A lawyer based in Toronto, Canada, Stuart Bollefer is a partner at Aird & Berlis LLP, where he focuses on tax law and estate planning. A respected practitioner, Stuart Bollefer regularly speaks on tax-related issues such as the new tax on split income (TOSI) rules.
When the Canada Revenue Agency (CRA) expanded TOSI rules, many people were left confused about the application of TOSI exceptions, especially with regard to service-related income. CRA sought to clarify this through examples.
Generally, TOSI rules subject split income, including taxable income and capital gains, to the highest marginal tax rate when it arises from a related business. This means if a business owner splits taxable income by distributing some income to his or her child in the form of dividends or interest, the split income is taxed at the highest marginal rate. There are exceptions to this, however. One of them is if the business derives less than 90 percent of its gross business income from service provision.
Problems arise when a business sells both products and services. Consider a construction company that offers construction services like concrete repair but also has a retail shop selling construction materials like cement. According to CRA, if in one year it generates income of $1 million ($950,000 from services and $50,000 from retail) and in another year $1.2 million ($900,000 from services and $300,000 from retail), TOSI will apply in the first year when over 90 percent of income was from services and not apply in the second year when less than 90 percent of income was from services.
However, it is important to consider the cost of incidental goods. If the construction company sells its services together with its own goods, then the cost of these goods should not be subtracted to determine gross service income. For example, if in doing $250,000 worth of construction repair it spends $30,000 on construction materials from its retail store, the $30,000 should not be subtracted when calculating gross service income.
When the Canada Revenue Agency (CRA) expanded TOSI rules, many people were left confused about the application of TOSI exceptions, especially with regard to service-related income. CRA sought to clarify this through examples.
Generally, TOSI rules subject split income, including taxable income and capital gains, to the highest marginal tax rate when it arises from a related business. This means if a business owner splits taxable income by distributing some income to his or her child in the form of dividends or interest, the split income is taxed at the highest marginal rate. There are exceptions to this, however. One of them is if the business derives less than 90 percent of its gross business income from service provision.
Problems arise when a business sells both products and services. Consider a construction company that offers construction services like concrete repair but also has a retail shop selling construction materials like cement. According to CRA, if in one year it generates income of $1 million ($950,000 from services and $50,000 from retail) and in another year $1.2 million ($900,000 from services and $300,000 from retail), TOSI will apply in the first year when over 90 percent of income was from services and not apply in the second year when less than 90 percent of income was from services.
However, it is important to consider the cost of incidental goods. If the construction company sells its services together with its own goods, then the cost of these goods should not be subtracted to determine gross service income. For example, if in doing $250,000 worth of construction repair it spends $30,000 on construction materials from its retail store, the $30,000 should not be subtracted when calculating gross service income.
