Income sprinkling, income splitting, and passive investments

  • March 29, 2018

No one is ever going to suggest that tax law is simple enough for average individuals to wrap their heads around. But the complexities in proposed changes to the “tax on split income” provisions of the Income Tax Act will go “beyond the capability of business owners and generalist advisors to comprehend and apply,” says a submission from the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada.

The Committee commends the Finance Department for the improvements made to the draft TOSI legislation introduced in July, 2017, but note that serious technical and practical issues remain.

Before enumerating a number of specific technical concerns with the proposals, the Committee noted a couple of areas where over-reach and complexity ran the risk of causing unintended consequences.

One of those issues is the structure of the proposals: instead of describing the situations where TOSI is meant to apply, the provisions adopt as a starting point that they could apply to every individual Canadian resident, with certain exceptions.

“We are concerned that the adopted drafting style will inevitably lead to assertions by the CRA that the rules apply in a broad range of situations, leaving the taxpayer with the task of proving why a particular exception applies to him or her.”

The rules are also “disproportionately complex,” the Committee says, as well as defining the term “specified individual” so broadly as to catch pretty much every individual in Canada – a radical departure from existing law, which does the opposite. And figuring out whether a taxpayer is subject to the law requires a nuanced understanding of tax law which most individuals simply won’t have.

“There is a time and place for complexity,” the Committee says, adding, “We respectfully suggest the burden imposed on such taxpayers by these complex proposals is simply unreasonable.”

The Committee offers to work with Finance to simplify the rules.

Revised tax proposals in Budget 2018

The latest letter from the Coalition for Small Business Tax Fairness, sent to Finance Minister Bill Morneau after the federal budget was brought down in March, raised concerns about changes to rules regarding income-splitting and passive investments.

The Coalition says it doesn’t feel the latest changes to rules for income-splitting accurately reflect the realities of running a small business, and adds that tax experts feel the changes add new levels of uncertainty – and much room for interpretation by the Canada Revenue Agency.

As for passive investments, the Coalition says it’s pleased the government now recognizes the importance of allowing some passive investments within a private corporation, but believes the proposed $50,000 investment income limit will be inadequate for many.