It’s the end of the year already which means the last opportunity for year end tax planning for parents, spouses, and caregivers. Raising a family and providing for a household can be expensive, but there are also many benefits and deductions available to lower the tax you owe once it is tax season. As a parent, spouse, or caregiver, there are circumstances in which unexpected and unavoidable expenses came up. Taking note of the flow of your finance will keep you abreast of the situation.

The end of the year is a time of reflection and review of past goals and reevaluation of finances.  We hope these four tips will serve as a helpful reminder for the new year and onward.

 

What is Tax Planning?

Tax planning is the strategic process of assessing the current state of your finances and creating plans to become more tax-efficient at the end of the year. However, proper tax planning is an all-year occurrence to help step up your finances.

 

1. Income Splitting with your Spouse

In Canada, you can split up to 50% of your income with your spouse or common-law partner. There are two situations where income can be split: before retirement and during retirement. Before retirement is a bit more complex. High-earning partners should ensure that their income is not all in one place, but rather distributing it through investments and other tax-saving/tax-deductible options to optimize their tax breaks.

Before retirement, partners with more income can add money to a spousal RRSP, so that the amount in each RRSP is even. This is most advantageous for partners with disparate income or very high earners. The goal of income splitting is to balance the overall income of the household.

Other ways to split income before retirement include:

  • Spousal loans that your spouse invests (the investments will be taxed at a lower tax bracket)
  • Max out your spouse or common-law partner’s TFSA contributions

To split income during retirement, you and your partner need to be at least 65 years old. Essentially, you and your partner would be splitting your pension income.

There are conditions and rules to each of these strategies, so we highly recommend consulting with a professional accountant.

 

2. Registered Education Savings Plan

If you and your spouse have children, contributing to an RESP is a great way to save on taxes. The good news is there is no annual contribution limit, however, you can only contribute up to $50,000 per child/beneficiary. Strategically planning when you contribute to an RESP will help you maximize the government grants you can receive.

Any money you contribute to your child’s RESP is considered tax-free until you withdraw from the account.

 

3. Hire Your Children

We shared this tip in our “5 Tips to Help Business Owners with Year End Tax Planning” article. While this tip mainly applies to parents who own a business, there are workarounds if you don’t.

Hiring your children gives them work experience, lightens your workload, and provides you with a bit of a tax break. As your children are most likely not earning as much as you, they wouldn’t be subject to as much taxes. Speak to a Chartered Professional Accountant to see how taxes would be handled for your children.

If you don’t own a business, you can still pay your children. Paying your children to conduct domestic work such as household chores counts too.

Keep in mind, this is “earned income” and not “kiddie tax” which is when parents try to avoid taxes by gifting their children stocks or other unearned income. You must actually make payments to your children, pay a reasonable amount, and keep a record of how many hours they worked.

4. Claim Your Child as a Dependent

You can claim a child up to 18 years old as a dependent (or older if they have a mental or physical disability/illness). For children attending post-secondary, you can claim their tuition and education amounts to help reduce your taxes. Claiming dependent grants you a non-refundable tax credit.

You can also save during tax season by

Need help with year end tax planning for parents, spouses, and caregivers?

Whether you are a parent, spouse, or caregiver, we all need help to plan our taxes. Making strategic decisions before the year ends is key to planning out your taxes. Using the knowledge from a professional tax accountant ensures you are making good decisions for your family and that the law is being followed.

Regularly keeping up with your income, expenses, and other financial needs is important to ensure your investments are kept safe.

At Soleimani Accounting, we specialize in providing professional accounting services for small businesses, corporations, and families. From bookkeeping and accounting to tax, we are here to help you and your business thrive through sound financial advice and assistance. Get in touch to book a free 30-minute consultation.