All in the family
Income splitting strategies
Tax season is here and that leads many Canadians to consider opportunities to reduce their income tax bill now and in the future. One of the best ways to reduce personal income taxes is through income splitting: the ability to use the lower tax rates of other family members to decrease the personal tax bills of you and your family.
Changes to the rules around income splitting in recent years may have created confusion on the availability of these tax savings strategies. We have summarized some of the key strategies that continue to be effective in sharing the tax burden amongst family members below:
Income Splitting for private corporations
Until recently, there were several more sophisticated strategies available to the shareholders of private corporations for “sprinkling” income amongst family members. As a result of sweeping changes to the rules around income splitting through private corporations last year, some of these approaches have been curtailed. Here are two strategies that can still be considered with the advice of your tax professionals:
Pay reasonable salaries to family members
Where you can show that your spouse and/or children have worked in the business, you may be able to pay them a reasonable salary. It is important to track their actual working hours, describe their work tasks, and define the terms of their employment. Wages must be reasonable based on the work performed and the age of the individual (i.e., school aged children).
Pay dividends to shareholders of private corporations over age 65
Despite the expanded “Tax on Split Income” (TOSI) rules for Canadian private corporations as of 2018, private corporations can continue to pay dividends to shareholders in specific situations. For example, in order to ensure consistency with other pension income splitting rules, where the business owner is age 65 or older and their spouse is a shareholder of the corporation, dividends can be paid to the spouse without attracting punitive TOSI tax consequences. If this exception did not exist, the dividend payments may be subject to the TOSI rules, which would tax the payment at the top marginal tax rate, regardless of the spouse’s tax bracket.
Next steps
Income splitting continues to be a powerful planning approach to tax minimization, and there are many opportunities to benefit at different life stages. More sophisticated trust and loan arrangements are available that can benefit business owners and affluent families. If you are interested in learning more about income splitting strategies, please contact your Richardson Wealth Advisor to receive our detailed income splitting education article.