Tax warfare

The federal government is on a mission to ensure that wealthy Canadians start paying their “fair share” of taxes.

You know, those individuals who pay personal income tax at a rate of more than 53 per cent on most income above $200,000 in many provinces. The ones who also pay GST, provincial sales tax, property tax and other levies. And who support the arts, the homeless and other social causes with charitable donations. Well, that is not enough. It is time that these tax avoiders started paying up.

Last month, Finance Minister Bill Morneau issued a package of tax proposals, ostensibly to close tax “loopholes” being used by the wealthiest Canadians and their private corporations to gain unfair tax advantages, including holding portfolio investments in Canadiancontrolled private corporations (CCPCs). Well, let’s take a look at this portfolio investment “loophole.”

A CCPC pays tax of about 15 per cent on up to $500,000 of annual business income, and 27 per cent on business income above that limit. The difference between these rates and the higher rates that apply to individuals is paid in the future, when the CCPC eventually pays dividends to its shareholders.

Investment income of a CCPC is taxed at a higher rate than business income — at about 50 per cent, roughly the same as the top personal tax rate. As a result of the “tax integration” rules, there is generally no further net tax when the after-tax investment income is paid as dividends to the CCPC’s shareholders. So where is the loophole?

The government is concerned that, if the CCPC does not require the after-tax business income for business expansion, and instead uses the funds to acquire portfolio investments, the CCPC the shareholders will pay additional tax when the after-tax investment income is distributed as dividends in the future. For example, if a CCPC pays tax on business income at the small-business rate, an individual in Ontario who is taxed at the top personal tax bracket will face a combined tax rate on investment income, including the tax paid by the CCPC, of close to 73 per cent in 2017. This combined rate leaves the CCPC and its shareholders with the same amount of investment capital in the future as an individual who is taxed at 50 per cent and who uses the after-tax funds for portfolio investment.