Preferred scenario assumes that all spouses aged over 24 are earning a reasonable return (pp. 1-2)
The Parliamentary Budget Officer (PBO) … computed possible revenue outcomes for the government based on three different scenarios.
In all three scenarios, we considered dividends paid to adult family members as not being subject to the TOSI, for individuals where:
- the employment income based on the T4 slip issued by a family owned- CCPC was above a $15,000 threshold;
- if they were 25 years of age or older, they owned at least 10 per cent of the shares of a family- owned CCPC that was not in the service or professional sector;
- they were the spouse of a primary owner aged 65 or over.
Scenario 1
In this scenario, we also excluded all the spouses aged 25 or over from being subject to the new TOSI rules. The rationale behind this scenario is that it is likely that most spouses have assumed some risk in the family business (for example, using the house as collateral for a bank loan to start the business). Therefore, we assume they would pass the reasonableness test and see the dividends they received as being exempt from the TOSI. This is our preferred scenario. …
95% of additional federal tax to be collected from families with taxable income over $150,000
The Parliamentary Budget Officer (PBO) … computed possible revenue outcomes for the government based on three different scenarios.
In all three scenarios, we considered dividends paid to adult family members as not being subject to the TOSI, for individuals where:
- the employment income based on the T4 slip issued by a family owned- CCPC was above a $15,000 threshold;
- if they were 25 years of age or older, they owned at least 10 per cent of the shares of a family- owned CCPC that was not in the service or professional sector;
- they were the spouse of a primary owner aged 65 or over.
Scenario 1
In this scenario, we also excluded all the spouses aged 25 or over from being subject to the new TOSI rules. The rationale behind this scenario is that it is likely that most spouses have assumed some risk in the family business (for example, using the house as collateral for a bank loan to start the business). Therefore, we assume they would pass the reasonableness test and see the dividends they received as being exempt from the TOSI. This is our preferred scenario. …
Under scenario 1, PBO’s preferred scenario, the new policy changes would result in an estimated $589-million increase in taxation revenues [for 2018-19], $356 million or 60 per cent of which would go to the federal government. Families in Ontario would pay $224 million more in federal taxes, close to 63 per cent of the total [compared to $46M/13% for Alberta and $23M/6.5% for Quebec]. More than 95 per cent of additional federal tax payable would come from families with family taxable income above $150,000.
Overview of 13 December 2017 changes (pp. 6-7)
Specified individuals aged 18 to 24 would be required to provide a greater labour contribution, as they would have to be actively engaged on a regular, continuous and substantial basis in the activities of the business.
On the other hand, individuals aged 25 and over would only need to be involved in the activities of the business (that is, they contributed labour that could have otherwise been remunerated by way of salary or wages).
“Actively engaged in the activities of the business” is defined as working on average at least 20 hours per week during the part of the year in which the business is operational. This average of 20 hours per week must have taken place during the current year, or a combination of any five previous years.
If this criterion is met, any dividend received from the family business in which the individual was actively engaged is excluded from the new TOSI rules. This would apply only in the year in which the individual was actively engaged if he or she has not yet reached five years of active engagement.
For children aged 18 to 24, the active labour contribution is the only way to completely exclude all the dividends received from the new TOSI rules. For any family member aged 25 and over, the same exclusion will prevail if they work at least 20 hours per week on average in the current year or any five previous years.
However, even if they don’t reach the 20-hour threshold, they can still receive a reasonable amount of dividend based on the labour contribution they will have provided and the TOSI will apply only on the unreasonable excess.
The same applies for capital contributions, as a legislatively- prescribed maximum return on the assets contributed by the individual would be imposed for those aged 18 to 24. On the other hand, individuals aged 25 and over would only be required to have contributed assets or assumed risk in support of the business.
The December announcement provided a further way of excluding dividends from the extended TOSI rules. Indeed, if a family member aged 25 and over owns at least 10 per cent of the shares of the family CCPC (in terms of votes and value), and if that corporation earns less than 90 per cent of its income from the service sector and is not a professional corporation, then all dividends received are excluded from the new rules.
Furthermore, for family members aged 25 and over, TOSI will apply only in cases where it is evident that an amount received is disproportionate relative to the contributions. The new rules will also not apply to the spouse of a CCPC owner aged 65 and over, to align with existing tax law which allows pension income splitting for seniors.
Finally, the December announcement also made some additional changes to the initial proposal. Here are the most important with regards to our costing exercise:
- The definition of “related individual” will not be extended to an aunt, uncle, nephew or niece unlike what was initially intended in July’s proposals.
- The Government will not proceed with the proposed measures to apply the TOSI to compound income (that is, income earned from the investment of an initial amount of income that is subject to the TOSI or attribution rules).
- A person inheriting property will generally not face a less favourable treatment than the deceased.
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