Canadian Contractor

After the Federal budget, what are the rules on Income Sprinkling?

Contractor who has their spouse do the books, digital marketing and more, wonders if the tax man will now go after them for income sprinkling.

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March 9, 2018 by canadiancontractor

Finance Minister Bill Morneau, as he did last fall, indicated the government’s intention to reduce “income sprinkling.”  As most veteran contractors will know, this is essentially listing family members as contributors to a business, and having them take shares/dividends to reduce business taxes – and the owner’s income tax – even though the family members may not, in reality, work in the business.

Here’s a post about that…

Do you have any specifics on how the government intends to interpret income sprinkling?

Example: If a spouse does the books of a small construction business and deals with all the industry standard issues including the digital marketing and selection of who to deal with, where do they stand on the income sprinkling? This person looks after our Homestars, Renovation Find, Get Assist, BBB and a host of other marketing initiatives that pop up every month.

Surely there has to be some kind of test that the government will use to approve the work that a spouse does and contributes to the business success when issued a T4 for the past 4 or 5 years?

Or do they just intend to roll the spouse’s income into the larger income of the husband on the assumption that no spouse does legitimate contributions to a business?


Editor’s Reply:

Bob: You are one of tens of thousands of contractors who are probably wondering the same thing. Ottawa has NOT yet indicated what tests the Canada Revenue Agency will apply to determine whether a spouse (or any other family member) can continue to benefit from income sprinkling.

On a personal note, for what it’s worth, I ran into Finance Minister Bill Morneau last fall, when he was at an event in his home riding of Cabbagetown. I told him who I wrote for, and asked him about the tens of thousands of spouses who work in family businesses, who have been the beneficiary of this common practice for years. He replied that the government was not looking to go after spouses in family businesses who do the books for those businesses. Now, Bill Morneau is a politician, but the back-pedalling that he and his government have done on small business tax reform in general, makes me highly doubt that Canada Revenue Agency would want to mess with the tax benefits enjoyed by spouses doing the books and other administrative work for family construction firms.



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