Why women might choose to save and invest differently from men

Money matters among men and women

There are innumerable differences between women and men, including when it comes to money matters. That’s both in terms of how we think about money, and how we manage it.

Though the economic makeup of today’s population has evolved over recent generations, there remain important and relevant distinctions. As well, historical rules of thumb and so-called common wisdom may no longer apply in today’s economy, especially if they were premised or skewed toward male characteristics.

For women, this necessitates taking a principled approach to financial matters generally – and investing in particular – reflecting our current society and their own individual characteristics.

Ability to earn, capacity to save

On average, women face greater challenges in being able to save effectively toward their later years. According to Statistics Canada, women as a group earn about 87 cents for every dollar earned by men. While the reasons are complex and the situation has improved over recent decades, this is a systemic hurdle to be aware of, though it may apply to a greater or lesser extent for a given individual.

Being part of a couple may relieve this concern to some extent. Two can usually live cheaper than one, and therefore save more, both in working and retirement years. However, if there is a breakdown, women tend to fare worse economically post-relationship. That’s in addition to any depletion of mutual savings if the parting is contentious.

Women may leave the workforce to raise children, reducing their income during the time they are away, and possibly affecting their career prospects. Again, statistics show that women spend more time than men in child-rearing, even when both continue to work. As well, women tend more often to be family caregivers to older generations, requiring periodic time away from work, and possibly indeterminate leave in some cases.

Whether these commitments are by choice, due to social pressures or driven by a particular family’s economic demands, they affect both current income and the ability to build savings.

Saving for a longer life expectancy

Typically, women live almost five years longer than men. While it is a positive to be able to share extended time with family and friends, it comes with financial baggage. The prospect of a longer life has the built-in need to fund a longer retirement. And it’s not only the length of time that must be considered, but also how that time is spent.

Take the traditional male-female relationship. A married woman will generally live through the waning health and end-of-life care of her husband. On top of the financial, physical and emotional demands, on average she then has another half decade ahead of her. It could even be longer if, as was perhaps more common in past generations, she married someone older than her. Of course, a new relationship may blossom, but she has to be prepared for the likelihood of eventually being entirely on her own.

Thus, her financial planning must anticipate being part of two end-of-life processes, with all their related costs. Even with the benefit of a helpful adult child or other family member when she is in decline, it is likely that she will require more assisted living services and professional support (and accordingly more associated cost) than was required in the care of her husband when she herself may have carried much of the load on a daily basis.

In a same-sex relationship, you have two women each with longer life expectancy than men. While it may be a guess which partner may be the survivor, there will be more expected years of declining health to fund, possibly both happening at the same time. That is in addition to the income and savings challenges that now both sides of the couple may have experienced in their working years, as mentioned above.

What’s a woman to do?

Be intimately informed

As a woman, you must be informed about financial matters from the very beginning, as you are more likely to face the brunt of it at the very end. This is self-evidently true for singles, and more likely than not in either type of couple relationship as outlined above.

Start saving early, for flexibility later

Individual earning capabilities and family circumstances will vary, but having savings both in-hand and in-mind from the earliest point provides the best grounding to respond to circumstances as life unfolds.

Invest with balanced intention

Those savings have to be invested while delicately balancing two competing priorities: you need to participate in market advances to build savings in your accumulating years, and protect against market retreats in your decumulating years so funds are there when you need them.

Be emotionally aware to be financially prepared

There is an old myth that men invest logically and women invest emotionally. While that stark distinction has been debunked, it is true that both logic and emotion influence money matters for all of us. Accept and listen to the emotions that can affect your behaviour, so that you can make informed decisions that best serve your lifelong needs.

Speak to a financial advisor about how these points about women generally may apply to you specifically. Together, you can then review your savings routine and investment portfolio to ensure that they align with your long-term personal and financial goals.

Donating securities ‘in-kind’ to charity

Tax-optimizing your philanthropy

When it comes to charitable donations, the most likely type of donation that comes to mind for most of is cash. However, there are a variety of ways to support your favourite charitable causes, one of which is to donate publicly traded securities in-kind.

The Canada Revenue Agency (CRA) defines a publicly traded security to include a share, debt obligation or right listed on a designated stock exchange, a share of the capital stock of a mutual fund corporation, a unit of a mutual fund trust, an interest in a related segregated fund trust or a prescribed debt obligation.

When such securities are donated in-kind from a non-registered account, a tax receipt is issued for their fair market value (FMV) on the donation date. As with cash donations, a tax credit can then be claimed to reduce your income tax bill. In addition, in-kind donations can cost you less, and there is no reduction in what the charity receives.

How the donation tax credit works

When you make charitable donations, both the federal and provincial governments allow you to claim a credit against the income tax you owe. The tax credit is based on the total dollar value of all donations in the year, no matter how many individual donations you make. The value of the credit varies by province, with the credit rate ranging from 20% to 25% on your first $200 of annual donations, and 40% to 54% on the amount over $200.

You can claim donations up to 75% of your net income in a year. Donations not claimed in the current year can be carried forward to be used in any of the next five years. This assures that a large single donation can be fully utilized, even if it exceeds the net income threshold. As well, this gives you flexibility if it is more beneficial to forego claiming the entire credit in the current year, and instead strategically spread it across multiple years.

For more on the principles of the donation tax credit, see the article Four tax strategies to get more bang for your charitable donation buck.

Donating cash or selling appreciated securities?

Most people make periodic charitable donations in cash, but that may not be optimal when you own securities that have appreciated in value. Cash is worth what you have in your hands, but appreciated securities carry a waiting tax bill. More specifically, in the 2024 Federal Budget the income inclusion rate for capital gains was increased to 2/3, but the prevailing 1/2 rate remains available for individuals on the first $250,000 of capital gains in any year. For trusts and corporations, the 2/3 rate applies to all capital gains. The 1/2 rate is used in the examples in this article.

Let’s say you want to contribute to a local charity’s capital fund, and you have equal balances in your chequing account and your (appreciated) securities account. If you write a cheque, you still have your securities, but with their pending tax liability. If you sell the securities to make the donation, there is less money available for the donation due to the tax, which means that either the charity gets less, or you need to top up the donation from your chequing account.

One way or another, you or the charity will bear the brunt of the tax in these two scenarios. The question is whether there is a way for you to keep your fully spendable chequing balance, while making the maximum donation to the charity using your securities? This is where in-kind donations come in.

Donating securities in-kind to eliminate tax on capital gains

Typically, when there is a change of ownership of a security, a disposition is deemed to occur, and a capital gain or capital loss is triggered. However, when a security is transferred directly to a registered charity as a donation, the tax on any capital gain is reduced to zero. We can illustrate this with the following example:

- Donor is in a 40% combined federal-provincial tax bracket in a province with a top donation credit rate of 50%
- $10,000 donation, using a security with $10,000 FMV and $6,000 adjusted cost base (ACB)
- There has already been $200 in charitable donations made elsewhere this year

Donating securities in-kind to trigger a capital loss

The donation of appreciated securities is attractive, as we have just outlined. However, donating depreciated securities can also be a viable option, especially when it comes to your year-end tax planning.

When you donate depreciated securities, you trigger a capital loss that will be applied against capital gains realized in that same tax year. You can then carry back any remaining capital loss to offset capital gains in the three previous tax years or carry those losses forward indefinitely. So not only will you receive a tax credit for the FMV of the donated securities, you will also be reducing your tax bill if you have realized capital gains elsewhere.

Spouse and family income splitting

Navigating income attribution rules, including prescribed rate loans

Income splitting has been around for as long as the tax system itself. It’s a shift of income recognition from a high-rate taxpayer to someone at a lower tax rate. Most often it will involve a spouse/common-law partner (CLP), and can also work with children though less often when they are of minor age.

Importantly, income splitting is not illegal. It is however constrained by tax rules that scrutinize gifts and preferential loans between closely connected people. That being so, it’s sensible to review and understand the rules that could undo a planned action, prior to launching into the effort.

The motivation for income splitting

The premise of a progressive tax system is that those more financially capable are asked to bear a larger share of tax. For income tax, a higher rate of tax is imposed on income above each bracket threshold.

Presently there are five federal tax brackets, with rates progressing from 15% up to 33%. Each province has a similar structure, though the rates and number of brackets vary. When combined with federal rates, the top individual marginal tax rate is near or above 50%. Comparatively, the lowest combined rates are roughly in the 20-25% range, and may be close to zero once personal tax credits are applied.

Successful income splitting could cut that portion of a given family’s tax bill in half or better.

Attribution with a spouse/common-law partner

Attribution rules include both general and specific Income Tax Act provisions designed to plug holes where tax may leak. The base rule between an individual and a spouse/CLP is that any income, loss, capital gain or capital loss on loaned or transferred property will be attributed back to the transferor.

The rules don’t affect or change the legality of the transfer, including the legal right to the associated income or gain. Instead, they simply cause the transferor to pay the tax at his/her marginal tax rate.

The rules apply to direct transfers, as well as to indirect transfers and more complex scenarios, including:

- Transfer to a trust or corporation in which the recipient has a beneficial interest
- Loans without interest, or at interest below the prescribed rate (discussed further below)
- Loans through an intermediary to mask underlying routing of funds back to the recipient
- Third party loans advanced to the recipient, contingent on the guarantee of the high bracket person
- Re-advancing loans paying off an original loan from the same person to whom attribution applied
- Non-monetary loans, such as a loan of real estate or personal property
- Claiming an advantageous split of commingled funds, without any record of respective contributions
- Pre-relationship transfer or loan, with attribution beginning once a spouse/CLP relationship begins
- Substituted property acquired with proceeds of sale of original property that was subject to attribution

Attribution with a related minor child

Where a transfer or loan is made to a related minor child, attribution applies on income up to the year the child reaches age 18. Notably, there is no attribution of capital gains or capital losses, whether realized before or after the child reaches age 18, presenting a significant splitting opportunity. For these purposes, child includes a grandchild, sibling, niece or nephew of the individual or of a spouse/CLP.

Strategies that can avoid the attribution rules

The attribution rules can be circumvented with informed planning. The strategies described below refer to a spouse/CLP, but they work just as well when splitting with a child.

Prescribed rate loan

While a transfer to a spouse/CLP by way of gift is a problem, a properly documented and serviced loan that complies with the prescribed interest rate rules will escape attribution. The investment income will be taxed to the lower income borrowing spouse, less a deduction for the interest paid. On the other side, the lending spouse will have to include the interest in income.

While a formal written loan agreement is not mandatory, it’s prudent to have one to buttress the bona fides of the arrangement, should it be questioned in future by tax authorities. Apart from that,

- Interest payments must actually be made from borrower to lender, paid during the calendar year or no later than 30 days after year-end (January 30^th, not ‘end of January’).
- The lending spouse cannot be the source of the interest for the borrowing spouse, meaning it cannot be simply capitalized to the loan or be part of a revolving loan arrangement.
- The rate must be commercially reasonable, and be no less than the rate prescribed by tax regulations. That rate is set quarterly, calculated as the average yield of Government of Canada 3-month T-Bills auctioned in the first month of the preceding quarter, rounded up to the next whole percentage.
- The prescribed rate is 5% in the third and fourth quarters of 2024.
- Failure to comply with any of these rules makes the loan forever offside thereafter.

What makes this strategy particularly appealing is that the loan may remain outstanding indefinitely at the original interest rate, even if the prescribed rate rises in future. And if the prescribed rate falls, the current loan could be paid out, and a new loan established at the lowered prescribed rate.

Fair market value exchange

If a low bracket spouse gives an asset of fair market value (FMV) in exchange, attribution will not apply. However, if the FMV falls short, full attribution still applies. In other words, there is no pro-rata treatment, so the transfer from the high bracket spouse should be no more than the available asset’s FMV.

Examples may be an automobile, antiques or jewelry, as long as the ownership interest did not originate with the high bracket spouse, such as an earlier gift. An interest in a cottage or principal residence may also be possible, but those are more complicated due to land transfer tax (in some provinces), as well as tax on disposition and required tax elections to be made when filing tax returns for that year.

Income-on-income (also known as second/later generation income)

It is only the income on the original gift that is attributable. When that income is reinvested by the receiving spouse, the ongoing income-on-income is taxed to him/her. To prove this distinction if there is an audit (given that the onus is on the taxpayer), it may help to move income on the original investment into a separate account where it can be clearly tracked.

Business income

Generally, the attribution rules are intended to capture passive income from property. If the receiving spouse uses the transferred funds to generate business income, then attribution will not apply.