Tax Considerations For Single Income Households

Stay at home parents may do a lot of work but unfortunately it’s not a labour cost that gets reported on a tax return.  For families with a single income, tax time can seem a little one sided, but both spouses or common-law partners still need to file their own tax return in order to get the greatest tax benefit.

Benefit Payments

For example, the Canada Child Tax Benefit (CCTB) requires both parents to file a return.  And if your children are younger than six, the lower income spouse is required to report the Universal Child Care Benefit (UCCB).

But you can avoid the tax on any interest it earns by putting your UCCB in a separate account in your child’s name.  This means the income is taxed in his or her hands, rather than yours.

Related: Smart Tax Planning Tips

If the lower-income spouse reports the UCCB amount as income, the spousal amount will be affected.

In a household with only one income, you’re allowed to claim a $10,822 spousal amount if your spouse didn’t earn any income in 2012.  That’s about $1,620 in tax savings.

But if you receive $1,200 in UCCB payments, the amount is reduced to $9,622 or about $1,440 in tax savings.

Spousal RRSP

You may be able to take advantage of different income levels for your investments.  Your investments should be purchased by the lower-income spouse, as he or she is taxed at a lower marginal rate.

Related: 5 Common RRSP Myths

The higher-earning spouse can direct his or her money towards paying off the mortgage and other household expenses.  However, the higher-income spouse cannot simply give money to the other spouse, as this will trigger attribution rules and the higher-income spouse will have to report the earnings.

There is also the option of a spousal RRSP, which allows one spouse to contribute to the other spouse’s RRSP.  The contributing spouse can claim a deduction for the contribution in the same way as if it was in their own RRSP.

Because the contributing spouse will typically have a higher income, this will result in a larger deduction than if the recipient spouse claimed it on their return.  However, when payments are received from the plan in retirement, they will be included in the income of the recipient spouse and taxed at their lower marginal rate.

While contributing to a spousal RRSP will result in a tax deduction for the contributor, the spouse depositing the money in the RRSP has to have room available.

Related: RRSP Over Contribution Limit and Carry Forward Rules

So if you have a $20,000 RRSP contribution limit, you can deposit $10,000 into a personal RRSP and $10,000 into a spousal RRSP, or some other combination that doesn’t exceed $20,000.

The money needs to remain in the spousal RRSP for three years before a withdrawal can be made and taxed in the hands of the lower-income spouse.

If you withdraw the money before that period, the spouse who contributed it has to report it as income on his or her return even though the other spouse will receive the money.

If there’s a breakdown in the relationship, the attribution rules no longer apply.

Tax Withholdings

Single income households may also want to revisit their TD1 Form and their tax withholdings, so that instead of a refund at tax time there is less tax withheld every paycheque, since one person claims all the credits.

Related: How To Pay Less Tax All Year Round

Though it’s nice to receive money back when you file your return, it may help the household budget if there is more money in every paycheque.

After all, there’s no point in loaning the government money over the course of a year.  Remember, one income or two, the goal is to always pay what you owe but nothing more.

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  1. Richard Hunter on January 28, 2013 at 7:29 am

    With a Spousal RRSP withdrawals in the first 3 years after your last contribution are taxed in the hands of the contributor not the lower income spouse. Withdrew $10,000 in 2011 (first year after both retired) & cost us about $650 more than if we had waited. Financial advisor did not warn us of this when transaction completed just before year end. Intent was & still is in 2014 & beyond to shift maximum we can from RRSP into TFSA before spouse turns 65 & eligible for CPP & OAS.

  2. Joe on January 28, 2013 at 12:32 pm

    Great tax-saving tips. If your stay-at-home partner runs a business, having a corporation from which he or she can draw a salary and then each taking money through dividends (which are generally much more tax efficient if done correctly) can help each of you get the full CPP entitlement while also splitting income and reducing tax burden.

  3. Boomer on January 29, 2013 at 12:27 pm

    Re: Income splitting for investments. The CRA waives the attribution rules when the money is used to invest in a TFSA. Over time this will become an effective way to switch investment income to a no- or lower-income spouse for tax purposes.

  4. Julie on January 30, 2013 at 10:00 pm

    Great tips for a changing relationship dynamic… check all these out in a lot of detail. Didn’t take advantage this year, make sure you do for next!

  5. igra on January 31, 2013 at 5:41 pm

    Hm, regarding the UCCB, this page on CRA’s website:

    seems to say that UCCB amounts can be included in the income of a child only in the case of a single parent.

    • Cleo Hamel, H&R Block on February 8, 2013 at 11:53 am

      If you deposit the UCCB payments to an account in your child`s name, the interest earned on the deposits is taxed in the hands of the child. But the UCCB payments can only be claimed by a child in a single parent situation. A single parent
      can choose who claims the UCCB payment.

      • igra on February 8, 2013 at 12:25 pm

        Thank you for clarifying this, Cleo.

  6. junec on February 4, 2013 at 3:18 pm

    The single income household title caught my eye but I don’t see anything about single income households without a spouse or partner. Are there no tax considerations to be had for me?

  7. David Orr on February 11, 2013 at 8:03 am

    When you say families with a single income need to file their own separate tax returns, does this mean rather than a joint return. I have no regular income (other than CPP)and my wife usually does our taxes online and includes whatever income I’ve made.

    • Cleo Hamel, H&R Block on February 11, 2013 at 1:20 pm

      David – in Canada, tax returns are always filed on an individual basis.
      There is no joint filing option. Most tax software programs will prompt you
      to prepare both at the same time to maximize your tax savings.

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