RRSP Season

'Family tax cut' on its way out, but still plenty of helpful ways to divvy your income

The Liberals came into power last year promising to eliminate a form of income splitting that the Conservatives had just introduced, but there are still plenty of legitimate ways to move your money around and save some tax dollars.

Seniors still have options, while younger people can get (legally) creative with their finances

Prime Minister Stephen Harper announced family income-splitting at this 2014 photo-op. The program is already on its way out, but there are still a number of ways to spread money around to ease you and your family's tax burden. (Nathan Denette/Canadian Press)

The Liberals came into power last year promising to eliminate one form of income splitting, but there are still plenty of legitimate ways to move your money around and save you and your family some tax dollars.

The so-called family tax cut, which allowed parents with children under 18 to split their income to shrink their tax burden, was only announced by the Conservatives in 2014. While it will still be available for the 2015 tax year, the government has said it will repeal the program going forward.

"It was very, very short-lived," said Christine Van Cauwenberghe, assistant vice president of tax and estate planning with Investors Group.

The tax cut benefited only a limited number of people and was capped at $2,000, but will still affect thousands of tax bills when it's taken away.

Fortunately for the tax savvy, there are still options.

Seniors can still split retirement income

Most obviously, seniors still have the ability to split some retirement income, including Canada Pension Plan benefits.

If both you and your spouse are 60 or over and retired, you can split your CPP or Quebec Pension Plan benefits so that you each receive equal benefit. For instance, if you are entitled to $6,000 yearly and your spouse is entitled to $10,000 yearly, you can split the benefits and each receive $8,000.

Whether or not you have an adviser or some sort of software, run a few different scenarios.- Christine Van Cauwenberghe, Investors Group

Van Cauwenberghe raises of a couple of small caveats: The split isn't necessary if you're both receiving less than the $11,000 personal tax exemption; and the amount of money you can split is dependent on how long you've lived together. 

"If you've only been with your current spouse for one year and they've been contributing for 40 years, your ability to income split would be less," she said.

Eliminating family income splitting — but keeping pension income splitting — was part of the Prime Minister Justin Trudeau's election platform. (Paul Chiasson/Canadian Press)

Seniors who are 65 or over can also take advantage of pension income splitting, which was introduced by the Conservatives in 2007.

"Eligible pension income includes annuity payments under a pension plan, or lifetime annuity payments under an RRSP or deferred profit-sharing plan or payments from a RRIF [registered retirement income fund]," Van Cauwenberghe said. "But other types of income, most notable lump-sum RRSP withdrawals … they don't qualify as pension income for those purposes."

Couples with lower incomes might consider moving part of their registered retirement savings plan to an annuity or RRIF once they turn 65 to take advantage of the annuity payments, she said.

Pension income splitting
Type of incomeApplication requirementsAge restrictions
Company pensionYearlyNo limits
RRIF incomeYearlyRecipient is 65 or over
RRSP annuityYearlyRecipient is 65 or over
CPP retirement benefitsOnceBoth partners 60 or older
Old Age SecurityNo splitting allowedNo splitting allowed

Other tax efficiencies

If you're not a retiree, there are still approaches you can take that might not be labelled income splitting, but have similar results.

  • Get a Registered Education Savings Plan for your child. Mark Ting, an investment adviser with Clearplan Wealth Management in Vancouver, said RESPs are "essentially income splitting with your children." You put after-tax dollars into an RESP and when it's taken out, it's taxed in your children's hands. "If your children are going to school and they're not really working then, essentially it's tax free because they'll have credits or writeoffs from their school, and all that growth becomes tax free."
  • Tax-free savings accounts. Ting notes that if you give your spouse money and he or she invests it in a TFSA, the Canada Revenue Agency doesn't care where that money came from. "Whereas if it wasn't used in a tax-free savings account, all of a sudden I've made a lot of money and I've invested in my spouse's name and it grows, then CRA might come back and actually look at the source of that funds, and say, 'Oh, actually that's not the spouse's money, that's actually your money, so we're rejigging everything and you're paying tax on it.'"
  • In-family loans. Ting and Van Cauwenberghe​ said these prescribed loans are little used, partly because you would have to loan a large sum of money to make it worthwhile, but they are available. The higher-earning spouse lends the lower-earning spouse money with an interest rate set by the government, currently one per cent. "That money can be used to be invested and any growth on that will be legitimately attributed back to the lower-income spouse," Ting said.
  • Move money around when doing your taxes. In particular, you can merge you and your spouse's charitable contributions to bypass the lower rate of savings taxpayers receive on the first $200 of charitable contributions. Also, the medical expense credit is usually more valuable if you claim it on the lower-income earner's return because it's based on percentage of income. 
  • Family trusts and corporations. Ting says there is also money to be saved with family trusts and corporations if you have enough money and lots of good advice. "You have to structure things properly, otherwise CRA can deny everything … and you get penalized."

Van Cauwenberghe says getting good advice is key even for the simpler approaches to saving tax money.

"Make sure you're taking advantage of what's available and talk to someone to make sure you aren't missing anything, because it can get kind of complicated," she said. "Whether or not you have an adviser or some sort of software, run a few different scenarios and don't just assume that the 50 per cent split is best."

With files from CBC's Tom McFeat


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