Friday, June 26, 2015

Canadian Tax Primer 4: Sharing Income with University-Age Children

If you operate an incorporated business, you have lots of options to split income with other family members (including children who have turned 18).

You can have the corporation hire family members, but any salary paid to the family member cannot be higher than the salary that you would have paid to a non-family member for doing the same type of work.  If your child is away at university most of the year, you must reduce the amount of salary that you pay to the child accordingly.

A better option may be to have the corporation pay dividends to your child.  Dividends are a return on investment.  Your child can receive dividends even if she or he is hitting the university texts hard and doesn't work for the corporation at all.

Many parents are reluctant to have a child own shares directly in the business corporation.  This is where a trust can be useful.  If a properly-structured trust is established, the parents can be the trustees and manage the trust assets.  If the trust assets include shares of the corporation, the parents can control the shares as well as the dividends paid on the shares.  If the student achieves targeted grades, for example, the trust can pass dividends through to the child to assist with tuition and other expenses.  If the target grades are not achieved, however, the child has no right to receive anything from the trust.  If the parents are also beneficiaries of the trust, the parents can distribute the shares to themselves on the termination of the trust.  There is no risk of feeding a sense of entitlement.

Introducing a trust as a shareholder will usually require a corporate reorganization.  The trust itself must be established in a very specific manner in order to take advantage of the income splitting advantages.  If the parents want to be trustees, a parent would not usually establish the trust.  This is usually the role of the grandparent or some other close family friend.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.