When the government gives us a whole new set of tax rules and regulations no one wants and then gives these rules the acronym "TOSI," it’s hard to avoid puns.
The obvious starting point is, "Let’s TOSI them out!"
However, the new Tax On Split Income regime is here to stay, for the owners of small businesses and private corporations.
To jump to the bottom line before explaining all this, I have some good news for accountants and business owners.
Recently, the Canada Revenue Agency (CRA) has stated the 20-hour- per-week requirement to work in a business in order to avoid TOSI:
● can be relied upon when met to pay a spouse or family member interest or dividends, even in excess of market rate wages; and,
● TOSI can still be avoided if a family member works less than 20 hours in the business, but where the actual facts show that the family member contributes significant value to the business as a participant.
An example of the latter was one of our clients, a professional whose spouse worked in the business less than 20 hours on average per week. However, the spouse did all the books and ran all HR functions like hiring, firing and supervising staff; scheduling work shifts; and dealing with all other personnel issues. The business could not run without this contribution.
With much work, we were able to convince the client’s accountant to pay income to the spouse. We were pleased to hear the CRA semi-officially agree with our position.
If income is subject to TOSI, then it is automatically taxed at the highest tax rate, even if received by a low-income earner.
For business-owner clients and their spouses or children under 25, "income" can mean:
● dividends from the private corporation;
● business or rental income from an entity related to the business;
● income or gains from the disposition of private shares or other property with previous TOSI: and,
● income on debt from a private company, partnership or trust.
These rules can apply to anyone who has created an enterprise that makes things or sells things to the public or to other businesses, but the rules are even tighter for service businesses — ones providing services such as repairs, consulting, medicine, accounting or legal advice, and which provide these services through a corporation.
Exceptions exist for couples 65 or older, and shares owned as a result of death or marital breakdown.
We are just touching the surface here, so please get good professional advice, and make sure your adviser has done lots of research, if you are a business owner in such a position.
STEP is the Society of Trust and Estate Practitioners. Every year at the STEP convention, we have a CRA roundtable, where CRA officials are asked and answer questions, initially "conversationally," but later backed up in writing.
This year, they provided the assurance I mentioned earlier. As with any new set of rules, it will be years before the guidelines become really clear, as cases are tested.
Creating a money-making business takes a lot of work. It almost always involves sacrifices regarding family life. (We still laugh about my son’s elementary school principal telling my wife that our son could hang around with the school custodian "if she wants him to have a male role model". They thought she was a single mom.)
Traditionally, there have been some limited ways to provide a salary to a spouse involved in the business, therefore splitting income and reducing the family tax bill. As well, good planning involved having the spouse and children (usually through a family trust) be shareholders in the corporation, and thereby receive dividends, taxable at a lower rate than the primary breadwinner.
However, years ago, a "kiddie tax" (Section 120.4) was introduced, taxing any dividends paid to minors at the very top tax rate, eliminating any advantage for private corporations. But that wasn’t enough.
TOSI extends this kiddie tax to adult children under 25 and to more types of income earned by the business enterprise.
Also introduced in 2017-18 was a punitive set of rules on investment income earned by private corporations, but we will have to save that for another day.
If you would like to access more resources on TOSI, send me an email at firstname.lastname@example.org. Happy to help.
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
David Christianson, BA, CFP, R.F.P., TEP, CIM is recipient of the FP Canada™ Fellow (FCFP) Distinction, and repeatedly named a top 50 financial adviser in Canada. He is a portfolio manager and senior vice president with Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.
Personal finance columnist
David has been a practising financial planner and life advisor since 1982, specializing in helping clients identify and reach their most important goals, and then helping them manage all of their financial affairs, including investments.