Revised Tax Legislation Released December 13, 2017
Just in time for an effective date of January 1, 2018, the Department of Finance released revised legislation on December 13, 2017 to address “income sprinkling”. This was one of the four areas targeted in the July 2017 release of sweeping tax changes that garnered so much public attention. We have previously written about the proposals and the government’s response to the feedback it received.
The original income sprinkling measures expanded the tax on split income (also known as “kiddie tax”) to tax distributions made by businesses to non-active family members of all ages at the highest marginal rate of tax.
Those who have been wondering about the taxation of dividends and interest paid by a business to non-active family members have been anxious to see what changes the government would make to its initial proposals in July, which were criticized as being overbroad and excessively complicated. In its October press release, the Department of Finance promised to simplify the rules that would apply to income sprinkling.
The new proposals include a number of exemptions (or “offramps”) intended to clarify who is not caught by the rules. Individuals who work 20 hours per week in the business will not be subject to the income sprinkling rules. Individuals who have reached the age of 65 can effectively split dividends and interest with their shareholder spouse without triggering the new rules. In some corporations, an individual over the age of 24 will be exempt from the rules provided they hold more than 10% of the shares of the business (both votes and value).
The rules also make it clear that the businesses the government is most anxious to target with the income sprinkling rules are professional corporations (such as those used by doctors, lawyers, accountants and other regulated professions) and corporations whose income is derived from the “provision of services”.
We will provide a more fulsome update when we have had a chance to review the rules in detail.
Those who are still debating what needs to be done before December 31 should note the following about the new rules:
- There continue to be different rules for young adults (under age 25) than for all other adults, so dividends to university age children in 2017 may be worth considering
- Shareholders in professional corporations or those who have services businesses will want to take advantage of the existing tax rules in 2017 when paying amounts to non-active family members
The released draft legislation also reintroduces the identification requirements for trusts. No other aspects of the July release are addressed at this time.
By LaBarge Weinstein’s Taxation, Tax Planning, and Tax Litigation team.