Marriage is a significant life event that changes your life in many ways. You share your life, house, assets, and finances with your spouse or common-law partner. You also share your taxes, which could be good news if one of you has a lower income. The Canada Revenue Agency (CRA) requires every Canadian to file taxes. Once married, you must update your spouse’s information on your tax return.
When you file your returns jointly, the CRA gives you taxable income and income threshold amounts of two people. The spouse with a lower income can transfer their unused amounts to the higher income earner. Meanwhile, the spouse with a lower income can claim the benefits the CRA offers to lower income.
This article will show how your spouse can help you save on taxes.
How Your Spouse Can Reduce Your Taxable Income
| Taxable income threshold | Tax rate |
| $55,867 or less, plus | 15% |
| over $55,867 up to $111,733, plus | 20.50% |
| over $111,733 up to $173,205, plus | 26% |
| over $173,205 up to $246,752, plus | 29% |
| over $246,752 | 33% |
The tax slabs are the same for every Canadian. For 2024, a 15% federal tax rate applies on the taxable income of $55,867 or less. While the tax rate doesn’t change, the amount you pay in taxes can be reduced. Your spouse can help you reduce your taxable income through spousal transfers listed in Schedule 2.
As per the schedule, the spouse earning a lower income can transfer the age amount, Canada caregiver amount for infirmed children under 18, pension income amount, disability amount, and tuition amount. They can also transfer the unused basic personal amount to the higher income partner.
For instance, Joey and Janet are married. Joey has an annual income of $10,000, and Janet has $75,000. For 2024, the basic personal amount is $15,705, on which no federal tax is paid. Janet can use $5,705 of Joey’s unused BPA plus her own $15,705 BPA to reduce her taxable income to $53,590. This puts Janet in the 15% tax bracket.
Similarly, married couples can transfer age tax once they cross 65, thereby reducing the taxable income.
How Couples Can Split Income to Reduce Tax
The CRA has stringent rules about income splitting, but there is some income you can split with your spouse. Suppose you run a business; you can hire your spouse for a particular job and pay as per the industry standards. But your spouse should be working for relevant hours like any other employee.
Dividend Income: You can also make your spouse a shareholder and pay dividends. While dividends are taxable, the amount will be divided between you two. You can withdraw $117,734 ($55,867 each) while paying only 15% federal tax. You would fall under the 26% tax bracket if you withdrew this amount individually.
Pension income splitting: You and your spouse can split eligible pension income after age 65 to lower the taxable income. The eligible pension income is the one you withdraw from RRSP, RRIF, life annuity, and other qualifying payments. The Canada Pension Plan, Old Age Security, Lump-sum pension payments, foreign pension, transferred RERIF amount, and non-registered pension plans are not eligible for pension splitting.
Investment income: You and your spouse can split investment dividends or capital gains to reduce the taxable income. However, you have to split the investment income proportionately to the actual amounts contributed by each partner.
For instance, Joey jointly invested $1,000 (33%) and Janet $2,000 (67%) in X stock. This amount has grown to $10,000 over several years. From the capital gain of $7,000, Joey can claim 33% or $2,310 and Janet 67% or $4,690.
How Couples Can Increase Tax Deductible Expenses
While the above amounts increase your tax-free income, you can also increase your tax-deductible expenses by claiming them jointly. One such expense is an eligible medical expense incurred for you, your spouse or common-law partner, and dependent children under age 18.
The CRA allows you to deduct eligible medical expenses above 3% of your net income or $2,635 (whichever is lower). Spouses with a lower income can avail of the maximum deduction.
For instance, Joey and Janet incurred $4,500 in total medical expenses. If Janet claims this deduction, she can only deduct $2,250 ($4,500-$2,250 (3% of $75,000)) in medical expenses. However, Joey can deduct $4,200 ($4,500-$300 (3% of $10,000)).
Couples can deduct many such expenses, including childcare.
How Couples Can Transfer Tax Credits and Reduce Taxes?
The CRA offers various tax credits and allows couples to transfer some to their spouse. One of them is the donation tax credit.
If you donate to a registered charity, a 15% federal tax credit applies to the first $200 donation and 29% to any donation above $200. If you donated $150 and your spouse donated $150, you can combine the donations and claim a 29% tax credit of $87 on the combined $300 donation. You could have only claimed a $45 tax credit if you had claimed them separately.
These are just some benefits. Different incomes, expenses, and scenarios can enhance your tax savings. If you split up with your spouse, these benefits will also change.
Contact Ford Keast LLP in London, Ontario, to Help You with Tax Planning
A skilled accountant can help you file your returns accurately after incorporating changes in life events. They can also guide you on several ways to avail tax benefits and deductions. To learn how Ford Keast LLP can provide you with tax planning and filing, contact us online or at 519-679-9330.
