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. | Income Splitting
Income splitting involves the transfer of assets such as cash, securities or rental property, from someone in a high tax bracket to someone in a lower bracket, so that the income earned on those assets is taxed a lower rate. Income splitting used to be quite popular, but there are now many restrictions preventing its widespread use in tax planning. In general, these restrictions deem any income earned on the transferred assets to be attributed to (in other words, included in the income of) the person trying to split his or her income.
There are, however, some exceptions to the general rule. For example, capital gains realized on assets transferred to a minor and income on child tax benefits (provided they are kept separate from the parents' assets) will not be attributed back to the transferor. Inter vivos trusts are a common way of taking advantage of the few income splitting opportunities that still exist.
One income splitting opportunity that is available involves life insurance. Using life insurance, you can not only effectively split your income with your child or grandchild, but also provide a source of income to meet their educational or other funding needs. Under this concept, you purchase a permanent life insurance policy on your child or grandchild. The cash value of the policy accumulates tax-free. After the child or grandchild reaches the age of 18 or older, you then transfer the policy to him or her on a tax-free basis. The cash value in the policy, if withdrawn, would then be taxed as income to the child or grandchild (most likely at a lower personal tax rate) and will not be attributed back to you. Your child or grandchild could then, for example, use the funds to pay for university or as a down payment for a home.
For more information on income splitting opportunities, contact us for a Manulife Financial representative in your area.
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