TOSI (Tax on Split Income)

[alekseyz]

Hello Everyone,

I am about to start a brand new business and since this TOSI came up last year, I decided to structure it properly for income splitting with my wife.

To give you a perspective
Myself (husband): earn 100K+ from a separate income
Wife: stay at home mom with kids with barely any income
New Business: Canadian small corporation that provides service that will be generating around 30-40K a year. Myself mostly do the work for around 15-20 hours a week.
End goal: put all of the income of the business into wife name.

Under the new TOSI rules: no matter what I looked at -> unless my wife owns the majority of the new Canadian small corporation -> TOSI rules will apply.

Proposal:
I just want to have my wife own majority of the shares. If she owns majority of the shares -> she is technically the owner so when she is going to receive dividend income from this corporation, TOSI is no longer applies since she is the owner.
I don't have any problem with giving up the ownership of the corporation to my wife as there will be no assets inside the corporation.

Question:
Anyone sees any problem with this structure?

 

[canuck_in_uk]

Hello Everyone,

I am about to start a brand new business and since this TOSI came up last year, I decided to structure it properly for income splitting with my wife.

To give you a perspective
Myself (husband): earn 100K+ from a separate income
Wife: stay at home mom with kids with barely any income
New Business: Canadian small corporation that provides service that will be generating around 30-40K a year. Myself mostly do the work for around 15-20 hours a week.
End goal: put all of the income of the business into wife name.

Under the new TOSI rules: no matter what I looked at -> unless my wife owns the majority of the new Canadian small corporation -> TOSI rules will apply.

Proposal:
I just want to have my wife own majority of the shares. If she owns majority of the shares -> she is technically the owner so when she is going to receive dividend income from this corporation, TOSI is no longer applies since she is the owner.
I don't have any problem with giving up the ownership of the corporation to my wife as there will be no assets inside the corporation.

Question:
Anyone sees any problem with this structure?

There is a blurry grey line between tax planning and tax avoidance. Have a look at GAAR, the General Anti-Avoidance Rule.

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic88-2/general-anti-avoidance-rule-section-245-income-tax-act.html

 

[alekseyz]

There is a blurry grey line between tax planning and tax avoidance. Have a look at GAAR, the General Anti-Avoidance Rule.

https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/ic88-2/general-anti-avoidance-rule-section-245-income-tax-act.html

Basically, the main thing here is:
I got a job proposal for a second part-time teaching job that already told me that I need to have a corporation as self-employed
My main job pays around $60 per hour. After taxes, it goes down to around $41-42 per hour.
The proposed job is only paying only $45 per hour and since I am already over 100K+, with after tax it comes down to $26-27 per hour. At this point, it is not worth for me to take the job.
If I transfer income in full to my wife income via corporate taxes/dividends to my wife, it will be around $37-38 per hour after taxes. This I can accept.

I thought of GAAR but I could find anything related to my case problem. GAAR might be a problem here, I just can't figure out if it is.

My other option is:
Have the corporation in my name only.
Don't pull the money from the corporation and simply invest the funds within the corporations and let it grow there until retirement.
Problem here is that this is not flexible in any way as if I need the money from it -> I am stuck. It is almost the same as RRSP structure and I don't really want into that.

 

[scylla]

Basically, the main thing here is:
I got a job proposal for a second part-time teaching job that already told me that I need to have a corporation as self-employed
My main job pays around $60 per hour. After taxes, it goes down to around $41-42 per hour.
The proposed job is only paying only $45 per hour and since I am already over 100K+, with after tax it comes down to $26-27 per hour. At this point, it is not worth for me to take the job.
If I transfer income in full to my wife income via corporate taxes/dividends to my wife, it will be around $37-38 per hour after taxes. This I can accept.

I thought of GAAR but I could find anything related to my case problem. GAAR might be a problem here, I just can't figure out if it is.

My other option is:
Have the corporation in my name only.
Don't pull the money from the corporation and simply invest the funds within the corporations and let it grow there until retirement.
Problem here is that this is not flexible in any way as if I need the money from it -> I am stuck. It is almost the same as RRSP structure and I don't really want into that.

I thought CRA had introduced new rules to eliminate the benefits of income splitting in situations like the one you've described and that any split income is now taxed at the highest marginal tax level. But I'm not a tax expert and may have that wrong...

 

[canuck_in_uk]

Basically, the main thing here is:
I got a job proposal for a second part-time teaching job that already told me that I need to have a corporation as self-employed
My main job pays around $60 per hour. After taxes, it goes down to around $41-42 per hour.
The proposed job is only paying only $45 per hour and since I am already over 100K+, with after tax it comes down to $26-27 per hour. At this point, it is not worth for me to take the job.
If I transfer income in full to my wife income via corporate taxes/dividends to my wife, it will be around $37-38 per hour after taxes. This I can accept.

I thought of GAAR but I could find anything related to my case problem. GAAR might be a problem here, I just can't figure out if it is.

My other option is:
Have the corporation in my name only.
Don't pull the money from the corporation and simply invest the funds within the corporations and let it grow there until retirement.
Problem here is that this is not flexible in any way as if I need the money from it -> I am stuck. It is almost the same as RRSP structure and I don't really want into that.

The main thing is you are trying to avoid paying tax. If you get audited, GAAR could result in serious penalties for you.

 

[alekseyz]

The main thing is you are trying to avoid paying tax. If you get audited, GAAR could result in serious penalties for you.

After reading this, it appears that this is the case where GAAR might be applied.
https://cdn2.hubspot.net/hubfs/3838611/Primers/GAAR-primer-insights.pdf

Canuck_in_uk, thanks for pointing in the right direction.

 

[alekseyz]

I thought CRA had introduced new rules to eliminate the benefits of income splitting in situations like the one you've described and that any split income is now taxed at the highest marginal tax level. But I'm not a tax expert and may have that wrong...

Yes, that is the case. Income splitting is reduced dramatically since 2018.