The extended TOSI rules restrict incorporated business owners to split income with their family members. Dividends paid to a spouse or child now taxed at top personal marginal tax rate unless the recipient of the income can show labour or capital contributions to the business.
Before January 1, 2018, TOSI rules apply top personal marginal tax rate to split income (Dividends, capital gains and certain income from partnerships or trusts) of family members under the age of 18. Commencing January 1, 2018, the government extends the TOSI rules to family members over the age of 17. Any income caught under these rules is subject to top personal marginal tax rate.
The rules provide a number of exclusions. The TOSI rules will be exempt, if the conditions for the exclusions are met. Here are a few main exclusions:
Excluded Business
Per Subsection 120.4(1) of the Income Tax Act (ITA), the excluded business exception can apply to any family member who is at least 18 years old; the family member must be actively engaged on a regular, continuous and substantial basis in the business. To be actively engaged, the family member works on average at least 20 hours per week in the business in the current tax year or in any 5 prior tax years.
The excluded business does not apply to salaries and wages since salaries and wages have always been subject to a reasonableness test.
Excluded Shares
Per Subsection 120.4(1) of the ITA, the excluded shares exception can apply to any family member who is 25 years of age or over; the family member holds shares that represent at least 10% of the votes and value of the private company which earns less than 90 percent of its income from the provision of services. This exception is not available to professional corporations.
Reasonable Return
Per Subsection 120.4(1) of the ITA, the reasonable return exception can apply to family member as follow:
- For family member age 18 to 24, an amount which is reasonable based on capital contributions.
- For family member age 25 or over, an amount which is reasonable based on work performed, property contributed and risks assumed.
Retirement
Per Subsection 120.4(1.1) of the ITA, the retirement exception can apply to a spouse, once the active owner is 65 years of age or over.