Where an individual under 25 is in receipt of income from a business, they must be actively engaged on a regular, continuous and
substantial basis in the activities of the business to avoid the TOSI recharacterization.
This reasonability test may be a safe harbour for some, but what is considered reasonable is currently unclear and will likely be
fact driven for each situation.
If the dividends being distributed to the shareholder are from corporate taxed capital gains or investment income, the reasonability test will
not provide a safe harbour and the income may be deemed to be unreasonable and subject to the highest personal tax rates.
Is any Income Exempt from TOSI?
If a child is under 25 and the income was earned as a consequence of the death of his or her parent, it will generally not be subject
Tax on Capital Gains
In addition to the changes to TOSI, if an individual or trust incurs a capital gain selling shares of a private company to a related
person, the shareholder will be deemed to have received an ineligible dividend (which can be taxed as high as 45%, depending on
the province of residence) rather than a capital gain.
This could make it significantly more difficult to transfer a business from one generation to the next.
Restricting Access to the Lifetime Capital Gain Exemption (LCGE)
The capital gain deduction is important to every entrepreneur, farmer and fisherman, as it allows them to protect a lifetime limit of
$835,714 for qualified small business corporation (QSBC) shares or $1,000,000 for qualified farm property (QFP) or qualified
fishing property (QFP).
Limitations on Dispositions after 2017:
There are new limitations on the ability to access the LCGE of qualified farm property, qualified fishing property and qualified small
business corporation shares for dispositions after 2017. These include:
• Minors: The capital gain deduction will no longer be available to minors.
• Gains Accruing while a Minor: If the individual held the shares while they were a minor, any portion of the capital gains
accruing during that time is not eligible for the capital gain deduction.
• Split Income: If the taxable capital gain is considered split income, it will not be sheltered by the capital gain deduction.
• Gains Accruing Prior to Rollout from Trust: If a personal trust holds the shares, any capital gain accruing while the
shares were held by the trust will not be eligible for capital gain deduction.
There will be an opportunity to create a deemed disposition in 2018 of qualified farm property, qualified fishing property and
qualified small business corporation shares to create a disposition of the property and shelter the capital gain with the capital gain
deduction. This will allow individuals and trusts to use their capital gains deduction before it is lost to them. It will be important to
determine the actual Fair Market Value (FMV) of the property before filing the designation, as if the elected amount exceeds the
FMV (whether inadvertently or intentionally) there will be adverse tax consequences.
This election will be due on the due date of filing the personal or trust tax return for 2018.
MNP TAX UPDATE