As a father of two, I never thought having a family could actually save me money. If you’re a lawyer or doctor and you’re considering incorporating your practice, involving your spouse and adult children in the process can do just that.
Today, I’ll be talking about why and how you can involve your family members in your professional corporation to save you a significant amount of tax dollars.
Now it’s time to talk about how you can put your family to “work” for your company, or make them shareholders of your company, in order to divert the income you make in the company into their names, and pay less tax. For the moment, I’m not going to consider how using a trust plays into this. I’ll address that option in a later post.
Before we dive in too deeply, we need to make sure this makes sense for you. First off, you need to make sure that the laws in your province allow you to have family members that aren’t professionals be shareholders of your professional corporation. Second, if your spouse earns a high income already, then you won’t benefit by adding them as a shareholder. Finally, you want to ensure that your kids are over 18 years old, if you’re considering adding them as shareholders.
Assuming you’ve checked all the above conditions, it can make sense to make your spouse and your adult children shareholders of your corporation. By doing this, you can pay them dividends from your corporation that get taxed at their lower tax rates. In Quebec, a person with no other income can receive up to about $33,000 in dividend income before having to pay any federal tax, and the provincial tax will only be $1,330. That’s a 4% tax on $33,000 of income! Not bad!
If the company earns more than $500,000 per year, the dividend can be even higher before triggering any tax. So you can see how advantageous it can be to involve lower earning family members as shareholders in your company.
Wouldn’t that be easier?” The answer is that you can, but it’s not as effective as making them shareholders of your company. If you pay a salary, it has to be a reasonable amount, for work that you can actually justify to CRA. In other words, you can’t pay your spouse $100,000 for doing the bookkeeping for your company. CRA will allow a reasonable salary of, say, $20 to $25,000 for that purpose. The benefit of paying dividends to a family member is that they don’t have to be justified.
The other benefit of paying dividends is that your company recovers some of the corporate tax that you’ve paid on dividends earned by the company’s investment portfolio. This is called Refundable Dividend Tax on Hand or RDTOH, but it’s a lot more complicated than I want to get into in this video. If you want me to go deeper on that topic, comment on this video to let me know.
Beware though: The federal government announced in their last budget that they were going to review professional corporations with the potential of reducing their tax effectiveness. We’ll have to wait until the fall budget update to find out what that means. So if you’re considering putting this in place, you may want to wait until then to make sure it still makes sense.
So I hope that gives you an idea for why and how it makes sense to “keep it in the family” and make your spouse and adult children shareholders in your company. In my next video, I’ll discuss some of the pros and cons of having a trust set up on top of you professional corporation.
Update: On July 18 2017, Finance Minister Bill Morneau announced a plan to modify the taxation of private corporations. The proposed plan calls for 75 more days of consultation before legislation is to be introduced. I am keeping a close eye on this situation and will update on the PWL blog when more information becomes available.
