Blurb: Few lovers bother to check the Income Tax Act before hooking up. But maybe they should. Canadian couples benefit from numerous tax advantages and it pays to inform yourself about them.

The tax consequences of hooking up
By Peter Diekmeyer o Bankrate.com

Hooking up with a life partner offers some of the best tax-reduction and tax planning alternatives you'll ever come across. But there are also some tricky rules that can trip you up if you're not careful.

According to Sonny Bernard, a tax partner at Bessner Gallay Kreisman, couples should use the opportunities afforded by the tax code, to "split" income.

Canada uses a progressive income tax structure, which means the income tax rates increase as income rises. The idea is to ensure that as much revenue as possible is taxed in the hands of the lower-income spouse.

"An ideal scenario, would be if the two spouses are paying the same rate of tax," says Bernard. "That means they've got a perfect split."

Spousal RRSP
Spousal RRSPs are a perfect example of a long-term strategy for reducing income taxes, by transferring income between the partners, so that it is taxed at a lower level.

A spousal RRSP refers to the process by which the higher income spouse contributes to his partner's RRSP, instead of his own. By doing this he gets a larger tax refund than if the lower income spouse had made the contribution.

However once you contribute to your spouse's RRSP the money now legally belongs to him or her. As a result many businessmen use a spousal RRSP as a form of creditor protection, the same way they often put real estate in their partner's name.

Business income
Couples in which one of the partners is carrying on an active business can also split income by having the owner pay his or her spouse a salary.

This common technique is perfectly legitimate Bernard says as long as the spouse actually does work such as filing or administration, and that the salary paid is "reasonable," with respect to the value of the work done.

Watch out for income attribution rules
One strategy that is increasingly hard to implement is directly transferring large amounts of property to your spouse or children, so that the income is taxed in their hands at a lower rate.

The Income Tax Act provides that income from such property is attributed back to the taxpayer who made the transfer, and taxed in his hands even though he did not directly receive it personally.

Family expenses
One technique that gets around income attribution rules is to have the larger wage earner pay most of the family expenses, and to have the lower income earner save his or her salary.

Then, the resulting interest and dividends on those savings are taxed at a lower wage owner's marginal rate and would not be attributed back, since no actual money was transferred.

Other tax considerations
Beyond the tax planning opportunities, coupling-up raises numerous administrative issues. There include:

o Spousal credits. Taxpayers are entitled to a spousal credit that varies depending upon how much income your partner earns. For the calendar year 2003, your tax credit will be $1,054, if your spouse's income was $659 or less, and the amount progressively decreases to zero, once your spouse's earnings hit $7,245.

o Credit transfers. Numerous credits can be transferred between spouses. These include medical expenses, tuition fee credits, age 65 and over credits as well as charitable donations and pension income credits.

o Child care expenses. The amount of childcare expenses that you can deduct doesn't change if you couple-up. But only the lower income partner is allowed to claim the deduction.

o Common law and same sex partnerships. Canada's tax code uses a broad definition of the word spouse that goes far beyond traditional marriages. In Canada the word "spouse" includes married, common law and same-sex partners. Common law and same sex relationships are defined as two persons who live in a conjugal relationship for a continuous period of at least 12 months.

 

For information about spousal RRSPs:
http://www.ccra-adrc.gc.ca/tax/individuals/topics/rrsp/contributing/spousal-e.html

For information about child care expenses:
http://www.ccra-adrc.gc.ca/E/pub/tp/it495r2/it495r2-e.html

For information about specific areas related to the tax consequences of coupling up check our Canada Customs and Revenue Agency's search feature:
http://www.ccra-adrc.gc.ca/search/menu-e.html

-- Posted April 1, 2004

Peter Diekmeyer is the Montreal Gazette's management columnist. He can be reached at: peter@peterdiekmeyer.com

 

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