I will paying over $50k in taxes again this year and want to see what other options we have available.

You are correct. An additional set of books and tax filing is required for the trust as well as for the holding company. The income company has to be large enough to generate enough tax savings and defferal options to warrant the additional expense and time that it takes to administer it. I maintain most of the accounting myself and our accountant just does the final tax filing for us, but it still costs around $1,500/year.

There are a couple of reasons I do not retain excess income in the main corporation. The first and most important is capital/liability protection. If something does occur (nothing that I am anticipating, but stuff happens) and the main corporation has to file for bankruptcy or gets hit with a massive lawsuit above our liability insurance limits, the additional retained earnings are protected in the holding company and are still available for personal income purposes. With the exra cash that sits in the holding company, I can then invest it in to an array of income-generating options, including other companies, stocks, bonds, whatever.

When the main corporation has a good year and issues a large dividend, we only have to take (and pay tax on) what we need personally and leave the rest in the holding company to with as it wishes. Then if we have a poor year, we can draw a little extra from the holding company to even out the bumps and reduce our overall tax burden (the tax rate on high income is brutal). Having two years pulling $50k/year each instead of $100k in the first year and $0k in the next will produce a better overall tax rate.

The holding company is also where I am building up funds for my children and when they turn 18, they can receive a “management fee” from the holding company which can go towards tuition, living expenses, etc. As they will be earning little to no other income, most of this money will flow to them tax free. The idea is that I will not give them a single penny personally: Whatever they need (as long as I approve the expense, of course!) will come as a dividend from the holding company, through the trust and in to their hands as low (or no) tax dollars.

Another advantage: Because the trust owns the shares of the income generating corporation, when the day arises that I decide to sell the company and record the capital gain on the shares, because the trust owns it, the trust receives the capital gain. I can then split this capital gain between myself and my children and *each* person can claim up to the $750,000 small business capital gains exemption. That means our family could potentially make a $3,000,000 capital gain on the sale of the company and not have to pay a single penny in tax. Compare that to if I held the shares myself and had to pay capital gains tax on $2,250,000!

I found the same thing when I was searching online, they all want a % of the claims, but 15% that’s insane!

I was referred to the service called Promedent Plan (www.promedent.ca), it’s a tiny PHSP that is basically a self serve website. It’s low key, run by an accountant company I don’t think they offer any personal service which is probably why it’s so much more affordable. Like they don’t have a call center to ask questions if something is admissable or not.

Once a year you basically just submit your claim as an “employee”, then login as an “employer” to accept your claim. It transfers the money from your business bank account and deposit’s it into your personal account.

Also check out their savings calculator to see how much a PHSP might save you:
https://www.promedent.ca/calc.asp

I’m not a PHSP expert, but I think a mid wife would be a normal medical expense, same as prescription drugs, dental work or hospital stays. However glasses, contacts don’t and I think laser eye doesn’t either, so in that case a PHSP could be well worth it.

Here is a CRA guide on eligible medical expenses:
http://www.cra-arc.gc.ca/E/pub/tp/it519r2-consolid/it519r2-consolid-e.pdf

If you do sign up for Promedent use my referrer ID “604-677-6522-585″ and they will give me a $20 credit on my next claim. That kick back doesn’t change my opinion of their service, if there was anyone offering the service cheaper I’d say and use them myself.

I understand some costs are a medical write off (for example, we used a mid wife for our first two children, and until this year, it wasn’t covered by Alberta Health Care. it is now), but are things like prescription costs a write off? Also, I plan to get laser eye surgery in the near future. This one should be an excellent candidate for the PHSP, right?

What is the administrative overhead of having your corporation inside a trust as opposed to being owned directly? Does a trust have to keep a separate set of books and file an annual T2?

Was I correct that you have a separate holding company for liability protection, or is there some other reason you don’t retain earnings in the income corp?

My concern with the advantage of nesting corporations and trusts is just that the costs grow and will outweigh the benefits. Filing a T2 for a single corp costs me ~$700/year, so I assume having a holding company and trust it would be close to $3000/year.

I have one a PHSP as well and it has been extremely beneficial because I’ve had high therapy costs for my son. But you need to make sure it actually makes sense because some PHSP’s will charge you a set percent of the claims, like 5%. This service charge could easily eat away the savings you would get because most PHSP eligible expenses would otherwise be a personal medical expense tax write offs anyways.

The PHSP I use has a straight $50 per year, per claim processing fee, if it had been 5% it would have cost $500 last year!

I already have a large amount of RRSP room accumulated, over $75,000, as I’ve been in the work force a number of years and never really had my financial house in order until just recently. So, I’m not terribly worried about accumulating RRSP room at this point. If I ever go back to being a salaried employee, then RRSP contributions will become a focus again and I’ll be growing my RRSP limits anyway, so it will make sense.

We’re planning to try and max out the TFSA. We’ve also signed up for PHSP (private health services plan) via the corporation, which will allow the corp to pay any medical/dental/vision expenses for the family and write off the expense. Since I don’t have benefits anymore, we felt this was important.

The tax avoidance is the main thing I’m looking for. As long as dividends are the best for that, then that’s great.

Because your wife is a shareholder of the corporation, she is entitled to dividend income if the Board of Directors (which is likely the two of you) decide to issue one. If you both own the same class of shares 50/50, then that dividend is split evenly. If, however, you each own a different class of shares in the corporation, that allows you to issue dividends to each class of shares in any proportion that you desire.

Dividends enjoy some benefits tax-wise but do have some disadvantages as well. Dividend income does not create RRSP contribution room nor is it eligible for CPP. That said, CPP doesn’t really pay when you are self-employed anyhow, since you have to pay both sides of the deduction. The deductions are tax deductible, but you still end up putting in around 8+% of your gross income (corporately and personally combined) in to your CPP. For what you will get out of it at retirement, this is a lot of your hard earned money going in to something that will yield a very low rate of return (if not negative).

Considering that you will likely be contributing to CPP for 30-40+ years before retirement, that is a lot of money saved up for little payoff.

Take the $2,118.60 max CPP deduction for 2009, double it to $4,237.20 since you pay both sides, multiply that by 40 years and that totals $169,488 (inflation neutral, since deductions will rise around the rate of inflation (if not more than)). At age 65 you can pull your full CPP and begin enjoying your maximum $908.75 per month payments. That is $10,905 per year. So if you live to 81, 16 years of payments will about reduce your original principal to zero. Of course, you’d expect some return over inflation on that $160k investment, so it’s more likely you’ll have to live to 90 or 100 before you even come close to what you could have done with that money if you had invested it yourself 40 years ago.

The other thing you lose with dividends is your RRSP contribution room. But given the level of government spending right now, I am very fearful that future income tax rates will be substantially higher than they are now and all of those RRSPs will be coming out at as high or higher a tax rate than they originally went in.

Long and the short of it is, I am choosing dividends over wages as a corporate income distribution strategy.

Sarlock seems to have some great ways to lessen his families tax burden which probably means he also spends more money in the economy, generating additional benefits.

We have used spousal RRSP’s almost since we’ve been living together and we will both get into TFSA’s probably next year when we have the money. Even though I make 3x what my wife makes I still have the non-registered account in my name since I’m borrowing to invest. As time goes by, we’ll try to offset that with spousal RRSP’s and TFSA’s for her.

Neither of us has any pension plans – our employers have only ever offered DCPs throughout our careers.

An income splitting option that is available only for the very few is for the self-employed. They could employ their spouse/children at a reasonable wage to help out with various administrative tasks and, especially for low income earning family members, the tax paid on that income could be very low or even zero.

I have a corporation as well, and I think it is the best method of income splitting, unfortunately it’s not an option for most people.

I wonder why you have nested your income corporation in a trust? You could just have different share classes for each eligible family member and issue a different dividend every year to any amount you want without having a trust. You can also retain earnings in the same income earning corp, unless you are also using it for legal protection?

You have to be careful about “attribution” rules and that is why you need to have these spousal investment loans.

The attribution rules essentially attribute the income from investments to where the original money came from (or from whom).

The real object should be to lobby our federal and provincial governments to introduce income splitting for families, not just seniors.

In Ontario, Tory leadership hopeful, Tim Hudak, has proposed just such a move on the provincial side of things.

What a thorough informative article. We are in the situation where my spouse makes about 2/3 of the income and I make 1/3.

For now we have joint accounts but max out our TFSAs. Before TFSAs he contributed to both his RRSP and a spousal RRSP to keep things more equal in retirement.

I never knew before today that you had to ‘loan’ your spouse money for them to invest. I thought that while married, you could put it in either name as long as the lower income earner, earned at least as much as the investment. I’m glad I understand it better now as our plan was eventually to live on his salary and invest mine in my name so that I as the lower income earner would pay the taxes.

Now with the TFSAs it doesn’t matter as much as we don’t have much more than our maximum amount of those combined to invest every year.