The government is proposing a review of tax planning strategies in three areas:

  • Income sprinkling using private corporations
  • Converting a private corporation’s income into capital gains
  • Holding a passive investment portfolio inside a private corporation


Income sprinkling using Private Corporations


Income sprinkling, also known as income splitting or shifting, generally occurs when income that would otherwise be earned by a high tax rate family member is taxed in the hands of family members who are taxed at lower marginal rates of tax.  The income sprinkling is often achieved by the use of a private corporation and has, until recently, been a perfectly legal and acceptable tax planning strategy.

The Income Tax Act presently contains rules which are aimed at preventing income sprinkling in certain circumstances – attribution rules and the kiddie tax rules (tax on split income, or TOSI).

Expanding the tax on split income (TOSI) rules:

Existing rules

  • Prevent transfer of certain types of income from high-income earning individuals to their children under 18 by taxing it at the top federal income tax rate.
  • Types of income
  • Dividends received from a private corporation of a related individual
  • Income from a partnership or trust derived from a business or rental activity of a related individual.
  • Presently do not apply not adult children.
  • Presently do not apply to wages and salaries (except for a reasonableness test).


Extend the TOSI rules to apply to any Canadian resident individual, regardless of age, to the extent that the split income is determined to be unreasonable.

  • Extend the meaning of a specified individual to include adults (18 and over).
  • Creates two categories of specified individuals (SI): minor SI’s and adult SI’s. The distinction between minors and adults will be relevant in applying a reasonableness test to determine whether the TOSI rules would apply to an adult SI.

Reasonableness Test

  • Subject the adult individuals’ split income to a reasonableness test that considers the individual’s labour and capital contributions to the corporation as well as previous dividends and remuneration received.
  • The test would be subject to stricter tests for individuals 18-24 years of age.

Labour Contributions - are they actively engaged on a regular and continuous and substantial basis in the activities of the business – for those over 25 years of age it will be sufficient to show the specified individual was involved in the business.

Capital Contributions - reasonableness test for SI’s between 18-24 will be set at a legislatively prescribed maximum in respect of an allowable return on assets contributed by the individual in support of the business.

For those SI’s over 24, the reasonableness test will consider the extent that the individual contributed assets, or assumed risk, in support of the business and will consider all previous amounts paid or payable to the individual in respect of the business.

If the amount is determined not to be reasonable then the top marginal tax rate will apply to the amount.

New definition of “connected individual” – proposed as a means of determining whether an adult specified individual’s income from a corporation (or trust of a partnership in certain circumstances) is to be treated as split income.

Proposals are to also expand TOSI to include:

  • Income from certain debt obligations,
  • Capital gains from the sale of shares the income from which is subject to TOSI, and
  • Compound income on property that is the proceeds from income previously subject to the TOIS rules or the income attribution rules (this will only apply to individuals under the age of 24.

The above is proposed to be effective after 2017.