New Rules for Splitting Income with Family Members

Starting on Jan. 1, 2018, changes to the Income Tax Act regarding income sprinkling take effect. It no longer makes sense for incorporated professionals and many business owners to income split via dividend with their families because legislation introduced Dec. 2017 proposes to extend the current “kiddie tax” anti-income sprinkling rules to a spouse or partner as well as to adult children who are not “actively engaged on a regular, continuous and substantial basis in the activities of the business.”

There are some exceptions under the new rules. One of those exemptions will need owners of private corporations to take action before the end of 2018.

If your company is non-professional Canadian Controlled Private Corporation that earns less than 90 percent of its income from services, you can have your spouse or common-law partner and/or adult children aged 25 or over participate in an incorporated business by owning 10% voting shares acquired with their own funds. This would allow company profits to be distributed to them in the form of dividends. Owners of private corporations will have until the end of 2018 to re-structure their business to meet the 10% rule.

It’s crucial that you consult your tax adviser, who can review your personal situation and give you advice about which income-splitting strategies best fit your circumstances.