If you own a small business, you work very hard for your money. You want to make sure that you have used every legal means possible to save on tax, to enhance your after-tax net income.
Here are some tips to help you achieve that objective. In all examples given, make sure that you speak with a qualified professional advisor with expertise in the area. This could be a professional accountant (such as a CA or CGA) and in some cases, a lawyer as well. The comments given here are general guidelines only, and it is advised that you obtain current tax regulations and strategies.
This is a classic way of saving on taxes. Basically, it means that you arrange your income to have it divided amongst other family members (spouse and/or children). That way, each of the individuals will be paying less taxes, because of lower marginal tax rates. The aggregate taxes paid will therefore be less than what you would pay if all the money went into your hands. Here are some examples:
Remember that the deadline is the end of February . You want to try to reach the maximum of your “earned income” for RRSP calculation purposes. Rather than put the RRSP in your own name, you can put up to l00 per cent of your RRSP annual contribution into the name of your spouse (assuming that your spouse has less taxable income than you do). You take the tax deduction from your taxable income. The advantage of this arrangement is that when the time comes to collapse the RRSP (take out the funds), it will be taxed in the name of your spouse, who presumably is still in a lower tax bracket and will therefore pay less tax.
By splitting your shares with your spouse and children, you can reduce the amount of tax paid in aggregate because the lower the income (from dividends) the lower the marginal tax rate. This point was covered above. For example, you could have 5l per cent of the shares, while your spouse and children share the remaining 49 per cent. You can deal with the issue of control by having Class A voting shares for yourself, and Class B non-voting shares for your spouse and children. You also want to have the right to buy back the shares at any time from the other shareholders at the original, or some other set share value. There are various formulas you can consider. You also want to get professional advice if your children are minors and don’t pay fair market value for their shares–their dividend income could be attributed back to the business owner for tax purposes.
If you set this arrangement up carefully, and there are several options, you can keep more tax-free money in the family unit. For example, if your spouse and children are holding shares in your company through the means of a family trust, and have no other family income, they could each receive up to approximately annually in dividend income totally tax-free. Sounds rather attractive doesn’t it? Normally, it is structured so that you hold Class A shares (voting) in your own name, while the Class B (non-voting) shares are held in the name of a family trust. This can be set up through the assistance of your lawyer and accountant. If you own an incorporated company that intends to pay or currently pays dividends to a spouse or children who are not actively involved in your business, ask your professional accountant, make sure you receive skilled tax advance.