By splitting income legitimately among family members, you will be able to reduce your overall family’s tax bill; here are a few ways to do it.
Low interest loan
The 2010 first quarter prescribed interest rate is to remain at 1%; If you lend money to your spouse or minor kids or a family trust (for benefit of spouse/minor kids) at 1% interest, you may be able to reduce your family’s overal tax bill. Here is how it works:
1. If you lend say $80,000 to your low income spouse/minor kids/ a family trust at 1%, they could invest the $80,000 in some investments which hopefully earns more than 1% income. All the income earned will be taxed in these low income earners’ hands and all you have to report is the 1% interest income i.e. $800.
2. Write a cheque from your own personal bank account and same will be deposited in a bank account of the low income spouse/minor kids/a family trust. Note the bank account must not be a joint account with you.
3. You are the only shareholder of your PC but you have poor parents, spouse and/or children 18 and older living in Canada and there is no other corporation. Since 2006, parents, spouse and children of dentists are now permitted to become non voting shareholders of the PC. There is no such restriction on the ownership of a hygiene or technical services corporation.
4. No dividends are paid to poor family members (spouse, parents, children 18 and older) even though they are shareholders of your PC, technical or hygiene services corporations. Do you know that an individual who makes little or no income pays virtually no tax on a dividend of $35,000 per year?
5. No reasonable salary is paid to poor salary members even though they perform services for your office.
6. You or your loved ones do not have double wills even though you/your loved ones own shares of PC/technical/hygiene services corporation. Also, you do not have a will if you have a proprietorship or a partnership or other assets and you also do not have a power of attorney.
7. You do not have child care expenses, even though you have poor parents living close by, adult children and children under 17.
8. You only deduct 50% of all business meals and entertainment expenses.
9. You do not have any deductible business automobile expenses.
10. You have not claimed your lifetime capital gains exemption (CGE) with respect to your PC shares. This also applies to your family members if they own a hygiene or technical services corporation. You can claim your CGE and still own your practice.
11. You pay for your medical expenses personally with expensive after tax dollars instead of having your PC pay them and receive a tax deduction for the medical expenses using cheap corporate tax dollars.
12. You are not aware of your ability to deduct 100% of software and hardware purchases before February 1, 2011.
Reducing your tax bill should be done on an ongoing basis, much like preventing cavities. If you are like some dentists looking to save taxes only in the month of April, close to the personal tax deadline, chances are it is too late and you are reacting to a problem rather than being proactive in finding tax savings opportunities.