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By Tony Wanless
The Province
Sunday, March 24, 2002
Now that RRSP season is over and everybody's talking taxes, maybe
they should also be talking about relationships.
Not the kind of talk that strikes terror into most men's hearts
-- "Honey I think we should talk about our relationship"
-- but relationships of the money kind.
In the taxman's eyes, few people are islands unto themselves moneywise.
If you're married, or have been living with someone from more than
one year, you're in an income relationship, whether you like it
or not.
This view has been taken by said taxman the better to tax you,
of course.
The tax people know that two incomes are better than one, because
two incomes usually put you in a higher, and therefore more taxable,
bracket.
Adrian Mastracci, president and fee-only
investment counsel at KCM Wealth Management says, “That means
you can lend a spouse money at two percent, and he or she can invest
it at five percent,
with almost no risk.”
However, two incomes also provide you with some income-splitting
opportunities, so as the better to dodge said taxman.
So, while you're pondering your mating game, also take some time
to think about:
1. The RRSP game
If you haven't heard about the income splitting opportunities inherent
in RRSPs by now, you must have been in hiding. If your incomes differ
greatly, the higher income spouse should be buying RRSPs for the
lower income spouse. That way when those RRSPs are cashed out, the
tax hit won't be as high.
2. The lending game
Right now there's a foolproof opportunity to make money by having
the higher-income spouse lend investment money to the lower-income
spouse.
As Vancouver financial advisor Adrian Mastracci of KCM Wealth Management
points out, the government has handed this opportunity to you on
a plate by "prescribing" the interest rate on spousal
loans at an extremely low rate.
The prescribed rate is three percent until March 31, and two percent
in the next quarter until June 30.
That means you can lend a spouse money at two percent, and he or
she can invest it at five percent, with almost no risk.
Because they can deduct the two percent "prescribed rate"
from their taxes the extra three percent is gravy.
So, lend your lower-income (and lower-taxed spouse) $10,000, and
he or she makes $300 a year, taxable at a lower rate. Also, you
can lock this rate into a long term and keep scooping up that gravy.
A caution: Make sure you have the money to do the lending. If you
have to borrow it you're ruining the whole thing.
3. The dependency game
The problem with most relationships is that people in them see their
money as their own, so miss opportunities within the tax system.
For example, a couple decides that one of them wants to stop working.
But that non-working spouse feels guilty and wants to generate
some income to "pull their own weight".
A laudable idea, but it could mean a problem.
If that non-worker earns $10,000 there's tax to pay. But if that
non-worker earns less than $7,400 (use personal deductions, RRSP
contributions, etc. to get the income down), he or she is "dependent"
and pays no taxes.
Also, the other spouse can claim some deductions for that support.
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