When setting up a corporation, what are the benefits of a shareholder spouse?
Corporations are owned by shareholders. Shareholders buy and own shares of the corporation and are on record as the legal owners of the business. Dividends can only be paid to shareholders.
Dividends for a shareholder spouse
If you have a corporation, the benefit of adding your spouse as a shareholder is that you can split income by paying both spouses a dividend. A dividend is a way owners pay themselves — it is typically a distribution of profit.
A person must be a shareholder if they are going to be paid a dividend.
Income splitting with a spouse
Often one spouse earns a much higher income per year than the other and is therefore in a higher tax bracket. In Canada, the more income you earn, the higher tax rate you pay. Here's a list of Alberta Tax Brackets. Income splitting is when the higher-earning spouse transfers some of their taxable income over to the spouse in the lower tax bracket, which saves tax dollars.
For example: Joan is a health professional earning $200,000 annually and is married to Tim, who earns $75,000 as a teacher. If Tim is a Class B shareholder of Joan's corporation, Joan could pay Tim a $20,000 dividend, which would reduce Joan's income to $180,000 and increase Tim's to $95,000. Referring to the tax brackets document, Tim's $20,000 dividend would fall into the $48,000 to $97,000 tax bracket, which is 22.18% for dividends. Joan is in the $160,000 to $213,000 tax bracket, which is 35.41%. By moving the $20,000, Tim and Joan are saving 13.23% (or 35.41%-22.18%) in taxes. This amounts to $2,646 (13.23% x $20,000).
In this scenario, income splitting saved Tim and Joan $2,646. There are plenty of rules around this, as people often abuse it, so be careful and consult your accountant for what is a safe and reasonable amount to allocate to your spouse in dividends.
Income splitting can also be achieved with wages.
Share classes for spouse shareholders
Shares must be of a specific "share class." Class A voting common shares is one class of shares, and Class B voting common shares is another. You can also have Class C non-voting shares and as many classes as you'd like. Shareholders are usually issued share certificates, which are kept in the minute books.
Share classes are set up in your by-laws by your lawyer. If you incorporated without the help of a lawyer, you would be set up with a standard list of share classes (but chances are, shares were never issued and shareholders were not set up).
Other benefits of a shareholder spouse
Being a shareholder doesn't give you the rights to do banking, or make legal changes to the corporation. Only directors can do this. Think about shareholders of Disney; they can't conduct business and banking on behalf of Disney just because they are a shareholder.
A director doesn't need to be a shareholder, and not all shareholders are directors.
If you did make your spouse a shareholder and a director, they would be able to keep the business running if something happened to you, without the need to go through the courts.