One of the changes that will affect small business owner’s in 2018 The latest plan for the liberal government to close the loophole which the government says have allowed business owners to avoid higher tax rates. Income Sprinkling: Lot of accountants and tax lawyers used income sprinkling as a planning tool which allowed a business owner to split his or her income among family members by paying them salaries, wages or dividends to family members, who may or may not involved in a business. The new rule will increase the tax on dividend paid to family members that are shareholders of a small business corporation, effective Jan 01, 2018.
For example, assume that Mr Harry and Mrs Megan are the shareholder in a medical professional corporation. Harry is the doctor and works for the corporation, while Megan is a home maker. Every year corporation pays Harry and Megan $100,000 each in respect of their shareholdings.
Under the current rules, Harry and Megan each paid tax at regular tax rates on the dividends they received. However beginning Jan 01, 2018, the dividends paid to Megan are taxed at the highest marginal rate. This is because Megan does not work in the medical practice, and she has not made any major financial investment in the practice.
Increase in Dividend Tax
Current tax rules (2017)
Proposed rules (2018)
As a result of the new rules, Megan’s personal tax will increase from $14986 to $45300 of dividend income.
Keep reading our blog for more tax changes
The information provided on this page is intended to provide general information. It is not a tax advice and your personal situation may be different. Jawed Asrani CPA, CGA and Asrani CPA, Professional Corporation will not be held liable for any problems that arise from the usage of the information provided in this page