Proposal to increase tax

Minister of Finance looking for money (and feedback)

August 11, 2017

Well the federal Minister of Finance has made a proposal to increase taxes for a certain part of the population, specifically those who have corporations with other family members being paid from those corporations.

The Minister has referred to this practice as “income sprinkling”, and says he considers it “unfair”. Let’s examine these proposals, on which the Minister has asked for comments prior to October 2, to fin.consultation.fin@canada.ca.

In July, the Department of Finance issued a “Consultation Paper” called Tax Planning Using Private Corporations. This requests feedback on three proposed tax increases aimed directly at small businesses and private corporations, and poses a series of questions for respondents to answer.

These three areas are “income sprinkling” (sharing income among family members), holding passive investments inside a private corporation, and converting income to capital gains.

The third measure is one where a strong argument can be made that loopholes are being exploited. The others I find concerning.

The government clearly has its mind made up on moving forward. I admit I was a little put off by their use of value-laden terms like “wealthy”, “high income” and “unfair tax advantage”, which I know do not apply to many of the people who would be affected, and possibly very few of them.

Many of the people who will be negatively affected by these proposals are not wealthy, not high income, and have likely never done anything unfair in their lives.

Small businesses, most of them incorporated, are the engine creating most of the jobs in Canada. The shareholders of these corporations are the people who make it happen.

The latest Key Small Business Statistics released by Statistics Canada in 2016 revealed that small businesses employ 70.5% of the labor force in Canada, were responsible for 87.7% of net employment growth and contributed an average of 30% to the GDP of their respective province.

These are the folks who take the risks, go into debt, work insane hours, have no job security, no pension or benefits (unless they create them and pay for them themselves), but always have to make payroll for their employees.

And yes, some of these business owners achieve success, occasionally creating great wealth. Many then give back to their communities, and you can see their names on hospitals, schools and the lists of people who support things like disease research and treatment, arts & cultural organizations and charitable foundations.

Is it really a good idea to give these people another incentive to pay their taxes in another country?

The government is proposing to eliminate the ability of business owners to share income with other members of their families, on the basis that some of these other family members may be in lower tax brackets. That would result in a possible decrease in total family taxes.

When an entrepreneur or professional works 12-14 hours a day, often 7 days a week, the family all pays a price. As well, they usually help with the business in a variety of ways. Shouldn’t they be paid, and allowed to pay taxes, albeit at a lower rate?

There is already a “kiddie tax” that prevents splitting business income with minor children. The new proposal would extend this to spouses and grown offspring, making them subject to the government’s new “reasonableness test.” (Yes, they are actually proposing to design a “reasonableness test.”)

The government also wants to eliminate the ability of a family to share the lifetime capital gains exemption, if they are lucky enough to sell the business at a profit in the future. Both proposals would undo years of planning by people who have organized their affairs properly, to take advantage of laws in place for decades.

If you have an opinion on these changes, or alternative solutions, make your voice heard.

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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice. Please consult legal, tax, insurance and investment experts for advice on your unique situation.

David Christianson, BA, CFP, R.F.P., TEP, CIM is recipient of the FELLOW OF FPSCTM Distinction, a portfolio manager and senior advisor with Christianson Wealth Advisors, a Senior Vice President with National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.