How can the management of family finances be adjusted to the income gap between the two spouses and parents? And at the same time further optimize taxation and the development of family wealth?
Posted at 7:00 am
Julie, 41, and Stéphane, 48, are partners and parents of children aged 2 and 10. Her household and financial position to date is well established, with a family record of good net worth (approx.
However, as the gap between their earnings from work widens over the years, Julie and Stéphane want to revise their equal split of family budget spending and savings to make them proportionate to their respective incomes against total family income.
With their current numbers, that would mean going from a 50%-50% split to a 60%-40% split. Julie and Stéphane are also wondering what effects such a revision of their budget allocation will have on the optimization of their tax situation and financial planning in the medium and long term.
“For several years, our income from work has not grown at the same rate, while we continue to share the family budget equally,” says Julie in an interview The press.
“In this context, how might we restore greater equity between our share of family income and our share of family budgets? Would splitting expenses relative to income be a good idea? asks Julia.
“Or should we rather make interspousal equalization contributions in our Registered Savings Accounts (RRSP, TFSA, RESP), specifically in favor of the lower-income spouse? In this case, how does this affect our personal and family taxation? »
Julie and Stéphane’s situation and questions were taken to Mathieu Huot, financial planner and tax specialist at IG Wealth Management in Montreal, for analysis and advice.
Julia, 41 years old
Income (employment + 50% of family allowances): about $74,000
- MSRP: $11,000 ($28,000 in unused contributions)
- TFSA: $31,000
- As a percentage of employment-related retirement fund assets: $113,200
Stephane, 48 years old
Income (employment + 50% of family allowances): about $52,000
- MSRP: $65,000 ($38,000 in unused contributions)
- TFSA: $34,000
- Unregistered investment savings account: $58,000
- Share of assets in an employer pension plan: 15 years of participation in the Quebec Public Sector RREGOP
- CONTACT: $22,700
- Family Residence: approx. $370,000
- Mortgage Balance: $189,000 (fixed at 2.35% through September 2026)
- Annual major payouts: approximately $60,000
- Residence-related: approx. $27,000
- Lifestyle related: about $33,000
From the start, Mathieu Huot endorsed Julie and Stéphane’s desire, as de facto spouses and parents, to check their financial situation against their income gap.
By doing this check when their family finances are in good order and their marital status documents are up to date (cohabitation agreement, disability mandates, wills, etc.), Julie and Stéphane reduce the risk of legal and financial problems in the event of the separation of the parents or one serious incident that could affect the family’s way of life.
Mathieu Huot, financial planner and tax specialist at IG Wealth Management in Montreal
He also appreciates their concern for building up savings (children’s education, retirement savings), while their main liability – the mortgage loan on the house – is financed on favorable terms (fixed rate of 2.35% until 2026) and therefore with little budgetary risk pressures for four years.
Furthermore, Mathieu Huot estimates that at the current rate of payment, at an average rate of 3% over the years, this mortgage debt could be wiped off Julie and Stéphane’s family balance sheet in a dozen years. That means around the year 2034, four to five years before Stéphane’s retirement, at the age of 65.
“Your family budget would then be relieved of a large payout. And that while Julie and Stéphane are preparing for their retirement,” says Mathieu Huot.
“They can then choose to retreat to 65 at the same timee Stéphane’s birthday and has therefore increased to 58 for Julie, affecting her retirement savings. Or stick to separate retreats at 65e birthday, which would minimize the impact on their retirement pension and lifestyle continuity. »
However, Mathieu Huot notes that Julie and Stéphane could improve their financial situation by optimizing the use of their savings capacity, which he estimates at around $20,000 per year according to the budget figures provided.
And this while taking into account their goal of a better division of the family budget and contributions to savings according to their income gap.
First, Mathieu Huot recommends Stéphane use his $58,000 financial assets in an unregistered and fully taxable investment savings account for his tax-advantaged TFSA account.
“He can proceed with this money transfer when his financial assets are monetized as well as the available amount of TFSA contribution. But the longer he delays making that money transfer, the more he will evade tax exemption on income and gains from investments in a TFSA account,” recalls the financial and tax planner.
RESPs for children
Second, Mathieu Huot recommends that Julie and Stéphane maximize their two children’s RESP contributions to avoid “wasting” the tax subsidy at 30% of the eligible annual contribution amount.
“They should prioritize their 10-year-old’s RESP to maximize contribution to the eligible amount of $2,500 per year, as well as ‘catch up’ on unused contributions from previous years before they reach age 17,” explains Mathieu Huot.
“For the youngest 2-year-olds, setting up an RESP is also important for medium-term family financing. However, parents have more years to catch up in the event of a household trap over the years. »
Moreover, adds Mr. Huot, nothing prevents Julie and Stéphane from modulating their contributions to their children’s RESPs according to the development of their respective earned income.
“Such informal contribution sharing between parents is easy to achieve because the 30% tax credit is deposited into each child’s RESP account, rather than as a tax credit benefiting the contributor, as is the case with the Retirement Savings Plan (RRSP). »
RRSP contributed by spouse
Third, Mathieu Huot suggests that Julie and Stéphane exploit an unknown provision of the RRSP.
“This is a spousal RRSP account that allows you to set up an account in the name of a spouse, but whose registered contributor – and therefore beneficiary of the tax credits – is the other spouse,” explains Mr. Huot.
“Its primary advantage in terms of family finances and taxation is that the higher-income spouse can contribute to the other lower-income spouse’s RRSP, while the tax credit for those contributions is optimized thanks to the higher tax rate for the contributing spouse with the higher income. »
In the case of Julie and Stéphane, Mathieu Huot estimates that the difference in their earned income results in a ten percentage point difference between their respective tax rates.
“In this way, they can optimize their family taxation over the years while achieving their goal of a better distribution of family expenses and investment savings according to the difference between their respective incomes. »