Bryan is an employee of mine who’s getting married this weekend. Coincidentally, my seventeenth anniversary was last weekend. Bryan was asking me the secret of our successful marriage. I decided to share with him the words of Henny Youngman that I heard at the time I was getting married: “We take time to go to a restaurant two times a week. A little candlelight, dinner, soft music and dancing. She goes Tuesdays, I go Fridays.”
I then told Bryan about the many tax benefits of being married and having a family. Specifically, it’s possible to share the tax bill that he might otherwise pay himself. This is the concept of income splitting – which I’ve been speaking about the last two weeks – and it can save you tax dollars.
Here’s a final instalment on how to split income effectively.
1. Pay an adult child for certain tasks. Consider paying your adult child (age 18 or older in the year) to look after your kids who are 16 or younger. These payments may qualify as child-care expenses for you to deduct – subject to child-care expense rules. Similarly, pay your adult child to help in a move and deduct that cost, subject to moving expense rules. In each case, your adult child will pay the tax on that income.
2. Invest the CCTB in your child’s name. If you receive Canada Child Tax Benefits in respect of a child, you can invest those dollars in the name of the child and there will be no attribution back to you of the income earned on those investments.
3. Transfer pension income to your spouse. You can transfer up to 1/2 of your eligible pension income to your spouse. You’ll claim a deduction for the amount chosen and your spouse will report that income. Eligible pension income is that which qualifies for the pension credit.
4. Split the tax on your CPP benefits. You’re entitled to take up to one half of your Canada Pension Plan benefits and report the amount on your spouse’s tax return, provided you’re both over age 60.
The arrangement is reciprocal so that the same proportion of your spouse’s CPP benefits will have to be reported on your tax return, but you could come out ahead as a couple. You’ll need to set up this arrangement by contacting Service Canada here.
5. Consider an RESP for a child’s education. When you contribute to a Registered Education Savings Plan (RESP) the funds can grow in that plan tax-free. When the student beneficiary makes withdrawals, he or she will face the tax on the accumulated income, not you.
6. Report your spouse’s dividends on your return. You can elect to report all of your spouse’s Canadian dividends on your own tax return. If your spouse’s income is quite low, he or she may not benefit from the dividend tax credit on Canadian dividends, so you may be better off as a couple having you report the dividends and claim the credit. To be eligible, the transfer must increase your spousal credit (the credit you can claim for having a low-income spouse).
7. Pay family members a salary. One of the great benefits of self-employment – even part-time – is that you can easily split income by paying family members to work in the business. As long as the compensation you pay them is reasonable, you’ll be able to deduct the salary or wages, and your family member will pay the tax, not you.
8. Become a partner with family members. A partnership doesn’t pay tax itself. Rather, each of the partners reports their share of the profit. By becoming a partner with a family member, you can split the profit in an agreed-upon manner. A true partnership should exist, which requires that it be a real business carried on with your family member(s) with the intention of creating profit. Creating a partnership agreement is important.
9. Use two corporations to transfer money. The attribution rules which will cause income to be attributed back to you can be avoided when you and your family member each have a corporation and money is loaned from your corporation to your family member’s. The attribution rules don’t apply to loans between corporations.
10. The higher-income spouse pays expenses. If the higher-income spouse pays the household expenses, it can free-up any income of the lower-income spouse to be invested. This will allow the lower-income spouse to pay the tax on the investment income.
Tim Cestnick is president of WaterStreet Family Offices and the author of several tax and personal finance books.