Given the recent changes to the taxation of your professional corporation (PC), we are always on the lookout for innovative ways to help you save tax. As you probably recall, the changes effectively killed the concept of income splitting and introduced a tax penalty on passive income earned inside the PC.
If you are a practice owner and your spouse is (or will be) in a lower tax bracket, we recommend using a Spousal RRSP to split income before the age of 65.
The idea is that you max fund a Spousal RRSP at younger ages for maximum tax savings to you. Then, if your spouse falls into a lower tax bracket due to starting a family or because of taking early retirement, your spouse will draw income from the RRSP. As long as the funds were in the Spousal RRSP for at least three years, the withdrawals are taxable in your spouse’s hands. We can see easily non-income earning spouses taking $50,000 per year from the RRSP and paying minimal tax on that income.
Once you are 65, income from your PC can be split, in accordance with the new rules so this strategy is no longer necessary.
The only requirements to make this work are that you pay yourself a salary (AKA T4 Income) and that your spouse is in a lower tax bracket now or at some point.
In future editions of TaxBites we’ll discuss the concept of taking “Shared-Ownership” in a Critical Illness policy in order to provide both a sickness benefit in the event of a diagnosis of a serious medical condition as well as a healthiness benefit in the form of a tax-free refund of premiums that can serve to extract tens of thousands of dollars from your PC. We’ll also revisit how to use tax-exempt life insurance to reduce passive income and avoid the new penalty.
If you’d like to discuss setting up a Spousal RRSP to gain some tax advantages, please get in touch!