Corporate Owner-Manager Compensation: Income Analysis Leads To Wise Investment

End of summer is a great time to review the income requirements of your family business clients. This is a prerequisite to any year end planning activities and required investment services to reduce and maximize after-tax income. Here are some tips to consider:

First, in determining the optimum tax efficient income plan, each individual family member's total income sources and their "tax timingî should be analyzed. The Knowledge Bureau's Tax Efficient Retirement Income Planning Course features an Income Analysis and Projection software tool that makes this process both fast and easy. It is important to ensure that every family member has enough total after-tax income or available cash flow to meet needs and wants. Family income splitting, which allows family members to fully utilize personal credits, and social benefit payments are most important planning factors.

Planning now for type of income to be earned coming into year end is critical, too. The payment of a reasonable salary, for example, will increase both net and taxable income. At lower income levels, it will also normally attract CPP and (often) EI contributions, both of which give rise to additional personal credits and may increase the family member's Canada Employment Credit. A decision to pay additional salary will increase net income for the purposes of calculating deductions like child care and credits like spousal and child amounts, medical and charitable donations. Keeping an eye on relevant net income thresholds is important and RRSP planning can help get desired tax minimization results. Therefore tax and investment advisors need to work together.

Remember that a salary is earned income for purposes of creating RRSP contribution room. If it is desirable to allow family members to accumulate more tax sheltered retirement income there may be a preference for paying a salary over a dividend, for example.

Dividend income, remember, increases both net income and taxable income as well, on an inflated basis, because it includes a gross up provision. That is later offset by the dividend tax credit, as part of the integration process between the corporate and personal tax systems. Therefore, issues that need to be taken into account in evaluating the payment of a dividend as compensation include:the taxable amount of the dividend is greater than the cash amount, so dividends have a greater effect on clawbacks than do salary, dollar for dollar: