Federal income tax rates increase the more you make. As a result, couples in which one individual earns significantly more money than the other often end up paying more income tax than they would if their incomes were equal. Use income splitting strategies to balance your tax bill regardless of the gulf between your income levels.
Income Tax Rates
The tax rates for 2019 are:
- 15% on the first $47,630 of taxable income,
- 20.5% on the next $47,629 of taxable income
- 26% on the next $52,408 of taxable income
- 29% on the next $62,704 of taxable income
- 33% of taxable income over $210,371
This means if you earn $40,000, you pay 15 percent income tax, or $6,000. If your spouse or common-law partner earns $95,259, he/she pays $16,908 in income tax.
If you split your income evenly, you would both have $67,629 in earnings and a tax bill of $11,244 each. This makes a total of $22,488, more than $400 less than the $22,908 you owe with your unbalanced incomes.
You cannot just average your earnings between the two of you. However, there are other strategies.
The Canada Revenue Agency (CRA) offers deductions for things such as contributing to qualifying retirement accounts and incurring moving expenses.
These are subtracted from your gross earnings to calculate your net income. You can transfer these two deductions between yourself and your partner. To create the biggest impact on your tax obligation, the spouse with the largest income should claim them.
For example, if you earn $40,000 and you claim a deduction for moving expenses of $5,000, you save $750 based on an income tax rate of 15 percent.
In contrast, if your partner earns $95,259 and he/she claims the deduction, you save over $1,000.
Non-Refundable Tax Credits
The CRA offers non-refundable tax credits, and those related to adoption expenses, student amounts, medical expenses, and others can be transferred between spouses.
The higher earning spouse should claim these credits. They offset that spouse’s higher tax obligation. In many cases, because these credits don’t trigger a refund, they are wasted when they are claimed by the lower earning partner.
Once you are retired, the CRA allows you to balance your income levels through pension splitting. If you earn more pension than your partner, you can allocate up to half of it to your spouse or common-law partner.
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