a non-family member for the same work.
Need help with your tax planning? The experienced team of professionals at Ernst and Company is available for personalized assistance. Contact us today.
