When running your own business, there are a number of income splitting opportunities. Many of these options apply whether or not the business is incorporated. You can hire your family and pay them a salary.
If a corporation is a Small Business Company (SBC), your spouse and children can be shareholders and receive dividends, without concern for the corporate attribution rules. You can also pay your spouse a guarantee fee they have pledged assets or otherwise guaranteed the debts of the business.
If your business is incorporated, other possibilities arise, such as paying your spouse a director’s fee for services performed in that capacity. Your spouse and children could subscribe for shares in your corporation and be paid dividends. The advantage here is the ability to have the dividends taxed in the hands of more than one person, which generally means that overall tax on the dividends is lower.
With the use of more than one class of shares, it would be possible to pay the dividends to selected individuals or a group of individuals. You should ensure family members pay fair market value for any shares issued to them. This should not be a problem if you have just done an estate freeze, since the common shares will generally have only a nominal value.
Be aware that family members must acquire the shares with their own funds. If you provide the funds to them, any dividends they receive would be taxed in your hands. Note that your spouse will also be jointly liable with the other directors for the fulfillment of requirements, such as salary withholdings and GST collections. If your spouse pledges assets or otherwise guarantees a business loan for your company, they can be paid a fee by the business. The amount paid must be reasonable for the circumstances.
To determine reasonableness, look at the amount of the loan, and the ability of the business to repay the loan. Consider the amount that would otherwise have been paid to an arm’s length party to guarantee the loan. The fee charged will also help in establishing the deductibility of the loan for your spouse, should the debt ever become bad and the guarantee called.
Funds can be loaned to a spouse to start up a business, without being concerned about attribution rules. Only income from property is subject to attribution. Income from a business is not subject to attribution.
You should consider that in business there is always a risk. Therefore, from a tax point of view you should be aware that an interest free loan would not qualify for capital loss treatment should the venture fail. Therefore, you should make the loan interest bearing.
You should also consider making a capital contribution to the business as a partner, which will make you responsible to share in any business losses. Income splitting and estate planning are made easier if the corporation is an SBC. If you transfer property non SBC property or make a low interest loan to a corporation of which your spouse or minor children are shareholders, an imputed interest penalty at CRA’s prescribed rate will be attributed to your income.
The corporate attribution penalty does not apply for any period throughout which the corporation qualifies as an SBC. Therefore, if you ensure your company always meets the 90% test for business assets, you can carry out an estate freeze and set up an income splitting arrangement without concern for corporate attribution.
To ensure you can pay dividends to a family member, make sure the member is actively contributing to the company. Let investments grow in the lower income earner’s name. This is a legal form of income splitting. Have the higher income earner pay all the expenses to reduce their income.

Retirement Income Splitting

Income splitting is important for everyone especially so for senior citizens. If you receive Old Age Security (OAS) benefits, your entitlement is clawed back at the rate of 15% of your taxable income in excess of $53,215. Splitting income between seniors reduces the total amount clawed back as well as saves on their income taxes.
Consider that when you contribute to a spousal RRSP, withdrawals from the RRSP by your spouse will be taxed in your spouse’s hands, if you have not made a contribution to the RRSP within the previous two years, or if the RRSP has been converted to an annuity.
If you contribute to a spousal RRSP and your spouse also has earned income, they should also contribute to their own RRSP. Spouses should consider electing to split CPP benefits 50/50. This is beneficial in situations where only one spouse has worked and is receiving a pension. Diverting half of your benefits to your spouse will not result in income attribution as this is specifically excluded from the rules.
Remember to invest the CPP benefits received in your spouse’s name since income earned on the accumulated CPP benefits will not be subject income attribution.
Advantages of a Small Business Company

A Company qualifies as an SBC, Small Business Company, if at least 90% of its assets are used for active business purposes carried on primarily in Canada.
A CCPC, Canadian Controlled Private Company, holding only shares or debts of other companies may qualify, subject to those other companies are also being SBCs. If corporations reinvest all their profits back into the business, meeting the “Asset use test” does not pose a problem.
If the corporations invest surplus funds in investments not required for their business purposes. And if the fair market value of these investments exceeds 10% of the fair market value of all assets, the corporation will not qualify as an SBC.
To ensure your corporation continues to qualify as a SBC you should consider reinvesting any excess funds in business assets, or remove them from your corporation, through payment of dividends, salary or repayment of shareholder loans. The word “small” in the definition of a “small business company” is interesting, as there are no size restrictions for qualifying as a SBC.