Two people who each earn $100,000 per year generally pay less combined income tax than an individual making $200,000 per year. This creates a strong incentive for couples to find ways to balance their incomes. One way to achieve income splitting is to try to shift non-registered investments from a higher-earning spouse to a lower-earning spouse. The TFSA rules seem to permit a strategy for shifting assets between spouses.
Let’s illustrate this with an example. Alice is a doctor making $200,000 per year. He husband Ted watches the children and makes no income. Over the years Alice has maximized her RRSP and TFSA contributions and in addition has built up significant non-registered investments that produce income. Unfortunately, this income is highly taxed in her hands.
If the non-registered investments belonged to Ted, the couple would pay less income tax each year. However, if Alice simply gives the assets to Ted, CRA attribution rules say that the income derived from the investments would be taxed in Alice’s hands.
But Alice is allowed to contribute to Ted’s TFSA. Ted currently has his full $20,000 of TFSA room available. What if Alice were to contribute $20,000 to Ted’s TFSA, and Ted then withdraws it and places it in a non-registered account? I couldn’t find anything in TFSA rules saying that future income from this money would be attributed back to Alice. (Update: see the comments below for The Blunt Bean Counter's explanation of why this would be prevented by income attribution rules.)
If this works, then Alice could give $20,000 to Ted this year, $25,000 to Ted next year, and so on. After a decade, she could shift a total of at least $425,000 (more if yearly TFSA limits rise). It would then be Ted who declares interest, dividends, and capital gains on these investments each year.
I’d be interested to hear expert opinions on whether this strategy would run afoul of income attribution rules, unfair advantage rules, tax avoidance rules, or any other problems.