On top of the usual unbridled excitement that you likely always feel at tax time, this year we have some actual tax changes and the opportunity for many families to pay significantly less income tax than in past years.
The biggest change is the new income splitting opportunity called the Family Tax Cut. Although you have likely heard about this, a recent survey conducted for H&R Block Canada showed that only 15% of Canadians expect this to have any impact on their tax return.
It will be interesting to see the actual results, after tax season is complete.
Only families with at least one child under 18 qualify. The greatest advantage is bestowed upon families where one spouse earns all of the income. However, according to H&R Block, “even a small disparity in income between two spouses could result in a few hundred dollars of savings…”
In a recent http://bit.ly/1Caybrt news release, the tax preparer provided several examples to illustrate. All of these involve families with at least one child under 18. The tax reduction is facilitated by a non-refundable tax credit.
The key to the credit is having one spouse in a different tax bracket than the other, and hence benefiting from income splitting.
For example, if one spouse earns $50,000 before tax and the other earns $40,000, the tax reduction will be about $277.
However, if one spouse earns $80,000 and the other earns $50,000, there will be no benefit, as they are both in the same federal tax bracket.
The 2014 federal tax brackets change when a person’s taxable income is below or above about $44,000, $88,000 and $137,300. So, anytime there’s a discrepancy in tax brackets between spouses, there will be some advantage from the Family Tax Cut.
If one spouse has taxable income of $100,000 and the other $75,000, then the tax saving will be about $484, according to H&R Block. The maximum amount of income that can be split is $50,000.
Further helping families this year is a doubling of the Children’s Fitness Tax credit. In 2014, up to $1,000 of sports fees can be claimed for a credit, compared to $500 in previous years.
What if you don’t have any children under 18? Then there’s not much in the Family Tax Cut for you, I’m afraid.
The Senior Advantage
However, for senior couples who are collecting pension income, the Joint Election to Split Pension Income introduced several years ago can provide a similar tax reduction, and can also provide the means to avoid OAS clawback.
So, what is “pension income”?
If you are under 65, only actual employment pensions qualify, plus amounts received as a result of the death of a spouse. However, over 65 you can create your own qualifying pension income, even if you never belonged to an employer pension plan.
You can convert enough of your RRSP to RRIF to generate $2,000 of regular income each year, purchase a registered annuity that will provide $2,000 of income, purchase a GIC-equivalent from an insurance company, or any combination of those.
Up to 50% of the higher income spouse’s qualifying pension can be notionally transferred for tax purposes. No cash transfer is involved. Any corresponding tax withholdings are also transferred.
Anyone with such qualifying pension income should also be taking advantage of the Pension Income Credit, which provides a tax credit on the first $2,000 of pension income each year. This can put $300 of federal tax back in your pocket, plus a corresponding amount of provincial tax.
By now, you have hopefully received all of your T4, T4A and T5 slips, as all were required to be mailed a few weeks ago.
However, you are likely still waiting for your T3 and T5003 slips, which have a March 31 mailing deadline, if you own any trust units (including most mutual funds), limited partnership investments or tax shelters.
As you know, the filing deadline is April 30 for most people, and June 15 for anyone with self-employment income (though any taxes due must be paid by April 30). If you’re filing a return for a Trust, your deadline is March 31.
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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIMis a financial planner and advisor with Christianson Wealth Advisors, a Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.