Tag Archives: income splitting

Blend income splitting with retirement strategies

Posted By Adrian Mastracci | June 5, 2017

My investing premise is straightforward: Splitting family income is very beneficial. Take full advantage of all provisions that apply.

Think of income splitting in the same breath as your retirement planning. In my view, the two camps ought to fit like a glove to deliver the best value. Families are keenly interested in paying the least income tax. There are a few low-cost activities left on the platter.

It’s never too early to get familiar with the menu. Let’s blend income splitting with your retirement strategies.

Ideally, a family pays less income tax where two spouses achieve similar income levels. Equalizing incomes allows each spouse use of the graduated tax scales from low to high.

Another beneficial goal is to equalize asset levels as much as possible. Retirees who reduce the “clawback” retain more of the OAS pension and, perhaps, the age credit.

A dozen tips for splitting income near retirement

Utilize these income splitting tips before and after retirement: Continue Reading…

5 tax tips for the Family Business: Keep more money in your wallet

Posted By Financial Independence Hub | March 21, 2017

By Mahyar K. Hansotia

Special to the Financial Independence Hub

In Canada, as many as 80 per cent of small businesses are family enterprises. Whether it’s a start-up or a third-generation company, there’s often plenty of hard work that’s been invested, not to mention financial risk. So it goes without saying that business owners are keen to utilize any tax-saving strategies available to help them maximize take-home profits. Here are five ways family business owners can keep more of their hard-earned dollars.

1.) Pay your family a salary

Don’t miss an opportunity to pay your spouse, common-law partner or children for any work done to help the business. This commonly known income splitting technique allows you to shift some of the income to family members who may be in a lower tax bracket. This can significantly reduce the overall tax bill by moving some of your income out of a higher tax bracket. Examples of work can include filing, answering phones, making deliveries and creative or technical assistance with the business website. Canada Revenue Agency (CRA) allows you to pay family members, as long as you meet two key conditions:

You must be able to prove that your family members actually did the work
The wages must be “reasonable under the circumstances”

In addition, this strategy allows family members to increase their CPP contribution, as well as create RRSP contribution room. Both items can benefit the family member in future years; CPP contributions will result in a higher retirement income, and the increased RRSP contribution room can be used in the future to bring down the family member’s taxable income should they be in a higher tax bracket.

2.) Pay a bonus directly to RRSP

There are some tax benefits for the family members as well. As an employee, they can consider contributing a bonus directly into their RRSPs. You’ll avoid tax withholding and the full amount can be used as a deduction, provided the family member has reached the CPP/EI threshold. Continue Reading…

Retired Money: Still a place for Spousal RRSPs

Posted By Jonathan Chevreau | February 23, 2017

My latest MoneySense Retired Money blog has just been published, which you can find by clicking on this highlighted link: Tax Strategies using spousal RRSPs.

This is the second in a series: the first one focused on pension splitting and can be found here: Pension splitting is now ten years old. The Financial Post also ran a related piece called Spousal RRSPs are an often overlooked retirement savings tool.

As these pieces note, income splitting usually works best for families when two spouses are in different tax brackets. Particularly if one spouse is a big earner and the second isn’t making peony at all.

As CIBC Wealth’s Jamie Golombek observed in this piece in the FP — Tax Season is Upon Us — the Family Tax Cut is no more as of 2016: that was a version of income splitting that let families with children under 18 transfer up to $50,000 of income to his or her lower-income spouse or partner. But “seniors need not worry,” Golombek added: seniors can still split eligible pension income with spouses or common-law partners.

And spousal RRSPs still present non-seniors with another valid income-splitting alternative, again assuming that a couple occupy disparate tax brackets. As the MoneySense piece phrases it, all those years the high-earning spouse is saving for retirement, the ideal solution would be to get a tax deduction for RRSP contributions but when it comes time to receive the income, to receive it in the hands of the lower-income spouse.

And that’s exactly what a spousal RRSP does. The contributor can deduct the amount of the spousal RRSP deposit from his/her (higher) earned income, while the recipient (the husband in our example) owns the investments. The aim is to equalize retirement income of both spouses, and to have the RRSP funds withdrawn by the recipient spouse at his or her lower tax rate.

Unlike pension splitting, you’re not restricted to splitting just 50% of the income: you can have 100% of it taxed in the lower-earning spouse if so desired. This income splitting also helps the couple each qualify for the $2,000 pension credit.

There are plenty of nuances to this, such as splitting CPP or QPP income after age 60. But as Chris Cottier, an investment advisor with Richardson GMP Limited, says, the spousal RRSP is generally a “no-lose” proposition.

Retired Money: Pension Splitting is now ten years old

Posted By Jonathan Chevreau | February 9, 2017

Pension Income Splitting can dramatically lower taxes for senior couples considered as a family unit

The latest instalment of my MoneySense Retired Money column is now available: click on the highlighted text to access the full version of the column: Pay Less Tax with Pension Income Splitting.

As I note, It’s hard to believe but the great boon of pension income splitting has now been available to Canadian retirees for a full decade. Coupled with the 2009 introduction of TFSAs, these two tools have certainly been a welcome addition to the arsenal of retirees and semi-retirees.

Pension splitting can generate many thousands of dollars in additional after-tax income for retired couples, particularly if – as is often the case – one of them enjoys a generous defined benefit (DB) pension and the other does not. Pension splitting is based on the fact that Canada’s graduated income tax system imposes far higher rates of tax on big earners than on modest or non-existent earners. Pension splitting can result in a highly taxed income and a low-taxed one being merged (conceptually speaking) into what amounts to a modest mid-level amount of tax for the couple as a whole, putting thousands of extra dollars into the family’s collective pocket each year.

The tax benefits vary with the marginal tax rates of both spouses. With pension splitting, if one spouse has no pension and the other has a $60,000 pension the couple as a whole ends up being treated exactly like a couple with two $30,000 pensions. The bonus is that both spouses can claim the $2,000 pension income s and the higher-income spouse may no longer be subject to clawbacks of Old Age Security.

Pension Splitting is a paper transfer at tax time

Retired Money: The Joy of Pension Splitting

Posted By Jonathan Chevreau | June 9, 2016

The third instalment of my new bimonthly Retired Money column at MoneySense.ca has just been published online and focuses on the important topic of pension splitting, or pension income splitting.

You can read the whole piece by clicking on this highlighted headline: How to keep more benefits with pension income splitting.

As the piece observes, pension splitting can be manna from heaven for retired or even semi-retired couples where one is collecting a generous Defined Benefit or other employer pension and the other is not.

Nor is it as complicated a process as it may seem at first blush: you don’t have to actually divide such a pension and send some to each spouse: it all happens at tax-time when for tax purposes you choose what percentage of the pension each spouse should receive. Naturally there are multiple things to consider, such as other income sources, relative tax brackets and so on.

But the bottom line is that in many cases, it should result in thousands of extra after-tax dollars a year in the pockets of the couple as a unit. And that’s how couples should behave, isn’t it?

For more information about pension income splitting, a good place to start is the Canada Revenue Agency’s web site, and in particular this explanation. Note too that it includes a short video.

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