TOSI could impact 33,000 families: PBO

Almost 33,000 families could be impacted by the federal government’s changes to income sprinkling, including roughly 900 that earn less than $100,000 per year, a report from the Parliamentary Budget Officer says.

Almost 90% of the families affected by the rule changes announced last summer and amended in December earn more than $150,000 per year, the report says, including 63% who earn more than $250,000 per year.

Read: Feds clarify income sprinkling proposal

Most of those impacted have a male controlling owner and reside in urban areas in Ontario and Alberta, the report says.

The changes to the tax on split income (TOSI) came into effect on Jan. 1. When the government announced the changes on Dec. 13, it said the number of businesses potentially affected is fewer than 45,000, or roughly 3% of all corporations.

In his analysis, Parliamentary Budget Officer (PBO) Jean-Denis Frechette said his office was unable to clearly identify the individuals who will be subject to the TOSI rules, so he calculated possible revenue outcomes for three different scenarios of who would be covered. The numbers reported here reflect the PBO’s preferred scenario.

The PBO estimated the federal government’s revenue from the changes as significantly higher than the Department of Finance’s numbers in the federal budget: $356 million in 2018-19 compared to $190 million, and $429 million in 2022-23 compared to Finance’s $220-million estimate.

Read: Feds to tie passive income threshold to small business deduction

More than half of the families affected will be in Ontario (17,100), compared to almost 5,000 in Alberta, more than 4,000 in Quebec, and 6,800 in other provinces, the report says. Families in Ontario would pay $224 million in federal taxes, or almost 63% of the total.

The changes to TOSI will also bring in more than $231 million in revenue for provincial governments, the PBO says, with Ontario claiming $160 million of that.

In brief, a tax on split income now applies to dividends paid to family members, except when they are:

• the business owner’s spouse, provided the owner meaningfully contributed to the business and is aged 65 or older;
• aged 18 and older and make “regular, continuous and substantial” labour contributions to the business during the last five years; or
• aged 25 and older and own at least 10% of a corporation that earns less than 90% of its income from services, and isn’t a professional corporation.

In a release responding to the PBO report Thursday, the Canadian Federation of Independent Business (CFIB) said the rules remain overly complicated and burdensome. CFIB president Dan Kelly said he’s concerned business owners won’t have the documentation to show they pass the government’s “bright line” tests, which will lead to court battles.

“If Finance and the PBO struggle to figure out who will be whacked with higher taxes, God help us when this hits the CRA!” he said in a statement.

Read the full PBO report here.

Read: What TOSI means for succession planning