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Ottawa turned income-splitting into a nightmare for small businesses

Ottawa turned income-splitting into a nightmare for small businesses

Ottawa has turned income-splitting rules into an absolute nightmare for small businesses

Source: Financial Post

As every reader will surely recall, the federal government issued a number of tax proposals for private corporations last summer. The government ultimately abandoned or replaced all of them, except for new rules that address so-called “income splitting.” Those rules, now in force, are extraordinarily complex and will impose a heavy compliance burden on small business. The rules should be set aside.

Income splitting involves diverting dividend income (and certain other types of income) from one family member to another member in a lower tax bracket. The planning is disarmingly simple.

For example, assume that an individual resident in Ontario — Sophie — owns a private corporation. Sophie has three children who are pursuing post-secondary education and have little in the way of income. If the corporation pays a dividend of $25,000 to each child, there will be little if any tax to pay on those dividends after deducting federal and provincial “dividend tax credits.” By comparison, if Sophie is in the top tax-rate bracket, her tax on a dividend of $75,000 to herself would have been over $35,000. And so, with a flick of her accountant’s pen, Sophie saves tax of about $35,000 a year.

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