# Income splitting options



## La_Maudite (Apr 10, 2009)

Hi all,

I'm currently staying at home watching over my kid. My wife is making a lot more money than I do, so the decision wasn't about which one would stay home during the day, but if I was going to keep studying/working. The decision was made and here I am at home thinking a lot about income splitting ;-)

My wife's financial adviser's is really doing a poor job. She's more of a mutual fund/insurance seller than anything else, collecting her cut of the fees, which makes me more and more angry. I'm still trying to convince my wife she should be a DIY investor, and I'd be glad to help. But until she realises that, the so called financial adviser didn't propose anything considering income splitting although she knows I'm currently unemployed.

The first option I'm looking at, is to invest the equivalent of my income of last year. Would that fly with the CRA? The idea behind it would be that my wife pays for everything for the family.

Second, I'd take all her investments outside her RRSP and contract a loan with her. I'd be "managing" (mostly passive investing using ETFs) the money following her wishes but in a broker account under my name. I wouldn't pay taxes because of my lack of income for the next few years. The rate, if I read correctly (correct me if I'm wrong please) would be 1% : see Interest rates for the second calendar quarter.

I'm not looking into spousal contributions to my RRSP yet, at least not until the so called finance advisor is out of the picture. Plus, I already have my RRSP contributions maxed out for the previous years and retirement will be 20 years from now, so there's still much time left for that.

Does that make sense? Any other income splitting options I should look at? 

Thanks.

Carl


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## La_Maudite (Apr 10, 2009)

*I just read the "Dividend Income Question" thread*

Sorry, I didn't see it before posting. 
Dividend Income Question thread.

It touches most of my questions. Still, I'm interested in your comments.


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## MoneyGal (Apr 24, 2009)

There aren't a ton of income-splitting options in the pre-retirement years (there aren't a ton of options in general). 

In addition to market-rate loans and the higher-income spouse funding all normal expenses, both of which you've identified, there are:

- gifts from higher earner to lower earner. First-gen interest is attributed back; second gen interest ("interest on interest") is not subject to attribution - or purchase assets which produce capital gains, not interest income

- TFSAs - no attribution

- shift assets between spouses, if one spouse has an income-producing asset, it can be sold or exchanged at FMV with the other spouse

Also make sure you prepare your tax returns on a family basis, to ensure you are using the credits most effectively.


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## MoneyGal (Apr 24, 2009)

OK, I went back and read the dividends thread. You can also shift taxable dividends between spouses, if one spouse has taxable dividends and would otherwise pay no tax.


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## leslie (May 25, 2009)

I realize you are not asking this question, but I think it needs addressing. 

It seems from your post that all the 'family' money was saved from her income and so is 'hers' for tax purposes. What happened to your savings? Do you have a record of successful savings and investing?

And she is resisting your advice re the advisor and her investments. Are you not opening a HUGE can of worms by trying to force her hand when she has made her position perfectly clear? 

When you discussed money and savings before you got married, what did you AGREE ? Money is so tender an issue, and is probably the biggest reason for divorce.


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## La_Maudite (Apr 10, 2009)

Hi,



MoneyGal said:


> OK, I went back and read the dividends thread. You can also shift taxable dividends between spouses, if one spouse has taxable dividends and would otherwise pay no tax.


Yes, that's a good point I didn't know about either. If significant capital gains are made on top of dividends, I still see the loan as a better option, i.e. I'll be taxed on capital gains and dividends.

Thanks for your comment.

Carl


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## La_Maudite (Apr 10, 2009)

Hi,



leslie said:


> It seems from your post that all the 'family' money was saved from her income and so is 'hers' for tax purposes. What happened to your savings? Do you have a record of successful savings and investing?


Savings, yes. Investing, well it depends on what you're talking about specifically. We've been both saving for more than 20 years now, but I opened my self directed account only this year. I wish I had done it before, because I would have read about income splitting and high fees mutual funds then, and would have made sure to set things up differently (using ETFs instead of high fees mutual funds, have all non RRSP investment using my income, etc). Her adviser should have proposed or at least talk about those options, but she (the advisor) never did because it wasn't in her (the advisor) interest.



leslie said:


> And she is resisting your advice re the advisor and her investments. Are you not opening a HUGE can of worms by trying to force her hand when she has made her position perfectly clear?


Cans of worms are better not left closed, it only gets worst with time. That said, I'm not forcing her hand. Of course I'll try to convince her because I think it's best for the family. If she still thinks she's better off paying all those trailing fees to her seller... heu... advisor, then fine. I'll just have to respect that and be miserable about it :-(



leslie said:


> When you discussed money and savings before you got married, what did you AGREE ? Money is so tender an issue, and is probably the biggest reason for divorce.


We have a contract, of course, so everything is clear on that side. You're right, money can be a hot issue. But I'm looking at it as a team effort, and plan for what I think is best for my family. That's the reason I decided to stay at home for a few years with my kid(s).

You had good points, thanks for sharing them. You can be sure I'll bring them to my wife's attention, just to make sure I'm not "creating" new cans of worms ;-)

Carl


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## cardhu (May 26, 2009)

La_Maudite said:


> The first option I'm looking at, is to invest the equivalent of my income of last year.


Do you still have your last year’s income sitting around? If not, and if you’re planning to carve an “equivalent” amount out from your wife’s income, and then pretend that it was your income of last year, then NO, it won’t fly. The general rule of thumb that CRA follows is that you must actually have done what you are claiming to have done ... pretending doesn’t cut it, and will land you in a heap of mess, if discovered. Now, some may say the chance of discovery is remote, and I wouldn’t necessarily disagree. But “getting away with something” does not make it legitimate. 



> Second, I'd take all her investments outside her RRSP and contract a loan with her. I'd be "managing" (mostly passive investing using ETFs) the money following her wishes but in a broker account under my name. I wouldn't pay taxes because of my lack of income for the next few years. The rate, if I read correctly ... would be 1%.


The loan-at-prescribed-rate mechanism is definitely a valid approach, and since the current rate is at historic lows and can be locked in forever, it is a good bet. But what you are proposing is a distortion of that approach ... you are proposing to “manage the portfolio following her wishes” ... if you are continuing to treat the money as hers, and are only setting up the loan for the sake of appearances, then CRA may view the entire setup as a sham, and the arrangement might be denied (I don’t know, I’m just suggesting) ... under the proper setup, which is unquestionably valid, the portfolio would be YOURS to manage as YOU see fit ... she would have no more control over the portfolio as a bank would, if you had borrowed the funds from them ... of course, taking that approach might have other undesireable, but non-financial, consequences, if your wife doesn't buy in.


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## MoneyGal (Apr 24, 2009)

CRA doesn't give two hoots about who is "managing" the money or whose investment wishes are being followed in allocating the portfolio. 

They care about the correct attribution of any resulting income and that a valid paper trail has been established for the inter-spousal loan (and that interest is actually paid from one spouse to the other). 

They don't care how the money is invested or even whether it is invested at all.


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## cardhu (May 26, 2009)

Thanks for the clarification moneygal ... I wasn't sure about that one, as I indicated.


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## La_Maudite (Apr 10, 2009)

Thanks again for the clarifications.


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## OhGreatGuru (May 24, 2009)

_I'm currently staying at home watching over my kid. My wife is making a lot more money than I do, so the decision wasn't about which one would stay home during the day, but if I was going to keep studying/working. The decision was made and here I am at home thinking a lot about income splitting ;-)_

It seems to me your question has little to do with income splitting and much to do with how you can manage/control the money your wife earns.

_My wife's financial adviser's is really doing a poor job. She's more of a mutual fund/insurance seller than anything else, collecting her cut of the fees, which makes me more and more angry. I'm still trying to convince my wife she should be a DIY investor, and I'd be glad to help. But until she realises that, the so called financial adviser didn't propose anything considering income splitting although she knows I'm currently unemployed._

_Second, I'd take all her investments outside her RRSP and contract a loan with her. I'd be "managing" (mostly passive investing using ETFs) the money following her wishes but in a broker account under my name. _

Since your wife doesn't even agree with your opinion of her financial advisor, trying to pressure her to give you control of all the family investment money would seem to be a good way to break up your marriage.

_
I'm not looking into spousal contributions to my RRSP yet, at least not until the so called finance advisor is out of the picture. Plus, I already have my RRSP contributions maxed out for the previous years and retirement will be 20 years from now, so there's still much time left for that.
_

You should be looking at spousal RRSP. Your wife, who is in the high income bracket, would get the tax deduction, but the RRSP would be yours to manage and invest as you wished. This is the most logical vehicle for splitting income, and should be persuasive without having to debate her allegiance to her financial advisor. But your wife's investment advisor isn't going to recommend it, because it means your wife will be diverting her RRSP contributions to your spousal RRSP, which means less commissions for her advisor, since you presumably don't wish to become her client as well. 

You should both open TFSAs. Your spouse can contribute to yours without worrying about attributions rules. You can control how yours is invested (but I hope you and your spouse have some kind of understanding about investor profiles and family financial needs.)

PS: I think I should qualify my comment about spousal RRSP. The purpose of this is to try to equalize retirement income, not split current income. (With pension splitting provisions this is not as important as it used to be anyway.) But if you already have more RRSP or other retirement benefits accumulated than your wife, then it makes more sense for her to continue catching up on her own RRSP first.


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