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In my previous article about taxation of private corps, we concluded that when money is withdrawn from a private corporation, the net taxation is about the same as if the company was a sole proprietorship.  However, that was assuming that all the of income was withdrawn under the one shareholder/owner.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


  1. Frog of Finance on July 21, 2009 at 11:49 am

    But where is the corporation taking its money? Doesn’t it have to pay taxes on it?

  2. Rob on July 21, 2009 at 12:35 pm

    Great summary! This can also be achieved with a family trust – whereby the family trust allocates the dividends to any of the beneficiaries. This avoids the need for multiple preferred share classes, but does add another layer of administration through the trust.

    The main advantage on a trust is the flexibility in this situation re dividends – and the ability to multiply the capital gains exemption in the case of a sale. You wouldn’t be able to multiple the capital gains exemption with the dividend sprinkling shares as they are nominal value.

    Again – discuss with a professional (CA, lawyer, etc) to determine which approach is best for you, and if the benefits of incorporation outweigh the costs.

  3. FrugalTrader on July 21, 2009 at 12:53 pm

    Frog, yes, the corporation will have to pay taxes on the money received. The savings is when the money is “withdrawn” from the corporation.

  4. tiggerzzz on July 21, 2009 at 1:34 pm

    Timely post !

    Does anyone have any additional info on the Kiddie tax … It is the first time I have heard of it.

    I own two corps… one with a value of ~$750K including the building (bldg cost was 97K but recently appraised for $340)

    2nd corp is a work in progress with negative retained earnings of ~$150K

    I plan to sell both corps with building in a 5-8 yr window if buyers can be found

    I have a spouse and 3 kids (7,10,13) and was planning to set up dividend sprinkling within the next few months.

    How does setting up a family trust take additional advantage in my situation?

    Which should I do?

    The majority of my advisors out there only ever some of the answers… I
    have an excellent CA a decent lawyer and a knowlegable Financial advisor but none can tell me which direction to go 100%

    Thanks !

  5. Steve Zussino on July 21, 2009 at 2:20 pm

    I have a couple of condos that I rent out. Can I create a corporation that runs the condos and in my RRSP and my wife contribute money to the corporation that then pays down the mortgage? The money we contribute to the corporation in our RRSP when we get it back on taxes we can pay down the mortgage even more.

    Does this sound like it would work?

  6. Ms Save Money on July 21, 2009 at 3:03 pm


    You should just follow your gut – weigh your pros and cons. Your financial advisor can only help you with providing the information – but not to tell you what to do.

    Good Luck!

  7. Kirk S. on July 21, 2009 at 4:09 pm

    This is probably more an accounting feature, but I have friends that have a corporation that runs the condos and the profits and liabilities and such. You would then be able to pay dividends (I’d imagine). That said, I’m no accountant.

  8. tiggerzzz on July 21, 2009 at 7:56 pm

    This is the info I rcvd from my CA after he researched it.

    “Paying dividends to minors doesn’t work as a tax planning tool.

    CRA calculates a special ‘Tax on Split Income” on dividends to minors from privately held corporations, separate from the normal tax calculation. This special tax calculation uses the highest marginal tax rates, and does not take into account any personal tax credits.

    For example, if the corp paid a $2,000 dividend to a child under 18, they would owe $617 of tax (even if they had no other income), a tax rate of 31%.

    If you or your spouse received the same dividend, your tax rate would be less than 31%, unless your other income was in excess of $123,000.”

    He is usually bang on with his info and advice and usually researches my questions with CRA before advising me.

    Looks like this option is a no-go until my kids are 18


  9. Ms Save Money on July 21, 2009 at 11:06 pm

    Yes – Tiggerzzz – that is a definite no-go. Doesn’t make sense to pay 31% in tax when you can pay less than that. :)

  10. Brian Poncelet, CFP on July 22, 2009 at 1:51 am

    Hi Ft,

    Don’t you think that my thoughts “Using Universal Life Insurance with Corporations” may be better for growing money tax sheltered and protecting the net worth in this case?

    I have another idea (instead of UL which is using participating Whole Life with paid-up cash values and dividendsyes it is a mouthful!) It is more conservative than the UL using GIC’s. The other idea is using this as a tool for the corporation to finance equipment instead of the local bank. It (whole life) is misunderstood and needs some time to explain.

    I am out of town at the end of July and back mid august drop me a line if you are interested.


  11. Garett on July 22, 2009 at 10:51 am

    Dividend sprinkling is a great strategy, but it does have some traps. You want to look at the long term ramifications. For example, what happens when, some years down the road, your son/daughter or whoever has a successful corporation of their own. You may run into issues with associated and/or related companies, and, for one example, end up sharing the small business deduction limit. Again, it’s a great strategy, but please do consult with a professional before going ahead with this.

  12. frugaldoc on July 22, 2009 at 11:22 am


    Can you please add some explanation to your comment about another idea using the corporation to finance equipment. Your post is cryptic but interesting, so any more details would be great.

  13. Sarlock on July 22, 2009 at 5:56 pm

    Minor children receiving dividends in this manner are subject to the highest tax rate (tax attribution). This was instituted to eliminate the loophole that had existed in filtering dividend income from a family company to minor children to reduce overall taxes.

    My company is owned through a family trust and myself, my wife and our children are the beneficiaries. As such, I do not directly own my company: I am the trustee of the trust that owns it (and as trustee, I control the company, and have wisely chosen myself to run it!). Dividends issued from the corporation flow through to the trust and then I can choose any method of distribution I wish (noting that minors get nailed with the highest tax rate). It works very well and offers a lot of flexibility, but there is more overhead and administrative costs, so there has to be enough corporate income to make it worthwhile.

  14. Ed Rempel on July 23, 2009 at 1:59 am

    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.


  15. Ed Rempel on July 23, 2009 at 2:36 am

    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.


  16. Ed Rempel on July 23, 2009 at 2:49 am

    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.


  17. Charles on July 23, 2009 at 7:16 am

    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:

  18. Brian Poncelet,CFP on July 23, 2009 at 8:51 pm

    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)


  19. Brian Poncelet,CFP on July 23, 2009 at 11:37 pm


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

    He covers a number of points about life insurance.


  20. Ed Rempel on July 26, 2009 at 10:08 pm

    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.


  21. Ed Rempel on July 26, 2009 at 10:08 pm

    Hi Charles,

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


  22. Charles on July 27, 2009 at 4:18 am

    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.

  23. christina on March 21, 2016 at 1:38 pm

    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”

    • FrugalTrader on March 21, 2016 at 2:17 pm

      Hi Christina, my understanding is that if you declare a dividend, then the shareholder is entitled to receive it. In addition, you’ll need to submit a T5 summary to CRA in February, which will indicate that you have issued dividends to that particular shareholder, for which they would be on the hook for any taxes on those dividends.

Leave a Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.