Purtzki Johansen + Associates


Splitting income with your parents (and other relatives)

When you consider income-splitting strategies for your business corporation, don’t just look to your spouse and children. Income splitting is the No.1 tax shelter in Canada for business owners. For instance, if your corporation pays a $100,000 dividend to a family member with no other income, your tax saving will be about $20,000.

Most often, parents are not actively involved in the business, so the salary option as a form of income splitting is unavailable. This only leaves the option of paying dividends. Since these family members must be shareholders in order to justify the payment of dividends, I recommend the family members do not own the shares directly, but that they become beneficiaries of a family trust. This will allow you to maintain absolute control over the shares. Most family trusts also provide an option for you, as trustee, to be able to add or delete beneficiaries, which gives you extremely effective flexibility in executing your income splitting strategies.

When you consider making your low-income parent or grandparent a shareholder, you need to carefully analyze the effect the additional dividend income would have on their potential loss of any government benefits or assistance. If they are receiving Old Age Security, for instance, and their income threshold exceeds about $73,000, these pension payments will be clawed back. The potential loss of government benefits often makes the strategy of splitting income with parents problematic.

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