Department of Finance Releases Revised Rules on Tax on Split Income
On December 13, 2017, the Department of Finance released revised draft legislation addressing the tax on split income (TOSI) rules previously released on July 18, 2017. The changes to the TOSI rules remain one of the July 18th measures the Department of Finance will be moving forward with. Under the current TOSI legislation, dividends and other forms of passive income paid to minors are subject to taxation at the top rate.
Effective January 1, 2018, the proposed TOSI rules will apply to any dividends received by a specified individual on shares of a corporation (other than shares of a publicly traded corporation) with the following exceptions:
- An amount received by a specified individual whose spouse or common-law partner is the founder of the corporation, and aged 65 and older, or deceased;
- Income earned by individuals aged 18 and over who worked in the business for an average of at least 20 hours per week during the year or any five previous years. Hours will be prorated for seasonal businesses;
- An individual aged 25 and over who owns at least 10 per cent of the voting rights and value of the corporation (except for professional corporations and service businesses from which more than 90% of its business income in the last taxation year was from the provision of services);
- An individual aged 18 to 24 having contributed capital to the business, providing the amount received represents a return on contributed capital not exceeding the prescribed rate (currently 1%);
- An individual that realizes a capital gain on shares that qualify for the lifetime capital gains exemption (i.e. qualified small business corporation shares or qualified farm or fishing property). This increases the importance for a business to satisfy the active business asset test which determines whether a share is a qualified small business corporation share or not;
- Income received on property inherited as a consequence of the death of another person. The specified individual is put in the same place as the deceased owner. If the former owner would have received the income free of the TOSI rules, then the TOSI rules will not apply to the individual.
Individuals who earn income not covered by the exceptions mentioned above will be subject to the new proposed income splitting rules on amounts derived to the extent that the amounts exceed a “reasonable return”. The CRA will apply a reasonableness test which has not yet been clearly defined. This test will take into consideration the relative contributions made to the business by the individual and the persons related to him or her.
For assistance navigating these proposed rules, please contact your Crowe BGK trusted advisor.
About the Authors:
Jennifer Warner, LL.B., LL.M Tax, is a Tax Manager at Crowe BGK.
Connect with her: [email protected]
Hugo Chalifour, CPA, CA., is a Tax Specialist at Crowe BGK
Connect with him: [email protected]