Tax on Split Income (TOSI Rules) – Impact to Dental, Doctor and Lawyer Professionals

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The federal government has confirmed changes to tax rules that will restrict income splitting using private corporations. The changes, effective January 1, 2018, would expand the TOSI rules. The TOSI rules will generally apply to income from private business arrangements, such as dividends or interest paid from a professional Corporation.

Where the TOSI applies, the income is subject to the top marginal tax rate in the hands of the individual, and personal tax credits (with the exception of the dividend tax credit and foreign tax credit) are denied with respect to the amounts.

The TOSI measures include clear “bright-line” tests or safe harbours to automatically exclude individual family members. The exclusions are as follows:

  • The individual is over the age of 65.
  • The individual is over the age of 18, and he or she worked for the business for an average of 20 hours per week, in the present year, or in 5 non-cumulative preceding years.
  • The individual is over the age of 25 and owns more than 10% of the votes and value of the shares of corporation directly (not through a trust) and the business is not in the provision of services, and the corporation is not a professional corporation.
  • Individuals who receive capital gains from qualified small business corporation shares if they would not be subject to the highest marginal tax rate on the gains under existing rules.

Individuals aged 25 or over who do not meet any of the exclusions described above would be subject to a reasonableness test to determine how much income, if any, would be subject to the highest marginal tax rate.

 

 



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