On December 13, 2017, the Department of Finance gave Canadian taxpayers some additional information regarding the proposed changes to the tax on split income (“TOSI”) rules regarding certain adult shareholders of private corporations. Intended to be a simplification and a more targeted approach than the original proposals introduced over the summer, these revisions are as follows:
- Spouses aged 65 or over will be excluded from the rules, provided that the owner “meaningfully contributed” to the business.
- Owners aged 18 or over who contribute an average of at least 20 hours a week to the business will be excluded from the TOSI rules.
- Adults 25 or over who own 10 percent (of votes and value) or more of a corporation are exempt from the rules. However, where that corporation earns 10% or more from the provision of services or is a professional corporation, this exemption is not available.
- Individuals who use their lifetime capital gains exemption on qualifying small business corporation shares or farm or fishing property are excluded if they would not have otherwise been subject to the highest marginal rate of tax under current legislation.
- Adults aged 18 to 24 will be exempt if they have contributed their own capital and the dividend paid passes the reasonableness test.
- Adult shareholders 25 years of age or older who do not meet any of the above exclusions are subject to the reasonableness test to determine whether TOSI applies.
Given the above changes, the Department of Finance states “the vast majority of private corporations will not be impacted by these proposals.” However, we point out that professional and service corporations continue to be the seemingly hardest hit by the rule changes. As well, although the government touts the latest changes as “clear, bright-line tests”, we challenge that much subjectivity still remains regarding the definitions of “meaningful contributions” or the “reasonableness test”. A lot of “grey” areas may be left up to your local CRA auditor to decide upon.
The revised proposals are projected to be effective for 2018 and subsequent taxation years and the government intends to legislate these measures as a part of the upcoming budget process in early 2018. As a result, it’s a good idea to discuss with your tax advisor how these changes may apply to you and what actions, if any, should be taken to minimize the impact of the new rules.
On the other side of the legislative branch of our Parliament, the Standing Senate Committee on National Finance also released its report entitled “Fair, Simple and Competitive Taxation: The Way Forward for Canada.” This report was the conclusion of two months of meetings, submission reviews and interviews of Canadians from all across our country. In their executive summary, the Committee states a few very direct recommendations:
- “…most witnesses told our committee that the proposed changes should be withdrawn in their entirety. We are inclined to agree. We are not convinced that the government has made a good case for its proposals.”
- “We also believe that we need an independent comprehensive review of our tax system to ensure that it is not overly complex, maintains our economic competitiveness and is fair to all Canadians.”
- “Canada needs a strategy to ensure our tax system encourages, rather than inhibits, innovation, entrepreneurship and economic growth.”
The Committee’s seemingly direct challenge to our Members of Parliament is refreshing to see. The principles they point the reader to in their report seem like valuable and worthwhile goals to pursue. However, it remains to be seen whether their report will influence the path these proposals take through our Parliament.
For all his work in the above-mentioned areas, our Finance Minister, Bill Morneau has recently been named the Canadian Press’s “business newsmaker of the year”. Let’s just hope that he doesn’t go for the repeat in 2018!
Link to Department of Finance – Backgrounder on Simplified Measures to Address Income Sprinkling
Link to Standing Senate Committee on National Finance – Fair, Simple and Competitive Taxation: The Way Forward for Canada