This month the Canadian Department of Finance released legislative proposals (Proposals) relating to tax planning using private corporations which will have far-reaching impact. In general, the Proposals will will eliminate most common income splitting strategies used by small businesses. If enacted, the new tax structure will apply in 2018.
Under the current rules, certain adults in the family of a private corporation may be shareholders and receive dividends from the corporation. Such dividends are then taxed to the shareholder at his or her personal graduated income tax rates. However, the Proposals extend the concept of “tax on split income” (TOSI) to dividends and other amounts received from a corporation by adult shareholders. TOSI is taxed at the highest personal income tax rate. Under the Proposals, dividends and other amounts received by a family member of the principal of the business may be subject to a “reasonableness” test, which requires the family member show that the amount of the dividend is reasonable in light of (a) his/her labor contributions to the business, (b) his/her assets contributed or risks assumed with regard to the business, and (c) his/her previous returns and remuneration paid to him/her. If the reasonableness test is not met the dividend or amounts received by the family member will be taxed at the highest personal income tax rate.
Among other tax planning strategies impacted by the Proposals include the lifetime capital gains exemption, by which individuals under the age of 18 will no longer be entitled to the current lifetime capital gains exemption. In addition, if the gain was accrued while a trust held the shares, an adult beneficiary will not be entitled to claim the lifetime capital gains exemption; he or she must have held the shares personally in order to claim the exemption. Finally, the availability of the exemption will be subject to a reasonableness test similar to that previously described.
The Proposals may have a significant effect on your current tax and estate plans. They will certainly be crucial to understand if you are contemplating setting up a trust or private corporation. Visit with your Ally Law member firm tax and estate planning professionals – no matter what country you reside in – to assure that your family and/or business employ the optimal tax structure to meet your long-term goals. For more information about our services in this area, contact us at firstname.lastname@example.org.
The complete article by Kay Leung of Ally Law member Torkin Manes.