Split business income with family to save tax

From a tax perspective, small business owners are a lucky bunch. They have far more opportunities than salaried workers to split income with family members and cut taxes overall.

The obstacle for most families is the attribution rules, which discourage family members from transferring ownership of investments to a lower earner in order to pay less tax. The disincentive? Depending on the situation, the government may continue to tax the original owner of the investment at their own high rate, defeating efforts to save tax.

As a business owner however, you have a number of extra ways to split income:

- Employ family members of any age - Wages will be deductible to you at your high rates and taxable to your relative at their presumably lower rate. Don't think you can pay someone $50 an hour to answer the phone, though. Payments must be "reasonable," reflecting market rates.

- Gift or lend business assets to a spouse or child of any age - Income from then on will be taxed in the family member's hands, not yours.

- Issue shares to family members - As shareholders, a spouse or adult children can receive dividends and benefit from the dividend tax credit. As well, if the business qualifies as a Small Business Corporation, each family member can make use of the $750,000 capital gains exemption for shares sold after March 18, 2007. As a result of the "kiddie tax," however, income on shares given to minor children will be taxed in the highest tax bracket until the year they turn 18.

- Set up a trust to own the shares - Family members who are beneficiaries of the trust can still benefit from the dividend tax credit and capital gains exemption, and the assets will also be protected from creditors.

- Do an estate freeze - Income splitting is one reason to consider an estate freeze, but there are many others. Let us explain the opportunities to you.

By working with our team, you can access specialized advice related to all aspects of your business and personal wealth management. Call us for an appointment to ensure you're taking advantage of every tax strategy available to you.