Menu
2 more years and Nadz (my daughter) will be stepping in her university years. Not sure if we are already mentally and financially ready to let her go on her own. Not only that, but we are also thinking of ways on how we can provide her money to spend on Tuition fees and other living expenses without being us taxed for deemed interest income earned.
Today, I will share with you on how you can reduce your family’s tax bill by doing the income splitting strategies.
Background: Attribution rules on loan to adult family members
Any loans interest-free being transferred to adult family members (if the main reason for the transfer is to invest to reduce family tax) may subject the transferor to deemed interest income earned for the money transferred. It means that if the transferor (Mom/Dad) personal tax rate is on the highest bracket (Ontario 53.3%), any deemed interest income for the money transferred will be taxed using this rate. Therefore, there is no income tax splitting in this scenario.
Now, how are we going to transfer money to our kids without having to pay a higher tax?
“👍When your children turn 17- In the year your children turn 17, give them funds they can invest”
Nadz turns 17 next year, so we are planning to transfer or gift her money to invest in a one-year or longer-term deposit or certificate. When she turns 18, let’s say it’s a 1-year GIC, any interest income earned for the funds invested will now be taxed using her own tax bracket. Since she will not have enough income as she is just working as our part-time bookkeeper, her Interest income earned out of that investment will be taxed on a lower tax bracket of (ON 2019- 20.05%) as opposed to higher tax bracket of (ON 2019-53.3%). Makes sense?
“👍Lend your children money in advance to pay for their tuition fee and other living expenses – let your children invest their own earnings”
Okay, Nadz, is currently working on our firm as our part-time bookkeeper during school days and more hours during summer break.
We are planning to lend her money interest-free in advance which we think is enough to pay for her tuition fee and living expenses for a year. For example, let us say her tuition fee and other personal expenses for a year is $20k+. She also earns close to that amount in a year, she can advance this money from us so that any employment funds she will receive during the year can be invested to earn income from GIC or other certificates.
Interest income out of that investment will be taxed using her own tax bracket (lower bracket), therefore achieving our goal to reduce family’s tax bill through income splitting.
You can repeat the same process every year until your children finish their University years. Just make sure to let them know to pay you back once they already have a stable job.😂
Disclosure- Proper professional advice should be taken to implement these strategies as the individual taxpayer may have different personal and tax situations.
Wanted to know more tax planning strategies for you and your family? Let’s talk!
Enjoy the rest of your Day!
Nadz pic for attention!
