On July 18, 2017, Finance Minister Bill Morneu announced the launch of consultation on tax planning using private corporations. Presently, it is possible for the owners of private corporations to gain tax benefits that are not available to other Canadian taxpayers. The consultation paper seeks input from Canadian taxpayers on such unfair practice and how to eliminate or limit such practices. The following are the three major areas:
Income sprinkling
This is defined as a diversion of income earned by a high-income individual to family members with lower personal tax rates using a private corporation that is owned by the high-income individual.
Many taxpayers’ earning income through active business corporation are able to split the income by issuing shares or debts to adult relatives who are taxed at lower tax rates on dividends, interest or similar type of income. There is no limit to the amount of dividends that can be paid. Proposed legislation/consultation paper is likely to limit the type of person who can be paid dividends (actively involved in the business).
Converting income to capital gains
This is income normally paid out by corporations in the form of salary or dividends to the principals of the corporation; it is taxed at their respective personal income tax rates. However, by converting this income to capital gains using a set of complex steps results in significantly lower tax rates taking advantage of the lower taxes on capital gains.
Passive (investment) income retention
Some corporation owners retain their personal investments within a corporation, thereby taking advantage of lower tax rates for corporations compared to personal income tax. When this is done with an intention of shielding from higher income tax rates rather than growing business, such individuals get an unfair tax benefit.
