Income splitting by paying salaries to spouse and children
By Adam
February 24, 2010
Lifestyle
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Brought to you by tax analysts from the QuickTax Business Incorporated and Unincorporated team
A penny saved is a penny earned, as they say. “They” must have been a small business owner, because any time you can reduce costs, you improve your bottom line. When it comes to tax time, finding all your allowable deductions will help get back every penny you deserve.
Whether you are carrying on a business personally (ie. self-employment) or through a corporation, one of the most cost-effective ways to save taxes is to use a strategy called income splitting. The term ‘income splitting’ refers to a process of splitting income amongst family members (ie. spouse and/or children) to achieve a lower overall tax burden by reallocating income to be taxed in their hands.
If your spouse and/or children work for you in your business, you can achieve income splitting simply by paying them salaries. Salaries paid to them from your business are tax deductible as long as the amounts are reasonable and that the employment services are genuine. So, what’s considered a reasonable amount of salary for your spouse or children? Well, a simple question would be to ask yourself how much you would pay a third party dealing at arm’s length for the same employment services rendered.
Here are some of the pros and cons of income splitting by paying salaries to your spouse and/or children:
Pros
Cons
As with any tax-saving strategy, careful consideration and planning should be given to achieve the best desired effect and to avoid any negative tax consequences. Income splitting can be complex and may require assistance from a tax professional. However, if done properly, this is an inexpensive way to help you get back every penny you deserve.
Tax tips brought to you by tax analysts from the QuickTax Business Incorporated and Unincorporated team
A penny saved is a penny earned, as they say. “They” must have been a small business owner, because any time you can reduce costs, you improve your bottom line. When it comes to tax time, finding all your allowable deductions will help get back every penny you deserve.
Whether you are carrying on a business personally (ie. self-employment) or through a corporation, one of the most cost-effective ways to save taxes is to use a strategy called income splitting. The term ‘income splitting’ refers to a process of splitting income amongst family members (ie. spouse and/or children) to achieve a lower overall tax burden by reallocating income to be taxed in their hands.
If your spouse and/or children work for you in your business, you can achieve income splitting simply by paying them salaries. Salaries paid to them from your business are tax deductible as long as the amounts are reasonable and that the employment services are genuine. So, what’s considered a reasonable amount of salary for your spouse or children? Well, a simple question would be to ask yourself how much you would pay a third party dealing at arm’s length for the same employment services rendered.
Here are some of the pros and cons of income splitting by paying salaries to your spouse and/or children:
Pros
- Lower overall tax burden by utilizing the lower tax rates that the spouse/children have relative to you / your business
- Creation of earned income for future RRSP contributions for family members
- Taking advantage of spouse’s and children’s personal tax credits which otherwise would not have been utilized by them in their own tax returns
Cons
- Need to withhold and remit payroll taxes for the salaries paid to your spouse and children
- Need to file additional T4 slips (Statement of Remuneration Paid) for your spouse and children
- May lose some personal tax credits including spouse or common-law partner amount
As with any tax-saving strategy, careful consideration and planning should be given to achieve the best desired effect and to avoid any negative tax consequences. Income splitting can be complex and may require assistance from a tax professional. However, if done properly, this is an inexpensive way to help you get back every penny you deserve.
Tax tips brought to you by tax analysts from the QuickTax Business Incorporated and Unincorporated team