Changes to income sprinkling

Until this year, business owners could pay dividends to lower-taxed adult children or other family members who were shareholders with few restrictions. But effective January 1, 2018, the rules changed. Now, only family members who meet certain criteria can pay tax on dividends at their personal marginal rate. Otherwise, dividends are taxed at the highest marginal rate.

Here are the situations where the personal marginal rate still applies:

  • The recipient works in the business. The family member must be 18 or older and have worked in the business for an average of at least 20 hours per week in the year dividends were received or in any five previous years.
  • The recipient holds 10% of shares. The family member must be age 25 or older and hold at least 10% of the shares in terms of votes and value. The business cannot be a professional corporation or service business.
  • The recipient is the retired owner’s spouse. The business owner’s spouse can receive dividends taxed at the personal marginal rate if the owner is 65 or older and has meaningfully contributed to the business.

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