CRA provides examples on the operation of the proposed split-income rules

Various points illustrated by examples prepared by CRA of the operation of the expanded split income proposals include:

  • There generally is no limitation under the rules on income-splitting with an over-24 inactive spouse with a significant shareholding in the business in question – for example, paying all the profits as a dividend to such spouse on a separate class of discretionary shares (Example 3B).
  • Nor is there any limitation under the expanded rules on Opco paying salary to a child or spouse (other than under the current rules including s. 67) (Example 5B).
  • There is a safe harbour for under-25 children who work an average of at least 20 hours per week in the business, but there is a more general exclusion for being actively engaged on a regular, continuous and substantial basis in the activities of the business in the taxation year or in any five prior taxation years. CRA does not consider this more general test to be satisfied where the child worked 600 hours in the four summer months (Example 5A), but considers it to be satisfied where the child is a major actor in a business that does not require a lot of hours per week (Example 9).
  • The definition of an excluded share refers inter alia to a test of less than 90% of the business income being from the provision of services. CRA references examples of shares in a portfolio-investment corporations (Example 8) and a rental-property corporation (Example 10) as being excluded shares.
  • CRA states that in determining whether a payment is a reasonable return, it “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.” It gives, as an example, a spouse doing bookkeeping of less than 20 hours per week for the other spouse’s professional firm, and who receives dividends that “while higher that the amount that was paid to the arm’s length bookkeeper,” nonetheless do not violate the quoted standard (Example 11).

Neal Armstrong. Summaries of CRA Guidance on the application of the split income rules for adults under s. 120.4(1) – split income – (c)(ii)(C), reasonable return, excluded shares, excluded business, split income, s. 120.4(1.1)(c).