If your family is like mine, they'll drive you crazy from time to time. But cut them some slack. Without their help, you could be paying a lot more tax.
That's right, when a family works together to reduce each member's tax burden, the result can be significant dollars saved. Consider these ideas:
Give investments to a child.
If you make a gift of investments to an adult child who is in a lower tax bracket than you are, any future capital gains and income earned will face tax at lower rates in your child's hands.
This can work with minor children as well, as long as the investment focus remains capital growth, since capital gains will be taxed in the minor's hands, but interest and dividends will be attributed back to you and taxed in your hands. When you gift assets to a child, keep in mind that you'll be deemed to have sold those assets at fair market value, which could trigger a tax hit. So count this cost first.
Trigger capital gains.
When you've already given investments to a child who has no or low income, it may make sense to trigger a capital gain before year-end where that gain will face little or no tax in the child's hands. Reinvesting the proceeds will create a bump-up to the adjusted cost base of the child's investments, saving him or her tax later.
Trigger capital losses.
Do you have any investments that have dropped in value? (As if I had to ask.) Consider transferring these investments to a child before year-end. This will trigger a capital loss that you can use, and will pass the tax liability on any future growth in the investment on to your child. You'll also avoid probate fees on those assets at the time of death with this idea.
Lend money to your spouse.
You can split income with a lower-income spouse by lending money to your spouse. A promissory note should be created, and interest should be charged at the prescribed rate in effect at the time the loan is set up (3 per cent until year-end), and that rate is locked in forever. Your spouse must pay that interest by Jan. 30 each year for the prior year interest charge, and can deduct that interest cost. You'll have to pay tax on the interest. Then, your spouse will pay all the tax on any income or capital gains earned on the money lent to him or her. The family will come out ahead as long as your spouse earns a rate of return on the portfolio greater than the prescribed rate.
Contribute to a spousal RRSP.
There are few ways easier than a spousal registered retirement savings plan to move a tax bill to a lower-income spouse. This is a plan to which you will contribute. You'll get the deduction, but your spouse will be the annuitant and will generally pay tax on the withdrawals. Ideally, you and your spouse should have equal incomes in retirement, and a spousal RRSP can even out the assets where your income and savings may be higher than your spouse's today.
Base withdrawals on the younger spouse.
If you turned 69 in the year, chances are you'll establish a registered retirement income fund by year-end for at least some of the assets in your RRSP. Be sure to base the mandatory RRIF withdrawals on the age of the younger spouse. This will reduce the required withdrawal annually and will allow you to defer tax longer.
Split CPP benefits.
If you and your spouse are in different tax brackets, it may make sense to call Human Resources Development Canada and arrange to split your Canada Pension Plan benefits with your spouse.
This will allow your spouse to pay tax on up to one-half of your CPP benefits while you'll have to pay tax on that same percentage of your spouse's benefits, if any.
The end result will be tax savings if your benefits are higher than your spouse's and your marginal tax rate is also higher.
Contribute to an RESP.
You're allowed to contribute up to $4,000 each year to a registered education savings plan for a future student. If you miss that $4,000 contribution in any year, you're not able to carry that contribution room forward to a future year (you could not contribute $8,000 in the next year, for example). Make an RESP contribution by year-end to ensure you don't miss the opportunity to put those dollars into the plan. And the Canada education savings grants, which will be paid by the government into the RESP when you contribute, is free money (up to $400 for each year the child is 17 or under) and only makes these plans more attractive.
Pay child-care expenses.
Qualifying child-care expenses can be claimed on your tax return for 2003 if those costs are paid in 2003. Consider paying adult children (18 or older in the year) for any time throughout 2003 in which they looked after the younger children (16 or younger throughout the year) to allow you to be at work earning an income. A deduction will be available to you, and your adult child will face the tax on the payments (and may pay little or no tax depending on his or her other income). This is another great income-splitting strategy.
Transfer unused education amounts.
Students are entitled to claim a credit for tuition for the year, plus an education credit for each month of full- or part-time enrollment in a qualifying post-secondary program. To the extent the student doesn't need these credits to reduce taxes owing to nil, the amounts on which the credits are based can be transferred to a parent, grandparent, or spouse, to a maximum $5,000 of tuition and fees. Just fill out the back of form T2202A provided by the school.
Pay salaries to family. You can split income with family members by paying them salary or wages in 2003 for services they've provided to your business. Review what services were provided by family membersand determine whether you might be able to justify paying deductible (to your business) compensation to them before year-end.
Name your spouse beneficiary.
At the time of your death, you'll be deemed to have sold all that you own at fair market value. Where the assets have appreciated in value, there could be tax to pay on the capital gains.
By leaving assets to your spouse, you'll avoid that deemed sale at fair market value. Instead, the deemed sale will take place at your adjusted cost base, deferring the tax that might otherwise be due.
Give thought to naming your spouse as beneficiary of those assets that will otherwise create a tax bill upon death.
Tim Cestnick, FCA, CFP, TEP, is the author of Winning the Tax Game and The Tax Freedom Zone, and is managing director of National Tax Services for AIC Ltd.
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