We had a little feud at our home last week. "Michael, I'm disappointed in you," my wife told our youngest son. "Throwing a rock at your brother is not acceptable," she continued. "But he threw a rock at me first!" Michael explained. "When he threw a rock at you, you should have come to me right away," Carolyn explained. "Why would I do that mom? My aim is way better than yours," he said.
Family feuds are part of life for most of us. But if there's one thing family members should agree on, and work on together, it's saving tax dollars. Here are some things you and your family should be considering before year-end to save taxes this year and next.
Lend your spouse money
Although the Liberals have promised to do away with the income-splitting measure introduced by the Conservatives last year (which would have saved up to $2,000 in taxes for qualifying families), it's still possible to reduce the family tax burden by lending money to a lower-income spouse for investment purposes. A promissory note should be created, and interest should be charged at the prescribed rate, which is currently just 1 per cent (this rate can apply indefinitely if you set up the loan on or before March 31, 2016). Your spouse will have to pay that interest to you by Jan. 30 each year for the prior year's interest charge, and can deduct that interest. You'll face tax on the interest. Your spouse can now pay the tax on any income earned on the lent funds. As long as your spouse earns more than 1 per cent on those funds, you'll come out ahead as a family.
Pay your family income
If you own a business and a family member works in the business at any time in 2015, pay or accrue wages or bonuses to them before year-end. You'll be entitled to a tax deduction for reasonable wages paid, and they may pay little or no tax if they don't have much other income. You can also pay adult children to help with a move or to look after the younger kids aged 16 or under. You may be entitled to a deduction for these moving and child care costs respectively.
Plan the timing of a family move
You'll face tax in the province in which you reside on Dec. 31 each year. If you're planning a move to a province with higher tax rates, consider delaying the move until January so that you can take advantage of the lower tax rates in your current province for one more year. Conversely, if you're moving to a lower-tax province, you may want to move before year-end if you can.
Pay certain amounts by year-end
You may be entitled to tax deductions or credits for certain amounts paid before year-end. I'm thinking about fitness costs for children (up to $1,000 for sports fees, for example), artistic costs for kids (up to $500 for music and dance lessons, or similar costs), child-care expenses, medical expenses, donations to charity, tuition fees and moving expenses, for example.
Review trust income
If you have a family trust to, perhaps among other things, split income with family members, you should determine how much income was earned in the trust in 2015 and work with a tax professional to decide who should pay that tax – the beneficiaries or the trust. It may be possible to have the beneficiaries pay the tax by making the income payable to them by year-end. This often makes the most sense since inter-vivos trusts are taxed at the highest tax rate possible.
Contribute to an RESP
If you've set up a registered education savings plan (RESP) for a child, you can contribute up to $50,000 in a lifetime to the RESP for the child. The government will also help by giving Canada Education Savings Grants (CESGs) generally equal to 20 per cent of your RESP contributions (up to $7,200 in a lifetime for each beneficiary). A maximum of $500 in CESGs can be paid into an RESP for each beneficiary each year. So, you can't simply contribute the full $50,000 to the RESP in one year and hope to get the full $7,200 in CESGs all at once. The answer is to contribute annually to an RESP to be entitled to collect the full CESGs over time. Make that RESP contribution by year-end – or set up an RESP for your children or grandchildren if you haven't done this yet.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.