This year’s federal budget didn’t contain much in terms of meaningful tax policy announcements, but investors are undoubtedly pleased that Finance Minster Bill Morneau didn’t increase taxes on capital gains. (That said Morneau pointed out in a post-budget interview that he isn’t completely ruling out changes in the future.)

Meanwhile, small business owners, including incorporated professionals, who feared that the budget would come down hard on their ability to enjoy a lower tax rate on the first $500,000 of active business income via the “small business deduction” (SBD) and put a stop to income-splitting were granted a temporary reprieve.

The government signaled in the budget that it’s in the process of reviewing “a number of issues regarding tax planning strategies using private corporations, which can result in high-income individuals gaining unfair tax advantages.” Specifically, Ottawa singled out three strategies “available to these individuals that are not available to other Canadians.”

Read: Budget 2017

The first is “income sprinkling.” This involves using private corporations whereby a business owner or incorporated professional can reduce her tax bill by causing income that would otherwise be taxed in her hands at a high rate (of more than 50% in seven provinces) to be realized, instead, by other family members via the payment of dividends or through a sale via capital gains. These individuals, such as a spouse, partner or kids, are subject to either lower personal tax rates or, in some cases, may not be taxable at all, due to the use of various credits, such as the basic personal amount or the tuition credit for kids enrolled in post-secondary education.

Next, the government is concerned about holding a passive investment portfolio inside a private corporation, “which may be financially advantageous for owners of private corporations compared to otherwise similar investors.” What the government is likely getting at is the tax deferral advantage that stems from the fact corporate income tax rates on active business income eligible for the SBD are significantly lower than personal income tax rates. This allows incorporated business owners and professionals to enjoy up to a 40% tax deferral advantage, depending on the province, by leaving funds in the corporation to be invested in a passive securities portfolio.

Finally, the government is troubled by a business owner’s ability to convert a private corporation’s retained earnings into half-taxable capital gains upon exiting the business. Income is normally paid out of a private corporation, in the form of salary or dividends, to its owners, who pay taxes at their personal income tax rates (allowing for the dividend tax credit to avoid double-taxing corporate income). But, if the shares are sold, only 50% of the capital gains are included in income, which can result “in a significantly lower tax rate on income that is converted from dividends to capital gains” given the current tax rates.

Although the government acknowledges that several measures have been put in place over the years to limit the scope of some of these planning arrangements, it feels that “such measures have not always been fully effective.” As a result, the government is “further reviewing the use of tax planning strategies involving private corporations that inappropriately reduce personal taxes of high-income earners…(and) will also consider whether there are features of the current income tax system that have an inappropriate, adverse impact on genuine business transactions involving family members.”

As such, Ottawa intends to release a paper in the months ahead that will set out the issues in more detail along with proposed policy measures. Stay tuned…