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January 30, 2022

Budget improves income splitting opportunities

By Gordon Powers, Sympatico / MSN Finance

In the U.S., married couples are allowed to file taxes jointly or individually. The choice is theirs, depending on which way will save them the most money. Most people file together.

Canada's tax system, on the other hand, requires each of us to report and pay tax on our own — which is why couples with disparate incomes simply have to split their earnings wherever they can, moving money from the partner in the higher tax bracket to the one in the lowest bracket. And this week's budget changes just gave this strategy a nice little boost. 

By increasing the amount that all of us can earn tax-free to $10,320, and also boosting the first and second tax bracket thresholds by 7.5 per cent, the Tories have widened the gap between the top and bottom earners in the family, notes Tim Cestnick, head of WaterStreet Family Wealth Counsel. And that makes shifting money around all the more attractive.

Lend your lower-income spouse money you might otherwise invest and he or she will pay little or no tax on any profits, even though you might have paid through the nose. The catch? To avoid the tax bite landing back in your lap, you have to charge the prescribed rate of interest — which is currently only 2 per cent — on the loan.

Still, as long as your spouse does better than that over the long haul, you’ll save tax as a couple.

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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...