The federal government is proposing measures to tighten what it calls “unfair” loopholes for private corporations that enable many wealthy Canadians, including professionals like some doctors, to reduce the amount of tax they pay.
Finance Minister Bill Morneau unveiled plans Tuesday designed to prevent some business owners from using a number of legal strategies to shield part of their income in order to gain tax advantages that are out of reach for most Canadians.
Even Morneau himself, who had a successful business career before entering politics, admitted that if the changes are introduced he will likely pay more taxes going forward.
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“We see these approaches to managing people’s affairs through a private corporation as creating an unfair playing field,” Morneau said.
“I don’t want to see one small subset of the population advantaged because of our tax code, so it is about creating fairness … All Canadians should be willing to pay that fair share, including myself.”
The suggested changes include steps to prevent business owners from using their private corporations as a way to shift some their income to family members, including minors, who are subject to lower personal tax rates – even if those relatives are not involved in the business.
The Finance Department believes about 50,000 families in Canada do this, a practice the government calls “income sprinkling.”
When asked later Tuesday in an interview to describe the businesses associated with these families, Morneau said “a lot of professionals.”
“There’s been a big increase in professionals that have been using these structures,” he said.
Morneau said doctors and lawyers are among the examples, but he added that they also include many other types of professionals.
To help address income sprinkling, the government is proposing measures such as stricter age-related requirements for family members and tests to ensure their contributions to the business are “reasonable.”
Doing so would provide an estimated $250 million per year in additional federal revenue, or about $5,000 per family, the government said.
The government also released proposed changes to target those who gain tax relief through passive investment income, which enables corporate owners and employees to make one-time investments from $100,000 of pre-tax income and retain them for 10 years.
The feds are calling for the elimination of the tax-deferral advantage on passive income earned by private corporations.
The federal government is also looking to address a tax-planning approach that converts income into capital gains, which are taxed at a lower rate.
It has yet to say how much additional federal revenue could be provided by closing those loopholes.
There will be a 75-day public consultation period to allow stakeholders to examine and weigh in on the three sets of proposals announced Tuesday.
Morneau said he expects to get some push back from Tuesday’s announcement.
“Of course, when you change things in a way that make it less advantageous for some people, they’re not going to be happy about it,” he said.
The president of the Canadian Federation of Independent Business said in an interview Tuesday that he’s concerned the Liberal’s proposed tax changes could have unintended, negative consequences on small and medium businesses.
Dan Kelly, whose organization represents more than 100,000 members, said smaller firms in Canada are already preparing to face challenges such as rising minimum wages in some provinces, planned increases in premiums for Employment Insurance and the Canada Pension Plan.
He added they are also bracing for changes to NAFTA.
“This is a pretty worrisome set of proposals out of the federal government,” Kelly said.
“That uncertainty alone, given all the other knocks small businesses are taking right now, is just not a particularly welcome development.”
Kelly stressed that he doesn’t take any issue with the government pursuing tax cheats, nor does he have a problem with steps to ensure rules are not abused.
The government believes the use of private corporations to lower tax rates is an increasing trend in Canada and has been exacerbated by the shift toward more of a services-based economy.
The number of Canadian-controlled private corporations grew from 1.2 million in 2001 to 1.8 million in 2014, the Finance Department said.
From 2000 to 2016, the department said the proportion of incorporated, self-employed individuals almost doubled.
While these tax-savings practices are legal, Morneau said they are unfair.
“I have seen these for years,” Morneau said when asked about whether he came across these practices first-hand during his business career, which included serving as executive chairman of Morneau Shepell, the country’s largest human resources consulting firm.
“I have not looked at my personal implications from these changes as we’ve gone through them and I’ve done that on purpose because I want to make sure the system is fair and I don’t want to consider my personal situation.
“My expectation is that these changes, over the long term, will mean that I’ll end up paying more tax.”
