Government Simplifies Measures to Restrict Income Sprinkling

When you have an economy that works for the middle class, you have a country that works for everyone. As the Government of Canada lowers the federal small business tax rate from 11 per cent in 2015 to 9 per cent in 2019, it will ensure the system is fair and supports owners who invest in their business, create jobs, strengthen the middle class and grow the economy.

Under current tax rules, an incorporated individual earning $300,000 can, in some circumstances, save as much in taxes as the average Canadian earns in a year. The Government is taking steps to limit the ability of owners of private corporations to lower their personal income taxes by sprinkling their income to family members who do not really contribute to the business.

Following extensive consultations with small business owners, professionals and experts, the Government is taking steps to make the tax system more fair with simplified measures that are easy to understand and implement.

Today, the Government published details of its proposals to simplify and improve the treatment of income sprinkling, which are proposed to be in effect for the 2018 tax year and beyond. The Canada Revenue Agency (CRA) has also released guidance with respect to these measures. The revised measures are designed to ensure that they do not affect family members who make meaningful contributions to a family business. The measures include several automatic, bright-line tests to make eligibility easy and simple to assess.

As announced in October, in response to concerns raised by farmers and fishers during the consultation, the Government will not move forward with changes that would limit access to the Lifetime Capital Gains Exemption or changes to rules on conversion of income to capital gains. The simplified measures on income sprinkling announced today contain rules for determining whether a family member has made a significant contribution to, or investment in, a business.

Owners of private corporations will have until the end of 2018 to adjust to the proposed exclusion for significant shareholdings‎.