The federal government has proposed changes to tax rules that will restrict income splitting using private corporations. The proposals, effective January 1, 2018, would expand the Tax on Split Income (TOSI) rules.
A recent article reviewed how the new rules will work, and highlighted exclusions from the rules that focus on contributions made by individuals to family businesses, or interests they may hold in these businesses. We will now look at several other proposed exclusions that could allow individuals to avoid the TOSI rules.
The proposals address concerns raised during the consultation process about the impact the expanded TOSI rules could have on retirement planning — specifically, the ability to split income with a spouse after retirement. The latest TOSI proposals include rules that better align with the existing pension income splitting rules.
Under the proposals, an individual will not be subject to TOSI on an amount that would otherwise be caught by the rules, if that amount would qualify for an exclusion from the rules in the hands of their spouse or common-law partner who is aged 65 or over. As a result, a business owner aged 65 and over can generally split income with a spouse or common-law-partner who has made no meaningful contribution to the family business, as long as the business owner has made a sufficient contribution to the family business and would therefore qualify for an exclusion under the TOSI proposals.
Currently, the TOSI rules do not apply to income or taxable capital gains of a minor earned on an inherited property where that property is inherited from a parent. This also applies to property inherited by a minor from any individual if the minor is enrolled as a full-time student at a post-secondary institution or if the minor is eligible for the disability tax credit. Under the proposed new rules, this exclusion for inherited property is extended to apply to individuals who are under 25 years of age. Note, however, that this exclusion does not apply to individuals aged 25 and older, even if the individual inherited the property before the year they turned 25 years of age.
A more general exclusion applies for adult individuals. Where an individual over the age of 17 has earned income or a gain from an inherited property that would be considered split income, an exclusion will generally be available to this individual if an exclusion would have applied to the deceased individual (from whom the property was inherited) had the deceased earned the income directly.
Lastly, there is a specific rule that will be beneficial for a surviving spouse. Effectively, an amount that would be split income of a surviving spouse or common-law partner will not be subject to TOSI if that amount would have been excluded from their deceased spouse or common-law partner's split income if it was earned by the deceased in their last taxation year. This is determined as if the TOSI rules applied in the year of death, and it applies regardless of the age of the deceased.
The proposed rules also provide an exclusion for income or gains from property that is transferred to a spouse or common-law partner due to a relationship breakdown.
This will generally apply where:
- the property is transferred pursuant to a decree, order or judgment of a competent tribunal or pursuant to a written separation agreement; and
- at the time of the transfer, the taxpayer and his or her spouse or common-law partner were separated and living apart as a result of the breakdown of their marriage or common-law partnership.
The new TOSI proposals aimed at preventing income splitting do provide for a number of exclusions which help to simplify when the rules will apply. However, there continue to be a number of issues and uncertainties when interpreting the rules. In the 2018 federal budget announced on February 27, 2018, the government confirmed its intention to proceed with the TOSI proposals. Comments in the budget papers also indicate the possibility of modifications based on consultations and deliberations since the release of those proposals.
The information in this publication is current as of March 5, 2018.
This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.