Assuming your children are mature, responsible and won't disrupt the smooth flow of your business and don't mind being thought of as "the boss' kids”. There are several advantages to hiring them for the summer or to work part-time during the school year, and all the benefits stem from one strategy: Income Splitting.
By shifting assets from you (higher earner) to your children, (lower earners), you transfer income off your business-tax return onto theirs, with their lower marginal rates. In addition, your organization gets tax deductions for the salaries it pays the kids.
Income Splitting can also help you:
- Teach the kids how to manage money, and
- Set up a partnership to work with your children toward financing their education and avoiding heavy student debt loads.
A bonus round: If your kids use their salary to pay for college or university, their tuition and other tax credits will help offset taxable earnings. If they don't use all their credits themselves, they do not just lose them. Credits can be carried forward or transferred.
They can carry forward leftover credits to use when they are working full time, earning more money and confronting larger tax bills. Or they can transfer unused credits to:
- You, your spouse or your common-law partner;
- A guardian;
- Their grandparents: or
- Their spouses or common-law partners.
Note: The maximum tuition, education, and textbook amount transferred from each child is $5,000 minus the amounts used. Amounts carried forward cannot be transferred.
There are a couple of other strategies you might want to consider for splitting business income with your children:
- Pay bonuses: When you pay a bonus to a child, spouse or common-law partner, the money is a deductible business expense that reduces your company's taxable income and is taxed at the recipient's lower rate.
- Pay dividends: If you run a small business corporation, you can pay dividends to a shareholding child, spouse or common law partner without worrying about attribution. The payouts are taxed at the recipient's lower rate, but are not a deductible business expense because they come from after-tax earnings. If they are paid to children under the age of 18, they are taxed at the highest marginal rate.