27th July 2017

The notion that large corporations and the wealthy do their best to dodge taxes is nothing new. Like the tax systems of many countries, Canada has a number of loopholes that businesses and wealthy professionals have been able to exploit over the years. Now, the Canadian Government is looking to crack down on this issue.

Finance Minister Bill Morneau has proposed a plan that aims to prevent businesses from continuing a practice that has become known as income sprinkling. This legal strategy the government now looks to outlaw occurs when a business owner shifts part of their income to family members such as their children or relatives. As these individuals are not subject to the same high taxes a business has to pay, the company using this loophole is able to lower its tax bill.

The government estimates there are around 50,000 Canadian families who use this ‘income sprinkling’ strategy to their advantage. And it is not just corporations who do this. Morneau has noted, “There’s been a big increase in professionals that have been using these structures.”

Doctors and lawyers, among many other types of professionals, are some of the people Morneau claims to be participating in income sprinkling.

As with any sweeping changes made by a government body, it is certain there will be people who will be against the reforms.

“Of course, when you change things in a way that make it less advantageous for some people, they’re not going to be happy about it,” Morneau said.

Dan Kelly, the president of the Canadian Federation of Independent Business fears that if these changes pass, they will have negative repercussions on small and medium businesses. Smaller firms, especially, are more vulnerable to this type of legislation as they already face a large number of obstacles. Kelly notes that these firms must face the challenges of premium increases for the Canada Pension Plan and Employment Insurance, changes to NAFTA, as well as the difficulties brought about by a rising minimum wage.

While this tax reform will likely make it more difficult for Canadian small and medium businesses, Morneau notes there is a more important issue at stake, “I don’t want to see one small subset of the population advantaged because of our tax code, so it is about creating fairness.”

Perhaps as a testament to his belief, Morneau admits he is likely to be affected by these tax changes as well.

"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 that these changes, over the long term, will mean that I’ll end up paying more tax." Morneau said.

Morneau firmly believes that all Canadians should have to pay their fair share of taxes, including himself.

At Accountancy Insurance, we hope to keep all our valued clients informed on the latest tax news and business trends.