Income Splitting Where One Spouse’s Age is 65 Exception to Tax on Split Income (“TOSI”), written by Stuart Bollefer
In July 2017 the Liberal Government Finance Minister announced a series of very significant changes affecting the taxation of private corporations. One of these was the tax on split income or TOSI rules which generally were intended to stop income splitting using private corporations. The rules have been subject to a number of revisions, are very complicated and are still subject a number of questions.
Stuart Bollefer is admitted to the Bar in the Province of Ontario and is an experienced tax lawyer practicing in Toronto, Ontario, with the law firm Aird & Berlis LLP. He has presented this topic at the Ontario Tax Conference and discussed these rules in detail.
The purpose of this short post is to briefly describe the ambit of the rules and some of the available exceptions, but is not intended to be a substitute for advice from a qualified tax specialist.
As part of the Ontario Tax Conference presentation, given in Toronto, Ontario, Stuart Bollefer also prepared an 80 page paper which can be accessed by members of the Canadian Tax Foundation.
Essentially, the TOSI rules will subject any type of distribution from a corporation to top rate tax where the payment is made as a dividend on shares owned by an individual or interest paid on debt advanced by the individual, where the recipient of the dividend or interest is related to a person who either owns 10% or more of the shares of the corporation or is active in the business of the corporation. The TOSI rules can also apply to certain capital gains realized on the sale of shares of a private corporation. There are many additional supplementary rules that apply.
In order to avoid the application of TOSI, it is necessary to find an applicable exception. One very useful exception — which is really in two parts — discussed by Stuart Bollefer is the “Income Splitting Where One Spouse’s Age is 65 Exception”. This exception is described below.
Income Splitting Where One Spouse’s Age is 65 Exemption
The TOSI rules provide for an exception once the spouse who is the source individual has attained the age of 65 and the income from the source individual spouse would be an excluded amount in relation to a related business in relation to that spouse. In those circumstances, the other spouse, who would be the specified individual, can receive distributions from the business and will not be subject to TOSI since that other spouse is considered to have received an excluded amount by virtue of the ancillary rule contained in paragraph 120.4(1.1)(c). More specifically, the source individual must attain the age of 64 years of age in the previous year. However, if the source individual spouse died in the previous year, then the age requirement is irrelevant and the income earned by the spouse who is the specified individual will be excepted from TOSI in the year of receipt.
As explained in the Department of Finance Explanatory Notes:
Paragraph 120.4(1)(c) applies to amounts received by a specified individual in the taxation year of the individual, if the spouse or common law partner of the specified individual attained the age of 64 years before the year, or died before the end of the year. In the latter case, it is not necessary that the spouse or common law partner have attained the age of 64 years before their death.
If paragraph (c)applies, an amount will be an excluded amount in the hands of a specified individual if the amount would have been an excluded amount in the hands of the specified individual’s spouse or common law partner, if it had been received by the spouse or common law partner as income in the year (or in their last taxation year, if applicable). For the purpose of determining whether an amount would have been an excluded amount in the last taxation year of an individual for a taxation year prior to the coming into force of these amendments, the definition ‘excluded amount’ (and related provisions) in these amendments are to be used.
Again, this rule will except not only income from a related business but any taxable capital gains or profit realized on the disposition of the entity that carries on the related business. Therefore, the most likely situation where this rule will apply is where one spouse is active in the business on a regular, continuous and substantial basis, either before the individual’s death or at the time the specified individual spouse receives a distribution if the active spouse (the source individual) is 65 or older.
The discrepancy in age of the spouses is irrelevant since it is only the source individual’s age that is tested.
There also appears to be a complete exception to the surviving spouse, where the source individual spouse has died in a previous year, regardless of age, and the surviving spouse could have received income that was an excluded amount in the year of death. For example, suppose a 46 year old wife was active in the business owned by the wife and husband. Husband is not active in the business, but their adult child is active in the business. The business is an excluded business in relation to the wife given her full time employment. If the wife dies, the business of the corporation will still be a related business in relation to the husband because of the involvement of the child. In these circumstances, the husband could receive distributions on the shares he owns in the corporation without application of TOSI given this exception regardless of the fact that the wife was only 46 years of age at the time of death.
The rules are complicated and good tax advice should be sought in navigating these rules. Stuart Bollefer will be discussing further exceptions in subsequent posts.
