In its latest document on the subject, released on Dec. 13, the government
has conceded on some important areas from the initial proposals that were
released July 18.
For example, amounts received by adult family members from “Excluded
Businesses” in which they were “Actively Engaged” on a “regular, continuous
and substantial basis” in the tax year or any five years at any time in the past, will escape the punitive
top rate taxes, levied without progressive tax rates.
“Actively engaged” will refer to a labor contribution of at least 20 hours
per week during the portion of the year in which a business operates –
which recognizes the unique circumstances of seasonal businesses like
farming. Otherwise, the recipient or “specified individual” would need to
meet a more onerous reasonableness test to avoid the tax on split-income
The “Reasonableness Criteria” will include four components, to be assessed
by CRA on the facts of each case, and will apply if the income does not
qualify under the “Excluded Business” and “Excluded Shares” definitions.
Here’s an example of the detail which would have to be met by the taxpayer:
a. A Labor Contribution,
which will require justification on the nature of the tasks performed;
hours required to complete the tasks; what a competitive salary/wage is for
those tasks in similar businesses in the marketplace; time spent on the
activities and the nature of the activities; the individual’s education,
training, experience, knowledge, skills, and know-how, as well as past
performance of the functions. As one can see, very detailed notes of every
family member’s contributions will be required going forward.
b. Property Contributions,
which will include details on amounts of capital contributed to the
business, amounts of loans, fair market value (FMV) of tangible and
intangible property transferred (including technical knowledge, experience,
skill, or know-how), whether other sources of capital or loans were readily
available, whether comparable property was readily available, whether
property was unique or personal to the individual, “opportunity costs” and
past property contributions. Again, family members must be prepared to
provide lengthy, lifelong, and detailed logs of their unique intellectual
and financial contributions.
c. Risk Assumption.
This will include the degree to which the individual is exposed to the
financial risks of the liabilities of the company including statutory
liabilities, the extent to which the contributions might be lost, whether
the risk is indemnified, and whether the individual’s reputation or
personal goodwill is at risk (how to justify this is a bit of a mystery!).
In addition, past or ongoing risk assumption will be considered.
d. Total Amounts Paid. To determine if amounts paid to a family member are reasonable, all other
amounts “previously paid,” including salary or other remuneration,
dividends, interest, proceeds and fees, as well as benefits and deemed
payments will be considered.
For those between the ages of 18 and 24, a further test is applied on
capital contributions. A “Safe Harbour Capital Return” will need to be
calculated on contributions made to the business by these specified
individuals. This return must not exceed a prescribed rate, calculated by a
formula that is essentially the prescribed rate of interest for a quarter
multiplied by the number of days in the quarter a loan is outstanding,
divided by the number of days in a quarter. The result for the year is the
sum of the quarterly calculation.
When it comes to taxable capital gains from the disposition of qualified
farm or fishing property or qualified small business corporation shares,
the amounts will be excluded from the split-income calculations if the
individual is over 17 or if the capital gain arises, at any age, from the
death of an individual or if the amounts arise pursuant to a court order or
written separation agreement.
When it comes to retirement income planning, note that if one spouse has
reached age 65 in the year and dividends are distributed to the other
spouse, the other spouse can claim progressive tax treatment on dividends
received in all cases. Unfortunately, these rules do not provide a level
playing field with employees who get benefits from an employer-sponsored
registered plan. Those employees can income split at any age, and the money
doesn’t actually have to change hands.
For those who split dividends from a private corporation under the new
rules, there doesn’t seem to be a limitation on how much income can be
split – no mention of an election up to 50% of income, a restriction that
applies to other private pension benefits when received personally.
Further, the dividends will have to be paid to the recipient, one assumes.
In other news, a specified individual who receives income that would have
been an “excluded amount” of a deceased spouse will enjoy regular rates.
Clearly the rules are not simple, the record-keeping will be very onerous
and complex, and it will require that many business owners to change their
share structures before the end of 2018. They will also immediately need to
shore up record-keeping procedures for family members who own shares or
work in the business or lend money to the business, starting Jan. 1, 2018,
well before proposed rules are passed into law.
For incorporated family businesses and their advisors, it’s a new,
unwelcome burden dropped on their laps during the Christmas break, when
many politicians and finance department officials had already departed for
originally appeared in the
Knowledge Bureau Report, © 2017 The Knowledge Bureau, Inc. Reprinted with permission. All
rights reserved. Follow Evelyn Jacks on Twitter
@EvelynJacks. Visit her blog at www.evelynjacks.com.
Evelyn Jacks’ latest book,
Family Tax Essentials, is now available.
Notes and Disclaimer
© 2018 by Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. No guarantee of investment performance is made or implied.
It is not intended to provide specific personalized advice including,
without limitation, investment, financial, legal, accounting or tax advice.