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re1qec0n0mist suntribune july 1986 tax planning advice many ways of splitting family income editors note the follow ing article is the second in a series on tax planning pre pared by mccabe burns and hubley chartered accoun tants an incomesplitting plan which had gained consider able popularity in recent years was the use of the fami ly trust or childrens trust this usually involved set ting up a trust and several of the brokerage houses would do this for a very small fee and then having dad loan funds in terestfree to the trust the trust would earn in come and then arrangements would be made to have the be neficiaries of the trust usually the low income members of the family and usually chil dren under 18 pay tax on the trusts income a trust is a taxpayer and this type of trust would itself be subject to tax at the top rate on the income but a trust receives a deduction from in come for amounts which are paid or payable to a benefici ary or for amounts which are subject to a preferred be neficiary election this election effectively allows the children to be taxed on the income without physi cally receiving the cash a re sult which is frequently popu lar with dad the present rules relating to this type of loaning arrangement are exactly the same as those for a loan directly to a spouse ie there is no attribution of income to dad in respect of a pre loan during 1985 1986 and 1987 but if the loan is still outstanding after the end of 1987 attribu tion of the related income will commence in 1988 income re lated to post loans attri butes to the lender it is important to remember that loans transfers gifts etc to children which are over 17 years of age are not affected by the attribution rules only spouses and indi viduals under 18 are caught there is also a fairly compli cated family trust arrange ment which has been in use for several years which involves a family trust owning partici pating shares of the family business corporation proper ly implemented this arrange ment still works but is not costeffective for many situa tions another incomesplitting plan which has been used in the more distant past in volved dad loaning money to a corporation in which mom and tjhe kids owned common shares the idea was that the com pany would earn income pay tax thereon and distribute the aftertax profits to mom and the kids as dividends where the income being earned by the company was interest this didnt often achieve much in the way of tax savings as the income would be taxed in the corporation at the high rate with some re fundable tax when taxable dividends were actually paid with a net tax rate to the cor poration of about 33 since the introduction of part ii tax on low rate busi ness income the tax cost to a company that earned business income and distributed the af tertax cash to shareholders has also been theoretically 33 the potential tax savings in this situation again were often not remarkable the current position on this type of approach would involve the following 1 interestfree loans to a cor poration which are made after november 21 1985 may give rise to some attribution im plications the relevant rules are very complicated and are not going to be discussed here suffice it to say that if dad loans money or makes some other transfer of property for less than fair market value consideration to an invest ment corporation at low in terest and mom or the under 18 kids receive dividends which relate to income earned on the loaned funds those di vidends will be taxed in dads hands 2 interestingly there are no phasein rules relating to such an arrangement if a plan of this sort was put into place before november 22 1985 it appears that it will work permanently at least for the property transferred or loaned before that date 3 these rules do not apply where the borrower is a small business corporation sbc an sbc is a company where substantially all ie 90 of the assets are used in an active business in other words splitting business in come is ok but splitting prop erty income is not 4 remember that salary in come generally does not attri bute to anyone as long as it is reasonable and legitimately earned by the recipient where family members can reasonably be paid salaries by a company there may be some advantage to incorpor ating investment income what is reasonable the case law is rapidly evolving in this areaaprofessional advisor should be consulted under the old rules hav ing a spouse pay fair market value for a transferred asset didnotremovetheeffectofthe attribution rules now paying fair market value will put the transfer outside the attribu tion rules as long as there is no rollover of tax position between the parties usually nonarms length transactions are deemed to take place at fair market value with a specific rollover provided where capital prop erty is transferred to a spouse spouses can elect not to have a rollover the new attribution rules in- clude a variety of anti- avoidance rules super summer 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