In July 2017 the Liberal Government Finance Minister announced a series of very significant changes affecting the taxation of private corporations. One of these was the tax on split income or TOSI rules which generally were intended to stop income splitting using private corporations. The rules have been subject to a number of revisions, are very complicated and are still subject a number of questions.

Stuart Bollefer an experienced tax lawyer with the law firm Aird & Berlis LLP presented recently at the Ontario Tax Conference and discussed these rules in detail.

The purpose of this short post is to briefly describe the ambit of the rules and one of the available exceptions, but is not intended to be a substitute for advice from a qualified tax specialist.

As part of the Ontario Tax Conference presentation, Stuart Bollefer also prepared an 80 page paper which can be accessed by members of the Canadian Tax Foundation. 

Essentially, the TOSI rules will subject any type of distribution from a private corporation to top rate tax where the payment is made as a dividend on shares owned by an individual or interest paid on debt advanced by the individual, where the recipient of the dividend or interest is related to a person who either owns 10% or more of the shares of the corporation or is active in the business of the corporation. TOSI can also apply to certain capital gains realized on the sale of shares of private corporations.  There are many additional supplementary rules that apply.

In order for TOSI to exist, the corporation must carry on a business. In certain situations, if a company’s activity is sufficiently inactive, it may be viewed as simply earning income from property and therefore dividends can be paid to shareholders without application of the TOSI rules.

Although the legislation is not clear, it appears that TOSI will not apply if:  (i) there is no business being carried on by the corporation in the year that the distribution is being made; and (ii) the corporation has not received any income from any other related companies in the year.  Canada Revenue Agency has released some technical interpretations that support this conclusion. 

In all other situations, it will be necessary to find an exception from the application of the TOSI rules. Some of the exceptions include “Excluded Businesses”, “Excluded Shares” and the Age 65 exception available to certain spouses.  Future blogs will discuss these and other exceptions.