OTTAWA -- The federal government plans to close three loopholes that let high-income earners pay the lower corporate tax rate instead of personal income taxes -- a change that Finance Minister Bill Morneau says he expects will affect him.
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"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," Morneau said Tuesday at a press conference in Ottawa to announce the changes.
"My expectation is that these changes, over the long term, will mean that I'll end up paying more tax."
The changes are complex, he said, and anyone facing them would need to do some research about how they'd be affected.
"I have not done that homework personally," Morneau said.
The new measures will tackle income sprinkling, where a business owner splits his or her income among family members by paying them salaries; and methods of converting income into dividends and capital gains.
The measures are completely legal, but Morneau says they're unfair to those who don't have private corporations.
The government is proposing solutions for income sprinkling and capital gains loopholes, and setting out a proposal on passive investment but seeking input from Canadians on it.
Methods used by professionals
Income sprinkling will now be subject to a reasonableness test, where the incomes paid will be evaluated against what a third-party would be paid or whether the income matches the contribution. The Department of Finance estimates 50,000 Canadian families are using sprinkling strategies. It also says the federal government could save $250 million a year by closing that loophole.
Passive investment refers to income derived from portfolio investments, as opposed to active income earned from running a business.
Capital gains refer to money earned from the sale of shares or property over and above the purchase price.
The measures are intended to deal with the difference created by having a much lower business tax rate than personal income tax rate, which has provided incentives for Canadians to convert their income to pay less in taxes.
It's also a problem created by an increasing number of Canadians offering professional services, like doctors and lawyers, which lends itself to taking advantage of these types of measures.
Once in place, the legislation will impact capital gains as of Tuesday.
Won't impact 'active businesses'
The number of Canadian-controlled corporation has more than doubled since 2001, Morneau said.
"Some people may be paying less than their fair share for the services Canadians rely on," Morneau said.
The changes aren't about businesses and their taxes, he added.
"It's about people using their corporate structure to shield their income."
Morneau repeatedly referred to income tax fairness during his press conference.
"This will not impact active businesses making investments in their business to further their success," he said.
"We want the lower corporate rates, the lower small-business rates, to result in more business activity. Not to result in people being able to have an investment vehicle that advantages them versus what someone else could have if they didn't have that private corporation."
The Liberals pledged during the 2015 election campaign to "ensure that Canadian-Controlled Private Corporation (CCPC) status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses." The party's platform cited an estimate by University of Ottawa professor Michael Wolfson that "approximately $500 million per year is lost, particularly as high-income individuals use CCPC status as an income splitting tool."
Last year, New Democrat MP Erin Weir called on the House finance committee to study how high-income professionals were using private corporations to limit their personal income tax.
