Last fall we touched on some proposed income tax changes that would significantly complicate family farm corporations.
The farming community, small businesses, and professional organizations all pointed out some obvious faults to the proposed changes. The Department of Finance took note of the feedback and simplified many of their initial proposed changes.
They have dialed in their focus on a couple areas of corporate organization that they think can be manipulated for unfair tax avoidance. One of the main areas of supposed abuse was what they called “income sprinkling”.
Their most recent press release gave some insight into how they define “income sprinkling” and what type of action is appropriate and reasonable.
Specifically, these tax changes (which are proposed to be effective for the 2018 and subsequent taxation years) will clarify the process for determining whether a family member is significantly involved in a business, and thus is excluded from potentially being taxed at the highest marginal tax rate (known as the tax on split income or TOSI).
The changes include clear, “bright-line” tests – or off ramps – to automatically exclude individual members of a business owner’s family who fall into any of the following categories:
- Family members who make a meaningful contribution to the business will not be affected by the new measures.
- The business owner’s spouse, provided that the owner meaningfully contributed to the business and is aged 65 or over, will not be affected. In recognition of the special challenges associated with planning for retirement and managing retirement income, the new approach to income sprinkling will be better aligned with the existing pension income splitting rules. This also reflects the fact that a business can play an important part in supporting its owner in retirement.
- Adults aged 18 or over who have made a substantial labour contribution (generally an average of at least 20 hours per week) to the business during the year, or during any five previous years. For businesses with seasonal operations, such as may be the case with farms and fisheries, the labour contribution requirement will be applied for the part of the year in which the business operates.
- Adults aged 25 or over who own 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation.
- Individuals who receive capital gains from qualified small business corporation shares and qualified farm or fishing property, if they would not be subject to the highest marginal tax rate on the gains under existing rules.
The language used is still very ambiguous but please note the specific language relating to farming and farm corporations. They are responding to the substantial pushback from the farming community. The Minister of Finance’s office was very clear that rules would remain unchanged for the majority of family farm corporations engaged in ongoing farming operations.
These proposals are not officially part of the Income Tax Act regulations yet. They are likely to be a part of the next federal budget, which is normally presented in March/April.
Past practice would see these proposals, unless changed, in full effect and retroactive to January 1st 2018…
If you are concerned about your current family farm corporate structure, contact your Forbes Wealth Management team. We would be interested in reviewing your structure to determine if any of the proposed changes will affect your particular situation.
Backgrounder on Simplified Measures to Address Income Sprinkling