Income Splitting

Allan Madan, CA
 Nov 19, 2013
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The Top Tax strategies for medical practitioners (doctors, physicians, chiropractors, dentists, pharmacists) are revealed in this article. The common theme is that of income splitting – distributing income to family members that otherwise would have been taxed in the hands of the same individual.

Hire your spouse/child

As an owner, you can hire your spouse and/or your child and pay them a salary. This is probably one of the most effective tax strategies for medical practitioners. Consider hiring your spouse and/or children for clerical and administrative needs, if they are not qualified medical practitioners.

You cannot pay your 12 year-old child a $200,000 salary as a ‘consultant’. The salary paid to your spouse/child must be reasonable based on the work performed. ‘Reasonableness’ is determined by assessing what any other person would have been paid under similar circumstances. Note also that the work must actually be performed, and documentation must exist for its performance. Documentation like a daily time log and/or diary should be kept.

Pay dividends to spouse/child (watch out for kiddie tax!)

Consider giving your spouse and/or children partial ownership of your Professional Corporation. In that case, you will be able to pay them dividends, thereby eliminating the need to take on the entire dividend for yourself.

Before you implement this strategy, consider the following:

1) Generally speaking, only qualified medical practitioners can become shareholders of medical professional corporations:

  • Orthodontists
  • Chiropractors
  • Surgeons
  • Family doctors
  • Pharmacists
  • Physicians, and many more

2) An exception for physicians’ and dentists’ professional corporations exists. Family members of physicians and dentists can become shareholders, as long as they own non-voting shares. Family member shareholders includes parents, step-parents, children, step-children, spouse and common-law spouses.

3) Dividends paid to children under the age of 18 (minors) will be taxed at the top marginal rate, which essentially eliminates the benefit of income splitting.

4) The first $40,000 taken as dividends by an individual is tax-free, as long as that individual has no other source(s) of income.

Spousal loans

You can loan your spouse the income you receive from your corporation. This way, your spouse will be able to invest the funds to obtain a return which will be taxed at a lower rate (provided your spouse makes less than you).

The income your spouse earns on the loaned funds will not be attributed back to you, as long as you pay your spouse the CRA’s prescribed rate of interest (2%) on the loan.

Spousal RRSP contributions

Spousal RRSPs – this is one of the best tax strategies for medical practitioners.

Take advantage of your RRSP contribution room, and contribute to your spouse’s RRSP. You will be able to take the deduction, and it will not affect your spouse’s deduction limit. Note, however, that your spouse cannot draw any funds from his/her RRSP in the current, and/or the next two succeeding years. Otherwise the income will be attributed back to you.

Withdrawals by your spouse from her/her own RRSP will be included and taxed in his/her income. This will allow you and your spouse to equalize RRSP withdrawals, and pay a lower tax rate.

Disclaimer

The information provided on this page is intended to provide general information. The information does not take into account your personal situation and is not intended to be used without consultation from accounting and financial professionals. Allan Madan and Madan Chartered Accountant will not be held liable for any problems that arise from the usage of the information provided on this page.

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