Careers
Contact Us
New legislation regarding the use of income sprinkling rules came into effect on January 1, 2018. Referred to as the “Tax on Split Income”, or “TOSI”, the intention of the legislation is to prevent the allocation of income to family members who are not involved in a business.
In part one of this series, we took a look at the largest changes to the TOSI rules. In part two, we’ll begin to examine the exceptions to those rules, to better assist you in determining how your family may be affected.
First exception: Four unique situations where the TOSI rules do not apply
The first exception deals with income derived from, as well as taxable capital gains or profit from, the disposition of a property due to the following four situations:
- When an individual is aged 24 or younger and has inherited property as a result of the death of:
- A parent; or
- Any person, and the individual is enrolled as a full-time student during the year at a post-secondary educational institute or is entitled to the disability tax credit.
- Property received as a settlement upon a marital breakdown.
- Taxable capital gains arising from the deemed disposition of property upon an individual’s death.
- Taxable capital gains from the disposition of qualified small business corporation shares, qualified farm property or qualified fishing property, except for taxable capital gains of a minor arising from the disposition of such property to a non-arm’s length person.
It should be noted that a more general rule applies to inherited property for adult individuals. Specifically, where an individual aged 18 or over has earned income or realized a taxable capital gain from an inherited property that would be considered split income, an exclusion will generally be available to this individual if an exclusion from the TOSI rules would have applied to the deceased individual, had the deceased individual earned the income directly. An additional rule also exists in the case of a spouse who inherited property from their deceased spouse.
Second Exception: The excluded business exception
The second exception applies where the individual is age 18 or over. An excluded business means a business where the specified individual is actively engaged on a regular, continuous and substantial basis in the activities of the business in the particular taxation year, or in any prior five taxation years. Where, however, the split income at issue is a taxable capital gain or profit from the disposition of a property, then the specified individual must meet the actively engaged test for any five prior taxation years. It should be noted that to satisfy the five-year test, the taxation years need not be consecutive years.
There is a bright line test, being that an individual who works an average of at least 20 hours per week during the year (or portion of the year when the business operates) will be deemed to be actively engaged on a regular, continuous and substantial basis. If the individual does not meet the 20-hour per week threshold, it will be a question of fact as to whether the individual was actively engaged on a regular, continuous and substantial basis in the particular year.
Other exceptions and how they apply
In part three of this series, we will examine the last three exceptions, and share a flowchart that demonstrates how and if these new rules will apply to your family.
PART 1: What has changed under the new TOSI legislation?
PART 3: The third, fourth and fifth exceptions from the TOSI rules
If you have more questions about the new TOSI rules, reach out to your Zeifmans advisor today by calling 416.256.4000, or e-mail Nathan Choran, Tax Partner, at nc@zeifmans.ca.
