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Splitting Income and Maximizing Spousal Tax Credits - 2013 Federal Budget Highlights

As year-end approaches our thoughts turn to mini mizing our taxes again. One area to focus on is the ability to split income between spouses as well as maximize the utilization of various tax credits available to both. Remember that CRA considers a "spouse" to include a common law relationship that has existed for at least a year, or when there is a child born or adopted into the relationship.

To ensure that you and your spouse are paying the least amount of tax jointly, it is usually best for both of you to work with one accountant. This ensures that the accountant is fully aware of both situations such as, who is claiming the credit, as well as the correct taxable income of both spouses.

The following credits can transfer or be utilized on one spouse or the other:

  • Married Credit
  • Child Credit
  • Age Credit
  • Pension Credit
  • Disability Credit
  • Children's Fitness Credit
  • Children's Arts Credit
  • First-time Home Buyers Credit
  • Tuition and Education Credit
  • Medical expense credit
  • Donation credit

Income splitting is another area that should be considered in order to maximize the use of the lower tax bracket and tax credits. If one spouse has income well into the middle tax bracket or higher and the other spouse is well under the top of the low bracket then it saves tax if you can lower the higher income spouse's income and add it to the lower income spouse.

Some methods of doing this:

  • Business owners or farmers can pay a legitimate wage to their spouse or consider setting up a partnership or corporation to allow income to be split
  • Utilize the pension splitting provision to split RRIF, RSP, and employment pensions between spouses
  • Take advantage of CPP equalization between spouses
  • Highest income spouse invest in spousal RRSPs to reduce their current income and allow for future transfer of income to other spouse when withdrawn after 3 years from last contribution

As you can see from the above credits and benefits, it is wise that both spouses deal with one accountant in order to ensure that every credit and benefit is being used and maximized.