Colleen Ellison, CPA, CGA, CA
Things get more complex for professionals
As you may be aware, the federal government has been working hard to eliminate income-splitting tax benefits where a related family member hasn’t made what they deem a sufficient contribution to the family business. As such, they’ve now expanded the Tax on Split Income rules (TOSI) to apply to adults, not just individuals under age 18.
Any income caught by these rules is taxed at the highest personal tax rates, eliminating any advantage achieved under income splitting. Therefore, it’s more important than ever to have a proper understanding of the contributions family members make to a business, especially as the rules are more stringent and intricate for professionals.
In fact, the rules are too complicated to outline in this article. Suffice it to say, if you pay a family member from your professional corporation, you really need to speak to your CPA. For now, let’s focus on a few situations when the TOSI rules do not apply.
Just some of the new income-splitting rules
1. Salaries and wages have always been subject to a “reasonableness” test and now dividends are too. However, if dividends are paid to a family member 18 or older, who’s engaged in the business on a “regular, continuous and substantial” basis in the year or any five previous years (including years prior to 2018 and not consecutive), you won’t be caught under the new rules. Talk to your CPA about what constitutes regular, continuous and substantial engagement.
You should also be prepared to defend the reasonability of the work performed and justify the rate. Recordkeeping and documentation will be key. And there are further restrictions on payments to adult family members aged 18 to 24, so look into that with your CPA.
2. You also will not be caught under the new rules when dividends are paid to the spouse of the active shareholder when the active shareholder is over 65. The age of the spouse receiving the dividend is not considered. This is intended to mimic the pension-splitting rules.
3. There will still be some planning opportunities for families on Qualified Small Business shares capital gains.
4. There are changes involving income received from property on the breakdown of a marriage or common-law partnership.
Think your family’s tax planning will be impacted by these complex new rules? Speak to your CPA.
Colleen Ellison is a Chartered Professional Accountant, CGA, CA and Partner with Presley & Partners, CPAs and Business Advisors, in Courtenay, BC. She can be reached at 250.338.1394 or firstname.lastname@example.org.