Different announcements have been made by Federal Finance Minister Bill Morneau in 2017 concerning proposed changes to the tax measures affecting private corporations. On July 18, the federal government unveiled legislative proposals which, among other things, would limit the benefits of income sprinkling by means of dividends paid by a private corporation.
In response to numerous submissions received during the consultation period and the concerns expressed by the taxpayers affected by these changes, the federal government decided to simplify and clarify the measures concerning income sprinkling. It announced the latest adjustments on December 13 and we share with you below our analysis of the situation.
Taxation of dividends paid
Without entirely barring the possibility of paying dividends to family members, the federal government’s initial proposals stipulated that dividends received would be taxed at the maximum rate. The sole exception to this rule concerned the payment of a “reasonable” dividend to an adult age 25 or older, considering his or her contribution to the business. In the case of adult taxpayers age 18 to 24, their contribution to the business had to be significant to be able to receive a “reasonable” dividend.
According to Minister Morneau’s announcement of December 13, these rules will be maintained, but a few exceptions have been added. Here is an overview:
Payment of dividends to a spouse
For the sake of equity with workers who have access to a retirement plan, the government is making it possible for the spouse of a business owner to receive dividends from the corporation without being subject to the new rules governing income sprinkling. This measure is modeled on pension income splitting.
A business owner age 65 or older will therefore be able to pay dividends to his or her spouse without any tax constraint. In such a case, the spouse will add the dividends received to his or her income for the year and these dividends will be taxed at the recipient’s personal tax rate.
Minimum number of hours worked
An adult age 18 or older who works an average of 20 hours or more per week will be able to receive dividends without being subject to the new income sprinkling rules. In addition, if this adult maintained this average number of hours worked (minimum of 20 hours) for a period of at least five years (consecutive or not) in the past, he or she will be able to receive dividends without any tax constraint, even if he or she no longer works for the business.
A person 25 years of age or older who owns 10 per cent or more of the voting and participating shares of a corporation that derives at least ninety per cent of its income from the provision of services and that is not a professional corporation will be exempt from the new income sprinkling rules. Considered from the viewpoint of incorporation of professionals, this situation will be more complex, if not impossible, to achieve.
Shares received at the time of death will continue to be eligible for dividends without tax constraints, if the deceased was not subject to the rules governing taxation of split income. The tax treatment of a person who inherits shares will therefore be at least as favourable as that of the deceased.
Capital gain on the sale of a business
We wish to point out that the capital gain realized on the sale of a business is no longer subject to taxation of split income. Such gains can be split with members of your family age 18 or older without any tax constraint. In such case, they will be able to benefit from their capital gains exemption, which comes to $835,716 in 2017.
Don’t forget that all the measures announced by Minister Morneau come into force on January 1, 2018. If you need explanations concerning the impact of these measures or if you have concerns regarding the incorporation of your practice, don’t hesitate to contact your advisor. We’re there to help you with your decisions and guide you towards the best solutions for you and your family’s well-being.
We will keep you informed of any new developments in this matter.
Benoit Chaurette, M. Fisc., Pl Fin.
Tax Specialist and Financial Planner
The information contained herein has been obtained from sources deemed reliable, but we do not guarantee the accuracy of this information, and it may be incomplete. The opinions expressed are based upon our analysis and interpretation of this information and are not to be construed as a recommendation.
If you have any questions, please contact your Wealth Management Advisor, or your tax advisor, your legal advisor or your accountant.