If someone tries to pass income to spouse, common law partner, children or any other relative he / she will still be taxed on income and not the person who gets a transfer of such income. However, there are ways to side step attribution rules and some taxes.
Setting up a Loan Payment:
You can set up a loan payment to a family member. You need to have a promissory note signed by borrower. This note should clearly specify date of loan, amount of loan, interest charged, method of calculating interest and when will interest be paid.
Interest must be paid by January 30 of each year. You can charge interest rate prescribed in the tax law or current commercial rate. Choose the rate whichever is lower.
Your family member can deduct the interest he pays to you as an expense. Interest earned by you becomes income to you. Your family member whom you loan can earn income by investing the borrowed funds. Income earned by your family member will not be attributable to you.
Giving money to your children for investment:
You can give money to your children for investing. Any capital gains on invested money will be taxed in the hands of your children. You can also transfer your investments in the hands of your children. When you transfer any assets in the hands of your children you are deemed to have sold those assets at fair market value. If these assets have increased in value you are liable to pay capital gain tax. However, once the assets are transferred to your kids any gains thereafter will be taxed in the hands of your kids.
If you have a child who his working and earns his own money, you can pay him an allowance so the child can meet his expenses from the allowance and it can free up his earned money for investment. Child can also contribute to his / her RRSP.
Pay your child for babysitting:
You can pay your adult child for babysitting your children who are 16 years old or younger in a tax year. You may be able to deduct these payments if making these payments allowed you to earn income. Your child will report these payments on his / her income tax and may face a little or no tax on these payments. This earned income will entitle your child to RRSPcontribution room.
Inheritance Money:
If a lower income spouse has some inheritance money try to invest it solely in the name of lower income spouse. This way investment income will be taxed in the hands of lower income spouse. Similarly if money has been left to both of you, try to invest lower income half separately.
Child Tax Benefit:
Many Canadian families receive Canada Child Tax Benefit on monthly basis. You can invest these payments in the name of child and let it grow.
Pension Income:
You can transfer 50 percent of your eligible pension income to your spouse. This way your spouse wil report this income and you will get a deduction.
You run a business:
If you run a business, you can hire a family member to do a job and pay him / her reasonable salary. Family member will report this income on T4 an business will report it as an expense.
If you own a corporation with family members as shareholders, corporation can pay dividends to family members who are shareholders in the corporation.
Disclaimer:
This information is for educational purposes only. It does not constitute any legal advice or opinion. Please do not use any of its contents without seeking a professional advice.
References:
http://www.taxtips.ca