It is often said that happy families talk, meaning open lines of communication are the best way to ensure the family's happiness. In a similar way, financially secure families talk finance. If you are not open about the financial situation in your family, you are robbing yourself of a valuable resource.
SEE: Registered Retirement Savings Plans (RRSP)
There are many reasons to have a family; love, companionship, tax breaks. In this article, we'll explore the third. We'll take a look at some of the ways Canadians can "invest" in their families, including income splitting and paying their kids a salary. (Not Canadian, but still interested in family tax issues? Check out The Benefits Of Having A Spouse.)
Even if your family only consists of you and your spouse, there are many things you can do to relieve your overall income tax bill. If one spouse is making significantly more than the other, you can split your income and lessen the tax you pay as a family.
One common technique is for the higher-income spouse to make contributions through the spousal Registered Retirement Savings Plan (RRSP). These contributions can be continued into retirement if your ages vary, meaning that the spouse who retires first can further minimize taxes by moving money into the younger spouse's RSP. (For more tips, see the RRSP tutorial.)
Another technique for income splitting, most useful when one spouse is working at home, is to pay him or her.
For business owners, this money is given over in the form of wages that can be deducted from the business taxes, and children can also be paid.
For the non-business owners, there is an amount set by the government that you can pay to your spouse and family. The allotted cash must actually change hands. You can't just keep it in your account and claim that you gave it. This is because the Canada Revenue Agency can demand further documentation at any time and the burden of proof is always on the taxpayer - you're guilty until you can prove you're innocent. (To learn more, check out Tax-Saving Tips For Canadian Taxpayers.)
There are hundreds of write-offs for families, but you have to keep receipts and records to take advantage of them. For example, summer camps, piano lessons and tutoring can be deducted if you are using them as a way to keep your children occupied while you work.
Clothing and food can even be used as write-offs in certain situations. The important thing is to find an accountant with experience in your particular field. If you own an income-producing acreage or farm, for example, you are able to write-off a plethora of living expenses that urban accountants may not be aware of. (To get started, read Find The Right Financial Advisor.)
RESP and Personal Loans
There used to be a time when allowing your children to pay for their own education was part of the rite of passage into the responsibilities of adulthood. Those times passed when the average student debt loads surpassed $30,000, and payment terms of 25 years became necessary. Now, starting a Registered Education Savings Plan for your child is one of the best ways to ensure that you don't find yourself with a boomerang coming back at you when you are trying to prepare for retirement. (For added insight on this phenomenon, see Boomerangs: Why Some kids Never Leave The Nest.)
Personal loans are another way to help out your kids, particularly if you are reaching the age where most of your money is being placed in fixed-income investments. If you are investing money at 4% and your kids are borrowing at 8%, then the bank is making all the money in between.
Perhaps a low-interest loan to your child can serve as a sweetheart deal for both of you. You don't have to wait until you are dead to be generous. (For related reading, see Cut Your Tax Bill With Permanent Life Insurance.)
The Bottom Line
It is a bit of a stretch to call dispersing your income within your family "investing", but it does help to relieve your tax burden and guard against future problems such as having to providing for your children when they are grown and you are retired.
The best source for finding out what you can do for your family is your accountant.
Every family is unique, but there are general sets of write-offs that any family should take advantage of. There will also be some that are particular to your situation. The important thing is to keep accurate documentation, whether it is on computer or in a simple ledger, because you can't deduct anything if there is no proof of the transaction.
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