When it comes time for a couple to prepare their individual tax filings, there are several ways to avoid a ‘one refund, one owing’ situation. When one spouse owes money to the government while the other does not, consider sharing or transferring credits. It is important to note the Canada Revenue Agency (CRA) doesn’t let one spouse’s refund offset a balance owing for the other spouse.
Income Splitting
Before filing, if spouses calculate their taxes and discover that only one of them owes any money, they should consider a concept known as income splitting.
Income splitting is only available to certain taxpayers; not the general public. It is limited to shareholders who are children, and those with eligible pension income. This is a strategy whereby income from one spouse, typically taxed at a higher rate, is shifted to the other spouse. Doing so reduces the rates paid by the higher earning spouse while increasing the rates paid by the lower earner.
Claim Spousal Tax Credit
When one spouse has low earnings or no earnings at all, the other spouse with a balance owed to the CRA may claim the spousal tax credit.
This non-refundable tax credit helps lessen the tax burden of the higher earning spouse. There is a federal and provincial amount that may be claimed. The higher earning spouse can claim this amount if the higher earning spouse supports the lower income spouse and the lower income spouse’s net income is under $11,809.
Sharing Tax Credits
Several tax credits can be transferred between spouses to minimize a ‘one refund, one owing’ situation.
This may be done when one spouse does not have enough income to claim a non-refundable tax credit. Tax credits that may be shared include the pension income amount, disability amount, as well as tuition, education and textbook amounts. Federal tax credits can be shared and claimed on Schedule 2, Federal Amounts Transferred from Your Spouse or Common-Law Partner, while provincial tax credits can be claimed on Schedule 2, Provincial Amounts Transferred from Your Spouse or Common-law Partner.
Combining Tax Credits
Some tax credits may be combined and claimed by the spouse who owes tax to the CRA.
It is wise for medical expenses to be combined and claimed on the tax return of the spouse with the lower taxable income. However, if the lower income spouse does not have sufficient taxable income to claim the tax credit, it is advantageous for the higher-income spouse to claim it. For a couple who made donations in the tax year, it is advantageous to combine the expenses and for one spouse to claim the donations tax credit. This can help lessen the tax burden of the spouse with the balance owing.