This week, Federal Finance Minister Bill Morneau announced revisions to the income splitting proposals set to take effect in 2018. The announcement served to clarify income splitting rules amongst family members and introduced specific tests to determine whether or not a family member is able to receive income from a small business.
For all family members who receive income from a small business that does not meet the revised conditions outlined in Morneau’s announcement, all income will be taxed at the highest marginal tax rate.
Family members who meet the following conditions will not be subject to taxation at the highest marginal tax rates:
- The business owner’s spouse, provided the owner meaningfully contributed to the business and is aged 65 or over.
- Adults aged 18 or over who have made a regular, substantial labour contribution—generally an average of at least 20 hours per week—to the business during the year, or during any five previous years.
- Adults aged 25 or over who own 10% or more of a corporation that earns less than 90% of its income from services, and isn’t a professional corporation.
- For those who do not meet these requirements, there is an option to self-assess if they meet the qualifications for “reasonable” payments on their tax return. Self-assessed income to family members would potentially face a review by the Canada Revenue Agency in order to prove “reasonability”.
These proposals will drastically increase income taxes for Canadians operating small to medium sized businesses. They are effectively removing the ability for companies to allocate income to legitimate corporate shareholders. Furthermore, the wording of the rules is vague and open to interpretation. It would appear that the government wants business owners to pay 50% tax on their personal incomes.
As these rules take effect in 2018, we would recommend that increased distribution to family members be made for 2017 rather than delaying and paying resulting higher taxes in 2018 and beyond.
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Canadian and foreign tax laws are complex and have a tendency to change on a frequent basis. As such, the content published above is believed to be accurate as of the date of this post. Before implementing any tax planning, please seek professional advice from a qualified tax professional. EPR Maple Ridge Langley, Chartered Professional Accountants will not accept any liability for any tax ramifications that may result from acting based on the information contained above.