Federal Finance Minister Bill Morneau is proposing to close loopholes allowing wealthier Canadians to avoid higher tax rates, largely by targeting people who incorporate themselves and then draw income from their businesses while paying lower corporate taxes.
The number of corporations in Canada has increased eight-fold since the 1970s, while the gap between personal tax and business tax rates has grown significantly. There now exists a 37.2% gap, meaning income derived from a business faces a much lower tax burden.
Morneau wants to put an end to so-called "income sprinkling," a tax move that allows business owners — often professionals like doctors and lawyers — to distribute money to family members who earn less, allowing income to be taxed at a lower rate.
Morneau plans to impose a test to avoid punishing legitimate family businesses. That test will determine just how much work a family member actually does at a business, and if that family member can really lay claim to profits. The Finance department estimates approximately 50,000 Canadian families would be affected by this change
The measure is meant to level the playing field, and to avoid advantages business owners have over employees who earn money from a salary.
A business owner earning $220,000 a year can pay up to $35,000 less in taxes by using sprinkling tactics and distributing income to family members. The government will extend income splitting rules that currently apply to minors — colloquially called the "kiddie tax" — to adults in certain circumstances.
That means dividend income could be taxed at the highest federal tax rate (currently 33%), even if the money is split with a family member who is in a lower tax bracket.
He adds the Liberal government wants to maintain the progressive tax system that demands wealthy Canadians pay more because they can afford it
