Canada: Finance Releases Updated Legislation To Limit Income Splitting

Last Updated: December 18 2017
Article by MaryAnne Loney and Mike Harris

On December 13, 2017, the Government released updated proposed legislation in respect of the tax on split income ("TOSI"). This legislation is a revision to the proposed changes introduced in July, 2017, and implements a number of changes that the Minister of Finance suggested in October would be forthcoming (for our October article see here).

Current TOSI

TOSI as currently drafted limits the ability to split income with minor children for the purpose of taking advantage of the child's lower marginal tax rates. Any "split income" of the child is taxed at the highest marginal rate, eliminating any benefit from splitting the income.

TOSI currently applies to income earned by children under 18 from certain sources, including dividends on shares (other than publicly listed securities), shareholder benefits, or income earned by a partnership or trust where the income can reasonably be considered to be derived from the provision of property or services of a related individual.

July 2017 Proposed Expansion to TOSI

In general, the July proposed legislation expanded TOSI to adults, and was proposed to apply to a number of sources, including dividend income earned from family businesses, unless the amount of the dividend paid was "reasonable". The proposed changes would also treat capital gains on shares of family businesses and income earned on previous TOSI as items to which TOSI would apply. Tax practitioners, including our tax lawyers at McLennan Ross LLP, had serious concerns as the proposed legislation was incredibly complex and added significant uncertainty to paying out dividends to related shareholders. (For a more detailed review of the July proposals, see our updates here).

Related July 2017 Concerns

In addition to the TOSI rules, the July proposed legislation introduced rules to greatly reduce the ability of family members who are not actively involved in the family business to use their lifetime capital gains exemption when the shares of the family business are sold. These proposed changes would also have greatly limited the ability to access multiple lifetime capital gains exemptions through the use of a family trust.

Our primary concerns with the July 2017 TOSI proposed legislation were:

  • It was not clear what the Canada Revenue Agency would consider to be "reasonable" in respect of dividends, interest income and capital gains. These concerns have been somewhat addressed as detailed below, though questions remain.
  • The complexity of the new rules would create a significant compliance burden. This has been largely addressed, though where TOSI could potentially be an issue, some additional analysis and record keeping will still be needed.
  • The proposed limitations on accessing the lifetime capital gains exemption would make transferring shares to the next generation more difficult. These proposed limitations have been eliminated.
  • As there is no grandfathering to protect gains already accrued prior to 2018 which will now be caught by TOSI, family owned corporations will have to consider what to do with shares already owned by shareholders which would be caught by the new TOSI rules. This is less of an issue under the most recent version of the legislation as fewer people will be caught by TOSI, but it is still potentially an issue for some people.

Excluded Amounts and Reasonableness

The new legislation provides some clear exclusions as to what is not caught by TOSI. These exclusions cover many of the circumstances tax practitioners were concerned about. In particular:

  • Income and gains on inherited property will generally be exempt from TOSI if the individual inheriting the property is 24 or younger and inherited the property from his or her parents. Inherited property will also generally be treated to more relaxed rules in other cases, with recipients being eligible for the same exclusions and reasonableness tests as the deceased.
  • Capital gains arising as the result of a death of an individual are not subject to TOSI.
  • Property acquired in a separation or divorce (by judgment or written agreement) will be exempt from the TOSI rules.
  • Capital gains on the shares of a qualified small business corporation share, qualified farm property, or qualified fishing property are not subject to TOSI and are instead treated as ordinary capital gains under the existing rules. Most importantly, these gains continue to be eligible for the lifetime capital gains exemption. A related rule ensures that planning through a family trust to access the lifetime capital gains exemption is also permitted.
  • Amounts derived from an "excluded business" are not subject to TOSI. Excluded businesses are those where the individual was at least 18 years of age and actively engaged on a regular, continuous and substantial basis ("Actively Engaged") in the activities of the business in the taxation year or in any five prior taxation years of the individual. Helpfully, the draft legislation provides a bright-line test that says that an individual will be deemed to be Actively Engaged if the individual works in the business at least an average of 20 hours per week during the portion of the taxation year of the individual that the business operates, or meets that requirement for any five prior years.
  • Amounts derived from "excluded shares" of a corporation owned by an individual over 25 are exempt from TOSI. A shareholder will own excluded shares of a corporation where:
  • the corporation is not a professional corporation, and less than 90% of the corporation's business income was from the provision of services (i.e. if the corporation has business income, at least 10% of that business income is from providing goods);
  • the shares represent 10% or more of the votes and value of the corporation; and
  • all or substantially all of the income of the corporation is not derived from another related business in respect of the individual.

Taxpayers will have until the end of 2018 to meet this qualification.

This exception only applies to income of an individual, where that individual owns the excluded shares. Finance guidance indicates that this definition will not be satisfied where a trust owns the shares and income is allocated to the beneficiaries of the trust. This means that even if the trust's ownership meets the excluded shares definition, any income allocated to beneficiaries will not be excluded because the beneficiaries do not themselves own 10% of the shares. This is likely to cause significant problems where there are non-tax reasons to have legal ownership of shares of a corporation separate from beneficial ownership (for example, disability trusts).

There is an exception for retired or deceased spouses. Where one spouse or common-law partner is 65 or older, and any income earned by that spouse would be an exempt amount (for example, if that spouse had at least five years of actively running the business), any income earned by the second spouse is exempt from the TOSI rules. This is intended to align with existing pension-splitting rules. A similar rule applies if the actively involved spouse has died.

Further, Finance has provided numerous examples that suggest the application of TOSI will end up being fairly limited.

What to do with existing shares caught by TOSI

One of our major concerns in 2017 was what should shareholders do with shares that are caught by TOSI, and more importantly, should they get rid of them prior to 2018.

This question was further complicated by the fact that gains on shares caught by the July TOSI rules that result from transfers to non-arm's length parties were going to be taxed as dividends, rather than capital gains. This gave a terrible tax result. As a result, our advice was that there may be an advantage in getting rid of the shares in 2017, although it would be impossible to know for sure until we knew more.

Luckily, this proposed dividend tax treatment of capital gains has been eliminated except for transfers from children under 18. As a result, the worst consequences of not having disposed of shares in 2017 are eliminated.

As the application of the TOSI rules appears to be quite limited, we do not believe that disposing of shares in 2017 will the best option in many circumstances. Instead, it may be preferable to consider many other planning techniques in 2018 to attempt to bring the share ownership outside of the TOSI Rules.

What to do in 2018

  1. Review ownership and shareholder contributions with your tax advisor to determine whether any shares will be caught by TOSI.
  2. Determine if the corporation should reorganize its share structure in order to be able to take advantage of the excluded shares provision. Note that for 2018 it is the share ownership at the end of the year that determines whether the shares are excluded shares, so there is an opportunity to reorganize in 2018 and avoid the TOSI rules.
  3. Review shares held in family trusts to determine what should be done with those shares. Potentially, shares should be rolled out to beneficiaries so they may take advantage of the excluded shares provision. Alternatively, the corporation may choose to not pay dividends on the shares to beneficiaries in the interim with the plan of potentially rolling them out to beneficiaries in the future.
  4. Stay tuned to our updates... While this legislation has answered many questions, further questions remain. We also anticipate the Government will be releasing their legislation on the taxation of passive investments in corporations with the 2018 budget.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions