Income splitting rules: How to make the most of your taxes

2.5 min read

The ins and outs of Canada’s tax on split income rules are complex. Depending on the structure of your farm and the age of family members working with you, exemption rules may be available for your farm’s use.

Here are some key points to understanding Canada’s tax on split income rules:

What’s tax on split income?

Incoming splitting can be used by high-income individuals, called “source individuals” by CRA, to divert their income to specified family members with lower personal tax rates, explains Christopher Doody, a CRA spokesperson.

He says tax on split income generally only applies to split income earned from streams such as:

Dividends and interest derived from private businesses, as is often the case with farms
Taxable capital gains from the disposition of shares (excluding shares of a public corporation)
Sometimes rental income and income derived through a partnership or trust

Find additional information on TOSI rules on the CRA website.

Age matters

Family members at least 18 years old and who work on the farm may be exempt from tax on split income.

For farmers who usually work with family, especially children, the age of an individual is notably relevant.

Kurt Oelschlagel, a tax partner with BDO Canada, says family members at least 18 years old and engaged on a regular, continuous and substantial basis in the business – that means working an average of 20 hours or more every week during the part of the year in which the business operates – can be exempt from tax on split income.

Document for proof

Marcello Mastroianni, a small business tax expert with the Ontario accounting firm G. L. Fraser Inc., says farmers should consider how they can prove an individual meets exemption requirements.

“I don’t know of any family-run business that uses a punch clock for owners and close family members,” he says. “Arguably, there have been many years in the farm industry where family members have been underpaid and worked more than 20 hours per week. Certainly, the income reported on a tax return will not support the hours worked.”

Ask the pros

Both Oelschlagel and Mastroianni encourage farm business owners concerned about tax on split income to actively keep logs, photos and other records of individuals’ involvement.

Overall, tax on split income regulations is complicated, and farmers should seek professional tax advice on the topic. Reviewing tax on split income implications is particularly critical for farms with more complex business structures, including holding corporations or family trusts.

4 take-aways to make the most of tax on income splitting rules

Income splitting allows you to lower your personal income by splitting your income with another individual in your family.
If you’re at least 18 and work an average of 20 hours or more a week for at least part of the year, you may be exempt from tax on split income.
Consider how your can prove your children are working on the farm, and for how long. For example, record books, time clocks and photographs.
Tax on split income regulations is complicated – seek professional tax advice.

Article by: Matt McIntosh

Accounting & taxes