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
- 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