For many Canadian businesses owners, income sprinkling has been an important topic in recent news regarding tax law. Our previous article on the recent tax changes briefly mentioned the revisions to rules regarding income sprinkling, but this week we’d like to give you a closer look.
As mentioned in our recent article, income sprinkling is a method used by business owners to distribute company dividends or income to family members in a way that secures a lower personal tax rate. This practice is already regulated by the Tax on Split Income (TSOI), often referred to as “kiddie tax”, which applies the highest marginal tax rate of 33% to split income gained by family members under 18. The changes proposed in July of 2017 aimed to extend the scope of the TSOI to family members aged 18 to 24, also requiring assessment of their contribution of labour or capital to determine the legitimacy of the earned income.
In response to mounting concerns, the Department of Finance has made several revisions to the proposed changes that simplify their contents, offer exemptions, and loosen criteria for reasonable involvement in the business. Family members over 24, for instance, may be exempt if they own at least 10% of the corporation. Income received by the spouses of certain shareholders above 64 may also be exempt. The Department has also modified proposed restrictions to the Lifetime Capital Gains Exemption that could have applied the income sprinkling taxes to capital gains earned by family members after the death of the shareholder.
What It Means for You
It’s key to note that the new revisions have been drafted to accommodate the circumstances and concerns of certain small businesses and their related families. For owners of high-income businesses and corporations, however, the new income sprinkling rules will have a particularly pronounced effect. In addition to this, certain aspects of the new rules retain a complicated nature that may be disorienting for some high-earning business owners. It’s as important as ever to consult with your corporate accountant to find the best adjustments for you. An extensive CIBC pamphlet on the revisions can be found here.
Remember that the new tax changes are proposed to go into effect for taxation years starting after 2018. Have you teamed up with the right corporate CPA to maximize the strength of your company? Don’t hesitate to get in touch with Cook & Company by calling 403.398.2486 today.