The safe harbours of Ottawa’s updated income-sprinkling tax rules

OTTAWA — The federal government is proposing to tighten rules that enable owners of private corporations to lower the amount of taxes they pay by sharing some of their earnings among family members — a practice known as income sprinkling.

The plan has faced criticism but federal Finance Minister Bill Morneau maintains fewer than three per cent of private corporations would be affected by the adjustments, that the changes are designed to target only wealthy individuals who have used the incorporation of small businesses to gain an unfair tax advantage.

Under the new rules, family members who make significant contributions to a company would not be affected. The others would be subject to a so-called “reasonable test” to determine how much income, if any, would be subject to the highest marginal tax rate.

Here are some examples of those who would be exempt:

— A business owner’s spouse, as long as the owner meaningfully contributed to the company and is aged 65 and older.

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— Adults aged 18 and older who have made labour contributions to the business that average at least 20 hours per week during the year, or during any five previous years.

— Adults aged 25 and older who own at least 10 per cent of a company that earns less that 90 per cent of its income from providing services and is not a professional corporation.

The Canadian Press