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Tax on Split Income- Key Exclusions

Department of Finance has revised the TOSI rules and have come up with four key exclusions. Income Sprinkling/TOSI was subject to revision and certain exclusions have been stated to new rule. ZRPC, the corporation income tax experts in Scarborough brings to you the list of categories excluded from the new rules pertaining to TOSI. 

Excluded Share Test

This is the share ownership test and has more plot twists than what appears on the surface. It states that the new TOSI rules will not apply to an individual aged 25 if he/she owns at least 10% of the outstanding shares of a corporation in terms of votes and values. The corporation must fulfill the following criteria:

• Services account for less than 90% of its income.

• It’s not a professional corporation.

• A related business does not provide for all or nearly all of its income. 

Excluded Business Test/ Labour Test

According to CRA, TOSI rules excludes an individual 18 or above and employed by an excluded business.  By definition, an excluded business is a business in which the individual, in his/her taxation year, is actively engaged on a regular, continuous and substantial basis for which an amount is received in the same or in any five previous taxation years. The five previous taxation years may or may not be consecutive on or after 2017 to qualify for the exclusion. Exclusion extends to seasonal businesses and takes into account seasonal period.

The definition of “actively engaged on a regular, continuous and substantial basis” according to CRA is an individual who works an average of 20 hours per week during the part of the year that a business operates.

Reasonable Return on Capital Test

It consists of two parts:

•  An individual 18-24 years of age with corporation contribution not qualifying for either excluded business test or excluded share test, may still qualify for “safe harbor exemption”. The amount exempted will be your capital contribution multiplied by the prescribed rate under this test (currently 1%). For a contribution of $100,000, you can exclude $1000. The fairly low prescribed rate seems unfair. 

•  A reasonableness test or reasonable return test takes into account work performed, risks assumed by the individual in the business, and other relevant factors of individuals 25 years and over. 

Miscellaneous

• TOSI rules will not apply to spouses of active owner-managers when they reach the age of 65, given they meet the labour contribution rules.

•  When an individual on reaching the age of 18 years inherits shares in a private corporation from someone who met TOSI exclusions, those shares will continue to be excluded.

•   New rules do not apply to salaries.

This is just a small part of TOSI that we’ve discussed here. For more information on TOSI and its exclusions, contact ZRPC, the corporation income tax consultants in Scarborough.