June 1, 2010
by David Chong Yen, CFP, CA
Make adult children shareholders — your adult children could subscribe for shares if they are not already shareholders of your professional or hygiene or technical services corporation. By becoming shareholders, they could receive dividends from the corporation. If an adult child receives a $100,000 dividend and has little or no other source of income, the tax bill would be around $14,000. If the dentist received the dividend, the tax bill would be around $32,500, assuming the top tax bracket. This maneuver could generate a tax saving of $18,500.
If your practice generates more than $500,000 profit and you only have a professional corporation which is subject to the low corporate tax rate, consider having your adult children or other family members set up a hygiene/technical services corporation. By doing so, you might be able to have more profit taxed at the low corporate tax rate.
Care must be taken to ensure the corporate structure facilitates payment of dividends to certain family members while excluding others. Consult your advisors. Create a corporate structure which enables the multiplication of the capital gains exemption. When designing the corporate structure consider the impact of a divorce and create possible safeguards against this.
Make adult children home owner(s) and multiply your principal residence exemption — principal residence exemption is available to an adult child. If your child owns and stays at this other home, he/she could enjoy the tax free gain on any appreciation of the home once it is sold.
If you currently own two homes i.e. a city home and a cottage, and you are contemplating transferring one to your adult child, there may be tax implications i.e. you have to sell one of the homes to your child at fair market value and if you use some or all of your own principal home exemption to shelter the gain on the transfer, you will have less room for your other home.
Make adult children baby sitters — you could pay your adult child to baby sit the young ones (16 and younger); this might be tax beneficial if the income of your adult children is less than the lower income spouse. In addition, the baby sitting income also generates RRSP room.
Buy investments in adult children’s names — your child will pay tax on earnings (i.e. interest/dividend/capital gains) on these investments and hopefully at a lower tax rate. To get a head start, you could purchase a 1 year term deposit on the child’s 17th birthday and since interest on this 1 year term deposit is not reportable until its anniversary, your child would end up paying tax on the interest earned on this 1 year term deposit.
Make use of the Tax Free Savings Account (TFSA) — $5,000 per year after reaching age 18 could be put into a TFSA. All income earned will be sheltered from tax. You could transfer money to the child’s account without any negative tax implications.DPM
David Chong Yen, CFP, CA of DCY Professional Corporation Chartered Accountants, has completed the CICA In-Depth Tax Courses and has been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail email@example.com. www.dcy.ca. This article is intended to present tax saving and planning ideas and is not intended to replace professional advice.
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