For high income earners such as dentists, taxes can be the single largest expense you have. With the help of your family, and the strategies listed, you could save enough money to take the family out for a vacation or purchase a new family car.
Pay your family members a salary or dividends
A single person earning $160,000 per year will pay more tax than two people who earn $80,000 each and significantly more than four people earning $40,000 each. This tax savings has been increased due to the 2015 new legislative proposal which reduced the 2016 tax rates on personal taxable income between $45,282 – $90,563. By paying a reasonable salary and/or dividends to your spouse, parents and children over 18 who are shareholders, not only is the tax burden shared among multiple people, but the burden itself is significantly reduced. In many cases, the savings could be tens of thousands of dollars. In order to receive dividends, one must be a shareholder of a corporation. Hence, a corporation is needed in order to pay a dividend.
Pay other family members to watch your children
Not everyone can be a shareholder of your professional corporation, however most family members (>17) can be a babysitter. Consider paying a niece, nephew, parent in-law, brother or sister with little or no income to babysit your children. Depending on your earned incomes (e.g., salary), either you or your spouse would claim a childcare expense deduction and the babysitter would report the income. The maximum child care expense that can be claimed is $8,000 per child under seven years old and $5,000 per child between 7-16 years old. If the babysitter has little to no income, this may result in tax savings of up to a few thousand dollars.
Setup a Technical Service Corporation/Hygiene Service Corporation (TSC/HSC)
Professional Corporation (PC) shareholder rules prevent you from using other low income family members such as your siblings and in-laws from being part of the tax savings game. A TSC/HSC does not fall under the same rules and may be worthwhile if your practice has income (revenues minus expenses) over $500,000 and has a strong hygiene program or technical component (lab, x-ray services etc.). The proposals in the 2016 Federal Budget could add some risk to this maneuver.
Invest in a Registered Education Saving Plan (RESP) for your children
Tax rules prevent you from saving taxes by paying minor children (under 18) dividends. However, you can still use them in the tax savings game. By investing in a RESP, you will be able to save for their future education while savings taxes. All grants and investment income earned in the RESP will be taxed in your children’s hands when they withdraw from the RESP. Many students have little to no income which means very little if any taxes upon withdrawal. You are able to save for your children’s education while avoiding taxes on the investment returns.
Invest in appreciating assets for your children
Many dentists want to give their children a head start by investing in their children’s names. Few dentists know that special tax rules force investment income earned in your minor children’s name to be taxed in your hands. Even fewer know that these rules don’t apply to most capital gains. Instead of investing in assets that pay interest or dividends for your children, consider investing in assets which will appreciate and produce capital gains which will be taxed in your children’s hands. For example, instead of saving bonds for your children, invest in some stocks and equities that will produce a capital gain/rise in value.
Invest in a spousal RRSP
Taking a million dollars from your RRSP when you are 71 means you will face a very high tax bill even in retirement. Instead, contribute to a spousal RRSP so that upon retirement both you and your spouse will only have to withdraw $500,000 each in your RRSPs. This will reduce your tax burden in retirement and may preserve your old age security benefits leaving you with more money.
If it is too late to contribute to a spousal RRSP, you can still split the pension income with your spouse. Your spouse could report up to 50 per cent of your RRSP/RRIF withdrawal/pension in their name while you receive a tax deduction.
Pay your family’s bills and invest the rest
It may seem unfair, but if you are the highest earning member of your household, you should pay all the personal bills. The income saved by the other members of household should then be invested so that any investment income is taxed at lower rates in their hands instead of yours.
Taking on the burden of taxes by yourself will lead to financial hardship, stress and less personal time to spend with your family. Working more hours to pay off your tax bills can become a vicious cycle as the more you earn, the more taxes you pay. Instead, share the burden with your family and reap the rewards of your hard work together. It never ceases to amaze us the lengths a dentist will go to in order to save a few pennies. But, we often see dentists paying thousands more in taxes than they should with proper tax planning.
This article was prepared by David Chong Yen, CPA, CA, CFP and Louise Wong, CPA, CA, TEP of DCY Professional Corporation Chartered Accountants who are tax specialists and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail firstname.lastname@example.org / email@example.com. Visit our website at www.dcy.ca. This article is intended to present tax saving and planning ideas, and is not intended to replace professional advice.