Business Owner Reduces Taxes with Income Splitting
Steve currently makes $84,000 in his small unincorporated business in BC; he wants to pay his new wife Carin half this amount, as they work together in the business. How much will the family save on taxes if they split income?
Currently Steve pays $20,349 in income taxes (including $4,712 in CPP Contributions). If he pays Carin a salary of $40,000, his net business income will be reduced to $42,193. (The business will need to pay the employer portion of Carin’s CPP contributions.)
As a result, Steve’s tax bill is reduced to $9,422 (including $3,830 in CPP contributions) and Carin’s tax bill will be $5,232 (plus CPP contributions of $1,807). Together they pay $18,267 for income taxes and CPP contributions.
That’s a savings of $2,082 each year by splitting the income. As a bonus, Carin will now be eligible for a CPP retirement pension when she reaches age 60, and potentially (depending on eligibility), a CPP disability benefit.
This family should also be looking closely at how to maximize earned income for RRSP/ PRPP purposes. This involved producing enough taxable income to reach contribution maximums. There are many benefits. The RRSP or PRPP contribution will reduce net income on the tax return, thereby increasing some tax credits. Future retirement income will be earned on a tax deferred basis. In addition, it’s possible to tap RRSP funds for the Lifelong Learning Plan or Home Buyer’s Plan. Couples who plan well can even use their tax refunds to fund their Tax-Free Savings Accounts (TFSAs)—another way to be sure all their eggs are not in one basket.
To legitimately write off the costs of hiring family members, certain rules must be followed:
· work must actually be performed by the family member;
· the amount paid must be reasonable for the work, time and effort put into the business by the family member and should be similar to the amount that would be paid a stranger in the same capacity; and
· the amounts must be actually paid and a normal paper trail, including payroll source deductions and T4 Slip issuance, is required.