Let’s Keep The Sprinkler Running

 Happy New Year!

2018 is here and with it the new rules to limit income splitting by Canadian small businesses comes into effect.

TOSI rules
Bad doctor.  You income sprinkler. Very bad doctor.

Our Prime Minister and his Minister of Fairness, who were both born into households with vast wealth that has sprinkled down onto them like fairy dust, want to make sure that those with Canadian Controlled Private Corporations (CCPCs or commonly called professional corporations) don’t try and “sprinkle” such wealth onto their families.

The CRA has a page fully outlining the proposed income splitting legislation.

Here is my brief summary:

  • Giving dividends to your non-minor kidults, parents, or spouse will be taxed at the highest marginal tax rate unless they work over 20h/wk in your business on a sustained basis in the past 5 years. You need to be able to prove it with timesheets, schedules, payroll etc.
  • For a business that is neither a CCPC nor over 90% service-based, they are excluded if the owner works in the business. That means businesses that mostly sell stuff can still income-split, if the owner works in the business over 20h/wk. They can still give their spouse (who is not contributing to the business in any way) dividends as per usual.
  • When the business owner is over 65, they are able to give their spouses dividends. This modification to the original proposal was made because it was pointed out that salaried employee’s can split their pensions or RRSPs.

So, what is a person with a CCPC or small business to do now???

This legislation makes it difficult for service-based small business owners to income-split using dividends with their spouses. However, they can still income split by hiring family and paying them a fair market rate. That has major advantages, even if they do not make the 20h/week cut-off for dividends. The difference is that a dividend could be any amount (not market rate) and used much more aggressively to income split.

Even though the Tax-On-Split-Income (TOSI) legislation hobbles a CCPC’s utility for income-splitting, they can still be useful. If you spend much less than you make, have topped up your RRSP & TFSA, and have extra money to save each year. Then, a corporation may still be useful for tax deferral. If you have huge income fluctuations due to the nature of your business, or parental leaves. Then, a corporation may still help by smoothing cashflow.

We can still keep the sprinkler running.

CCPC dividend spouse

The political spin has been that CCPCs and small businesses can income split while normal Canadians cannot. “Not fair”, says Wild Bill.

Check under your desk and in your lamps for bugs, frisk your partner for any hidden wires, and close the blinds…

Whew. That sounded like the prelude to “date night”, but actually it is the necessary precautions to take before reading my next series of posts about how we can still income split.


  1. Looking forward to hearing how you can still “income sprinkle” with CCPCs. I only know of the “Capital Gains Strip” strategy that some physicians are using to “income sprinkle”, but my group’s tax lawyer feels strongly that this “loophole” will be closed in the near future. It was supposed to be closed in last year’s budget, but the government changed their mind in the end. Only issue with this strategy is that it costs approx. $10k to set-up!

    1. I think your lawyers are right or will soon be proven to be. It was on thin ice for a while. CCPCs were the most convenient and efficient way to split income, but there are a bunch of other ways outside CCPCs themselves that add up when you put them together. I started using a number of them around the time of the 2015 election because the writing was on the wall of where things were going to go. As a result, right now our financial assets are pretty evenly split between my wife and I and she generates good cashflow taxable in her hands without working outside of our business. You can still use dividends to income split from a CCPC if over the age of 65. I plan on being retired well before then, so we needed ways to ensure that we even out our income generation well before then.

Leave a Reply

Your email address will not be published. Required fields are marked *