This fall, CHC has been busy, engaged in Finance Canada’s consultation on changes to the Income Tax Act. The Government has just announced revisions to its “Income Sprinkling” rule. These revisions are in addition to the revisions the government announced back in October, following a concerted advocacy effort by CHC and Canada’s small business community.
These changes include the following categories that automatically exclude individual members of a business owner’s family from having to go through the reasonableness test:
- A business owner’s spouse, provided that the owner meaningfully contributed to the business and is aged 65 or over. In recognition of the special challenges associated with planning for retirement and managing retirement income, the new approach to income sprinkling will be better aligned with the existing pension income splitting rules. This also reflects the fact that a business can play an important part in supporting its owner in retirement;
- Adults aged 18 or over who have made a substantial labour contribution (generally an average of at least 20 hours per week) to the business during the year, or during any five previous years. For businesses with seasonal operations, such as may be the case with farms and fisheries, the labour contribution requirement will be applied for the part of the year in which the business operates;
- Adults aged 25 or over who own 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation;
- Individuals who receive capital gains from qualified small business corporation shares and qualified farm or fishing property, if they would not be subject to the highest marginal tax rate on the gains under existing rules.
Individuals aged 25 or over who do not meet any of the exclusions described above would be subject to a reasonableness test to determine how much income, if any, would be subject to the highest marginal tax rate. In certain cases, adults aged 18-24 who have contributed to a family business with their own capital will be able to use the reasonableness test on the related income.
CHC has been quite vocal about the reasonableness test, to ensure producers will not be unintentionally impacted. The test will take into account the following factors:
- Work Performed: the work done by the individual in support of the Related Business before the amounts are paid;
- Contributed Property: the property contributed by the individual in support of the Related Business;
- Assumed Risks: the risks assumed by the individual with respect to the Related Business;
- Past Payments: the total of amounts paid or payable by a person or partnership to or for the benefit of the individual in respect of the Related Business; Any other relevant factor.
For additional clarity, the Canada Revenue Agency (CRA) has released guidance with respect to these measures. The CRA’s guidance will seek to help businesses and family members understand the operation of the measures and, in doing so, effectively reduce their compliance burden in relation to these new rules. Taxpayers with questions regarding its guidance can contact the CRA.
The revised income sprinkling measures are proposed to be effective for the 2018 and subsequent taxation years. Owners of private corporations will have until the end of 2018 to adjust to the new exclusion for non-service businesses.
After a first review, CHC is generally pleased with Finance Canada’s efforts to reverse and scale back its proposed changes (as announced in July 2017) so that hard-working farmers will not be unintentionally impacted.
CHC will continue to review the changes and keep an open dialogue with the Government of Canada to ensure that fruit and vegetable producers are safeguarded from the changes.