There are many social, psychological and financial advantages to being happily married, and now you can add a lower tax bill to the list.
Brian Quinlan, partner at Campbell Lawless chartered accountants in Toronto, says strategies like income splitting are a great way for Canadian couples to get some tax relief. "This is a tried, tested and truly legal strategy. It is not aggressive, just smart."
By moving income from one family member who would pay tax at a higher rate to the other who will pay tax at a lower rate, families can find they have extra cash left over to fund fun events, like that long-awaited European or Caribbean vacation.
Mr. Quinlan, co-author of 78 Tax Tips for Canadians for Dummies, provided these tax-saving tips for spouses or common-law couples:
1 Investment-income splitting. Splitting investment income involves shifting investment income from the hands of one individual who pays tax at a higher rate to another who pays tax at a lower rate. Like all income-splitting strategies the result is less tax is paid by the family leaving more after-tax money for living expenses. There are a few obstacles in the Income Tax Act, called the "attribution rules" to avoid to make it work but it can easily be done.
2 Pension splitting. This is an easy tax strategy to implement. Nothing to do but fill in a couple of lines on your tax return and the tax return of your spouse/common-law partner. Up to 50 per cent of certain types of pension income - not Canada Pension Plan (CPP) (but see below) and not Old Age Security (OAS) - can be shifted or allocated to the pension recipient's spouse or partner. This is done by simply indicating the amount on your tax return and for you and your spouse or partner to complete form T1032 to elect to pension split. The strategy works where the pension recipient is in a higher tax bracket than his or her spouse or partner.
3 Canada Pension Plan sharing. This idea has been around for a while. Unlike with pension splitting, a call or stop at a Service Canada Centre is necessary to make this happen. Spouses or common-law partners that are at least 60 and live together can elect to share CPP payments on the portion of CPP earned during their time together. A portion of CPP payments of a high-bracket individual can be shifted - or shared - with a lower-tax-bracket individual. This will result in tax savings for the couple.
4 Paying salary or wages to family members. If you run you own business, consider paying a salary or wages to members of your family. Of course, they must actually work in the business and be remunerated with an amount that is reasonable to the skill level of the job and the time spent doing it. The advantage again is that a salary or wage to a family member in a lower-tax bracket than yourself will result in a greater after-tax family income.
5 Contribute to spousal RRSPs. With a spousal RRSP you contribute to an RRSP where your spouse or common-law partner is the annuitant. You claim the tax deduction for the amounts put into the plan, and when the cash is withdrawn, your spouse is taxed on the withdrawal. In other words, making use of a spousal RRSP is a step you do now to shift retirement income later.
6 Take advantage of a low interest rate on a spousal investment loan. A great way to "income split" with a spouse or partner is to have a high-tax-bracket spouse or partner lend funds to a spouse in a low-income-tax bracket. The low-tax-bracket spouse then does the investing and the investment returns are taxed in the low-tax-bracket spouse or partner's hands. The good news is that the minimum rate that can be charged on these loans is now 1 per cent as set by Canada Revenue Agency. More good news is that once the loan is made the 1-per-cent interest rate is locked-in for the life of the loan.
7 Get the high-income-tax bracket spouse to pay household expenses. Another way to get the family's investment income taxed in the lower-tax-bracket spouse's hands is to have the higher-tax-bracket spouse pay all the daily living expenses. This frees up more cash for the lower-tax-bracket spouse or partner to earn investment income that is taxed at a lower tax rate.