Getting hitched? Give at least as much thought to your registered investments as you do your gift registry. You’ll likely find that tying the knot provides some unexpected financial favours.
Take employee health benefits. If only one partner has health and dental coverage, she can add her spouse or common-law partner to her plan at rates well below market costs, says Cindy David, president of the Cindy David financial group Limited in Vancouver.
If both partners have benefits, then they have several options, says Andrea Ballett, senior employee benefit consultant at Al G. Brown & Associates in Toronto. If one person must pay into his plan, while his spouse’s plan is free it might make sense for him to opt out and be covered under his partner. Where neither spouse has to pay for their coverage, it often makes sense to keep both plans and coordinate benefits, claiming, for example, 80% of a prescription cost on one plan and then remitting the remaining 20% to the other plan.
“Sit down and review the costs and benefits of both your plans and the best way forward,” says Ballett, and then consult your human resources department to make any changes.
Couples enjoy a significant financial advantage when it comes to using permanent life insurance as part of an estate plan, says David. Say, for example, that a couple wants to offset the taxes that will be owed on their estate by purchasing an insurance policy that will pay out after they both die. “Permanent insurance can be expensive,” says David. “But when we can insure two lives under one plan with a joint-last-to-die policy, that cuts the cost almost in half. That’s a huge advantage.”
Income splitting and other tax benefits
Income splitting — where a higher-earning spouse transfers income to a lower-earning spouse in order to pay less tax overall — is one of the easiest and most effective ways to benefit from getting married. This strategy can take many forms.
For example, spouses can split future retirement income by using spousal RRSPs, which allow one partner (usually in a higher tax bracket) to contribute to an RRSP where the other spouse is the annuitant. When the cash is withdrawn in retirement, it’s taxed in the hands of the annuitant, who will presumably still be in a lower tax bracket. A spouse can also contribute indirectly to her partner’s tax-free savings account (TFSA) by gifting her spouse money, which the spouse can then put into his tax-free account. And, both RRSPs/RRIFS and TFSAs can normally be transferred tax-free to a spouse or common-law partner upon death.
Pension splitting lets one spouse give up to 50% of eligible pension income to the other for tax purposes. Eligible income includes that from a registered company pension plan, life annuity or RRIF. While income from Old Age Security (OAS) And Canada Pension Plan (CPP) don’t qualify, spouses over age 60 can elect to share CPP payments on the portion of CPP earned during their time together.
Someone who runs her own business can split income by paying wages or a salary to a spouse or children in lower tax brackets who legitimately work in the business, resulting in more after-tax family income overall.
Spousal investment loans allow a partner in a higher tax bracket to loan money to the partner who pays less tax at low interest rates (currently 1%): any returns on investment are then taxed at the lower rate.
One major source of income splitting, the Family Tax Cut, will be discontinued after the 2015 tax year. The FTC allowed a spouse to transfer up to $50,000 to his or her partner provided they had a child under 18.
Marriage provides several other tax benefits. For example, qualifying medical expenses for both spouses can be combined and claimed on the return of the lower-income spouse; charitable donations can likewise be combined to take advantage of high deductions for donations over $200. A spouse who is studying at a qualifying educational institution can claim tax deductions for tuition, education and textbook expenses; any unused amounts can be carried forward or transferred to the other spouse to a maximum of $5000.
The spousal tax credit is a big tax benefit, says Taylor. If one spouse isn’t working or earns below the basic personal amount of $11,327, the higher-earning spouse can claim up to that amount as a spousal or common-law partner credit — lowering federal taxes by up to $1,699, plus provincial savings.
One easy way to make sure you’re getting all your benefits is to have your returns prepared by the same accountant. Every Canadian has to disclose their marital status at tax time, but spouses aren’t required to file joint returns. They should do it anyways, says Taylor: it’s much easier and more cost-effective to identify and optimize the many tax-related benefits of marriage when your accountant or tax-software program has access to both partners’ information.
Taylor recalls a situation where a couple had their returns prepared by two different accountants: “The wife had a very high income and the husband [had] very low income. We later determined that he would’ve been able to transfer some of his credits over to her.”
Update your beneficiary
Speaking of RRSPs, RRIFs and TFSAs, make sure that you update the beneficiary on your registered accounts, insurance policies, and pension plans. Often, young unmarried people designate their parents as beneficiaries, and then forget to change that to their spouse, says Brad Taylor, senior manager of taxation at Edmonton-based Kingston Ross Pasnak LLP. Marriage doesn’t automatically make your spouse your beneficiary, says David; further, the beneficiary designation will take precedent over your will. If you want your spouse to be your beneficiary, she says, it’s imperative to contact all your financial institutions and fill out new beneficiary designations, “to avoid confusion or possible animosity.”