Feds unveil plans to stop ‘unfair’ business tax advantages reaped from ‘income sprinkling’

OTTAWA — The federal government is proposing measures to tighten loopholes for private corporations that it says enable many Canadians to “unfairly” cut down how much tax they pay.

Finance Minister Bill Morneau unveiled plans Tuesday designed to prevent some business owners — particularly wealthy ones — from using legal strategies to shield part of their income in order to gain tax advantages.

Even Morneau himself, who had a successful business career before entering politics, admitted that if the changes are introduced he will likely pay more taxes going forward.

“We see these approaches to managing people’s affairs through a private corporation as creating an unfair playing field,” Morneau said.

“I don’t want to see one small subset of the population advantaged because of our tax code, so it is about creating fairness . ... ”

“All Canadians should be willing to pay that fair share, including myself.”

The possible changes include steps to prevent business owners from using their private corporations as a way to shift their income among family members subject to lower personal tax rates — even if those relatives are not involved in the business.

The Finance Department believes about 50,000 families in Canada do this, a practice the government calls “income sprinkling.” To help address it, the government is proposing measures such as stricter agerelated requirements for family members and tests to ensure their contributions to the business are “reasonable.”

Doing so would provide an estimated $250 million per year in additional federal revenue, or about $5,000 per family, the government said.

The federal government also released proposed changes to target those who gain tax relief through passive investment income, which enables corporate owners and employees to make one-time investments from $100,000 of pre-tax income and retain them for 10 years.

The government is calling for the elimination of the tax-deferral advantage on passive income earned by private corporations.

Ottawa is also looking to address a tax-planning approach that converts income into capital gains taxed at a lower rate.

There will be a 75-day public consultation period to allow stakeholders to examine and weigh in on the three sets of proposals announced Tuesday.

Canadian-controlled private corporations grew from 1.2 million in 2001 to 1.8 million in 2014, Ottawa said. From 2000 to 2016, the proportion of incorporated, self-employed individuals almost doubled.

While these tax-savings practices are legal, Morneau said they are unfair.

“I have seen these for years,” Morneau said when asked about whether he came across these practices first-hand during his business career, which included serving as executive chair of Morneau Shepell, the country’s largest human resources consulting firm.

“I have not looked at my personal implications from these changes as we’ve gone through them and I’ve done that on purpose because I want to make sure the system is fair and I don’t want to consider my personal situation.

“My expectation is these changes, over the long term, will mean that I’ll end up paying more tax.”

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