Canada Tax: CRA Revised “Sprinkling” Proposals And What “Kiddie Tax” Really Means

The “sprinkling” proposals issued in July 2017 were amended in December 2017 effective for the 2018 taxation year.

As you may recall, the July proposals were designed to tax at the top rate, individuals now over age 18 who are in receipt on what is called “split income” or TOSI (tax on split income). Before 2018, the TOSI was called a “kiddie tax.”

For 2018, the TOSI rules extend to family members who are not active in the business that are receiving dividend income on any type of shares they hold and on capital gains on the sale of shares that are not qualified small business corporation shares. The pre-2018 rules applying to those under age 18 did not extend to capital gains on the sale of shares.

The rules will extend to income derived indirectly from a family trust however the initial proposal to deny the multiplication of the capital gains exemption to beneficiaries has been removed and other previously proposed complexities.
Family members for purposes of the revised rules will not extend to aunts, uncles, nieces and nephews.

To simplify matters, the December revisions provide for certain exclusions for those who hold shares of an “excluded business”, hold “excluded shares”, or the payment qualifies as a “reasonable return.”

The first test has a 20-hour work week with some limitations.
The second test excludes payor corporations if it earns less than 90% of its business income from the provision of services, and it is not a professional corporation, and the individual is over age 25 and owns shares with 10% votes and value.

On the third test, if the individual is over age 24, the income is not TOSI if the payment represents a “reasonable return” based on certain criteria. If the individual is age 18-24, there is a safe harbor capital return or now a reasonable return having regard to contributions of arm’s length capital.

TOSI exemptions also apply to income recipients who are retired if over age 64 if they would have qualified under the foregoing exclusions. The non-retired spouse who is not over 64 will qualify if the retired spouse over age 64 would have qualified. Exemptions also extend to those who have inherited property from individuals that were exempted from the TOSI rules.

The legislation will not apply the 2018 TOSI rules for 2018 where restructuring is done by the end of the year that would cause the shareholder to hold “excluded shares” at some time in 2018. In this regard, those individuals holding say non-voting discretionary special/preferred shares that can’t meet the “excluded business” test or hold their shares through a family trust will have to be part of a corporate reorganization that ultimately results in them directly holding shares (likely common shares) that represent in aggregate, 10% votes and value.

Every profile/situation is different and professional advice is highly recommended in dealing with the TOSI rules.

Have a question? Contact Larry Stolberg.

Your comments are always welcome!

Larry Stolberg, CPA, CA, CPA (South Carolina), has been practicing as a full-time tax specialist for over 30 years, in the Toronto, Ontario Canada and surrounding GTA area with primary emphasis on:

•Corporate restructuring for business owners
•Estate/succession planning
•U.S. expatriate and cross border issues
•Tax efficient planning that will achieve both your short and long term objectives

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