My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, December 10, 2018

Tax on Split Income (“TOSI”) Update

I have written several times on the Tax on Split Income ("TOSI") legislation and the impact these rules will have on small business owners and their families. However, the last time I wrote on this topic was in early January of this year when I discussed the December 13, 2017 update of the rules.

While the December 2017 update provided much clarity, the actual application of the rules is far from simple and further clarity is still required from the CRA on several fronts. I had hoped to have an update post on these rules several weeks ago, but for various reasons I could not provide the blog post until today.

As I have transitioned from tax to Wealth Advisory over the last couple years, I felt I should have a tax expert write this post. Thankfully, Howard Kazdan, a Senior Tax Manager with BDO Canada LLP, agreed to write an update on the TOSI rules; although, with this legislation, the devil is in the details, so you must review with your professional advisor.

Many of you will be familiar with Howard's writing as he has provided guest posts in the last couple years on such topics as What Small Business Owners Need to Know - Management Fees - The Importance of Having Proper Support and how 2016 tax changes Made Reviewing Your Will a Must.

I thank Howard for his excellent TOSI update posted below.

Tax on Split Income (“TOSI”) Update

By Howard Kazdan

If you own a Canadian private corporation, and wish to split income with your family members, you now have to deal the Tax on Split Income (“TOSI”) rules, which are complicated and full of uncertainty.

These rules were effective January 1, 2018, but since this is the transition year, taxpayers have the opportunity to rearrange their affairs by December 31, 2018, to avoid the application of these rules in 2018.

Prior to the introduction of the TOSI rules, there were restrictions in place to prevent income splitting on certain types of income with family members under the age of 18. The TOSI rules extend and expand those restrictions to adult family members who are not actively involved in the business. Generally, where family members can demonstrate that they have made legitimate and meaningful contributions to the business, the TOSI rules should not apply.

Any income caught under the TOSI rules will be subject to tax at the highest personal marginal tax rates, eliminating any advantage of income splitting.

In some cases, structuring put in place many years ago may no longer meet all of the original objectives, unless a further reorganization is undertaken.

What type of income is subject to TOSI?


The TOSI rules will apply to many types of income earned from a private corporation, including:

  •  Dividends and shareholder benefits;
  • Income received from a partnership or trust where the income was derived from a related business, or the rental of property in certain cases;
  • Income on certain debt obligations (e.g., interest); and
  • Income or gains from the disposition of certain property disposed of after 2017. However, if the shares of a corporation qualify for the capital gains exemption ("they are qualified small business corporation shares”), then taxable capital gains on the disposition of those shares will not be included in TOSI.

TOSI does not apply to:

  • wages paid for work performed which are subject to a separate reasonableness test.
  • capital dividends
  • second generation income earned on a distribution previously subject to TOSI.

Is there any way out of TOSI?


If certain exceptions are met, TOSI may not apply to distributions from a private corporation:

Excluded shares


The “excluded shares” exception can apply where corporate distributions are paid to individuals who are 25 years of age or older. This will exempt distributions from TOSI where the individual owns shares with at least 10% of the votes and value of the company; where less than 90% of business income of the company is from services, and where less than 10% of the company’s gross income is earned from a related business.

Since there is a requirement for the individuals to hold shares directly under this exception, if an individual owns shares through a beneficial interest in a family trust, they will not be able to rely on this test to escape TOSI. Professionals will also not be able to rely on this test to be exempt from TOSI.

There is lack of clarity on exactly what is considered to be a service – for example, if goods are sold, they could potentially be considered to be service income, if they are incidental to providing a service. 

At a conference held in October 2018, the CRA shed some light on their views with respect to whether shares of a holding company may qualify under the excluded shares exception. In general, if its income is from carrying on a business, the purpose of which is to earn investment income, then it may qualify if the ownership and related business tests are met. This may be the case even if the capital used to buy portfolio dividends was originally derived from dividends previously received from a related operating company. Note that the distribution of the original capital may be subject to TOSI, therefore, only the income earned from the original capital would escape TOSI.

Due to all of the conditions that need to be met and many other technical requirements not discussed in this blog, this is considered one of the hardest tests to meet and you need to discuss and review this with your accountant.

Excluded Business


The “excluded business” exception can apply to any family member who is 18 years of age or older. To qualify for this exclusion, the family member must be engaged on a “regular, continuous and substantial basis” in the business in the year or for any five previous years. A bright line test has been established by the CRA so that an individual is considered to be actively engaged in the business if the person works at least an average of 20 hours per week in the business during the portion of the year in which the business operates in the taxation year or for any five previous years. However, there
is still some subjectivity to this test.

Also, in some cases, record keeping of time spent in the business by owners may not have been perfect, so there could be an issue of proving that the test has been met. It will be key to maintain proper file documentation to support any filing position taken in filing tax returns.

Reasonable Return


The reasonable return exception can apply for adult family members who are 25 years of age or older. In this case, a reasonable amount of dividends can be paid to these individuals and not be subject to TOSI if the amount paid represents a reasonable return on their contribution to the business (e.g. work performed, property contributed, risks assumed). This is an extremely subjective test, so your files will need to be adequately documented in order to support your position in case the CRA comes knocking.

There is also a reasonable return exception for family members between 18 to 24 years of age, however, the amount representing a reasonable return is limited to the prescribed rate of interest (currently 2%) on any investment made by that individual, into the business.

Other Exceptions


  • There are certain exclusions from TOSI where the spouse who contributed to the business is aged 65 or over.
  • Special rules will apply to ensure that individuals who inherit property will benefit from the same tax treatment realized by the deceased individual, had the deceased continued to own the property:
  • An amount will be deemed to be excluded from TOSI for a surviving spouse if that income would have been excluded from TOSI if it was earned by the deceased in their last taxation year.
  • Similarly, if income would have not been considered to be TOSI if it was earned by the deceased individual from whom the property was inherited, then such income will generally be excluded from TOSI for other individuals over 17 years of age.
  •  TOSI should not apply in the case of marriage breakdown or on deemed capital gains on death.

Next Steps:


If these rules sound complicated, that’s because they are! Each corporate situation is unique with respect to every shareholder.

Before making any further distributions, or undertaking any reorganizations, it is suggested that you consult with your tax advisor on how the TOSI rules may impact you and your family for 2018 and onwards.

Note from Mark: 

1. As noted above, the rules are complex and unique to each situation. Thus, I nor Howard will answer any questions on this blog post.

2. If you have not already met with your professional advisor, you only have a couple weeks to rearrange your affairs for 2018. Thus, time is now of the essence and you may need to act immediately. 

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Monday, December 3, 2018

Renting Your Property as an Airbnb - Beware of the Income Tax Issues

In the last few years, more and more people have begun to rent out all or part of their residence through
online services such as Airbnb or other rental vacation sites such as Tripping.com or FlipKey. Some will say it is for the unique opportunity to host people from a variety of backgrounds, others that it helps to cover the cost of the skyrocketing real estate/rental market.

Regardless of the reason, there are potentially detrimental tax consequences that can impact you in both the short- and long-term that I would suggest are unexpected to those renting.

Today, I discuss some of these tax consequences. Before I start, I would like to acknowledge the substantial assistance of Christopher Bell CPA, a senior tax accountant with BDO Canada LLP, in writing this post.

Sales Tax


The first thing that you will want to consider (which most laypeople would not) is whether your rental income is subject to GST/HST. You are required to register your business for GST/HST when your gross revenues from all of your commercial activities surpass $30,000 in revenue in a 12-month period. As a result, even if you only make $5,000 from renting your residence, if other commercial activities total $25,000 or more, you will be required to register to collect and remit sales tax. There is an important distinction to keep in mind when considering rentals. Long-term rentals (think of the rent you pay to your landlord) are exempt from GST/HST, while short-term housing rentals for periods of less than 30 continuous days are taxable for GST/HST purposes. There is a clear distinction here and Airbnb rentals, like hotels, are generally considered taxable for GST/HST purposes once you surpass $30,000 in a year.

You can claim back portions of the GST/HST you pay on expenses that are incurred related to the rental of the space in your home. Some items you might be able to recover GST/HST on are:
  •  Housekeeping expenses
  •  Professional/accounting fees
  •  Advertising expenses
Note that there are some potentially significant impacts of improper planning when it comes to GST/HST. If you rent out your property for 90% of the time for rental periods of under 60 days, the property could lose its “residential complex” status, which would result in any future sale of the property to becoming subject to GST/HST. Good luck trying to explain that to any potential buyers!

If you decide to reduce or eliminate the rental of the property in the future, it may change status again, to either an exempt long-term rental or back to a personal residence. When this change occurs, you would need to pay GST/HST on the fair market value of the house at the time of this change. In some cases, you may be eligible to apply for a rebate on these taxes.

As you can see, the GST/HST issues of renting as an Airbnb are very complex. I strongly urge you to seek professional advice before you start renting. Note: I will not answer any questions on GST/HST as I am not an expert in this area. I am just making you aware of the issues you must consider.

Income Tax


Any income you earn from renting your home needs to be reported on your tax return and can be classified in one of two ways: rental income or business income. It is very important to always consider the impact renting can have on your Principal Residence Exemption. This is discussed in greater detail below. The characterization of your rental income is largely determined by the number and kinds of services that you provide to your customers. If you rent your home to someone and they only receive the “bare-minimum,” such as light, heat, parking, laundry, etc., this income would typically be deemed as rental income. If, however, you are offering additional services, such as meals, cleaning, or entertainment, you are more likely to be deemed to be carrying on business activities. As Chris told me, "if you want to keep the green, keep it lean".

You can deduct related expenses from the income earned on your tax return. Some of those items include the following:

1. Utilities (light, heat, water, etc.)
2. Maintenance (painting, small repairs, cleaning*)
3. Property taxes and condo fees
4. Internet and cable
5. Home insurance
6. Mortgage interest

*Note: you cannot clean or do repairs yourself and pay yourself $50 an hour for your hard work. Cleaning and repairs are typically only deductible if done by external service providers.

These expenses will need to be prorated based on the number of days of the year in which you hosted guests in the year against the total amount of time you’ve owned the home. Similarly, if you only rent out a portion of your home, you would need to prorate the expenses further to account for the proportion of the home that is used for rental purposes. The space can be prorated based on either the square metres/feet of the home you are renting or based on the number of rooms you rent out. I suggest you base the pro-ration on the square area to avoid any conflict with CRA, so get the measuring tape out!

Impact of renting as Airbnb on your Principal Residence


There are sometimes more significant amounts that you want to claim, such as large repairs or maintenance costs. Given the capital nature of these expenses, you may want to claim Capital Cost Allowance ("CCA"- you may know CCA as depreciation) on these repairs, or maybe on the property itself. While it is tempting to reduce your annual income by making a CCA claim, there are some long-term implications of doing so.

First of all, renting out your property regularly may result in you being considered to have changed the use of the property, which could result in some significant tax consequences. There is a deemed disposition of the property upon the change in use at the fair market value, and the property is no longer considered a principle residence.

Furthermore, claiming CCA against your income will potentially limit or outright prevent you from claiming the principle residence exemption on your home when you decide to sell it. Something to note would be that if you make significant structural changes and there is a significant change in use, CRA will deem the property as income generating.

Final Comments


It is vital that you understand the various complex income tax implications discussed above. I strongly urge you to obtain professional advice before you start renting in order to avoid some costly pitfalls.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.