When you read this newsletter we will be in the teeth of income tax season, which can be the cause of splitting headaches for many people. To reduce tax pain, have you taken advantage of the available techniques for splitting income with a spouse, minor child, or adult child? A brief summary of some of the main strategies is provided below:
Income-Splitting with a Spouse
Up to 50% of eligible pension income can be split with your spouse. Prior to age 65, “eligible pension income” only includes income from a defined benefit pension plan, while starting at age 65 it also includes income from a Retirement Income Fund, Life Income Fund, or annuity
You can give your spouse money to contribute to their Tax Free Savings Account (TFSA).
Money can be lent to a spouse for investment purposes at the government’s “prescribed rate” (currently 2%). The receiving spouse must pay the interest owing for a given year no later than January 30 of the following year. The lending spouse declares the interest income on their tax return, while the receiving spouse in many cases will be able to deduct the interest paid. The investment income earned by the spouse receiving the loan is taxed to them. Care must be taken to properly draw up the loan documentation if using this technique.
Using some or all of your RSP contribution room to contribute to a spousal RSP remains an effective strategy where it is expected your spouse will be in a lower tax bracket in retirement
Canada Pension Plan (CPP) retirement pensions can be shared between spouses for CPP credits accumulated during the relationship.
Income-Splitting with a Minor Child
Take full advantage of Registered Education Savings Plans (RESPs). When the beneficiary child attends qualifying post secondary education, the government grant and investment growth, when withdrawn, are taxed to the child.
A permanent life insurance policy on the life of a child provides not only the life protection, but may also provide access to a cash value that can be used at various times during their life (see The Gift of Life article).
Although interest and dividend income from an investment account opened “in trust” for a minor child is taxed to the parent, capital gains are taxed to the child. Accordingly, look for capital gains producing investments when opening such an account.
Income-Splitting with an Adult Child
The income (regardless of type) earned by the investment of money gifted to an adult child is taxed to that child – not to the gifting parent.
Where the parent is a business owner and the adult child is employed in the business at a reasonable income for the work done, the income paid is a deduction to the business. Although recent government initiatives have targeted this technique, being able to prove that the child was “actively engaged” in the business keeps this strategy available.
Although the strategies outlined above can be helpful for tax purposes, they should be utilized only after consideration of all pertinent planning factors. For example: would the gifting of money to an adult child reduce the parent’s ability to fund their desired level of long term care, if required?
Do you have an income splitting strategy? If not, talk to your Scrivens advisor – they could be the pain reliever the doctor ordered.