Barb and Danny each expected to earn $75,000 in 2020, which would have placed them in the 28.2 per cent tax bracket. But at the company Christmas party a few weeks ago, Barb's boss drank too much and, in the middle of his turn with the lip-sync microphone, pointed at the visiting CEO and loudly accused him of being a ranking member of the Illuminati, then fainted.
That was bad enough, but he landed on the serving table, catapulting a cheese dip through the air and into same CEO's hairpiece, which removed his toupee, and exposed an embarrassing tattoo on his head, causing him to spill his drink on his wife, and her to scream and slap him soundly with a sardine. The whole scene was captured on video and within minutes was trending on all the social media sites.
Barb's (former) boss is now looking for work, but Barb got a huge promotion and now expects to earn $150,000 this year. This paved the way for Danny to take an unpaid leave of absence to stay home and work on his dream book project. But Barb's new income will not entirely compensate for Danny's year off. Her new tax bracket will be 40.7 per cent and, ignoring other write-offs, they will now pay more tax on the same combined income.
Because of this sort of thing, not always involving a cheese dip, Canada Revenue Agency (CRA) allows some adjustments, especially for seniors.
Pension Income Splitting:
If your spouse (or common law) has a lower marginal tax rate, consider splitting eligible pension income with them to reduce the overall tax bill. Eligible pension income includes, but is not limited to, life annuity payments from a pension plan and, when you're age 65 or over, it also includes withdrawals from your RRIF, LIF, RLIF, LRIF and Prescribed RRIF accounts. Withdrawals from your RRSP are not considered eligible pension income. Generally, you can allocate up to 50 per cent of your eligible pension income to your spouse.
Spousal RRSP contributions:
If you expect your retirement income to be higher than that of your spouse, consider making contributions to a spousal RRSP. If you have unused RRSP contribution room and your spouse has not yet reached the year in which they turn 72, you can continue to make spousal RRSP contributions even if you are over 71. Making a spousal contribution will provide you with a deduction on your tax return and help equalize future retirement income.
Pension sharing:
If you and your spouse are both age 60 or over and are receiving or are eligible to receive the Canada Pension Plan (CPP), consider sharing your CPP benefits. If only one of you is eligible for CPP benefits, it may still be possible to share it if both of you are at least age 60. Service Canada will recalculate the pensions paid to you and your spouse if you apply for pension sharing.
Use your spouse's age for RRIF minimum payments:
If you choose to convert your RRSP to a RRIF, you will be paid a yearly minimum amount, calculated (partly) based on your age. If you have a younger spouse, you can use his or her age instead, reducing the amount you pull in to taxable income each year. This doesn't stop you from taking extra payments if you need them.
- Mark Ryan is an investment advisor with RBC Dominion Securities Inc. (Member-Canadian Investor Protection Fund), and these are Mark's views, and not those of RBC Dominion Securities. This article is for information purposes only. Please consult with a professional advisor before taking any action based on information in this article. See Mark's website at: http://dir.rbcinvestments.com/mark.ryan
