Tax Time Tango? Share Income with Your Boo & Save!
Thinking about sharing some of your income with your spouse in Canada? It’s a smart move that can save you money on taxes! But there are a few things to keep in mind to avoid any issues with the CRA (Canada Revenue Agency).
What is (Spousal) Income Splitting?
Imagine this: you’re earning a lot, your spouse is earning less. Income splitting lets you strategically shift some of your higher income to your spouse’s lower tax bracket. Why? Because Canada’s tax system rewards lower earners with lower tax rates. So, by sharing your income strategically, you both potentially pay less tax overall. Sounds like a win-win, right? It’s Like a Tax Tango!
What are the Legal Ways to Share Income with Your Spouse (The Green Lights)?
The CRA actually approves of certain ways to share income with your spouse:
- Canada Pension Plan (CPP) Sharing: You can choose to split your CPP payments with your spouse, giving them some extra cash and potentially boosting their retirement benefits.
- Spousal Pension Splitting: Feeling generous after retirement? You can transfer up to half of your pension income (like withdrawals from your RRIF) to your spouse, potentially lowering their taxes.
- Loans at Special Rates: Need a financial boost for your spouse? You can lend them money at the CRA’s special interest rate. They can then invest that money and potentially pay less tax on the returns (double win!).
The CRA Makes Sure It’s legit (The Red Flags)
The CRA keeps an eye on income splitting to make sure everything is legit. Here’s what could raise a red flag:
- Big Income Shifts: If your income suddenly drops a lot and your spouse’s skyrockets, the CRA might take a closer look. Aim for a more balanced sharing of income.
- No Work, All Paycheck: If your spouse seems to be living the dream job of watching Netflix all day while getting paid a lot, the CRA might suspect something fishy. Make sure your spouse is doing real work for their income.
- Missing Paperwork: No paperwork showing your income splitting arrangement (like loan agreements or work logs) is a big no-no for the CRA. Keep good records to show everything is above board.
- Overpaying Your Partner: Giving your spouse a huge salary for little work or unrelated expenses? The CRA might not like that. Keep things fair and reasonable.
- Funky Interest Rates: Skipping the special interest rate for spousal loans can raise eyebrows. Stick to the CRA’s rate to avoid any trouble.
When Income Splitting Becomes Unlawful: Examples to Avoid (The No-Nos)
Income splitting is legal when done correctly, but some things can cause problems:
- “Employing” Your Spouse (But They Chill at Home): Giving your spouse a high salary for work they don’t do in your business? The CRA might disallow the expense and reassess your taxes. Make sure your spouse genuinely earns their income.
- “Loaning” Without Following the Rules: Skipping the special interest rate or paperwork for spousal loans can look like tax evasion. The CRA could tax you on the income earned by the loaned money. Follow the rules!
- Just Moving Investments: Simply giving your spouse investment assets without following the rules (like loans at special rates) can trigger tax issues. The income might be taxed to you instead. Be strategic about asset transfers.
- Shady Family Trusts: Setting up a family trust just for income splitting could backfire. If the trust seems like a tax dodge, the CRA might challenge it and tax you on the income. Make sure your family trust has a legitimate purpose.
- Hiding Your Spouse’s Work: Trying to mislead the CRA about your spouse’s involvement in business or investments can result in penalties and reassessments. Be honest and document your spouse’s contributions accurately.
Get Help from the Tax Experts: Don’t Go It Alone! Sharing income with your spouse can be a great way to save money on taxes, but the rules can be tricky. Don’t risk an audit! Capital Tax Law’s experienced team can help you develop a smooth and legal income-splitting strategy. Get a free consultation today and dance your way to tax savings with peace of mind! Contact us today through our convenient online query form.