If there are two things I'm determined to teach my kids, it's good dental hygiene and how to save tax, because nice teeth and money in their pockets both matter a lot. As for the dental hygiene, it's an uphill battle. I know there's hope, because a researcher at Kyoto University's Primate Research Institute told Agence France-Presse in March that he had observed mother monkeys teaching their offspring how to floss (with strands of hair).
I've also been teaching my kids the value of tax planning as a family. Every night before we put the kids to sleep - and after they have brushed and flossed - I read them a few tax tips as part of our bedtime ritual. They don't seem to appreciate it much today - but one day they will thank me.
I know what you're thinking: What are those tax tips Tim is reading to his children in place of other, less-educational bedtime stories? Let me share the top "family tax strategies," ideas involving family members that you should consider implementing in 2009.
Make a loan to your spouse
It's possible to transfer investment income to a lower-income spouse to save tax by lending money to your spouse to invest and charging the prescribed rate of interest, which can be locked in at just 1 per cent until June 30, 2009. See my article dated March 12, 2009, in the resources area at waterstreet.ca.
Make a gift to a child
Transfer investment income, and the resulting tax bill, to a child by giving assets to that child. In the case of minor children, focus on earning capital gains since other income will be attributed back to you. Be aware that you'll be deemed to have sold the asset for fair market value when making the gift, which could give rise to a tax hit if you're giving something other than cash. If you're giving securities that have dropped in value, you'll generally be able to claim the capital loss against capital gains.
Pay salaries to family
There's nothing like a part-time or full-time business to create income and provide an opportunity to pay deductible salaries to lower-income family members. Consider starting even a part-time business in 2009. Paying a reasonable salary to your spouse may itself create a loss in the first year or two of the business, which can offset other income you have earned.
Pay household expenses
If you're the higher-income earner in the family, consider paying the household expenses. This could free up the income of your lower-income spouse to invest where any income earned will be taxed at lower rates.
Contribute to a spousal RRSP
In an ideal world, you and your spouse should have equal incomes in retirement. Contributing to a spousal registered retirement savings plan (RRSP) will put assets into your spouse's hands where he or she will pay the tax on withdrawals later in life. Consider this strategy where one spouse is currently expected to have a higher income in retirement.
Contribute to an RESP
Contributing to a registered education savings plan (RESP) for a child can save tax since any income earned in an RESP will eventually be taxed in the student's hands, not yours, when withdrawals are made. And with Canada Education Savings Grants being offered by the government on contributions to RESPs, this should be a no-brainer.
Transfer capital losses to your spouse
If you own investments that have dropped in value (and who doesn't?), it may be possible to transfer those unrealized capital losses to your spouse if he or she will be able to use them before you. See my article dated Oct. 28, 2006, in the resources area at waterstreet.ca.
Negotiate to hire an assistant
If your employer requires you to hire and pay for an assistant in your work, you'll be able to deduct the salary paid to that assistant. If you happen to hire your spouse or child, you'll shift income directly from your tax return to your family member's, saving taxes if they are in a lower tax bracket.
Consider an estate freeze
This strategy involves freezing the value of certain assets today, so that any future growth will be taxed in the hands of, most commonly, your children. A freeze effectively transfers and defers a tax liability on future growth. Talk to a tax pro for more details.