Information
Split income
The types of income that are subject to income tax on split income are:
- taxable amounts of dividends on a share of a corporation (other than a share listed on a stock exchange or a share of the capital stock of a mutual fund corporation) received directly or through a partnership or a trust (other than a mutual fund trust or a trust that is deemed to be in existence by a congregation);
- benefits received as a shareholder on a corporation share (other than a share of a class listed on a stock exchange or a share of the capital stock of a mutual fund corporation) allocated directly or through a partnership or a trust (other than a mutual fund trust or a trust that is deemed to be in existence by a congregation);
- taxable capital gains realized on the disposition of shares to a person not dealing at arm's length with a specified individual that is a minor, where the dividends paid on the shares to the minor would be subject to income tax on split income (twice the amount of the taxable capital gain is deemed to be a taxable dividend other than an eligible dividend);
- income from a trust (other than a mutual fund trust or a trust that is deemed to be in existence by a congregation) or a partnership that is derived from:
- one or more businesses related to the specified individual (see the definition of "related business" on page 7) for the year,
- the rental of property if, during the year, a person related to the specified individual takes, on a regular basis, an active part in the rental activities of the trust or partnership or holds, either directly or indirectly through one or more partnerships, an interest in the partnership;
- amounts included in the calculation of income (for example, interest) for the year that is related to a debt of a corporation whose shares are not listed on a stock exchange (other than a mutual fund corporation), a trust (other than a mutual fund trust) or a partnership, other than:
- certain government debts or debts they guarantee,
- a debt listed or traded on a public market,
- a deposit to the specified individual's credit with a Canadian branch of a bank or credit union;
- taxable capital gains or profits realized on a disposition of any of the following property that the specified individual carried out after 2017, or allocated by a trust or a partnership that carried out a disposition of property after 2017:
- a share of the capital stock of a corporation (other than a share of a class listed on a stock exchange or a share of a mutual fund corporation),
- an interest as a beneficiary of a trust (other than a mutual fund trust or a trust that is deemed to be in existence by a community organization, such as a congregation),
- an interest in a partnership,
- a debt, other than excluded debts described in the previous bullet item.
If the property disposed of after 2017 is not a share of a corporation, the capital gain or profit is split income if one of the following conditions is met:
- an amount is included in the specified individual's split income for the property for the year or a preceding year;
- immediately before the disposition, all or a portion of the fair market value (FMV) of the property was attributable to, either directly or indirectly, a share of the capital stock of a corporation (other than a share of a class listed on a stock exchange or a share of a mutual fund corporation).
A taxable capital gain or profit realized on a disposition of property after 2017 that is not otherwise included in split income is also split income if the income derived from the property is split income for the specified individual.
Excluded amount
An excluded amount is income that is not subject to income tax on split income for the year if it meets certain conditions and would otherwise be split income of a specified individual. As a rule, an excluded amount is determined on the basis of the specified individual's age as at December 31 (or immediately before death, if the individual died during the year).
An excluded amount can be income earned by a specified individual who is 18 or over at the end of the year (or immediately before death if the individual died during the year) and the income:
- is not, directly or indirectly, from a business related to the specified individual;
- is, directly or indirectly, from an excluded business (see the definition on page 6) of the specified individual.
An excluded amount can be income earned by a specified individual who is 18 or over but under 25 at the end of the year (or immediately before death if the individual died during the year) and the income:
- is a safe harbour capital return (see the definition on page 7);
- is a reasonable return (see the definition on page 7) for the specified individual based only on the individual's contributions of arm's-length capital (see the definition on page 6).
An excluded amount can also be income earned by a specified individual who is under 25 at the end of the year (or immediately before death if the individual died during the year) and the income is income or profit, including a taxable capital gain, derived from property that the specified individual inherited further to the death of:
- the specified individual's father or mother;
- another person if, during the year in which the income or profit must be reported, the specified individual was enrolled as a full-time student at a post-secondary educational institution or if a tax credit could be claimed with respect to the specified individual for a severe and prolonged impairment in mental or physical functions.
An excluded amount can also be income earned by a specified individual who is 25 or over at the end of the year (or immediately before death if the individual died during the year) and the income:
- is derived from excluded shares (see the definition on page 7) of the specified individual or a taxable capital gain realized on the disposition of such shares; or
- is a reasonable return for the specified individual.
A specified individual who is 18 or over but under 25 is deemed to have reached age 24 before the taxation year concerned if the individual acquired the excluded shares (or if the shares were acquired on behalf of the individual) upon the death of another person who had reached age 24 before that year.
The following amounts are also deemed to be excluded amounts, regardless of the age of the specified individual:
- a taxable capital gain realized on:
- the deemed disposition of capital property belonging to the specified individual immediately before the individual's death,
- the disposition, after 2017, of property that is, at the time of the disposition, qualified farm or fishing property or a qualified small business share, if the capital gain deduction can be claimed for the taxable amount of the capital gain, unless the gain is deemed to be a dividend;
- income derived from property that the specified individual acquired from his or her spouse if, at the time the property was transferred, the spouses were separated and living apart as a result of the breakdown of their marriage, civil union or de facto union;
- income derived from a related business such as:
- an amount received by the surviving spouse of a deceased person if the amount is an excluded amount for the deceased person,
- an amount received by the spouse of a person who had reached 65 during the year or earlier if the amount would have been an excluded amount for the latter.
Solidary liability with respect to split income
The age of a specified individual determines who is solidarily liable for the payment of the tax on split income. If you have not reached age 17 before 2020, you and your parents are solidarily liable for the payment of the tax. If you reached age 17 before 2020 and the income is from a related business, the tax on this income is the solidary liability of you and of each source individual (see the definition on page 7) who is sufficiently related to the related business. The relationship required between the source individual and the related business is described in the definition of "related business."
The liability of your parents and of each source individual is limited to the amounts included in your split income. However, the liability of you, your parents and each source individual is not limited with respect to interest payable as a result of the application of the measures applicable to income tax on split income. Your liability is also not limited with respect to the application of other legal provisions.
Adjusted taxable income under the rules governing income tax on split income
As a specified individual subject to the rules governing income tax on split income, you must adjust the amount of your taxable income (line 299 of your income tax return) to calculate the amount transferred by a child 18 or over enrolled in post-secondary studies. You must do the same when calculating the unused amount of non-refundable tax credits that you can transfer to your spouse (line 431 of your return).
Amount transferred by a child 18 or over enrolled in post-secondary studies
You must adjust your taxable income to calculate the amount transferred by a child 18 or over enrolled in post-secondary studies (line 14 of Schedule S). The adjusted taxable income to enter on line 14 of Schedule S is the total of line 299 of your return and line 93 of this form.
Non-refundable tax credits that you can transfer to your spouse
If the amount on line 430 of your income tax return is negative and you have a spouse on December 31, 2020, you must recalculate the unused amount of non-refundable tax credits that you can transfer to your spouse. In the new calculation, the adjusted taxable income amount is the total of line 299 of your return plus line 93 of this form. If the amount obtained is still negative, you can transfer it to your spouse on December 31, 2020. For more information on credits transferred from one spouse to another, see the instructions for line 431 in the guide to the income tax return (TP-1.G-V).
Glossary
Arm's-length capital
Property, or property substituted for the property, of a specified individual that is not:
- acquired by the individual as income from, or a taxable capital gain or profit from the disposition of, another property that is derived, directly or indirectly, from a related business in respect of the individual;
- borrowed by the specified individual under a loan or other indebtedness; or
- transferred, directly or indirectly, to the specified individual from a person who was related to the specified individual (other than as a consequence of the death of the person from whom the property was transferred).
Excluded business
For a given taxation year, the business of a specified individual if he or she was actively engaged on a regular, continuous and substantial basis in the activities of the business in either the taxation year or any five prior taxation years.
The five prior years in which the involvement of the specified individual is necessary can be non-consecutive. Furthermore, these years can be before the effective date of the split income measures that apply to adults (beneficiaries of a trust or members of a partnership).
A business may be considered an excluded business of a specified individual even if it derives income from another business that is related to the specified individual and is not an excluded business.
Whether or not the specified individual is considered to be actively engaged (on a regular, continuous and substantial basis) in the activities of a business in a year depends on, among other things, the nature of the individual’s involvement in the business and the nature of the business itself. An individual is considered to be actively engaged if he or she works an average of 20 hours per week.
Excluded share
Shares of the capital stock of a corporation owned by a specified individual, if all of the following conditions are met:
- Less than 90% of the corporation's business income for its most recent taxation year is from the provision of services.
- The corporation is not a professional corporation (a corporation in which a person carries on the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor).
- The specified individual holds 10% or more of the FMV of the capital stock of the corporation and of the votes that could be cast at an annual meeting of the shareholders of the corporation.
- All or substantially all of the income of the corporation is not derived, directly or indirectly, from one or more related businesses that are not businesses operated by the corporation.
Minor child
A person aged 17 or under on December 31 of the calendar year in which he or she receives income or gains.
Reasonable return
Amount derived, directly or indirectly, in a given taxation year, from a business related to the specified individual that:
- meets the definition of “split income” in respect of the specified individual for the year, except for the following two conditions given in the definition of “excluded amount”:
- if the individual was 18 or over but under 25 at the end of the year, the amount is a reasonable return in respect of the individual, taking into account only the individual’s contributions of arm’slength capital,
- if the individual had been 25 or over, the amount would be a reasonable return in respect of the individual;
- is reasonable given the following factors relating to the contributions of the specified individual related to the business and those of each source individual:
- the work performed for the business,
- the property contributed, directly or indirectly, to the business,
- the risks assumed in respect of the related business,
- the total of the amounts paid or payable, directly or indirectly, by any person or partnership to, or for the benefit of, the specified individual or a source individual in respect of the related business, and
- any other relevant factors.
Related business
As the case may be:
- a business carried on, at any time in the year, by a source individual in respect of the specified individual or by a partnership, a corporation or a trust, if the source individual is actively engaged on a regular basis in the activities of the business;
- a business of a partnership if a source individual in respect of the specified individual has an interest in the partnership, whether directly or indirectly through one or more partnerships;
- a business of a corporation, if a source individual in respect of the specified individual holds shares of the capital stock of the corporation or property that derives, directly or indirectly, all or part of its FMV from shares of the capital stock of the corporation, and the total FMV of the shares or the property is 10% or more of the total FMV of the capital stock of the corporation.
Safe harbour capital return
Return obtained by a specified individual for a year that does not exceed the highest rate of interest prescribed for a given quarter of the year. The return is obtained by multiplying the FMV of property contributed by the specified individual to a related business at the time of the contribution by the ratio between the number of days in the year that the property (or property substituted for the property) is used in support of the activities of the related business and has not, directly or indirectly, in any manner whatever, been returned to the specified individual, and the number of days in the year.
Source individual
An individual (other than a trust) who, at any time in the year, is resident in Canada and related to a specified individual.
Note
An individual is related to a specified individual by blood, marriage or
adoption, or by being the specified individual's de facto spouse.