TAX ON SPLIT INCOME: The 20 Hours Test
The tax on split income (TOSI) can subject various income sources, with taxable private corporation dividends being the most common, to personal tax at the highest marginal rate. One of the exceptions from TOSI occurs when the income recipient is actively engaged in the business. An individual will be deemed to be actively engaged in any year in which the individual works in the business at least an average of 20 hours per week during the portion of the taxation year that the business operates.
Statutory holidays, sick days, vacations
In an August 6, 2019 French Technical Interpretation, CRA opined that days that an individual is paid for time that they do not actually work (such as statutory holidays, sick days, and annual vacations) should not be considered hours worked for the computation. For example, if an individual is paid for five days for a week, but only actually works four days due a statutory holiday on one of the days, only four days of work should be considered in the computation.
Less than 20 hours required
In a June 7, 2019 Technical Interpretation, two spouses contributed an equal amount of effort to a business that only required 10 hours of weekly work (5 hours each per week). Where the 20-hour test is not met, the spouses may still not be subject to TOSI if they can demonstrate that they were actively engaged on a “regular, continuous and substantial basis”.
While it is a question of fact, CRA stated that it is possible for this exception to be available in this scenario. Consideration should be given to the ongoing nature and labour requirements of the business for the particular year. In general, whether an individual is actively involved in a business will depend on the time, work and energy that the individual spends on the business.
The more an individual is involved in the management or day-to-day operations, the more likely they will be sufficiently involved.
ACTION ITEM: Document the activities in which individuals who may be subject to TOSI are involved in the business. When tracking time, do not include paid hours in which the individual was not working.
The preceding information is for educational purposes only. As it is impossible to include all situations, circumstances and exceptions in a newsletter such as this, a further review should be done by a qualified professional.
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