How to go about adjusting the management of family finances according to the income gap between the two spouses and parents? While continuing to optimize taxation and the progression of family assets?
Posted at 7:00 a.m.
The situation
Julie, 41, and Stéphane, 48, are common-law spouses and parents of children aged 2 and 10. Their budgetary and financial situation is well established so far, with a family balance sheet in good net worth (about $515,000) between the main assets – registered savings accounts and others, family residence – and the liabilities of the loan balance mortgage on the family residence.
However, seeing that the gap between their employment incomes is growing over the years, Julie and Stéphane want to revise their equal sharing of family budget disbursements and savings in order to align it in proportion to their respective income in total family income.
With their current numbers, that would mean going from a 50%-50% split to a 60%-40% split. Also, Julie and Stéphane wonder about the impact of such a revision of their budget sharing on the optimization of their tax situation and their financial planning in the medium and long term.
“For several years, our work income has not grown at the same rate, while we continue to share the family budget in equal parts”, indicates Julie during an interview with The Press.
“In this context, how could we restore greater equity between our share of the family income and our share of the family budget? Would sharing expenses in proportion to income be a good idea? asks Julie.
“Or should we rather make compensatory contributions between spouses in our registered savings accounts (RRSP, TFSA, RESP), especially in favor of the lower-income spouse? In this case, what impact on our personal and family taxation? »
Julie and Stéphane’s situation and questions were submitted for analysis and advice to Mathieu Huot, financial planner and tax specialist at IG Wealth Management in Montreal.
Numbers
Julia, 41 years old
Income (employment + 50% of family allowances): approximately $74,000
Financial assets
- RRSP: $11,000 ($28,000 in unused contributions)
- TFSA: $31,000
- As a share of employment-related pension fund assets: $113,200
Stephane, 48 years old
Income (employment + 50% of family allowances): approximately $52,000
Financial assets
- RRSP: $65,000 ($38,000 in unused contributions)
- TFSA: $34,000
- Non-registered investment savings account: $58,000
- Share of assets in an employer pension plan: 15 years of participation in the RREGOP of the Quebec public sector
Joint asset
- RESP: $22,700
- Family residence: approximately $370,000
Joint liabilities
- Mortgage balance: $189,000 (fixed at 2.35% by September 2026)
- Principal annualized disbursements: approximately $60,000
- Residency-related: approximately $27,000
- Lifestyle related: approximately $33,000
Advice
From the outset, Mathieu Huot compliments Julie and Stéphane’s wish, as de facto spouses and parents, to review their financial situation based on their income gap.
PHOTO PROVIDED BY MATHIEU HUOT
Mathieu Huot, financial planner and tax specialist at IG Wealth Management in Montreal
By carrying out this review when their family finances are well established and their family status documents are kept up to date (living together agreement, mandates in case of incapacity, wills, etc.), Julie and Stéphane reduce the risk of legal and financial hassles in the event of the break-up of their parental couple or a serious incident that could affect the family lifestyle.
Mathieu Huot, financial planner and tax specialist at IG Wealth Management in Montreal
He also appreciates their concerns about building up a savings asset (children’s education, retirement) while their main liability — the mortgage loan on the house — is financed on favorable terms (fixed rate of 2.35% by 2026) and therefore at low risk of budgetary pressure for four years.
Moreover, at the current rate of payments, with an average rate of 3% over the years, Mathieu Huot estimates that this mortgage liability could be wiped off Julie and Stéphane’s family balance sheet in a dozen years. That is to say around 2034, four to five years before Stéphane’s retirement, at age 65.
“Their family budget would then be relieved of a large disbursement. And this, while Julie and Stéphane will be preparing for their retirement from work, ”says Mathieu Huot.
“They can then decide on a simultaneous retreat to 65e Stéphane’s birthday, and therefore moved up to 58 for Julie with the impact on her retirement savings. Or, stick to separate retreats at their 65e respective birthday, which would minimize the impact on their retirement pensions and the continuity of their lifestyle. »
Father’s TFSA
That said, 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 objective of a better sharing of the family budget and contributions in savings assets according to their income gap.
First, Mathieu Huot recommends that Stéphane use his financial assets of $58,000 in a non-registered and fully taxable investment savings account towards his tax-advantaged TFSA account.
“He can make this transfer of funds as his financial assets monetize, as well as the available amount of TFSA contribution. But the longer he delays this transfer of funds, the more he will deprive himself of the tax exemption on income and gains from investments in a TFSA account,” recalls the financial and tax planner.
Children’s RESPs
Secondly, Mathieu Huot recommends that Julie and Stéphane maximize their two children’s registered education savings plan (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’ unused contributions from prior years before he reaches the age limit of 17.” , explains Mathieu Huot.
“For the youngest 2-year-old, setting up an RESP is also important for medium-term family finances. However, parents will have more years to catch up in the event of a budgetary pitfall over the years. »
Moreover, adds Mr. Huot, nothing prevents Julie and Stéphane from modulating their contributions to their children’s RESPs according to the evolution of their respective employment income.
“Such a sharing of contributions agreed informally between the parents is easily achieved because the 30% tax subsidy is paid into the RESP account of each child, and not as a tax credit for the benefit of the contributor as is the case with the Registered Retirement Savings Plan (RRSP). »
RRSP contributed by spouse
Third, Mathieu Huot suggests that Julie and Stéphane take advantage of an unknown provision of the RRSP.
“This is a spousal RRSP account, which 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 main advantage in family finances and taxation is to allow the spouse with higher income to contribute to the RRSP of the other spouse with lower income, while optimizing the tax credit for these contributions thanks to the tax rate higher for the contributor-spouse with higher income. »
In the case of Julie and Stéphane, Mathieu Huot estimates that the difference in their employment income results in a difference of ten percentage points between their respective tax rates.
“By doing so, they will be able to optimize their family taxation over the years, while achieving their objective of a better distribution of family budget disbursements and investment savings according to the difference between their respective incomes. »