Author Topic: Reducing Canadian income tax / Income splitting  (Read 3346 times)

Ziggurat

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Reducing Canadian income tax / Income splitting
« on: November 10, 2013, 09:26:41 AM »
Hi all,

I'm a 48 years old, DW and I have been reasonably mustachian, but I found MMM some months ago and am working to better focus our efforts.

I am fortunate in recent years to have experienced huge growth in an already high salary. This is to the point now where my income tax is almost $50K per year. My wife works part-time and earns about $13K per year.

I'm wondering what (legal) options are open to me in Canada to reduce my income tax or "split" income. It seems the tax structure is deliberately set up to prevent this except for very limited ways.  We did the spousal RRSP while we could, but my work pension has eaten all my contribution room and back-contribution has been used up. We have contributed to our kids' RESP (in more recent years, not enough to cover all university expenses) and both TFSAs to the max.

The only other thing I have seen is the idea of a "spousal loan" for investing, but that only means that dividends etc on the money invested are taxed in her name. At the moment, all our investments are in tax-sheltered accounts. We have little to invest outside those due to the kids' university expenses and paying down the mortgage.

Is there another way? Some kind of business setup or something?  I know we have it very good, including living in a great country supported by taxes. But I'd be happy to find some ways for my "fair share" to be as low as possible. I'd be happy to pay for an accountant's services to help with this, but would like to go into that being more aware of what the options are.

Thanks

Kazimieras

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Re: Reducing Canadian income tax / Income splitting
« Reply #1 on: November 11, 2013, 11:21:45 AM »
A lot of it will hinge on the amazing phrase of "it depends". So question - how is your income derived right now? Are you an employee of a corporation? Contractor? Do you run your own businesses? Consulting? This will largely dictate how you can structure things. From there we can figure things out.



In the mean time though - your work pension - does it have survivor benefits? If not, some life insurance plans may be a good idea. They can help shelter things and provide her an income stream in the event of your death.

Spousal loans are great things, especially with the current prime rate. You can loan your wife money at 1%. You have to declare the interest she pays you (and she must pay it) as income tax. However in the long term, all gains on that money are her dollars to be taxed. I think, and it has been a while, so I may be wrong, there was a clause for spousal forgiveness of the loan as well. Given her yearly income the income tax rate on any gains will be minimal, saving you both money (since it appears there are few other options for you to stock it away) in the long term.

daverobev

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Re: Reducing Canadian income tax / Income splitting
« Reply #2 on: November 11, 2013, 05:06:24 PM »
I believe the Conservatives will introduce income splitting if they get in, next election, so that might be something to hope for.

Not sure how it works with the.. AMT?.. and you, but you may be able to get the enhanced dividend tax credit through investing in Canadian companies (or full-replication ETFs too I think ie, ETFs that hold all the stocks in the index - ZCN.TO would work, I think).

Not sure if you give much to charity, but if not you can get a nice refund this year (though obviously you have to give away X in order to get 0.4X back or whatever - this won't make you money but it is "better" for you to get top-bracket back than me with 20% or whatever!)

But honestly I think these are small things and not now or not fitting - you should probably talk to a fee-based tax person (maybe have a look at Canadian Couch Potato - the owner there has started doing consulting).

Ziggurat

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Re: Reducing Canadian income tax / Income splitting
« Reply #3 on: November 12, 2013, 03:05:34 PM »
A lot of it will hinge on the amazing phrase of "it depends". So question - how is your income derived right now? Are you an employee of a corporation? Contractor? Do you run your own businesses? Consulting? This will largely dictate how you can structure things. From there we can figure things out.

I'm a hospital employee.

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In the mean time though - your work pension - does it have survivor benefits? If not, some life insurance plans may be a good idea. They can help shelter things and provide her an income stream in the event of your death.

Yes, it does have survivor benefits, and also I'm covered with a minimum 2x annual earnings in life insurance while I work there.

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Spousal loans are great things, especially with the current prime rate. You can loan your wife money at 1%. You have to declare the interest she pays you (and she must pay it) as income tax. However in the long term, all gains on that money are her dollars to be taxed. I think, and it has been a while, so I may be wrong, there was a clause for spousal forgiveness of the loan as well. Given her yearly income the income tax rate on any gains will be minimal, saving you both money (since it appears there are few other options for you to stock it away) in the long term.

Apparently the loan rate was set to go up to 2% starting in October, so that option is not quite as good as it used to be. But I will definitely look into it. In the past we have done lump payments on our mortgage with any extra money, but the rate is <3% so that wasn't the smartest move.

I don't think I mentioned that I was considering early retirement (or at least a year or two off from full-time work) in the next few years. That could make the spousal loan a little trickier too with probably needing the money in the short term, so not being able to invest for the longer haul. We have the net worth for me to retire, but it is mostly in pensions I can't touch yet, so free cash may be an issue until my late fifties.

The other option I'm considering now is going to part-time work. Just had a great long weekend and love the idea of working less. Might help honing our skills at keeping expenses down, and doing more things ourselves. I would be happier to continue working longer if it was three days a week. Of course that still doesn't help with income splitting, but maybe I could also work on building other sources of income.

Ziggurat

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Re: Reducing Canadian income tax / Income splitting
« Reply #4 on: November 12, 2013, 03:15:34 PM »
I believe the Conservatives will introduce income splitting if they get in, next election, so that might be something to hope for.

According to this: http://www.ipolitics.ca/2013/10/09/whats-wrong-with-income-splitting-nothing-if-youre-wealthy/, the income splitting will be for people with children under 18. Unfortunately, we have less than a year left in that situation, so it likely won't come in time for us.

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Not sure how it works with the.. AMT?.. and you, but you may be able to get the enhanced dividend tax credit through investing in Canadian companies (or full-replication ETFs too I think ie, ETFs that hold all the stocks in the index - ZCN.TO would work, I think).

Thanks for that tip - haven't heard of that and will look into it.

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But honestly I think these are small things and not now or not fitting - you should probably talk to a fee-based tax person (maybe have a look at Canadian Couch Potato - the owner there has started doing consulting).

We did pay for an accountant to review our "early retirement" thoughts several years ago. It was helpful as he raised a few issues we hadn't thought of, and gave us a detailed spreadsheet with various projection scenarios. I revisit that sheet every year or so and update it with more recent net worth and savings.  However, if I continue working full time, I think you are right: it would make sense to get advice specifically about tax reduction.



Kazimieras

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Re: Reducing Canadian income tax / Income splitting
« Reply #5 on: November 13, 2013, 10:01:32 AM »
I think you're in a tricky, yet enviable position. DB pensions are nice to have (and by that I mean golden), and I am going to make some assumptions as to which plan you belong to, but the HOOP pension fund I expect you belong to is well funded.

Short of regular income tax deductions, I don't think there is much you can do. If you don't do your own taxes, try it and use something like Quicktax. There are alternate areas that allow for further deductions, e.g. medical expenses, which may be something you can use. Rent and transit passes are deductable, and since it appears you are paying for your children's education, have them pass along the maximum amount of tuition credits to you, so that you can reduce your income taxes.

And don't feel bad about paying down the mortgage, even with rates being low. While you could have made more money investing elsewhere, your overall future risk decreased as a result (cost predictability).

Ishmael

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Re: Reducing Canadian income tax / Income splitting
« Reply #6 on: November 13, 2013, 12:25:52 PM »
I believe the Conservatives will introduce income splitting if they get in, next election, so that might be something to hope for.
While income splitting would personally benefit me a great deal, I certainly will not be hoping for the Conservatives to get in again.

I don't care if a hamster gets elected, as long as it's not the asshat Harper and his gang of angry yes-clowns.

Sorry, didn't mean to derail the conversation :)

daverobev

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Re: Reducing Canadian income tax / Income splitting
« Reply #7 on: November 13, 2013, 01:48:49 PM »
I believe the Conservatives will introduce income splitting if they get in, next election, so that might be something to hope for.
While income splitting would personally benefit me a great deal, I certainly will not be hoping for the Conservatives to get in again.

I don't care if a hamster gets elected, as long as it's not the asshat Harper and his gang of angry yes-clowns.

Sorry, didn't mean to derail the conversation :)

Unfortunately I am not eligible to vote (yet). There isn't, also unfortunately, a party I would truly wish to vote for. I will say that the Provincial (ON) parties and the Federal parties do a good job of... what's the word. Making their Federal or Provincial counterparts look similarly bad (ie, the Lib ON govt makes me think voting Lib Fed; the Fed Con govt makes me think Con ON would be bad..).

The ON gas plant scandal just makes me sick. The Senate stuff going on makes me sick. The military stuff makes me sick. What I read of the opposition positions makes me sick.

Now. There are good parts to the parties as well, but I have a horrible feeling we'd all be better off if there was a 'law freeze', everything that is was linked to inflation (so public sector pay, CPP, benefits, etc all go up by a reasonable inflation amount every year). Yes, offtopic, heh.

Honestly... I'd be amazed if Trudeau didn't get in. Such a shame about Jack Layton, he seemed like a genuinely decent guy.