Tax us fairly
It sounds a little, well, a little scatological: income sprinkling. But it’s something that has been going on in Canada’s tax system for years. Here’s how it works: someone who runs a private business, instead of taking a large salary and paying taxes in a high-salary bracket, can spread, or “sprinkle,” that salary around over a number of family members who would then pay taxes at a lower rate.
For those who can avail of the method, it’s quick way to keep money from the taxman.
The problem? Well, it’s not available to the average Joe or Jane working at an ordinary job.
Many professionals — doctors, lawyers and accountants — have formed private companies for exactly that tax advantage. In all, the federal government estimates 50,000 families are now receiving a tax benefit from the method.
If the federal Liberals stay the course, it’s something we can expect to come to a screeching halt.
Other tax changes the Liberals are proposing include putting an end to the practice that lets people avoid taxes by keeping investment profits inside a business — business income is taxed at a lower rate — and protecting capital gains by shifting them through a number of companies.
The income sprinkling change alone would bring in somewhere between $250 million and $500 million in federal and provincial taxes, which doesn’t sound like a lot of money, in the big picture.
But what’s important in the big picture is fairness in the Canadian tax system. If people are going to be taxed on their income, and taxed at a progressively higher rate as they earn more and more money, than the comparison of those incomes should be on an apples-to-apples basis.
No one should get special or different tax treatment based on their ability to form a corporation and shift income around.
Critics complain that the tax changes — particularly the ban on “sprinkling” — somehow limits entrepreneurship. There have even been suggestions that taxing everyone on the same basis will drive businesses to jurisdictions that don’t have the same tax system.
Well, usually entrepreneurs are rewarded for the way their innovative and original business ideas mesh with public needs and interests, rather than by the way they manage to avoid the taxes that everyone else has to pay.
What we need in a tax system is one that fairly spreads the tax burden across everyone who is able to pay, one that legitimately taxes those who earn the most at a higher rate.
Either that, or, if we’re going to continue to allow some Canadians to spread their income across their entire family, allow everyone to do it.
One tax system for the rich, and another for the poor is not a fair system.
The time for an even-broader review of Canada’s tax code is, frankly overdue.