In December 2017, the Government announced Simplified Measures to Address Income Sprinkling. Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures received Royal Assent on June 21, 2018 implemented these Measures, effective as of January 1, 2018.
This legislation extended the tax on split income (TOSI) rules to certain adult individuals, but generally only to cases where the amount is unreasonable under the circumstances.
The tax on split income (TOSI) rules is a set of rules that require you or your family members to pay tax at the top federal and provincial income tax rates on certain types of income from Canadian-controlled private corporations (CCPCs).
The changes exclude individual members of a business owner's family who fall into any of the following categories:
- The business owner's spouse/common-law partner, provided that the owner meaningfully contributed to the business and is aged 65 or over. In recognition of the special challenges associated with planning for retirement and managing retirement income, the approach to income sprinkling will be better aligned with the existing pension income splitting rules. This also reflects the fact that a business can play an important part in supporting its owner in retirement.
- Adults aged 18 or over who have made a substantial labour contribution (generally an average of at least 20 hours per week) to the business during the year, or during any five previous years. For businesses with seasonal operations, such as may be the case with farms and fisheries, the labour contribution requirement will be applied for the part of the year in which the business operates.
- Adults aged 25 or over who own 10% or more of a corporation that earns less than 90% of its income from the provision of services and is not a professional corporation.
- Individuals who receive capital gains from qualified small business corporation shares and qualified farm or fishing property, if they would not be subject to the highest marginal tax rate on the gains under existing rules.
Individuals aged 25 or over who do not meet any of the exclusions described above are subject to a reasonableness test to determine how much income, if any, would be subject to the highest marginal tax rate. In certain cases, adults aged 18 to 24 who have contributed to a family business with their own capital will be able to use the reasonableness test on the related income.