There are some common tax-reduction strategies families can use throughout the year.GETTY IMAGES
Tax season is a time for families to review ways to lower their household tax bills. Options include pension income splitting, spousal registered retirement savings plans (RRSPs) and spousal loans.
Here are some of the most common tax-reduction strategies families can use throughout the year, while staying on the right side of the Canada Revenue Agency (CRA).
Pension income splitting
Pension income splitting is typically the “first step to try to normalize tax brackets [between spouses],” says Laura Whiteland, financial planner and owner of Inclusive Financial Planning in Truro, N.S.
If spouses are in two different tax brackets, the higher income earner can elect to transfer up to 50 per cent of eligible pension income from sources such as a registered pension plan, a deferred profit-sharing plan, a registered retirement income fund (RRIF) or a life income fund (LIF) – to their partner in a lower tax bracket. Ms. Whiteland notes that people often don’t realize that spouses can split Canada Pension Plan (CPP) credits when one earns significantly more than the other.
“Every spouse should do it if they’re at retirement age and able to do it in any way, shape or form,” she says.
In cases where one spouse has substantial retirement assets, it might make sense to defer their Old Age Security (OAS) payments to age 75, to give them enough time to get their RRIF income below the OAS clawback threshold, Ms. Whiteland adds.
Spousal RRSPs
Spousal RRSPs are one of the few tools that spouses have to income-split in their working years, says Paul Shelestowsky, an investment advisor at Meridian Credit Union in Niagara-on-the-Lake, Ont. These retirement savings vehicles allow a higher-earning spouse to contribute to their lower-earning partner’s RRSP and still receive the same tax deduction they would if they had contributed to their own RRSP.
Mr. Shelestowsky offers the example of a couple in which one spouse earns $100,000 and the other $40,000, with $5,000 to put toward retirement savings. He says that if the lower-earning partner contributed the funds to their RRSP, they would save $978 in taxes. In contrast, the higher-earning partner would save $1,574 by contributing through a spousal RRSP.
“It makes so much more sense to make a spousal RRSP [contribution]. Let [the higher-earning partner] get the reduction, but [their spouse] gets the asset,” Mr. Shelestowsky says.
Spousal loans
Spousal loans are one exception to the CRA’s income-splitting attribution rules, which prevent high-earning individuals from simply giving funds to their lower-earning spouse to be taxed at a lower marginal tax rate.
This strategy allows the higher-earning spouse to loan money to their spouse at a government-prescribed interest rate. The spouse can then invest the loaned funds, and the investment income will be taxed at their lower marginal rate.
Ms. Whiteland says spousal loans can be useful when one spouse experiences a one-time jump in their tax bracket, such as when a business owner sells their business.
“Typically, you’re working with someone in quite a high tax bracket versus their spouse in quite a low tax bracket,” Ms. Whiteland says, giving the example of someone who sells their business for $800,000 and has a spouse earning $20,000 a year. “There’s no way to say, ‘here’s $400,000 to invest.’ You have to loan it over.”
The strategy is more popular and tends to make more sense in low-rate environments, Mr. Shelestowsky says. Once someone takes the loan, the interest rate remains fixed.
“Back in 2022, when rates were zero, the government rate was 1 per cent. It was almost like free money. When the government rate is 5 per cent and [the investment return] is 5 per cent, there’s no benefit. There has to be a difference between the loan interest rate and the expected return.”
Gifting money to contribute to a registered savings account
Similarly, this strategy is not income splitting in the traditional sense, Mr. Shelestowsky says. The higher earner would still be taxed on the funds they earn, but once they gift money to a spouse for investment in a tax-free savings account (TFSA), the gains can’t be reattributed to them. “It’s down the road when the income gets used, it stays with the lower-earning spouse,” he explains.
Mr. Shelestowsky notes that this can also be done for children in either a TFSA or a first home savings account (FHSA). One of his clients withdraws $16,000 each year to contribute to his two children’s FHSA accounts.
“He’s been making the money, and paying taxes on what he made, but going forward it’s no longer taxable for him and can’t be reattributed.”
Family trusts fall out of favour
Changes to trust rules in the past decade that require income earned on the trust balance to be taxed at the highest marginal tax rate have made family trusts largely more work than they’re worth, Ms. Whiteland says. The administration costs are also higher.
“Almost all the rules have changed, the benefits have evaporated over the last 20 years,” she points out. “There are still situations with quite large family businesses or family wealth situations, [but] … not even your top 10 per cent earners are looking at it anymore."
Other strategies
Tina Tehranchian, a certified financial planner and senior wealth advisor at Assante Capital Management Ltd., in Toronto, says people may also be able to leverage strategies such as tax-loss selling and charitable giving to reduce their family’s tax bill.
Tax-loss selling involves realizing losses on stocks held in a non-registered account, typically to offset capital gains, whether from the sale of a business or investment property or from gains on securities. Any net capital losses can be carried back three years or carried forward indefinitely. Any trades must be completed by Dec. 30 of a given year to ensure they’re settled by the final day of the year.
People using this strategy need to be aware of superficial loss rules, Ms. Tehranchian says. Someone who realizes a loss for tax-loss selling purposes cannot buy the stock back within less than 30 days, nor can their spouse, or a corporation or trust they control.
Charitable giving can also help reduce a family’s income tax bill, she says. Donations of up to $200 receive a federal donation credit of 15 per cent, and any donation amounts above $200 receive a 29-per-cent credit, or 33 per cent if someone’s taxable income exceeds the top marginal tax bracket. Provincial donation credits are also available, potentially bringing someone’s total credit to as much as 55 per cent.
If someone plans to make a charitable gift and also holds securities that have appreciated in value, Ms. Tehranchian recommends donating them in kind to a charity of their choice. The charity will sell them immediately and issue a charitable donation tax receipt based on the securities’ market value.
The strategy, which eliminates any capital gains that would have been paid on the securities, is “unfortunately underutilized,” she says, adding that “if you like those securities and want to keep them in your portfolio, you can always use the cash you wanted to give to charity to buy them back.”