High-Earning Dentist with a Lower-Earning Spouse? Discover Tax Savings with Intermediate-Term Income Splitting!

As a Canadian dentist, managing finances effectively within your family is crucial, especially considering you likely pay a lot in taxes. For those who have a spouse with a significantly lower income, there are ways to maximize your household income and save significant sums on taxes making a major difference in your lifestyle. One such strategy is intermediate-term income splitting. This approach, when executed properly, can result in considerable tax savings over time.

Understanding Intermediate-Term Income Splitting

Intermediate-term income splitting is a financial strategy designed for families where one spouse earns significantly more than the other. It revolves around the concept of having the high-income spouse pay most of the family expenses while the lower-income spouse builds an investment portfolio of income-producing investments that are ultimately taxed in their hands. The beauty of this strategy is that the income generated from these investments is taxed in the hands of the lower-income spouse, who typically falls into a lower tax bracket. This method not only makes tax sense but also boosts the family's net income.

The Strategy in Action

Here's how it works: the higher-earning spouse, which in many cases might be you, the dentist, takes on the responsibility of covering all household expenses as well as funding TFSA and Spousal RRSPs. This strategic move allows the lower-income spouse to channel their available funds into a personal taxable investment account. Given the income disparity, the lower-income spouse would naturally have less disposable income for investments if the household expenses were divided. By centralizing the expense responsibilities, you mitigate this issue and maximize what the low-income spouse has left over to invest.

This tactic circumvents the attribution rules that might otherwise apply if you were to give assets to your lower-earning spouse for investment purposes. When attribution rules apply, the income earned on those investments is attributed back to the person who provided the funds (in this case the high-earning spouse) and taxed at a higher tax rate. To implement this strategy effectively, maintaining meticulous records of income, expenses, and investment accounts becomes paramount to justify the investment funds' origins to the Canada Revenue Agency (CRA).

Joint vs. Individual Accounts

A practical tip for implementing this strategy is the use of separate banking and investment accounts. While joint accounts offer convenience and immediate asset transfer upon a partner's death, they can blur the lines of who owns what. Individual accounts, on the other hand, provide a clear audit trail, essential for validating the strategy to the CRA. However, if the income difference between spouses is minimal, the benefits of separate accounts might not outweigh their convenience.

Planning for Early Retirement

For dentist families eyeing early retirement, intermediate-term income splitting can be a game-changer. Typically, corporate owners can start income splitting at 65 using corporate investments. However, if retirement is planned before then, having a fund from which the lower-income spouse can draw from at a lower tax rate offers financial efficiency and could support a smoother transition into retirement.

Implementation Steps

1. Establish a Joint Account: Start with a joint account for all significant living expenses and tax installments. The higher-income spouse should fund both spouses' Tax-Free Savings Accounts (TFSAs) and a spousal Registered Retirement Savings Plan (RRSP) from this account.

2. Individual Accounts for the Lower-Income Spouse: The lower-income spouse should direct their income into their own bank account. This account will be the source for their RRSP contributions and their personal taxable investment account avoiding attribution rules.

By following this strategic approach to intermediate-term income splitting, dentist families in Canada can leverage the disparity in income to their advantage. Not only does this strategy foster financial growth by optimizing tax savings, but it also ensures that both partners contribute to the family's financial security in a meaningful way. With careful planning and execution, intermediate-term income splitting can be a cornerstone of your family's financial strategy, paving the way for a prosperous future.

- Brandt Butt, CFP®, CIM® Portfolio Manager/Investment Advisor

Brandt is a Portfolio Manager, Investment Advisor and Financial Planner and part of an award-winning team at Endeavour Wealth Management with iA Private Wealth. Brandt’s focus is working with incorporated dentists with busy schedules and who feel they need assistance making educated decisions with their money.

This information has been prepared by Brandt Butt who is an Investment Advisor/Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained here in may not apply to all types of investors. The Investment Advisor/Portfolio Manager can open accounts only in the provinces in which they are registered.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax, legal or investment advice. Please obtain independent professional advice in the context of your particular circumstances.

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