The income splitting tax change announcement made right before Christmas was a big surprise for most accountants and advisors. Many had been burning the midnight oil throughout the holiday and into the New Year trying to help their clients prepare for the change that was made effective January 1st, 2018.
Once incorporated, physicians would need to choose between salary and dividend when they take money out of the corporation. In more recent years, more physicians opt for dividends over salary due to its simplicity of not having to remit taxes and CPP (Canada Pension Plan) every month. The net after-tax dollar amount is also higher when you do not need to give the government $5,000 a year for storage until you retire. (I used the word “storage” because you are only getting 1 to 2% return on your CPP contributions at best). In my opinion, the real benefit of salary is to build your RRSP contribution room.
However, the scale definitely tips over to salary a lot more for 2018 for a couple of reasons:
1. The dividend tax rate is higher for 2018. Wait! Didn’t the government lower the corporate tax rate for 2018? Yes, they did but they also increased the dividend rate so you do not get to take advantage of drawing dividends. In fact, you are paying slightly more taxes for 2018 than 2017 when withdrawing dividends. Here is an article from PWC explaining this tax change.
2. The last update from government on raising taxes on passive income inside corporations was introducing a $50,000 threshold. So, instead of taxing all passive income at a higher rate, only passive income over $50,000 will be taxed at a higher rate. Having more RRSP contribution room will allow you to shift more of your savings from the corporation to your RRSP so that your corporation will not reach the $50,000 passive threshold as quickly. This change has not yet been put in place but we will probably hear more about this in the coming months.
It is worth having a discussion with your accountant and advisor to see if your dividend/salary composition should remain the same for 2018. If you are switching to salary and RRSP, you should also learn more about the drawbacks of RRSP such as minimum withdrawals requirement at age 71 and taxation at death.
It is not too late to declare additional dividends for 2017. Since 2017 is the last year you can distribute dividend a non-voting shareholder without justification, you should see if it makes sense to top up the dividend to a higher tax bracket for your spouse and/or parents.
Further to the last point, you may also increase the payout to your spouse so he/she can effectively use his/her RRSP contribution room at a higher tax bracket for 2017.