you may have heard of splitting before - if a salary or other profits of an enterprise divided two or more ways, so that the tax brackets that are lower on revenue.
So instead makes a salary of $ 100,000 40% bracket, it make more sense to have $ 50,000 income two in the 30% bracket. However, if you are familiar with splitting, you may be wondering whether it can legally reduce your income taxes as a small business owner in Canada.
The challenge is the balance between what an accountant or attorney may suggest you do what may mean splitting for the control of your business. You can also ask how rigid or flexible income can be divided. For example, a 50/50 ownership split is a 50/50 revenue split? Or might 50/50 ownership be more flexible and have a 75/25 revenue split?
And as a business owner, you probably want to maintain control of the company you have worked hard to build. Fortunately there is a way to have it both ways: to divide income and not split control.
The answer: shares without voting rights
The answer is in the characteristics of the shares that will be issued to the owner. Shares are what keeps an owner of a company that they agree to and share in the income of the company allow. Many small businesses with basic company structures have stocks that provide both voting rights and the right to a share of proceeds. These stocks are often referred to as "common shares".
While this basic structure is very popular, is the problem for companies that use it, is that all the shares have votes and all shares have the right to profits. For this reason, it is impossible that you (which also means control) someone else shares without giving votes.
The answer is to give the share structure a little more complex or sell. Instead of having shares, both of which have voting rights and the right to profits, you would split the shares in two or more kinds. One type typically has votes and no right to profits, and another type usually has no votes but has the right to Win
shares without voting rights. How To
places you want to share before you income with your spouse - you could create three different types of shares in your company:
- , the first type has all the voices and no rights to dividends (profits) ( "common Class A" called).
- The second type ( "common class B" called) has no vote and has a right to dividend (profit).
- The third type ( "common class C" called) also has no vote and has rights to dividends.
So with your spouse without splitting votes split income, the class A and B would have, and your spouse would have only Class C.
An example of splitting by non - voting shares
to further illustrate how income splitting through-voting shares might work in practice, here is a comparison of the two approaches to $ 100,000 profit is divided as dividends with your spouse:
example 1: Acme brush company
your company Acme brush society wants a profit after tax of $ 100,000 to share with its two owners - you and your spouse. Both of them have 50 ordinary shares each, so you get $ 50,000 each.
This approach can work well, as you like to work, but if you have completed personal relationship, it can mean trouble for your business. What's more, if your spouse has another job of $ 50,000 income would push him into a higher tax bracket
Example 2 :. Better Brush Company
Let us imagine now that your company The Better Brush Company wants to share a profit after tax of $ 100,000 with its two owners, you and your spouse.
you have all the Class A and Class B shares. Your spouse has all Class C. The number of shares does not matter, because the dividend is not divided by the number of shares - they will be allocated by share class.
In this example, the dividend will be $ 50,000 split of Class B and $ 50,000 to class C. This has the same tax result as the first example, but the voices of the Class A shareholder, the could make things easier if your relationship ends with your spouse. You could also split about $ 75,000 to the Class B and $ 25,000 the Class C shareholders.
re to give if your spouse has another source of income, as before, the family has the advantage of taking the full $ 100,000 but you avoid the higher tax bracket spouse.
Holds Up
There are significant tax advantages to the second structure. As an owner, you and your spouse in the dividend Split manipulate to fit your lifestyle. But it is important to know that what is shown above are only the tax consequences of splitting the property in this way - there are other considerations business in deciding who gets the votes, and who gets the profits.
However, when doing splitting ownership of your business makes sense for your business and your personal tax situation, then re-evaluate the structure of your company and its stock, before you do this, an intelligent control decisions could be on long term.
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