Salary will qualify you and other family members active in the business for Registered Retirement Savings Plan (
RRSP) contributions, Canada Pension Plan (
CPP) contributions, and child-care deductions. In contrast, dividends will not qualify an individual for these contributions or deductions.
The Tax on Split Income (
TOSI) rules have made income splitting using dividends significantly more difficult. TOSI eliminates the tax benefits of paying dividends to family members (with little or no other sources of income), who are not active in the business or who do not own “excluded shares” of the company. If TOSI applies to the dividends, the recipient will pay tax on these dividends at the highest marginal tax rate. Speak to a
Crowe Soberman advisor to determine whether you may benefit from income splitting opportunities under your specific circumstances.
If you have family members over the age of 17 who are actively engaged in the business (i.e., working at least 20 hours per week in the business) and own shares of the corporation (directly or indirectly through a family trust), you may split dividend income with them under certain circumstances.
Additionally, dividend income may be split with family members over the age of 24, who are not otherwise engaged in the business, but own shares of the corporation that entitle them to no less than 10 per cent of the votes and value. These shares would be considered “excluded shares,” the dividends on which are not subject to TOSI. To meet the “excluded share” exception to the TOSI rules, the corporation can neither be a professional corporation, a corporation that earns its income from the provision of services, nor a holding corporation that receives dividends from its subsidiary operating company.
Family members can be employed by your business and paid salary or wages for their services. The business is entitled to a deduction in respect of this remuneration, but only if the amount paid is reasonable for the work performed.
Consider accessing funds from the corporation that can be withdrawn tax-free. For example, repay shareholder loans, return capital to shareholders up to the lesser of the paid-up capital and the adjusted cost base of the shares, or roll in certain personal assets with a high-cost base to the corporation on a tax-deferred basis to extract the cost base of the assets on a tax-free basis.