FINANCIAL GIFTS FOR YOUR SPOUSE
Strategies exist to minimize tax bite for partners at different income levels
Are you trying to think of the perfect gift for your spouse? Certain financial gifts to your spouse help reduce your household’s overall income tax bill.
Meet a fictional couple, Hi, who is the higher-income spouse, and Lo, the lower-income spouse.
PAY DIVIDENDS
Suppose Hi is a small-business owner and Lo is a shareholder in the family’s private corporation but not actively involved in the business. Changes to the dividend sprinkling rules are supposed to take effect Jan. 1, 2018. Now is the time to pay maximum dividends to Lo to take advantage of Lo’s lower bracket in 2017. Starting next year, those dividends will be taxable at the highest rate.
HI PAYS HOUSEHOLD BILLS
What should Lo do with such dividend income or salary? Hi should pay all the household bills to give Lo full opportunity to save and invest those dividends and salary. After Lo maximizes TFSA contributions, any resulting investment income can then be taxed in Lo’s tax bracket.
SPOUSAL RRSP
Instead of contributing to Hi’s own RRSP, Hi can contribute to a spousal RRSP owned by Lo. Hi would enjoy the same immediate tax deduction either way.
The added benefit of Hi depositing to a spousal RRSP instead of Hi’s own RRSP is the chance they could pay less income tax by using Lo’s future low tax rate, especially during any pre-65 retirement years. Of course, once Hi turns age 65, pension splitting usually does the same job more efficiently.
Watch out for the three-year attribution rule, which is based on the calendar year of contribution. To minimize the chance of attributing withdrawals to Hi, make the spousal contribution before Dec. 31 rather than waiting until the end of February.
CPP SHARING
For example, suppose Hi receives Canada Pension Plan retirement benefits of $800 per month while Lo’s CPP entitlement is only $200 per month. CPP sharing would be a way to shift up to $300 of monthly CPP retirement benefits from Hi to Lo. Because pension splitting works very efficiently, CPP sharing is probably redundant for most people.
SPOUSAL LOAN
What if Hi has received a large inheritance or exercised stock options, for example? Suppose Hi invests that money and now has interest and dividend income taxable at a high rate. Hi could loan money for Lo to invest. Charging one per cent interest on the loan is the way Hi avoids all attribution of Lo’s new investment income.
Lo must remember to pay the loan interest to Hi by Jan. 30 each year. Lo claims the loan interest as a carrying charge deduction. Hi reports the loan interest as income. This spousal loan can save tax if Lo can use the borrowed capital to generate a return on investment exceeding one per cent
Canada Revenue Agency’s prescribed interest rate for family loans for the final quarter of 2017 is still a record low one per cent.
FUND LO’S TFSA
Hi can help Lo with a gift of cash that Lo can deposit to a tax-free savings account. There’d be no attribution of investment income from Lo to Hi because TFSA investment income is all tax-free.
SUPERFICIAL LOSSES
What if Lo owns shares that have dropped significantly in price from $50 to $10, for example? Lo could sell the shares. Then, Hi could buy back the same shares within 30 days to take advantage of the superficial loss rule. The $40 loss that Lo cannot claim is added to Hi’s adjusted cost base. Now Hi can sell the shares and use the capital loss to offset other realized capital gains. Terry McBride, a member of Advocis, works with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James Ltd. Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. We recommend that clients seek independent advice from a professional adviser on tax-related matters. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.