In general terms, income sprinkling occurs where a private corporation pays out dividends to shareholders who are not necessarily involved in the business of the corporation, or where an individual receives income from the provision of goods or services through a trust or partnership to a “related business” carried on by a related person. The proposals will take effect retroactive to January 1, 2018, even though they will not be passed by Parliament for some time (and conceivably could be held up by the Senate). However, the proposals were amended significantly on December 13, 2017; the amendments are meant to simplify and improve the rules.
Under the income tax laws before 2018, a tax on split income (“TOSI”) often applies to the above types of income, but only to children who are under the age of 18 at year-end. The TOSI is a flat tax equal to the highest personal rate of tax, which obviously makes income splitting undesirable when it applies. The July 18, 2017 draft legislation proposed to extend the TOSI to private corporation dividends and the other types of income received by adults in many situations.
The December 13, 2017 changes simplify the original proposals. In general terms, the changes provide that the TOSI will not apply in the following circumstances:
- It will generally not apply to income received from an adult directly or indirectly from an “excluded business”, generally meaning a business in which the adult is engaged on a “regular, continuous and substantial” basis, either in the relevant taxation year or any five previous taxation years;
- It will not apply to adults who are 25 or older by year-end, who receive income from an “excluded share” of a corporation, generally meaning the adult has a significant equity investment in the corporation (10% or more of the shares on a value and votes basis) that earns less than 90% of its income from the provision of services, where the corporation is not a professional corporation and does not derive its income directly or indirectly from a related business;
- It generally will not apply to a spouse of the owner of the related business if the owner significantly contributed to the business and is age 65 or over by the end of the year; and
- It will not apply to capital gains from the disposition of qualified farm or fishing property of the individual, or of qualified small business corporation shares that are eligible for the capital gains exemption, regardless of whether the exemption was claimed (except where the sale is by a minor to a non-arm’s length person – this rule has been in place for several years).
As noted, the proposals take effect beginning on January 1, 2018. In this regard, one of the main criticisms regarding the proposals has been the lack of adequate time to restructure business affairs to take into account the proposals. Nonetheless, the January 1, 2018 start date appears to be set.