How you can keep splitting your income
Income splitting for families, formally known as the Family Tax Cut, was introduced with much fanfare by the Harper government in late October 2014 but will be a thing of the past after the 2015 tax return is filed.
You’ ll recall that in the run- up to the recent federal election, the Liberals promised to “cancel i ncome splitting and other tax breaks and benefits for the wealthy.” Citing a cost to the federal government of $ 2 billion, the Liberal platform stated that “income splitting delivers no benefits to working parents who earn similar salaries, no benefits to single parents and no benefits to Canadians who do not have kids.”
But just because the Family Tax Cut will soon be toast, that doesn’t mean that all i ncome- splitting opportunities are over. In fact, there are several other ways to split income, some of which have been around for a long time and provide much more significant tax savings. With marginal tax rates for high- income earners now over 50 per cent in more than half the provinces, now is a great time to revisit some traditional income- splitting strategies.
In general, income splitting can be defined as the transferring of income from a high- income family member to a lower- income family member to reduce the overall tax burden of the family. Since our tax system has graduated tax brackets, by having the income taxed in the lower- income earner’s hands, the overall tax bill of the family can be reduced.
Seniors were relieved to learn that despite family income splitting being eliminated, you can still split eligible pension income with your spouse or partner. Any pension income that qualifies for the federal pension income credit also qualifies to be split. Specifically, this would include annuity- type payments from an employer- sponsored registered pension plan, regardless of age, and also includes Registered Retirement Income Fund ( RRIF) or Life Income Fund withdrawals, but only upon reaching age 65.
Another o pportunity for income splitting in retirement is to contribute to a spousal RRSP. This is particularly beneficial if you think that, upon retirement, you will have a higher income or have accumulated more retirement assets than your spouse. By contributing to a spousal RRSP, you can accomplish post- retirement income splitting, since withdrawn funds are taxed in one spouse’s ( the annuitant’s) hands instead of the other’s ( the contributor’s). If one spouse is in a lower tax bracket than the other in the year of withdrawal, there may be an absolute and permanent tax savings.
Note that with a spousal RRSP, you can effectively tax all of your RRSP/ RRIF withdrawals in your spouse’s name, whereas with pension- income splitt i ng, you are l i mited to 50 per cent of RRIF withdrawals.
Finally, if your spouse, partner or kids are in a lower tax bracket than you, consider a prescribed rate loan strategy whereby the f unds are loaned to t he lower- income family member, either directly or via a family trust, to invest. Provided you charge at least one per cent on the loan ( t he c urrent prescribed CRA rate), you can income split any excess returns.
SENIORS CAN SAVE TAX ON PENSION OR RRSP INCOME.