In Canada, many small business owners and real estate investors use the dividend sprinkling strategy to help lower their personal tax liability with a corporate structure.
For a taxpayer who doesn’t have any personal income, you can receive around $30K dividend income from a small business corporation.
If you invest in the stock market and assuming that you have no other personal income, you can receive $50K dividend income from these publicly traded stocks and mutual funds, tax-free.
This is because the corporations you invested in already took care of the taxes for you.
You don’t have to pay a dime more!
Some smart business owners intentionally leave all the after-tax profit money in the corporation, spread out the dividend payout to multi-years, to lower their income taxes. This is splitting income with yourself.
When the strategy is applied evenly to multiple years, you can potentially save tens of thousands of taxes.
Say if you net $250,000 active business income in year 1, you pay 12.5% tax to CRA. After tax, you have $218,750 left.
If the owner is to draw out the entire $218,750 dividend income entirely in year 1, he would likely have to pay an additional $66K as personal tax.
But…with the dividend sprinkling strategy…
- The owner can draw out $30K in year 1, pay zero personal income tax.
- The owner can draw out another $30K in year 2, pay zero personal income tax in year 2.
- It will take him 7 years to draw down the entire net income earned in the corp.
Of course, it’s not always realistic to live off only $30K every year.
As a business owner, the key is to discuss the strategy with a professional accountant so you can legally minimize the amount of taxes you have to pay.
Happy Canadian Real Estate Investing.
Cherry Chan, CPA, CA
Your Real Estate Accountant