Family-owned corporations have until December 31, 2018 to ensure their shareholdings do not attract extra taxation.
The federal government recently changed the legislation regarding taxation of dividend income from small business corporations. The main thrust of the legislation is to tax split income at a higher rate. Split income is defined as income allocated to a shareholder where that shareholder is a family member and they are a passive investor only. Passive investor is a shareholder who either does not work for the business, have an investment in the business, or a risk in the business. To clarify when this will apply, the new rules create several specific exemptions.
One of the exemptions applies when a family member owns at least 10% of all the issued voting shares and at least 10% of the value of the corporation’s issued shares. This is deemed to create a sufficient risk or stake in the business that the enhanced taxation rules will not apply. It is not enough to own non-voting shares or other special shares that do not participate in the equity of the business. The shares owned must be voting shares and also participate in the value.
The new rules have allowed a grace period for compliance. When a corporate shareholder is offside (less than 10% of the votes and value), they have until December 31, 2018 to rearrange their corporate shareholders. This can often be done by swapping non-voting shares for fully voting shares.
If you or anyone you know has a corporation, make sure the shareholdings are reviewed well in advance of December 31, 2018. If there is any concern, please check with your accountant and then one of our team members can determine what steps must be taken. Always check with your accountant as any change in shareholdings can trigger other tax consequences if not done properly.
Please note there are other exemptions that will avoid any taxation of split income. This article focuses on the ownership of shares exemption only as that one must be in compliance by December 31, 2018. If the shareholdings are in compliance by the end of 2018, then all dividends received at any time throughout 2018 will be excluded from the TOSI (Taxation of Split Income) rules.
You have until the end of 2018 to ensure your corporate shareholdings are onside to avoid TOSI.
Don’t wait! Do it now!