A practical example for small business owner saving taxes with income splitting
Mr Li runs a small unincorporated business in Ottawa, Ontario. His business net income is $88,888. His wife does not have a job and no any income. In 2013 income tax return, Mr Li pays $25,700 income taxes (including $4,712 in CPP contributions for self-employment).
If Mr Li paid a salary of $40,000 to his wife, his net business income would be reduced to $48,888. As a result, Li’s tax bill would be $12,204 (including $34,493 in CPP contributions) and Li’s wife tax bill would be $9,201 (plus CPP contributions of $3,613). Together they would only pay $21,405 for income taxes and CPP contributions.
That’s a savings of $4,295 by splitting the income! As a bonus, Li’s wife will now be eligible for a CPP retirement pension when she reaches age 60, and potentially (depending on eligibility), a CPP disability benefit.
This family should also be looking closely at how to maximize earned income for RRSP/ PRPP purposes. This involved producing enough taxable income to reach contribution maximums. There are many benefits. The RRSP or PRPP contribution will reduce net income on the tax return, thereby increasing some tax credits. Future retirement income will be earned on a tax deferred basis.
To legitimately write off the costs of hiring family members, certain rules must be followed: 1) Work must actually be performed by the family member; 2) The amount paid must be reasonable for the work, time and effort put into the business by the family member; and 3) The amounts must be actually paid and a normal paper trail, including payroll source deductions and T4/T4A Slip if applicable, is required.
To find out more tax saving tips and income tax planning strategy, please contact us at TaxServices@AccXperet.com or call 613-800-8810 to book a consultation with our Certified Tax Accountant in Ottawa Tax Services Office.
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