Tax Strategy: Dividend Sprinkling

For those of you who have a family business and thinking about incorporating, there is a tax strategy that you can use to your advantage that will minimize the overall taxation of company income.   It’s called “Dividend Sprinkling”.

We’ve mentioned dividend sprinkling briefly before in the discussion about holding corporations, but lets explain it with a bit more detail.

What is dividend sprinkling

Dividend sprinkling is where family members are given shares of a private corporation setup with the intention of paying dividends to the members with the lowest tax bracket.  The result is that the corporate income gets paid to the family at the lowest tax rate possible.

Why use this strategy?

In my previous article about taxation of private corps, we concluded that when money is withdrawn from a private corporation, the net taxation is about the same as if the company was a sole proprietorship.  However, that was assuming that all the of income was withdrawn under the one shareholder/owner.

With the dividend sprinkling strategy, the director can “declare” dividends for specific classes of shares while excluding others.  That is, if one spouse/shareholder makes less income than another thus in a lower tax bracket, then simply declare dividends for that shareholder only

How to set up dividend sprinkling?

When creating a private corporation, the business owner has the option of setting up the share structure in any way that they see fit.  In this case (check the rules of your province/jurisdiction):

  • The majority owner/director would be assigned common shares
  • The spouse is assigned non-voting Class A Preferred Shares
  • Any other family members are assigned non-voting  Class B, C and so on.  Note though that if dividends are distributed to children under the age of 18, there is a “kiddie tax” which taxes dividends at the highest possible rate.

A lawyer would help greatly with structuring your private corporation to take advantage of dividend sprinkling.

An example of the tax benefits

Lets assume that there is a new company to be setup, ABC Inc. in Ontario.  Wife is the director/business owner and at a higher tax bracket than husband.  Common shares would be assigned to Wife while non-voting Class A Preferred shares would be given to Husband.  Assume that Wife makes $60k/year while Husband makes $30k/year.

If they wanted to withdraw $20k from the company to pay down the mortgage (assuming that the company is cash flow rich) in the form of a dividend, the director would declare a dividend for the class A shares (husband) only, the lower income spouse.  If the dividend was declared for the common shares (wife), the tax on the dividend would be approximately $4,108.  On the other hand, if the dividend was declared for Class A shares (husband), then the tax on the dividend would be about $2,733, a significant difference of $1,375 more in pocket.  Do this a few times over the years and the savings are quite substantial.


While it may take a bit more work to setup a corporation with proper share structure, it is well worth it if there is a significant difference in income between spouses.  As I mentioned before, it is recommended that you consult with an experienced lawyer to setup your private corporation properly.

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FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.
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5 years ago

are adult children legally entitled to keep the dividends that have been declared in their name? Do they have any claim for litigation? We currently have a daughter who is seeking the money declared on her behalf. Our corporate lawyer is insisting we pay whatever amount she wants plus her legal fees as ” you do not want this to go to court. It is a crab shoot as to wether or not she has grounds”

11 years ago

Hi Ed,

Thanks for putting the time to formulate such an awesome answer.

As for the link, it appears the website is having server issues, rather than it being an issue with the link itself. Hopefully it will be working again in a day or so.

It’s too bad the link isn’t working, because despite you excellent points, it raises some an intriguing strategy.

Ed Rempel
11 years ago

Hi Charles,

By the way, the link in your post does not work.


Ed Rempel
11 years ago

Hi Charles,

The first issue with investing in a universal life insurance policy is: Do you need life insurance for life? Unless you actually have a need for insurance for your entire life of the amount of the UL policy, why would you invest there?

Remember that, in addition to the amount you invest in the UL, you also have to pay for the life insurance.

Very few people have a permanent life insurance need – at least not for more than the cost of a funeral and taxes on death (which is usually not a lot). People with a reasonable amount of investments should be able to pay this with little difficutlty.

The main reasons for a permanent need for insurance are owning a cottage and having business partners other than your spouse.


1. Investments in a UL policy go up and down, just like regular mutual funds.
2. If you sell them, you pay tax, just like regular mutual funds.
3. Your investments grow with little tax, just like with a tax-efficient mutual fund.
4. You can have principal guarantee on the investments in a UL, but you can have the same guarantee with a regular segregaged fund.

Investments in a UL are generally only more tax-efficient than a tax-efficient mutual fund AFTER YOU DIE.

In your case, if you have other shareholders in your company (other than your wife), you might have a permanent need. Then investing in a UL might make sense.

However, there are also disadvantages of investing in a UL, especially that they usually have higher fees, you have to pay for the insurance, and you can only buy investments from that insurance company.

Since our focus is primarly on investments, we would much rather be able to invest wherever we want and avoid the extra costs.


Brian Poncelet,CFP
11 years ago


You may want to read Tim Cestnick’s story in the Globe and Mail

He covers a number of points about life insurance.


Brian Poncelet,CFP
11 years ago

Hi Ed,

The problem wtith your idea of tax efficent mutual funds is one the they may go down in value just in time when the owner needs the money. Assuming that the person has money in the holding company has beneficiaries (family members) life insurance is ideal.

Ed you may want to re read “Using Universal Life Insurance with Corporations”
I wrote awhile back.

With respect to whole life if it is set up correctly, over time it can be better than UL. Since this is a big topic I will get into more detail after my holidays (mid August)


11 years ago

Great responses Ed!

wrt your last response, I was wondering how you or anyone on here feels about universal life insurance that is kept in the corporation, with the strategy of taking a personal loan out against it as a way to access the money without paying income tax.

Like this:

Ed Rempel
11 years ago

Hi Brian,

The issue with most business owners relates to tax-efficient ways of withdrawing cash from their corporation, not growing investments tax sheltered in the corporation.

Growing investments tax-shetered is easily done with tax-efficient mutual funds or long term holding of equity investments, without the cost of life insurance, tax on insurance policy premiums, and general high costs and limited investment opportunities in insurance policies.

Insurance policies also generally have the same tax consequences as regular investments when cashing in investments during your life. The tax savings are generally only realized if you leave the money there until after you die – which is a rather severe condition. This income tax saving is also generally off-set by the tax on the insurance premiums.

Whole life policies are particulalrly vexing, since you generally do not get both the cash value and the face value of the policy – it is one or the other.

Life insurance policies are generally not worth considering unless you already have a permanent insurance need for the policy.


Ed Rempel
11 years ago

Hi Steve,

Your rental corporation in an RRSP concept sounds interesting, but has some issues and is generally not the way to approach rental income. CRA has designed the tax rules generally to eliminate the advantages.

Owning a private corporation in an RRSP is very complex and costly, requiring regular independent valuation of the shares. You should expect at least $1,000/year costs of an accountant and fees from your RRSP administrator.

You can avoid all this by investing your RRSP into a public real estate company or mutual fund, of which there are many.

Having your rentals in a corporation can run you into several issues:

1. Refundable Part I tax on investment income in a corporation. Generally, investment income of any type is taxed at the highest possible rate in a corporation.
2. If the main business of your corporation is rental, then the rental income and future capital gain on sale can all be deemed “active business income” and subject to full taxation (instead of capital gains).

As a general rule, rent is not tax-preferred income, like dividends or capital gains. Rental properties are taxed at low rates while you have a large mortgage, but once the mortgage is small, the rent income is fully taxable each year, just like interest.

Therefore, the goal with rentals is usually to keep the mortgage as high as possible and blead out cash. An interest only mortgage is best in most cases, so that you never pay down the mortgage.

If you have the rental in a corporation, the goal is usually to withdraw all the net rental income from your corporation each year in order to avoid the additional refundable tax on investment income.

Because of the refundable tax on investment income and the risk of being declared active business income, the reasons for holding rental properties in a corporation usually relate more to control, liability and legal issues, not to tax issues.


Ed Rempel
11 years ago

Hi Tiggerzzz,

The family trust concept to sprinkle dividends and split other income to kids was commonly used, but has been completely wiped out by the “Kiddie Tax”. Now there are essentially no benefits at all of dividend sprinkling or a family trust until your kids are 18+.

The most effective strategy when you have kids under 18 is probably with the use of an EPSP (Employee Profit Sharing Plan). You can make your kids employees of the corporation and then pay them a profit share in addition to fair pay. They must be legitimate employees, but you can pay them somewhat more than a reasonable amount for work actually done.

Professional advice is required to structure this properly, but an EPSP will have benefits while your kids are under 18, while dividend sprinkling and family trusts are useless until your kids reach 18. The EPSP generally has most of the benefits of family trusts, but in a different way even for kids over 18 and other adult family members.