Upcoming Changes to Income Splitting Using Private Corporations
The tax on split income (“TOSI”) is currently imposed on individuals under age 18 who receive “split income”. Split income (also known as Income Splitting) generally includes dividends and shareholder benefits conferred on an individual from a non-public corporation, and partnership income, trust income, or rental income that is derived from a business owned by a person with whom the individual does not deal at arm’s length. The TOSI is levied at the highest marginal rate—33% for federal purposes. TOSI currently applies only to individuals under 19 years of age but the government proposes to extend the TOSI to certain adults and further expand the types of income to which the TOSI applies.
If the draft legislation announced on July 18, 2017, is enacted as it is currently proposed, the TOSI will be expanded so that it also applies to several more types of income earned from a corporation. The TOSI will also be expanded to apply to certain adult individuals. The TOSI will not apply to income received by adult individuals if the amount of the income is considered reasonable, and this determination is a subjective test.
The implications of these controversial changes are vast. Arguably, this is the biggest change to small business taxation in decades. As tax experts consider how this could affect the compensation arrangements currently in place, they identify numerous situations where it may be difficult to apply the rule, or where the TOSI may apply to genuine transactions.
In his recent article, Kevyn Nightingale, Partner and Business Advisor at MNP, LLP, provides an informative discussion of the proposed income splitting rules and identifies technical issues and limitations.