Wealth Strategies: Income Splitting - Post TOSI (Tax on Split Income) Revisions

After undergoing recent changes on the taxation of private corporations, the options for income splitting have narrowed greatly. This limits and eliminates many of the ways that small business owners had traditionally split income. This does not mean that they no longer exist, but even more detailed planning and stringent requirements will need to be adhered to.

The eligibility criteria are very much circumstantial and particular, which includes the age of the family members to potentially split income with and the level of their involvement in the business. This definitely compounds the need to consult with a tax advisor in advance to ensure that one is indeed meeting the new criteria, as it is extremely specific.

Under the prior rules and regime on splitting income, the “kiddie tax” was in place to target paying dividends to minor children. Under the new regime rules, it aims to also target adult children and spouse’ and therefore eliminate specific types of tax planning.

The new regime rules have three main exemption categories including “excluded business,” “excluded shares” and “reasonable return.”

Beyond these three options and perhaps the most widely available exception, is allowing a retired business owner who is age 65 or older, to split dividend income with their spouse (or common law spouse), regardless of their age.

Salary paid to family members is still an effective planning tool to facilitate income splitting however, provided the salary is considered “reasonable.”

To fall under the category of “excluded business’ exemption one must ensure that proof is kept and maintained that the family member aged 18 and above and has indeed been working within the business. In order to meet the “actively engaged” test means engaged in regular, continuous, and substantial work in the business (typically working 20 hours per week), but there may be other special circumstances that would still qualify.

Within the “excluded shares” exemption category, family members aged 25 and above that own shares totalling at least 10% of the votes and value of the business are excluded. One could potentially restructure their corporation to meet the exception but would obviously need to consult with several professionals to determine if this plan is feasible. For professional corporations and business’ with at least 90% of business income from provision of services, they would not qualify.

Lastly, under the exemption of “reasonable return” income splitting is permitted if the value of dividends that a family member receives is deemed “reasonable.” There is not a clear distinction under this provision however, it is far more favourable for those age 25 and above as opposed to age 18 – 24. Given the lack of clarity in this area, it will prove more difficult to anticipate CRA’s ruling. Needless to say, consulting with a tax advisor would be crucial.

Income splitting options have not disappeared but certainly not as within reach as they once were. Provided one can incorporate these changes into their business strategy and planning, benefits are still viable and worthwhile.

 

Disclosure: This information has been provided to give general guidance. For advice specific to your situation, you should consult with your accountant or reach out to your Milestone representative for further information.