Reducing Your Taxes by Income Splitting

Reducing Your Taxes by Income Splitting

In Canada, we have a progressive tax system. That means that as your income rises, the increased income amounts have higher tax rates. You can think of it as a stair case. On your first step (the first ~$37,000) in BC you’ll pay about 20% tax, the next step up, (around $7,000) pays tax at about 23%, the next $32,000 you make pays tax at about 30% etc. and so one. For any income over $150,000 in BC it will be taxed at 45.8%. Here are the BC tax rates in 2014 from the CRA website:

   Tax Rate    Taxes excl. basic Exemption
Up to $37,606     20.1%    $7,544
$37,607 to $43,954     22.7%    $1,441
$43,954 to $75,213     29.7%    $9,284
$75,214 to $86,354     32.5%    $3,621
$86,355 to $87,907     34.3%    $532
$87,908 to $104,858     38.3%    $6,490
$104,859 to $136,270     40.7%    $12,784
$136,271 to $150,000     43.7%    $6,000
$150,000 and up     45.8%    depends on income

 

 

 

 

 

 

 

From Canada Revenue Agency website

In order to pay less tax, you need to reduce your income. Common ways to do that are through RRSP deductions, or child care expenses.
As a couple or family you may also be able to Income Split. This means distributing income from a higher income earner to a lower income earner. A couple that both make $50,000 per year will pay tax of about $10,800 each or $21,600 in total. This is 10% less tax than a couple that has one person earning $80,000 and one earning $20,000 (around $23,900 tax), because of the progressive tax rates. (I haven’t included the basic personal exemption so the taxes will be less than stated).
There are some legitimate ways to income split in Canada which include:

  • If you receive pension income, you can elect to split the amounts with your spouse.
  • You can also have CPP payments split between couples.
  • Have the higher income spouse or common-law partner pay most or all of the personal household expenses, leaving the person with the lower income as much disposable income as possible to invest. As a result, the investment income earned will be taxed in the lower income person’s hands
  • Contributing to a spousal RRSP has the higher income earner getting the tax deduction and in the future the income received is taxed at the lower income earner’s tax rate
  • If you receive child tax benefits, invest the money in your child’s name so the child pays tax on the investment income instead of yourself
  • You can give gifts to children under age 18 of capital assets (i.e. property or investments), and if the investments earn capital gains the children will pay tax on that, not the parent.
  • If you own a business you can pay your spouse or children a reasonable salary for work performed.
  • Have your spouse or common-law partner and/or adult children participate in an incorporated business by owning shares purchased with their own funds. This would allow company profits to be distributed to them in the form of dividends.
  • You can transfer or sell assets to family members at fair market rates. The family member would then pay tax on any investment income earned from the asset. If the family members are at a lower tax bracket, you would save money.

Important Note: Revenue Canada requires legitimate income splitting. If Revenue Canada does not believe you, the income will be attributed back to the higher income earner, who will then pay tax on it.

Please contact your tax advisor for specific advice for your own situation.

This article was prepared solely by Laura Chanin who is a registered representative of HollisWealthTM (a division of Scotia Capital Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada). The views and opinions, including any recommendations, expressed in this article are those of Laura Chanin alone and not those of HollisWealth.
TM Trademark of The Bank of Nova Scotia, used under license.

 Image ©nuttakit/freedigitalphotos.net.