Bill Morneau – Finance Minister is to unveil a package of proposed reforms - part of an commitment to crack down on tax avoidance and evasion.
“There are signs that our system isn’t working as well as it should, specifically when it comes to private corporations,” writes Morneau. “There is evidence that some may be using corporate structures to avoid paying their fair share, rather than to invest in their business and maintain their competitive advantage.”
The government is launching a 75-day public consultation on the proposed measures that are designed to target tax advantages not available to most Canadians.
Income sprinkling is a key method of shifting the tax burden from individuals to corporations.
Wealthy Canadians can reduce their tax obligations by routing incomes through private corporations. They then pay salaries to family members, such as children, who are subject to lower personal tax rates.
The government is working on new rules that would determine whether compensation is reasonable, based on the family member’s contribution of value and financial resources to the private corporation.
Morneau wrote: “When the rules are used for personal benefit, they are not contributing to growing our economy. Rather, such practices can undermine confidence in our economy by giving tax advantages to a select few. We don’t think that’s fair.”
A second measure would harmonize the treatment of “passive” investment portfolios. Under the current system, high-income Canadians can benefit from a more favourable taxation rate for income derived by stocks and real-estate investments when the investment is held in a private corporation. The proposed measure would not be applied retroactively, but rather to future investments.
A third proposed measure would limit the ability to convert a private corporation’s regular income into capital gains, given that only half of capital gains are included in a taxpayer’s income.