Income Sprinkling Restrictions Simplified

On December 13, the federal Minister of Finance announced a plan to simplify changes to the Income Tax Act. For the 2018 tax year, several categories of business owners will be exempt from the new rules on income sprinkling.

Under the new rules, the following exemptions will apply:

• For business owners aged 65 or older, sprinkling with a spouse will be permitted in the same way that pension income can be split between spouses.
  
• Adults aged 18 or older will be exempt, provided they work on average at least 20 hours per week in the year or during the previous five years.
  
• Adults aged 25 or older will be exempt if they own at least 10 per cent of the shares of a small business.

For those who don't qualify in the above categories, a reasonableness test will be applied based on labor contributions, capital contributions and risk assumed.

Owners of private corporations—such as personal real estate corporations—will have until the end of 2018 to adjust to the proposed exclusion for significant shareholdings. The CRA has prepared guidance on these measures.

Read more from the federal Department of Finance here.

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