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Finance Minister Releases Income Sprinkling Rules on Eve of Holiday Season

We have now received the revised draft legislation that takes effect in 2018! Tax on Split Income (TOSI) has now been defined for us with very specific outlines on how CRA will interpret and apply the legislation in audit situations. Our Finance Minister did not want backlash this time and has completed his homework before release.

The Senate just before such release sent out a press release of their own.  In this press release the Senate stated “The federal government should scrap or at least delay plans to amend the Income Tax Act as the proposals risk harming the Canadians these changes are meant to help,” To read the report please follow this link https://sencanada.ca/en/newsroom/fairtax-ation/

 

Below is a summary of revised rules which are intended to clarify when a family member has made a significant contribution to the business and would therefore not be caught by these revised rules.

TOSI will not apply to amounts received in a year in the following circumstances:

  1. Income received by a spouse of a business owner when the business owner has made a meaningful contribution to the business and is 65 years or older.
  2. Income received by individuals 18 years of age or older and have made a substantial contribution to the business during the year or during the previous five years. The government has defined that a substantial contribution is when the person has worked at least 20 hours per week in the business during the year. If the business is seasonal then the 20 hours per week is assessed during that seasonal time period.
  3. Income received by individuals 25 years or older who own 10% or more of a corporation. Such ownership represents 10% of the votes and value of the company. Such corporations cannot be professional corporations or corporations where the provision of services represents 90% of its income.
  4. Capital gains derived from qualified small business shares or from qualified farm property or fishing property. Note that the exception does not apply to non-arm’s length dispositions where the vendor is a minor.

There will also be a reasonability test for individuals that do not meet any of the specific exclusions above. This test applies to family members that are 25 years of age or older and is applicable to non-salary payments such as dividends and gains.

If the family member is aged 18 to 24 and does not fall into any of the exceptions above, then any non-salary payments made to them are taxed at the top rates of tax. The only exception would be if such payment was made for contributed capital and the payment was a reasonable rate of return on such capital.

As indicated above these rules take effect January 1, 2018. There is an extension of time for private corporations to restructure the ownership to allow family members to obtain a 10% ownership level. If such restructuring is in place before the end of 2018, then any income received during 2018 would fall into the ownership exclusion test.

Please contact us if you would like to discuss any of these proposed rules and their application to your specific situation.

 

This entry was posted on Thursday, December 14th, 2017 at 11:03 am and is filed under Tax News. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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