Income splitting is a great way to reduce your family tax bill by shifting income from a high tax bracket to a lower one.
On Oct. 30 the government announced the proposal of new income splitting measures for families as well as enhancements to existing family programs. The new system will allow couples with at least one child under the age of 18 to notionally share up to $50,000 of taxable income with their spouse. While this transfer will reduce the overall tax liability for the couple, tax savings benefit is limited to just $2,000 - though every bit helps! Unfortunately, there were no new benefits for single parents or couples without kids. In addition the universal child care benefit amounts have increased to $160 per month and a new UCCB was introduced for kids aged six to 17 at $60 per month.
The enhanced payments take effect as of January 2015 and will be reflected in monthly payments to recipients in July 2015 with a catchup amount for the prior six months.
Along with family income splitting strategies, when a person reaches retirement there are tax savings opportunities that they should know about. Pension income splitting came in to effect Jan. 1, 2007 and it allows retirees to split half of their eligible pension income with their spouse. These rules were implemented to reduce the tax liability of a couple when one retired spouse is the primary income earner. As an example, if you have a retired couple with one spouse earning $60,000 of eligible pension income and the other earning no income, the one with the pension income would pay all the taxes at his or her marginal tax rate. In this scenario pension income splitting allows each spouse to claim $30,000 as income at a lower marginal tax rate, thereby reducing their overall tax bill! This can be a great tax savings opportunity, especially when you have one spouse with a much higher income than the other at retirement.
The type of income that is eligible depends largely on the age of the retiree. If they are 65 or older, most pension income can be split. This includes income from an RRIF or LIF account, deferred profit-sharing plan, registered pension plans and lifetime annuity payments. If a retiree is younger than 65, the eligible pension income that can be split with their spouse includes income from registered pension plans and lifetime annuities. We are often asked if Old Age Security and Canada Pension Plan benefit payments are eligible to be split. Unfortunately, OAS is not eligible for income splitting, but the government does allow for CPP to be shared.
We are also asked by clients if it is still useful to contribute to spousal RRSP in light of pension income splitting. Generally it does make sense to have a spousal RRSP because you never know if the pension income splitting rules will change. Having a spousal RRSP is a good hedge against future changes to the tax code and it can also be beneficial for those who retire before the age of 65. To reduce taxes in retirement, the ideal situation is to have both spouses file the same amount of income each year, so a spousal RRSP can help balance the income between spouses and reduces taxes.
When filing your tax return we always recommend you consult with a tax professional to safeguard that you don't run into any trouble with the taxman down the road.
Lori Pinkowski is a portfolio manager and senior vice-president, Private Client Group, at Raymond James Ltd., a member of the Canadian Investor Protection Fund. This is for informational purposes only and does not necessarily reflect the opinions of Raymond James. Lori can answer questions at 604-915-LORI or [email protected]. Listen to her every Friday on CKNW at 5:35 p.m.
