Minimize Your Taxes to Maximize Your Wealth with Income Splitting
Givens LLP | March 23, 2023
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If you're looking for a way to minimize your taxes and maximize your wealth, income splitting might be the strategy for you. It's like a magic trick, but instead of a rabbit out of a hat, it's money out of your taxes. And who doesn't love a good magic trick?
With income splitting, you can increase your disposable income and put that money back into what matters most. Let’s dive into the facts behind the magic so that you can really begin to maximize your wealth.
What is Income Splitting?
Income splitting refers to the process of dividing your income among family members, who are in lower tax brackets, to reduce your overall tax burden. Here are some ways you can split income with your spouse and children:
Salary
If your spouse and children are involved in your business, you can pay them a salary for the work they do. This will allow you to deduct the payments as business expenses, reducing your taxable income.
Pro tips:
- Ensure that the payments are reasonable and reflect the fair market value of the work done.
- Keep a timesheet of hours worked as well as a list of duties. This will help further justify their wage in the event that it's reviewed by CRA.
- It's important to note that they will be exempt from Employment Insurance (EI).
Trusts
You can also set up a trust to split income with your spouse and children. A trust is a legal arrangement where you transfer assets to a trustee who manages them on behalf of the beneficiaries. The income generated by the assets can be distributed to the beneficiaries, who are often family members.
Remember, trusts can be complex, so it's best to consult with an accountant or lawyer before setting one up.
Benefits of Income Splitting
There are several benefits to splitting income with your spouse and children. First, it can help reduce your tax liability, allowing you to keep more of your hard-earned money. Second, it can provide financial support to your family members, who may be in a lower tax bracket and therefore pay less tax on the income they receive. Finally, it can help you build a strong financial foundation for your family, ensuring that they are well taken care of now and in the future.
Before putting on your magician's hat, remember that the Canada Revenue Agency (CRA) has strict rules around income splitting. To avoid penalties and interest charges, contact us today. We’ll help you navigate the complex world of income splitting with ease, and subscribe to our newsletter for more future-focused tax advice.
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