Explore how recent changes to amended tax on split income (TOSI) rules apply to and have affected personal rates of tax, pension splitting, taxable capital gains, property and more.
Since January 1, 2018, new income sprinkling measures, referred to as the amended tax on split income (TOSI) rules, have applied top personal rates of tax to dividends and other (non-salary) income, as well as some capital gains, received by specified individuals from a related business. A specified individual can either be a minor or an adult who is related to a person who either is actively engaged in carrying on a business in Canada or who owns a significant portion of the equity in that business (i.e. a related business). However for adults, the TOSI will not apply when (non-salary) income, capital gains or profit received meets the definition of an excluded amount. Excluded amounts can be received from an excluded business, as a result of owning excluded shares, or are amounts considered to be a reasonable return.
Amounts received by an adult, age 18 or over, from an excluded business are not be subject to the new TOSI. An excluded business is:
- A related business, in which the individual was actively engaged on a regular, continuous and substantial basis in the activities of the business either in the current taxation year or in any five prior taxation years of the individual.
- For certainty, an individual is actively engaged if they work in the business at least an average of 20 hours per week. For seasonal businesses, the average applies only to the months during which the business operates.
- If the average of 20 hours per week test is not met in the current year, but the individual meets that requirement for any five prior years (these years do not have to be consecutive), the amount is an excluded amount.
Amounts received by individuals, age 25 or over, from excluded shares are not be subject to the new TOSI. Shares will be excluded shares when:
- The shares owned represent 10% or more of the votes and value of the corporation. The ownership must be held directly (i.e. not through a family trust). Taxpayers have until the end of 2018 to obtain the required 10% ownership in the corporation in order to rely on this exclusion;
- Less than 90% of the corporation’s business income was from providing services;
- The corporation was not a professional corporation (i.e. doctor, lawyer, accountant, dentist); and
- 90% or more of the income of the corporation is not from another related business of the individual, meaning a corporation cannot be used to move income from a service business or professional corporation in order to meet the excluded share test.
Amounts received, other than from an excluded business or from excluded shares, are subject to the TOSI to the extent that they are unreasonable. For individuals, age 25 or over, reasonable amounts are based on the comparison of contributions made by others in the related business with respect to the following factors:
- Work performed in support of the business;
- Property contributed in support of the business;
- Risks assumed in respect of the business;
- Total amounts paid for the benefit of the individual in respect of the business; and
- Other relevant factors.
For individuals age 18 to 24, an excluded amount is a return not exceeding a prescribed rate return. Individuals age 18 to 24, can receive a reasonable return, rather than a prescribed rate return, on contributed capital obtained from arm’s length sources.
Retirement and Inherited Property
To provide similar benefits as the existing pension income splitting provisions, the TOSI rules do not apply when income is received by an individual from a related business when that individual’s spouse has made current or previous contributions to the business and that spouse is 65 years or older. If the amount would have been considered an excluded amount to the spouse had they received it, the amount will be an excluded amount to the specified individual.
There are also new rules with respect to inherited property. When the property has been inherited by an individual, 18 years or older, the income from that property is not subject to the TOSI if it was not subject to the TOSI for the deceased.
Qualified property eligible for the Lifetime Capital Gains Exemption (LCGE)
The TOSI does not apply to taxable capital gains resulting from the disposition of property which can qualify for the lifetime capital gain exemption (LCGE). The exemption from TOSI applies regardless of whether the specified individual actually claims their LCGE in respect of the resulting taxable capital gain. Gains realized by a minor resulting from a non-arm’s length disposition continues to be subject to the TOSI.
To discuss how the TOSI rules may apply to you, please speak with your IG Consultant. You can also ask them for a copy of our white paper ‘Income Splitting: Understanding the changes and exclusions.’