If you’re married or in a common-law relationship, could there be anything more romantic than tax season? Nicole Ewing, Director, Tax and Estate Planning, TD Wealth, joins Kim Parlee to discuss some key tax moves couples can consider and misconceptions to be aware of as well.
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* Tax season is upon us. And if you're married or in a common-law relationship, there may be nothing more romantic than sharing tax forms. OK, not really. We tried. But anyways, Nicole Ewing, Director of Tax and Estate Planning at TD Wealth, joins me now with some of the ways couples can lower their tax bill and other things to keep in mind.
- Nicole, I tried, right? I tried to make it romantic. It's just, what can you do? Let's start off with how people need to think about this. If you're married or if you're in a common law relationship, does that affect your taxes? And I guess the corollary to that is then, should you do your taxes together?
* Well, it's really interesting the misconceptions that people have around this. So firstly, for tax purposes, you are a spouse if you have lived in a conjugal relationship with your partner for 12 months-- less if you share a child together or your child is dependent on them for support. So married or not, you may be spouses according to family law-- pardon me, for tax law, even if you are not for family law or estate law.
- So for tax purposes, if you are spouses, it's not that you're filing together. So it's a little bit different than in the US where they have joint filing. Rather, you are filing individually, but you must provide information about your spouse's income and circumstances. So for example, for certain federal credits or deductions, they're income-tested on the basis of a family. So your entitlement to the GST credit or the GIS-- those sorts of things where-- the Canada Child Benefit-- those are the sorts of things where the government really needs to consider both your income and your spouse's income.
- And then beyond that, yes, I would say absolutely we need to not only be filing together but planning together. Because marital status or becoming a spouse has a big impact in terms of some of the provisions of the act. So attribution rules apply. The stop loss rules are going to now involve your spouse and the transactions that they're doing. The Tax on Split Income or TOSI rules will apply to your new relationship.
- And then, of course, we have options for things like spousal RRSPs. But I would encourage people to think of this not just your spouse. When you marry, for tax purposes, your family unit may have expanded. Who you're related to for tax purposes may have expanded. And that can really have an impact on the type of planning that you do or planning that you've already done, how that might be impacting you now. So, if, for example, you've married somebody that is related to someone you're in business with, that might be an important consideration in terms of how you've structured your corporation or your business affairs.
* All right, let's peel this back a little bit and start talking about some specifics. I understand things like medical expenses, charitable donations. There's some opportunities there.
* There are. So when you're spouses, as a unit, you can share your medical expenses, for example. And generally speaking, you would want to claim those on the income of the lower income spouse because the threshold is determined based on the expenses over and above 3% of your net income.
- So that will get a bigger bang for our buck if we are using our spouse's lower income. And charitable credits as well or charitable receipts, you would be able to combine those. Depending on the amount in question, there can be a benefit to claiming those in the higher income spouse's hands. So depending on tax rates and the amount of the expenses and donations, there can be some benefit to coordinating that with your spouse.
* What about other things that you can transfer back and forth, other credits, maybe, that you just mentioned that are more advantageous in one spouse versus another?
* Well, we have the age credit, tuition credits. People would know about textbook credits, that sort of thing, pension credits that can be shared. But I would say most of the tax software that people would be using, it's going to be doing this automatically. Certainly, your tax preparers are going to be doing that for you.
- So making sure that, perhaps, this is where you want to be going in together, and giving them the opportunity to file at the same time. Because if you don't have that information, you are required to file for your deadline even if you don't have your spouse's information. So you need to make your best efforts. If you're doing that together and there are excess or unused amounts, you're able to transfer those to your spouse and, again, help reduce the overall tax burden of the family.
* Now, one thing you cannot split, I do know this, is capital gains. They belong to the person who-- it's the attribution piece, right?
* If there's one thing I could help people understand, it would be this. It is widely and wildly misunderstood. Simply adding your spouse's name to your account or giving them money to invest in their own name does not allow you, for tax purposes, to split that income. For tax purposes, the tax will follow the contribution.
- So even if I have a joint account with my spouse, if I have contributed all of the money in that account, I should be reporting that income for tax purposes. Now, there are some opportunities that we can do where, perhaps, we are utilizing what's known as the prescribed rate loan-- not as attractive these days with the higher interest rates. But, essentially, we're not able to simply gift our spouse money for it to be taxed in their hands.
- It will be attributed back to us, and we need to make sure that we're factoring that in. Now, income on income, you might be able to have some income generated there because that's not going to be attributed back or utilize things like the Tax-Free Savings Account. You can gift your spouse those funds or utilize a spousal RRSP, for example.
* So let's talk more about the spousal RRSP. What do you need to know? What can you take advantage of there?
* So this is a great tool. We are essentially thinking about an RRSP really is for retirement savings. And so when we think about our retirement, if we know that one spouse is going to be in a significantly lower income bracket, then we might be able to transfer some income over into their hands that they will then take out in retirement.
- So if I'm the high income earner, I can make a contribution to my spouse's RRSP using my contribution limit. It will be claimed on my taxes. But my spouse will now become the owner of that. They're the annuitant.
- And upon withdrawal, the funds will be taxed in their hands. So if we're thinking about in retirement, instead of me having the full income all being in my hands and taxed at the high marginal rate, perhaps because I've transferred some over, we'll both be in a lower marginal rate. It's a useful strategy to think about as well if you know that there's going to be periods in your relationship where one of you is going to be either in a lower income or out of work for a period of time. Perhaps you're taking a paternity leave or a maternity leave.
- And knowing that you're going to have that lower income will allow you to pull funds out of your RRSP. Now, with spousal contributions, those funds need to sit in the account for three years. If you pull those funds out before the three years, those attribution rules I mentioned, they're going to kick back in and attribute that back into the hands of the spouse who made that original contribution. So some details to be aware of, but a very useful tool.
* Yeah. This is an excellent list, I think, for people to think about in terms of trying to understand what they can take advantage of and what they can't. But first off, I think probably they should talk to an advisor, to which then they can figure out about their own personal situation.
* Absolutely. I mean, we want to look at-- none of this should be done in a vacuum. We're not looking at taxes simply from the tax perspective. We need to look at that from our holistic wealth planning perspective-- so engaging our advisors, our wealth advisors, our tax advisors, and our legal advisors.
- I think about the look on this gentleman's face when he shared with me that he had transferred-- he had added his spouse onto a joint account and had put his funds in there. And this wasn't an attribution issue. It was a prenuptial agreement issue, where under the terms of the prenup, it actually said that if funds are transferred into the joint names, it will be deemed to be a gift. And he will have transferred half of that account over to his spouse, which was not the intention. So making sure that you're doing these things with the full picture, knowing all of the different factors that need to be weighed, is really going to be important.
* A good cautionary tale. Nicole, always a pleasure. Thanks so much.
* Oh, my pleasure, Kim.
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- Nicole, I tried, right? I tried to make it romantic. It's just, what can you do? Let's start off with how people need to think about this. If you're married or if you're in a common law relationship, does that affect your taxes? And I guess the corollary to that is then, should you do your taxes together?
* Well, it's really interesting the misconceptions that people have around this. So firstly, for tax purposes, you are a spouse if you have lived in a conjugal relationship with your partner for 12 months-- less if you share a child together or your child is dependent on them for support. So married or not, you may be spouses according to family law-- pardon me, for tax law, even if you are not for family law or estate law.
- So for tax purposes, if you are spouses, it's not that you're filing together. So it's a little bit different than in the US where they have joint filing. Rather, you are filing individually, but you must provide information about your spouse's income and circumstances. So for example, for certain federal credits or deductions, they're income-tested on the basis of a family. So your entitlement to the GST credit or the GIS-- those sorts of things where-- the Canada Child Benefit-- those are the sorts of things where the government really needs to consider both your income and your spouse's income.
- And then beyond that, yes, I would say absolutely we need to not only be filing together but planning together. Because marital status or becoming a spouse has a big impact in terms of some of the provisions of the act. So attribution rules apply. The stop loss rules are going to now involve your spouse and the transactions that they're doing. The Tax on Split Income or TOSI rules will apply to your new relationship.
- And then, of course, we have options for things like spousal RRSPs. But I would encourage people to think of this not just your spouse. When you marry, for tax purposes, your family unit may have expanded. Who you're related to for tax purposes may have expanded. And that can really have an impact on the type of planning that you do or planning that you've already done, how that might be impacting you now. So, if, for example, you've married somebody that is related to someone you're in business with, that might be an important consideration in terms of how you've structured your corporation or your business affairs.
* All right, let's peel this back a little bit and start talking about some specifics. I understand things like medical expenses, charitable donations. There's some opportunities there.
* There are. So when you're spouses, as a unit, you can share your medical expenses, for example. And generally speaking, you would want to claim those on the income of the lower income spouse because the threshold is determined based on the expenses over and above 3% of your net income.
- So that will get a bigger bang for our buck if we are using our spouse's lower income. And charitable credits as well or charitable receipts, you would be able to combine those. Depending on the amount in question, there can be a benefit to claiming those in the higher income spouse's hands. So depending on tax rates and the amount of the expenses and donations, there can be some benefit to coordinating that with your spouse.
* What about other things that you can transfer back and forth, other credits, maybe, that you just mentioned that are more advantageous in one spouse versus another?
* Well, we have the age credit, tuition credits. People would know about textbook credits, that sort of thing, pension credits that can be shared. But I would say most of the tax software that people would be using, it's going to be doing this automatically. Certainly, your tax preparers are going to be doing that for you.
- So making sure that, perhaps, this is where you want to be going in together, and giving them the opportunity to file at the same time. Because if you don't have that information, you are required to file for your deadline even if you don't have your spouse's information. So you need to make your best efforts. If you're doing that together and there are excess or unused amounts, you're able to transfer those to your spouse and, again, help reduce the overall tax burden of the family.
* Now, one thing you cannot split, I do know this, is capital gains. They belong to the person who-- it's the attribution piece, right?
* If there's one thing I could help people understand, it would be this. It is widely and wildly misunderstood. Simply adding your spouse's name to your account or giving them money to invest in their own name does not allow you, for tax purposes, to split that income. For tax purposes, the tax will follow the contribution.
- So even if I have a joint account with my spouse, if I have contributed all of the money in that account, I should be reporting that income for tax purposes. Now, there are some opportunities that we can do where, perhaps, we are utilizing what's known as the prescribed rate loan-- not as attractive these days with the higher interest rates. But, essentially, we're not able to simply gift our spouse money for it to be taxed in their hands.
- It will be attributed back to us, and we need to make sure that we're factoring that in. Now, income on income, you might be able to have some income generated there because that's not going to be attributed back or utilize things like the Tax-Free Savings Account. You can gift your spouse those funds or utilize a spousal RRSP, for example.
* So let's talk more about the spousal RRSP. What do you need to know? What can you take advantage of there?
* So this is a great tool. We are essentially thinking about an RRSP really is for retirement savings. And so when we think about our retirement, if we know that one spouse is going to be in a significantly lower income bracket, then we might be able to transfer some income over into their hands that they will then take out in retirement.
- So if I'm the high income earner, I can make a contribution to my spouse's RRSP using my contribution limit. It will be claimed on my taxes. But my spouse will now become the owner of that. They're the annuitant.
- And upon withdrawal, the funds will be taxed in their hands. So if we're thinking about in retirement, instead of me having the full income all being in my hands and taxed at the high marginal rate, perhaps because I've transferred some over, we'll both be in a lower marginal rate. It's a useful strategy to think about as well if you know that there's going to be periods in your relationship where one of you is going to be either in a lower income or out of work for a period of time. Perhaps you're taking a paternity leave or a maternity leave.
- And knowing that you're going to have that lower income will allow you to pull funds out of your RRSP. Now, with spousal contributions, those funds need to sit in the account for three years. If you pull those funds out before the three years, those attribution rules I mentioned, they're going to kick back in and attribute that back into the hands of the spouse who made that original contribution. So some details to be aware of, but a very useful tool.
* Yeah. This is an excellent list, I think, for people to think about in terms of trying to understand what they can take advantage of and what they can't. But first off, I think probably they should talk to an advisor, to which then they can figure out about their own personal situation.
* Absolutely. I mean, we want to look at-- none of this should be done in a vacuum. We're not looking at taxes simply from the tax perspective. We need to look at that from our holistic wealth planning perspective-- so engaging our advisors, our wealth advisors, our tax advisors, and our legal advisors.
- I think about the look on this gentleman's face when he shared with me that he had transferred-- he had added his spouse onto a joint account and had put his funds in there. And this wasn't an attribution issue. It was a prenuptial agreement issue, where under the terms of the prenup, it actually said that if funds are transferred into the joint names, it will be deemed to be a gift. And he will have transferred half of that account over to his spouse, which was not the intention. So making sure that you're doing these things with the full picture, knowing all of the different factors that need to be weighed, is really going to be important.
* A good cautionary tale. Nicole, always a pleasure. Thanks so much.
* Oh, my pleasure, Kim.
[MUSIC PLAYING]