On December 13, 2017, the Department of Finance introduced revised rules relating to distributions of income (referred to as “income sprinkling”) from a private corporation. Those rules lend some clarity to previous proposals that were vague in nature.


On July 18, 2017, the Department of Finance introduced a consultation paper which included far-reaching proposals seeking to limit the ability to use legal “income sprinkling” plans. Those proposals imposed a vague reasonableness test that was anticipated to be a minefield of tax litigation. That reasonableness test applied to any “split income” (which included, generally speaking, income from the business of a related individual and a corporation to which a related individual was connected). It was proposed that the labour and capital contributions, and risks assumed by the recipients of that income would be considered. To the extent that the income was not considered reasonable, it would be taxed at the highest marginal tax rate.

Submissions to the Department of Finance by the tax community highlighted concerns and unpredictability arising from the reasonability test. As a consequence, the Department of Finance committed to a revision of the proposals. Dentons wrote on both the proposals and revision process.

New exclusions

The December 13, 2017 release proposed to simplify and limit the changes effective January 1, 2018. The rules will still apply to income received by individuals from a business to which they are related. However, several exclusionary “bright line” tests will remove individuals from the application of the rules. Among those are the following:

  1. Spouses: Spouses of business owners will not be subject to TOSI provided that the business owner meaningfully contributed to the business and is over 65 years of age. This is an attempt to recognize the existence of succession planning strategies, which include ownership of a business by a spouse.
  2. Work in the business: Adults who work on a regular, continuous and substantial basis in a business during a year or during any of the five previous years are excluded from the rules. An average of 20 hours per week is considered to be regular, continuous and substantial, lending some clarity to the test for regular, continuous and substantial (which was previously to be adjudicated on a subjective basis).
  3. Ownership: Adults holding more than 10 percent of the votes, and value in a private corporation that earns less than 90 percent of its income from services and is not a professional corporation are excluded from the rules.
  4. Capital gains: The realization of taxable capital gains on the disposition of qualified small business corporation shares or farm/fishing property is excluded from the rules, to the extent that it would not have been otherwise subject to the highest marginal tax rate.

To the extent that distributions from a private corporation do not fall within one of the new bright line exceptions, they will still be subject to a reasonableness test.

Despite the proposed simplification, many established tax plans risk triggering the TOSI rules.