On July 18 Finance Canada launched a public consultation process to review federal tax policies that benefit private corporations whose owners use their business as a tax shelter from personal income tax.
Federal Finance Minister Bill Morneau explained the government’s reasoning for the proposed changes in a newspaper column:
“While we know most businesses are investing and creating jobs, we also know that corporate structures are being used to reduce personal taxes. This means that some of the highest-income earners are effectively being taxed at a much lower rate than everyone else.”
The key issues being considered in the proposed tax reforms are as follows:
‘Sprinkling dividends” as a means of income splitting: The government wants to tighten rules to prevent a practice whereby a business owner “sprinkles” corporate income among family members (who may not even be employed in the business) primarily to take advantage of that family member’s low income tax rates.
Reducing tax deferrals: Currently, an owner can accumulate portfolio earnings inside a corporation and pay corporate income tax rates, which are lower than personal rates. The owner can defer paying any personal income or dividend taxes on this portfolio indefinitely until the money is taken out of the business. The government is considering alternatives that would reduce this tax advantage.
Multiple capital gains exemptions: When an owner sells a small business, the first $850,000 of capital gain is exempt from taxes. But some businesses take advantage of this benefit by getting multiple family members to each claim their exemptions in the sale as well.
Converting income into capital gains: Private corporations generally pay either salary or dividends that are taxed at the owner’s personal income tax rate. But when the business is sold, only a portion of the capital gains are included as income. So instead of paying tax on dividends the owner pays the much lower capital gains rate. The government wants to tighten the rules on this tax benefit.
To explain the government’s concerns, Morneau cited this example:
“An incorporated professional earning $300,000 with a spouse and two adult children can save about $48,000 in taxes by using just one of these loopholes. What that means is an incorporated professional could be taxed at a lower rate than a salaried nurse practitioner or police officer making much less a year.” Morneau said Canadian small business pays some of the lowest rates in the G7 countries and, “have some of the most competitive corporate tax rates in the world – more than 12 points lower than the United States.”
In spite of the Minister’s assurances, Finance Canada’s announcement has triggered an outpouring of alarm from business groups, small business advocates and owners, doctors, farmers, accountants and political conservatives, to name a few.
CREA and BCREA are both preparing submissions for Finance Canada’s public consultation process for the October 2, 2017 deadline.
CREA has assembled a team to lobby and respond to the government proposals, including the former Director of Tax Policy at Finance Canada, a former Parliamentary Secretary to the Prime Minister, lobbyists and former government officials. CREA staffs are also participating through regular contact with national organizations engaged in various coalitions and have already held a meeting with Finance Canada officials to discuss concerns about the proposal.
FVREB will share the drafts of BCREA’s and CREA’s submissions with our members when they are available.