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Ch. 8 solutions - Chapter 8 4 Some of the issues and...

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Chapter 8 4. Some of the issues and answers are not affected by whether they are a spousal couple. We deal with them first. This question involves income splitting between unrelated persons, income splitting between parents and children, tax deferral and at least two non-tax issues. However, the biggest question is whether Anita and Elizabeth expect to live together for the rest of their lives. If they don't, then income splitting to reduce taxes involves Elizabeth giving up money she won't recover. On the other hand, Anita is providing a valuable service by working in the home, but she isn't being paid for it. In fact, her wealth is declining (she has less now than she received in her separation payment), while Elizabeth's wealth is increasing. If the instructor places the students in the role of adviser to these women, the issue of how to approach this question can lead to an interesting discussion. Assuming that they plan to stay together, or at least to minimize taxes by joint planning, there are the following issues: income splitting; children’s education; tax deferral; and, tax sheltering. Furthermore, the answers are sometimes different, depending on whether they are a spousal couple or not. First, I provide the answers that are the same for either spousal or non-spousal couple. Children's education. If they want to put money aside now for future post-secondary education, there are two possible ways to do so with tax-minimization aspects. One is an RESP. This will defer tax on the income, though no deduction is allowed for the principal. In addition, they will receive the CESG. The income is ultimately taxed in the child's hands; so this method defers and splits income. However, if the child doesn't go to post-secondary education, the income may be lost (depends on the plan), with only the principal being returned. If they plan to stay together indefinitely (spousal or not), then they might want to designate each other’s child as the alternative beneficiary. The other
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