Proposals from the Department of Finance on July 18, 2017 included changes to the taxation of split income.
The most common form of split income is income from a dividend from a related entity that is not excluded from being categorized as such.
Prior to 2018, shareholders of privately held companies over the age of 18 could receive dividends from that company without needing to provide additional information to support the dividend amount. Family owned businesses were able to split dividends among non-arms’ length shareholders to take advantage of each shareholders lower income bracket. This resulted in a reduction of the family’s overall tax burden.
The Department of Finance proposals will limit the ability to dividend sprinkle to related shareholders for some businesses. The Department of Finance released revised proposals on December 13, 2017 that were meant to provide guidance on the application of the revised split income rules. These revised proposals set out to treat all dividends from the related business to be split income unless they are specifically excluded under 3 general rules.
1) Excluded Shares
a) Owned by individuals age 25 or older
b) The shares are both 10% or more of the votes and 10 % or more of the value of a corporation
c) Less than 90% of the corporation’s income is from the provision of services
d) The corporation is not a PC
2) Excluded Business
a) Individual is 18 years or older
b) Individual was engaged in the business for more than 20 hrs/week during the year or during any 5 previous years. Special rules for seasonal businesses
3) Retirement Vehicle
a) Individual is the spouse of the business owner
b) The business owner is over 65
c) The owner contributed to the business in a meaningful way
As well, the way the rules presently read many dividends from holding companies would also be considered to be split income.
If the dividend is not excluded from split income, it would be subject to the highest personal tax rates in the hands of the recipient. The highest personal tax rates can exceed 50% in some provinces.
The legislation is set to come into effect in 2018. These proposals will limit the ability of some business owners to split income with non-arms’ length shareholders via the payment of a dividend.
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Thanks to David Wickenberg of KWB Chartered Professional Accountants for providing this content.