Success in business doesn’t come without a price.  You put in long hours, carry an exhausting workload, worry constantly about the economy, interest rates, market shifts – anything and everything that can have a negative effect on the business you’ve nurtured and grown.  And, even when you succeed there’s a price to pay – to the government in the form of taxes. 

Business owners look at it as an unavoidable consequence of business success:  the better you do, the more taxes you’ll pay.  But is paying more taxes really unavoidable?  The answer is no – there are often ways to reduce your taxes simply by making your business a family affair.

Split up to bring tax down

Whether your business is a sole proprietorship or a corporation, you can choose to pay a salary to your spouse and/or children.   That can be a distinct advantage given that the Canadian tax system uses progressive tax rates – meaning that the more you make, the higher the percentage of your income is taxed.  The current federal tax rates are 16 per cent on the first $35,000 of taxable income, 22 per cent on the next $35,000, 26 per cent on the next $43,804 and 29 per cent on taxable income over $113,804.  Provincial tax rates vary, but they can add from 6 to 9 per cent in the lower taxable income range to as much as 17+ per cent in the upper range.

By splitting income with family members in a lower tax bracket, you reduce your taxable income and place it in the hands of a spouse or child who will usually  pay less tax – that adds up to a net tax savings for your family.  For example, if your taxable income is $70,000, your federal tax bite will be $13,300, but when that taxable income is split between you and your spouse, your combined federal tax bill is reduced to $11,200 – for a total tax saving of $2,100 on your federal taxes alone. 

Pay within the rules

When you pay a salary to your spouse or children, the Canada Revenue Agency (CRA) requires that it be ‘reasonable’ for the services they perform for your business.  The CRA’s attribution rules do limit certain types of income splitting with children under 18, but these rules do not apply to paying your child a reasonable salary for work in a family business (nor to capital gains or income earned on income).

Pay close attention to that word ‘reasonable’ in relation to a salary paid to a family member. The employment must be real, and the remuneration realistic.

By the way, when paying a family member to work in your business, not only does more of that money stay in the family, you can also deduct that labour from your business – so you win both ways.

Income-splitting is just one of the many tax-planning issues you need consider as a business owner.  It pays to sit down with your financial advisor to ensure you’re not missing out on other tax-saving strategies.