Back in the early 1970s, tax reform, which largely introduced the taxation framework we still live with, considered whether the family, including dependants living in the home, should be taxed as one unit on one tax return.
Despite the fact that economic decisions—including spending and investing – are generally made as a family unit, the thinkers of the day struggled with this question. They wanted to ensure there was no “tax on marriage. ”Specifically, people with two incomes should not be taxed as if there was only one, there by bumping the whole family into one larger tax bracket.
Today, not only do we have a much broader definition of a “conjugal relationship” for tax purposes, but each member of the family continues to be taxed as an individual. Everyone is entitled to a Basic Personal Amount (federally, just $11,000 in 2012) and individual incomes are subject to progressive tax rates. That is, you pay more as you earn more, yet the family unit is not bumped into one large tax bracket.
That is, except when it comes to certain refundable tax credits. Net family income – the income of both spouses – does have to be taken into account for the purposes of measuring how much of these credits your family unit will receive. This includes Canada Child Tax Benefits, the GST/HST Credit and the Working Income Tax Benefit on the federal side. Most provinces offer refundablecredits too.
Therefore the size of net family income needs to be managed. An RRSP will help to reduce it, but it means looking at two net income projections, not just one. Who has unused contribution room? Should a spousal RRSP be considered? Should each spouse make a contribution? How much more will be gained from the various tax credits with the RRSP deduction in place?
It’s Your Money. Your Life. Year end tax planning includes a close look at individual tax savings opportunities. But, often more can be accomplished when spouses, including common law couples, review their tax savings strategies, and their access to refundable tax credits, together. Speak to your tax professional about a”what if” simulation soon.
Evelyn Jacks is president of Knowledge Bureau, which offers bookkeeping and income tax preparation courses within its curriculum. You can also offer financial education books to your clients or other family members Follow her on Twitter @evelynjacks. For more information, click here.