We’ve already discussed the Liberal’s tax changes to income sprinkling/Tax On Split Income (TOSI) quite a few times. Well, on December 13th, 2017, the government released yet another new and improved version of the law, so we’re going to talk about it again.
First the Good News. For business owners who are 65 and over, new TOSI rules do not apply to you nor to your spouse, regardless of their age. This is also true if your spouse has died. You may simply carry on as before. And when your majority-aged children or grandchildren inherit their shares, it appears the shares will continue to be excluded from TOSI changes.
Some of the biggest complaints against earlier versions of the TOSI changes were the complexity, lack of clarity, and that the changes had an unnecessary negative impact on many, many business owners. This new version was supposed to address these issues. Unfortunately, it doesn’t seem to eliminate complexity or make the rules more clear, but the core changes do seem to help better target who the changes will affect. In general, the key new rules seem to mostly outline who is exempt from the TOSI changes.
Share Test. One of the new ways to be excluded from the income sprinkling/tax on split income changes is through the Share Ownership Test. In order to qualify for this exclusion, you must be at least 25 years old and own 10% of the outstanding shares of the corporation in terms of both votes and value.
For many Canadian private corporations, this may seem perfect to them. Even if not every family member is a shareholder, the Liberals have given small businesses until the end of December 2018 to get everything in order. However, there are rules on the corporation as well.
Your corporation must earn at least 10% of its income from products, and it may not be a professional corporation. Finally, its income may not be substantially derived from a related business. At the moment, there is no word on what is specifically considered a product vs a service, nor has professional corporation been clearly defined.
Labour Test. Another way to be excluded from the TOSI changes is to have clearly defined hours worked for your family business. A person must work over 20 hours per week for at least five previous (not necessarily consecutive) years to meet this exemption.
While the above two exemptions are fairly straightforward, other tests, including a safe harbour test and reasonable return test, have also been created. As it stands, the safe harbour test appears to extremely unhelpful for the vast majority of Canadians, and the reasonable return test is so vague that it’s impossible to yet say whether it’s helpful or not. But as always, we’ll be keeping our eye on changes, and we’ll let you know what to expect as the TOSI changes come into full effect.
The professional estate advisors at MacMillan Estate Planning constantly strive to stay on the forefront of tax planning. With so many political changes both in Canada, the US, and UK, we’ve been working hard to stay on top of everything that may affect our clients. To learn more about how the changes at home and abroad could affect your tax plan, contact the experts at MacMillan Estate Planning today. Or, if you haven’t worked with us before, we welcome you to schedule your free consultation.