4 Ways to Split Income with Lower Income Spouse & Family Members

For those of you who always wonder – should I incorporate to own my real estate portfolio, this is where you get to know all the answers!

All proceeds less the cost involved will be donated to Hamilton Basket Brigade to feed more families this Thanksgiving and Christmas.  Each seat filled means you are feeding 3 families this upcoming festival.

For those of you who don’t know what Hamilton Basket Brigade is, check out this video done by Tony Robbins, one of the world’s most successful business coach.   He started his foundation because his family received a basket of food from a stranger on Thanksgiving.

He decided to pay it forward by starting his own Basket Brigade.

We started 2 Christmas ago feeding over 30 families. We fed 150 families last Christmas. Our goal is to feed another 100 families this Thanksgiving and of course another 100 to 150 this Christmas. You can also see what we have done in this Facebook page.

Giving back makes you happier.
If you are not interested in my incorporation class (which I can understand, accounting classes aren’t for everyone 😉 ), you can also donate directly by going to this link. If you are interested in helping out to pack and deliver food, you can email us at [email protected].

Now on to this week’s topic –

As Canadians, we all pay a lot of taxes here.

Raising a family is even tougher. When one spouse decides to stay home to take care of the kids, our tax system isn’t designed to give us any break on it.

Family tax cut was cancelled by our Prime Minister Justin Trudeau from 2016 onwards.

Any daycare expenses you can incur cannot be deductible (as daycare and summer camp expenses can only be deducted against lower income spouse).

It sucks.

As real estate investors and business owners, thankfully, the following strategies can be used to split income with the lower income spouse & family members.

1. Prescribed rate loanFor real estate investors who do not have business, limited planning opportunities are available to split income with lower income spouse or other family members.Setting up a prescribed rate loan is definitely one of them.The low income earner borrows from the high income earner to invest.

   The low income spouse has to pay the prescribed interest rate (as set out by CRA at the time the loan is setup) on the loan to the high income spouse by January 31 of next year.

   All income earned from the investments is reported in the low income spouse’s tax return.

   High income spouse simply reports the interest received every year.

   If you are expecting to receive 30% to 40% ROI from your real estate investments, setting up a prescribed rate loan is definitely a great idea.

   Today’s prescribed rate set out by CRA is 1% only. This means that high income earner can reports 1% interest income while the low income earner reports the rental income plus the capital gain minus any interest cost paid.

   Win-win. 🙂

2. Paying a reasonable amount of salary for services providedFor real estate investors and people who carry a business, you can choose to pay a reasonable amount of salary to your spouse or low income family members who do work for your business.Because the people getting paid are not at arm’s length, you have to be very careful when you decide to make a payment.For one, you have to document all the work that has been performed.

   For two, you have to make sure the amount is reasonable.

   What is reasonable? It is what you would otherwise pay to an arm’s length person to do the same job. If you were to hire someone you don’t know, how much would you pay that person to do the same thing?

   If your kids mow the lawn for your rental properties, you can pay them and deduct the expense. But don’t pay them $1,000 each time they mow your lawn, that likely wouldn’t fly with CRA.

   Many investors asked me if they could pay their children a property management fees. Of course you can, provided that they did actually act as a property manager and the amount you paid is reasonable.

   Keeping a job description is a good start. But other supporting documentation should also be kept, such as communication between your children/lower income spouse and the tenants and contractors, etc.

4. Paying a dividend via a corporate structureUnlike salary, paying dividend does not need to be reasonable.Similar to what you get from investing in mutual funds or stock market, you can get as much a dividend as these corporations would distribute.If you are into real estate, you may want to consider setting up a corporate structure so you can split income properly with your spouse and lower income family members.

   You do, however, have to watch out for attribution rule when you setup this type of structure.

   Consult a professional to setup the proper structure.

   An individual without any other income can receive up to $40,000 pretty much tax free (except Ontario Health Tax for roughly $1K).

   Lots of tax planning opportunities are available here.

5. Contributing in spousal RRSPI don’t always recommend buying in RRSP given the limited choices of investment opportunities allowed.But it is definitely one of the ways that you can split income with your spouse.When you make a contribution, be sure to tell your bankers you are doing it for your spouse.

   Three years later, your spouse may decide he/she needs the money. The withdrawal is being reported in his/her own tax return.

Here’s the donation link to Hamilton Basket Brigade.

And if you are interested in helping out to pack or deliver food, email [email protected].

Cherry Chan, CPA, CA

Your Real Estate Accountant