Excerpt from Professional Corporations – Income Splitting Opportunities

Although the 2018 federal budget eliminated a number of income splitting opportunities, there are still ways to income split with family members. The following is a brief overview of available income splitting methods. The Canadian tax system is not based on family income, it’s based on individual income. A couple earning $60,000 each will pay less tax than if one of them earned $120,000 and the other didn’t work. This occurs as a result of individual marginal tax brackets, and the different tax rates applied to each bracket. The federal government currently has five personal tax brackets. The tax rate ranges from 15 per cent in the lowest bracket, to 33 per cent in the highest bracket. Provinces and territories have their own brackets and rates ranging from 4.0 per cent to 21.0 per cent. The idea behind tax planning is to try to split income equally between spouses or between a number of lower income family members. The best-case scenario is having both spouses taxed in the same bracket. The worst-case scenario would be to have one spouse in the higher bracket and the other spouse with no income. After you decide what income you require, work with your accountant and financial planner to decide what may be open to you regarding income splitting.

Dividends can still be paid to family members as long as they are “actively engaged” in the business. For most physicians, this may be difficult, but it’s not impossible. The definition of actively engaged, according to the February 2018 federal budget, is an individual who works in the business for at least an average of 20 hours per week during the taxation year or meets this requirement in any five prior years. Even if your spouse is not actively engaged in the business, it still makes sense to have them as a shareholder as you can give them dividends when you reach age 65. You’re also allowed to pay your spouse, children, or parents a reasonable wage or salary for any work they do for you.

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