Do the long awaited new tax rules for tax on split income (TOSI) for small business apply to me and my business?
The July 18th proposals from Finance Minister Bill Morneau were very unpopular with small businesses across the country. On December 13th, the minister made significant changes to the proposals. We thought it would be fun to create a decision tree and call it Minister Morneau’s Christmas Tree seeing that the new rules have been released at Christmas.
- Are you directly or indirectly receiving income from a family business? No – Stop. These TOSI rules do not apply to you.
- Are you on the list of relatives that are closely enough related to the business that you are included in the new tax? No – Stop. These TOSI rules do not apply to you.
- Are you over 24? No – Stop. Move to a different decision tree because other more punitive and costly rules apply to you.
- Is the business an excluded business? Interestingly, this definition has nothing to do with what the business does. It has everything to do with what you do in that business. To qualify as an excluded business, you must be “actively engaged on a regular, continuous and substantial basis in the activities of the business” in either the current year or in five previous years. Yes – Stop. You can take an “off-ramp” as it is called by Mr. Morneau and avoid the TOSI.
- Do you own more than 10% of both the voting shares and value of the company and it is not both a service business and a professional corporation; nor is this corporation’s source of income 90% or more from another business in the group (i.e. a rental holdco in a corporate group)? Professional corporation means a corporation that carries on the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor. If you answer yes to this question, you can take an “off-ramp” and these rules do not apply to you.
- Are you receiving a reasonable return? Yes – Stop. You also have an “off-ramp” to avoid TOSI. The challenge with this “off-ramp” and with the “off-ramp” in question 4 is that there is a judgement call. What you think is reasonable might not match what CRA staff think. TOSI would be applied to the portion of your dividends that exceeds the reasonableness test.
The good news is that there are now several bright-line tests in Minister Morneau’s decision tree and off ramps to avoid TOSI. However, these rules are very complex and arrived just 18 days before they became law. Call us at in the New Year and we will guide you through them.VIEW THE CALENDAR