On July 18, 2017, the Honourable Bill Morneau, Minister of Finance, released draft
legislation and explanatory notes intended to “close loopholes and deal with tax planning
strategies that involved the use of private corporations.” One of the key issues
addressed was income sprinkling (commonly known as income splitting) by private
corporations to achieve access to lower marginal tax rates. In this update, we will take
an in-depth look at the proposed rules relating to income sprinkling.
1. Overview of Proposed Legislation
The government has proposed a taxation plan that greatly reduces the ability to income
split, resulting in higher taxes for shareholders of most private corporations.
Extension of the Tax on Split Income (TOSI) Rules
Historically, TOSI was only applied to minors and known as the kiddie tax wherein any
dividends, business income and capital gains on a disposition to a related person would
be subjected to the highest tax rates when earned by a minor.
The draft legislation proposes to expand the definition of what is subject to TOSI to
include interest on loans, capital gains if the income on the shares would have been
subject to a higher tax rate and second-generation income if it is earned on income that
was itself subject to a higher tax rate for people under 25 years old.
If this legislation passes in its current form, the new rules are broadened to include adult
family members, including spouses and children. You or your family may be subjected to
these punitive tax consequences if you are a Canadian resident who receives TOSI from
a business (i.e. dividends, interest, capital gains) and you are related to another person
who is involved in the business and has ownership in the business.
Reasonability of Income
For the income not to be subject to TOSI, it must be considered reasonable in the
circumstances. To be reasonable, it cannot exceed what would have been paid or payable to
a third party for the same activities, considering the following:
• Work performed
• Capital contributed
• Risk assumed
• Compensation for services already completed
1. Overview of Proposed
• Extension of the Tax on Split
Income (TOSI) Rules
• Reasonability of Income
• Is any Income Exempt from
• Tax on Capital Gains
• Restricting Access to the
Lifetime Capital Gain
• Limitations on Dispositions
• Planning Opportunity
2. What will these changes
mean to you?
3. What do you need to do?
Government of Canada Proposed Tax Changes for Private Corporations | 2017
MNP TAX UPDATE Part 1: INCOME SPRINKLING
How the Proposed Legislation Impacts You and Your Business