Despite a labyrinth of complex tax rules and blind alleys, with careful planning and professional guidance from Logan Katz LLP Chartered Accountants, a family can effectively manage its financial affairs to preserve its wealth and save tax.

If your taxable income exceeds $104,000, the income in excess of that amount is generally taxed at the highest rate of personal income tax. To the extent this income can be shifted to a spouse, child or related adult who is in a lower income tax bracket, the amount of income tax paid on it will be lower. If the spouse, child or other adult has taxable income under $32,000, the income is taxed in the lowest bracket and the result is greater tax savings. Here are a few areas that your family should consider as a means of reducing personal income taxes paid.

Provide an Interest-free Loan to a Spouse or Child to Use for Investment Purposes

Of course the attribution rules will cause the interest and/or dividend income earned by the spouse or child to be taxed in your hands. However, if the spouse or child then invests this income, any income earned on it is included in the income of the spouse or child.

Amounts loaned to related persons who are not your spouse should be invested in investments that produce capital gains. The capital gains arising on these investments will not be subject to attribution.

Make Interest-bearing Loans to Family Members

Consider loaning funds to a spouse, child or related family member on an interest-bearing basis. The interest rate must be the lower of Revenue Canada's prescribed interest rate (currently 6%) and normal commercial rates. Of course, the interest paid to you on this loan must be included in your income. The other family member, who is presumably in a lower tax bracket, will be taxed on the amount they earn from the investments but can deduct the interest paid on the loan for investment purposes. This strategy is beneficial where the return on the investments exceeds the interest paid on the loan.

Gift Funds to Adult Members of the Family

If you are supporting your adult children at school or if your parents require financial assistance, consider gifting assets to them that they can invest to earn their own income. The investment income will be taxed in their hands, not yours. In that many assets may have a capital gain element if "gifted" and subsequently sold, cash is the best form of asset to gift.

You should carefully consider whether this transfer of assets to other family members has a significant impact on your retirement savings. If gifting to a parent, this may not be a concern if you ensure that in the event of his or her death, the asset is willed back to you even though probate fees may be payable.

Review How Living Expenses are Shared

In most relationships, household expenses are split 50/50. However from a tax planning point of view, it is better to have the higher income spouse pay the majority of the expenses while the lower income spouse invests his or her income.

Assist with an Adult Child's Purchase of a Principal Residence

If a child is living away from home or plans to attend university in another city, consider lending the child funds to purchase a principal residence. The loan eliminates or reduces the income tax paid on investment earnings and assuming that the principal residence rises in value, provides a tax-free return on the investment to the child.

The parent may wish to secure the loan with a mortgage on the property, particularly if the child is married and the marriage later breaks down.

Other opportunities to split income are:

(i) Invest any Child Tax Benefit Received in the Child's Name

(ii) Contribute to a Spousal Registered Retirement Savings Plan (RRSP)

(iii) Contribute to a Registered Education Savings Plan (RESP)

A RESP allows the deferral of taxes on income earned on investment that you have saved in a plan for your child's post-secondary education. Unlike RRSP contributions, RESP contributions are not deductible from taxable income. However, like the RRSP, the investment earnings within the RESP are sheltered and not taxed until the beneficiary/child withdraws it.

In addition, the Canadian Education Savings Grant ("CESG") can help you build the RESP more quickly. For more details, please contact us.

(iv) Create a Family Trust

When properly created and administered, a family trust can help you achieve many objectives, including saving tax, avoiding capital gains tax or probate fees, holding assets for minors, protecting assets and organizing your financial affairs more effectively.

Trusts are a complex area of tax planning. Revenue Canada is keenly aware of the tax planning benefits of family trusts and has developed rules as to how these trusts can be used. This is an area where advice from Logan Katz LLP is essential, particularly as regards to the attribution rules and the certainty of the trust.

(v) Provide for a Testamentary Trust in Your Will

Another type of trust, the testamentary trust, is created by virtue of the deceased's will and so comes into existence when the individual dies. A testamentary trust avoids the estate being left directly to the spouse and other family members, a situation that could result in a high tax burden to some or all of the beneficiaries.

If properly executed and managed, this situation can reduce the overall amount of income taxes paid. Again, advice from Logan Katz LLP is essential.

The above provides general information only. It should not be regarded or relied upon as accounting or taxation advice or opinions. Logan Katz LLP Chartered Accountants would be pleased to provide more information or specific advice on matters of interest to you.

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