For 2018, the Federal Government of Canada implemented new tax on split income (TOSI) rules to target the splitting of income earned by private corporations with family members, usually through dividends. Generally, where the family member receiving the dividend has not made a sufficient contribution to the business, the dividend would be taxed at the highest marginal tax rate.
However, there are situations where TOSI would not apply. In general terms, here are some the exclusions to TOSI:
– The individual is age 18 or older and has worked in the business for at least an average of 20 hours per week in the current year, or for at least 5 prior years.
– The individual is age 18 to 24 and the payment received represents a return (of up to the prescribed rate) on the fair market value of the property contributed by the individual. The property of the individual cannot be borrowed under a loan or transferred from a related person.
– The individual is age 25 or over and directly owns at least 10% of the votes and value of the shares of a corporation. The corporation must earn less than 90% of its business income from the provision of services and the corporation cannot be a professional corporation. Also, all or substantially all of the corporation’s income cannot be derived from a related business.
– The individual is age 25 or over and the payment received represents a reasonable return based on factors such as work performed, property contributed, risks assumed and other relevant factors.
– The spouse of the individual who contributed to the business where the contributing individual is 65 or over.
Business owners should determine whether they meet any of the TOSI exclusions and, if not, whether they can structure their corporation so that an exclusion would apply.
If you have any questions our tax team will be happy to help. Call or email Ann 204-977-3879, firstname.lastname@example.org or Ken 204-957-8205, email@example.com or Garry 204-977-3520, firstname.lastname@example.org.