Sigh. Emotion’s so over-rated. But being Valentine’s weekend, this pathetic blog is opening its tiny black heart to lovers everywhere, with some sage words (two, actually) on the real reason for hooking up with a life partner. Here they are: tax avoidance.
So I met a young couple I’ll call Tom & Julie a few months ago, about a year after they blew almost twenty grand on an idiotic wedding some place hot. “Well, that was dumb,” I said in a celebratory way. “I hope it gets better from here.” But it didn’t.
They may happily exchange fluids, but they refuse to share a bank account, let alone any savings. Tom banks with RBC. Julie is a PC Financial addict. They opened a joint account at a neutral place (BeeMo) and a portion of each paycheque goes there to pay household expenses. They have no real idea how much the other has salted away, what kinds of stuff might sit in their partner’s TFSA, what RRSP contribution room they each have, or even the precise details of income.
Experience shows this is, sadly, common. Money’s for hiding and arguing about. Not for common purpose. “If I want to indulge myself a little,” asks Tom, “then why should I have to ask her permission, or feel guilty about it?” And Julie says, “My parents split up when I was eight and my mom suffered bigtime. No way am I ever going to let that happen.”
Well, kids, there are lots of reasons you need to comingle the dollars. For starters, dealing with two or three banks means more fees being sucked off. Second, it’s impossible for you to put together a coordinated plan, so your savings and investments are balanced and reasonable. Third, without monetary intercourse how do you know if there’s overlap and duplication between your investments? Or if Tom is flipping junior pharma stocks while Julie’s grinding through a 1% GIC, cancelling each other out? Worse, she might be losing horribly at Poker Stars and hiding it by siphoning a line of credit. If marriage doesn’t mean financial fidelity, just like the other kind, can the union last?
Nah, doubt it. Besides, haven’t people heard about legislation that splits matrimonial assets?
So here are a few things every married couple ought to be doing. Forget Ghomeshi. Let’s talk Fifty Shades of GreaterFool.
Tax avoidance comes in many forms where you’re married. For example, a husband and wife can take their separate savings and investments and plop them into a joint, non-registered investment account. The returns earned over time – interest, dividends and capital gains – can be equally attributed to each, instead of having them pile up in the hands of the partner who pays the most tax. Many couples legally manage to have the bulk of the gains attributed to the one in the lower tax bracket. Big savings.
Of course someone making a pile more money than his or her spouse can gift that person cash to stuff into a TFSA. Or fund their RRSP. Or, better, contribute to a spousal plan. In that case the higher-income dude gets to claim all of the money from taxable income, and yet (after three years) the funds legally belong to the spouse. They can then be taken out at a lesser tax rate, or cashed in to finance a maternity leave.
Old retired, married wrinklies can pension-split, allocating up to 50% of the pension one person receives to the other spouse, for a tax savings which is often substantial. Takes about two minutes when filling out your annual return. Ditto for CPP, because couples over 60 can elect to share pension payments on the amount earned during their time together. So a portion of the higher-taxed person’s payment can go to the less-taxed one. More savings.
And here’s an easy one: in a marriage the person making the most money should pay all the household expenses – instead of sharing them equally. That way the less-taxed spouse can invest the money not going to rent, mortgage or groceries. Because their tax bracket is lower, the after-tax investment returns will be higher.
The person making more income can always lend a whack of money to their less-taxed spouse for investment purposes. Not only are the gains then taxed at a lower rate, but the interest the CRA establishes for the inter-spousal transaction is a lowly 1%. And if one of the partners is an entrepreneur, with a corporation or business, then the other can be hired as an employee (some actual work has to take place), or become a shareholder and collect dividends, taxed at a preferential rate.
These are just a few of the reasons to get married. I hear there are others. Above all, try to mate with someone with financial potential. Or at least a bad blog.