This is the first in a number of videos exploring investing and retirement planning strategies.

We’re starting with Income Splitting.

It’s a simple but extremely effective way to reduce taxes currently and in retirement.

Why does income splitting work? Who does this apply to? Should I being doing this now or in retirement? Watch the video to find out!

If you have questions, topic ideas or want to discuss your own investments please reach out, we’d love to hear from you.

Email us at info@towerasset.ca.

Mark 00:00:01 Welcome here to another Tower Talks. Tariq has an idea that we should start a series of practical, long shelf life videos that will maybe be useful for planning your own financial scenarios. And so we’re going to start out this time with the conversation about income splitting. And then we’re going to go toward a few other ideas that, you know, we’re going to drop down some videos in the future that will we hope you’ll find practical and useful. So anyway, Tariq, he’s got some new headphones that looks like it’s winter time in Medicine Hat. Got earmuffs on. Yeah. So I hope you can hear us. I hope you can. Everybody can hear you. Over to you.

Tarek 00:00:46 Perfect. Thank you. So we’re talking income splitting, really, really important retirement planning technique. And let’s start with some simple definitions. So the concept is income splitting in retirement. But it’s helpful to understand it’s because of our progressive tax system if two individuals who are part of the family make 50 grand a year federally, they will pay taxes at 14,000 or 14.5% each.

Tarek 00:01:11 Okay, so that’s a household income of 100 grand. Still, each person paying taxes at 14.5%. But if there’s the same household, one individual makes 100 grand and the other individual makes zero. Their tax rate actually jumps up to 17%. And you say, why is that? Well, that’s because we have a progressive taxes too. If you make more, you pay more. So on the first 57 grand of income, you pay 14.5% on the next, you know, roughly 60 grand or 40 grand of income. You pay 20.5. So what we’re trying to do with income splitting is keep everybody as the lowest tax bracket possible. For good financial planners, we want you to pay as little taxes as possible. Okay. Now when we say income splitting we also are basically trying to say asset splitting. So in retirement. You want to be able to make sure you have income for each spouse, as opposed to all of the retirement savings accruing to one spouse, so they’re forced to draw down a larger amount, moving them up into a higher tax bracket.

Tarek 00:02:19 Does that.

Mark 00:02:19 Make sense? So one question would be are the RFPs the same size?

Tarek 00:02:25 That’s the goal you can make. If you can make them the same size, that’s ideal. Absolutely.

Mark 00:02:29 Okay. Okay.

Tarek 00:02:30 Now the way that’s practically applied today is oftentimes the situation that made me think of this particular solution is, you know, I had a client or we have clients who, you know, both make good income, but then one spouse all of a sudden say, hey, I’m making a lot more income this year. And going forward, should I be increasing my RSP contributions for retirement and to offset the taxes I’m going to have to pay? And it wasn’t that simple. He’s got the right idea in mind. What he needs to do, though, is instead of contributing that to his own RSP. He contributes it to a spousal RSP. So what that means is he still gets the tax benefit. He still gets the tax deduction for the higher earning spouse, which is great. But the asset, the spousal RSP is in the spouse’s name.

Tarek 00:03:20 So when it comes time for retirement, the spouse draws down on that income. And it’s their income instead of the higher earning spouse’s income.

Mark 00:03:29 Okay, I’ve got one more idea for you.

Tarek 00:03:32 Okay.

Mark 00:03:34 If you’re with a company that wants to give you a bonus. And you’d like to split that bonus with your spouse. Maybe the company could put it into a consulting company that you own. And then out of that consulting company, you can each you can pay each of the spouses equally. Yeah. Works.

Tarek 00:04:00 Yeah. That’ll work.

Mark 00:04:01 There’s an extra step there. But if it’s if there’s a remarkable amount, it might may be worth it. In that consulting company, you have to have more than one type of income. Otherwise, it’s just viewed as, general anti-tax avoidance.

Tarek 00:04:14 And there has to be some, demonstration that the spouse is doing something, you know, there has to be attribution like they earned. Right. Okay. but yeah, that’s that’s definitely a good way of thinking of it in terms of, yeah, that’s keeping every person’s income lower is better for, for your effective tax rate as a family.

Mark 00:04:35 Even better yet. Oh, Eric.

Tarek 00:04:40 Exactly. I was one I was going to say, you know the theory has a lot of rules. We make it sound simple, right. That’s what we’re supposed to do. but the CRA actually has quite a few rules. You can never split employment income for one. Right. So employment income, it goes to the person or earning that income. And then before the age of 65, you can sometimes split some income. Sometimes not. There’s a lot of rules. After the age of 65 you can split more. So RSP riff life income. That’s the big one. But honestly, if your situation if you think this applies to you. Reach out to me, reach out to Mark, and we’ll put together a plan specific to you and the various types of income you might be receiving, and how we can make sure you’re in the lowest tax bracket possible.

Mark 00:05:21 Yep. In fact, I will tell you that we have a client, hopefully someone who’s listening right now who wanted to make a charitable donation.

Mark 00:05:28 And they called Tarek to to trigger the donation. And Tarek went back to him saying, well, if you’d like to save some taxes, you could donate some stock that is in your account. Yeah. And you ended up saving them quite a bit of money because. Yeah. Donation of stock, generates a full charitable receipt for the dollar value, but it is not treated as a taxable gain. So your cost basis stays low. There’s no tax event causing taxes, but you get the full tax receipt instead of receipt. Anyway talk to Tarek. Is is the short version of all of that?

Tarek 00:06:08 Yeah. I, you know, and kind of toot my own horn here. I think that clients said we saved them 70 grand in taxes or something like that. It was, you know, and that’s going to be another, you know, maybe tax strategy we talked about was donating securities in kind, but, you know, significant savings available.

Mark 00:06:24 Let me let me go to a I’m talking about no future videos.

Mark 00:06:28 I think we’re done with this right there. Yes. We’re wrapping up, for you to sort of whet your appetite and start the priming the pump for watching for what’s coming next. We’re going to do a video on what are our actual management fees, if you want to listen to that, because I think we’re more competitive than it might appear. That’ll be another video. there’s another one that oh, you know, this charitable donation thing. Many of our clients are charitably inclined. We are working on developing a foundation in tower so that you can transfer assets into the foundation. It’s going to take us a couple of months to iron that out, make sure it works well, but it’s called a donor advised fund. We’re going to generate within tower, and we’re going to unwrap that in the next. I would say by Christmas time we’ll be ready to do that. Yeah.

Tarek 00:07:25 It’s it’s a very interesting I think it’s going to be very, very, very helpful for a lot of our clients.

Mark 00:07:29 And then you as, as clients can have an account that’s your own.

Mark 00:07:34 It’s your investment account. You can have another account sitting beside it. That’s your donation account. And that money, you can just simply call us and say, I’d like to give this much money to that account and to that to that client, that charity and that charity and that charity, and we’ll handle that for you. But you’ll generate the tax receipt the minute you make the donation, and it can all be done in stock. Okay. We’ll come back to you. But thank you for your time. Are we done?

Tarek 00:08:00 Yes. Appreciate it. If you have any questions, let us know.