RRSPs I think pretty much everybody in Canada knows how RRSPs work so I’ll confine myself to describing what I like and dislike about them. I like that they encourage people to save long term for their retirement. I like that they can grow tax deferred for a long time. The advantage to tax deferral is that you can have growth on the growth (as Einstein said "The most powerful force in the universe is compound interest"). So even if your marginal tax rate is the same as when you were accumulating the RRSP assets, you can end up with more capital…

In Canada, individuals file tax returns, not couples. Because of our progressive tax system, tax rates go up as your income goes up. So if one member of a couple makes a lot, and the other very little, they pay far more tax than if the income were evenly split between the two individuals. A simple example will highlight the difference. John and Mary Oldfashion. John has a taxable income of $120,000 per year and Mary has no taxable income. Their total family tax bill is $36,719. Bill and Jane Evensteven. Both Bill and Jane each have a taxable income of $60,000 so there…

Here are some ways to split income before retirement: Hiring Spouses and Children – If the higher income spouse is running a business they can hire their spouse or children and pay them a wage. The spouse or children actually have to do work, and the value you ascribe to it must be reasonable and supportable   Prescribed Rate Loan - The Income Tax Act (ITA) has attribution rules to prevent a higher income spouse from transferring assets to a lower income spouse but the higher income spouse can lend money to the lower income spouse at a prescribed rate, currently at an all…

Before age 65, only company pension and superannuation annuities qualify for income splitting or annuities arising from the death of your spouse. If you don't have a company pension, it’s kind of hard to split income. After attaining age 65, RRIF income qualifies, so if you haven't converted your RRSP to a RRIF or annuity, that’s the time to do it. Income splitting is only going to work if you and your spouse are in different income brackets. When I'm doing a couple’s tax return and they have qualified pension income, I run a pension splitting optimizer to determine how…

Testamentary Trust - There used to be an excellent way to split income after death by creating a testamentary trust in your will. Formerly, a testamentary trust was taxed separately and like an individual taxpayer, there were graduated rates (but no personal exemption). This was such a nice way to reduce taxes that the government changed the rules such that testamentary trusts are now taxed at the top marginal rate. Therefore, do not use a testamentary trust for this purpose (there may be other valid reasons to have a testamentary trust). However, if we don’t have a testamentary trust, we can…