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	Supreme Court rules in favor of income splitters.       Says taxpayer can reduce tax bill by paying dividends to family            ~ by Rob Carrick - Investment Reporter ~  The Supreme Court of Canada has made life easier for the many people who reduce their tax bill with an income-splitting technique in which they pay dividends to spouses and children.  The high court ruled this week in the long running case of Melville Neuman, a Winnipeg lawyer who setup an investment company with shares owned by himself and his wife, Ruby. The court said Mr. Neuman may channel income from the company to his wife in the form of dividends.  Revenue Canada twice tried to block Mr. Neuman’s use of this income-splitting technique and lost. The Federal Court of Appeal ruled in the departments favor in August 1996, and the matter was then appealed to the Supreme Court.  Gena Katz, a senior principal with Ernst & Young, said the dividend strategy was standard tax advice for many years. After the 1996 ruling, however, clients were advised to use it carefully and to ensure that any shareholder who received dividends actually made a contribution to the running of the company.  Ms. Katz said the Supreme Court ruling means that such conditions are unnecessary in the use of this kind of income-splitting.  “Now, people don't have to go through hoops to legitimize this. That's what this decision is telling us,” Ms. Katz said.  However, it is still possible that the federal Finance Department will take action through new legislation to either limit or stop altogether the paying of dividends to split income.  A department official said the Supreme Court ruling is being studied in particular because it was made in the context of tax regulations in place in 1982. Since then, he said, several measures have been introduced that may effect the ability of taxpayers to spit income through dividend payments.  “We'll have to spend more time looking at this to determine what we need to do, if anything,” the official said.  Revenue Canada says it doesn't know how many people are using the payment of dividends to split income and therefore reduce their tax bills. However, MS. Katz said its very common among people who own small business corporations and have families.  “It can really be effective in terms of reducing overall family tax burdens,” she said, noting that people can receive up to $27,000 in dividends from a Canadian company tax-free if they have no other source of income.  Mr. Neuman caught Revenue Canada's eye after his wife was paid dividends on shares she alone held in 1982. Both he and his wife owned shares in the company, but she was not active in the running of the operation.  Revenue Canada argued that Mr. Neuman should have to pay tax on the dividends paid to his wife because the money would have been taxable if he had received it himself.  However, the Supreme Court ruled that the anti-avoidance provisions cited by the department did not apply to dividends received by a shareholder.  Ms. Katz said income-splitting arrangements prior to the Neuman case were often setup so that they appeared to be for business reasons.  “But he was pretty blatant in saying, ‘I’m purely doing this for income splitting,’” she said.  The situation was further complicated by the fact that the Supreme Court, in a different situation known as the McClurg case, had ruled that income splitting through dividend payments was legitimate.  However, in that ruling, the chief justice of the time, Brian Dickson, said the legitimacy of the strategy might depend on whether the person who received the dividend contributed to the operation of the company.
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