Income splitting for owner-managed and family-owned business could be coming to an end, according to Department of Finance releases in connection to the 2017 budget. One of the goals of the budget is to achieve “Tax Fairness for the middle class…ensuring the tax system is fair…reviewing tax planning strategies involving private corporations”.1 In 2016, the government passed legislation putting an end to multiplying the small business deduction for corporate groups and partnerships and canceled the Family Tax Cut. Now it looks like small businesses are next.
Bread and Butter
Income splitting using dividends and wages are the simplest and often most effective way to save taxes – the bread and butter of tax planning. Canada’s tax system is integrated, which means that in theory, a dollar paid in dividends or wages, whether personally or through corporations, will result in the same amount of tax. However, integration only works at the top tax rate, so by paying dividends or reasonable wages to lower income family members, significant tax savings can be achieved.
Mr. Jones operates Jones Corp., a small family business generating active business income from which he can take $250,000 of gross remuneration. The family has no other income. Mrs. Jones performs some administrative and bookkeeping duties on a part-time basis. Their two children, who are both over 18 and beneficial shareholders of the company, are in university, and do not have any other income. Their parents assist with their living expenses and education.
If Mr. Jones splits income with his wife and pays dividends to his children, under one scenario2 the family could save $47,500 of tax – a tax savings of 49%!
|No splitting – Wages only||Income splitting||Savings $||Savings %|
and personal tax
|After tax funds||153,000||200,500|
Even Bigger Savings
The higher the earnings, the more the potential savings. Add RRSPs, education credits, and childcare expenses to the mix and tax savings grow exponentially.
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At this point it remains unclear how, and more importantly at what income level, the government intends to curtail income splitting by private corporations. Although the timing of new legislation is unclear, this is not an empty threat by the government, so businesses should prepare.
Tax planning is most effective when done in advanced, and it’s very difficult and costly to fix poor planning after the fact.
The upcoming income splitting changes can greatly affect your business. Sloan Partners can help you maximize your tax savings and minimize compliance costs in the face of the ever-evolving tax rules. Contact us.
Disclaimer: This article is intended for educational and informational purposes only. It is not intended in any way whatever to provide tax advice. The reader should be aware that legislative changes have been proposed and are subject to change. None of the persons involved in the preparation of this article accepts any responsibility for its contents or the consequences that arise from its use.
- Tax rates are calculated for the province of Ontario based on the availability of the small business deduction and non-eligible dividends. This tax scenario is one of many available, may vary depending on the circumstances, and does not take into corporate payroll tax, other income, income tax deduction or tax credits. Actual savings may be higher or lower depending on the circumstances.