Reasonable Return Test for TOSI

The new Tax on split income (TOSI) rules in the 2018 federal budget requires that dividends, salaries and partnership income be allocated based on what is reasonable, in the absence of any other exclusions (There are many other considerations, see the previous posts we have made on this issue). There are three possibilities about establishing what is reasonable.

The first test is the relative contribution of work, if the person being paid works full time then their pay is likely reasonable. If they work less than full time, a ratio would need to be applied. Has the person contributed property to the business – if so what percentage of the total property contributed? Has this person assumed any risk, such as having the family home pledged as security for the business line of credit?

The issue with establishing these benchmarks is that we do not yet know how CRA will apply them. Is a spouse who has 50% of the risk due to the family home being at risk, entitled to 50% of the income or none of the income because they are not active in the business?  What we do need to do, is document that we have considered these factors and then make a decision about whether we are going to allocate some of the income paid as being subject to TOSI. CRA may accept our determination. If we don’t make any effort to consider TOSI, CRA may do it for us and possibly we will not like the results.

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