Most Canadians, and no doubt all small business owners, have heard a lot over the past few months about income sprinkling. On December 12, 2017, the Department of Finance released its final proposals concerning this issue.
Here is what you need to know:
What it is not
- The proposed new measures are not directed at wages or salaries paid to family members. These amounts may be paid, and deducted by the business, if they are a reasonable business expense.
What it is
- Certain types of income, most often dividends, may be considered "split income" and subject to a Tax on Split Income - or TOSI.
- If dividend income is split income, it will be taxed at the highest marginal rate - 48% in Alberta. The only credit allowed against this income is the Dividend Tax Rate, and the payer and recipient are jointly liable for any tax owing.
- TOSI has applied to minor children for some time (known as the "kiddie tax), but the new proposals will affect some adults as well.
Who is affected?
- Family shareholders, 18 and over, may now be subject to TOSI in certain situations, but there are exclusions, or "off-ramps" to the TOSI rules:
- If the shareholder has been active in the business on a regular and continuous basis in the year, or any five prior years (these need not be consecutive). CRA defines this as working at least 20 hours per week.
- If the shareholder is over 24, and owns more than 10% of the voting and value shares of the corporation, and less than 90% of the corporation's business income was from the provision of services (in other words, more than 10% of the revenue is from the sale of goods), and the corporation is not a Professional Corporation (doctor, dentist, veterinarian, lawyer, accountant or chiropractor).
- If a shareholder has reached the age of 65, and would not be subject to TOSI, income paid to his or her spouse will not be subject to TOSI.
- If any one of the above conditions are met, any amount of dividends may be paid, and will not be subject to TOSI.
- If none of the above exclusions are met, dividends paid to a family member must be "reasonable" to be exempt from the TOSI rules. Criteria used to determine what is "reasonable" include:
- The work performed in the business.
- The capital contributed to the business.
- The risk assumed for the business.
The new rules apply to the 2018 and subsequent years. Canada Revenue Agency has said it will update the personal tax form for the 2018 tax returns, and will begin to assess taxpayers on this basis in 2019 for the 2018 tax year.
The proposed legislation changes the landscape for some business owners. We can help you understand how they will apply to your specific situation and develop strategies that may mitigate the effect on your family's tax bill.
Let us know if you have any questions, we are here to help!