If you own a Canadian Controlled-Private Corporation (CCPC), you are probably familiar with the method of paying dividends to your family members in order to reduce the overall tax you pay to the CRA.
Most CCPC’s do this, but it is vital that you make sure you are eligible for the tax benefits and that you are not going against Federal regulations when you opt for this route to reduce your taxes. Rules and regulations controlling such matters are changed often and what was allowed a few years ago most likely is not allowed today.
For instance, before the year 2018, you, as a CCPC, were allowed to pay dividends to your family members freely and there were no real restrictions controlling this except that your family member had to be at least 18 years of age or older.
However, the rules have changed quite a bit in recent years. Now, this freedom has been greatly reduced and limited by the CRA. As of 2018, dividends split to family members are taxed up to 40% and, for many CCPC’s, there is no longer any real benefit to income splitting with your family members in this manner.
Is anyone exempt from these new income-splitting regulations?
The good news is not every type of business loses out on the tax benefits of income-splitting. Some businesses that are exempt include:
· Businesses that are not service-related
· Businesses in which the family members invest
· Businesses in which the family members work
Businesses that generate most of their income from selling items and not from offering services are still eligible for income-splitting tax benefits if they are not a professional corporation (accountants, lawyers, doctors) and their family member is over 25 years old and owns at least 10% of shares.
Businesses in which family members have invested are also allowed to continue to benefit, and lastly, businesses in which family members actually work for the corporation for at least 20 hours a week for the last 5 years are also eligible to enjoy the tax benefits of income-splitting.
Get in touch with an accountant
It is very important to note that the rules are not always the same and taxes will be based on whether the amount of dividend given makes sense in accordance with the amount of work or investment the family member put into the business. It is best to talk to a tax accountant and explain your situation to them so they can inform you whether you are eligible to benefit from income-splitting, or if the recent change in rules applies to your CCPC.