Dividend Sprinkling – A Corporate Tax Strategy

I found a very interesting primer article on a generally little known tax strategy called: Dividend Sprinkling.  Frugal Trader from Million Dollar Journey writes:

Dividend sprinkling is where family members are given shares of a private corporation setup with the intention of paying dividends to the members with the lowest tax bracket.  The result is that the corporate income gets paid to the family at the lowest tax rate possible.

The article can be found here.  After you read the article it is quite likely that you will have several important questions that need answering.  Some of these questions can be answered by your lawyer or accountant but others are often rather difficult to get a straight answer for.

Why use dividends?

Dividends are one way of ensuring that paying a family member will not be questioned by the CRA.  When employing a family member the CRA has special rules requiring the payment of a fair and reasonable wage to this person.  If you do not want to do such or cannot do such due to not actually having that much money you can use dividends.

What are the costs involved?

As with all dividends the money comes from a corporations after tax money.  Basically the corporation must have first paid taxes on the money.  Because of the funky accounting rules that exist around dividends it can sometimes be possible to pay less overall tax on the money due to dividends.  This is not always the case though so you need to investigate the details.

Is there a better way?

Legally moving money into your personal pockets from a corporation can be rather difficult if you do not want to pay much or any taxes upon the money.  Money usually exits a corporation through expenses, salaries, dividends and loan repayments.  Other than those methods it can be rather difficult to pull other money out.  Loan repayments are technically tax free, this is because you should have already paid taxes upon the money being repaid so it isn’t really a way around paying taxes.

Conclusions

Corporations can be a good way to earn money.  They generally pay a much lower amount of taxes on all profits and do not pay any taxes upon expenses.  The challenge can be pulling the lower taxed money out of the company.  One useful method in your arsenal can be dividend sprinkling.  Never consider any one method to be better or worse than others, each method for removing cash from a company can work effectively depending upon your situation.

Remember that corporations can be rather difficult and expensive to run and maintain.  If you are trying creative ways of paying yourself you may want to consult a lawyer and/or accountant to ensure you are not accidentally giving yourself problems with the Tax Department.

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