DIVIDEND SPRINKLING

Finally, small business owners may want to take action prior to Jan. 1, 2018 if your corporation could be caught by the proposed anti-dividend-sprinkling rules. The new rules would look at whether income received, typically in the form of dividends, by a related adult shareholder is “reasonable,” taking into account the person’s labour and capital contributions to the business along with any previous returns and remuneration, in comparison to a situation where an arm’s length investment was made.

If your private corporation has other shareholders, such as your spouse, partner, or other adult relatives as shareholders, consider whether it makes sense to pay additional dividends to family members who are in lower tax brackets in 2017 to get one last kick at the can and maximize any income sprinkling opportunities before any proposed rules could increase the tax rate on such income beginning in 2018.

You may also wish to review the share structure of your private corporation to determine if more than one shareholder own shares of the same class. Corporate law might require you pay the same amount of dividends to all shareholders of the same class of shares. If you cannot pay dividends to one shareholder without causing another shareholder to be taxed at the highest tax rate on dividends received by them, you may wish to consider a corporate reorganization so that the shareholders own shares of different classes.