Married Canadians: Save on Taxes by Combining Finances

Are you part of a married couple? Did you know that you and your spouse can save on taxes by combining your finances?

It’s true. The government provides several tax breaks for sharing assets with your spouse. It’s not as simple as having joint accounts, though. You have to be smart about what you share. In this article, I will explore how you can save on taxes by combining finances.

What not to share

Before going further, I should say that Canada’s tax system for married couples is not as simple as “share everything and you’ll pay lower taxes.” On the contrary, there are some things that you really shouldn’t hold jointly. These include the following:

• Business assets. Business income splitting used to be allowed, but it was mostly walked back in 2019. You may be able to “split income” by hiring your spouse or vice versa, in which case it makes more sense for one of you to own the business. Your spouse has to actually work for the business, though. If he/she doesn’t, then the Canada Revenue Agency (CRA) may invalidate the arrangement.
• Debts. If you keep your debts separate, the spouse with the lower credit rating will not affect the other’s credit rating. However, if the two of you apply for credit jointly, someone’s rating could suffer.

What to share

Having gotten the exceptions out of the way, here are some things you can share tax-efficiently.

#1: Investments

It pays to hold investments in the lower-earning spouse’s name. If the money comes from the higher earner, it is initially taxed at the higher rate, but subsequent re-invested amounts are taxed at the lower earner’s rate. For example, if your spouse gives you $1 million and you get a $50,000 dividend from it, the $50,000 is taxed at their rate, but you can invest what remains and be taxed at your rate.

Let’s say Bob and Jane of Toronto hold $100,000 worth of Fortis (TSX:FTS) stock in a taxable account. The $100,000 comes from dividends on a previous investment. This position pays $4,300 in dividends based on Fortis’s 4.3% dividend yield. Those taxes could be taxed a lot or very little, depending on who owns the Fortis shares.

Bob is a Doctor with a 46% marginal tax rate, and Jane is a Social Worker with a 33% marginal tax rate. The Federal dividend tax credit is 15%, while the Ontario dividend tax credit is 10%. If the couple holds FTS shares in Bob’s account, they pay $1,246 in taxes, but if they hold them in Jane’s account, they pay $473 in taxes (see spreadsheet below).

Note that the tax savings in Jane’s account require that this be “second-generation income”: proceeds from an investment initially paid for by Bob, taxed at Bob’s rate, with the gains then re-invested in Jane’s personal account.

#2: Registered Retirement Savings Plan (RRSP) money

A second thing you can do is make spousal RRSP contributions. When the higher-earning spouse makes a contribution to the lower-earning spouse’s RRSP, the tax deduction goes to the higher earner. Tax deductions are more valuable at higher tax rates. So, when you make spousal RRSP contributions, you pay less taxes than if the lower earner made the contribution themselves.

#3: Pensions

Finally, we have pension income splitting. This is the main form of income splitting that survived the 2019 crackdown on the practice. You can still transfer RRSP or other pension income to your lower-earning spouse and pay lower taxes on it as a result. This only works if you’re retired, of course.

Foolish takeaway

There you have it: three ways you can save on taxes by sharing money with your spouse, along with two pitfalls to avoid. As you can see, financial planning for couples is a bit more complex than just having a joint account. Nevertheless, you can save real money that your single peers would never be able to.