How to save tax as a couple

Jun 18, 2019
Young couple looking at laptop

You can’t escape paying tax on income, but you may be able to split some of your income with your spouse. And if your spouse is in a lower tax bracket, you’ll pay less tax as a couple.

Here are three scenarios that illustrate some of the tax-saving strategies available through income splitting.

Kim and Henry

Kim, an executive at a health care firm, is the couple’s primary income earner, and Henry is a self-employed photographer. The couple saves tax in several ways, all involving investments.

If Kim simply gave money to Henry to invest, as a way to pay less tax on income and returns, attribution rules would pass the tax bill back to Kim. But she uses a prescribed rate loan. Kim loans $100,000 to Henry that she received as an inheritance. She charges Henry interest at the government’s prescribed rate, currently 2%, and investment income is taxable to Henry at his lower rate. It takes a large loan like this and a significant difference in marginal tax rates for the strategy to be worthwhile.

In addition, the couple uses an easy and effective investment technique. Kim covers household bills and expenses so Henry can use his earnings to invest in a non-registered account – again, benefiting from his lower tax rate.

Kim also gives money to Henry that he contributes to his Tax-Free Savings Account (TFSA), which attribution rules allow.  

Mark and Laura

Mark owns an event planning business. His wife, Laura, has been working part-time to bring in new business, largely through social media. She is paid by the company with dividends taxed at her personal rate. But when the new Tax on Split Income (TOSI) rules took effect on January 1, 2018, their previously acceptable income-splitting arrangement was in jeopardy. Laura worked fewer than 20 hours per week, which subjects her dividends to tax at the highest marginal rate.

The couple had a decision to make – switch payment to salary, which is not subject to the TOSI rules, or meet the new requirements. They prefer the relative simplicity of dividends over the paperwork that salary involves. So Laura now works a minimum of 20 hours per week and continues to receive tax-friendly dividends. The couple still benefits from income splitting and Laura keeps time records to demonstrate they are onside of TOSI rules.

Amelia and Hasan

A retired couple, Amelia and Hasan are making the most of their retirement income by paying less tax where possible. Hasan had been the higher-income earner and he established a Spousal Registered Retirement Savings Plan (RRSP), now a Spousal Registered Retirement Income Fund (RRIF). Amelia withdraws funds from the Spousal RRIF to help support the couple’s lifestyle, which is taxable at her lower rate.

Hasan takes the minimum required withdrawals from his RRIF and splits half of his RRIF income with Amelia. This strategy saves tax and helps Hasan prevent Old Age Security (OAS) clawback by lowering his net income.

The couple also shares their Canada Pension Plan (CPP) benefits. The government uses a formula to determine the exact split, based on giving Amelia and Hasan an equal share of the combined pension they earned while living together.

Early spousal RRSP withdrawals

Here’s a strategy especially effective during a period when one spouse has little or no earned income. For several years, the spouse earning the higher income contributes the maximum allowable amount to the spousal RRSP. Then the higher-income spouse stops these contributions and begins contributing to his or her own RRSP for two calendar years after the year of the last spousal RRSP contribution.

Now the lower-income spouse withdraws funds from the spousal RRSP. If withdrawals had been made earlier, during the two- to three-year waiting period, they would be taxable to the higher-income earner. But these withdrawals are taxable at the lower-income spouse’s favourable rate. The withdrawn funds can be used as contributions to the higher-income earner’s RRSP or to the couple’s TFSAs.

This strategy can be used once or repeatedly – and should only be carried out with guidance from your advisor. It offers the tax advantage of the higher-income spouse receiving an RRSP tax deduction at a higher rate, while funds are withdrawn from the spousal RRSP at a lower tax rate. And the withdrawals can be invested to gain further tax benefits.

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