How you can keep splitting your income, even after the Liberals axe the Family Tax Cut
The Harper government's income-splitting program is on the Liberals' chopping block, but that doesn't mean all hope is lost. Jamie Golombek outlines...
Income splitting for families, formally known as the Family Tax Cut, was introduced with much fanfare by the Harper government in late October 2014 but will be a thing of the past after the 2015 tax return is filed.
You'll recall that in the run up to the recent federal election, the Liberals promised to "cancel income splitting and other tax breaks and benefits for the wealthy." Citing a cost to the federal government of $2 billion, the Liberal platform stated that "income splitting delivers no benefits to working parents who earn similar salaries, no benefits to single parents and no benefits to Canadians who do not have kids."
As a reminder, the Family Tax Cut credit provided a version of income splitting that allowed an individual to notionally transfer up to $50,000 of income to his or her lower-income spouse or partner, provided they have a child who was under 18 at the end of the year. The credit was capped at $2,000 annually.
But just because the Family Tax Cut will soon be toast, that doesn't mean that all income-splitting opportunities are over. In fact, there are several other ways to split income, some of which have been around for a long time and provide much more significant tax savings. With marginal tax rates for high-income earners now over 50 per cent in more than half the provinces, now is a great time to revisit some traditional income-splitting strategies.
In general, income splitting can be defined as the transferring of income from a high-income family member to a lower-income family member to reduce the overall tax burden of the family. Since our tax system has graduated tax brackets, by having the income taxed in the lower-income earner's hands, the overall tax bill of the family can be reduced.
Seniors were relieved to learn that despite family income splitting being eliminated, you can still split eligible pension income with your spouse or partner. Any pension income that qualifies for the federal pension income credit also qualifies to be split. Specifically, this would include annuity-type payments from an employer-sponsored registered pension plan, regardless of age, and also includes Registered Retirement Income Fund (RRIF) or Life Income Fund withdrawals, but only upon reaching age 65.
Another opportunity for income splitting in retirement is to contribute to a spousal RRSP. This is particularly beneficial if you think that, upon retirement, you will have a higher income or have accumulated more retirement assets than your spouse. By contributing to a spousal RRSP, you can accomplish post-retirement income splitting, since withdrawn funds are taxed in one spouse's (the annuitant's) hands instead of the other's (the contributor's). If one spouse is in a lower tax bracket than the other in the year of withdrawal, there may be an absolute and permanent tax savings.
Note that with a spousal RRSP, you can effectively tax all of your RRSP/RRIF withdrawals in your spouse's name, whereas with pension-income splitting, you are limited to 50 per cent of RRIF withdrawals.
Finally, if your spouse, partner or kids are in a lower tax bracket than you, consider a prescribed rate loan strategy whereby the funds are loaned to the lower-income family member, either directly or via a family trust, to invest. Provided you charge at least one per cent on the loan (the current prescribed CRA rate), you can income split any excess returns.