Canadians file their own tax returns and pay progressively greater rates of tax as their income rises. Although Canada’s restrictions on income splitting are less lenient than those in other countries, single, married, or family taxpayers in this country can split their income in order to pay less in taxes.
Up until 2018, paying dividends on shares of a business that the family members held allowed business owners to divide their revenue with them. Tax on Split Income (TOSI) regulations went into force in 2018 and made paying dividends to family members more challenging. Here’s a brief explanation of the new rules:
What is income splitting?
Redistributing income among a family using the strategy of “income splitting” is typically from one spouse in a higher tax bracket to another spouse in a lower tax bracket. It is done to lessen the total amount of taxes owed by the family.
Generally speaking, income splitting is more effective when one spouse makes much more money than the other because the tax benefits are greater. Usually, people approach accountants like Shayan Rashid to claim income splitting.
How does income sharing now operate?
The TOSI will now apply to the distribution of income to people over the age of 18. All individuals above the age of 18 will be subject to the “highest marginal tax rate” on their dispersed income. The prospect of using income splitting with a family member in a lower tax band to benefit from reduced tax rates is completely eliminated by the new regulations. With the help of accountants like Shayan Rashid, you can get a clear idea about the new income splitting.
The process of sharing the income is more complicated than just having the higher earner give, the lesser earner investments or investment funds. According to attribution regulations set down by the CRA, taxpayers must disclose all sources of income, including any income derived from investments made using savings or capital. As a result, any profits made from a gift investment would be credited to the high earner and subject to higher taxation. Thankfully, there are a few exceptions to these laws.
- Business profits are not included
Profits are free from TOSI if he/she is between the ages of 18 and 24 and has put in an average of at least 20 hours per week for the business during the current tax year. Additionally, you can be eligible for the exemption if you show that you worked at least 20 hours per week for five prior tax years.
- Shares are not included.
Dividends paid to a relative who is at least 25 years old and who holds at least 10% of the voting and financial interests in the company are not subject to TOSI.
- Further exclusions
- Entrepreneurs who are over 65
- Spouses of business owners who have made contributions will not be liable to TOSI when distributing their income, nor will anyone over 65.
- Income from the sale of eligible business interests, agricultural or fishery properties
The new TOSI exemption criteria are not only complex, but they may also alter in the years to come. There are various “grey areas” that you can’t leave to speculation, so a lot of businesses still need to work on realigning the extended TOSI structure.