On March 22, 2018 the Minister of Finance released the budget implementation bill for the 2018 federal budget (“Budget Bill”), which was tabled on February 27, 2018. The Budget Bill contains some helpful amendments to the second iteration of the tax on split income (“TOSI”) rules that were released on December 13, 2017. The explanatory notes for the Budget Bill were released separately on April 5, 2018. The changes fall into three categories.
First, the Budget Bill adds a new deeming rule in the context of separated spouses. Under the rule, if spouses are living separate and apart at the end of a year because of a breakdown of the relationship, they are deemed not to be related to one another at any time during that year. The effect of the rule is that if there is a relationship breakdown in a year and the spouses are living separate and apart at the end of the year, a business that would have been a related business prior to relationship breakdown will not be a related business for that year, and in any future years they continue to live separate and apart at the end of the year.
Second, the definition of “excluded shares” has been amended to clarify one of its requirements. Specifically, the language of the “votes and value” requirement has been changed to clarify that the shareholder must own, in the aggregate, shares that provide that shareholder with 10% or more of the votes and value of the corporation. In other words, it is not necessary for the votes and value to attach to the same class of shares, but can be spread over more than one class of shares owned by that individual.
The third set of changes addresses concerns that had been raised about the application of the TOSI rules where an individual has previously received split income from a related business, but which has ceased to be a related business in respect of that individual. Specifically, the changes address concerns that, under the prior versions of the rules: (a) if an adult individual receives income from a related business, then even if the related business ceases in the future any income that individual receives from that entity may still be subject to TOSI because the income is derived from a historical related business; and (b) if a corporation carries on a related business in respect of a shareholder and later ceases to carry on that related business, the shares of the corporation may not qualify as excluded shares because the income may be considered to be derived from another (i.e. the former) related business.
To address the above concerns the Budget Bill amends the definitions of “excluded amount” (specifically, paragraph (e) of that definition which excludes from TOSI split income that is not derived from a related business) and “excluded shares”. The effect of the change to paragraph (e) of the definition of “excluded amount” is that, in the case of a specified individual who is 18 years or older, TOSI will apply to split income of that individual if it is derived from a related business that exists “in the year”, and so presumably not to income that is derived from an historical related business. The change to the definition of “excluded shares” (the income from which is not subject to TOSI if the shareholder is 25 years of age or older) clarifies that the shares will be excluded shares (assuming all other requirements are met) so long as substantially all of the income of the corporation is not derived from another related business “other than a business of the corporation”. Presumably this means that income from an entity that was formerly a related business will not, in itself, put the shares offside the excluded share requirements.
While the TOSI rules remain complex, all of the above changes are welcome improvements.