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Revised proposals to limit income sprinkling

The government also reconfirmed that it will move forward with measures to limit tax deferral opportunities related to passive investments, and details of this plan will be included in Budget 2018. When introduced, the passive investment measures will apply only on a go-forward basis.

The government also reconfirmed that it will not move forward with changes that would limit access to the Lifetime Capital Gains Exemption (LCGEs) to rules or conversion of income to capital gains.

Application of revised income sprinkling rules

Under the current income tax rules, tax on split income (TOSI) applies the highest marginal tax rate (currently 33% for federal tax purposes) to "split income" of an individual under the age of 18 years old. In general, an individual's split income includes certain taxable dividends, taxable capital gains and income from partnerships or trusts.

The new draft measures proposes to extend the application of the TOSI rules to individuals over the age of 17 years old, but only with respect to income derived from a "related business" (i.e., a business whereby a related individual is either actively engaged in the business or owns a significant portion of the equity in the corporation that carries on the business).

The proposed changes, however, will not apply to individual members of a business owner's family who fall into any of the following categories:

  • The business owner's spouse, provided that the owner meaningfully contributed to the business and is 65 years old or older. This reflects the fact that a business can play an important part in supporting its owner in retirement and aligns with the existing pension income splitting rules.
  • Individuals who are 18 years or older who were engaged on a regular, continuous and substantial basis in the activities of the business (i.e., generally an average of at least 20 hours per week) to the business during the year, or during any five previous yearsii. 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.
  • Individuals who are 25 years old or older, who own 10 percent or moreiii of the votes and value of a corporation that earns less than 90 percent of its income from the provision of services and is not a professional corporation (i.e., a corporation that carries on the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor)iv.

Summary

These revised proposed measures may have a significant impact on you, your family and your business. Please contact your Grant Thornton advisor if you would like to discuss these proposals further. We can help you prepare for these changes.

i https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/income-sprinkling.html

ii A business in which an adult individual is actively engaged on a regular, continuous and substantial basis in the activities of the business in the taxation year or in any five prior taxation years of the individual is considered an “excluded business”. An individual will not be subject to the TOSI on amounts received from an “excluded business.”

iii As a transitional measure, taxpayers will have until the end of 2018 to meet the condition of owning at least 10 per cent of the outstanding shares of a corporation in terms of votes and value; this will provide taxpayers a year to organize themselves in a manner that will enable them to meet this requirement.

iv Shares of a corporation whereby an individual who is 25 years or older owns 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation is considered “excluded shares”. An individual will not be subject to the TOSI on amounts received from “excluded shares” owned by the individual.

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