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Investments, Tax, and Estate Planning

Investments

When you get married many things will change and one may be your investments. As single people you each had a financial plan that suited your age, objectives, risk profile, income, etc. However, now that you are becoming a couple, and perhaps planning a family, your investment situation may change. Although this will probably not be the most pressing issue as your marriage nears, it is strongly recommended that you plan to meet as a couple with your financial advisor to reconsider your financial future. Your plans and objectives as a couple will definitely be different than your individual plans and this opportunity to take stock of your new situation should be an exciting time. Properly arranged and structured, your collective saving ability may very well be more powerful that the sum of your independent efforts.

Your advisor will have a lot of information about not only creating a solid portfolio for your new circumstances, but also some good strategies to take advantage of the tax opportunities available and to ensure your estate is protected.

Taxation

There are distinct tax advantages to being part of a couple as opposed to two individuals. When it comes to filing tax returns, certain tax advantages can be shared or directed to the spouse who benefits most. As well, there are numerous tax advantages provided for spouses such as the 'spousal rollover' and an opportunity to ‘income split’, both of which reduce the overall amount of tax paid by a couple.

Income Splitting and Income Attribution

Given that the more you earn the higher your tax rate, it is a good strategy for a higher income spouse to direct income to a lower income spouse as any income or capital gains earned on that money is then taxed at a lower rate—which can reduce your overall tax burden. However, because Income Tax Act (ITA) tries to ensure that one taxpayer does not derive unfair advantage over another, it contains provisions that can greatly restrict this income splitting strategy. According to these provisions, or "attribution rules", any income or capital gains earned on money you transfer to a spouse is taxed in the hands of the spouse who transferred the money—the one in the higher tax rate. There are, however, several situations where you can legitimately achieve income splitting as a couple:

Transfer to earn active or business income – While the attribution rules restrict transferring money to earn passive income (interest, dividends, rent, etc), if you use the money transferred to a spouse to earn 'active business income', then that income is not subject to the attribution rules and can be taxed in the hands of the receiving or transferee spouse. Speak to your Advisor about what constitutes active business income.

Spousal Loans - When you loan money to your spouse, there is no attribution of the income or capital gains earned on that money so long as the loan is structured as a bona fide non-arm’s length loan, interest is paid at least once a year (a maximum of 30 days after year end), and the interest rate is at least equal to the ‘prescribed rate’ set by the CRA.

While the requirement of paying interest is intended to limit the attractiveness of making spousal loans, the historically low interest rates we have been experiencing in Canada may make it a very good time to direct money towards your lower income spouse through a loan locked in at this very attractive rate. The CRA has recently confirmed that the prescribed rate will be set at an historical low of 1% until at least March 31, 2012.

Your Advisor can provide you with more information on spousal loans and income splitting.

The Importance of Wills

Everyone should have a legal Will. It is also important to appreciate that when you become married, your previous Will is automatically revoked. Consequently, it is very important that you and your spouse discuss your estate plans and create new Wills, ideally with the assistance of a lawyer. If you don’t have a legal Will in place, provincial/territorial law will apply legislation that will distribute assets subject to a specific formula for the distribution of assets and care of dependent children which may not be what you and your spouse intended. You should also have proper Powers of Attorney in place to ensure your property is protected should anything happen to you and you become unable to make decisions.

You should also have proper Powers of Attorney in place to ensure your property is protected should anything happen to you and you become unable to make decisions. Here are helpful resources that you can use when planning your estate: Will planning checklist and personal record keeper.