ACTG4P42 Tax Law Tax On Split Income (TOSI)

It is about Canadian Tax Law.

Problem 1 – Tax On Split Income (TOSI) 10 Points

LauCo carries on an active business supplying parts to an auto parts manufacturer. The sole shareholder of LauCo is Holdco. The shareholders of Holdco are Parent A, Parent B, Child 1 and Child 2. Parent A, Parent B, Child 1 and Child 2 each owns a separate class of shares of Holdco. Parent A is the founder of Opco’s business and is the controlling shareholder of Holdco.

• Child 1 is age 23 and is a full-time graduate student at a university and is away from home for most of the year either attending classes during the school term or working part-time as a research assistant during the summer. Child 1 has never performed any functions for Holdco or Opco and has not made any other contribution to Holdco or Opco and its business.
• Child 2 is age 16 and is a high school student.

LauCo pays a dividend to Holdco. Holdco declares and distributes a dividend on the class of shares held by Child 1 and Child 2.

Please write an email to your tax client describing the implications of the 2018 TOSI rules and Kiddie Tax on the dividend income received by Child 1 and Child 2. Although income splitting is greatly restricted as a result of the expanded TOSI rules, there are some exceptions which still allow individuals to benefit from income splitting with family members. In your email, be sure to discuss the TOSI exclusions pertaining to “business”, “shares”, and “labour or reasonable return.”