Income Sprinkling Update
DECEMBER 14, 2017
By Amrita Siva, CPA, CA
Yesterday morning, the Senate released a statement that recommended that the Liberal government abandon its new small business tax proposal, or at a minimum delay it until 2019, so that a more detailed study of its impact could be conducted.
Yesterday afternoon, the Finance Minister plunged ahead with his proposals and released further details on dividend sprinkling shares. He also announced that the passive income rules will be released and effective after the 2018 Federal Budget.
While the changes come into affect January 1, 2018, the government has given businesses until December 31, 2018 to adjust to these changes before filing their 2018 taxes. The announcement yesterday afternoon was made to clarify the situation around when an individual could receive a dividend from a private corporation and have it taxed at his/her marginal tax rate.
Income received by those aged 25 and older will be subject to a “reasonable return” test if none of the new specific exclusions apply. Any income that exceeds a “reasonable return” will be taxed at the highest marginal tax rate. A reasonable return will consider what the individual has contributed (labour contributions, capital contributions, risks assumed, previous amounts received and other factors. The government has specifically listed as a contribution “other relevant factors” but has not defined this.). It will also consider what other family members have contributed to the business in comparison.
Additionally, there will be no additional tax (beyond what they would normally pay) for those that are using their lifetime capital gains exemption on eligible capital gains.
The following people are not subject to this “reasonable return” test:
1) The spouse of a business owner where the business owner is aged 65 or over and the business owner has contributed meaningfully to the business;
2) Adults aged 18 and over who have made a substantial labour contribution (average of 20 hours per week) during the year or during any of the past five years. The government has said that the 5 years do not have to be continuous, or after 2017. Therefore, the rules are currently very broad regarding when specifically or within what time period, if any, the five years pertains to.;
3) Adults aged 25 and over who own 10% or more (votes and value) of a corporation that earns less than 90% of its income from the provision of services and is not a professional corporation.
Those between the ages of 18 and 24 who have contributed to the family business with their own capital will also be subject to the “reasonable return” test on that related income. However, if it is an unrelated business, they will be allowed a government regulated rate of return on the capital contributed to the business.
The changes do not generally impact our current thinking for year end planning. If you are wondering how this will affect you and your business, feel free to contact us.