v Report your spouse s dividends on your tax return in .NET

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v Report your spouse s dividends on your tax return
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What if I told you that reporting someone else s income on your tax return could actually save you tax You d probably have me committed The truth is, the idea can work You see, you can elect to report all of your spouse s Canadian dividends on your own tax return It can make sense if your spouse s income is quite low By putting your spouse s dividends on your return, you ll reduce your spouse s income, which may, in turn, increase the spousal tax credit you re entitled to claim In fact, you ll only be allowed to make this election if it increases your spousal tax credit Since you ll also be entitled to claim a dividend tax credit on the dividends reported, your family could save hundreds of dollars in tax by making this swap (see Tip 54 for more)
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The tax rules say that when you transfer dividends from one spouse to the next, you ll have to transfer all the dividends You can t simply pick and choose which dividends to transfer Watch out! Transferring all the dividends to the higher-income spouse s tax return might increase that spouse s income enough to cause a
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clawback of Old Age Security bene ts In this case, you might want to avoid this type of transfer
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1 0 1 Ta x S e c r e t s F o r C a n a d i a n s
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w Pay family members a salary
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If you happen to run a business of any kind, you ll be able to pay your family members a salary or wage to work in that business The only catch is that the amount you pay must be reasonable for the services provided What s reasonable Consider what you would pay an unrelated third party and this should give you a pretty good idea Your business will claim a deduction, and your family member will report the income More on this in Tip 45
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x Become a partner with family members
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Did you know that a partnership does not pay taxes itself Rather, the income or loss of the partnership is passed along to each of the partners, who are then responsible for reporting the income or loss to the tax collector If you become a partner with your spouse or children, you ll split income by having some of your pro ts taxed in their hands, in accordance with your partnership agreement By the way, a written partnership agreement is critical, both to avoid misunderstandings with family and to satisfy CRA of the partnership allocations
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y Own a corporation with family members
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If you re a co-shareholder with your spouse or kids, you can split income with them in a number of ways As shareholders, your family members are entitled to dividends from the corporation In addition, they may be entitled to directors fees if they are directors of the company, or salary if they are actively employed by the company It s also common to see family trusts set up where the trust owns shares in the corporation, and the kids are bene ciaries of the trust Dividends can be paid to the trust and allocated out to the children to be taxed in their hands, although the 1999 federal budget made this tactic unattractive for minor children as of January 1, 2000 (I ll talk more about this in Tip 11) Adult family members can receive up to $31,750 in dividends from a Canadian corporation in a year and pay little or no tax (varies by province) if they have no other income, thanks to the dividend tax credit
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Home Team Advantage: Tax Planning for the Family
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z Use two corporations to transfer money
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The ugly attribution rules we ve been talking about apply to transfers of assets between two individuals or between an individual and a corporation but not between two corporations If, for example, you and your spouse own separate corporations, funds can be lent from your corporation to your spouse s without attribution If those funds were used in a business or invested inside your spouse s corporation, your spouse could access the funds by taking dividends Your spouse will be able to take up to $31,750 in dividends from his or her corporation and pay little or no tax (varies by province), thanks to the dividend tax credit, provided those dividends are your spouse s only source of income Be sure to visit a tax pro before trying this idea You ll have to set things up properly to satisfy the antiavoidance provisions in the Income Tax Act
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Splitting income involves moving income from the hands of one family member, who will be taxed at a higher rate, to the hands of another, who will face tax at a lower rate The attribution rules prevent many attempts at passing income to other family members Splitting income most commonly entails investing money in lower-income hands, making deductible payments to lower-income family members, and claiming deductions and credits on the most appropriate tax return
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