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



## rnorman3 (Aug 30, 2012)

Hi everyone, I'm setting up a corporation for the purpose of income splitting using dividends. If the company makes about $120k, and pays it's apx 15% corporate tax it's, left with about $100k. I plan to distribute that $100k evenly to myself and my wife as dividends on separate unrestricted share classes monthly. This sets up both our personal tax's with $50k of dividends, on which we would pay $0 tax in my province (NL). Does this scenario sound about right so far?
[I understand this will mean no CPP payments and no RRSP deduction].


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?

Thanks!!
Richard


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## FrugalTrader (Oct 13, 2008)

Richard,

I just did a tax calculation (taxtips.ca), and if you withdraw $50k non-eligible dividends each (assuming NL and no other income), you'll pay $6,557 personal income tax in total. Have you thought about retaining some of the earnings within the corp?


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## rnorman3 (Aug 30, 2012)

Thanks FrugalTrader, you are absolutely correct as you probably already know ;-), $6557. I had entered in "eligible dividends" which I would not be able to pay from my company since I would already have availed of the small business deduction. Thanks for the correction! Seems like we're on the same page and my initial strategy of paying monthly dividends is legitimate. I just need to retain enough to pay the tax's.

However, are you saying there's no way to get the money out without paying the marginal tax rates?

Thanks,
RN


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## the-royal-mail (Dec 11, 2009)

Can anyone say tax avoidance? I seriously doubt this is the intended purpose of a corporation. Two people using it for the sole purpose of avoiding paying their fare share of taxes? I don't think it sends a good message about CMF to all the lurkers out there that we encourages newbies on this type of scheme.

Perhaps the OP is ok without roads, clean water and healthcare too?


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## Homerhomer (Oct 18, 2010)

the-royal-mail said:


> Can anyone say tax avoidance? I seriously doubt this is the intended purpose of a corporation. Two people using it for the sole purpose of avoiding paying their fare share of taxes? I don't think it sends a good message about CMF to all the lurkers out there that we encourages newbies on this type of scheme.
> 
> Perhaps the OP is ok without roads, clean water and healthcare too?


You are jumping to conclusions, OP is clearly asking about legal ways to minimize taxes.

Morman, if you draw money from the corporation there are tax consequences regardless how you draw it, and the system is designed in such a way that you pay the same amount of tax regardless of how you take the money out with small variances due to various provincial rates and such.

It would be more tax efficeint if you have more shareholders you can allocate the dividends to, they obviously have to be over 18.
As a general note most often combination of wages and dividends is the way to go, however it does depends on the individual circumstances.


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## rnorman3 (Aug 30, 2012)

the-royal-mail, that's funny. I guess you're also against everything else everyone in Canada and the world does with respect to income splitting and trying to pay the least amount of taxes possible? So you are suggesting I should just scrap the entire corporation, pay myself a salary and get hit with $70k of taxes on $200k of earnings, great strategy. If you're an accountant I wouldn't hire you for sure.

Let me rephrase the question so that you don't get all bent out of shape:

Are you saying there's no way to *LEGALLY* get the money out without paying the marginal tax rates?
Thanks,
Richard


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## slacker (Mar 8, 2010)

the-royal-mail said:


> Can anyone say tax avoidance? I seriously doubt this is the intended purpose of a corporation. Two people using it for the sole purpose of avoiding paying their fare share of taxes? I don't think it sends a good message about CMF to all the lurkers out there that we encourages newbies on this type of scheme.
> 
> Perhaps the OP is ok without roads, clean water and healthcare too?


You're just jealous that you're too poor to be able to take advantage of such advanced tax management strategy.


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## rnorman3 (Aug 30, 2012)

Thanks Homerhomer, I'm starting to understand better the bigger picture wrt taxes because of some of the great feedback on this site!
Richard


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## MoneyGal (Apr 24, 2009)

They ARE paying their fare share. It's just less than if they structured their income another way. Should we kill the tax deduction on RRSPs because people who make RRSP contributions are TAX AVOIDERS?


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## andrewf (Mar 1, 2010)

The question was phrased as: how can I pay no tax at all?

Not sure why it is phrased that way. The OP will be paying some tax on the ineligible dividends. 

To answer OPs question: no. If you want to distribute the income, you have to pay some form of tax on the distribution. Alternately, you can retain that income in the corporation and invest it until you annual income is less.


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## MoneyGal (Apr 24, 2009)

rnorman3 said:


> 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."


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## rnorman3 (Aug 30, 2012)

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


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## andrewf (Mar 1, 2010)

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.


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## MoneyGal (Apr 24, 2009)

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).


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## cardhu (May 26, 2009)

TRM said:


> Can anyone say tax avoidance?


Absurd.



homer said:



> 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.


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## jason26 (Apr 6, 2009)

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


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## Homerhomer (Oct 18, 2010)

cardhu said:


> 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 ;-)


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## cardhu (May 26, 2009)

homer said:


> 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.


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## rnorman3 (Aug 30, 2012)

jason26 said:


> 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!


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## jason26 (Apr 6, 2009)

rnorman3 said:


> 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.


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## rnorman3 (Aug 30, 2012)

jason26 said:


> 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".


Thanks, this is exactly what I was asking about in another post to this forum but no body could really explain it either. Sounds like you don't have a corporation setup at all, that would be even better. If there's any one out there now that can explain this please do. 


Thanks!


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