Joint Committee identifies anomalies in the revised split income rules
In addition to broader questions about the scope and practicableness of the revised split income proposals, the Joint Committee has identified quite a number of technical anomalies and oddities respecting the rules, of which a sampling is listed below.
- The definition of an excluded shares excludes shares of a corporation which derives significant income directly or indirectly from a related business. This means that a holding company that annually receives its income as dividends from an Opco in whose business the parents are actively involved will be tainted (so that dividends paid by Holdco to their over-24 inactive child will also be tainted) whereas there likely would not be a problem it there were no Holdco and the family held all their shares in Opco directly.
- The exclusion in para. (b) of the excluded amount definition for spousal separation transfers described in s. 160(4) is quite narrow so that, for example, property transferred indirectly to the separated spouse through a s. 55(3)(a) spin-off transaction would not qualify, nor would an extraordinary discretionary dividend paid on one of her existing shares.
- The definition of “arm’s length capital” for adults who have not attained the age of 24 before the year excludes any borrowing by the specified individual under a loan or other indebtedness including from arm’s length sources – even where there is no security or guarantee provided by a “source individual” (related family member).
- The s. 120.4(1.1)(d)(iii) rule – which deems an amount to be derived from a business to include an amount that is “derived from an amount that is derived directly or indirectly from the business” – will be problematic if interpreted broadly. For example, an Opco dividend is received by a specified individual in respect of Opco’s business, who invests it in shares of Opco 2, which does not carry on any “related business” respecting the individual, with the shares subsequently generating income or a capital gain.
[I]t seems particularly inappropriate for the rule to apply in situations such as [this], where amounts could be deemed to be derived from a related business “through” amounts that have already been received by, and taxed in the hands of an individual.
- The definition of “related business” does not exclude listed corporations or mutual fund trusts or corporations. For example, a specified individual is a beneficiary of a trust holding shares of a listed arm’s length corporation of which a Canadian-resident sibling is a full-time employee, such that this public corporation is carrying on a “related business” in respect of the specified individual, and so that any income or taxable capital gain of the specified individual included under s. 104(13) or 105(2) in respect of the trust would seem to be subject to the tax.
Neal Armstrong. Summaries of Joint Committee, “Legislative Proposals to Address Income Sprinkling Released December 13, 2017,” 8 March 2018 Joint Committee Submission under s. 120.4(1) – “excluded shares,” “excluded amount,” para. (b), para. (a), “arm’s length capital,” “related business” - para. (c), “excluded business,” and s. 120.4(1)(d)(iii), and s.120.4(3).