On December 13, 2017, the Department of Finance released revised draft legislation which simplifies the income sprinkling proposals first announced on July 18, 2017. The legislation will likely be enacted as part of the 2018 Budget process, but is intended to apply as of January 1, 2018.
Highlights of the revised draft legislation are as follows:
Tax on split income
The tax on split income (TOSI) will be extended to individuals over 18 (who are “specified individuals”) on amounts that are received directly or indirectly, whether in the form of dividends, trust distributions, partnership distributions or certain capital gains derived from a business in which a related individual is actively engaged or is a significant equity owner.
Income from excluded businesses exempted from TOSI
Amounts derived from excluded businesses are exempted from TOSI. An excluded business is a business in which the specified individual contributes labour on a regular, continuous and substantial basis (at least 20 hours per week) during the year or in any five previous years (need not be consecutive). For businesses with seasonal operations, the labour requirement will be for the part of the year in which the business operates. If the 20 hour per week test is not met, it will be a question of fact as to whether the specified individual contributed labour on a regular, continuous and substantial basis.
If none of the exclusions apply, specified individuals aged 25 and older will be subject to a reasonableness test to determine how much income should be subject to TOSI. Reasonableness will be determined based on a number of factors, including labour contribution, capital contribution, risks assumed, and any other relevant factors. The CRA has also released a list of criteria it will consider in assessing reasonableness.
Specified individuals over age 24
For specified individuals over age 24, TOSI will not apply to income derived from excluded shares. To qualify, the individual must own shares representing at least 10 per cent of the votes and value of the corporation, and the corporation must meet one of the following conditions: (i) it must earn less than 90 per cent of its income from the provisions of services; (ii) it must not be a professional corporation; and (iii) no more than 10 per cent of its income can be derived directly or indirectly from related businesses. The condition that the specified individual own shares having at least 10 per cent of the votes and value must be met by the end of 2018. Specified individuals under age 25 who inherit shares that qualified as excluded shares to the deceased will benefit from the excluded share exemption.
TOSI and spouses
TOSI will not apply to dividends paid to a business owner’s spouse if the spouse contributed to the business in an important way and has reached age 65 (with relieving rules applicable where the contributing business owner dies before age 65). This is somewhat consistent with the existing pension income splitting rules.
Capital gains exemption
Taxable capital gains arising from the disposition of property that would be eligible for the lifetime capital gains exemption will be excluded from TOSI. These rules do not apply to non-arm’s length dispositions of property by individuals under age 18, or by trusts for the benefit of individuals under age 18.
Passive investment income
The government also reconfirmed its commitment to introducing the proposed passive investment income rules to limit tax deferral opportunities for private corporations in the 2018 Federal Budget.
Please contact your Lipton advisor if you would like to discuss these proposed changes further.