Saving on taxes can be simple: Spreading, splitting income is a good start 2007-03-03 National Post Before investing in the latest tax shelter or flow-through share deal to save on taxes, you may want to review some of the basics: income deferral, income spreading and income splitting. INCOME DEFERRAL The idea behind this strategy is straightforward: Postpone reporting income today with a view to reporting it later. That way, your dollars remain with you instead of the government. In addition, if you happen to be in a lower tax bracket when the income is reported, savings may result. The most common example of this is RRSP contributions, where a portion of your current income is set aside today and then withdrawn and included in income later, generally upon retirement. Not only is the tax deferred, but your tax-sheltered contributions have the opportunity to grow much faster inside the plan. INCOME SPREADING Since we face graduated tax brackets federally and in all provinces other than Alberta (which has a flat provincial tax), the ability to spread income receivable in one tax year over two or more years presents possible tax savings. An example of income spreading that's starting to build some traction is to partially deregister an RRSP before the mandatory conversion age of 69. For example, let's say Ted, a 65-year-old retiree, has a $1-million RRSP that continues to grow at approximately 7% per year. Even with no further contributions, by age 70 the RRSP will have grown to over $1.4-million. A forced minimum RRIF withdrawal at age 70 of 5% means an extra $70,000 of income. This could force Ted into a higher tax bracket and jeopardize his entitlement to Old Age Security (currently clawed back at income levels higher than $63,511). By starting a process of early RRSP withdrawals at age 65 or earlier, Ted could spread his RRSP income over a number of years and avoid hitting a higher tax bracket. At the same time, he could maximize his OAS benefits and reduce his RRSP balance, which means lower minimum withdrawals when he converts to an RRIF. INCOME SPLITTING We have to wait a couple of weeks for the federal budget to reveal whether we'll get broad-based income splitting in Canada, but there are already some ways to legally split income. Income splitting involves the shifting of income from a high-income individual to a low-income individual to take advantage of the graduated tax-bracket system. Spousal RRSPs are the obvious choice for income splitting upon retirement between spouses and partners. Spousal loans are another way to get investment income into the hands of a lowerincome spouse or partner, but are less attractive today given the Canada Revenue Agency's prescribed rate of 5%. If you invest on your kid's behalf, perhaps through an in-trust account, the capital gains earned in the account can be taxed in your kids' hands, not yours. - Jamie Golombek, CA, CPA, CFP, CLU, TEPis the vice-president, taxation and estate planning, at AIM Trimark Investments in Toronto. jamie.golombek@aimtrimark.com