TOSI Rules: Everything You Need To Know

In this blog, we look at some frequently asked questions about the tax on split income (TOSI) rules, including an overview of the proposed changes from the Federal Government.

What is income sprinkling?

Income sprinkling, sometimes called income splitting, is a tax planning strategy that involves distributing income from a high-income individual to family members who have lower income brackets.  The intent is to reduce the overall taxable income of the family by spreading it out among multiple individuals. The downside is that, depending on how it's done, it can be considered a form of tax avoidance or evasion.

What are the TOSI rules?

The TOSI rules are designed to limit the ability of high-income individuals to split their income with family members in lower tax brackets. The rules apply to certain types of income, including dividends from private corporations and any income from businesses or trusts. The rules are designed to ensure that income-splitting is only used for legitimate business purposes and not as a way to reduce taxes. The rules also limit the amount of income that can be split with family members.

What is the tax rate for TOSI rules?

The tax rate under the TOSI rules is the same as the top marginal tax rate for the individual receiving split income, which is currently 33%. This means that any income that is split with family members subject to the TOSI rules will be taxed at 33% rather than whatever lower tax rate they would normally pay. As such, the TOSI rules can significantly increase the amount of tax paid by some individuals.

Are there any exceptions to the TOSI rules?

Yes, there are some exceptions to the TOSI rules. Generally, these include situations where family members provide significant labour or capital in the business, such as through an active role in the company or by providing a loan to the company. In these cases, income may be split without being subject to the TOSI rules. However, it is important to note that the Canada Revenue Agency (CRA) will review all cases carefully and assess whether an exception is appropriate.

What is the proposed change to the TOSI rules?

The proposed change to the Tax on Split Income (TOSI) rules involves limiting passive income inclusion in a corporation to specific family members. The Federal Government is proposing to limit the ability of high-income individuals to use private corporations as a tax planning strategy by limiting the amount of passive income that can be split with family members. Under the proposed changes, any passive income that is split with a family member would only qualify for inclusion under the TOSI rules if that family member meets certain conditions, such as being over the age of 25 and contributing to the business in some way. The proposed changes are intended to ensure that income-splitting is only used for legitimate business purposes.

Who will be affected by the proposed changes to the TOSI rules?

The proposed changes to the TOSI rules will affect high-income individuals who have used private corporations as a tax planning strategy. Those affected by the proposed changes will no longer be able to split their passive income with family members in lower tax brackets. It is important to note that the proposed changes will only affect income that is split with family members and not other types of income or investments. Additionally, the proposed changes will also affect those who are not directly involved in the business but may benefit from income splits through family members. It is important to note that these proposed changes have not yet been implemented and the details are still being discussed by the government.

Conclusion:

The Tax on Split Income (TOSI) rules are a set of rules designed to limit the ability of high-income individuals to split their income with family members in lower tax brackets. The rules apply to certain types of income and are designed to ensure that income-splitting is only used for legitimate business purposes and not solely to reduce taxes. The Federal Government is proposing to limit the amount of passive income that can be split with family members under the TOSI rules. Those affected by the proposed changes will need to consult with a tax professional to understand how the proposed changes may affect their tax situation.

Looking for a professional accountant to help you make sense of all of the rules and regulations? Let us help. At Blackspark, we specialize in personal tax return preparation. Contact us today to learn how our services can assist you.

This blog post is intended to provide general information only and should not be construed as tax advice or opinions. Always consult a qualified accountant before making any decisions regarding your tax situation.