Business Succession Planning

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Business Succession Planning

Private family businesses have played a major role in Medicine Hat’s economy.  Family businesses have used corporations to help with both business and personal estate planning. Corporations provide a useful structure for parents transferring the family business to an interested child while at the same time trying to be fair to those children who are not interested in the business. In many family businesses, the plan involves the corporation issuing shares to family members who are both involved in the business and those not involved in the business. The structure of the corporation can provide flexibility to the parents so they can make different choices for transferring income to the family members, usually by way of wages or dividends. In December, 2017 the Government of Canada proposed tax changes to come into effect January 1, 2018. These tax changes will affect both business succession and personal estate succession. The purpose of this article is not to give an opinion on the merits of the changes, but to show how the changes may affect existing business succession plans. Question – are the tax changes in effect?  If they are, best to say so. If not, then when might they be?

Old Tax On Split Income Rules (TOSI)

Business and personal estate planning has allowed for income splitting in which a plan is set up to shift income from those persons paying tax at a high rate to those who have a lower tax rate. The plan usually has the corporation paying income to spouse and children through wages and dividends. The old TOSI rules taxed income (usually by way of dividends) received by children under 18 at the highest tax rate.

It should be noted the TOSI rules do not apply to wages. Wages have always been subject to the “reasonable” test. If wages paid by a corporation are excessive for the work done for the Corporation, the Corporation does not get a deduction for the excessive wage paid.


The Government of Canada was concerned about persons receiving income where they have not made a sufficient contribution to the family business. So they extended the TOSI rules to apply to income received by adults as well.        Generally, dividends and shareholder benefits paid to an adult amounts to split income and will be taxed at the highest tax rate unless an “exclusion” category is applicable. If the exclusion applies then the person does not have to worry about whether the amount received from a related business is “reasonable” or not. This article will consider the 3 main exclusions.

Excluded Business

This exclusion applies to adults who are actively involved in the business on a regular basis during the year or in any 5 years preceding the current tax year.

Excluded Shares

TOSI will not apply if the adult holds excluded shares. These are shares that represent 10% of the votes and value of the company. The shares must be held directly by the adult so can’t be held through a trust. Additionally, the Corporation must earn less than 90% of its income from the provision of services. This condition is causing some uncertainty as “provision of services” is not defined.

Reasonable Returns

If the adult does not meet the business or shares exclusion categories, they can still avoid TOSI if they are over 25 and the reasonable dividends/income they receive reflects a reasonable return on the adult’s contribution to the business. Factors which may be considered in determining if the income is reasonable are: the work performed, property contributed to the business, risks assumed by the adult with respect to the business. This will probably be a harder test to meet as it is very subjective as opposed to the more definitive tests set out for the excluded business or excluded shares tests.


The TOSI rules are complicated as there are more exclusions, conditions and age restrictions. It will take some time to fully appreciate the extent to which TOSI will affect private family businesses. It is important for families operating businesses to obtain legal and accounting advice in reviewing their business and personal estate plans to limit the effect of the new TOSI rules.

Malcolm Pritchard
Malcolm Pritchard helps you navigate the turning points of life. He is a partner with Pritchard & Co. Law Firm, LLP. Contact Malcolm at 403-527-4411 or at