On December 17, 2017, the government released revised DRAFT legislative proposals which may be applicable January 1, 2018. The focus was on income splitting and Foundations LLP is now happy to say that there is now some clarity regarding the treatment of dividends. Our basic summary is:
The highest marginal tax rate (currently 33%) is planned to apply to recipients of dividends from businesses that the recipient is connected to which basically means spouses and children.
Exemptions to the application of this high tax rate are to dividend recipients if:
- The recipient is the spouse of the key business owner who is age 65 and over;
- The recipient of a dividend is or was in the past 5 years, “actively engaged on a regular, continuous and substantial basis” in the activities of the business. 20+ hours a week qualifies as actively engaged. Facts for less than 20 hours will be considered on a case per case basis;
- The recipient owns 10% or more of the voting shares of the business AND is age 25 and over AND the business is NOT a professional corporation. This means that the spouse and children of doctors, dentists, lawyers, accountants, chiropractors, engineers and veterinarians, etc. will be subject to the highest tax rate still;
- The recipient qualifies under the reasonableness test based on work performed, property and capital contributed, risks taken, etc; OR
- The recipient is 18-24 in age, the reasonableness test is based on contributions of actual capital to the business.
You can read more on this by going to http://www.fin.gc.ca/n17/data/17-124_1-eng.asp and https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/income-sprinkling/guidance-split-income-rules-adults.html