How Income Splitting Rules Affect Doctors

Income splitting rules, commonly referred to as Tax on Split Income (TOSI), have imposed significant limitations on the ability of physicians to split income with adult family members through a Medicine Professional Corporation (MPC). These new regulations have led to a notable decline in the number of doctors opting for incorporation with the intent of income splitting. It’s crucial for both already incorporated doctors and those contemplating incorporation to understand the implications of the updated Income Splitting rules. Here’s a brief overview of the key points related to Income Splitting:
- Previous Rules vs. New Rules: The new rules differ significantly from the previous ones, especially in terms of how income can be split among family members.
- Exceptions to the Rule: There are certain exceptions to these rules that can help alleviate their effects:
- Adults aged 18 or older who have contributed significantly to the business, typically averaging at least 20 hours per week, are exempt from these rules. This exemption applies not only for the current year but also for any of the past five tax years. These five years don’t need to be consecutive. This means that after a cumulative 5-year period of contributing at least 20 hours weekly, the MPC can still distribute dividends even if the family member is no longer actively involved.
- The rules don’t apply to income received by a person if their spouse (i.e., the doctor) has turned 65 years or older in the year the income is received. This means that once the physician is 65 or older, income can be shared with the spouse from the MPC, regardless of whether the spouse has been active in the business. This provision aligns with the pension income splitting regulations.
- To validate the number of hours an individual has worked in a year, records like timesheets, schedules, or logbooks can be used. If the individual also earns a salary from the business, payroll records indicating the hours worked can be considered by the Canada Revenue Agency (CRA).
- Tax Implications: Any split income that doesn’t fall under an exclusion will be taxed at the highest marginal tax rate, which is currently 53.53% in Ontario.