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Attribution Rules
Finding ways to lower taxes

Income splitting is a strategy for decreasing the tax burden of a family. Here's how it works: Money or property is loaned or transferred to a lower-income family member so that gains are taxed at a lower rate. It can be a great way to minimize taxes, but attribution rules can block many of these opportunities.

The first thing you need to know about attribution rules is that they are very complicated. The rules were designed to prevent attempts to shift income to another person by attributing it back to the person who transferred the money or property.

In other words, if a wife transfers investments to her lower-income husband, any income realized on the investments could be assigned back to the wife. Though the husband receives the income, the wife still pays tax on it at her marginal rate, and the family is no further ahead.

The rules governing attribution

There are a lot of rules in the Income Tax Act pertaining to attribution, and many of them are intended to foil circumvention of the general rules. One of the most misunderstood attribution rules is significant because of its scope. The rule states that trust income is attributed to the person who transfers property to a trust when that person reserves the right to take back the property or retain some control over it. This rule applies to certain specific circumstances, and professional guidance is advised.

However, in spite of the numerous attribution rules, some income-splitting opportunities do exist. For example, a higher income family member can pay all of the family's living expenses, leaving the lower income person with more to invest. Also, the new Canada Child Benefit (CCB), like its predessor, the Canada child tax benefit (CCTB), may be invested in a child's name without any attribution of income back to the parents. 

As in all matters related to tax planning, it's important to understand the rules and how they affect your specific situation.



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