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in si de ha lto n. co m O ak vi lle B ea ve r | T hu rs da y, M ay 16 ,2 01 9 | 38 Understanding the New Tax Rules: Effective Tax Strategies for Business Owners by Jim Molyneux and David Thompson, MNP consumer featurefeature N ewrules around income sprinkling and so- called passive income can translate into increased tax burdens and fewer deductions for many busi- ness owners.The rules are complex and there is uncertainty and confusion as to how the rules will be applied by the Canada Revenue Agency (CRA) in various situations. Understanding the rules and adjusting tax strategies can help reduce the negative impact of the new rules and avoid pitfalls with CRA. Tax on Split Income (Income Sprinkling) Income sprinkling is a common practice for incorporated small businesses wherefor incorporated small businesses wheref family members are granted shares of the company, including indirect own- ership that can occur through the use of a family trust.The corporation pays dividends to family members, "split- ting" the income and reducing the overall tax bite, allowing other family members to be taxed at a lower tax rate. Under the new tax on split income (TOSI) rules, dividends paid from a private corporation to a family member can easily be 'caught' by the new rules. As a result, the dividends would be taxed at the top tax rate instead of a lowermarginal tax rate. However, exceptions to TOSImight apply.The exceptions include: a) Capital gains arising from the dis- position of shares of a qualified small business corporation (QSBC). b) Income received by a spouse, if the spouse is 65 or older and they are not subject to TOSI themselves. c) Income that is derived from an "excluded business" of the individual. A business qualifies as an excluded busi- ness of an individual if that individual is actively engaged on a regular, continuous and substantial basis in the activities of the business in either the current taxa- tion year, or, any five prior taxation years. d) For shares inherited from a deceased individual by will, any income or gain on the shares would not be TOSI to the decedent. As well, certain shares can qualify as "excluded shares" - and dividends paid on excluded shares are exempt from TOSI. Excluded shares include those owned by individuals aged 25 years or older who directly own at least 10 percent of the business (both votes and value). However, the company must meet certain conditions, includ- ing earning less than 90 percent of its income from providing services and not being shares of a professional corpora- tion (doctors, lawyers, dentists, etc.). Can Family Trusts Still Provide Shelter? Under the new TOSI rules, family trusts have come into question since shares have to be directly owned by a family member tomeet the 10 per- cent ownership test and avoid TOSI. If your family members did not meet the 10 percent votes and value test at the end of 2018, consider restructuring so that they canmeet this test in the future. It may be a valuable exercise to undertake an estate freeze and to issue common shares directly to family members.This will allow all future growth of the corporation to attribute to shares owned by family members so they could eventually meet the 10 percent votes and value test and receive income in the future. Issuing shares to other family members should be considered only after reviewing poten- tial business issues that could arise.