Financial Planning Body of Knowledge
The Financial Planning Body of Knowledge (FP-BoK) describes knowledge expected of CFP® professionals
and FPSC Level 1® Certificants in Financial Planning.
Income Splitting for Investors
KNOWLEDGE EXPECTED OF: CFP® Professionals Only
- Define prescribed interest rate.
- Explain how the prescribed interest rate must be used when engaging in income splitting opportunities that require it.
- Explain methods for how investors may split income, such as:
- Investing income in lower income spouse or common-law partner’s name
- Transferring capital losses to a spouse or common-law partner
- Loaning† funds to spouse or common-law partner for investment or business purposes
- Loaning† funds to a trust for the benefit of spouse or common-law partner††
- Gifting or loaning† property to adult child
- Gifting or loaning property to adult child for the purchase of a principal residence
- Loaning† funds to a trust for the benefit of adult child††
- Gifting capital gains producing property to minor child
- Loaning† money to a family trust for benefit of minor child††
- Retaining assets in estate for up to 36 months before distributing to higher income beneficiaries†††
- Explain the estimated income tax impact for each income splitting method.
- Estimate the income tax impact for each income splitting method.
- Explain how each of the factors may impact the suitability of investors splitting income, such as:
- Marginal tax rate differential between the taxpayer and investor
- In current year
- In future years when withdrawals are made, if applicable
- Impact on net taxes paid by the taxpayer and investor
- 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 investors splitting income.
† The loan must be made at the prescribed rate, at a rate that would be agreed upon between arm's length parties under similar circumstances, and interest paid no later than 30 days after the end of each calendar year in which it becomes payable.
†† As settler of the trust, taxpayer must ensure that they are not a beneficiary of the trust or risk the trust being classed as revocable and the income being attributed back to the taxpayer.
††† Assuming that the adult child is in a higher income tax bracket than the trust.
Glossary of Verbs (mouse over to see definition)
Read more about the Taxonomy used in the FP-BoK
To state exactly the meaning of
To be aware of / to recognize and correctly name / to locate an appropriate resource
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
To note the similarities and differences between two or more things
To determine an approximate value for
To find the value using mathematics
To change from one form or purpose to another
To reach a conclusion or make a judgement through careful study
To give the meaning of / to construe or understand / to translate orally