Janice and Tom sleep together. They live together. They’ve got a mortgage. Even a kid. And a golden doodle. But when it comes to money, they just don’t trust each other.
“This is the way we started out,” she says, talking about their marriage six years ago, “and that’s the way we’re comfortable.” That’s code for, ‘I’m not going to answer to him about my spending.’ Tom’s the same. “We never argue about anything,” he says, “except money. Whatever. Not worth it.”
So they have two savings and chequing accounts each (RBC, CIBC), and a joint account they both contribute to for household expenses, the mortgage and bags of Iams chunks. She makes $105,000 as a health & safety consultant, and he’s a chef, at half the wage. She has a matched RRSP at work, while Tom has no pension. Only in the last year – after a mat leave and digesting the mortgage – have they started to save some money. In separate bank accounts, making 1%.
Janice and Tom are the kind of clients bankers love. They’re Joe Owe’s idea of perfect taxpayers. Because they won’t share money (the way they share fluids) these thirtysomethings pay way more in bank fees and taxes than they need to. It’s amazing how many couples are in similar circumstances. We sure seem to have an unhealthy relationship with money. More precious than love.
Well, this post is not about matrimonial intimacy, on which I am a renown expert, but income-splitting. By treating a marriage or common law relationship as an economic union, there are a mess of advantages – especially if you’re like these guys, with a big disparity between incomes.
Here are a few ways you can make romance work harder.
Open a joint investment account. Don’t accumulate secret piles of money in dead-end bank accounts, but pool it with your spouse and invest it jointly. This way you can get more momentum in a larger portfolio, plus be reassured that if something happened to your spouse the funds would pass to you without a legal barrier (not necessarily so with a bank account). Plus, the money this account makes can be split between you – a savings when one person is in a lower tax bracket. In fact many couples attribute all of the gains to the less-taxed person.
Open a spousal. This kind of RRSP is custom-made for Janice and Tom. She can contribute to a plan in his name, to her own limit. She gets to deduct all of the money from her substantial taxable income, while he gets ownership of it after a three-year seasoning period. Tom can then remove it at his lower rate, or run away with the doodle and open his own food truck.
Don’t share the expenses. That’s just dumb. The person making the most money in a relationship should pay the entire costs of running the household, including the mortgage. That way all of the income of the less-paid spouse can be used for investment purposes – because the proceeds will be taxed at a lower rate, building family wealth faster.
Invest the kid’s loot. The Child Tax Benefit cheques are not intended for silly things like day care or Huggies. Instead, open an in-trust investment account and stick that money into things your child will really enjoy, like ETFs and REITs. That way the proceeds are taxed in your child’s hands, not yours, since attribution rules do not apply.
Then hire him. If you have a business – incorporated or sole proprietorship – you can give your kid a job, pay him or her a wage, and deduct that from the taxable income of your enterprise. Just ensure that the work being done is ‘reasonable’ in the eyes of the CRA for someone of that age and skill level, which probably means Junior will not be your marketing consultant.
Then fund his TFSA. Once your child is 18, then you can stick cash into his tax-free savings account, and invest the money in capitals gains-producing assets. In fact, Janice should also do this for Tom, as should every spouse who is in a higher-income situation. There is no attribution of investment gains back to the donor, and all of the growth is completely free of tax.
Well, this is just a taste of things you can do to split income within a family and pay w-a-y less tax. Of course, you can also loan money for investment purposes to family members at the ridiculously low rate of 1% and have no profits attributed back to you. If you’re an old fart you can split pension income with your squeeze. Or your CPP. You can loan money to relatives to start a business, without interest, and maybe turn it into an allowable loss.
It’s a long list. But it all starts with trust. Share that first.