Tax on Split Income
While previously tax on split income only applied to individuals who were under the age of 18, starting in 2018, all Canadian taxpayers will be subject to this tax on certain types of income received during the year.
Starting 2018, you’ll need to complete the T1206: Tax on split income form if you:
- Were a Canadian resident at the end of 2018 (or were a Canadian resident immediately before your death), have split income in the tax year, and that income is not an excluded amount
- claimed a reserve on line C of your 2017 Form T1206
If you were under 18 years of age at the end 2018, at least one of your parents must have also been a resident of Canada at any time in the year.
Split income is treated differently and is subject to a special tax of 33%. However, it also qualifies for a deduction. Based on the information you enter on the T1206 page in H&R Block’s 2018 tax software, the software will automatically calculate your deduction amount.
Note: Certain federal, provincial, and territorial amounts are calculated using your income. If you had split income during the year, in order to calculate these amounts correctly, the deduction amount you’re claiming for split income has to be added back to your income, which might result in lower credit or deduction amounts. Some of the affected federal, provincial, and territorial amounts include the spouse or common-law partner amount, working income tax benefit (WITB), amount for an eligible dependant, Canada caregiver amounts, low-income tax reduction, and the sales tax credit. For a full list of affected credits and deductions
What is Splitting Income?
Split income is a strategy used by high-income owners of private corporations in which they share their income with family members who fall in lower income tax rate brackets.
Generally speaking, split income includes dividends or interest (not salary) paid by a private corporation directly or indirectly (through a trust other than a mutual fund trust) to an individual from a related business, and certain capital gains unless it is an excluded amount (see section below):
- Taxable amount of dividends (eligible and other than eligible) from ownership of shares of a corporation (other than from shares of a class listed on a prescribed stock exchange and those of a mutual fund corporation) that you received directly through a partnership or a trust (other than a mutual fund trust)
- Shareholder benefits (other than from ownership of shares of a class listed on a prescribed stock exchange)
- Income you received from a partnership or trust that was from providing property or services to, or in support of, a business operated by:
- a person related to you at any time in 2018
- a corporation of which one of your family members was a specified shareholder at any time in 2018 or
- a professional corporation of which one of your family members was a shareholder at any time in 2018
- Income related to a debt obligation (such as interest) that you received from a debtor corporation (other than a mutual fund corporation or one with shares listed on a designated stock exchange), partnership or trust (other than a mutual fund trust), if other amounts such as dividends you received from the debtor were subject to tax on split income. Do not include amounts from the following debt obligations:
- fully exempt interest on certain debts, including debts guaranteed by governments
- publicly-listed or traded debt
- a deposit standing to your credit at a bank or credit union
- Income you received from a business or rental property of a partnership or trust, if a person who is related to you at any time in the year:
- actively participated on a regular basis in the activity of the partnership or trust of earning that income or
- has an interest in the partnership directly or indirectly through another partnership
- Taxable capital gain or a profit you had from the disposition of a property, or income you received from a trust that is from a taxable capital gain or a profit from the disposition of property, if:
- the amount is not otherwise included in the definition of split income
- the income from the property would also be split income if you received it
What are excluded amounts?
The following are excluded amounts and aren’t included in your split income:
- Income from a property that was transferred to you because of a separation agreement or judgment due to a breakdown in your marriage or common-law partnership.
- Taxable capital gains that were from a disposition of qualified fishing or farming property, or qualified small business corporation shares, or taxable gains for such property that was allocated to you by a trust. This doesn’t apply to capital gains that are deemed taxable dividends.
- At the end of the year, if you were:
- 18 years of age or older – the amount your received from an excluded business (amounts that are from a related business where you were engaged on a regular basis in 2018 or any of the previous five tax years.
- Between 18 and 24 years of age – the amount you received that is your safe harbor capital return for the year or an amount that’s a reasonable return with respect to your arm’s length capital contributions.
- Under the age of 25 – income or taxable capital gains that were from the disposition of a property which you inherited from:
- your parent
- someone else provided you were a full-time student at post-secondary institution or you were eligible for the disability tax credit
- 25 years of age or older – income or taxable gains that were from the disposition of excluded shares or an amount that represents a reasonable return from a related business.
- Income or taxable gains from the disposition of a property that was an excluded amount because it was used in calculating the income:
- of your spouse or common-law partner who was at least 65 years of age at the end of the year or
- on the final return of your spouse or common-law partner who died in the year their final return