Canada Income Tax – Income Splitting Shares

May 27

Canada Income Tax – Income Splitting Shares

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only. If you need legal advice with respect to creating a limited liability company or amending a corporation’s articles of incorporation, you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto and Ottawa business lawyers registered on the website who can answer your questions or help you with your Ontario or Federal corporations.

As a follow up to my recent post about income-splitting shares, I neglected to mention one of the biggest benefits of using income splitting preference shares: income splitting to reduce reduce household taxes.

Take the following example. You have a corporation. It earns $300,000 in taxable income. Because of the small business credit (which I will be discussing in a future blog post), the corporation only pays 16.5% tax on that amount (this rate is going down to 15.5% starting July 1, 2010). What do you do with the after-tax dollars? Well, you could either keep it in the company and let it accumulate or you could dividend it out. The latter is where the income-splitting shares come into play. You can simply give these shares to members of your family who have little or no income. Then, when the corporation’s directors (e.g. you) declares a dividend to the shareholders of this class of shares, they will receive and have to pay tax on those dividends. They will get the benefit of the dividend tax credit. But the beautiful thing is that less taxes end up being paid than if someone (e.g. you) had a higher income and received the same dividends (because of how our marginal taxes work). These shares are not susceptible to the attribution rules found in the Canada Income Tax Act.

Remember, if you need help structuring your corporation to create income-splitting preference shares, you should make a post on Dynamic Lawyers.