Attribution rule for income from personal services

Businesses can operate under many structures, such as a company, partnership, trust or a sole trader. The structure selected would depend on many factors, such as the number of owners involved, size of the business, legal requirements etc.

Income diversion

The tax rate for a company is 28% whereas for an individual, the tax rate varies for each level of income, with a maximum rate of 39% for income above $180k. Some may use this provision to channel the income to the company although the services are provided by the individual and thus pay less tax.

This is where the attribution rule comes into picture.

Attribution rules will apply if person A provides service to a buyer B while associated with an entity C, with 80% of the entity C’s income coming from the buyer B or their associated person, and 80% of entity C’s income goes to person A or a relative.

In the above case, if Entity C and the person together earns more than $180,000 – the total income will be deemed as received by person A. If there are more than one person, it will be distributed in the proportion of service performed.

Exemptions

There are exemptions to this treatment, such as when the person and associated entity are non-residents for the full year, entity is a CFC with CFC rules applying, or if attributed income is less than $5,000.

It also applies when associated entity has substantial business assets which are not available for personal use, and cost more than lower of $75,000 or 25% of associated entity’s yearly income.

Please note that the above is general information and does not constitute tax advice. If you have specific questions related to applicability of the above provisions in your situation, please reach out to us using the ‘Contact Us’ option.

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