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Simply extending the existing rules to older children would apparently have been too easy for the bureaucrats in Ottawa

This type of planning did not work with children under age 18. Minors are taxed at the highest rate on the entire amount of such dividends. So why didn’t the government simply extend the existing rules to older children — age 18 to 24 for example — and eliminate most of its concerns and revenue loss with a word or two of legislation? That apparently would have been too easy for the bureaucrats in Ottawa.

Instead, the government enacted a tortuous new package. There are pages of new rules that tax dividends from family businesses, and more pages of exemptions from the rules. There are definitions of “source individual” and “specified individual”; of “related business” and “excluded business”; of “reasonable return” and “safe harbour capital return.”

But what does it all mean? In short, it means that many family members — of all ages — now have to convince the tax authorities that their contributions to the family business are meaningful enough to justify the dividends they receive. Otherwise, they risk punitive tax rates on the dividend income.

Under these rules, if family members are over age 24 and have not worked an average of 20 hours a week in the business, they may have to prove that their contributions to the business are reasonable — in terms of work performed, property contributed, risks assumed and any other “relevant factors” — all as compared with such contributions by their relatives.

Here is one example. Let’s say Tony and his wife Joyce own an incorporated renovation business. Tony works 40 hours a week in the business, and Joyce works 10 hours. When the business started several years ago, the company required a loan, and Joyce and her parents guaranteed the loan. The company is about to pay a dividend. How much can be paid to each of Tony and Joyce without running afoul of the new rules? Who knows? It all depends on the perceived value of the couple’s respective contributions. How valuable are Tony’s hours as compared with those of Joyce? And what value should be placed on the loan guarantee? The business could not have started without the loan, but the loan has since been repaid. This is an absolute nightmare.