Income splitting is lucrative and legal

The idea behind tax planning is to pay the least amount of tax legally possible as a family unit. A legitimate part of tax planning involves income splitting amongst family members, but you’ll have to be careful about the tax rules.

The general rule is that earnings generated from principal that was transferred from a higher income earner to a lower earning spouse or minor child, will be taxed back to the higher earner. This means that if you give your spouse $5,000 to invest in a Canada Savings Bond, you’ll have to report the resulting interest.

This concept is called "attribution". Attribution rules apply to interest and dividend income resulting from funds transferred to lower income earners in the family. However, capital gains generated from investments transferred or acquired for minor children are generally taxed in the hands of the child.

The attribution rules can be avoided if you can establish income earned in the lower earner’s "own right". Therefore have teenagers reinvest their part-time earnings, or consider paying your spouse to work in your business. The result could be higher after tax returns on your efforts.