Tax season-time to consider tax planning opportunities | Kerr Financial
Accounting & Tax
Tax season-time to consider tax planning opportunities
Category: Accounting & Tax

As you gather your tax documents to prepare your 2013 income tax returns, it’s a great time to review your current financial situation with your financial planner to determine what improvements can be made.  Here are four Tax Planning Ideas to consider as you prepare your tax return.

Optimize your Investment Income

Most individuals have a main steady source of income, with the most common being employment income, income from a company pension or income from a RRIF.  However, significant planning opportunities arise in particular with respect to investment income; this is because investment income is taxed at varying rates depending on its source.







Canadian dividends and capital gains are more favorably taxed. Assets which generate this type of income should be held outside of a registered plan, while investments producing interest income should be held in a registered plan, given the constraints of one’s investment policy.

Spousal Loans

Lending funds to one’s spouse to invest provides an interesting income splitting opportunity, particularly in the case where one spouse is in a high tax bracket and the other is in a much lower tax bracket.  One cannot simply gift funds to a lower income spouse to be invested by that spouse without triggering the attribution rules, which would tax the investment income in the hands of the higher income spouse.  In order to properly implement such planning, a loan bearing interest at the government prescribed rate, currently 1%, must be made.  It is highly recommended to properly document such a loan with a loan agreement and a promissory note.  The benefit is that the funds loaned can be invested by the lower income spouse and taxed at their lower marginal tax rate.

Family Trust

Similarly, using a prescribed rate loan, one can set up a family trust in order to provide for income splitting possibilities among children and grandchildren.  Such trusts usually are viable from a cost/benefit standpoint once approximately $500,000 is loaned to the trust.   The complexities of such an arrangement cannot be easily explained in a paragraph or two, suffice it to say that such a trust has long-term benefits, both from a taxation standpoint and in terms of providing for the needs of beneficiaries over a number of years

Split CPP Income

Spouses can also split Canada/Quebec Pension Plan payments.  The portion of your pension that can be shared is based on the number of months you and your spouse or common-law partner lived together during your joint contributory period. You can apply for pension splitting when you apply for your CPP/QPP, or if you are already receiving it, you can also complete the pension splitting form including a copy of your marriage certificate or proof of common-law relationship.  The benefit can be significant.  For example if one spouse receives $10,000 of CPP/QPP payments and the other receives $4,000, the combined total of the two payment streams could be split so that each would receive $7,000 each.  This could result in annual tax savings of $500-$700.  Over twenty years, the cumulative tax savings could be around $10,000-$14,000.  Furthermore, if one spouse did not contribute, then such splitting can only be applied for when both reach 60 years of age.

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Kerr Financial Group was formed in 1979 for the purpose of assisting individuals to maximize their personal financial resources, alleviate their financial and retirement concerns and simplify the administration of their affairs.

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