Only the rich are allowed to income split,
Some of you may have read my article about “Why do I have to divorce to Income Split?”, well below explains why I would have to die or become very rich to income split.
These laws are for Ontario as well as Canada in the tax revenue, please ask your local MP one question next time you email/phone he or she, “Why are only specific Canadians allowed to Income Split?”
Dentists
1. The Corporation would be taxed at a much lower rate and personal taxes would be deferred on retained earnings until paid out from the Corporation in dividends, salaries or bonuses.
2. Persons other than the dentist (usually family members and/or a family trust) are not prohibited from owning shares of corporations that deliver non-dental services. Therefore, the income could be taxed in the hands of persons other than the dentist, often resulting in substantial reductions in overall taxes (i. e. income splitting).
3. Selling shares of a small business corporation may qualify for taxfree treatment whereas the sale of an unincorporated business does not. Ancillary corporations could allow a dentist to lower the total tax paid on the sale of a practice.
General
Q. I have a question regarding tax implications on investment accounts.
I currently have a non-registered investment account under my name only. My spouse and I have joint bank accounts. If I were to add my spouse’s name to my investment account and make it a joint account, who can or has to report the capital gains or loss and at what percentage?
- Terence C.
A. In general, from the Canada Revenue Agency standpoint, any asset can be registered jointly for legal ownership. However for income tax purposes, CRA considers who the beneficial owner of the asset is, as opposed to the legal owner.
Generally the split for capital gains, capital losses and other income (interest, dividends) would be in the proportion of funds that each spouse has contributed to the account.
In the case of a joint bank account, you might want to factor the income earned by each of you and split accordingly.
Death Estates
2. Income Splitting. Since individuals are taxed at progressive tax rates, a family trust is an ideal mechanism for high income earners to reduce their annual tax liability by transferring income to persons taxed at a lower, marginal rate. Generally, people think of minor children as the ideal beneficiaries under a discretionary family trust as they generally have little or no income. However, low income earning spouses, dependent parents, adult children and other individuals are also common beneficiaries named in discretionary family trusts. By transferring income through a discretionary family trust to a low income beneficiary, a substantial tax saving is possible.
Physicians
How Can You Income Split with a PC
Physicians are allowed to split income with other family members, such as a spouse, parents, children and trusts for minor children. The income splitting is achieved by having the family members own non-voting shares of the PC that can receive dividends as determined by the physician. Dividends are taxed more favourably than other types of income. An individual with no other income can receive up to approximately $30,000 of dividends tax-free. Dividends can be paid most tax-efficiently to family members who do not have significant other income.
What Factors do you need to Consider when setting up the Share Structure:
It is extremely important that the share structure of the PC be set up with advance planning at the outset, in consideration of the following:
1. Flexibility for changing circumstances of family members;
2. Flexibility to pay dividends to whatever family members are selected each year by the physician;
3. Ensuring that the physician retains complete control of the PC;
4. Allowing the physician to cancel the shares of family members if the circumstances warrant (i.e. marital problems);
5. Establishment at the time of incorporation of multiple classes of shares, so there is a separate class for each family member (allowing complete flexibility as to dividends payable to each family member); and
6. Establishing special classes of shares to be issued to the physician on the transfer of goodwill and other assets relating to the practice, such as equipment.
Professional Corporations
(b) Professional Corporations
Prior to 2001, only a handful of professionals (such as engineers) were permitted to incorporate their practices. In 2001 the majority of professions were given this similar right – but it came with restrictions. There are two major restrictions. The first restriction is that a “shareholder” in a professional corporation does not have limited liability like a shareholder in a “regular” corporation – at least for professional liability. Thus, if a law firm becomes a professional corporation, the shareholders will be protected from claims by their landlord for the failure to pay the rent for the offices, but they will not be protected from claims for negligence in providing legal advice. The second restriction is that the shareholders of a professional corporation are restricted to members of the applicable profession. Thus, for example, a professional corporation established by several accountants is restricted to having only the accountants as shareholders. One of the large advantages of corporations is the possibility for what is known as an “income split”. Suppose Timmy makes $50,000 in salary from TimCo. If Timmy is married with two children, he may be able to make his wife and children shareholders of TimCo and pay the same $50,000 to himself and his family with the result that the tax paid by the four family members will be less than the tax Timmy would have to pay if he received the full $50,000. (It should be mentioned, of course, that the Canada Revenue Agency does not like income splitting and uses what are called “attribution rules” to negate such attempts. However, with careful tax planning by one’s accountant, even a minor income split may produce significant results.) Under the current rules for professional corporations, if Timmy was a social worker, he would not be able to effect an income split with his family unless they were all social workers. However, an important exception to this rule came into place in 2005 which permitted physicians and surgeons and dentists to have family members (ie. spouse and children) as shareholders of professional corporations – so there is hope that this will someday be extended to all other professional corporations. At the moment, the primary persons who would consider professional corporations are: accountants, audiologists, chiropodists, chiropractors, dental hygenists, dental surgeons, dental technologists, denturists, dieticians, lawyers, massage therapists, medical laboratory technologists, medical radiation technologists, midwives, nurses, occupational therapists, opticians, optometrists, pharmacists, physicians and surgeons, physiotherapists, psychologists, respiratory therapists, social workers, social service workers, speech language pathologists, and veterinarians.