Planning a Small Corporation earning $120k+ with income splitting.

[MoneyGal]

If that sounds right so far, imagine then the company makes $200k in one year. It pays it's apx 15% tax and is left with $170k. Which will be $100k in dividends and an extra $70 in earnings. Is there anyway to get that $70k out of the company without incurring the marginal tax rates?

No "no tax at all," just "not the marginal rate."

[rnorman3]

Thanks MoneyGal, even I know you'll likely have to pay some tax.

[andrewf]

I interpreted that as an awkward way of saying to pay a 0% marginal tax rate. He thought initially that his income would be eligible dividends and that he would face an effective tax rate of 0% on the first $50k, and was looking for a way to do the same for the next increment.

The tax rate you pay at the margin is by definition the marginal effective tax rate. Whatever rate you end up paying is the marginal tax rate. The question doesn't even make sense, so I substituted what I thought he meant.

[MoneyGal]

Very nice. I read it as "the MTR that would otherwise be payable" (in the absence of any tax planning strategies he might learn about in this thread).

[cardhu]

Can anyone say tax avoidance?

Absurd.

system is designed in such a way that you pay the same amount of tax regardless of how you take the money out

Not really … the system is designed in such a way that the aggregate tax revenue to gov’t is about the same, on average, regardless of how people draw from their corps ... but for any specific individual there could be significant variances, depending on their particular circumstances.

[jason26]

A family trust is another option. I use one to split out my income to my spouse and kids.

[Homerhomer]

Not really … the system is designed in such a way that the aggregate tax revenue to gov’t is about the same, on average, regardless of how people draw from their corps ... but for any specific individual there could be significant variances, depending on their particular circumstances.

Pretty much what I said/meant, glad we agree ;-)

[cardhu]

Pretty much what I said/meant, glad we agree ;-)

Perhaps its what you meant ... its not what you said.

Your statement implies tax-neutrality to each individual, which may or may not be the case, depending on their particular circumstances ... mine implies tax-neutrality to the entire population of the country, in aggregate, which is how the system was designed.

[rnorman3]

A family trust is another option. I use one to split out my income to my spouse and kids.

Hi Jason26, that's interesting. How does that work if you don't mind?
THanks!

[jason26]

Hi Jason26, that's interesting. How does that work if you don't mind?
THanks!

I don't know 100% how it works myself, my accountant suggested it to me as he did it himself, and my lawyer agreed (and another lawyer, my dad agreed as well) that it was the best way to operate as I'm an independent contractor. So I bill my client under the trust name, then the income is split among our family in the most tax advantaged way.

My understanding is that it was easier to split the income this way than doing a corporation.. Less paper work, no mandatory "meetings".

Its just one option, but not one that should be entered without discussing with an accountant or lawyer.