Income sprinkling is the concept of taking profits from a company and paying them out to family members, or other close people, in order to lower taxes and retain more of the revenue from the company. This can be done by paying someone from your family, usually a son, daughter, or spouse, who does little or nothing for the business. OFten they can do little for the business, and receive salaries that are not commensurate with their contributions. It can be as little as a few thousand dollars, it could be $30,000. Or it could be a lot more!
Income sprinkling has been something that has been against the spirit of our law for years. However, it has not been explicitly outlined as to what it is (not properly defined), nor what penalties would be in place for this. The legislation is still not passed. Part of the proposed legislation is that any company caught would be retroactively penalized. This means that if a company is caught for income sprinkling in 2018, then the CRA can review years past, as well. They may even choose to open prior years selectively.
My input? Don’t do it! It’s nice not to pay the taxes, if you can think you can get away with paying your spouse (or kid) for not working at your company. It’s also nice to be able to help them out if they are in a tough spot and need some help. Don’t pay them for nothing. Make them work! If they’re contributing, and they’re being paid a fair wage, commensurate with the contribution they are giving and industry rates, then there will be no issues. Yes, I’ve seen business owners pay their children or spouses who are not involved at all (or very minimally) in the business wages that are far above what they would earn for doing the same work for someone else. That’s income sprinkling.
Paying dividends to children or those over the age of 17 (adults) who are into actively involved in the business is also considered income sprinkling. Dividends are paid to owners of the company! He or she must be engaged in the business at least an average of 20 hours per week during the part of the taxation year that the business operates. If an individual does not satisfy this deeming rule, then it is a question of fact whether he or she was engaged on a regular, continuous and substantial basis. [CRA on income sprinkling]