Bob Gauvreau breaks down two legal ways to split income with family members in Canada and the U.S. Pay a relative a reasonable salary for actual work, like his daughter's $1,000/month for managing social media, and you deduct it while they pay little tax on low income. Or appoint them as a shareholder if they work over 20 hours weekly in the business.
Questions this video answers
More than 20 hours per week.
$1,000 per month (approximately $12,000 per year).
Over $200,000 per year (speaker cites ~56–57% marginal tax rate at that level).
Chapters
Okay. One of my favorite topics is looking at income splitting and how we can essentially lower our income tax rates as individuals. So in Canada and in the United States, both are a marginal tax system. What does that mean? It means that as an individual, we go from tax rates of zero all the way up to 50% plus, depending on the state or the province you live in. I know in the province I live in, we're at about 56 or 57%, which is the highest marginal tax rate. And that's if I make over $200,000 a year. So if I make over 200,000, more than half of that income is taxed and goes back to the government. Not an ideal situation. Right. And people like me spend my entire life trying to make sure people are not in that situation where they're giving the government more than half of their money back. So one of the things that we can do in this situation is look at income splitting. And some of you would say, okay, Bob, well, I know income splitting, you can't just pay random people if they're not doing any work. And that's correct. Right. We need to have reasonable compensation and reasonable payments for those services or products that we're receiving in exchange. When we have a family member, it's considered a non arm's length transaction. And they're already, you know, looking at that relationship with a little bit more scrutiny than any other relationship. So if we want an income split, two things need to happen. One, our family member needs to be actively involved in the business of more than 20 hours per week. If they're actively involved more than 20 hours per week, we can set them up as a shareholder or a beneficiary of a family trust. And we can income split through dividends. This is my preferred way to do it. But that's only if they're actively working more than 20 hours a week. If they're not, we can set them up on payroll and they can earn salary for reasonable pay for reasonable services in exchange. I'll give you an example. My daughter travels with me. She goes to conferences and events with me. I pay her $1,000 a month to manage my TikTok account and to manage some of my social media and video and photos and all that great stuff. I would be paying an equivalent amount, if not more, to somebody else. It's a great setup for her. Now she gets paid this and I get a business deduction for it. When I get a business deduction, I save tax money. So whether it's, let's say, it's 20% tax rate. For the thousand dollars I'm saving $200 in income taxes. She claims that $12,000 on her personal tax return, but because she's got personal tax exemptions and she's subject to those same marginal rates that go all the way up because her income is only $12,000, she pays zero tax on that income. So. So I get a full deduction. She doesn't pay any tax. That's ultimately the outcome of income splitting that we want is to bring someone's tax rate down and bring someone else's up, where we're ultimately in a savings position. Income tax planning and income splitting is one of my favorite topics, and it's probably one of the areas that, if we do it right, can save you the most money.
