Tax planning with your spouse

Written by Caroline Cakebread

Marriage is a beautiful thing. For entrepreneurs at tax time, it’s drop-dead gorgeous. By channeling some of your wealth to a less lucrative spouse, you can cut your total tax bill. These are a few of your options:

1. Income splitting

By putting your spouse on the payroll and redirecting some of your income to them, you can duck into a lower tax bracket. For example, one spouse making $70,000 will pay more tax than a couple making $35,000 each. Beware that simply cutting cheques for your significant other won’t pass muster: Ottawa expects your spouse to be paid reasonably for the quantity and type of work they’re doing.

2. Spousal RRSP

If you’re a high-income earner, then one way to get around your paltry annual RRSP contribution limit of $14,500 is to plug any contribution overflow into your spouse’s RRSP. You’ll increase your combined retirement savings and shelter more of your present income from a higher tax hit. The only condition: your spouse can’t exceed their limit, either.

3. Partnership

If your business is unincorporated, then make your spouse a business partner and let them share in the profits, à la income splitting. Note that your spouse’s share must be reasonable compared with the work they contribute or capital they invest in the business. You can also install them on your board of directors and pay them a director’s fee. However, spouses assume the same liabilities for certain regulatory requirements as do other directors.

4. Giveaways

If you give a gift (e.g., cash) or an interest-free loan to a family member, then they can invest it and be taxed on the capital gains at their marginal rate, not yours. (Some conditions apply, so consult your accountant.) The net income generated can be used to cover their expenses (e.g., university), but who knows? They might just buy you a new car.

© 2004 Caroline Cakebread

Originally appeared on PROFITguide.com