The New Draft Income Splitting / Sprinkling Tax Rules

The Current Rules
The income splitting strategy diverts income from high-income earners in the family to lower income earners in the family through the use of a private corporation. The purpose of this strategy is to reduce the overall tax burden of the family.

To counter this strategy the current rules for tax on split income (TOSI) applies the highest marginal income tax rates (i.e. federally 33%) to the split income of only those individuals under the age of 18. The income items captured by the current rules are:

Taxable dividends;

Taxable capital gains; and

Income from partnership trusts.

The New Draft Rules
The new draft rules are proposed to apply to 2018 and subsequent years, and restrict income splitting for adult individuals. The result is to extend the TOSI rules to individuals over the age of 17 on income from a related business.

A related business is defined as a business that a related individual is actively engaged in or a business where a related individual owns a significant interest.

Split income generally includes dividends and interest paid by a private corporation to an individual from a related business and certain capital gains that are not specifically excluded.
The following are exempt / excluded from the new draft rules:

Salary received by an individual;

Adult individuals: Amounts an individual receives in the taxation year he/she has attained the age of 17, where the individual is engaged in the business on a regular, continuous and substantial basis in the year or any five prior taxation years (e.g. 20 hours per week);

Individuals age 25 or older: Income from taxable capital gains from the disposition of excluded shares or a payment that qualifies as a reasonable return;

Individuals age 18 to 24: return on property contributed in support of a related business that is safe harbor capital return or a reasonable return;

For any individual: taxable capital gains realized on death, or the disposition of qualified farm, fishing property, or qualified small business corporation shares.

 

Definitions

Excluded Shares

Less than 90% of the corporation’s business income earned from services and the corporation is not a professional corporation;

The shares represent at least 10% of the votes/value of the corporation; and

All or substantially all of the income of the corporation is not derived form another related business.

 

Safe Harbour Capital Return

Return on property contributed by the individual in support of the related business provided that such return does not exceed a prescribed capital return determined by a formula.

It is advisable to seek professional advice to understand the tax laws that impact your particular situation, and to guide you through the complexities of Canadian Income taxes.
 
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