In July 2017, the government proposed tax changes that would restrict those who are operating their businesses through private corporations from income splitting with their family members. The proposed rules were too broad, too complex and altogether too confusing. After the consultation period ended, the government promised to simplify the “income sprinkling” rules, and the revised proposal was subsequently released on December 13, 2017. While there is some relief, the revised rules are still particularly damaging to dentists and other healthcare professionals. Here is what you need to know.

What are the tax implications of the proposed rules?

Effective January 1, 2018, any unreasonable amount of income (including interest, capital gains, and dividends but excluding salaries) paid to or realized by family members will be taxed at the highest personal marginal tax rate. For example, until this year if your mom is a shareholder of your professional corporation and she has no other income, you would have been able to pay her a dividend of $40,000 and she would pay virtually no taxes on this amount. Under the proposed rules, if she’s not involved with the business in any way, she would have to pay about $19,000 in personal taxes on the same amount of dividends.

Who or what is generally excluded from the proposed rules?

  1. Family members over 18 years old who are actively involved in the business during the year or during any five previous years. As a general rule of thumb, this means they work on average at least 20 hours per week throughout the year. This translates to at least 1,040 working hours each year.
  1. Your spouse, only if you are 65 or older and you are, or have been, actively engaged in the business.
  1. Capital gains on sale of qualified small business corporation shares (i.e. shares that qualify for the life time Capital Gains Exemption). This exclusion does not apply to minor shareholders (i.e. less than 18 years old) if the shares were sold to a related person. This means you can still multiply the Capital Gains Exemption by making family members equity shareholders.
  1. Income from shares of a corporation if:
    • The corporation is not a professional corporation.
    • You own at least 10% of the voting shares and your shares are worth at least 10% of the total fair market value of the corporation.
    • Less than 90% of the corporate business income is from provision of services.
    • Substantially all of the corporation’s income is not from other related businesses (i.e. a holding corporation that owns and leases the dental building to your practice would not qualify for this exclusion).

This means professional, hygiene service, technical service and building corporations will NOT be excluded.

  1. Income from assets received as a result of a marital/common-law breakdown.
  1. Capital gains arising on death.
  1. Income that is a “reasonable return” on the family members’ contributions.

What is a reasonable return if the proposed rules apply?

In determining a reasonable return, age is especially important.

Less than 18 years old (i.e. minors)

No amount is reasonable. There have been no changes to the existing “kiddie tax” rules. All dividends paid to minor shareholders are still subject to the highest personal tax rate as in prior years. Additionally, capital gains realized on the sale of shares to relatives are considered dividends for tax purposes and are not eligible for the life time Capital Gains Exemption.

18 to 24 years old

The reasonableness tests are very restricted for family members of this age group. In fact, only a reasonable return based on capital contribution is considered and the contribution must not be borrowed or acquired from related businesses/persons; otherwise returns on contributions are limited to the CRA prescribed rate, which is currently 1%. This means that even if your child worked in your practice full time in the summer between school terms, any dividends paid to your child would be unreasonable since labour contributions are not deciding factors unless he or she is actively involved throughout the year. In other words, pay your children a salary for their work as salaries are not subject to the proposed rules.

25 years old or older

For family members who are not actively involved in the business, the reasonableness of amounts paid to them will be assessed based on the following criteria:

  • Labour contribution (i.e. work hours, service provided, qualifications, etc)
  • Property contribution (i.e. capital contributions, loans, intangibles such as technical knowledge)
  • Risks assumed (e.g. being a guarantor for a loan)
  • Amounts that were previously paid (i.e. salaries already paid to the individual) 

Please refer to the flowchart, which summarizes the exclusions and reasonableness tests that may apply:
Click here for Flowchart

In summary, you can continue to pay a discretionary dividend from your professional, hygiene service technical service and/or building corporations to adult shareholders if they work at least 20 hours per week on average throughout the year. If they are not actively involved, the dividend amount must be reasonable given their contributions.



This article was prepared by David Chong Yen*, CPA, CA, CFP, Basil Nicastri*, BComm, CPA, CA, Choy Men Lin*, BMath, MAcc, CPA, CA, Eugene Chu, CPA, CA, and Louise Wong*, CPA, CA, TEP, of DCY Professional Corporation Chartered Accountants who are tax specialists* and have been advising dentists for decades. Additional information can be obtained by phone (416) 510-8888, fax (416) 510-2699, or e-mail,,, or Visit our website at  This article is intended to present tax saving and planning ideas, and is not intended to replace professional advice.