Income sprinkling is a strategy used by higher income small business owners to redirect their income to other, lower income family members, through payment of dividends. As these dividends are discretionary and can e paid in any amount and year to specific family members depending on their income and tax brackets.
What are the changes are being made to the TOSI (tax on split income) rules to prevent income sprinkling
Finance has proposed new changes to the income sprinkling rules so any amount received by way of dividends directly or indirectly from a related business by an adult individual from a related business. A related business is where an individual is either actively engaged or owns significant portion of the equity in the corporation that carries on business.
Exclusions to the income sprinkling rules
Finance has introduced “bright line” test that exclude certain specified individual from income sprinkling rules. Family members who are now excluded from the income sprinkling rules are:
A business owners’ spouse, provided that the owner meaningfully contributed to the business and is aged 65 or over
Adult aged 18 or over who were engaged on a regular, continuous and substantial basis in the activities of the business( generally an average of at least 20 hours per week) during the year or during any five previous years
Adult aged 25 or over who owns 10% or more of the votes and value of a corporation that earns less than 90% of its income from providing services (and is not a professional corporation such as an accountant, lawyer, doctor or dentist)
Individual who realize taxable capital gains from the disposition of qualified small business corporation shares or qualified farm or fishing property, provided that they would not be subject to the highest marginal tax rate on the gains under existing rules?
If you are 25 and over, you can also be exempt from TOSI rules if you hold “excluded shares”. These are shares of provide corporation which give you 10 percent of both the votes and value. (these exception does not apply to professional corporation i.e Doctors, lawyers and an accountants) however, you are eligible to “reasonable return” on your shares .
To ensure that business with family members who meaningfully contributed will not be affected, Finance has clarified the “reasonableness test”. The tests consider whether these individual made contributions to the business through any combination of the following:
Any other relevant factors
However, if you are between 18 and 24, the only factor taken into consideration in determining the reasonable return are capital contribution made with “arm’s – length capital”. Other than that, these individuals will only be permitted to earn a “safe harbour capital return” i.e return on his/her capital contribution that is either equal to or less than the prescribed rate – which is currently one percent.
Do the proposed TOSI rules apply to salaries?
No. Salaries must be reasonable to be deductible by the corporation.
How you can demonstrate to the CRA that you’ve worked an average of at least 20 hourse per week during the part of the year that business operates?
The CRA issued some guidance saying that records such as timesheets, schedules or logbooks retained by either the employee or the business will be sufficient to establish the number of hours the individual worked in a given year. The CRA would also consider information contained in payroll records that supports the number of hours the individual worked.
The information provided on this page is intended to provide general information. It is not a tax advice and your personal situation may be different. Jawed Asrani CPA, CGA and Asrani CPA Professional Corporation will not be held liable for any problems that arise from the usage of the information provided in this page.