Assess income splitting, registered plans, family relationships, attribution, and planning alternatives.
Individual tax planning is not simply choosing the lowest tax result. A supportable recommendation must fit the taxpayer’s income sources, family relationships, registered plan room, cash-flow needs, attribution risk, and compliance obligations.
Income splitting and registered plans are often tested together because both involve moving income, timing, or savings capacity across taxpayers or years. Some strategies are expressly permitted, such as eligible pension income splitting when the conditions are met. Others are restricted by attribution rules, tax on split income, reasonableness requirements, or documentation problems.
| Planning issue | What to analyse | Evidence to inspect |
|---|---|---|
| Pension splitting | Eligibility, joint election, amount, withholding allocation, and effect on credits. | Pension slips, spouse or common-law partner facts, Form T1032, age and residency facts. |
| Private corporation income splitting | Whether the amount is split income and whether an exclusion applies. | Related business facts, dividends, interest, capital gains, age, labour contribution, share ownership. |
| Registered plans | Whether the plan creates deduction, tax-free growth, deferred tax, grants, or future inclusion. | RRSP, TFSA, RESP, RDSP, FHSA, room, beneficiary, contribution and withdrawal facts. |
| Attribution risk | Whether income remains taxable to the transferor because of family transfer or loan rules. | Relationship, transfer terms, interest rate, repayment, documentation, purpose. |
| Deferral versus permanent saving | Whether the plan shifts tax to another year or permanently changes the tax burden. | Marginal rates now and later, withdrawal timing, credit effects, benefit clawbacks. |
Income splitting is not one rule. It is a group of planning ideas, some of which are permitted and some of which are restricted.
| Strategy type | Strong exam treatment |
|---|---|
| Eligible pension income splitting. | Check eligibility, joint election, maximum allocation, impact on both spouses or common-law partners, and filing support. |
| Salary to family member. | Assess whether work was actually performed and whether compensation is reasonable. |
| Dividends or trust income to related family members. | Consider tax on split income and related-business exclusions. |
| Property transfer or loan to spouse or minor child. | Consider attribution, prescribed-rate loan support, and documentation. |
| Registered plan contribution. | Determine whether the plan creates deduction, deferral, tax-free growth, grant support, or future inclusion. |
The exam trap is treating every family shift as effective tax planning. A response should explain why a strategy is permitted, restricted, risky, or incomplete based on the facts.
CRA guidance allows spouses or common-law partners to jointly elect to split eligible pension income when the conditions are met. The election is made on Form T1032. The transferred amount is reported by the receiving spouse or common-law partner, and related tax withheld may also need to be allocated.
Analyse pension splitting in both directions:
Do not recommend pension splitting solely because one person has a lower rate. The net benefit can change when credits and income-tested benefits are included.
Tax on split income can apply to certain income received by minors and to certain amounts received by adults from related businesses. The rule is designed to restrict income sprinkling arrangements that shift private-business income to family members who have not made a sufficient contribution or do not meet an exclusion.
In an exam case, look for red flags:
The answer should not say “TOSI applies” automatically. Identify the related business, recipient, type of income, age, relationship, contribution facts, and possible exclusions. If the facts are incomplete, request the information needed.
Registered plans are planning tools, but they do not all work the same way.
| Plan | Tax planning idea | Main caution |
|---|---|---|
| RRSP | Deduction now and deferred tax on withdrawal. | Contribution room, marginal rate at deduction and withdrawal, spousal RRSP attribution period. |
| TFSA | No deduction, but qualifying income and withdrawals are generally tax-free. | Contribution room and over-contribution risk. |
| RESP | Education savings with grant support and future student taxation considerations. | Beneficiary, grant rules, withdrawal purpose, and unused-plan consequences. |
| RDSP | Long-term savings for a beneficiary eligible for the disability tax credit, with grant and bond features. | Eligibility, contribution limits, assistance holdback and withdrawal rules. |
| FHSA | Deduction and tax-free qualifying withdrawal for first-home purposes. | Eligibility, room, qualifying withdrawal rules, and interaction with other home-buyer planning. |
The correct recommendation depends on the taxpayer’s objective. A young taxpayer with no current taxable income may not benefit immediately from the same RRSP deduction strategy that helps a high-rate taxpayer. A family supporting a disabled beneficiary may value RDSP grant and bond structure more than current tax deduction planning.
Attribution rules can cause income from transferred or loaned property to be taxed back to the transferor. This matters when family members try to shift investment income or business returns without commercial substance.
A defensible planning answer should address:
Documentation is not a formality. For family transactions, missing loan agreements, interest records, valuation support, employment records, or trust documents can change the risk level.
Planning recommendations should classify the tax benefit:
| Tax effect | Meaning |
|---|---|
| Deduction | Reduces income or taxable income now. |
| Deferral | Moves taxation to a later period. |
| Credit | Reduces tax payable rather than income. |
| Exemption or tax-free growth | Reduces or eliminates tax on qualifying income or withdrawal. |
| Income shift | Moves income to another taxpayer, subject to eligibility and anti-avoidance rules. |
| Cash-flow relief | Changes timing of payment, instalment, or withholding without necessarily reducing total tax. |
This language prevents overclaiming. An RRSP contribution usually creates deferral, not a permanent tax saving by itself. A TFSA does not create a deduction. Pension splitting may reduce family tax, but it may also change credits and benefits.
Use this order for income splitting and registered plan cases:
| Pitfall | Better approach |
|---|---|
| Treating all income splitting as automatically acceptable. | Distinguish permitted elections from arrangements restricted by attribution, TOSI, or reasonableness rules. |
| Ignoring both spouses or family members after a shift. | Analyse the effect on each taxpayer’s net income, credits, benefits, and tax payable. |
| Calling every registered plan contribution a tax saving. | Identify whether the plan gives a deduction, deferral, tax-free growth, grant support, or later inclusion. |
| Recommending family compensation without work evidence. | Tie salary or fees to actual work, reasonableness, records, and payment support. |
| Forgetting documentation. | Require forms, slips, contribution room, election forms, loan records, and trust documents. |