Mr. and Mrs. Lee are considering income splitting. Mr. Lee earns $180,000 annually, and Mrs. Lee is considering starting a new part-time job that would pay her $30,000 per year. They have two children aged 6 and 8. Which strategy is most likely to be effective for income splitting in their situation, considering Canadian tax rules?

Question: Mr. and Mrs. Lee are considering income splitting. Mr. Lee earns $180,000 annually, and Mrs. Lee is considering starting a new part-time job that would pay her $30,000 per year. They have two children aged 6 and 8. Which strategy is most likely to be effective for income splitting in their situation, considering Canadian tax rules?

Answer options:

• Mr. Lee could transfer some of his investment funds to Mrs. Lee, allowing her to earn investment income taxed in her hands. ✅ Mr. Lee could employ Mrs. Lee in his proprietorship for legitimate services, paying her a reasonable salary.
• Mr. Lee could make a gift of shares of his successful private corporation to their 8-year-old child.
• Mr. Lee could deposit funds into an RESP for their children, and then withdraw the income as an education assistant.

Correct answer: Mr. Lee could employ Mrs. Lee in his proprietorship for legitimate services, paying her a reasonable salary.

Explanation: Employing a spouse for legitimate services in a business and paying a reasonable salary is a valid income splitting strategy, as the attribution rules generally do not apply to earned income. Transfers of investment funds to a spouse typically trigger attribution, and gifting to a minor child who then earns investment income would also trigger attribution. RESP withdrawals for the beneficiary's education are taxed in the child's hands, but this isn't directly splitting Mr. Lee's current income.