For couples with the happy problem of having used up all their RRSP and TFSA room, excess savings in taxable accounts generate income that gets taxed. Usually, it’s better if the lower-earning spouse with a lower marginal tax rate declares this investment income, but attribution rules get in the way. Here we look at a way to build assets in the name of the lower-earning spouse.
Let’s use an example to avoid using the awkward term “lower-earning spouse” any further. Jim has a soul-destroying corporate position paying $200,000 per year. His wife Sandy makes $35,000 per year selling flowers in a small shop. They have used all their RRSP and TFSA room. They have additional savings that build up in a taxable account.
If Jim and Sandy do nothing special, the taxable account would likely be full of money from Jim’s income and Jim has to declare the returns generated by this account on his taxes (even if the account is in Sandy’s name). If Sandy could declare this income, the couple would pay less tax overall.
The solution is to have all of Sandy’s income go into a taxable account in her name, and for the couple to use Jim’s income to pay family expenses. This way the taxable account would be full of Sandy’s income and the investment returns would be taxable in her hands. This is an approach that my wife and I use.
An interesting question is how far can Jim and Sandy push this? In a safe version of this idea, Sandy saves only her take-home pay and she pays any income taxes she owes at the end of the year herself. Here are some questions about whether this can be taken further in order to increase the amount of savings in Sandy’s name.
1. Can Jim pay any additional income taxes Sandy owes at the end of the year?
2. Can Jim reimburse Sandy for the taxes deducted from her paycheques? The idea here is that Jim pays all of Sandy’s taxes.
3. If Sandy owns the flower-selling business, can Jim pay the businesses expenses so that Sandy is free to save her total revenues rather than just her net income of $35,000?
One opinion I’ve received on these questions is that #1 might be okay, but could be a problem, #2 is definitely pushing it, and #3 is just inviting tax problems. I haven’t tried any of these ideas and I have no interest in breaking tax rules, but I would like to know for certain whether any of these 3 is deemed acceptable by CRA.