Couples often envision aging gracefully in their “golden years” – together. Unfortunately, health does not always decline at the same rate for everyone, and couples often face separation when one spouse needs more assistance or even Complex Care. BC’s government services can support these needs, but the fees are income-tested and, when combined with taxes, can reach as high as 84% of income. Fortunately, with proper planning, the impact of these costs can be reduced, leaving more money for other services and family legacies.
When a senior couple is separated due to health care needs, Revenue Canada (CRA) allows for each spouse to file a separate tax return. Couples often automatically file as single, separate taxpayers, with the assumption that CRA offers this opportunity to their benefit. However, the circumstances of every couple are different and, when accounting for the income-testing formulas used to calculate care costs, filing separate returns is not always the best way. The formula for an Assisted Living facility is 70% of after-tax income, up to $3,530 monthly; and for Complex Care, it is 80% of after-tax income, up to $3,575.50 monthly.
Traditionally, couples must file joint tax returns in Canada. This allows for standard retirement income tax planning, which lowers taxes by combining tax credits to one spouse’s income, claiming deductions against the higher income spouse, and combining medical expenses (usually against the lower income spouse). The intention of filing this way is to keep income in the lowest possible tax brackets, between the two spouses.
When couples are separated and file single tax returns, they may qualify for the additional government benefits of the Guaranteed Income Supplement (designed to support low-income seniors) and GST benefits more easily. This can potentially increase the income of either or both spouses.
However, when one spouse enters Assisted Living or Complex Care, the benefits of income splitting usually outweigh the benefits of filing separate returns. Health Authorities charge between 70-80% of after-tax income for care costs. These fees do not show up on tax returns, but they have a significant impact on the total disposable income. The goal must be to reduce the income of the spouse who is in care as much as possible, by shifting income to the independent spouse, and consequently lowering the amount subject to the combined taxes and care costs of 84% in Complex Care. While this is definitely a high cost, it is important to note that these fees are dependent upon a percentage of income, so no one will ever be evicted from government care due to lack of funds.
By filing a joint tax return, couples can income split and move pensionable income to the spouse who is living independently. For dependent seniors living in care who are under age 71, RRIFs should be converted back into RRSPs, and all withdrawals should cease. For those dependent seniors living in care who are over age 71, RRIF withdrawals should be set to the minimum and be income split to the independent spouse. By default, many institutions will set LIF payments to the maximum allowable; instead, these should be set to the minimum. If splitting CPP benefits at the source lowers the dependent spouse’s income, couples should apply to Service Canada, using form ISP - 1002 to change this. If CPP income splitting has already been elected and increases the income of the spouse in care, it should be reversed. Excluding CPP, all these income splitting strategies require filing joint tax returns.
These steps can be used immediately to lower taxable income and consequent income-tested government care costs. With a longer time horizon, strategic planning can lower future income to reduce care costs. Proper planning can prepare families and smooth the transition from independent living to more complex models of care.
*All suggestions should be reviewed and implemented with the advice and expertise of your tax and financial planning professionals.