Personal holding corporations are companies incorporated to hold the investments of an individual shareholder and may provide a profitable vehicle to split income between family members. For example, if you or your spouse each have wholly-owned corporations, and your corporation has retained earnings (accumulated profits) from a business which are loaned to your spouse’s corporation interest free, investment income on the loaned funds can be paid and taxed in your spouse’s hands.
TAX TIP One may successfully argue that such a loan described above will not be subject to Canada Revenue Agency’s special Attribution Rules (rules preventing certain transfers of assets), although certainly in the absence of the corporations described above, attribution rules would apply. To determine if it will be beneficial for you and/or your spouse to incorporate a Personal Holding Company, please contact us now.
Where a start-up business is being incorporated, it is often possible to provide for income splitting by having a spouse purchase shares with his/her own money. When the business succeeds, the income can be divided with the spouse through dividends, giving a second use of marginal tax rates and personal amount credits. Dividends allocated to children in this way will be taxed at top marginal rates, the so-called “kiddie tax”. However, when children acquire shares of an incorporated business it enables them to receive the future growth in the value of the business, which can carry the benefits of deferring tax on future death of a parent, and can spread the tax costs of any future company sale, perhaps even multiplying the $800,000+ Capital Gains Exemption.
TAX TIP If savings are intended to fund post-secondary education of minor children, it may be possible to “dam up” the savings in the corporation and pay them out as dividends to the child piecemeal when they reach the age of 18, during the years when their higher education must be paid. At present, the special kiddie tax will not operate once the child turns 18. Please contact us now for professional assistance regarding your Personal Holding Company.
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