Federal budget 2018: Corporate tax measures: Restriction of income sprinkling
In its budget tabled on February 27, 2018, the Department of Finance Canada reiterated its intent to put measures in place to limit income splitting techniques used by companies.
Income splitting, also known as income sprinkling, is a technique that makes it possible to split income between the members of a family in order to reduce the family’s overall tax burden. Income taxed at high marginal rates is transferred to family members who are taxed at lower marginal rates.
In the past, it was possible to pay dividends to a spouse or adult child who did not work for the company and who had made only a minimal contribution to the company’s share capital. The business simply had to issue discretionary shares to such individuals in order to pay them dividends of its choosing.
Please note that dividends paid to underage children were covered by a tax on split income, which ensured that these dividends were taxed at the highest marginal rate for individuals (over 50% in Quebec).
Here is what has changed: Now, all dividends are considered split income (and taxed at the highest rate) unless it can be proven that a contribution was made to the company in time or financial resources. There are several rules that define the minimum contribution that must be demonstrated. The Canada Revenue Agency has issued a few guidelines regarding the matter, but specifics will be required. Please also consult their Frequently Asked Question (FAQ) section.
Also, please note that salaries already had to be shown to be reasonable compensation for time worked, duties performed and training received.
Given that this article is a brief summary that does not take into account all the facts related to a given situation, it cannot be construed as tax advice. If this matter affects you, please consult your tax advisor at Impôts ICI! to find out exactly what impact it will have.
Nicolas Godbout, M. Fisc, FPA
