Spousal tax strategies, part 2
Start-up companies, pension splitting
If your spouse is in a lower tax bracket than you, several tax strategies may let you take advantage of your spouse’s lower tax rate. Last time, I looked at strategies involving independent capital, loans, and transfers of assets. Let’s continue with a look at some more strategies involving start-up companies and income splitting retirement income.
Before 2018, it was possible to include your spouse as a shareholder of a new start-up company, where there is no value at the time the shares were issued to your spouse. Then as the company increased in value, you could pay dividends on a separate class of shares owned by your spouse, and pay tax at your spouse’s lower tax rate.
However, with the introduction of the Tax on Split Income (TOSI) rules on Jan. 1, 2018, this strategy has been seriously revised. Generally speaking, under TOSI, if your spouse (or children, regardless of age) is a shareholder in a company in which they are not actively involved, then any dividends paid to them would be taxed at the top tax rate.
There are some exclusions, however, that may still allow you to get around the TOSI rules. For example, if your spouse is over 25 and owns shares directly in the company that are worth at least 10% of the votes and value, then these shares will be considered to be “excluded shares” and could fall outside of the TOSI rules. However, you will need to ensure that the company is not in the business of providing services (e.g., professional companies for lawyers, doctors, and accountants would not qualify), and the bulk of the income from the company cannot be received from a related company.
Another exception would apply if your spouse was working at least 20 hours a week in the business on average or if the spouse contributed something meaningful to the business (e.g., man-hours, equity, financial risk). (For a more detailed discussion of the TOSI rules, see my article from April 2018).
Income splitting – pensions and RRSPs
If you and your spouse are seniors, it is possible to pool your retirement pension income in order to income split. However, there are some specific eligibility rules that apply:
* For those age 65 and over, eligible pension income includes lifetime annuity payments under a registered pension plan, an RRSP or a deferred profit-sharing plan, and payments from a RRIF.
* For those under age 65, eligible pension income is limited to lifetime annuity payments from a registered pension plan and “certain other payments received as a result of the death of the individual’s spouse.”
Note: Amounts received from a government pension plan (i.e., Old Age Security, Guaranteed Income Supplement, CPP/Quebec Pension Plan) are not eligible for the new pension splitting rules. While CPP income does not qualify as eligible pension income for the pension income credit, existing rules permit CPP pensioners to split their CPP retirement benefit.
In order to take advantage of this income-splitting measure, both you, as the recipient of the eligible pension income, and your spouse must agree to the allocation in your tax returns for the year in question. (Note that the allocation must be made one year at a time.) Up to one half of your pension income can be allocated to your spouse.
Spousal RRSPs had been the preferred route to split income prior to the ability to split pension income (which has only been available since 2007). A spousal RRSP is an RRSP where you make the contributions, but the plan is owned by your spouse. When you contribute to a spousal plan, you receive a personal tax deduction, but amounts received from the plan generally will be taxable to your spouse, not you. Sounds good? The only problem is that spousal RRSPs do not allow for splitting of other types of pension income, such as RRIFs and employer-sponsored registered pension plans. Now that pension-income splitting is allowed, some advisors believe it may eliminate the need for spousal RRSPs despite the higher age limit for RRSP contributions.
However, while helpful to many seniors, pension-income splitting will not ease the tax burden across the board. It will not be of any assistance to seniors who are single, senior couples with equal incomes, or couples where each spouse has more than $118,000 of income or less than $30,000 of income.
Samantha Prasad, LL.B., is a Partner with Toronto law firm Minden Gross LLP, a Meritas Law Firm Worldwide affiliate, and specializes in corporate, estate, and international tax planning. She writes frequently on tax issues, and is the co-author of Tax and Family Business Succession Planning, 3rd Edition. She is also co-editor of various Wolters Kluwer Ltd. tax publications. Portions of this article first appeared in The TaxLetter, © 2019 by MPL Communications Ltd. Used with permission.
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The foregoing is for general information purposes only and is the opinion of the writer. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.