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Tip of the Week
The July 18 proposals have finally been explained in a little more detail. This tip is about the criteria for a family member to be considered to be “active in the business.”
The concept of “active in the business” has been defined to mean 20 hours of work done for each week that a business was open in a year. Presumably this is an average so that people can take a vacation each year. A seasonal business, say one that is open for 6 months a year, the related person would have to work an average of 20 hours a week for each week of those six months. If the related shareholder has worked 20 hours a week during the past year, then they can be paid a dividend from the business without the dividend being subject to the tax on split income (TOSI) rules. The TOSI rules require that the dividend be taxed at the highest tax bracket.
Of course, there are some other rules. If a related shareholder has worked 20 hours a week for five years, any time in the history of the business, then the TOSI rules do not apply to dividends paid in any subsequent year. The years do not have to be consecutive. This is a significant advantage. In the situation where both partners of a marriage worked full time in the business for at least five years, and then one of the partners is more active in the home than the business, we can then pay dividends without being subject to the TOSI rules forever.
I don’t like any of these proposals, but the 5 year criteria will be a help.