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I want to split my income with my wife in order to save on taxes. I have a corporation, however, my wife does not currently work for my company. What is the best way for us to split our incomes while satisfying the requirements of the Canada Revenue Agency (CRA).

To clarify: I know that it is possible for an individual who is incorporated. This reduce their taxable income by lowering their marginal tax rate. This usually happens when one spouse earns more than the other and gives their income to the other spouse. This reduces their overall tax bill. I know the theory but from what I understand it's complicated.

I would like to know how it works and the pitfalls that draw the attention of the CRA?

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  • What do you mean by "splitting my income"? – littleadv Dec 2 '14 at 7:31
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Your company may pay your wife or your child a salary. There is unfortunately now a requirement for this salary to be reasonable. The conditions are:

  • the person must perform the duty. If you want to pay your child to pick up paper clips from the floor of your office once a month, that's fine, but the child needs to go in the office and do that - you can't pay them to do that over at the corporate office where they have never set foot. (You also can't keep paying them while they're away at university and clearly not doing their duties.)
  • the money must actually be paid to the person. This is less of an issue for an adult spouse, but it might be an issue for a child. They must actually be given the money. (Most families I know deal with this by having the child's money used to pay for field trips, skating lessons, clothes and so on so that you don't end up with a sulky teen who has $200,000 in the bank.)
  • the work must be necessary for the business. Sending the company Christmas cards and keeping the books is necessary. So are marketing, trade show networking, and so on. Even redecorating the office. But looking after the company's dog, or buying suits, shoes and ties for the business owner, or advising the business owner on personal travel decisions, are probably not. You have to be prepared to defend the job and it might help to have a written job description.
  • under some circumstances CRA will disallow deducting salaries for a company if they don't think it's reasonable. (This is new: when my children were toddlers we could have paid them thousands a month for an hour's work had we wanted to.) You can probably pay somewhat more than you would pay a stranger, but don't try to pay someone 10 times the going rate for a job. (In practice, I never paid my children more than their peers, because I thought the other staff would find that unfair.)

I recommend you think of something your wife can do for the company and start paying her to do it, at whatever rate you mutually agree on, which doesn't have to be the same as she could earn elsewhere, as long as it doesn't get ridiculous. $10,000 a month to manage the company twitter account? If you like, and can show that some "social media consultants" are charging that. But again to be clear - she must really do it and the company must issue her paycheques, T4s, send in her CPP contributions (she, like you, is likely EI exempt) and so on. All completely above board.

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    I'll add: For a corporation, having family-member shareholders receive dividends may be a good alternative to earned employment income, but requires shares to be issued (e.g. non-voting preferred shares of different classes.) A good accountant (and perhaps a lawyer, too) can help structure an arrangement of this sort. – Chris W. Rea Dec 3 '14 at 2:26
  • Good point! This removes the need to do the work or have the salary be reasonable. – Kate Gregory Dec 3 '14 at 11:18

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