Is CRA being fair to the elderly?

If your spouse is a beneficiary of a pension plan did you know that you can allocate some of that income to you?

OK, so why would you want to do that?!  If you have a lower marginal tax rate then it may be beneficial to put the income on your tax return and pay the tax at a lower rate.  You can split up to half of the pension income and only with a spouse or common law partner.   The really neat thing is that you don't have to do it every year and you don't have to always use the same percentage to split.  You can vary these amounts annually....or not even split at all.

This may be a huge savings, especially if one partner has a pension and the other doesn't have much retirement income.  Leveling the playing ground does two things...it lowers the income level of the spouse that has most of the income and then it increases the income level of the spouse who has the lower income.  In effect this lowers the marginal tax rate of the higher income spouse and increases the marginal tax rate of the lower income spouse.

A practical application would be ~ Mary has over $150,000 in pension income and her husband has no income. Her combined marginal tax rate is 46.41% and her husbands is zero.  If she splits her pension income with her husband, effectively earning them $75,000 each which would put them both in the 35.39% tax bracket.  In scenario #1 the taxes owing would be $69,615 and in the second scenario the tax payable would be $53,085.  That's a difference of $16,530!!!

Of course, I over-simplified the answer and there is much more to consider when doing your taxes.  For example, there is an additional benefit of both spouses partaking in the pension tax credit, amongst other tax issues..........however............it can definitely be a benefit to look at the pension splitting option for those with pensions or for those with income streams from retirement plans once they are both 65 years of age.

Keep in mind that the analysis should be done as this does not always work to everyone's benefit.  It must be considered on an individual basis.

The Secret of How to Negotiate the Waves of the Stock Market

Many people are already doing this, either directly or indirectly.  Maybe they're doing it but they don't know they're doing it.  The secret of how to take the nervousness out of investing is to make the conscious decision to allocate your investments in a strategic fashion. 

For example, I'm a Balanced investor.  What does that mean, for me?  That means that my asset allocation is 60% equities (or stocks) and 40% fixed income (or investments with a stated rate of return).  I stick to this asset allocation through good markets and through bad markets.  If my equities become 65% of my portfolio then I take 5% out and allocate it to the fixed income component, and vis versa.  This keeps me disciplined in my approach with my investment portfolio.  It also does something else ~ it keeps me disciplined in the 'sell high' and 'buy low' strategy that tends to bring about successful investing.

Currently earning an income, I may not be so worried about the fluctuations of the market as I will be when I am retired.  Without income replacement it is challenging to watch those dips in the market but my strategy of keeping 40% in fixed income will help me.  While equities are out of favour the less volatile fixed income component of my portfolio can become my major source of cash flow.  This way I can wait for the equity markets to return and I will not be forced to sell them while they are at their all time bottom price levels.

Having my portfolio balanced, from an asset allocation perspective, is the first step in negotiating the waves of the stock market.

Tax Strategies

Ok, so last week's bad word was debt and this week is 'taxes'!

I thought this may be a timely post considering that April 30th is fast approaching. So let's discuss a tax strategy that may save you money.

This particular strategy works if you have a large disparity of income between spouses because one spouse will have a higher marginal tax rate than the other. CRA rules dictate that if you have investable assets they must be derived from your income. In other words, a wife (assuming she is the higher income earner) cannot gift her husband monies to invest and take advantage of his lower marginal tax bracket. If she did then the interest, dividends and capital gains would be attributable back to her which defeats the purpose of changing ownership of the funds. If he is working she can pay all the bills and have her lower-income spouse do all the investing with the income that is attributable to him. This must be tracked carefully for CRA to legitimize this strategy.

If however, he is not working, she can loan her husband the money at the CRA perscibed rate of interst (currently 1%) and he can invest it and any returns would be taxable to him but she must also include the interest portion of the loan as income on her tax return. This strategy must be evidence by a loan document and the interest portion is payable to the wife by January 31 of any given year. Because the CRA perscribed rate is so low, at the moment, it would be an opportune time to utilize this income splitting strategy, if it was beneficial to do so. The question remains ~ what is the optimum amount to lend to your spouse??? Well, that question could be answered by your accountant or tax preparer by either assessing your 2009 filing or by doing a pro-forma tax calculation after the fact.

If this strategy does not affect you then stay tuned as next week's topic will also be about taxes and strategies to ensure CRA doesn't get more than it should.