What the proposed new income sprinkling rules mean for you and your business
December 15, 2017
Since Wednesday, accountants, lawyers, small business owners and incorporated professionals have been burning the midnight oil — and not in celebration of Hanukkah. Rather they are trying to comprehend the implications of the new income sprinkling rules released that day and whether any steps need to be taken before Dec. 31 to ensure that business owners are properly prepared for the new rules, set to be effective on Jan. 1, 2018.
Here’s a primer on the proposed new rules and how they may affect your business in a couple of weeks.
What is income sprinkling?
Income sprinkling, which is sometimes known as “income splitting,” is a strategy sometimes used by higher-income small business owners or incorporated professionals to redirect their income to other, lower-taxed family members, generally through the payment of private company dividends. The payment of these dividends is often discretionary so that, with the proper legal structure, the owner can direct any amount of dividends in a particular tax year to specific family members. The amount and recipients can vary from year to year depending on their need for income and their tax brackets.
Isn’t there already a rule to prevent this?
Sort of. The current “Tax on Split Income” (“TOSI”), sometimes referred to affectionately as the “kiddie tax,” applies the highest marginal tax rate (currently 33 per cent federally plus provincial tax) to “split income” of certain family members under the age of 18. Split income includes private company dividends, capital gains and certain income from partnerships or trusts.
So, what changes are being made to the TOSI rules to further prevent income sprinkling?
The draft rules released on Dec. 13 will extend the TOSI rules to certain family members over the age of 17, with, as the government put it, some “clear, bright-line tests or off ramps” to exclude certain members of the related business owner’s family who fall into various categories.