How couples can take advantage of exemptions and credits this tax season to maximize returns

The Globe and Mail consulted Certified Financial Planning Professional Kelly Ho with Vancouver’s DLD Financial Group Ltd to discuss how couples can take advantage of exemptions and credits this tax season to maximize returns.

Being in a relationship means sharing yourself with someone else, and that concept applies advantageously to tax planning because Canadian tax rules allow couples to share a range of benefits.

From various deductions and incentives programs to options for income splitting and more efficient retirement planning, the allowances vary so widely that clients might not be aware of them all. But that’s where advisors can provide much-needed guidance with effective strategies.

The very first question to ask when having tax planning conversations with couples is who will actually be filing the tax returns on their behalf, says Kelly Ho, partner and certified financial planner (CFP) at DLD Financial Group Ltd. in Vancouver.

“Advisors need to find out whether their clients are working with a [chartered professional accountant],” Ms. Ho says. She has heard “so many horror stories” of clients using tax filers, especially in more complex situations involving couples.

“Sometimes they miss things,” she says. “It’s the equivalent of going to a notary versus going to a lawyer.”

Ms. Ho says pension income splitting is an option that not a lot of people know about where if one spouse doesn’t have a pension in retirement but another does, they have the ability to split that income.

David Christianson, senior wealth advisor and portfolio manager with Christianson Wealth Advisors at National Bank Financial Wealth Management in Winnipeg, adds that pension income splitting is “one of the biggest things” advisors can do to help clients with spouses.

“What we do is we create pension income if they don’t have any,” he says. For example, once a client turns 65, Mr. Christianson would transfer roughly $40,000 into a registered retirement income fund (RRIF) from their registered retirement savings plan (RRSP) in order to create $2,000 in pension income that would be eligible for the pension income credit.

“If only one spouse has registered assets, but they’re both over 65, you can double that amount up … to make sure they both get the pension income credit,” he says.

Splitting income and tax credits

Even for clients not yet in or near retirement, Ms. Ho says there are various ways to split income between working spouses to lower their overall tax burden.

“A lot of the income splitting privileges were taken off the table when the [federal] government changed the small business rules,” she says, referring to 2018 changes in federal tax law. “But there are still ways of being able to strategize around that.”

For example, if one spouse is a business owner and the other is earning a salary, the spouse who owns the business can retain more money in the business itself while the couple lives off of the other spouse’s salary.

“I do that all the time with my clients,” Ms. Ho says, noting the strategy would work only if the business was incorporated and not if the spouse who owns the business is a sole practitioner. The tax benefits would be to keep the money in the business.

Combining medical expenses is another option for couples, Ms. Ho says, but that can be tricky depending on whether a person has group benefits.

“For those who are self-employed, sole proprietors, or people who work in situations in which there are no group benefits, then [combining medical expenses] can be an applicable situation,” she says.

The Canada Revenue Agency (CRA) lists qualifying medical expenses and Mr. Christianson says combining the expenses of both spouses on just one of their returns “can end up being a lot of money.”

Total medical expenses need to exceed 3 per cent of net income to qualify for a tax deduction, he says.

While that usually means the lower-income spouse should claim the couple’s combined medical expenses on their return, Mr. Christianson says it’s possible the lower-income spouse doesn’t actually pay enough taxes to take full advantage of the credit. “So, you kind of need to look at it both ways.”

Spouses can also effectively share various tax credits in situations in which one spouse doesn’t have enough income to take full advantage of a particular deduction, he says. For example, for the tuition credit in which one spouse has been a student but doesn’t have enough income to create income taxes to use up all of the tuition tax credit, the unused portion of the credit can be transferred to the other spouse.

Similarly, if one spouse qualifies for the disability tax credit but doesn’t earn enough income to make full use of it, Mr. Christianson says that too can be transferred to the other spouse.

“Almost no financial advisors understand the disability tax credit and the vast number of people who qualify,” he adds.

Utilizing spousal RRSPs and loans

More commonly understood among advisors are the benefits of spousal RRSPs, Ms. Ho says. They allow a lower-income spouse to be the owner of an RRSP while the higher-income spouse makes the contributions and claims the subsequent tax benefit.

What some advisors maybe forget about spousal RRSPs, Mr. Christianson says, is that if a client over the age of 71 still has contribution room, they can no longer make contributions. However, they can still contribute to their spouse’s RRSP as long as their spouse is not yet 71.

Meanwhile, Jackie Porter, CFP and founder of Team Jackie Porter at Carte Wealth Management Inc. in Mississauga, says now is a great time to set up a spousal loan before interest rates go up. While a formal loan contract is required using the CRA’s prescribed interest rate, Ms. Porter says this is one of the ways you can shift income from the higher-income spouse to the lower-income spouse in a non-registered account.

“That has been very popular as interest rates have been so low,” she says.

Ultimately, Ms. Porter says advisors need to be the ones to broach the topic of tax planning with their clients to have a more holistic conversation about what the family is doing.

“[We] to make sure they’re not having money slip out of their pockets,” she adds.