December 15, 2017

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On December 13, 2017, the Department of Finance released revised draft legislative proposals in respect of the tax on split income (“TOSI”) rules, which are proposed to be applicable after 2017. The revisions aim to simplify and clarify the proposed measures originally introduced on July 18, 2017. The Canada Revenue Agency also released guidance on the application of the TOSI rules, which can be found here.

As part of the updated measures, the Government has introduced new “bright-line tests” to exclude certain individuals from the TOSI rules:

  • Adults aged 18 or over who made regular, continuous and substantial labour contributions (average of at least 20 hours per week) during the year or during any prior five years. The labour contribution requirement is adjusted for seasonal businesses.
  • Adults aged 25 or over who own at least 10% of the votes and value of a corporation, where the corporation earns less than 90% of its income from the provision of services and is not a professional corporation. Taxpayers seeking to rely on this exclusion will have until the end of 2018 to meet the 10% ownership test.
  • A business owner’s spouse, if the owner made contributions to the business and has attained the age of 65 years in or before the year the amounts are received.
  • Adults aged 18 or over who inherit property will generally inherit the deceased contributions and will not receive less favourable treatment.

Other changes to the July 2017 proposals include the following:

  • The TOSI rules will not be extended to apply to compound income.
  • Capital gains from property that can qualify for the lifetime capital gains exemption will not be subject to TOSI, regardless of whether the exemption is claimed.
  • The existing TOSI rules that apply to taxable capital gains earned by a minor will not be extended to specified adult individuals. Further, the existing rules are proposed to be modified to exclude a capital gain arising on the death of a minor.
  • The TOSI rules will not be extended to aunts, uncles, nieces and nephews.
  • The TOSI rules will not apply to income derived from property acquired as a result of the breakdown of marriage or common-law partnership.

For more information on this proposed policy, contact one of Smythe’s tax advisors here.

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