You may have heard of income splitting before – when a salary or other profits of a company are split two or more ways so that the tax brackets that apply to the income are lower.
For instance, instead of one salary at $100,000 in the 40% bracket, it makes more sense to have two $50,000 incomes in the 30% bracket. However, if you’re familiar with income splitting, you may wonder whether it can legally lower your income taxes as a small business owner in Canada.
The challenge is balancing what an accountant or lawyer may suggest you do with what income splitting can mean for control of your company. You may also wonder how rigid or flexible the income split can be. For example, does a 50/50 ownership split mean a 50/50 income split? Or could 50/50 ownership be more flexible and have a 75/25 income split?
And as a business owner, you likely want to maintain control of the business you’ve worked hard to build. Luckily, there is a way to have it both ways: to split income and not split control.
The Answer: Non-Voting Shares
The answer is in the properties of the shares that are issued to the owners. Shares are what an owner of a corporation holds that allow them to vote and share in the income of the corporation. Many small businesses with basic company structures have shares that provide both voting rights and the right to a share of the income. These shares are often called “common shares.”
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