The proposed new rules for income sprinkling are set to take effect  in just over two weeks. Yesterday, the federal government attempted to clarify under what situations these rules will apply. (See my previous blog on Tax Planning for Private Corporations)  The Liberals are hoping that these adjustments will help pacify the critics who have complained that the proposals unjustly target small business owners.  Although I am happy to see certain exemptions being put in place, the rules are starting to look remarkably like those for a game of Fizzbin. (For those of you who are not Star Trek fans – Google it!).

In the Finance Minister’s previous announcement in October, he promised to bring forward measures that would reduce the compliance burden for establishing the measurement of contributions made by family members.  Yesterday’s announcements would eliminate the reasonableness test for income sprinkling payments for the following taxpayers:

  • family members who work at least 20 hours a week for the business
  • adults over 25 years of age who own 10 per cent or more of a corporation that earns less than 90 percent of its income from providing services and is not a professional corporation
  • spouses over 65 years of age who have contributed meaningfully to the business  (this places the measures in alignment with current pension income splitting rules)

Those who do not meet these exclusions would be subject to a reasonableness test to determine how much income received though income sprinkling arrangements would be subject to tax at the highest marginal rate.

In the meantime, the Senate finance committee has called for the proposals to be abandoned in their entirety, or at a minimum delay their implementation until 2019.  The government’s response has been that although the rules will be in effect as of January 1, 2018, businesses will actually have until the end of the year to figure out how to comply with them.  Personally, I think that changes of the magnitude that the government is proposing are indeed necessary, but we need far more study of the ramifications to ensure that the results are fair for all.