There are ways to pay less tax during your working years and in retirement, writes certified financial planner Jason Heath. Read more.
A salary paid to a spouse or child is deductible if it meets three conditions. First, the salary is actually paid to them. The work they do must also be necessary for earning the business income. Lastly, it must be reasonable given their age, and in line with what you might pay someone else. The salary should be reported on a T4 slip just as you would for another employee.Article content
Until 2018, it was possible for business owners to split income with adult family members by paying them dividends on shares they owned of a corporation. Beginning that year, tax on split income rules came into effect and made it more difficult to pay dividends to family members. Split income paid from a corporation is taxed at the highest tax rate unless certain criteria are met.
Workers with DC pensions that invest in mutual funds to provide a future retirement income have restrictions on their ability to income split. If the DC pension is used to buy an annuity or provide another lifetime retirement benefit, the income may be eligible to split with a spouse or common-law partner without restriction. Otherwise, a DC pension must be converted to a life income fund or locked-in retirement income fund depending on the federal or provincial pension legislation for the plan.
RRSP contributions provide a method to split income today and in the future. If spouses have a significant difference in incomes, RRSP contributions should be made by the higher income spouse. RRSP deductions will reduce the higher income spouse’s income and leave the other spouse’s income to be taxed at a lower tax rate. One exception to this rule could be if the lower income spouse has a matching contribution for a group retirement plan with their employer.
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