Weekly Tax Tips
Pay Dividends from Your Corporation
Date: 27 Aug 2010
If you carry on your business through a corporation, consider the following point:
In certain situations, a corporation can be used to split income with family members. For instance, if your spouse or children, who are 18 years of age and older, subscribe for shares of your corporation at fair market value using their own funds, they can receive dividends from the corporation out of its after-tax profits and you can split income. Dividends paid by the corporation before its year-end could generate a tax refund on its corporate tax return, if it has previously earned investment income on which it paid tax. If your corporation has a year-end early in 2011, say January 31st, you could declare a dividend in January, which would generate a tax refund for the corporation on its current return. The recipients of the dividend would then be taxable on their 2011 returns which are due April 30, 2012.
There could be a problem with this type of planning if you’ve loaned or transferred property to the corporation. In this case, you must ensure that the company maintains its status as a Small Business Corporation. Otherwise, you could be subject to an imputed interest penalty if your spouse or children are shareholders.
Income splitting with minor children is more difficult because of the income splitting tax. Under these rules, minor children are taxed at top personal rates on dividends received from your corporation, as well as certain types of business income. For more information on this tax, read our Income Splitting tax bulletin.
You should review your corporation’s status throughout the year, and again at year-end in conjunction with tax planning for you and your family. If dividends are required, they should be properly documented and recorded in the company’s minute book. Also, for any dividends paid in 2010, the corporation must prepare and file T5 slips to report the dividends on or before February 28, 2011.
If your corporation had business income after 2000 in excess of the federal small business limit or received public company dividends after 2005, the corporation may be able to pay an eligible dividend. These dividends are subject to a lower tax rate and must be designated as eligible. As these rules are fairly complex and strict documentation rules apply, you should consult with your BDO advisor before declaring dividends to take advantage of the eligible dividend rules.
This tax tip is a publication of BDO Canada LLP on developments in the area of taxation. This material is general in nature and should not be relied upon to replace the requirement for specific professional advice. The information in this tax tip is current as of 27 Aug 2010.
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