Guidance on the application of the split income rules for adults 15 December 2017 CRA Webpage

Deference to taxpayer’s good-faith efforts to determine Reasonable Return

In determining whether the payment is a Reasonable Return [defined as a reasonable return based on listed criteria or “such other factors that may be relevant” (the "Reasonableness Criteria")], the Agency does not intend to generally substitute its judgment of what would be considered a reasonable amount unless there has not been a good faith attempt to determine a reasonable amount based on the Reasonableness Criteria.

Example 2 (high interest on start-up loan)

Proposals do not apply to age-25 child with start-up restaurant company who borrows at the same high interest rate from mother and friends.

Example 5C (over 24 and dividend comparable to reasonable salary)

An Opco dividend distributed by family trust to grandchild (over 24) working one day per week in Opco business, where the distribution’s amount is the same as the amount paid by Opco to its full-time clerical staff prorated for the time worked by the grandchild.

Example 7 (child acquiring Opco receives large dividend before exceeding hours test)

Parent who worked full-time in the business of Opco, which is a small business corporation, retires and sells all the shares of Opco to Child (over 25), who now manages the business, but does not meet the 20 hour average test because the sale occurred part-way through the year. A large dividend paid to Child at year end is an excluded amount because Child is actively engaged in the business and because the dividend represents a reasonable return.

Example 10 (dividend of over-25s on gain from jointly supervised real estate)

Siblings A, B and C founded Real Estateco with nominal capitalization and built it up through 3^rd-party financing (using personal guarantees) and a 3^rd-party manager. Dividends received by them (now, over 25) following a sale of one of Real Estateco’s rental properties at a gain is from excluded shares and also represents a reasonable return “having regard to the risks they assumed as directors of Real Estateco, their supervision of Third Party and their involvement in Real Estateco’s strategic decisions.”

Example 11 (not unreasonable dividend to bookkeeper-spouse working under 20 hours for Professionalco)

As the spouse (over 25) of a full-time professional works less than 20 hours per week on her bookkeeping functions constitute a reasonable return. “While high, the amount of the dividend is comparable to the amount that was paid to an arm’s length person.”

Example 1 (trust distribution to inactive under-25 child)

Opco dividend distributed by discretionary family trust to age-23 child who never worked in business is split income.

Example 6 (dividends following estate freeze)

Following Parent A (who previously had worked full-time in the business) effecting an estate freeze on Opco, his preferred shares will be redeemed over time, Child 1 (over 25) who works in the business over 20 hours per week will receive salary and Child 2 (also over 25) who does not work in the business and is employed elsewhere will receive, along with Child 1, distributions by a family trust of Opco dividends.

The deemed dividends received by Parent 1 are from an excluded business given Parent 1’s previous full-time work. Child 1’s trust distributions are excluded amounts but not those of Child 2 – but as Child 2 is in the top bracket, no additional tax will be paid.

Example 3B (inactive spouse holding excluded shares)

Dividend paid by Opco (a components business) only on the class of voting discretionary shares (50% of equity) held by over-25 inactive spouse is an excluded amount.

Example 8 (retired owner-managers holding excluded shares)

Dividends paid by Investco, which a number of years ago had ceased to carry on an active business managed by Siblings A and B, to its two equal shareholders (Sibling A, who is retired, and the widow of Sibling B) are from excluded shares.

Example 10 (dividend of over-25s on gain from jointly supervised real estate)

Siblings A, B and C founded Real Estateco with nominal capitalization and built it up through 3^rd-party financing (using personal guarantees) and a 3^rd-party manager. Dividends received by them (now, over 25) following a sale of one of Real Estateco’s rental properties at a gain is from excluded shares and also represents a reasonable return “having regard to the risks they assumed as directors of Real Estateco, their supervision of Third Party and their involvement in Real Estateco’s strategic decisions.”

Example 4 (under 25 and over 20 hours)

Dividends from Farmco paid to a children’s trust and distributed to an age-20 child who works 20 hours per week in the business are excluded amounts.

Example 5 (under 25 and under 20 hours)

An Opco dividend distributed by family trust to grandchild (age 19) working one day per week in Opco business is not from an excluded business.

Example 5A (reasonable-return dividend not excluded if under 25)

An Opco dividend distributed by family trust to a child (age 20) working 600 hours each summer in Opco business is not from an excluded business.

Example 7 (child acquiring Opco receives large dividend before exceeding hours test)

Parent who worked full-time in the business of Opco, which is a small business corporation, retires and sells all the shares of Opco to Child, who now manages the business, but does not meet the 20 hour average test because the sale occurred part way through the year. A large dividend paid to Child at year end is an excluded amount because Child is actively engaged in the business and because the dividend represents a reasonable return.

Example 9 (business requires less than 20 hrs/week)

Spouses A and B, each aged 23, equally own and founded a mobile-apps company, on which they work on evenings and weekends (less than 20-hours per week) as the only employees. Their dividends are from an excluded business.

Example 10 (dividend of over-25s on gain from jointly supervised real estate)

Siblings A, B and C founded Real Estateco with nominal capitalization and built it up through 3^rd-party financing (using personal guarantees) and a 3^rd-party manager. Dividends received by them (now, over 25) following a sale of one of Real Estateco’s rental properties at a gain is from excluded shares and also represents a reasonable return “having regard to the risks they assumed as directors of Real Estateco, their supervision of Third Party and their involvement in Real Estateco’s strategic decisions.”

Example 5B (salary excluded)

Salary paid by Opco to a child (over 24) working 600 hours each summer in Opco business is not split income (s. 120.4 does not apply to salary).

Example 12 (spouse over 65)

Spouse A and B, aged 65 and 60, own 95% and 5% of the shares of Investco, whose active business was actively managed by Spouse A (with no involvement of Spouse B) before it became a portfolio company. The payment by Investco of substantially all of its net investment income to them to augment their retirement income will give rise to excluded amounts to Spouse B given “because, on the one hand, it would be an Excluded Amount in respect of Spouse A if it had been included in the income of Spouse A and, on the other hand, Spouse A is over age 65.”