Skip to Content News Archives Economy Energy Oil & Gas Renewables Electric Vehicles Mining Commodities Agriculture Real Estate Mortgages Mortgage Rates Finance Banking Insurance Fintech Cryptocurrency Work Wealth Smart Money Wealth Management Investor Personal Finance Family Finance Retirement Taxes High Net Worth FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials More Innovation Information Technology FP500 Podcasts Small Business Lives Told Tails Told Shopping Financial Post Store Obituaries Place a Notice Advertising Advertising With Us Advertising Solutions Postmedia Ad Manager Sponsorship Requests Classifieds Place a Classifieds ad Working Profile Settings My Subscriptions Saved Articles My Offers Newsletters Customer Service FAQ News Economy Energy Mining Real Estate Finance Work Wealth Investor FP Comment Executive Women Puzzmo Newsletters Financial Times Business Essentials HomePersonal FinanceTaxesMismatched tax rules on income splitting show the government is getting dressed in the darkKim Moody: Proper review and reform of the Income Tax Act would restore fairness to Canada's tax systemLast updated 31 minutes ago You can save this article by registering for free here. Or sign-in if you have an account.The tax on split income is not a principled tax policy; it's a sock drawer nobody's checked in decades. Photo by Vesnaandjic/Getty ImagesWe independently select everything we recommend. Buying through us may earn us a commission, which supports our work.A young relative showed up at a family gathering last week in flip-flops with one white sock and one black. She shrugged when I pointed it out, saying she’d been rushing and hadn’t noticed. I was the first person all day to say anything.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman, and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Subscribe now to read the latest news in your city and across Canada.Exclusive articles from Barbara Shecter, Joe O'Connor, Gabriel Friedman and others.Daily content from Financial Times, the world's leading global business publication.Unlimited online access to read articles from Financial Post, National Post and 15 news sites across Canada with one account.National Post ePaper, an electronic replica of the print edition to view on any device, share and comment on.Daily puzzles, including the New York Times Crossword.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one account.Share your thoughts and join the conversation in the comments.Enjoy additional articles per month.Get email updates from your favourite authors.Create an account or sign in to continue with your reading experience.Access articles from across Canada with one accountShare your thoughts and join the conversation in the commentsEnjoy additional articles per monthGet email updates from your favourite authorsSign In or Create an AccountorA kid in my high school class 40 years ago did the same thing on purpose. Everyone thought he was strange. Today, nobody bats an eye until someone points it out.The Income Tax Act has many pairs of mismatched socks. Legislators are often more comfortable with a provision’s politics than with how it clashes with the rest of the act or with the unintended consequences that follow.Get the latest headlines, breaking news and columns.By signing up you consent to receive the above newsletter from Postmedia Network Inc.A welcome email is on its way. If you don't see it, please check your junk folder.The next issue of Top Stories will soon be in your inbox.We encountered an issue signing you up. Please try againOne example that has bothered me since 2017 is Section 143, the so-called Hutterite rule. If a religious congregation — as the act defines it — runs a business communally, such as a Hutterite colony’s farm, the act deems a trust to exist.Broadly speaking, the trust can elect to split income each year among adult members by formula: one per family gets a full share, the others a half share. No one has to prove hours worked or capital contributed.This wasn’t an accident. It traces to Wipf vs. the Queen in 1975: the court ruled a Hutterite colony wasn’t a commercial enterprise generating individual profits. Parliament put that into Section 143 in 1977 in order to tax colonies “in the same manner as their non-Hutterian neighbours.” The Federal Court of Appeal reaffirmed it in 1979. Call this the white sock.Now, the other foot. On July 18, 2017, finance minister Bill Morneau unveiled a package aimed at private businesses, framed as closing loopholes for wealthy Canadians trying to avoid higher tax rates and singling out income sprinkling among family members.What followed, after significant backlash, was sweeping amendments to the tax on split income (TOSI) rules, applying them to various private interests, any income level, any family. Professional groups said the real target would be middle-class owners, not the wealthy.Take a hypothetical Ontario couple who each own half the shares of BakeryCo, a business they started together. Mom drives the company; dad stays home raising their two young kids and isn’t active in it. Ignoring government benefits, BakeryCo is their only family income.If dad receives certain income from BakeryCo, TOSI could tax that income at the highest rate instead of graduated rates simply because he’s not active in the business.Say BakeryCo earns $100,000 in profits. At the small business rate, the combined federal and Ontario corporate tax takes roughly $12,000, leaving about $88,000 to pay out as dividends, split evenly at $44,000 each.If TOSI didn’t apply, and that $44,000 was his only income, his tax bill after the basic personal amount and dividend tax credit would land around $1,100. With TOSI, the benefit of those ordinary graduated rates and personal credits disappears, and the dividend is effectively taxed at the top rate: roughly $21,000, or about 19 times higher, purely because of who he married and what he didn’t do at the bakery that year.There’s an irony in Parliament’s reasoning for Section 143: it enables income splitting because members own no personal property at all – no individual claim, no individual profit to tax.Flip that onto our hypothetical couple and it points the opposite way. The dad isn’t propertyless: Ontario’s Family Law Act already treats marriage as an economic partnership, entitling a spouse to an equalization of net family property, including growth in a business such as BakeryCo, regardless of who ran it.But tax law treats his dividend as abusive income splitting, taxable at the top rate, regardless of what family law states about his stake in the business.Through it all, the Hutterite rule was written into TOSI’s own exclusions on purpose. Parliament carved out any trust “deemed to be in existence by subsection 143(1)” and let colonies stay exempt, even before the 2018 amendments. Call this the black sock.Our federal government also lets spouses split pension income with no test of the recipient’s effort; nobody asks a retired teacher’s spouse to prove she was actively engaged first.Add that to the colony rule and matrimonial property law and a pattern emerges: Parliament has repeatedly recognized that income earned inside a shared economic unit doesn’t always belong to whoever’s name is on the cheque. A colony is a shared economic unit, as is a pension-splitting couple and a small business run by two spouses, one active and one not.Yet one group gets formula-driven splitting with no strings attached. The other — risking the family’s capital — gets the harshest treatment via TOSI.That’s not principled tax policy; that’s a sock drawer nobody’s checked in decades: one deliberate quirky sock from 1977 and one rushed, mismatched sock from 2018, sitting side by side, nobody bothering to look down.Being deliberately quirky, like my old classmate, meant someone thought about it. Being accidentally mismatched, like my young relative, just means you were in a hurry and nobody caught it.A proper review and reform of the act — one that looks at all the socks at once, not just whichever foot is cold that year — would restore fairness and stop our tax system from getting dressed in the dark.I love Hutterite vegetables and other farm-fresh goodies as much as the next person. I feel the same about my neighbourhood family bakery, but I just wish I could buy their bread and pastries knowing their family gets the same tax treatment as the colony gets for its carrots and meat sales.Kim Moody, FCPA, FCA, TEP, is the founder of Moodys Tax/Moodys Private Client, a former chair of the Canadian Tax Foundation, former chair of the Society of Estate Practitioners (Canada) and has held many other leadership positions in the Canadian tax community. He can be reached at kgcm@kimgcmoody.com and his LinkedIn profile is https://www.linkedin.com/in/kimgcmoody. _____________________________________________________________If you like this story, sign up for the FP Investor Newsletter._____________________________________________________________ Join the Conversation This website uses cookies to personalize your content (including ads), and allows us to analyze our traffic. Read more about cookies here. By continuing to use our site, you agree to our Terms of Use and Privacy Policy.