Canadian Government Announces Revised Income Splitting Rules
December 19, 2017
Last week, Canada’s Department of Finance released revised draft legislation, accompanied by a guidance document, intended to simplify the income sprinkling proposals initially introduced in July 2017. Concurrently, the Canada Revenue Agency (CRA) provided its own guidance on how it plans to implement and enforce the newly revised rules. The new legislation will apply as of January 1, 2018.
As we previously blogged about, the original proposals were met with opposition and outrage from Canadian business owners, and the government launched a 75-day consultation period in response. That consultation period ended in early October, with more than 21,000 submissions sent in. Following the consultation, Finance Minister Bill Morneau stated that the government’s original proposal would be “significantly watered down”.
The newly released revised draft legislation is intended to reflect this and to address some of the concerns raised during this consultation period, including unintended tax consequences on intergenerational business succession.
What are the New Revisions?
The general scheme of the draft legislative proposals first introduced in July 2017 has been largely maintained, with the newly introduced revisions intended to simplify the application of those proposals.
- Specified adult individuals, including those aged 18-24 who contribute labour to a related business on a regular, consistent and substantial basis will be excluded from the application of the tax on split income (TOSI);
- Specified adult individuals over the age of 24 who have a significant equity investment in a corporation (other than a professional corporation, or one which carries on a services business) will be excluded from the application of the TOSI;
- Changes to how capital gains are treated to ensure that the TOSI rules do not limit access to the lifetime capital gains exemption (LCGE);
- Simplification of the “reasonableness test”; and
- Relief for spouses that is better aligned with pension income splitting rules;
Additional changes intended to simplify application of the TOSI rules and to address possible unintended consequences of the original proposals include:
- The original proposals to apply the TOSI to compound income will not be carried out;
- Suggested amendments to extend the application of ss.120.4(4) and (5) of the Income Tax Act to specified adult individuals will not be carried out;
- Existing provisions will be modified so that they will not apply to a minor in circumstances where a capital gain arises due to 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 resulting from property acquired due to breakdown of marriage (i.e. separation or divorce) or breakdown of common-law partnership will be exempt from the TOSI rules;
- Individuals 18-14 years old will have a prescribed rate of return on capital contributed to a related business. In some cases (such as where the person earned the capital contributed from an unrelated business) that person will be permitted a reasonable return on the contribution.
We will continue to follow developments in this regard and will blog updates when more information becomes available. In the meantime, if you have questions about how these proposals and potential changes will affect your current tax plan contact Feigenbaum Law. We are leaders in the field of tax law, and offer services to clients in the US, Canada and around the world. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.