One of the best ways to reduce taxation is through dividend sprinkling. Up until now, business owners have used their children or spouses lower personal tax brackets to engage in income sprinkling - paying salaries to them that they haven’t worked for, and thus taking the income into a much lower bracket. The recent TOSI rules have made this impossible, but they explicitly have an exception for dividend income received by individuals over 18 years of age. Effectively this means that allowing your children to own a portion of the business gives them the ability to absorb profits at a much lower tax bracket than yourself, because dividends are also based on eligible tax brackets.
This is particularly important because of the Basic Personal Amount. In Canada, everyone is guaranteed up to 15k tax-free, and so the use of dividend sprinkling can help distribute income to those without any and make use of at least that amount…
The use of dividend sprinkling also holds specific advantages in Ontario. Through a series of complex combinations of the Basic Personal Amount and the dividend gross up and credits, an individual can receive up to 50k in tax-free dividend income if they have no other form of income. Again, for students this is particularly important since they are usually in a position to justify not working and can thus be used to benefit their families’ tax plans.
Although TOSI pumped the brakes on splitting income, there are still ways to take advantage of your family’s wide range of brackets, and along with the capital gains advantages we discussed in the Estate Freezes article, Dividend sprinkling is just another reason why involving family members in ownership can be useful.
By: Mateo Gjinali
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