New Family Tax Cut:  What’s the Link to Owner-Manager Compensation Planning

Year end tax planning for corporate-owner managers includes decision-making around the most tax efficient income streams - salary, dividends or bonus - for each shareholder in the family.

This may need to be given a new eye with the introduction of the new Family Tax Cut provisions.

CRA has long acknowledged that self-employed owners of CCPC have options available to them regarding their personal remuneration planning.    The Family Tax Credit will now allow Owner-Managers, who can also control the amount of income they earn as wages or salary over the course of the calendar year, to consider the Family Tax Cut in their year-end tax planning.

Remember, the tax cut provisions allow for the transfer of 50% of taxable income, up to $50,000, to a spouse.  It is assumed that all other provisions leading to taxable income will follow normal rules.  Still, the following will need special thought from a year end planning point of view:

• Dividends – Is the amount of income that is used in the calculation the gross-up or net amount of the dividend?  What is impact of a potentially “shared” dividend tax credit?
• Employee Benefits – Consider the implications of a T4 slip consisting only of “Employee use of a company owned vehicle” and other taxable benefits.  Which family member working in the business should be granted the benefits in light of the Family Tax Cut opportunity?
• RRSP– It is assumed that the person transferring the income to a lower earning spouse will be the one to use the full RRSP contribution room on that transferred income.  Still it’s a question to be asked.

We expect these issues to be resolved with the release of the various tax return forms on which the calculations will be made.   But remember, the terms “Reasonable” and “Reasonable in the Circumstances” have long been relied on by Canada Revenue Agency under ITA s.67 when it comes to family income planning and this must be taken into account with every transaction to pass audit tests.

We invite you to weigh in with your thoughts.  The key to proper year end planning is in the tax brackets and the income attributes available and Owner Managers of a Canadian Controlled Private Corporation already have the ability to structure their wages and ownership of the CCPC to attain maximum tax efficiency.  The new family income splitting provisions will undoubtedly provoke new strategic thought in how to get the best outcomes for the family unit as a whole.