The Pros Speak: More Changes to TOSI are Needed

Beth Graddon & Christine Steendam

It’s an issue that is still controversial. In 2017, legislation was passed introducing new tax on split income (TOSI) rules in effect for 2018.* It’s legislation that many tax and financial advisors who participated in our October poll would like to see rolled back to old rules. Others have specific changes they believe would be more effective and beneficial to small businesses in Canada.

Before getting into the comments, here’s a recap: what’s the difference between the current TOSI rules, and the pre-2018 legislation?

Why the change? The federal government believed that family members receiving distributions from a private corporation provided an unfair tax advantage in three ways:

1. They allowed families to income split by distributing income to family members who are taxed at a lower marginal tax rate that would have otherwise been earned by an individual and taxed at a high marginal personal tax rate.

2. They allowed for the accumulation of a passive income portfolio owned by a private corporation.

3. They allowed for strategies that convert regular or dividend income of a private corporation into capital gains, which are taxed on only 50% of the gain.

What were the rules before 2018? Put simply, tax on split income applied to individuals under the age of 18 and the income was taxed at the highest marginal tax rate (33%). Split income included:

  • Taxable dividends
  • Taxable capital gains
  • Income from partnerships or trusts

What are the changes? The federal government changed the TOSI rules in two key ways:

  • Who it applies to: TOSI was extended to apply to adults as well as minors, but only with respect to income from a “related business”
  • What it applies to: The definition of split income was extended to include a variety of distributions from service businesses and professional corporations, unless they qualified for specific exclusions. The rules are extremely complex

Our October poll that asked specifically, “In your view, should the government roll back the controversial TOSI (Tax on Split Income) to pre-2018 legislation?” proved to be popular with our audience, with over 400 Canadian tax and financial professionals participating. A total of 345 people (84.77%) answered “yes” to the question, while 62 people (15.23%) said that TOSI rules do not need to change again.

Let’s take a closer look at their reasoning:

First, the comments from those that said “no”:

Anni Markmann cited concerns about the old legislation: “No, they should not roll back; it allowed high-income professionals to pay less taxes on income; perhaps exempt spouses, but dividends to adult children not involved in the business should not be allowed. If children are involved, they can be paid a reasonable wage.”

Peter Wouters stated: “I support the proposal to keep TOSI as it is, but exempt spouses. There has been IMPO, abuse with the old way of splitting income with children and in particular those not involved in the business. I too see no reason why business owners should be able to split income with their adult children if those children are not actively involved in the business.”

David offered a simple explanation for his stance: “Family members who work can already be paid reasonable compensation for their services.”

Peter Coles stated that current rules should stand, with one change: “The Tory proposal to keep TOSI as it is, but exempt spouses, seems to be a reasonable compromise. No reason why business owners should be able to split income with their adult children if they are not actively involved in the business.

Karen Costello said: “Move forward and make it a part of 2019, fine. Going backwards, I don’t see the point.”

Denzil Feinberg chimed in, too: “Small businesses with active moms & pops need incentives. Tax benefits flow into capex, education & training, travel (staycations!) hence do get recycled.”

Now, to those that believe the old rules should be re-instated:

Irina Glazounova said: “Yes, splitting between family members should be allowed, except for young children.”

Sandra simply stated: “Yes! Small business drives the country’s economy, stop penalizing them!”

Bob White provided a detailed analysis on why he believes current rules are unfair to small businesses: “Yes they need to roll it back. It was the dumbest thing they ever did. They said they wanted to target the very wealthy with the changes. Using a shooting analogy, that would mean using a sniper rifle. They used a shotgun and hurt every single Canadian small business. People work hard for years, investing all their money back into business, not saving for retirement, not getting benefits which employees working for Governments and large business receive. And when they are at the stage to produce reasonable income to catch up for the years they went without, they are penalized.”

Enzo said: “Silly rules - in the name of ‘fairness’.”

Andy Mark pointed out that small businesses need tax simplicity: “TOSI adds a complexity and cost to small business owners. They have enough to worry about running their businesses. They should not be overburdened with complex tax regulations. Tax clarity and simplicity will reduce their business risks and operations.”

Sanjit Kumar agreed: “I believe the hard-working Canadians running a small business and owning some real estate and passive investments need to be able to keep some cash for themselves after tax. Small businesses make up quite a bit of the Canadian economy and also provide employment to the majority of Canadians.”

And, the final word goes to Kristal Lorena Shaw: “Yes, small businesses take enough risk that they should be able to distribute their wealth to shareholders as they see fit without government interference.”

Many thanks to all who participated. Please weigh in on our November poll question: Financial literacy is the knowledge, skills and confidence to make responsible financial decisions. Do you believe your clients are financially literate?”

* CRA

Additional educational resources: To get a more comprehensive education of TOSI rules, join us at our CE Summits stops in Vancouver tomorrow where Larry Frostiak will be discussing TOSI in two sessions: Owner-Manager Compensation, Retirement and Succession Planning and Corporate Tax Planning with New Passive Investment Income Rules. Missed the CE Summits? Learn online with the certificate course, Tax Planning for Corporate Owner-Managers.

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