Two smart tips to help you save on taxes

The TaxLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

Split pension income, save taxes

All’s fair in love… and taxes. At least, that’s the way the Canada Revenue Agency seems to see it when it comes to pension income.

“Up to 50 per cent of eligible pension income can be transferred between tax returns for spouses or common-law partners,” says Joseph A. Truscott, CPA, CA, in Hamilton.

“So the spouse with the higher income may want to transfer pension income to the lower-income spouse, which can often significantly lower the taxes they pay on pension income as a couple.”

You can transfer the taxable part of life-annuity payments from a superannuation or pension fund or plan, RRSP annuity payments, and income from registered retirement income funds. “But you cannot not transfer portions of your Old Age Security, any foreign-source pension income, or income from a U.S. individual retirement account (IRA),” cautions Truscott.

You’re not permitted to transfer Canada Pension Plan payments, either. But spouses and common-law partners can elect to share the benefits at the source, which can yield tax savings, too.

To set this up, you must file an Application for Pension Sharing of Retirement Pension(s) Canada Pension Plan, which can be found on the Service Canada website.

“To set up a transfer, you both must complete and sign Form T1032, Joint Election to Split Income, and retain it if you’re filing your return electronically.

If you’re filing a paper return, the form must be completed, signed and attached to both your and your spouse’s or common-law partner’s returns. Most professional accountancy firms and tax software packages will do this for you automatically, and will usually calculate the exact amount you should transfer for the maximum tax advantage.”

Consult a professional if you’re not sure about setting this up, because the recipient could face a clawback of their Old Age Security benefits if the amount transferred exceeds certain limits.

“If you’re 65 or older at the end of the year, you may also be eligible for a $2,000 pension inicome credit, and your spouse/partner may be able to claim it, too,” Truscott adds. “In some cases, the savings from splitting your pension income could be significant, so it a strategy that’s well worth investigating.” 

To save on taxes, business owners need a plan

When it comes to reducing the income tax they have to pay, private business owners can have a real edge on the rest of us.

“If the business is incorporated, private owners usually have some discretion as to the amount of compensation they receive,” says Chartered Accountant Jason Safar, National Private Company Services Tax Leader of PwC in Toronto. “So instead of meeting with your accountant at the end of the year to fix what you’ve done over the last 12 months, go now and get on track for the year ahead.”

If you’ve been in business for a few years, you probably have a good idea of how it will perform, Safar says. “Don’t get bogged down trying to get every detail just right. Instead, think about the big things. Know what you can expect in a good, an average, or a less-than-average year.

“Your accountant should know what the situation is in both your business and your personal life: your business losses, RRSP room, capital losses, medical expenses and whether you’re putting kids through university.

So the question becomes, what’s the best way to fund everything? Salary? Dividends? Bonuses? Think about it before the year starts and plan the best way to manage everything.”

Tax rates vary widely, depending on who or what is paying them. “Taxes are just 15.5 per cent on the first $500,000 of active business income earned in a private Canadian corporation, inside the corporation,” Safar explains.

“So, is it better to take more salary and lower the company taxes, or take your compensation as dividends and pay the lower taxes on your personal income? Are there opportunities to income-split, by paying your spouse or children a salary?

If you help your parents financially, would it be better if they had shares in your company to use for income instead of you writing them a personal cheque?”

Safar cautions that there’s no silver bullet, and that you need to put all those pieces together and look ahead to what’s likely to happen.

But he’s resolute that you’ll get a much better result if you do. “The idea is not to lock you in, but to give you a framework for making it happen and a sense of control. It just puts you in a better place overall.” 
Source: The Institute of Chartered Accountants of Ontario.

The TaxLetter, MPL Communications Inc.
133 Richmond St.W., Toronto, ON, M5H 3M8. 1-800-804-8846

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