Income splitting with wages can save you thousands of dollars. Income splitting with dividends from a professional corporation can save you tens, even hundreds, of thousands of dollars.
My last post explained how income splitting works. In this post, I am going to provide examples of the benefits of income splitting.
Susan is a recently qualified family physician. She is planning on working locums throughout BC to earn as much as possible to pay down student debt, purchase a new car and furniture, and accumulate a down payment for a new house in Victoria. She expects to earn $250,000 this year after expenses. After taxes of $89,325, she will have $160,675 available to pay personal living expenses and reduce debt. She will not be incorporating yet as she spends all that she earns and has no family to split income with.
Cindy is a lawyer with a small real estate practice in Vancouver. Her husband Phil, a teacher, is taking a few years off to write a text book. After expenses, she will earn $250,000. On the advice of their accountant, Cindy is paying Phil $24,000 a year for bookkeeping and administration services, resulting in a combined tax bill of $81,250.
Thanks to income splitting, Cindy is paying over $8,000 less in tax than Susan while earning the same amount. But the savings could be greater. She would like to pay Phil more to take greater advantage of income splitting, but her accountant is concerned that $24,000 may already be too high to be considered reasonable by Canada Revenue Agency.
If Cindy were to incorporate her law practice, she could pay dividends to Phil without any reasonability restrictions and save an additional $14,000 in tax.
The tax savings from income splitting grows with the number of low income family members available to receive dividends.
Rick is an associate dentist at a clinic in Burnaby. His wife Andrea is going back to school at Simon Fraser University and their son Todd is taking time off from school to travel before starting post secondary education at the University of British Columbia in a year or two.
Out of the $250,000 that he earns, Rick pays Andrea and Todd a total of $34,000 to take advantage of income splitting. Being able to pay $10,000 to Todd saves him over $4,000 more in taxes compared to Cindy. And, like Cindy, he can save even more if he incorporates his dental practice.
By setting up a professional corporation to earn his dental income and paying dividends out to himself and his family, Rick can save almost $25,000 in taxes over his current structure. Compared to Susan, he ends up with $37,000 more in after tax money each year.
Depending on income and the number of low income family members that can receive dividends, incorporation and income splitting has the potential to save hundreds of thousands of dollars in taxes over the years.
Income splitting is one of the biggest reasons for using a professional corporation.
But what about professionals that have already paid off their debt and don’t spend everything they earn? That’s the topic of my next post.
Next: Incorporation Benefit – Tax Deferral
Related Posts
- Incorporation – A Brief Introduction
- Professional Corporations in British Columbia
- Professional Corporations – Why Incorporate?
- Incorporation Benefit – Lower income Tax Rates
- Incorporation – Taxation of Salary and Dividends
- Incorporation Benefit – Income Splitting
The Professional Edge 
Very useful information, I am in the same situation as Ewa says, and that I am also looking for your next post about Saving and Investing…….
With tax season and summer, I haven’t been very active in the blog. I’ll start posting again in October starting with the investing/saving.
In your example with Rick, Andrea, and Todd, When you say Rick “pays” Andrea and Todd, do you mean dividends? (Cause do not they not to actually do work to get a salary). And when you call it professional , is this also a reference to limited. We have a LTD. company, where I pay dividends, but am finding a bit of both (salary & dividends) may work. I pay out about $120,000 year to myself and husband. We are in Alberta.
thanks for your articles. , Susan
Hi Susan
In my example, I mean that Rick can pay a small salary or management fees to Andrea and Todd to achieve limited income splitting. I used $24,000 to Andrea and $10,000 to Todd. The salary is limited by reasonability. Unless Andrea and Todd actually worked a lot in the business, high salaries to them would probaly not be considered reasonable and would not be deductible to Rick.
I wanted to illustrate the difference between limited income splitting with salary, and full income slitting with dividends.
Although I refer to professional income, the income splitting concept actually applies to any business income. Professionals must adhere to certain rules governing the type of business their company can conduct, and restrictions on who can be shareholders. A regular business (a restaurant, retail store, business consultant, etc…) is not governed by these rules, so anybody can be a shareholder.
When advising clients, I usually employ a mixture of salary and dividends – a base salary and then dividends to cover any excess drawings from the company (I’ll be posting an article on salary vs dividends in the future – many variables to consider)
Is there CPP required on “management fees” ? thanks, susan
Any suggestions on paying a 12, 14 and 16 year old?
thanks
Management fees are usually self-employment income to the recipient and attract CPP when the tax return is prepared.
If paying minor children, you really need to ensure that the amount you are paying is reasonable / justifiable. CRA is on the lookout for minor children receiving emplyment income from a related company.
Enjoyed your articles. When I plugged in the numbers, the total tax for 300K would be $111K. For 100K, it is 25K. So the overall saving is 36K for income splitting rather than 40K listed in your table.
Hi Brian – my aplogies for delay in responding – with April 30 being the filing deadline for tax returns, I was a little preoccupied.
I assume you are referring to the 3 family members scenario. You are correct that there is only a savings of $36,000 if regular income of $300,000 is split 3 ways. But there is a slight advantage to earning dividends vs salary. In BC, corporate tax on $300,000 of active business income is $40,500. If the after tax dollars are then paid as 3 equal dividends to the 3 family members, there is about $10,000 in tax for reach family member. Total tax, personal and corporation is $70,500 compared to $111,000 if the $300,000 is earned directly by one person – a $40,000 savings
Hi John: You are right. There is a $1400 advantage with dividend vs. Salary. Thanks for taking your time to write these very helpful articles. I was aware of incorporation advantages; tax deferral, future withdrawal at lower rate, family trust for income splitting, but having a hard number really helps. I think the income split advantage will be even higher with the upcoming personal tax increases in BC. I would like to see an article on using smith manoeuvre for people with high savings in the corporation but limit their withdrawals from the corporation to avoid high taxes. In that case, I think it makes sense to be aggressive on the personal side.
This is fantastic information! Thank you for sharing. My kids are still too young for income splitting, and my husband earns a salary higher than my corporate earnings, so I’m looking forward to the next post about saving and investing.
Thanks for your comment.
Unfortunately, with tax season in full swing, I’ll have the wait until May to complete my first post re: saving in a corporation.