Tuesday, September 11, 2007
Think of Income Splitting When Incorporating
If you are considering incorporating your business now or down the road, you should have a discussion with your accountant and lawyer about any income-splitting opportunities that you may have. If you have a spouse, or children over 18, it may be useful to create some separate classes of shares so that you have some flexibility when declaring dividends. Let's use an example of a business where the husband is the sole proprietor and his wife stays home with the kids and has no income. If the husband is going to incorporate, he may want to ask the lawyer to create a separate class of common shares. So, for instance, the husband could have voting Class A Common shares and the wife could have nonvoting Class B Common shares. Both classes of shares would share in the growth of the business. The husband would retain voting control and, therefore, control over the business. However, it would be possible, from year to year, in conjunction with the advice of the company's accountant, to issue dividends to only the Class B shares. If the wife has no other income, she could potentially receive in excess of $20,000.00 per year in dividends, tax free. This is a relatively simple way to achieve some tax savings, but be sure that your lawyer is an experienced corporate lawyer who is able to set up these shares appropriately. If done with solid financial and legal advice, this makes good business sense.