On June 25th 2018 the government passed Bill C-74. This legislation brings new rules on income splitting and limits access to the small business deduction where passive investment income exceeds $50,000 a year. Below is a summary on the proposed income splitting tax rules (TOSI rules) for illustration and discussion purposes.
For most incorporated physicians, there are two parts to what they refer to as “income”; salary and dividends.
Salary.
The general rule is the salary you pay an employee must be reasonable for the work he/she is doing on behalf of the corporation.
Dividend Income.
The new tax rules apply to dividend income splitting otherwise referred to as the TOSI (tax on split income) rules. There are three areas that most physicians should pay attention to.
Adult income splitting.
If you are incorporated and dividend income split with your spouse, your spouse must work 20 hours or more per week during the last tax year or any prior five years in order for that split income (dividends) to be excluded for the TOSI rules.
If your spouse works less than 20 hours a week, than income paid to that spouse must be reasonable for the work the spouse has done. Any amount over and above a reasonable amount paid will be taxed at the highest marginal tax rate.
What does reasonable mean?
A payment will be considered a Reasonable Return based on the following criteria:
- the work performed in support of the Related Business;
- the property contributed directly or indirectly in support of the Related Business;
- the risks assumed in respect of the Related Business;
- the total amounts paid or payable by any person or partnership to or for the benefit of the individual in respect of the Related Business; and
- such other factors that may be relevant.
Adult children age 18-24:
Generally speaking, the split income in excess of a reasonable return based on the contributions of these adult children will be subject to the TOSI rules. Essentially this means you can no longer reasonably pay dividends to adult children ages 18-24.
For individuals age 65 +
Amounts received by the individual’s spouse will not be subject to TOSI if the amount would have been an Excluded Amount if included in the individual’s income.
The revised tax rules are complex and the CRA has discretion in the application of the reasonableness criteria, including determining whether there is sufficient evidence to substantiate the number of hours worked in the business. For complete details please review the CRA website. For a simplified layout on the TOSI rules see TOSI rules chart from tax law firm Moodys Gartner.
The above is an overview for general purposes only and is not to be relied upon for definitive legal, tax or financial planning advice. Professionals interested in exploring these opportunities should consult with their legal or tax advisor to discuss their specific needs and circumstances. E&OE.
June, 2019
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