Ask an expert
Every week, financial expert Caroline Cakebread answers your money questions.
Read on for her advice and send in your personal finance queries.
Please note that only published questions will be answered.
Q: What exactly is income splitting and how do I do it?
A: Income splitting allows the higher earner in your marriage to transfer some of his or her income to the lower earning spouse at tax time. In Canada, the higher your income, the more tax you have to pay – to the tune of nearly 50 per cent at the top end. In contrast, the lowest tax bracket hovers at about 25 per cent. If the highest earner can transfer just $10,000 to his or her spouse’s tax return, it means a savings of $2,500 on tax (assuming it’s being taxed at 25 per cent). Here are a few ways you can split your tax bill.
The most popular way to income split is through a spousal RRSP. It’s the same as a regular RRSP, except that it is registered in the name of one spouse (the lower earner) and the contributing spouse (the bigger earner) gets the tax deduction. Down the road, when the RRSP matures, it’s taxed in the hands of the lower income spouse. A note of caution – if the funds are withdrawn within two calendar years after the original contribution, the higher-earning contributor gets dinged on tax.
If you’re a married senior receiving your Canada Pension Plan retirement benefits, you can apply to split the income you receive. Check the Service Canada web site for more information.
If you run your own business and you make more money than your spouse, consider paying him/her to work for you. You can claim the payments on your tax return and get a break.
There are even more ways to income split, from letting the higher earning spouse pay the bills, to giving or loaning the lower earning spouse money. To find out which of these applies to you, check with your accountant or financial planner. Good luck – and happy splitting!
Q: What’s the best way to consolidate credit card debt?
A: Credit card debt has a funny way of creeping up on you, but carrying a balance on more than one card makes it even harder to keep track of what you owe. Simplify your situation by putting all your debt in one place. The best way to do this is to get a line of credit from your bank or a low interest credit card, go for whichever option has the lowest interest rate. A word of advice – once you’ve consolidated your debts, cut up some of your cards to avoid piling on the debt again. If you’re serious about debt consolidation, check out the Government of Canada website for detailed information on how to get started.
Q: How much of my weekly earnings should be put into savings?
A: A general rule of thumb says you should save between 10 and 20 per cent of your gross earnings. What you save, however, depends on your stage of life and financial goals. If you’re saving for retirement, some experts say you should save enough to replace 70 per cent of your working income. If you are saving through a registered retirement savings plan (RRSP), you can contribute up to 18 per cent of your earned income for the previous year, to a maximum of $18,000 (2006 figures).
If your employer offers a pension plan or a group RRSP you should seriously consider joining, especially if they match your contribution. Why say no to free money?
If you’re not sure what your goals are, that doesn’t mean you shouldn’t be saving. Even if there’s not much left over after you’ve paid all your bills, it’s still important to sock away whatever you can.
Just think – one day you might suddenly see the house of your dreams or you might decide you want to take a trip around the world. Saving gives you choices – so keep your options open by paying yourself first.
Q: I’m thinking of selling my home and buying a new one. How do estimate my moving costs?
A: Back in the good old rental days, the cost of moving was limited to the price of a cube van and a pizza for your buddies. But today, buying and selling a home is a lot more expensive. One of your biggest costs will be the real estate agent’s fees. On your sale, you can expect to hand over about 5 per cent or more of your total sale price, depending on the agent and your needs. Then there’s the fluff factor – making your house look enticing to prospective buyers might involve a fresh coat of paint or even the services of a professional home stager who can whip your place into shape.
After that, you have to consider the legal fees and disbursements. These can run you a minimum of $500, according to the Canada Mortgage and Housing Corporation (CMHC), and that doesn’t include the title search and land transfer tax. When buying a new home, you’ll want to ensure that you have a home inspection done ($200 and up according to CMHC). A good home inspector is well worth the money – he or she can help find out if anything major is wrong with the place you want to buy.
You’ll also need to consider how much to put down as your deposit on the new place (25 per cent is the recommended minimum). As well, if you’re planning to change mortgage providers, you’ll need to investigate whether or not there is a penalty for breaking your existing mortgage.
Then there are other incidental costs: consider all the things you might need or want to do before moving into the home – rewiring, renovations, painting and new furniture.
And don’t forget the little details – things like change of address services, mail forwarding, installation for phone and cable. The move itself can also be expensive, depending on how much stuff you have and the distance you are moving. You can help knock the price down by pitching in, though, so consider lending your movers a helping hand.
To help you out, the CMHC has a good checklist that you can follow. Happy moving!
Read last month’s question and answers.