By: Laura Steiner
Canada’s Finance Minister Bill Morneau has proposed new tax measures meant to close loopholes between allowing wealthier Canadians avoiding higher tax rates. According to the CBC the plan is to target people who incorporate themselves, and then draw income from their businesses while paying lower corporate taxes.
The second shift is an attempt to cut back on income sprinkling. It’s a practice allowing business owners such as lawyers, and doctors to share income with family members earning less. Morneau wants to introduce a “reasonableness” test to determine how much a family member does, and if they are entitled to profits.
Using CBC numbers: a business-owner earning $220,000/ year could potentially pay as much as $35,000 less in taxes by sharing it with family members. The proposed changes could mean that income is taxed at the highest federal tax rate. “This is about people using a corporate structure to shield their income and gain a tax advantage,” Morneau told reporters according to the CBC.
Potential Capital Gains Crackdown
In Canada only 50% of capital gains are taxed at federal income rates. Dividends are taxed at approximately 24% according to 2016 numbers. Some business owners claim business dividends as capital gains because the rates are lower. Legislation is being proposed to close the loophole, retroactive to July, 2017.
Passive Investment Income:
Another proposed change is to Passive Investment Income. Passive Investment income refers to dividends, interest, and capital gains. Currently Canadians can put money into a business, and pay substantially less tax over time.
Finance Canada hasn’t decided on how to close the loophole. The problem with the changes is that lower taxes for businesses are meant to create jobs, and encourage reinvestment in the economy.
Some of the changes could affect as many as 50,000 Canadian families.