Tax on Split Income (TOSI)

Tax on split income (TOSI) refers to the rules that determine whether or not an individual would be taxed for business income. It also encompasses dividend payouts and company setup. The Prasad & Company LLP team is ready to advise readers on this matter.

This post will also detail who should fill out Form T1206, what split income entails, and the applicable exclusions.

What do the new TOSI rules mean to my business?

In July 2017, the Canadian government released a proposal on addressing strategies for tax planning. Prior to the application of these new strategies, company owners were able to have their children either become shareholders of the company or beneficiaries of a trust. This form of paid dividends, known as “kiddie tax,” subjected individuals who were under the age of 18 to higher individual tax rates. Meanwhile, individuals who were 18 and over benefited from a reduced tax burden.

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An owner was also able to pay dividends to their spouse. Although income normally went to the owner, they were able split their high income with family members who had a lower income. Again, this “income splitting” allowed company owners to pay a lower tax rate.

Prasad & Company LLP is ready to help companies avoid penalties and understand the new TOSI rules.

Who should fill out Form T1206?

In order to figure out if you should Form T1206 in the first place, you should first determine if you are a specified individual.

A specified individual is someone who was a resident of Canada at the tax year’s end. For those who were under 18 years old at the year’s end, at least one of their parents must have been a resident of Canada during that year. If the situation pertains to an individual who has passed away, then such a person should be a resident of Canada before their death.

In addition to these conditions, you should fill out Form T1206 if you have income that does not pertain to an excluded amount. You should also have split income in the tax year. If you have claimed a reserve for 2018 on Form T1206, then you should fill out the form for 2019.

What does split income entail?

It is important to understand what split income entails as well. For example, split income can include taxable dividends and shareholder benefits. It should be noted, however, that there are details within each inclusion that you should take into account.

For one, taxable dividends refer to corporation shares that were received either directly, through a partnership, or a trust. This trust refers to one that is not a mutual fund.

In terms of income that was received via either a trust or partnership, it is considered as split income under specific conditions. For instance, it counts if the income is either directly or indirectly from a related business or a rental of property.

A related business is one where an individual is significantly involved with the business at any time during the given year. An example of such a situation is when a source individual, in respect of the specified individual, is involved in a business partnership.

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As for the rental of property, this entails the involvement of either a trust or a partnership and whether or not an individual is related to you during the tax year. This individual should be taken into account if they regularly and actively undertake rental property activities pertaining to either the trust or partnership. The individual should also be taken into consideration if they have an interest in the partnership through another partnership.

Another instance when you may be subjected to TOSI rules is if you have received income related to interest from a debtor corporation, trust, or partnership. This applies if your other amounts, such as dividends, were received from the debtor.

When it comes to taxable capital gain and profit, they refer to the amount realized through either property disposition or a trust. This is applicable if certain conditions, such as the amount not being included in the split income definition and if the property income received is split income, are met.

What are TOSI exclusions?

Form T1206 should be filled out if the income in question is not an excluded amount. There are several types of excluded amounts.

For instance, your split income is excluded if your comes to taxable capital gains are via the disposal of applicable small business corporation shares. Qualified farm or fishing property is also relevant in this case. This is in addition to the property you received as a trust beneficiary.

Another applicable exclusion pertains to individuals who were at least age 18 at the year’s end and have received amounts that are either not from a related business or derived from an excluded business.

Exclusions also apply for individuals who were between ages 18 and 24 at the year’s end. The amount that this age group received should also be either their safe harbour capital return or a representation of a reasonable return respective of their arm’s length capital contributions.

For individuals under 25 years of age, exclusions apply if their income or taxable capital gain or profit is due to property disposition. The property should be inherited from either one of their parents or another party. This other party applies if the individual, who is under age 25, was either qualified for the disability tax credit or enrolled in a post-secondary school on a full-time basis.

If you are at least 25 at the year’s end, exclusions apply if you have received either taxable capital gain or income from excluded shares disposition. This is also the case if you have received income via a related business. It should be noted that this amount should represent a reasonable return.

What are my next steps?

Correctly filling out Form T1206 and understanding the definitions that it entails can be a challenging task. That is why the Prasad & Company LLP team is ready to assist you.

Prasad & Company LLP is an accounting firm that has been helping Canadian businesses for over 30 years. The firm’s advisors have a stellar reputation with respect to reliable solutions. Clients choose to work with the firm because of its commitment to exceptional value and up-to-date knowledge about ever-changing economic conditions and business policies.

To contact a professional at Prasad & Company LLP, call 416-226-9840. The firm can also be reached via its toll-free number at 1-888-550-TCAS.