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Income Sprinkling Rules Simplified
On Wednesday, December 13, 2017, the Department of Finance released draft legislation that intended to clarify aspects of the July 18, 2017 tax proposals relating to income splitting from private corporations that are effective as of January 1, 2018.
While there are still points open to interpretation, this legislation has answered many questions. Further, it was noted that changes to tax rules for passive income earned inside a private corporation will be provided in the 2018 Federal Budget.
Please note that in some cases, December 31, 2017 will be the deadline to split income with family members under current tax rules. To the best of our abilities we have summarized the changes below.
The CRA has made available specific exclusions from the extended “Tax on Split Income” (TOSI) rules. For situations that do not qualify for an exclusion, a general reasonableness test is to be used for any non-wage remuneration (dividends, interest, capital gains, etc.) paid to an individual from a private corporation. If TOSI applies, split income is taxed at the highest marginal tax rate.
Amounts received in a year in the following situations will be excluded from the TOSI rules for specific adult individuals as follows:
Taxpayers aged 25 to 64
The ‘Ownership Exclusion’ applies if all four of the following conditions are met:
- The individual owns 10% or more of the votes and value of the corporation, and
- The corporation is not a professional corporation (i.e., a corporation that carries on the professional practice of a dentist, lawyer, medical doctor, veterinarian or chiropractor); and
- Less than 90% of the corporation’s income is earned from providing services, and
- Does not have income derived, directly or indirectly, from a related business (e.g., a professional corporation pays rent for the building in which the professional business is carried on to a corporation owned by the adult children of the professional).
There is still a measure of ambiguity in regards to how the CRA will define “the provision of services”.
Taxpayers aged 65 and over
If the owner spouse has meaningfully contributed to the business and has reached the age of 65, both the owner and their spouse will meet this exclusion from the TOSI rules.
Taxpayers aged 18 or more
If a taxpayer, during the year or any 5 previous years, worked an average of at least 20 or more hours per week for a business then the individual is considered to be actively engaged on a regular, continuous, and substantial basis. This is the “Excluded Business” rule.
There are other exemptions as well:
- Capital gains arising from the sale of shares, which are Qualified Small Business Corporation shares.
- Income from property received due to the death of the contributor or due to marital breakdown.
For a summary of these tax changes please consider the PWC Tax Insights article found at https://www.pwc.com/ca/en/private-company/pwc-private-business-exchange-blog/income-sprinkling-rules-announced-senate-comments-private-company-tax-proposals.html
For details on the Technical Backgrounder on Measures to Address Income Sprinkling from the Department of Finance please refer to http://www.fin.gc.ca/n17/data/17-124_2-eng.pdf
Stay tuned for more changes and clarifications. If you believe that you or your family are impacted by the above changes, please contact our office at 705-329-7700 or firstname.lastname@example.org.
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