Everything You Need to Know About the New Income Splitting Rules in 2020 is right here:
As of January 2018, new income splitting rules put into place by the Government of Canada prohibits business and corporate owners from income splitting with family members who have no relationship to the family business. Prior to January 2018, income splitting was allowed with family members above 18 years of age even regardless of his contribution to the business. Now these avenues are closed, except for a few exceptions that still allow this tax saving practice to continue.
Read our articles on income splitting to learn about what these exceptions are and the rules of thumb that apply so that you are not flagged as violating General Anti-Avoidance Rules (GAAR) by engaging in illegitimate income splitting practices.
What are the new income splitting rules as of January 2018? While the rules are more rigorous, there are still legitimate avenues. Read on to discover what these are!
The purpose of this article is to clarify the changes to the Tax on Split Income regime in Canada effective January 1, 2018 and to explain the ways in which you can continue to income split with your family.
‘Income Splitting’ refers to the ability of a business owner to ‘sprinkle’ bits of income to various members of his or her family including children, brothers, sisters and parents, so as to reduce that business owner’s overall tax obligation.
Tax savings through creative income sprinkling
Generally speaking, a taxpayer is allowed to income split with a family member as long as the family member is of a certain age and has a meaningful relationship with the family business either through labour or share ownership. Other than this broad condition, there are other creative income splitting strategies that are worthwhile knowing.
While traditional income sprinkling opportunities were fundamentally changed and largely eradicated by the overhaul to corporate tax planning by the Liberal government in 2017, some formidable tax planning opportunities are still available to Canadians.
Tax Planning and the Anti Avoidance Rule
Illegitimate income splitting is just one example of violating anti-avoidance rules, otherwise known as General Anti Avoidance Rules (GAAR). Read on to learn about the three-part test to determine if you will be penalized for tax planning transactions that are considered abusive or taken solely for tax savings purposes.
A taxpayer is entitled to arrange his affairs in such a way that results in the lowest amount of taxes payable. However, our right as Canadians to tax plan is not unfettered.
Salary or Dividends and Tax-Free Corporate Dividends
With the new income splitting rules, the traditional avenues of income splitting are closed. The days of “hiring” your wife to be the “bookkeeper” and splitting your salary with her are over. With the new income splitting rules, a shareholder is only allowed to split dividends of a corporation among qualified family members (see articles above for qualifying criteria) who own at least 10% of a corporation’s common voting shares that generate at least 90% of its profits from selling goods, not services.
As the new income splitting rules relate only to splitting dividends among shareholders, we’ve included the articles below as backgrounders on dividends. The first provides the advantages and disadvantages of paying yourself in dividends versus a salary; the second speaks to the tax advantages of income splitting by paying out dividends from one corporation to another corporation.
Which one is best? The one that results in a “tax rate advantage”; that is, the compensation model whereby the total corporate and personal tax paid on one form of compensation (either dividends or salary) is less than the corporate and personal tax paid on the other form of compensation.
Inter-corporate dividends refer to dividends that are paid by one company to another company holding shares in the first, particularly where the companies are operated by the same person or group of people (as with a holding company structure).
Tax planning with the TFSA
There are many ways to income split with a family member that are allowable. One excellent way is to utilize your TFSA. This article will look how the TFSA can be used as an indispensable tool to income split with a family member.
The tax-free savings account allows Canadians to withdraw proceeds of a TFSA (principal and interest and investment earnings) on a tax-free basis. A tax-free savings account is not just a simple savings account; it allows an investor to hold a wide range of investment products, including mutual funds, stocks, bonds, and GICs.
We hope you enjoy our articles on income splitting. Yes, the rules for income splitting have changed, closing the door on paying less tax through income splitting with family members that have no relationship with the family business. While legitimate income splitting has become more difficult, there are still ways to use this tool, along with other excellent tax planning tools, to save you money. Contact a lawyer at Kalfa Law today to discuss which tools you can use to save on taxes and increase your savings.
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The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.