What is Income Splitting?

What is Income Splitting?

By definition, income splitting involves diverting dividend income (and certain other types of income) from one family member to another member in a lower tax bracket resulting in substantial tax savings.

By way of example, let’s take the assumed owner of a private corporation and call her Mary. Mary has two daughters, Sue and Chelsea, who are currently studying full time and, as such, have hardly any income. If the corporation pays a dividend of $30,000 to each child, there will be little if any tax to pay on those dividends after deducting federal and provincial “dividend tax credits.” However, if Mary currently falls into the top tax bracket, her tax on a dividend of $60,000 would be close to $30 000. As such, with a technical adjustment, Mary saves herself $30 000 in tax annually.

A simple solution to this workaround would have been to extend the existing rules that apply to children under 18. Under the current tax laws, minors are taxed at the highest rate on the entire dividend amount. If the government had extended the existing tax legislation to older children, this would have eliminated the opportunity to take advantage of this ‘income splitting’ loophole in a simple, easy-to-understand manner.

Unfortunately, the government elected to bring this new elaborate and very complicated set of tax rules into play.

“This is where it becomes a minefield for individuals to navigate.”

What does this mean for me?

In essence, these new regulations mean that family members of all ages who receive dividends from a private corporation have to convince the tax authorities that their contributions to the family business are meaningful enough to justify the dividends they receive. Otherwise, they risk tax penalties on the dividend income.

Under these rules, if family members are over age 24 and have not worked an average of 20 hours a week in the business, they may have to prove that their contributions to the business are reasonable in comparison to the similar contributions of their relatives as well as concerning the dividends received.

These ‘contributions that are to be assessed are multi-faceted – work performed, property contributed, and risk assumed all come into play.

This makes defining what % dividend every family member involved in a private corporation can receive without incurring penalties highly complex. The decision is highly dependent upon the perceived value of each family member’s respective contributions.

How valuable are one person’s hours of work in comparison to another? What value should be placed on property contributed to the corporation or loan guarantees undertaken? There are also numerous exemptions to take into account.

For example, these new rules do not apply to certain family members, provided, in part, that less than 90% of the corporation’s income is earned through a service business. This is where income splitting becomes a minefield for individuals to navigate.

Need advice on personalized income-splitting tax strategies? Contact us for more information on how we can help you protect your wealth.

By: Steven R. Kark (CFP, CLU, CHS, EPC, MDRT)


Events & Sponsorship

Toronto Entrepreneurs Conference @ Mississauga

May 08, 2019 Our B.E.S.T. (Business Entrepreneurs Services Team) Group has participated in this event for first time. Toronto Entrepreneurs Conference and Trade Show is the largest Entrepreneurs event in Canada. The event which targets business owners, partners or...

Hispanic Fiesta 2018

September 04, 2018 RGB Accounting will participate in this event for a second year in a row. Hispanic Fiesta will be held at Mel Lastman Square in Toronto during the Labour Day Weekend, August 31st, Sept. 1, 2, & 3, 2018. Hispanic Fiesta is a four-day celebration...

Secure Your Future Seminar 2018

June 20, 2018 This event gathered business owners running a small or medium-sized business, self-employed and incorporated businesses willing to learn tax saving strategies to help them utilize their company assets to secure their retirement. We are proud of having...

2nd Latino Business Expo Show

May 19, 2018 The 2nd Latino Business Expo Show held on May 19th at Daniels Spectrum gathered a wide range of entrepreneurs and business owners avid to learn how to take their businesses to the next level. RGB Accounting participated as vendor and speaker at this...

Hispanic Fiesta 2017

September 04, 2017 Hispanic Fiesta, a celebration of Spanish and Latin-American: Arts, Food, Music and Entertainment, is a four-day celebration filled with the splendid sounds, tempting treats and colorful culture featuring 300 local, national and International...

Articles & Publications

Shareholder Owners Salaries vs Dividends

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Understanding the Shareholder Loan

Understanding the Shareholder Loan. How to Use it to your Advantage and Stay Compliant with CRA If you are the owner-manager of a corporation, understanding the concept of the shareholder loan is essential to running your business. Below I will explain what a...

GST/HST for digital economy businesses

GST/HST for digital economy businesses Overview New rules for digital economy businesses are in effect as of July 1, 2021. As of July 1, 2021, digital economy businesses, including digital platform operators, may have potential goods and services tax/harmonized sales...