On December 13, 2017, the Government released its updated proposed rules on Income Sprinkling (also known as Income Splitting). These rules were first proposed on July 18, 2017, effective in 2018, and operated in a manner that would tax the recipient of “split income” (e.g. dividends from a family-owned corporation that carries on a business in which a related individual is active) at the highest marginal tax rate if the income was not considered “reasonable”. Then on October 16, 2017, the Government announced that it would update these rules to reduce their complexity and the associated compliance burden.
Generally, Income Sprinkling refers to the transfer of income between family members to effect a lower overall tax rate compared to if the income was earned directly by one family member (who would typically be in a higher tax bracket). The Government has stated that these updated proposed rules on Income Sprinkling should not affect family members who make meaningful contributions to a family business.
The updated rules now include several automatic “bright-line” tests that should exclude certain family members from their application. These exclusions are summarized below:
Individuals seeking to rely on this exclusion will be granted some transitional relief in that they will have until the end of 2018 to meet the 10% ownership requirement.
Adults aged 25 or over are also exempt from the new rules in regards to a “reasonable return” that they receive based on work performed, property contributed, risks assumed, historical payments and any other relevant factors.
Canada Revenue Agency has released guidance on the updated Income Sprinkling rules. Please find their Frequently asked questions – Income sprinkling and Guidance on the application of the split income rules for adults documents by clicking here.
Also of note, the updated rules no longer apply to second-generation income (i.e. income earned on split income) nor consider aunts, uncles, nieces and nephews as related individuals.