Why Income Splitting?
Due to the Canadian tax system implementing progressive tax rates where the taxable income increases, the marginal rate of tax (tax on income) also increases. The marginal rate of tax, tax brackets, and surtaxes across all provinces are as follows.
- 46% on income over $139,000
- 42% on income from $89,000 to $139,000
- 35% on income from $45,000 to $89,000
- 25% on income from $11,000 to $45,000
RDSPs – Registered Disability Savings Plans
If you have a child with a disability who is eligible to get the disability tax credit, this can help you save for their long term security. This plan is not tax deductible, but investment income can be earned in the plan is tax free.
Canada Education Savings Grant
The federal government will provide a direct grant to an RESP valued at 20% of the first $2,500 of annual contributions made to the RESP in a year. For each year the beneficiary is under 18, the grant will be worth up to $500 per year, to a maximum of $7200 per beneficiaries over the age of 18.
How much can you contribute for TFSAs?
Up to $5,500 per year you can contribute as long as you are 18 years of age or older and reside in Canada. If you are 24 years old or older and you have made no contributions as of 2015, you can contribute a total of $41,000. For an indefinite period of time you can carry forward unused contribution room.
TFSAs – Tax Free Savings Accounts
These are not tax deductible but rather you can withdraw the income earned in the TFSA and your contributions to your TFSA, tax free at any time.
DPSPs – Deferred Profit Sharing Plans
They operate the same way as registered pension plans since contributions are made by the employer and are only taxed once they have reached the employee, usually during retirement. They are based on current or accrued profits but may have a defined minimum contribution.
IPPs – Individual Pension Plans
This is a defined benefit registered pension plan designed and structured for one individual person. However, at times a spouse or other family member can also be a member of the IPP. The amount needed to provide a defined benefit rises when you are closer to retirement due to less time being available to accrue investment income.
Ordinary RPPs – Registered Pension Plans
This is set up by an employer for its employees and large and small companies both have such plans. An annual amount on behalf of each employee is contributed by the employer and this is deducted for tax purposes. Employees are taxed on the income from the pension when they receive it, usually after retirement.
The Lifelong Learning Plan – RRSP withdrawals for education
Students in full-time training or post secondary education and their spouses are allowed to withdraw up to $10,000 per year from their RRSPs during a four-year period. The total amount during those four years must not exceed $20,000. Money that is withdrawn must be paid back to an RRSP in equal instalments over 10 years or they will be included in the income of the individual who made the withdrawal.
What happens to the funds in the RRSP?
They are not subject to tax at all while they are in the RRSP. Until the funds are withdrawn, no amount of interest, dividends, capital gains, or losses will be taxed.
What is an RRSP?
It stands for registered retirement savings plan. It is essentially if you agree to put some of your salary or self-employment income away and not have access to it right away, the tax system will tax that income along with all the interest and other income it earns. This is not done when the income is earned but rather when it is received.
GST/HST credit
This is geared towards low income individuals as well as families. It is designed to counteract the GST/HST paid by consumers on the majority of goods and services. As of 2015, $272 is the annual credit per eligible adult and $143 is the annual credit per child under the age of 19 in the family.
CPP/QPP contributions and EI premiums
All Canada Pension Plan contributions and Employment Insurance premiums are available with a federal credit of 15%, which gives you back around 25% of these amounts when the equivalent provincial credit is factored in.
First-Time Home Buyers
First time home buyers may be eligible for a non refundable tax credit on up to $5,000 of the home’s cost, which is worth close to $750. The credit can be claimed by you, your spouse, or your common-law partner. Also, neither of you are allowed to have lived in or have ownership of another home in the year it was purchased or the four years preceding that year.
Caregiver and Family Caregiver Credits
You are eligible for a caregiver tax credit worth as much as $691 as of 2015, if you are a caregiver who provides in-home care for elderly or infirm relatives who are 18 years or older You must live with the individual you are proving care for in the same self contained home.
RRSP withdrawals under the Home Buyer’s Plan
You are allowed to withdraw up to $25,000 as a loan from your RRSP and not pay tax on it if you intend to purchase or build a home under the Home Buyer’s plan. This will only work if you repay it over 15 years beginning in the second year after the year of the withdrawal.
Disability Credit
You are eligible to receive extra federal credit valued at $1,185 if you are experiencing severe and prolonged impairment in your physical or mental functions. In order to be considered having a severe and prolonged impairment, being able to do a “basic activity of daily living” must be “markedly restricted” for you. The impairment must have been or is expected to be at least a year in duration.
Tax Credit for Interest on Student Loans
If you are a student or a former student, you can claim a 15% federal tax credit that is non refundable as of 2015. This claim will be on interest paid from student loans under the Canada Student Financial Assistance Act, Canada Students Loans Act or comparable provincial programs.
Tuition Fees Tax Credit
If an individual pays their own tuition fees, as of 2015, they qualify for a 15% federal credit that isn’t refundable. However, if you pay for your child or another individual you may also be able to claim certain tuition fees. The fees must be paid to a Canadian university, college or other post-secondary institution, in order for you to be eligible for a credit. The requirement for the fees you claim must total more than $100 per institution.
Adoption Expense Tax Credit
For children that are adopted under the age of 18, the adopter is eligible to receive a refundable credit of 15%. As of 2015, $15,255 is the maximum eligible expenses that may be claimable per adoption. Examples of some eligible expenses could be: court and legal expenses, reasonable travel and living expenses for the child and adoptive parents, and fees paid to adoption agencies.
Child Tax Benefit
For families who have a low and moderate income, and are raising children under the age of 18, they will receive a non taxable benefit every month. They will also receive a Child Disability Benefit from the government which is a non-taxable benefit paid for children who are eligible for the disability tax credit.
Universal Child Care Benefit
Effective January 1, 2015, this benefit was increased for children under the age of six. Parents are eligible for a benefit of $160 per month for each eligible child, up from $100 per month. Parents may also receive a benefit of $60 per month for eligible children ages six to seventeen.
Adoption Expenses
The maximum amount of eligible expenses has been increased to $15,000 for each child.
Medical Expenses
Expenses such as cost of service animals used to help manage severe diabetes and amount paid as salary for personalized therapy plans for person eligible to claim the disability tax credit are now eligible as medical expenses.
