Canadian Tax and Estate Planning

In response to tax planning proposals that were originally released in July of this year, the Department of Finance released revised draft legislation on December 13, 2017, for its proposed changes to income splitting using private corporations. The revised rules are intended to clarify when a family member has made a significant contribution to a business and is therefore not subject to the new rules.

The revised rules will not apply to amounts received in a year in the following situations:

• Income received by a business owner’s spouse where the owner made a meaningful contribution to the business and is 65 years of age or older;
• Income received by adults who are 18 years of age or older, and who have made a substantial labour contribution to the business during the year or during any five previous years. A substantial labour contribution will be considered to have been made if the individual worked an average of at least 20 hours per week in the business during a year;
• Amounts received by adults aged 25 or older who own 10% or more of a corporation (must be 10% of votes and value), provided the corporation earns less than 90% of its income from the provision of services and the corporation is not a professional corporation;
• Capital gains from qualified small business corporation shares and qualified farm or fishing property (except for gains of a minor on a non-arms length sale).

Family members who are aged 25 or older that do not meet any of the above exclusions will be subject to a reasonableness test on non-salary income and gains (there are already rules in place that require salary to be reasonable). If an amount received is unreasonable, the income will be taxed at the top personal tax rate.

Family members who are aged 18 to 24 that do not meet any of the exceptions above will be taxed at the top personal tax rate on amounts received (other than salary) from a private corporation, except for certain cases where they have contributed capital to the business and are earning a reasonable return.

These proposed rules will be effective as of January 1, 2018. However, they will not apply to amounts received during the year provided the ownership exclusion test is met by the end of 2018. This will allow some private corporations to restructure in 2018 so that the 10% share ownership exclusion test is met.

In the meantime, please contact your Fuller Landau advisor to discuss how these proposed changes may impact you, your family, and your business. If you’re new to Fuller Landau, partner Gord Jessup, head of our Tax department, would be happy to help.