Today’s post is all about The Liberals New Rules For Small Business Income Splitting and how this may affect your business…and also how to work around it if you have an incorporated private company.
Gotta throw in a disclaimer that my only qualification to speak about this subject is my own personal experience with the changes and I have no accounting background whatsoever. Also if you are in the US, none of this applies to you.
The changes the liberals have made affect my business directly and I’ll share with you what I have learned so far. I’ll share the changes I have to make in order to maintain something similar to income splitting in hopes it will help people in a similar situation.
My scenario involves several corporate entities. My primary corporation (the main revenue generator) pays out dividends to a numbered company which is owned by a trust company. There is also an investment company in between.
The flow is such that only income that is drawn out personally, ie pulled out of the company structure and put into our personal chequing account is taxed personally and the rest is taxed on the dividends at a much lower rate. The money that stays inside the corporate structure is not taxed personally until it is pulled out into personal accounts.
In this situation there is some tax savings because you are not paying personal taxes on the money that is left in the corporation and what you are pulling out could be income split to your spouse.
The income splitting component is what the liberals are changing. Unfortunately if you do not have an incorporated company and you are income splitting on a sole proprietorship, then to my knowledge you are SOL.
For those that do have a corporate structure, here’s what needs to happen…again, this is just based on my own personal corporate structure and yours may differ…
Whomever you want to income split must now get shares in the primary revenue generating company. Talk to your lawyer / accountant as there are many different classes of shares that allow for different voting rights and ownership. You’ll also want to make sure you have an iron clad shareholders agreement in place to deal with all foreseeable scenarios.
Dividends are now paid out to all shareholders up to the lower tax bracket and you can supplement with a salary draw for anything above this, which yes you’d be additional income tax on but not nearly as much as if it was all drawn out to yourself personally. In this scenario you are still “Sprinkling” the income the same as with the old income splitting scenario.
Of course, it’s possible the liberals will also remove this tax saving benefit as well but until then, at least there is an option for us small business owners.
We won’t get into opinions on this change and how it is essentially limiting small business growth and their ability to save for retirement. I just hope this helps others in a similar situation who may not be sure how to deal with this change.