Feds to close loopholes for private corporations

The federal government is proposing several measures to close loopholes for private corporations it says enable many Canadians to “unfairly” reduce how much tax they pay.

The Liberals unveiled their plans today, which are aimed at preventing some business owners — particularly wealthy ones — from distributing their income among family for tax-savings purposes, even if those relatives are not involved in the business.

The Finance Department believes about 50,000 families in Canada are engaged in the practice known as income sprinkling.

The changes “are far more broad-reaching than anticipated,” says Michelle Connolly, vice-president of tax, retirement and estate planning at CI Investments. And complying won’t be simple or cheap. The federal government has “put a burden on the small business owner from a compliance standpoint” she says, specifically referring to income splitting requirements.

The federal government also released proposals to target those who gain tax relief through passive investment income and by converting their income into capital gains, which are taxed at a lower rate.

The government is launching a 75-day public consultation period to allow stakeholders to examine and weigh in on the three proposals. Comments will be received until October 2, 2017, at fin.consultation.fin@canada.ca.

The feds believe the proposed measures could generate significant amounts of revenue, with the plan to address income sprinkling providing an estimated $250 million per year.

There’s some good news: the government has agreed to revisit intergenerational business transfers. At the moment, a specific anti-avoidance tax rule means it’s often more profitable to sell a business to an outsider. In the consultation, the government says it’s “interested in the views and ideas of stakeholders regarding whether, and how, it would be possible to better accommodate genuine intergenerational business transfers while still protecting against potential abuses of any such accommodation.”

Read: How tax rules disadvantage family business succession

The Trudeau government said in its March budget that it would take a closer look at measures to address what it considers tax-fairness issues. Read the full consultation.

Read our further analysis here:

Finance tax proposals threaten family business planning

How Finance’s tax proposals will squeeze biz owners