The split income proposals assume a model that is at variance with the reality of long-term family businesses
The proposed expanded tax on split income will extend to split income of individuals over 17 to the extent that the amounts received are the “split portion” of the split income.
“The proposals imply that outputs are equal to inputs.” For example:
[A]ssume that in a successful family business, each individual receives appropriate salaries for the time and effort contributed to the business. After payment of these salaries, the business still has retained earnings and marketable goodwill. Under the proposals, all dividends and capital gains — to everybody — will be split income and taxed at the top rate.
Furthermore, “To be effective, measurement of input then must go back to inception, which is not practical.” In this context, consider this situation:
A family starts a business, which requires a great deal of time and effort from all family members for many years. Eventually the business becomes very successful and it is turned over to professional management. It runs for many years with little involvement of those same family members.
The Explanatory Notes state that “Generally, the split portion definition is intended to include amounts received by a specified individual which are not commensurate with the amounts that the individual would receive if they were dealing with the payor of the amounts at arm’s length." However, this proposition does not take into account that:
The nature of the small business financed by family is that the appropriate arm's-length return is almost impossible to calculate — in many cases, no arm's-length person would finance the operation on any terms.
Neal Armstrong. Summary of Kevyn Nightingale, “Private Company Income Splitting: Part 2 – Observations, Tax Topics (Wolters Kluwer), No. 2371, 17 August 2017, p. 1 under s. 120.4(1) – split portion - para. (b).