The Perfectly Legal Way to Maximize Your Tax Reductions
Being an entrepreneur means simultaneously taking on multiple tasks and responsibilities. This also means that your profits are hard-earned and well-deserved. If you are the breadwinner or the highest earner in your family on top of running your own small business, you may be interested in completely legal ways to reduce your tax burden. Hence, it’s important to take advantage of eligible deductions in order to lessen your taxable amount, to transfer your taxes to future years, and to split taxable income between different tax payers in your family to reduce the total amount the family has to pay.
Income Splitting 101
In a nutshell, income splitting is the process of lessening your family’s tax burden by transferring income from the hands of the highest earning family member to a lower earning one. ‘Why?’ you may ask. It is because the highest earners qualify for the higher tax brackets. It is important for families to take complete advantage of the varying marginal tax rates in order to achieve maximum reduction of taxable amount.
Split Your Income in 4 Methods
It is important to note, however, that income splitting has rules that may limit the way you transfer your incomes to family members in a lower tax bracket. These attribution rules defer from your spouse, children, and other relatives depending on their type of income. Luckily, there are different ways in which you can obey these attribution rules to lessen your family’s tax load.
Employ a family member and pay him or her a reasonable salary. The income that you pay to your family member must meet the salary expectations depending on the employee’s tasks and duties. Maintained a well-detailed payroll record for future tax audits.
Invest under the name of the lowest earning family member. You may do this by making investments as a gift to your adult child to whom the income will also be taxed.
Lend or loan money to the lower earning spouse in order to make an investment. This also entails that the spouse must pay interest for the loan otherwise you may risk suffering from legal and financial consequences for violating the attribution rules.
Create an RRSP account. Until funds are withdrawn, the accumulated income will remain untaxed. During withdrawal, your child will carry the weight of the tax in a lower student tax bracket.
There are many other ways that you can split your income during tax season while adhering to the attribution rules. We hope this helped you make better decisions for your tax planning. If you would need professional help with filing your taxes, you can rely on local firms in Calgary such as Calgary EZTax and A1 Accounting and Business Solutions and to take care of your year-end finances and to maximize tax savings while perfectly complying with the Canada tax laws.
If you liked what you read, feel free to give us a thumbs up and share us on Facebook.
Till next Friday!