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You can collect dividends from Brookfield Asset Management (TSX:BAM) in a TFSA and split the income with your spouse.
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Andrew Button
Andrew Button is a freelance financial writer with extensive experience writing about stocks, real estate and managed products. His portfolio consists mainly of blue chip dividend paying stocks and index funds. He has completed the Canadian Securities Course and passed the CFA Level 1 exam.
If you’re married, you might be surprised to learn that your marital status has some bearing on how you should file your taxes. The most obvious difference between filing as part of a couple and filing as a single person is the option to file a joint tax return. You probably already know that one, but there are other differences that aren’t so well publicized. In this article, I will explore a key difference between filing taxes as an individual vs. filing as a couple, that all married Canadians should know about.
You can split your pension income with your spouse
A big difference between married couples and single Canadians is the fact that the latter can take advantage of pension income splitting. Pension income splitting is a strategy whereby the higher earning spouse transfers income to the lower earning spouse. By doing this, the couple pays less taxes on the pension income. This assumes that one spouse is below the province’s top tax bracket, of course. If one partner makes $1 million a year and the other makes $500,000 a year, income splitting will have no effect.
If one partner earns a lot less than the other, then the money saved can be quite substantial. Let’s imagine you have a 50% marginal tax rate and your partner has a 20% marginal tax rate. If you transfer $50,000 in pension income to your partner, you reduce the taxes payable from $25,000 to $16,750. The former is a 50% tax on $50,000, the latter a 33% tax on $50,000. I calculated the lower earning partner’s taxes at 33% rather than 20%, because an extra $50,000 in income would cause the latter’s tax rate to rise. Still, at 33%, it results in much less taxes than having the whole $50,000 sum taxed at 50%.
That includes RRSP income!
When you hear the expression “pension income,” you probably immediately think of CPP and employer-sponsored pension plans. Those definitely count, but RRSP income counts too. So, even if you don’t have a big employer sponsored pension coming your way, you can still benefit from pension income splitting.
Another RRSP benefit to married couples is worth mentioning here: split contributions. The higher earning partner can make an RRSP transfer to the lower earning partner, thus increasing the value of the tax refund produced by the contribution. This strategy not only increases the refund, it also leaves the lower earning partner with all of his/her contribution room intact, therefore enabling him/her to achieve a higher RRSP balance than would otherwise be possible.
What kinds of investments are best?
If you’re going to be doing income splitting with an RRSP, it pays to think about what kinds of assets to hold in the RRSP. Dividend-producing assets are often considered ideal for RRSPs, as dividends create automatic cash flows that are taxable if not held in an RRSP or a TFSA.
Consider Brookfield Asset management (TSX:BAM, for example. It’s a Canadian non-bank financial company that has a 3.3% dividend yield. I personally hold a small position in this stock, as the company behind it (Brookfield) has a great long-term track record, and BAM itself has a sky-high 50% net profit margin.
I could talk until I’m blue in the face about the virtues of BAM (its high margins, dividend growth, and strong brand), but the point here is how its dividends are taxed. Because it pays out dividends each and every quarter, BAM is taxable whether or not you sell it. In an RRSP, those dividends can compound tax free until the day you retire, or age 72 (whichever comes first). Outside an RRSP, the dividends may be taxed heavily. By holding stocks like BAM in an RRSP, you optimize your tax strategy and generate dividend income that can be withdrawn and given to your spouse. Talk about a win-win situation.
Unlike other countries such as the United States, Canadian tax rules don't allow spouses or common-laws to file joint income tax returns. Each Canadian files their own tax return and indicates their marital status and name of their significant other on the return.
You must report the name, social insurance number and net income (or the amount the net income would be if he/she filed a return) of your spouse or common-law partner on page 1 of your tax return. The spouse net income affects some tax credits, including the spousal amount tax credit.
The spousal amount that can be claimed will be the Basic Personal Amount (BPA) of the supporting taxpayer, which for 2023 is a minimum of $13,520 and a maximum of $15,000 ($14,156 and $15,705 for 2024), less the net income of the spouse.
Since your marital status has a significant impact on your return – family incomes are combined for calculating income-tested benefits, such as the GST/HST credit or the Canada Child Benefit. Couples benefit from combining charitable donations and medical expenses.
Double the Deductions: Married and filing jointly typically can net you a bigger Standard Deduction, reducing your taxable income—$27,700 for most couples under age 65 in 2023, jumping up to 29,200 in 2024.
You should contact your bank to arrange to change your name on your accounts, credit cards and banking cards, and the federal government to deal with documents such as your social insurance number and passport. Your driver's licence should also be changed.
The standard deduction for a single person or a person filing as Married Filing Separately is the same. It is $12,950 for tax year 2022. When two individuals get married and decide to file jointly, their standard deductions combine, and their Married Filing Jointly standard deduction becomes $25,900 for 2022's taxes.
You can claim a spousal credit on your non-resident spouse as long as your marriage is in good standing. Your spousal tax credit is the difference between your personal credit and your spouse's net income. You can qualify for an additional caregiver amount if your spouse is mentally or physically impaired.
The fact is, filing jointly makes sense for most married couples and most decide to file jointly because it tends to result in a lower tax bill and easier filing. One of the biggest drawbacks to married filing separately is that you may lose potential tax breaks, credits and deductions.
Living common-law means that you are living in a conjugal relationship with a person who is not your married spouse, and at least one of the following conditions applies: This person has been living with you in a conjugal relationship for at least 12 continuous months.
The CRA has a 10-year collections limitations period, which is the amount of time it can pursue you for unpaid taxes. This time frame begins 90 days after the issuance of your notice of assessment or reassessment. However, the collection limitations period can reset or extend if you or the CRA take specific actions.
April 30 is the deadline to file and pay your taxes to the Canada Revenue Agency. If you don't, you can lose benefits, pay stiff fines or even face jailtime, an accountant told Global News.
The longer you wait to file your taxes, the more penalties you will owe, and the likelihood of the CRA seeing your avoidance as tax evasion increases. If you haven't filed in years and the CRA has not yet contacted you about your late taxes, apply to the Voluntary Disclosure Program as soon as possible.
Your marital status on December 31 determines whether you are considered married for that year. Married persons may file their federal income tax return either jointly or separately in any given year. Choosing the right filing status may save you money.
Married Filing Separately will benefit you the most is to prepare your returns both ways. Then, choose the filing status with the lowest net balance due or refund. After you choose the appropriate filing status for your situation, know that your tax rates (tax bracket) could differ based on filing status.
Married filing separately may be an appropriate option if there is a lack of trust between spouses. Both partners must consent to filing a joint tax return, so filing separately can help if one spouse suspects the other of tax evasion or misfiling tax documents.
If you file a separate return from your spouse, you are often automatically disqualified from several of the tax deductions and credits mentioned earlier. Separate filers usually get a smaller IRA contribution deduction. Couples who file separate returns can't take the student loan interest deduction.
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