In 2017, new rules were introduced limiting the use of income splitting which allowed people the ability to income split with family members. The new rules were called Tax on Split Income (‘TOSI”). TOSI applies to situations where a family member has not contributed or worked in a family business and is applicable depending on age. For family members under 18, income splitting is restricted. The rules are less restrictive to family members 18-24 years old and less restrictive still for family members over 24 years old. There is also a special exclusion for those whose spouse is 65 years or older and was active in the business.
The details of the rules are beyond the scope of this article. However, we would like to highlight one corporate structure that has unexpectedly been caught in these rules: a structure where an operating company is owned by a holding company, the holding company is owned by an owner/operator and his/her spouse and adult children (over 25 years old), and the family members are not active in the business.
There is a special exclusion from TOSI dividends known as “Excluded Shares”. Excluded shares are defined as a corporation that is owned by the taxpayer where the following conditions are met:
- It is NOT a professional corporation.
- Less than 90% of the business income from the most recent fiscal year is from the provision of services.
- The individual taxpayer owns 10% or more of the votes AND 10% or more of the value of the company.
- 90% (all or substantially all) of the income of the corporation does NOT come from other related businesses.
The rules state that even if the 10% shareholding test is met, holding companies do not meet the test of Excluded Shares for a few reasons.
Firstly, they earn no business income. As per “b” above, it states that less than 90% of the business income is from the provision of services. CRA interprets this to mean that the corporation must have business income in the first place and that 90% of that business income is not from services. If a holding company only earns dividends from its subsidiary and/or investment income on its assets, it earns no business income and will therefore not qualify as an excluded share.
If the Holdco earns fees from the operating company so as to earn business income, the test in “d” would be a problem. The business income must come from a non-related business.
Bottom line is that having a holding company can be a problem to avoiding TOSI. Seek the advice of your advisor to determine your exposure to TOSI and tax planning options.
Contributed by Howard Wasserman, CPA, CA, CFP, TEP from Segal LLP, Toronto. This piece was produced as a part of the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America.
This article is from the quarterly Canadian Overview, a newsletter produced by the Canadian member firms of Moore Stephens North America. These articles are meant to pursue our mission of being the best partner in your success by keeping you aware of the latest business news.