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tax

Income-Splitting Strategies

Are you looking for tax saving opportunities while filing your tax return? Forward-looking planning with a year ahead can help you find different tax-saving strategies and techniques available to you. Income-splitting techniques may be available to you if you plan ahead and your situation fits.

If you and your family member(s) have different income levels and the marginal income tax brackets are quite different, you may be able to reduce your family’s overall tax burden by taking advantage of the differences. Try to use one or a combination of the following strategies.

Income-splitting loans

You can loan funds to a family member at the prescribed interest rate specified by CRA (the current annual rate is 2%). Your family member can invest the money and the investment income will not be attributed to you (i.e., treated as your income for tax purposes), as long as the interest for each calendar year is paid no later than January 30 of the following year.

The CRA announces the prescribed interest rate on a quarterly basis, based on a three-month average of short-term government of Canada T-bill rates and rounded up to the highest whole percentage number. The current rate can be found on the CRA’s website: https://www.canada.ca/en/revenue-agency/services/tax/prescribed-interest-rates.html

Spousal RRSPs

A registered retirement savings plan (RRSP) is a registered account to which you or your spouse or common-law partner could contribute. Deductible RRSP contributions can be used to reduce your tax. In addition to splitting income in retirement years, spousal RRSPs may be used to split income before retirement. The higher-income spouse or partner can get the benefit of making contributions to a spousal plan at a high tax rate and, after a three-year noncontribution period, the lower- or no-income spouse can withdraw funds and pay little or no tax.

Reasonable salaries to family members

If you own a business, consider employing your spouse or partner and/or your children to take advantage of income-splitting opportunities. Their salaries must be reasonable for the work they perform.

This planning is becoming more important than in the past because other income splitting opportunities involving your business (such as paying dividends) may be limited by the recent changes in tax laws.

Recent amendments may limit income splitting opportunities with certain adult family members through the use of private corporations in 2018 and later years. For example, a business is operated through a private corporation, and an adult family member in a low-income tax bracket subscribes for shares in the corporation. A portion of the business’s earnings is distributed to the family member by paying dividends.

These rules apply the highest marginal personal income tax rate (the tax on split income) to the dividend income received unless the family member meets one of the legislated exceptions to the application of this tax. For example, if the adult family member is actively engaged in the business on a regular basis by working an average of at least 20 hours per week during the year (or in any five previous but not necessarily consecutive years), the tax on split income may not apply.

Categories
tax

Income Tax Checklist

Tax season is coming. Generally, the personal income tax filing deadline is April 30. Income tax filing can be overwhelming. To make sure you get every tax credit and deduction you are entitled to, use the following checklist to get ready with all the receipts and income records necessary.

Tax slips 

  • T4 slips (Employment income)
  • Employment insurance benefits (T4E)
  • Interest, dividends, mutual funds (T3, T5, T5008)
  • Tuition / education receipts (T2202A)
  • Universal Child Care Benefit (RC62)
  • Old Age Security and CPP benefits (T4A-OAS, T4AP)
  • Other pensions and annuities (T4A)
  • Social assistance payments (T5007)
  • Workers’ compensation benefits (T5007)
  • All other information slips

Receipts

  • RRSP contribution receipts
  • Support for a child, spouse or common-law partner
  • Professional or union dues
  • Tool expenses (Tradespersons & apprentice mechanics)
  • Medical expenses
  • Transit pass receipts
  • Charitable donations
  • Political contributions
  • Child care expenses
  • Adoption expenses
  • Children’s arts and sports programs
  • Moving expenses
  • Interest paid on student loans
  • Carrying charges and interest expenses
  • Office – in-home expenses
  • Exams for professional certification

Other supporting documentation

  • Notice of Assessment/Reassessment from CRA
  • Canada Revenue Agency correspondence
  • Sale or deemed sale of stocks, bonds or real estate
  • Northern residents deductions receipts
  • Rental income and expense receipts
  • Business, farm or fishing income/expenses
  • Automobile / Travel logbook and expenses
  • Disability Tax Credit Certificate
  • Declaration of Conditions of Employment (T2200)
  • Volunteer Firefighters certification
  • Search and Rescue volunteers certification
  • Custody Arrangement documentation