The proposals
There are three tax-planning tactics the government is looking to shut down:
Income sprinkling
Income sprinkling involves diverting income from a high-income individual to family members with lower personal tax rates, or who may not be taxable at all.
At the moment, the law allows incorporated business owners to split their income with their spouse and any kids between the ages of 18 and 24, even if they had nothing to do with the company.
When it comes to income sprinkling of salary income, the current tax rules are strict in that the Income Tax Act only permits “reasonable” amounts to be deducted from the corporation’s income when salary fees are paid to employees, including family members. This rule is meant to prevent a parent who owns a corporation from paying his spouse or child an annual salary when he or she is not actually involved with the business.
Therefore, the amount received by such adult family members must be “reasonable.” In conclusion, if the amount isn’t reasonable, then a top rate tax will apply, preventing income sprinkling among non-involved family members.
Passive income
When a corporation generates income, it's eligible for an attractive tax rate on the first $500,000 of active business income. If a business owner doesn't need all of his earnings to support his lifestyle, it's common to leave the rest in the corporation to invest
The government believes that this tax deferral results in a significant tax advantage to owners of private corporations.
They believe that the additional capital available to corporate owners to invest in passive investments when using a corporation results in a significant advantage that grows over time.
Converting income to capital gains
In general, when an individual sells shares of a corporation for an amount in excess of what they paid for the shares, they realize a capital gain. Depending upon the assets of the company, and the personal tax history of the vendor, the capital gain may or may not be eligible to be offset by a capital gains deduction, such that no personal tax is paid.
The new policy is that individuals should not be able to extract any funds from their own company at capital gains rates, but should always pay the higher dividend rates.
The proposed changes will cause genuine hardships and problems for families, including:
- Potential double tax upon the death of a shareholder as a result of the elimination of the “pipeline plan”
- Potential double tax upon the transfer of a family business from one generation to the next
Если вы хотели бы получить больше информации о налоговых программах и оптимальной стратегии списания налогов, пожалуйста, не стесняйтесь обращаться ко мне по телефону:
416-548-7899, ext.200
Илана Шпарбер, CPA, CMA