Tuesday, January 23, 2018

Calculated Thought: Corporate tax changes get a reboot

January 8, 2018 by Sean Annable, contributing writer

After public outcry, the proposed changes to how corporations are taxed in Canada have been redrafted in hopes of simplifying the contentious updates.

The most debated issue was the practice of business owners structuring their corporation to have family members as shareholders and pay them dividends, spreading income across the family to reduce taxes, a process referred to as “income sprinkling.”

The government’s controversial plan was to expand the “kiddie tax,” also known as the tax on split income—a provision that imposes the highest marginal tax rate to income transferred to minors—to include all adult children and family members.

Calculated Thought is a column dealing with student finances that is featured in every issue of Nexus.

According to a Department of Finance press release, there are now “bright-line” tests to determine what—if any—income earned by family members through a corporation will face the highest rate, and if those tests are not met, a reasonableness test will be performed by the CRA.

To recognize that business ownership plays a role in retirement, any spouse over age 65 will not be affected. Those over 18 who work at least 20 hours per week for the business won’t be hassled. Adults over 25 who own 10 percent or more of the business get a pass, too.

A spouse who doesn’t meet these tests, or the reasonableness test, is subject to tax that would make the scheme undesirable.

This leads to an interesting passage in the release’s section on “gender-based analysis.”

The release says that data show that men transfer 70 percent of the sprinkled income, and that 68 percent of it is received by women. The government document goes on to say that “while this income is of benefit for recipients, it also creates incentives that reduce female participation in the workforce. Increased participation of women in the workforce is a source of economic opportunity for individuals and is a major driver of overall economic growth.”

I suppose that the government’s suggestion is that some women have incentive to avoid employment in favour of a lower tax burden on their families afforded through shared, family corporate ownership.

I haven’t found any comment from women regarding the government’s statement, and would be interested to know how this is being interpreted.

The medical community has been a staunch opponent to these changes. Following negotiation with the federal government in the ’90s, the ability to incorporate was built into doctors’ compensation packages, and income splitting through dividends became a common practice.

Doctors Nova Scotia director David Chapman reacted to the changes by expressing that they still don’t address this deal struck with doctors, and that they put pressure on people who move to underserved communities where work can be scarce for their spouses. The BC government has incentives for doctors to work in underserved communities, but the new rules may work against those efforts.

Support for the changes comes from people earning income as employees who don’t get to enjoy splitting income with their spouses, and that’s a strong argument.

It will be a long road ahead tackling the issues brought on by a corporate tax system that has Canadians at odds.

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