At Tax Time: Don’t Overlook the Opportunity to Split Income

Taxes are such a drag, aren't they? We all know we're paying a lot, and it turns out Canadians pay more taxes than Americans. High-income families bear the brunt of that burden, with the top 20 percent of earners covering almost two-thirds of all personal income taxes! Yikes. That's why it's so important to do some tax planning, especially if you're in a relationship or have adult kids. Here are some ideas to help you save some money

Pension Splitting:

If you're eligible, you can split up to 50 percent of your pension income with your spouse or common-law partner. This can help both of you claim the pension income tax credit of up to $2,000 per year, depending on your age. If you're over 65, certain payments from sources like a life annuity, registered pension plan, or RRIF could qualify. If you're under 65, payments from a registered pension plan (except in Quebec) and certain other payments received as a result of your spouse's death could qualify. Just remember that CPP/OAS payments don't qualify.

CPP/QPP Sharing:

You and your spouse can apply to have your Canada/Quebec Pension Plan (CPP/QPP) pensions split between you. It's important to know that the CPP pension sharing rules are different from the pension income-splitting rules, and you have to proactively apply for CPP pension sharing.

Transferring Unrealized Capital Losses:

You might be able to transfer unrealized losses in your investment portfolio between you and your spouse using the superficial loss rules. This could help your spouse utilize those losses more effectively.

Spousal RRSP:

If you contribute to a spousal RRSP for your lower-income spouse, you could be taxed at their lower rate when you withdraw the money later on. Keep in mind that the spousal RRSP will be owned by your spouse, and any funds withdrawn will be included on their tax return.

Household Expense Allocation:

You could allocate your household cash flow so that the higher-income spouse pays for family expenses. After tax-advantaged accounts have been maximized, the lower-income spouse's funds could be used for investments.

Gifting to Adult Kids:

If you give money to your adult child who's in a lower tax bracket, they could put future capital gains and income in their own hands. They could even put the money in tax-sheltered accounts like a TFSA. Just remember that once you give the money away, you lose control over it.

Business Planning:

If you're a business owner, you could pay reasonable salaries to lower-income family members who work for you. This could help take advantage of their lower marginal tax rate and build up RRSP contribution room.

Remember, if you're thinking about any of these strategies, it's a good idea to talk to a tax advisor first.