In 2016 I wrote an article about whether a Doctor should incorporate or not. In 2017 the tax rules were significantly changed in a way to discourage professionals and service businesses from incorporating. While I have been a vocal opponent of the changes since they were originally released in July 2017, they have been improved in some ways, but not in others, and unfortunately they will still target Doctors, various other professionals and service businesses.
Here is the updated story… but the short answer is, if you have not yet incorporated, let's wait until after Budget Date 2018.
After our last discussion, (https://www.taxfordoctors.ca/news-notes/2017/12/21/to-incorporate-or-non-incorporate) Adam came back to my office to discuss his plans for incorporation. The last time we chatted about incorporation was 2016 and he decided that with a new baby on the way and starting out work, that he would delay the incorporation decision. Amanda is now done maternity leave and is looking for work as their daughter is now in full time child care (costing $1,300 per month!), so the idea has come back.
The first question out of Adam’s mouth is what is going on with these new tax changes? He tells me about how so many of the doctors at work are talking about the changes- some are taking more shifts, some are taking less shifts, some are exploring moving to the United States and some are just going to retire.
We start with the first plank of the tax changes – the income splitting. I ask Adam, “has Amanda found a job yet?” The answer is “No”. I ask if Adam is still happy with his assistant. The answer is “No”. I ask Adam if he would be willing to hire his wife as his assistant. He hems, he haws… he likes the idea of keeping work and home separate. So I explain why I asked the question.
Previously when we met, Adam and I discussed the power of income splitting, which could have saved him back then around $13,000 per year by paying dividends to his wife, Amanda. However, under the draft new rules effective for 2018 income splitting for professionals (and many service based companies) will be allowed if the family member working in the business, works there for at least an average of 20 hours per week in the year (the only bright line test in the exceptions), or has worked there for that amount of time in five of the previous years. (Note: for children 24 and under the rules are stricter).
Adam asks, does she actually have to work there? Or can we just say she is. He gives a wryly smile. Unfortunately, I also explain that the CRA has the power to review the payroll records, work done and other evidence related to this assertion, so we have to be careful to ensure she works the 20 hours AND we have to document it. (As a side note, I recommend that we implement a proper payroll and time tracking system so that we can put together the records).
Adam asks, can he just pay his wife a huge salary and ignore the dividend rules? Unfortunately, that will not work either. I explain that there are already rules set up to discourage paying spouses unreasonable salaries too.
Luckily though, Amanda is not working and she has training in the skills Adam needs. Not all couples are that lucky though, and in this case neither is Adam’s assistant. Given that hiring Amanda allows for the income splitting, and tax savings of $13,000, he plans to let go of his assistant, and hire Amanda at least for the next five years.
The second plank of the tax proposals was to go after the ‘passive investment’ rules. Or as the Government calls it, the ‘dead money’ in the system. Unfortunately, the rules are much vaguer here. I explain that we don’t know what is going to happen, so we should probably discuss this at a later point, but in the meantime, if he does decide to incorporate between now and the budget date, that he should ensure his investments are long term focused investments prior to the budget date which could be when the rules change over… we will see.
We chat about a few other tax changes and the various articles on the topic. Adam goes away a little more clear on the income splitting, but even more unsure about incorporation. We plan to arrange another meeting after the budget date and revisit the decision to incorporate until after we see the results of the 2018 budget.
(Please note that all names were fictional, and tax calculations are based on a simplified calculation)
FYI - Just to be clear, the new income splitting (sprinkling) rules are complex and we do not recommend paying dividends to family members without appropriate advice with a tax professional.