Maximize tax exemptions on split income

Changes to the federal Tax on Split Income rules have gone through revisions in the last few years, and some experts say they are still seeking clarity on some aspects of the rules.

Kurt Oelschlagel, tax partner with BDO Canada, says the Canada Revenue Agency changed some rules and changed allowable and excluded business expenses.

Young adults and excluded business exception

In a presentation given during the Canadian Association of Farm Advisors’ 2018 Farm Tax Update conference, Oelschlagel lists several notable TOSI characteristics proposed by the Department of Finance, that are now no longer being pursued by the ministry. 

A change still in play, however, has to do with dividends and other payments received by young adults. 

Businesses may be exempt from some tax through excluded business exceptions, he says, but now, rules have changed for individuals between the ages of 18 and 24. 

Oelschlagel says data indicated young adults may receive a large number of dividends from private corporations and pay little tax, largely because many were in post-secondary school and lacked significant taxable income. Because of this, young adults in that range can no longer rely on the excluded shares exemption in the same way.  

According to BDO Canada, family members who are at least 18 years of age and are engaged on a regular, continuous and substantial basis in the business - that means working an average of 20 hours or more every week during the part of the year in which the business operates – can be exempt from TOSI. 

Marcello Mastroianni, a small business tax expert with G. L. Fraser and A Inc. – an accounting firm in Essex County, Ont. – says proving an individual actually put in the required time might be an issue. 

“I don’t know of any family run business that uses a punch clock for owners and close family members,” he says.  

“Arguably, there have been many years in the farm industry where family members have been underpaid and worked more than 20 hours per week. Certainly, the income reported on a tax return will not support the hours worked, so this will likely be a hurdle.”  

Going forward, both Oelschlagel and Mastroianni encourage business owners concerned about TOSI to actively keep logs, photos and other records of individuals’ involvement. 

Customized tax advice critical

Oelschlagel reiterates TOSI regulations are complicated, and farmers should seek professional tax advice “to be on the safe side.”  

“The structure of the farm operation may not be complicated, and the shareholders/partners may easily qualify for an exclusion,” said Oelschlagel in a later interview. “Non-active family members who own shares of the corporation, or are partners in a family farm partnership, TOSI may apply to them.” 

“The key advice for farmers is to check with their tax advisor on whether or not TOSI is an issue for them.” 

He adds that a thorough review on the impact of TOSI is required for farms with more complex business structures, like those including holding corporation(s) or family trusts. 

Bottom line

Qualifying for exclusions to Tax on Split Income may not be difficult. Tax experts recommend keeping accurate records of family involvement in the farm to help facilitate tax calculations, but also stress the critical need for each producer to seek individual tax advice. 

Tax experts recommend farm families log work done by family members to maximize allowable exemptions for the Tax on Split Income. Tweet this

Article by: Matt McIntosh