Widely used tax tactic tagged as ‘unfair’

The tax planning playbook might soon become a few pages shorter as the federal government proposes to disallow tax breaks to wealthy individuals who give part of their income to relatives.

“Many of the richest Canadians are unfairly exploiting the tax rules designed to help businesses thrive,” Finance Minister Bill Morneau said in a statement, reported the Financial Post. “We want to make sure those rules are used to do just that, and not to give unfair tax advantages to certain – often high-income – individuals.”

Three major loopholes, open to as many as 50,000 families, are in Ottawa’s crosshairs. Among them is the use of so-called “income sprinkling,” where private corporations are used to funnel income from one high-earning individual to a family member who has lower or no personal income tax exposure.

“It’s just standard business owner planning,” Kevyn Nightingale, an international tax partner with MNP LLP, told the Post. “If you’re not doing it, you are not doing what everybody else is doing and something is wrong with your accountant and your lawyer.”

The savings are highly dependent on an individual’s income, according to Nightingale, and can be particularly significant for those whose children are old enough to be in university. “Their kids can be shareholders in the company and they will pay dividends to the kids, and the kids will use that money to pay for school, and the tuition [tax] credits will eat up most of the tax on the income being diverted to them,” he said.

The government is looking to expand the existing tax on split income for minors so that adults can also be taxed in some cases, based on a test of reasonableness. Other sprinkling tactics, such as the use of family members to get multiple claims to the lifetime capital gains exemption, are also included in the crackdown.

Currently, such methods can be harder or easier to use depending on where an individual resides. In Ontario, doctors have easier access to the strategy than lawyers. According to Nightingale, that’s because of a concession in corporate law made specifically for doctors and dentists.”

“The government was negotiating with doctors back in the late 1990s and the doctors wanted more money as they always do,” he said. “They looked over at the federal government and said ‘Hey, we’ve got something that can make the federal government give us a wage hike by allowing incorporations and allowing doctors to split income with spouses and children.’”

The Ontario Medical Association is reviewing the federal government’s announcement to find out if it has any ramifications for their members.

The government is also taking aim at two other strategies: the use of passive investment portfolios within a private corporation, and the conversion of a private corporation’s regular income into capital gains.

Ottawa has opened a window of until Oct. 2 for submissions on its proposals.


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