Today the Department of Finance released its much awaited simplified proposals with respect to the tax on split income (“TOSI”) rules which were originally released by Finance on July 18, 2017.
The new proposals will be effective for 2018 and subsequent taxation years.
The simplified proposals released today include what Finance refers to as “bright-line” tests which will automatically exclude certain individuals from being subject to TOSI rules.
Circumstances under which the TOSI rules will not apply include the following:
A specified adult individual will not be subject to the TOSI rules on amounts received from an “excluded business”. An excluded business is a business in which the individual is actively engaged on a regular, continuous and substantial basis in the taxation year of the individual in which an amount is received or in any five previous taxation years.
An individual who works an average of 20 hours per week will be deemed to be actively engaged on a regular, continuous and substantial basis for the year.
The TOSI rules will not apply to specified adult individuals over the age of 24 years in respect of income received from “excluded shares” owned by the individual. This exclusion from the TOSI rules will apply to income received from a share (including from the disposition of the share) if the following conditions are met:
- the individual has attained the age of 25 years in or before the year;
- the individual owns at least ten per cent of the outstanding shares of a corporation in terms of votes and value; and
- the corporation meets the following conditions;
- it earns less than 90 per cent of its income from the provision of services
- it 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); and
- all or substantially all of its income is not derived from a related business in respect of the specified individual. This is intended to prevent a service business from inappropriately accessing this exclusion by interposing a non-service entity between it and the intended recipient of the income (e.g., a professional corporation pays rent for the building in which the professional business is carried on to a corporation owned by the adult children of the professional).
For 2018, taxpayers seeking to rely on this exclusion will have until the end of 2018 to meet the condition of owning at least ten per cent of the outstanding shares of a corporation in terms of votes and value.
Retirement and inherited property
The TOSI rules will not apply to income received by an individual from a related business if the individual’s spouse made the contributions to the business and has attained the age of 65 years in or before the year the amounts are received.
Special rules will apply in respect of a deceased individual, so that the surviving spouse continues to benefit from the contributions made by the deceased individual.
New rules for inherited property will apply to people who have attained the age of 18 and not just those whose spouses have attained the age of 65. For the purpose of applying the exclusions from the TOSI rules in respect of income from inherited property, the person inheriting the property will generally not face a less favourable treatment than the deceased.
Lifetime capital gains exemption (“LCGE”)
The TOSI rules will not apply to taxable capital gains from the disposition of property that can qualify for the LCGE.
Some of the other changes Finance made to the July 18, 2017 proposals are as follows:
- The July 18, 2017 proposed measures to apply the TOSI rules to compound income will not proceed.
- The July 18, 2017 proposals had included amendments to extend the application of subsections 120.4(4) and (5) of the Income Tax Act (which currently apply to minors and effectively deem twice the amount of a taxable capital gain to be a dividend in certain circumstances) to specified adult individuals. These amendments will not move forward. Furthermore, it is proposed that the existing provision be modified so that it will not apply to a minor in circumstances in which a capital gain arises as a consequence of that person’s death.
- The class of related individuals for the purposes of the TOSI rules will not be extended to aunts, uncles, nieces and nephews.
- Income derived from property acquired as a result of the breakdown of marriage or common-law partnership will be exempted from the application of the TOSI rules.
- Generally, individuals aged 18 to 24 will be permitted a prescribed rate of return on capital contributed to a related business. In certain cases, however, such as where the individual earned the capital contributed from an unrelated business, the individual will be permitted a reasonable return on the contribution.
For a more detailed review of the proposals released by Finance today, click on the link below:
Canada Revenue Agency (“CRA”) also released guidance today on the application of the TOSI rules. Please click on the link below if you are interested in reading the guidance released by CRA: