New Income Sprinkling Rules What You Need to Know

Transcription

1 New Income Sprinkling Rules What You Need to Know Government Releases Updated New Measures to Restrict Income Sprinkling Toronto, ON December 13, 2017 Presented by: Iqbal Khan, CPA, CA, MAcc, Principal and CFO of StorageVault Canada Inc. (SVI.V)

2 PROPOSED INCOME TAX CHANGES Two proposed changes discussed at my November 8, 2017 presentation were: 1. Tax on Split Income ( TOSI ) Rules 2. Taxation of Passive Income Earned through a Corporation The government is still studying the first proposal. On December 13, 2017, the government proposed a revised set of rules on income splitting.

3 TAX ON SPLIT INCOME ( TOSI ) JULY 18, 2017 PROPOSED RULES Will apply to any Canadian resident, regardless of age, with a connection to a private company The proposed TOSI rules are much broader and would take effect in 2018 Income distributed, will be subject to a reasonableness tests and if not reasonable, will be taxed at the top marginal tax rate.

4 TAX ON SPLIT INCOME ( TOSI ) DECEMBER 13, 2017 REVISED PROPOSAL To address the subjective, complicated and expensive nature of the July 18, 2017 criticisms, the government has revised the proposal in an attempt to alleviate these concerns. Changes are: 1. TOSI will not apply to owners greater than 65 or businesses that qualify for Capital Gains Deduction 2. Individuals will be exempt from TOSI if individual works for more than 20 hours per week and if has done so for any 5 years, then will have a lifetime exemption from the labour reasonability test. 3. The individual will be exempt from TOSI if the individual is at least 25 years old, owns at least 10% of the business and the corporation meets certain non-service business conditions. 4. Aunts, uncles, nieces and nephews will not be considered related individuals for purposes of the TOSI rules to 24 year olds will now be entitled to earn a reasonable return, but only on contributions sourced from an unrelated business.

5 WHAT SHOULD YOU DO?

6 WHAT SHOULD YOU DO? NEAR TERM The revised income sprinkling measures are proposed to be effective for the 2018 and subsequent taxation years and will be legislated as part of the federal budget process (likely in March 2018). The new rules address some of the criticisms and challenges of the July 18, 2017 proposals; however, they still raise significant challenges in planning and compliance issues with the CRA. Even though the proposals are less punitive than what was originally planned, they are still complex. Therefore, consult with your tax advisor to see how you can maximize your ability to split income under the new rules.

7 APPENDIX RELEVANT SLIDES FROM PRIOR PRESENTATION

8 JULY 18, 2017 PROPOSED TOSI RULES WHO HAS A CONNECTION TO A PRIVATE COMPANY? Any person who is related to a connected individual For this purpose, the definition of related is expanded to include uncles, aunts, nephews, and nieces An individual is connected with a private corporation if he/she has: - Equity influence (10% or more) - Strategic influence (e.g. debt) - Earnings influence (e.g. spouse performs services that drive the revenue of the business), or - Investment influence (e.g. property contributed by individual or corporation)

9 JULY 18, 2017 PROPOSED TOSI RULES REASONABLENESS TESTS These rules will not apply to income amounts that are considered to be reasonable i.e. comparable to the return that an arm s length party would receive For persons aged 18 24, this test is very stringent as their return from a private company will strictly be limited to: - Labour contributions (must be working in the business full-time) - Can only earn the prescribed rate of interest (currently 1%) on capital contributions For persons 25 or older, the test is less stringent as it considers labour (with no full-time requirement), capital contributions (with no prescribed rate limitation), and risks assumed As currently drafted, these tests are very subjective