Weekend Reading: Income Splitting for Small Business Edition

When I started my online business I was concerned about how best to minimize taxes on any income earned. As the lone breadwinner in my family, any extra income earned outside of my day job is taxed at my highest marginal rate.

I knew that one advantage of having a small business is the ability to split income with family members. I found the most effective way for us to do that is by paying out dividends.

My wife and I went to a lawyer and set up a corporation – it cost about $800 – and each of us hold shares in the company. We then set up a small business bank account and met with an accountant to walk us through the details of starting a corporation, declaring dividends, and paying taxes.

So let’s say that I earn $85,000 at my day job and we take out $40,000 from our small business each year. If we didn’t incorporate then I’d have to declare all $40,000 as personal income – which would bring my income up to $125,000 and increase my taxes owing from $20,550 to $34,774. That extra income is basically taxed at 36 percent.

In a typical year we will pay out approximately $36,000 ($3,000 per month) worth of dividends in my wife’s name. That takes her income from $2,400 (Universal Child Care Benefit gets taxed in her name) to $38,400. Any income left in the business is taxed at 14 percent.

Of course, there are other advantages to having a small business. We’re able to deduct home office expenses – which includes a percentage of our mortgage interest, house insurance, utilities, phone bills, and internet costs.

The bottom line: While it was expensive to incorporate our small business, the ongoing tax advantages and ability to use dividends to split income have more than made up for the initial start-up cost.

(On a related note for web entrepreneurs, the Financial Independence Hub shared a great post this week on how to make money online without getting audited.)

This week(s) recap:

Last Monday I looked at some options for renewing my mortgage later this year.

Last Wednesday Marie gave us a history lesson with the rise and fall of the Alberta oil & gas industry.

Last Friday Marie explored the question: what is a safe withdrawal rate in retirement?

On Monday this week I shared the pitfalls of prioritizing retirement savings above all else.

On Wednesday this week Marie continued her financial management by the decade series with a look at the 60s.

And on Friday we opened up the Boomer & Echo mailbag and looked at whether spousal RRSPs are still a worthwhile income splitting tool.

(Alan Whitton from Canajun Finances also had a good take on Spousal RRSPs on his blog this week.)

Financial resource of the week:

Want to find out if you’re ready to retire, but unsure whether you need to replace 50%, 70%, or 100% of your working income to make it happen? The Globe and Mail has put together a retirement readiness calculator that’s designed to calculate your personal replacement ratio.

You’ll input your monthly expenses (both working and in retirement) and also identify the pre-retirement costs that you will no longer face in retirement. Finally, the sandwich test: will you have to provide financial assistance to your children or your parents in retirement?

Speaking of retirement readiness, a new book by accountant David Trahair shows how procrastinators can get back on track in the 10 years before retirement.

Weekend Reading:

A great piece from CBC news on why the lack of competition in Canada leads to higher prices; from banks to Uber.

Financial technology, or FinTech, is starting to bring some much needed competition to the banking and investment services sectors. Here’s how millennials are fuelling the growth of robo-advisors’ RRSP business.

Power Financial – who recently made a substantial investment in robo-advisor Wealthsimple – continued its interest in the FinTech space by investing in online lender Borrowell.

Kerry Taylor rented rooms and drove with strangers as she recounts her week with the sharing economy.

U.S. insurance disrupter Lemonade made an interesting hire by tapping behavioural scientist Dan Ariely to serve as the company’s Chief Behavioural Officer. Ariely is tasked with helping design systems and processes that ensure that the interests of the insurer and the insured are aligned.

Canadian businesses are also jumping on the behavioural economics bandwagon.

Speaking of rewards and behaviour, Starbucks recently made big changes to its rewards program and this video by Preet Banerjee explains whether you’d be better off under the old program or the new one:

Here’s a story of a f— off fund – something the author argues every young woman should build.

Mr. Money Mustache Pete Adeney steps into the mainstream limelight with this revealing piece in The New Yorker about the father of Mustachianism.

J.D. Roth explains why frugality buys freedom: how to spend less to live more.

This legal dispute says everything about the shadiness of personal finance gurus.

Speaking of shady, Financial Uproar looks into the recruiting firm investing firm Primerica.

Michael James shares an interesting take on avoiding Trudeau’s tax increase – by taking unpaid vacation.

Is homeownership the opium of the masses? Rob Carrick argues, yes.

Most Germans don’t buy their homes, they rent. Here’s why Germany has one of the world’s lowest homeownership rates.

Million Dollar Journey blogger Frugal Trader reveals his RESP portfolio, plus a great chart showing how and when he’ll reduce the equity exposure as his kids get closer to post-secondary age.

Smart-beta is a relatively new strategy that attempts to out-perform plain vanilla index funds by tilting your portfolio towards small-cap or value stocks. Canadian Couch Potato blogger Dan Bortolotti asks how long will you wait for smart beta to actually work?

Finally, with the RRSP deadline right around the corner (Feb 29th to be exact) many tax-payers will ponder using an RRSP loan to top up their RRSP and reduce taxable income. Here’s a smart take on why that’s a bad idea.

Have a great weekend, everyone!

Print Friendly, PDF & Email


  1. Michael James on February 28, 2016 at 7:48 am

    I forgot to include Kerry’s excellent article in my own roundup. Thanks for the mention.

  2. Gord on February 28, 2016 at 1:20 pm

    Is Wealthsimple a recommended roboadviser? How do I find their portfolios and results without joining?

    • Echo on February 28, 2016 at 5:06 pm

      Hi Gord, a blogger signed up with Wealthsimple and reported his progress one-year later. It’s worth a read: http://findependencehub.com/robo-portfolio-update-one-year-later/

      You can see they used a variety of ETFs to build his portfolio, including iShares, Purpose Investments, Vanguard, and BMO ETFs.

      I will say that Wealthsimple has been the most transparent about its progress, with 12,000 clients, $400M assets under management, and the securing of $32M in financing.

      If you’re curious, you can also open an account without investing any money. Follow the steps and it will give you a recommended portfolio of ETFs based on your risk profile. From there you can choose whether or not to go through with an actual investment.

    • Gord on February 28, 2016 at 6:12 pm

      Thanks very much for the info

  3. Anti Moustache on February 28, 2016 at 8:48 pm

    Got to love the Mr Money Moustache article. Sending more people to his blog about being an ‘anti-consumerist’ all the while making a fortune on advertising and product recommendations. 400k a year?? Hard to believe much of what he preaches. I’d love to see an early retired person actually be retired and not continuing to use any opportunity to grab more money. How much is enough? Instead of saying “I’m going to donate it since I don’t need it” ….actually donate it. Or better yet, live by your own rules, just make enough to cover your expenses for the blog and donate the knowledge for the good of mankind. I guess the mightly dollar has too much temptation to truly give it up, even when your whole blog is about how to do just that.

  4. DA on February 28, 2016 at 8:51 pm

    That is very interesting information about Wealthsimple. I am a recent follower of this blog.

  5. Don on February 29, 2016 at 12:15 pm

    I’d recommend caution to anyone deducting a portion of their mortgage interest as a business expense. I’ve been told that this can result in incurring capital gains when I sell my house – any clarification would be appreciated.

    • Echo on March 2, 2016 at 12:28 am

      Hi Don, here’s how I understand the issue:

      If you are an employee claiming business expenses as part of your conditions of employment – mortgage interest is an unallowable expenditure and would be denied as an expense if you included it on your tax return. The inclusion would in no way result in a capital gain on the future sale of your home.

      If you are operating a sole-proprietorship (having business or professional income) – mortgage interest is an allowable expense, the inclusion would in no way result in a capital gain on the future sale of your home. Deducting CCA would however result in a capital gain upon the future sale of your home.

Leave a Comment

Join More Than 10,000 Subscribers!

Sign up now and get our free e-Book- Financial Management by the Decade - plus new financial tips and money stories delivered to your inbox every week.