The Department of Finance Canada on Tuesday issued a consultation paper on the use of certain tax-planning strategies involving private corporations that asks for input from Canadians on what actions should be taken to ensure wealthy individuals can’t gain access to unfair tax advantages.
“These tax advantages are in place to help these businesses reinvest and grow, find new customers, buy new equipment and hire more people,” said Minister of Finance Bill Morneau in a statement announcing the consultation paper, the release of which was promised in the 2017 federal budget. “We want to make sure those rules are used to do just that, and not to give unfair tax advantages to certain — often high-income — individuals.”
The government is targeting such tax strategies as:
> The practice known as “income sprinkling,” which involves the diversion of income from a high-income taxpayer to family members with lower personal tax rates.
> The retention of passive investments in personal corporations, such as those set up by certain professionals, taking advantage of the fact that corporate income tax rates are much lower than personal tax rates.
> The conversion of a private corporation’s regular income into capital gains in such a way as to provide an “unfair opportunity” to reduce income taxes by taking advantage of the lower tax rates on capital gains.
The government indicated in the 2017 federal budget, announced in March, that it considered tax planning using private corporations to be an area of concern and that it would be releasing a consultation paper on the practice in the coming months.
The consultation paper, Tax Planning Using Private Corporations, outlines potential solutions to address the issues and invites input from interested parties. The deadline for submission is Oct. 2.
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