Income Splitting Strategies: The Plan Fails on Execution

Prescribed rate loan interest paid after January 30 turns on attribution for the year, and a capital dividend paid out by share redemption becomes substituted property that attributes back. Work through the attribution rules, section 74.4 imputation on a freeze, the TOSI excluded shares and excluded business exceptions, and pension and spousal RRSP splitting.

Michael Cadesky FCPA, FCA, FTIHK, CTA, TEP (Emeritus)

Hugh Woolley CPA, CA, TEP

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2.0h Verifiable CPD

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$150 CAD

Effective Income Splitting Strategies: Attribution Rules, Prescribed Rate Loans, TOSI Exceptions, and Pension Splitting

Interest on the prescribed rate loan is not paid by January 30 and the attribution rules apply to the arrangement. A capital dividend is routed out by share redemption instead of paid on the shares, becomes substituted property, and the reinvested income attributes back. Income splitting fails on execution, and the failure surfaces years after the structure was signed.

An income splitting plan has to clear every gate at once: sections 74.1 and 74.2, the reversionary trust rule in subsection 75(2), the low-interest loan rule that applies at any age, section 74.4 imputation on a freeze, and TOSI. Any one of them applying is enough to negate the plan. And the split income becomes the recipient's money — routing it back to the person who funded it invites the whole arrangement to be reversed.

check_circle The TOSI excluded shares exception. The 10% votes and value test, the age 25 requirement, the 10% non-service income and related business income tests measured on the prior year, the professional corporation disqualification, and why the exception is unavailable where the shares are held through a trust.
check_circle Prescribed rate loans and the low-interest loan rule in subsection 56(4.1). The rate tested at the time the loan is made, interest paid within 30 days of year end, no age limit on the rule, and the amount of capital the technique requires before it produces anything.
check_circle Section 74.4 imputation on freeze structures. Prescribed rate per quarter on the value of the preferred shares, the designated person definition, the small business corporation quarter exception, and why a dividend paid by redeeming the preferred shares does not reduce the imputation.
check_circle Subsection 73(1) and electing out of the spousal rollover. The fair market value asset swap between spouses that moves an investment portfolio to the lower income spouse with no attribution and no interest expense.
check_circle Pension income splitting under section 60.03, spousal RRSPs and spousal RRIFs. The joint election and the 50% limit, what qualifies before and after age 65, the contributions in the year and two preceding years that attribute back, and the minimum amount that does not.
check_circle Alternative minimum tax inside the trust. Interest expense allowed at 50% for AMT, no AMT exemption available to the trust, and the effect on a prescribed rate loan structure that is otherwise correct.

What You'll Learn

Twelve topics, in the order the seminar builds them. Where the benefit comes from, then the attribution, imputation and TOSI rules that stand in the way, then the planning divided by income type: portfolio income, private company income, and pension and registered plan income.

expand_more Where the Benefit Comes From: Bracket Spread, Multiplying the Capital Gains Exemption, and the AMT Exemption

Sizing the prize before spending anything on structure, and the one condition attached to it.

The rate differential Income moved from a high rate taxpayer to a low rate taxpayer, with the benefit at its largest in the lowest brackets rather than at the top.
Why modest amounts are worth structuring for The spread between the lowest and the top bracket being far wider than the spread between the upper brackets.
Multiplying the capital gains exemption A one-time absolute saving at the $1,250,000 limit, not dependent on the recipient having no other income.
The AMT angle Each individual having their own AMT exemption, so spreading income can keep a family below it.
The OAS clawback The threshold and the 15% reduction rate, and why effective income splitting generally targets income below the clawback range anyway.
The spousal credit Lost when the spouse claims their own personal credit, a cost that does not arise when splitting with other family members.
The recurring benefit Repeating each year until the low income recipient has other income sources, with the student who graduates as the standard case.
The condition attached Income and gains derived from the plan become the recipient's funds, and the case law on gifting the after-tax amount back to another family member.

expand_more The Attribution Rules: Sections 74.1 and 74.2, Subsection 75(2) Reversionary Trusts, and the Low-Interest Loan Rule

Four separate rules, each with a different scope, a different class of recipient, and a different treatment of capital gains.

Transfers and loans to a spouse or common-law partner Both investment income and capital gains attributed back to the transferor.
Transfers and loans to a person under 18 Non-arm's length individuals, and nieces and nephews, with income attributed and capital gains not.
When the under-18 rule switches off Attribution ceasing for the entire year in which the individual turns 18.
Subsection 75(2) A trust drafted so that property can revert to the contributor, with both income from the property and capital gains on its disposition attributed back.
Subsection 56(4.1) Loans to non-arm's length individuals at less than the prescribed rate, with income attributed and capital gains not.
Two mechanics that decide the loan rule The prescribed rate tested at the time the loan is made, and interest paid during the year or within 30 days of year end.
Why the loan rule catches plans the other rules miss It has no age limit and applies to adults who are otherwise outside the attribution rules entirely.
Who sits outside the rules Adult children, siblings, parents and grandparents, subject always to the loan rule.

expand_more Section 74.4 Corporate Attribution on a Freeze, Designated Persons, and Subsection 120.4 TOSI

The imputation that arrives with the freeze, and the rule that replaced the kiddie tax and stopped stopping at 18.

The structure that triggers section 74.4 Property transferred to a corporation for preferred shares, or common shares converted into them, with family members taking the new common shares directly or through a trust.
Designated person A spouse or common-law partner, and a non-arm's length person or a niece or nephew under 18, the same class used by the attribution rules.
How the imputation is computed The prescribed rate per quarter applied to the value of the preferred shares.
No corresponding deduction The corporation gets nothing, because the amount is an imputation of interest income rather than a payment.
The small business corporation exception No imputation for any calendar quarter throughout which the corporation is an SBC.
Defeating the imputation with dividends Dividends on the preferred shares applied against the imputed amount on the grossed-up figure.
The trap A dividend created by redeeming the preferred shares does not reduce the imputation.
The kiddie tax A non-arm's length capital gain on private company shares deemed to be an ineligible dividend and taxed at the top rate.
What the 2017 amendments changed TOSI effective for 2018, extending well beyond private corporation dividends to interest, rental and other private source income, with no age ceiling.
The two-party requirement A source individual and a specified individual who are related, without which the rule cannot apply.

expand_more Preventing Attribution Under Section 74.5: Persons Outside the Rules, Prescribed Rate Loans, and Fair Market Value Transfers

The four routes around attribution, and which of them survives contact with a real client's balance sheet.

Splitting with someone outside the scope Any adult other than a spouse, with adulthood reached for these purposes in the year the individual turns 18.
The fair market value transfer An exchange at full value falling outside the attribution rules.
The prescribed rate loan as a fair market value arrangement Interest at the prescribed rate or higher, computed at the time the loan is taken out.
The payment deadline Interest paid no later than 30 days after year end, and the annual compliance obligation that creates for the life of the loan.
Trust drafting Avoiding the reversion issues in subsection 75(2) at the time the trust is constructed, rather than discovering them later.
Why TOSI is dealt with separately The attribution solutions do nothing for private source income, which is governed by a different regime.

expand_more Portfolio Income: Gift Versus Loan, Loans to a Trust, and Alternative Minimum Tax in the Trust

Five ways to fund the same plan, worked through in sequence, each one failing for a different reason until the last.

The capital requirement Portfolio splitting needing a large invested sum before it produces meaningful income, which is the practical constraint the technical analysis usually ignores.
Outright gift No loan rule to consider, and no route back for the capital.
Interest-free loan to the individual Security taken over the portfolio so the capital can return, at the cost of attribution on interest and dividends, leaving the plan effective for capital gains only.
Interest-free loan to a trust Funds segregated from personal ownership and a far greater degree of control, with the loan rule applying when income is distributed to the beneficiary.
Prescribed rate loan to a trust Attribution eliminated, and interest income to the lender and interest expense in the trust that reduce what the plan delivers.
AMT in the trust Interest expense allowed at only 50% for AMT purposes, no AMT exemption available to a trust, and the effect of distributing the capital gain.
Why the obvious fix fails An outright gift to a trust of which the funder is a beneficiary making the trust reversionary under subsection 75(2).
The structure that resolves it An outright gift to a trust of which the funder is not a beneficiary, with other acceptable beneficiaries added who can receive capital at trustee discretion.
Why that version delivers more No interest expense, no AMT in the trust, and no interest income in the funder's hands to offset the split.

expand_more Income Splitting with Minor Children: Why Prescribed Rate Loans Fail and How Capital Gains Are Used Instead

The technique that works everywhere else is unavailable here, and the substitute carries an investment risk rather than a tax risk.

Why a prescribed rate loan direct to a minor does not work The child's inability to contract and the exposure to the arrangement being treated as a sham.
The capital cost of the loan route A prescribed rate loan increasing the amount of capital the plan needs in order to produce the same split.
The trust as the only sensible vehicle Leaving the prescribed rate loan to a trust and the outright gift to a trust as the two viable structures.
The capital gains strategy Equity investments emphasised so the return arrives as capital gains, which are not attributed when distributed to a minor beneficiary.
The exposure that remains No assurance that capital gains can be realized consistently over the longer term, which is an investment risk the tax analysis cannot solve.

expand_more Splitting with a Spouse or Common-Law Partner: Prescribed Rate Loans, the Subsection 73(1) Election, and Joint Accounts

Both income and gains attribute, so the entire plan depends on landing inside one of the exceptions.

The starting position Income and capital gains both attributed on a transfer or loan to a spouse, which is what distinguishes spousal planning from every other relationship.
The prescribed rate loan spread The plan running on the difference between the prescribed rate charged and the yield actually earned, with the capital required scaling inversely to that spread.
The fair market value asset swap One spouse selling property to the other at full value in exchange for cash and investment assets, with no attribution and no interest expense in the structure.
The subsection 73(1) point Both spouses electing for the spousal rollover not to apply, without which the swap does not achieve what it was built for.
Building the portfolio from cash flow The higher income spouse's earnings applied to family living costs while the lower income spouse's after-tax income accumulates and is invested in their own name.
Joint accounts Investment income reported 50/50 off slips issued in joint names, how ownership would be established on a careful CRA review, and the reassessment exposure that follows.

expand_more Income Earned on Income, Capital Dividends, Substituted Property, and Portfolio Income in an Estate

Sources that sit permanently outside attribution, and the redemption mechanic that destroys one of them.

Income earned on income Second generation income falling outside the attribution rules, subject to the substituted property limitation.
Capital dividends Not income for tax purposes, so not attributed, and outside TOSI as well.
The planning principle Once a source exists that is free of attribution, preserving it deliberately as the funding base for future splitting rather than distributing it.
The structural version Income paid to a trust from a private corporation and taxed there, with the after-tax amount reinvested in a public portfolio as the splitting source.
The redemption trap A capital dividend paid out by redeeming shares being property substituted for the shares, so the reinvested amount attributes back when distributed to beneficiaries.
The way around it The trust having acquired the shares from a person unrelated to the beneficiaries.
Estates No attribution on portfolio income earned in an estate, because attribution ceases on the death of the person who contributed the property.
What an estate permits Splitting among any beneficiaries entitled to income or capital gains, with TOSI still to be considered where the income is a private company dividend.

expand_more The TOSI Excluded Shares Exception: 10% of Votes and Value, the Related Business Income Test, and the Year-End Refinement

Five conditions, two of them tested on the prior year, and a holding company structure that fails the exception every time dividends move up.

Age 25 The individual receiving the dividend or disposing of the shares having to reach 25 in the year.
The 10% test At least 10% of the shares by votes and by value, measured for each individual.
The services test At least 10% of the corporation's income, read as gross revenue, coming from a source other than services, determined by reference to the prior year.
Professional corporations Disqualified from the exception outright, which forces professional practices onto a different route.
The related business income test Not more than 10% of income from another related business, such as a dividend from a subsidiary, again computed on the prior year.
Direct ownership only The exception unavailable for shares held through a trust, which is where many existing freeze structures fail it.
The freeze built to qualify Adult children subscribing directly for common shares and waiting for the value to reach the threshold, with the freezor taking remuneration by redeeming preferred shares to accelerate the shift in value.
The purchase route Shares sold to adult children for a note bearing interest at the prescribed rate, the capital gains exemption claimed on the sale, and the reserve used to spread the gain and manage AMT.
Why the note needs prescribed rate interest The low-interest loan rule applying to the vendor take-back if it does not.
The holdco problem Dividends received from a subsidiary breaching the related business income test, so the holding company's shares are not excluded shares.
The one-year lag The test looking to the prior year, so dividends paid up in alternating years leave the intervening year qualifying.
The off-calendar year end refinement Changing the holding company's year end so that dividends can be paid in two calendar years while the shares are still excluded shares.
Investment holding companies Marketable securities producing interest, dividends and gains, with at least 10% of revenue not from services, and the other attribution rules that still have to be cleared.

expand_more TOSI Excluded Business, the Age 65 Exception, the Subsection 104(14) Preferred Beneficiary Election, and Salary Under Age 18

Where excluded shares are unavailable, these are the routes that remain, each with its own qualifying condition.

The excluded business exception An average of at least 20 hours a week during the part of the year the business is carried on, with the seasonal business accommodated by that wording.
What the exception removes No reasonableness test applied to the amount, unlike the reasonable return route.
The professional corporation route Excluded shares being unavailable to a PC, so a spouse working in the practice qualifies on hours instead.
The age 65 exception One spouse aged 65 with an exemption of some form passing the benefit of it to the other spouse, who does not need to be 65.
What it does not solve Spousal attribution still having to be planned around separately when the shares are put in place.
Subsection 104(14) A joint election by trust and beneficiary allocating trust income to the beneficiary whether or not it is paid.
The qualifying condition The beneficiary being under a disability, which is the principal requirement of the preferred beneficiary election.
Why the election defeats TOSI Income allocated under it simply not being covered by the TOSI rules.
The designation trap Designating the amount as dividend income restoring the dividend rule's priority and losing the exception.
The cost Income treated as regular income by default, giving up the gross-up and dividend tax credit.
Under 18 Dividends taxed at the top rate with very limited exceptions, including where no parent is resident in Canada or the shares were inherited.
Salary as the alternative No attribution and no TOSI on salary, and the CRA position that an excessive salary is not recharacterized as a subsection 15(1) benefit even where the corporate deduction is denied in part.

expand_more Avoiding a Related Business, the Reasonable Return Exception, and Inherited Shares Under TOSI

Three exceptions that turn on structure rather than on ownership percentages, including one that depends on the choice between a partnership and a joint venture.

The related business definition Complex and multi-part, with a business owned by one individual and receiving no significant services from a related person falling outside it.
The gifted capital structure Cash gifted to a spouse who carries on a trading business with it, where attribution does not apply because the return is business income rather than investment income.
The condition it depends on The transferor providing no services in respect of the business, without which it becomes a related business and TOSI applies.
Where it breaks A return characterized as capital gains rather than business income, which brings spousal attribution back into play.
Partnership versus joint venture Family members developing real estate, with partnership income treated as related business income subject to the reasonableness test and joint venture income outside it.
The reasonable return exception A dividend supported by the value of what the shareholder actually contributes, rather than by hours worked or share percentage.
Guarantees as a contribution A personal guarantee of equipment leases and premises obligations supporting a reasonable return, and why the size of the obligation guaranteed drives the amount.
Capital as a contribution A shareholder loan sold to a spouse funded by a prescribed rate loan, with the spread between the corporation's cost of capital and the prescribed rate landing in the lower income spouse's hands.
Two rules cleared at once No TOSI because the corporation's borrowing rate is a reasonable return, and no spousal attribution because the purchase was funded at the prescribed rate.
The AMT check on that structure Half the interest paid under the prescribed rate loan disallowed for AMT purposes, and the income level at which that starts to matter.
Inherited shares Beneficiaries taking on the attributes of the deceased, so a testamentary trust can distribute dividends free of TOSI where the deceased was exempt.
The two effects of death The TOSI exemption inherited, and the attribution rules for minor children ending because the contributor is deceased.
The caveat The inheritance exemption not being free of doubt, and the review that any plan built on it needs.

expand_more Pension Income Splitting Under Section 60.03, Spousal RRSPs and RRIFs, and Salary for Services Performed

The splitting that needs no structure at all, and the three-year rule that decides whether a spousal plan withdrawal works.

Section 60.03 A joint election by the spouses splitting up to 50% of eligible pension income, regardless of whether any amount is actually paid to the other spouse.
At age 65 Most forms of retirement income eligible, including RRIF payments.
Before age 65 Eligibility limited to a life annuity under a pension plan.
What never qualifies Old Age Security, Canada Pension Plan, and RRSP income whether taken as a withdrawal or an annuity.
Spousal RRSP attribution Withdrawals attributed to the contributor spouse only up to premiums paid in the year of withdrawal and the two immediately preceding years.
What that leaves with the annuitant Everything above that limit, including the growth in the plan, taxed in the lower income spouse's hands.
The planning window Contributions timed years ahead of an anticipated low income period, such as a home purchase or time away from work.
Spousal RRIFs The same three-year contribution rule, with attribution applying only to withdrawals in excess of the minimum amount.
The RRIF conversion point No age restriction on converting an RRSP to a RRIF, and the low minimum amount that results when it is done young.
Salary for actual services No attribution and no TOSI, with disallowance of the corporate deduction as the only real exposure where the amount is not reasonable.
What supports a salary Director fees, summer and part-time work, mail and banking and phones, scheduling, software assistance, market research, property inspections, and business social functions.
Executing the plan The ongoing filings and the annual payment of prescribed rate loan interest by January 30, and why one missed obligation upsets an otherwise correct structure.

Learn Directly from Tax Experts

Michael Cadesky

FCPA, FCA, FTIHK, CTA, TEP (Emeritus)

Managing partner at Cadesky Tax, practising since 1980 and a Fellow of CPA Ontario. Past governor of the Canadian Tax Foundation, past chair of STEP Canada and STEP Worldwide, and past chair of the CPA Canada Tax Committee for Small and Medium-Sized Enterprises. Co-author of 11 books on tax subjects.

Hugh Woolley

CPA, CA, TEP

Independent tax consultant who has taught income tax for over 30 years. Hugh has written courses for CPA Canada and over 10 papers for the Canadian Tax Foundation and STEP Canada. From 1990 to 1992 he worked at the CRA's Rulings Directorate in Ottawa writing butterfly tax rulings, and is a past Governor of the Canadian Tax Foundation.

Frequently Asked Questions

Can I start right away? expand_more

Yes. Recorded live on November 18, 2025 and available on demand. Register and begin immediately at your own pace.

Does this course provide verifiable CPD? expand_more

Yes. You will receive a verifiable CPD certificate for 2.5 hours of instructional learning upon completion.

What is included with registration? expand_more

The full seminar recording and the slides with detailed notes, with one year of access from your date of registration.

Do I need the technical background on attribution and TOSI first? expand_more

No. The session sets out the attribution rules, section 74.4 imputation and the TOSI framework before it works through the planning, and then stays on the strategies and the conditions each one depends on rather than on the full technical anatomy of section 120.4.

Who is this course for? expand_more

CPAs and tax professionals advising families and owner-managed businesses, and anyone setting up a prescribed rate loan, drafting or reviewing a family trust, restructuring share ownership to reach an excluded shares position, or deciding how a spouse or adult child should be paid.

Is there a cost to register? expand_more

Registration is $150 CAD, a one-time payment with no subscription required.