Every family has traditions. When I was a kid, board games were a family affair. Whether it was Monopoly, Rummoli, or Colonel Mustard in the kitchen with the knife in the game of Clue, Friday night was game night, and we had a great time.
Tax planning, on the other hand, was never a family affair. We never did take the time to sit down on Friday night together to browse the pages of a good tax book. Too bad, really. As I ponder the laughter we could have shared sitting around our kitchen table, discussing spousal loans and the like, I think my sisters would have enjoyed it.
Move over Colonel Mustard. I'm going to make sure my own children don't miss out. Yes, they'll have a childhood that I never had.
What about your family? Are you thinking about taxes as a family affair this year? You see, those who fail to think about taxes in a family context are very likely paying more in tax than necessary. It's not "every man for himself" in the tax game, rather, it's "every family for itself."
Let me share some ways in which you should be thinking of taxes as a family.
Tips for today
There are some things that you can do today, as you file your tax returns, to save tax as a family. Consider these ideas.
File a tax return for children.
If your kids have earned any income at all, ensure they file a tax return even if they won't owe any tax. The earned income will create RRSP contribution room, which will save them tax later when they contribute to a registered retirement savings plan.
Claim a spouse or equivalent-to-spouse credit.
If the income of your spouse (or common-law partner) is under $7,130 for 2002, you'll be entitled to a spousal credit. Even if you're not married, you may be entitled to an equivalent credit if dependents lived with you in 2002.
Claim child care expenses properly.
You'll be entitled to claim child care expenses incurred for any child who was 16 or under in 2002. The taxman does not attribute specific expenses to specific children, so report all your children 16 or under on your return, whether you incurred expenses for them or not. This will increase the total amount you're eligible to claim.
Transfer credits to a spouse.
To the extent your spouse is not able to use certain tax credits, they can be transferred to you. Specifically, tuition and education, pension, disability, and age credits can be transferred. Use Schedule 2 of your tax return to make the transfer.
Transfer credits to a parent.
If your child has tuition and education amounts that he or she does not need to reduce a tax bill, up to $5,000 of those amounts can be transferred to a parent or grandparent. Further, any disability credit that is not needed can be transferred to a supporting parent, or a number of other family members.
Transfer dividends to your spouse.
It may be possible to save tax by transferring all the dividends from the lower-income spouse's return to the higher-income spouse. This is the case where the lower-income spouse does not have sufficient income to utilize the dividend tax credit. This will (and must) also increase the spousal credit for the higher-income earner.
Claim the caregivers tax credit.
If you provide care in your home for an elderly or infirm relative, you may be eligible to claim a credit worth up to $577 federally. The credit is phased out once the dependant's income exceeds $12,312.
Claim donations properly.
Claim all the donations on the tax return of one spouse. This will save your family tax since the tax relief is greatest once the donations reported aggregate $200 or more. You'll hit that $200 level faster this way.
Claim medical expenses
Claim all family medical expenses on the lower-income spouse's tax return. You're only entitled to claim medical expenses that exceed 3 per cent of your income, or $1,728 (whichever is less), so you'll be able to claim more on the lower-income return.
Tips for tomorrow
Now that we've looked at some tax filing ideas, there are some strategies that you should consider implementing this year to save taxes for 2003. Consider these ideas.
Make a loan to your spouse.
It's possible to transfer investment income to a lower-income spouse to save tax by lending money to your spouse to invest and charging the prescribed rate of interest. See my article dated Nov. 27, 2001, at http://www.timcestnick.com.
Make a gift to a child.
Transfer investment income, and the resulting tax bill, to a child by giving assets to that child. In the case of minor children, focus on earning capital gains since other income will be attributed back to you. If you're giving something other than cash, be aware that you'll be deemed to have sold the asset for fair market value, which could give rise to a tax hit.
Pay salaries to family.
There's nothing like a part- or full-time business to create income and provide an opportunity to pay deductible salaries to lower-income family members. Consider starting even a part-time business in 2003.
Pay household expenses.
If you're the higher-income earner in the family, consider paying the household expenses. This will free up the income of your lower-income spouse to invest where any income earned will be taxed at lower rates.
Contribute to a spousal RRSP.
In an ideal world, you and your spouse should have equal incomes in retirement. Contributing to a spousal RRSP will put assets into your spouse's hands where he or she will pay the tax on withdrawals later in life. Consider this strategy if one spouse is currently expected to have a higher income in retirement.
Contribute to an RESP.
Contributing to a registered education savings plan (RESP) for a child can save tax since any income earned in an RESP will eventually be taxed in the student's hands, not yours, when withdrawals are made. And with Canada Education Savings Grants being offered by the government on contributions to RESPs, this should be a no-brainer.
Transfer capital losses to your spouse.
If you own investments that have dropped in value (and who doesn't?), it may be possible to transfer those unrealized capital losses to your spouse if he or she will be able to use them before you. See my article dated Sept. 29, 2001, at http://www.timcestnick.com.
Negotiate to hire an assistant.
If your employer requires you to hire and pay for an assistant in your work, you'll be able to deduct the salary paid to that assistant. If you happen to hire your spouse or child, you'll shift income directly from your tax return to your family member's, saving taxes if they are in a lower tax bracket.
Consider an estate freeze.
This strategy involves freezing the value of certain assets today, so that any future growth will be taxed in the hands of, most commonly, your children. A freeze effectively transfers and defers a tax liability on future growth. Talk to a tax pro for more details.
Tim Cestnick, CA, CFP, TEP is author of The Tax Freedom Zone and Winning the Tax Game 2003. He is managing director, National Tax Services, at AIC Ltd.
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