Income Splitting For Business Owners

by Dean Paley on May 10, 2012

Income splitting can produce some pretty dramatic results. Consider the case of a married, self-employed individual whose taxable income is in excess of $250,000. Assuming the spouse does not work, the tax bill would be $94,700 (in Ontario).

If this couple were to split their income equally, their combined tax bill would drop to $77,700, a savings of $17,000.

Now if income splitting were as simple as moving income from one family member to another everyone would be doing it. However, the Income Tax Act contains some rules that prevent most of simple income splitting.

Business Income Splitting Techniques

There are a number of simple strategies business owners use to split income with your family members.

  1. Pay Your Spouse & Children A Salary – If your spouse and children help you in the business, consider paying them a salary for the work performed. You will need to keep a record of the dates worked and what was done. In addition, you should pay them what you would have paid a third party for the same work.
  2. Become A Business Partner With Your Spouse – If your business is not a corporation, you may be able to show that your spouse is a partner in the business and can share in the income and losses. This strategy requires some planning and thought and a shareholders agreement should be part of the plan.
  3. Corporate Income Splitting – Although there are some challenges to overcome, income splitting through a corporation provides flexibility in allocating income between family members. Be careful to avoid the “kiddie-Tax” applied on dividends to minor children and the corporate attribution rules that may apply when the spouse is made a shareholder.

Get More From Your Business

If you are interested in in finding out how income splitting can help you reduce your tax bill, call us at (289) 288-1206 or contact us to arrange a consultation.

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