Personal tax rates in Canada are incremental which means that as you earn more income you pay more taxes. One may be able to take advantage of the incremental tax rates by moving income from the higher income spouse to the lower income spouse. This would mean income that would have been taxed at a higher incremental rate is now being taxed at a lower tax rate.
For example, in 2014, a couple with only one income earner making $100,000 gross and with no children would have paid $6,000 more in tax than a similar couple where each person made $50,000 gross.
The federal government has taken steps to provide income splitting measures in two areas, pension income splitting and new in 2014, the Family Tax Cut. Pension splitting has been around for a few years and allows people receiving pension income to transfer up to half the eligible pension amount to their spouse. The Family Tax Cut is generally available for couples that have a child under 18 at the end of the year and allows the couple to notionally shift (unlike the pension split which actually moves the income, the family tax cut is only a calculation and doesn’t actually move the income) up to $50,000 of income to allow a reduction in tax of up to $2,000.
The are also other great options one can implement for income splitting between spouses including:
Low Interest Loans – Have the higher income spouse lend money to the lower income spouse at prescribed interest rates (currently at 1%) to invest. This will allow the income earned from the investments to be taxed in the hands of the lower income spouse. Even though the higher income spouse has to report the 1% interest earned on the loan, the income earned from the investment would ideally be greater than this 1%.
Self-Employed – If one spouse is self employed and the other assists with the business, it may be possible to pay a reasonable salary or fee to the spouse. This would reduce the self employment income of the higher income spouse and move some of the income into the other spouse’ hands.
Whether income splitting with your spouse is possible and of benefit will depend on your specific situation and should be discussed with a tax professional.
For more information, visit us on the web: http://www.rmtca.ca
Rosenswig McRae Thorpe LLP