Ok, so last week’s bad word was debt and this week is ‘taxes’!
I thought this may be a timely post considering that April 30th is fast approaching. So let’s discuss a tax strategy that may save you money.
This particular strategy works if you have a large disparity of income between spouses because one spouse will have a higher marginal tax rate than the other. CRA rules dictate that if you have investable assets they must be derived from your income. In other words, a wife (assuming she is the higher income earner) cannot gift her husband monies to invest and take advantage of his lower marginal tax bracket. If she did then the interest, dividends and capital gains would be attributable back to her which defeats the purpose of changing ownership of the funds. If he is working she can pay all the bills and have her lower-income spouse do all the investing with the income that is attributable to him. This must be tracked carefully for CRA to legitimize this strategy.
If however, he is not working, she can loan her husband the money at the CRA perscibed rate of interst (currently 1%) and he can invest it and any returns would be taxable to him but she must also include the interest portion of the loan as income on her tax return. This strategy must be evidence by a loan document and the interest portion is payable to the wife by January 31 of any given year. Because the CRA perscribed rate is so low, at the moment, it would be an opportune time to utilize this income splitting strategy, if it was beneficial to do so. The question remains ~ what is the optimum amount to lend to your spouse??? Well, that question could be answered by your accountant or tax preparer by either assessing your 2009 filing or by doing a pro-forma tax calculation after the fact.
If this strategy does not affect you then stay tuned as next week’s topic will also be about taxes and strategies to ensure CRA doesn’t get more than it should.