Thursday, December 28, 2017

Family Members as Part-Time Workers

This continues consideration of the revised proposals on income splitting through a family corporation. The government released these revisions on December 13, 2017. If passed into law in their current form, the proposals will apply as of the start of 2018.

The revised proposals contain an exemption for an over-age-17 family member who is actively engaged on a “regular, continuous and substantial basis” in the activities of the family business corporation.

This will be a difficult question of fact in many cases. However, a de minimis rule allows a family member to qualify for this exemption if the family member works an average of 20 hours per week in the business during a taxation year. If the business operates on a seasonal bases, the average is for only the portion of the year in which the business operates.

If the family member has met the 20-hour per week minimum for any five previous taxation years (including years before 2018), the family member will be exempt from the proposals even during years in which the family member does not work an average of 20 hours per week.

A qualification has to be made in respect of capital gains. In order for a capital gain on the sale of shares to be exempt from the income-splitting proposals under this exemption, the family member must have met the 20-hour per week standard during five previous taxation years (not just the year of the sale). The five years need not be consecutive.

The 20-hour per week exemption applies in respect of any family corporation, including service corporations and professional corporations.

If a family member wants to rely on the 20-hour per week exemption, the family member will have to keep careful track of hours worked in the business. As the 20-hour minimum is an average, the family member may have to work more than 20 hours per week if the family member takes vacation time. The family member may (but does not have to) receive a reasonable salary for the work. The primary advantage of meeting the 20-hour per week average is that the family member can receive dividends without having to justify the dividend.

A signed employment agreement is advisable, but careful tracking of time worked is more important. In the case of an audit, the onus of proof is on the taxpayer.

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The above article provides general commentary of an educational nature. It does not constitute advice for any specific person or any specific set of circumstances. Because circumstances vary, readers should consult professional advisers in order to obtain advice that is applicable to their specific circumstances.

Revised Income-Splitting Rules Released

On December 13, the federal government released its revised proposals on income-splitting.
If passed into law, the rules will be effective as of the start of 2018. While it will take time to fully analyze the rules, the following general points can be made at this point.

The proposals will not apply to any dividends paid during 2017. If passed into law, the proposals apply only as of January 1, 2018.
Revisions to corporate structures do not need to be finalized prior to the end of 2017. Corporate structures can be revised in early 2018 in order to take the proposals into account.
The new rules specifically target professional corporations and corporations that derives 90% or more of their income from the provision of services. A professional corporation is one that carries on the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor.
The new rules will not apply to an individual over the age of 24 who earns income from a non-professional corporation that earns less than 90% of its income from the provision of services, provided that the individual has at least a 10% interest in the corporation. The 10% interest has to include at least 10% of the voting shares and at least 10% of the value of all issued shares.
If a person is 65 years of age and over and has been active in the corporate business in the past, that person can split income with his or her spouse (even if the person has retired from the business). This will be important for retirement plans.
If an adult works in the business for an average of at least 20 hours per week, the income splitting rules will not apply to amounts paid to that adult.
The rules will no longer be extended to nephews, nieces, uncles and aunts.

Further analysis of specific aspects of these new proposals will follow.

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for information about our services and lawyers' profiles.