You’ve heard us identify this issue but how does it affect YOU?
In general – it increases your taxes, which means reduced cash flow to you personally. The change is effective January 1, 2018.
Does it apply to everyone?
Not necessarily. It depends if you are splitting income with family members. It also depends on their level of activity within the corporation, historically and currently. There are additional complex criteria, but this is the starting point for the analysis. Overall though, the new TOSI rules are very far-reaching as they start with the inclusion of everyone and then exclude certain individuals based on the criteria.
What is the REAL impact?
Let’s use an example of $200,000 of other than eligible dividends. When TOSI applies, the dividends are taxed at the HIGHEST marginal tax rate and personal tax credits are lost. The TOSI situation is actually worse than allocating all of the dividends to one individual. Taxes increase from $32,114 (per couple) to $57,466 (under TOSI) or $46,283 (no allocation).
How can we plan for this?
Planning started when your 2017 personal income tax returns were prepared. Vertefeuille Rempel reviewed your personal income levels in detail to assure dividends allocated to family members were maximized.
The planning continues as we complete your 2018 fiscal year-ends. We will be forwarding a series of questions for your confirmation. We look at each scenario individually and, even though we know your operations, we need your input in case circumstances have changed. This process involves optimizing dividend amounts AND allocations or possible salary implementation.
What can you do to support your position?
Documentation. Formalize job descriptions. Identify tasks and functions that are performed on a regular basis. Track the time commitment and property contribution to business operations. Document risks assumed on behalf of the business (i.e. financing, personal guarantees).
Yes, it is an onerous task, but well worth it if it allows for the continuation of income splitting.