Income Splitting for Self-Employed Business Owners

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Evaluation

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.


Additional Knowledge Expected of CFP Professionals
  • Explain methods for how self-employed business owners may split income, such as:
    • Paying reasonable wages to spouse, common-law partner, adult or minor child for services performed in the operation of a business owned by the taxpayer
    • Paying reasonable director’s fee to spouse, common-law partner, or adult child for services performed in the operation of a corporation owned by the taxpayer
    • Paying reasonable guarantee fee to spouse, common-law partner or adult child for services performed in the operation of a business owned by the taxpayer
    • Creating a business with shared ownership between a taxpayer and spouse
    • Adding adult family members as shareholders to a corporation to receive dividends 
    • Adding adult family members as shareholders to a corporation owned by the taxpayer to maximize the capital gains deduction
    • Establishing a family trust 
  • Identify that Tax on Split Income (TOSI) rules impact methods of income splitting1
  • Explain how Tax on Split Income (TOSI) rules impact methods of income splitting 
  • Explain terms used in the application of TOSI rules, including:
    • Related business
    • Specified individual
    • Excluded amount
    • Excluded shares
    • Excluded business
    • Reasonable return 
  • Explain the income tax treatment for each income splitting method.  
  • Determine how each of these factors may impact the suitability of self-employed business owners splitting income:
    • Marginal tax rate differential between the taxpayer and self-employed business owner.
      • In current year 
      • In future years when withdrawals are made, if applicable
    • Impact on net taxes paid by the taxpayer and self-employed business owner.
    • Income attribution rules
    • Potential impact on government benefits 
    • Potential impact on government-sponsored savings plans, including grants and bonds
    • Potential impact on ownership of assets
    • Potential impact on creditor protection of assets
    • Potential for CRA to deem method unreasonable and used only for tax avoidance under General Anti-Avoidance Rules (GAAR)
    • Cost and fees associated with implementing the strategy to split income
  • Evaluate how each of the factors may impact the suitability of self-employed business owners splitting income.

REFERENCES

1 https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/income-sprinkling/guidance-split-income-rules-adults.html