Income Splitting and Its Benefits for Ottawa Taxpayers

In the United States, married/common-law couples have the option to file a joint tax return, in effect combining all the income from both of them into one single tax return. This is in contrast to Canada, where individuals are required to file their own tax returns, separate from each other.

Jake Anand, an Ottawa-based accountant providing personal tax services, explains, “The concept of splitting income is especially enticing to Canadians where we have a progressive tax system, where higher incomes are taxed at a higher percentage of tax. This results in situations; for example, where a person earning $100,000 might have to pay $27,000 in tax but a couple making $50,000 each might only pay $18,000 between them.”
While most opportunities for income splitting fail due to CRA’s attribution rules, here are some options that can provide significant tax savings:

• Pension Splitting – In 2006, the Federal government made new rules allowing various sources of pension income to be split up to a maximum of 50% between spouses, although this does not include CPP or OAS pensions. “Pension splitting can make a huge difference, especially where one person has a relatively high income and the other spouse has a much lower or better still, no income. Especially in the latter case, we find that much of the tax paid on the split income ends up being refunded back.” says Jake Anand. “All that is required is that each spouse files a T1032 joint election form annually indicating how much and from whom it is being split.”

• Spousal Loans – Jake Anand tells us, “We’ve seen situations in the past where one spouse stays at home and the other works outside the home, which still occurs today, and the spouse working outside will give money to his spouse in an attempt to have that income taxed at a lower rate. This generally fails due to attribution.” He continues, “But you can successfully pull it off by loaning your spouse the money instead of merely giving it.” The major requirement is that you must charge interest that’s at least equal to what’s called the CRA’s prescribed rate.” (Currently at 1%, yes 1%)

As long as the lent money earns more than the prescribed rate in interest, the overall tax bill will be lower. And the loan can be locked in at the current rate, so even if rates rise you can hold the loan at that 1% indefinitely. “The important thing to remember is that the interest for the year must be paid by January 31st of the following year at latest, otherwise the loan will be subject to attribution rules and income generated for that year and all future years reverts back to the higher income spouse.” says Ottawa-based tax accountant Jake Anand. “This is definitely an area where a qualified tax advisor can come in handy and save you a lot of headaches.”

• Hiring Family – “If you own a business, you can see drastic tax savings by hiring your spouse or even your kids.” explains Ottawa tax accountant Jake Anand. “The important thing to remember is that you have to deal with them at arm’s length, as the saying goes. In other words, you must document their activities and pay them appropriate wages like any normal employee, including workplace deductions like CPP and EI, and issue T4s. So you won’t be able to get away with claiming that your wife is getting paid $250,000 as a receptionist.” Jake adds, “As well, you have to make sure they’re actually performing the duties they’re being paid for. Otherwise you run afoul of the attribution rules. And for corporations, they can be paid in dividends which lead to further tax savings.”

• Spousal RRSPs – One option available for some time has been the Spousal RRSP, where one spouse contributes on behalf of the other spouse’s RRSP. Jake Anand tells us, “Where this really comes in handy is where one spouse has a significantly larger income than the other, hence much larger contribution room. They receive the deduction; while the other spouse receives the funds into their RRSP of which they otherwise would not be able to take advantage.” He continues, “It’s especially useful when the higher income spouse is over 71 and the other is under 71. The higher income spouse can no longer contribute to their own RRSPs, but they can still contribute to their spouse’s plan and reap the tax benefits. The major caveat is that contributions cannot be withdrawn from the RRSP within two years without being attributed back to the higher income spouse.”

• CPP Sharing – While this doesn’t technically count as splitting income, which is done after receiving it, you can arrange through Service Canada to have Canada Pension Plan benefits shared between spouses, provided both spouses are 60 or older. So if one spouse receives $1,000 and the other $500 per month, sharing benefits would see each spouse instead receive $750 per month. Jake Anand gives us more information. “Each spouse has to claim what they received, so you do have to set this up beforehand, but if you take the time to arrange CPP sharing, the savings can be significant.”

Scarborough Tax Advice: Why you should file taxes if you made no income during the year

Scarborough-based tax accountant Jake Anand advises “Providing income tax services in Scarborough for many years, I’ve seen many people who have neglected to file returns because they had no income for the year. While you may not have had have income for the year, you may still be required to file a return depending on your specific situation. And even if you’re not strictly required to file a return, it may still be to your benefit to file a tax return.”

You must file a return for 2013 if any of the following situations apply:

• You have to pay tax for 2013.
• CRA sent you a request to file a return.
• You and your spouse or common-law partner elected to split pension income for 2013.
• You received working income tax benefit (WITB) advance payments in 2013.
• You disposed of capital property in 2013 (for example, if you sold real estate or shares) or you realized a taxable capital gain (for example, if a mutual fund or trust attributed amounts to you, or you are reporting a capital gains reserve you claimed on your 2012 return).
• You have to repay any of your old age security or employment insurance benefits.
• You have not repaid all amounts withdrawn from your registered retirement savings plan (RRSP) under the Home Buyers’ Plan or the Lifelong Learning Plan.
• You have to contribute to the Canada Pension Plan (CPP). This can apply if, for 2013, the total of your net self-employment income and pensionable employment income is more than $3,500.
• You are paying employment insurance premiums on self-employment and other eligible earnings.

Even if none of these requirements apply, you may still want to file a return if any of the following situations apply:

• You want to claim a refund.
• You want to claim the WITB for 2013.
• You want to apply for the GST/HST credit (including any related provincial credits). For example, you may be eligible if you turn 19 before April.
• You or your spouse or common-law partner want to begin or continue receiving Canada child tax benefit payments, including related provincial or territorial benefit payments.
• You have incurred a non-capital loss in 2013 that you want to be able to apply in other years.
• You want to carry forward or transfer the unused part of your tuition, education, and textbook amounts.
• You want to report income for which you could contribute to an RRSP in order to keep your RRSP deduction limit for future years up to date.
• You want to carry forward the unused investment tax credit on expenditures you incurred during the current year.
• You receive the guaranteed income supplement or allowance benefits under the old age security program. You can usually renew your benefit simply by filing your return by April 30. If you choose not to file a return, you will have to complete a renewal form.