Income splitting techniques help save taxes. So, what is income splitting, exactly? Usually, income is splintered or split with family members who are in lower tax brackets. This article will illustrate how tax savings can be achieved using various family members in the tax savings game.
Option A
DDS receives salary........................................................................$170,000
DDS pays taxes (A)............................................................................$54,000
Option B
DDS receives salary........................................................................$100,000
DDS pays taxes..................................................................................$22,000
Spouse receives salary.....................................................................$70,000
Spouse pays taxes.............................................................................$13,000
Total taxes paid (B)...........................................................................$35,000
Taxes saved (A) – (B)........................................................................$19,000
If the salaries paid to family members are unreasonable, then the tax deduction could be denied. Even worse, the recipient would still be taxed on the amount received resulting in double taxation.
Split income with family members but pay them a reasonable salary (i.e., what would be paid to a stranger for doing similar work).
Option A
DDS receives non-eligible dividends.............................................$100,000
DDS pays taxes (C)............................................................................$16,500
Option B
DDS receives non-eligible dividends...............................................$50,000
DDS pays taxes.................................................................................... $3,500
Spouse receives non-eligible dividends..........................................$50,000
Spouse pays taxes............................................................................... $3,500
Total taxes paid (D)............................................................................. $7,000
Total taxes saved (C) – (D)................................................................. $9,500
Ensure spouse works a minimum of 20 hours per week on average at the practice throughout the year.
An individual can receive $40,000 in non-eligible dividends assuming they have no other income and pay personal taxes of about $1,500. Ensure your corporation is set up in a manner which facilitates dividend payment to family members.
Tax saving opportunities using family members who are in a lower tax bracket still exist and can be very useful in reducing tax burdens.
Option A
DDS is the only equity shareholder
DDS sells practice (Dentistry Professional Corporation – DPC)
shares for $2.7M
DDS pays taxes (E)..........................................................................$450,000
Option B
DDS, spouse and 6-year-old child own equity shares of DPC;
child owns shares from day she was born
DDS, spouse and 6-year-old child sell practice
(DPC shares) for $2.7M to unrelated party
DDS, spouse and child pay taxes (F).........................................................$0
Total taxes saved: (E) – (F)............................................................$450,000
1. The spouse and child must own shares for 2 years or longer.
2. Only the appr eciation since the time the spouse and child became shareholders will be sheltered from taxes.
3. Speak to your accountant to ensure your DPC’s shares qualify for the Lifetime Capital Gains Exemption (LCGE)
The sooner you add your spouse and children, the sooner you may be able to save taxes when you sell your DPC shares.
Option A
DDS, at highest tax bracket, (earning more than $220,000),
invests $100,000 personally and gets 10% return........................$10,000
DDS pays taxes (G).............................................................................. $5,350
Option B
DDS lends $100,000 to 18-year-old child, at the prescribed interest rate
of 1% (prescribed rate as of March 31, 2022) (Y)............................ $1,000
Child invests $100,000 at a 10% return (X)....................................$10,000
Child’s income (X) – (Y)....................................................................... $9,000
Child’s taxes (H)...........................................................................................$0
DDS taxes on interest income from child $1000 @ 53.5% (I)........... $535
Taxes saved (G) – (H) – (I).................................................................. $4,815
This tax savings maneuver does not apply if the child is under 18 years old.
1. This tax savings maneuver could be done with a spouse, where a spouse in higher tax bracket lends to the spouse in a lower tax bracket
2. Document and put the terms of the loan in writing.
Tax saving opportunities using family members who are in a lower tax bracket still exist and can be very useful in reducing tax burdens.
Please send comments to david@dcy.ca.
This article was prepared by David Chong Yen*, CPA, CA, CFP, Louise Wong*, CPA, CA, TEP, Basil Nicastri*, CPA, CA and Eugene Chu, CPA, CA of DCY Professional Corporation Chartered Professional Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail david@dcy.ca / louise@dcy.ca / basil@dcy.ca / eugene@dcy.ca . Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace professional advice.
