Business Law, Succession, Taxation law

Reaction of Robert Raich to proposed federal tax changes announced on July 18, 2017

Aug 1st, 2017

By Robert Raich


In connection with said proposed federal tax changes relating to private corporations, the following letter was sent to the federal government, along with relevant documentation (see links below):  

July 31, 2017


The Honourable Marc Garneau

4060 Ste-Catherine Street West

(Riding Office)

Suite 340

Montreal, Quebec H3Z 2Z3


Re: New Tax Proposals

Dear Mr. Garneau:

As my local MP, I am writing to you in connection with the recent Release by your government of proposed changes to Canada’s tax system, which Release was dated July 18, 2017.  Numerous documents were issued and, for sake of brevity, I will refer to all of these documents collectively as “the Release”. In certain instances below, I will cite specific sections of the Release.

In the “Minister’s Letter”, he indicates that:

“one of our Government’s first actions was to cut taxes for the middle class, and raise them on the richest 1%”.

He then goes on to say that the Government is taking steps to:

“close loopholes that are only available to some – often the very wealthy or the highest income earners – at the expense of others”.

With respect, it is my view that many of these new proposals go far beyond merely increasing the taxes on the “richest 1%” and “closing loopholes”.

It should be kept in mind that on December 7, 2015, the federal tax rate on income over $200,000 per annum, was increased by 4% (to 33% from 29%; being an increase of 13.8%) so the “richest 1%” have already been subject to a significant tax increase by the current Government.  For Quebec taxpayers, the highest marginal tax rate is now 53.31%.

Specifically, it is my view that the new proposals are flawed for the following reasons:

  1. The basic assumptions used are incorrect;
  2. The proposals hurt families;
  3. The proposals result in double (or sometimes triple) tax to estates;
  4. The proposals will create greater uncertainty, and hence, more litigation going forward; and
  5. The phase-in rules (the transitional rules) punish taxpayers who had already undertaken business transactions before the date of the proposed changes.

I will briefly outline my views below, with suggestions, where applicable. As for my qualifications, I have been a tax lawyer for over 40 years and have practiced tax law at the Montreal law firm of Spiegel Sohmer. We are a boutique law firm of approximately 50 lawyers, specializing in tax and business law (we currently have approximately 20 lawyers in our Tax Department).  I have taught tax courses at the Cegep, University and graduate school levels, have given numerous speeches on tax issues and have written extensively on tax matters, including speaking several times at the annual conference of the Canadian Tax Foundation.

Basic Assumptions

At page 13 of “Tax Planning Using Private Corporations”, an example is given comparing an employee earning $220,000 to a taxpayer who earns the same amount via an incorporated consulting business. The example presumes that the corporation “sprinkles” its after-tax income to a low income spouse and to two low income children, who are aged 19 and 21.

First of all, the example fails to deal with the obvious “other benefits” available to the employee; namely, probably a pension plan (possibly a defined-benefit plan, especially if the employee in question works for the Federal government) plus other benefits (such as participating in medical and dental plans, paid maternity leave, sick leave, vacation pay, use of a company car, and, importantly, stock option plans). The self-employed “incorporated employee” has no such perks and has to save for these valuable benefits.  In addition, the employee has some job security as, if let go, the employee can likely collect a generous severance amount, whereas, the self-employed person (via his corporation), has no such protection.  Also, the example uses “perfect facts” to make its point. (For instance, the two children will likely soon start earning income of their own which will significantly reduce the indicated “benefits” of this strategy.) These glaring omissions, are to me, intellectually dishonest, which is something found throughout the Release.

The second basic example concludes that a private operating company, that earns more than it needs to reinvest in the business, is somehow much better off than an employee who does not own or have the ability to control a corporation.  This is like comparing “apples to oranges”.   Does the employee take any business risk? (Oftentimes, entrepreneurs use a good portion of their life savings, and require loans from third parties to start a business.) Does the employee lose any money if the corporation has an “off year”? What about the pension and other perks for the employee discussed above?

The narrative goes on to indicate (in an example) that “although there is some reconciliation at the end - when Andrea winds down the portfolio and pays personal tax on it”, it concludes that the employee is prejudiced. I find this whole approach to be mean-spirited. (Did the person who incorporated the business create a “loophole”?)

Finally, the general theme of the Release is that Canada’s top earners do not pay their fair share of taxes.  I enclose an article, written by analysts at the Fraser Institute, which appeared in the National Post, dated September 27, 2016, that questions this very premise.  For example, the article concludes that in 2013 (well before recent tax increases to the top earners) the “top 10%” earned 35% of Canada’s income yet paid 54% of Federal and provincial tax. Isn’t that a “fair share”?

Another statistic, this time from Statistics Canada (copy of the article is enclosed), concludes the following with respect to the “top income earners”:

“Compared with their high-earning counterparts from the 1980s, the top earners in the 21st century are much more likely to be wage earners – that is, their income is much more likely to come from working for other people than from owning capital or businesses.

In 1982, just under 49% of all market income earned by the top 1% came from wages and salaries. By 2014, this proportion was 65%. Among women, the top 1% saw their share of wages and salaries rise from under 30% in the early 1980s to 50% in 2014.”

This quote totally disproves one of the main thrusts of the tax proposals; namely, that entrepreneurs are being benefitted by the tax laws at the expense of wage earners. If almost two-thirds of the “top 1%” are salaried employees, how can this be the case?

I also have a problem with the pejorative use of the word “loophole” throughout the Release, as, to me, it is unfair and creates a negative connotation.  Most of these so-called “loopholes” have been in the Income Tax Act since 1972 when there was an overhaul of Canada’s tax system.  Also, the Release takes a negative view of certain corporate and trust structures yet, in other places, it boasts that Canada’s corporate tax rates are some of the lowest in the G7.  Is using a corporation, in certain circumstances, therefore, a “loophole”?

The Proposals Hurt Families

Despite the Government’s claim that it is trying to help families, I find many examples of where this is simply not so. The most egregious example is found at page 43 of the “Explanatory Notes” section of the Release.

In this example, a family run company is sold to an arm’s length corporation but the family (via the brother) buys back the corporation’s shares from this arm’s length party. Believe it or not, when the brother sells the shares to his sister, the rules penalize the brother for the share sales (between his father and mother) which took place prior to the sale to the arm’s length corporation.  This example highlights the absurdity of the section concerned; being Section 84.1 of the Income Tax Act.  This section has long favoured sales of family businesses to outside parties (to access the capital gains exemption and receive capital gains treatment) versus inter-family transfers (as there are already barriers in this section to a leveraged buyout, accessing the capital gains exemption or realizing capital gains altogether). Instead of dealing with the real issue (making it easier, or at least, tax neutral for an inter-family transfer), the rules are tightened making it almost impossible for an inter-family transfer to take place.  (By the way, Quebec has recognized the practical limitations created by this Federal provision and in its last two Budgets, has legislated to take away some of this negative bias.)

At page 16 of the Explanatory Notes, it is indicated that “women are disproportionately represented amongst recipients of sprinkled dividends and income derived from trusts and partnership (68% and 58% respectively).” Assuming this is correct, this highlights that “income sprinkling” is a “family affair” as women are receiving over two times the amount of dividends received by men (68% versus 32%). One would think that this is a good result given the Government’s preoccupation with insuring that “gender impacts” are not disproportionate. In addition, it indicates that inside family units, there is a recognition that even if a wife is not sitting at a desk located at the family business, she is also contributing to its success in a way that the family has determined is optimum to that success.  However, one of the conclusions is that such “sprinkling” is unfair and requires redress.   More surprising is that the proposed rules will give to CRA officials the right to determine what is reasonable in family situations. (See below under the heading “Uncertainty Ahead”).

Another point worth mentioning is that family ownership of private companies often allows children to pay for their higher education. The new proposals will do away with this “advantage”, which seems to be counter-productive to increasing the education level of Canada’s youth.

To date, the current Government has already eliminated the income splitting tax credit with children under the age of 18 (in the Federal 2016 Budget) and the proposed amendments will further hurt families.


If someone in Canada dies holding shares of a private corporation, that person is deemed to have disposed of the shares of such corporation at fair market value. This creates the first level of tax on that person’s death.  If the corporation, itself, holds an appreciated asset, and this asset is sold, a second level of tax will apply at the corporate level.  If the corporation then distributes its surplus to the estate of the deceased, or to the beneficiaries of the estate, a third round of tax could apply. Clearly, the above is unreasonable and the current structure of the Income Tax Act allows for “post-mortem tax planning” to avoid this result.  Such post-mortem tax planning includes using the provisions of Section 164(6) of the Income Tax Act within a very limited time-frame and using a “pipeline plan” (or a combination of the two).

The new proposals seem to do away with the “pipeline” option. (This was confirmed in an oral discussion with an official of the Department of Finance last week.) What is the thinking in prejudicing estates in this manner?  Double tax (or triple tax) is something that is legislatively an anathema (see section 248(28) of the Income Tax Act).


Any taxing statute should be as clear as possible and the less discriminatory power given to the taxing authority the better.  The proposed new rules will give the CRA much more power to decide what is “reasonable”, especially in the context of the new income splitting rules.

As outlined at page 24 of the Explanatory Notes:

“(a)  reasonable test would be introduced for the purpose of determining whether TOSI (being a new acronym for “Tax On Split Income”) applies to a specified individual who is an adult… the test is proposed to apply differently based on the age of the adult specified individual (i.e. whether the individual is between 18 and 24 or is 25 or older), recognizing the opportunities for income splitting with younger adult family members.”

Basically, the new rules will empower the CRA to determine if salaries and/or dividends paid to family members are reasonable, and the rules for “reasonableness” will be different if someone is under 25 (will the test be “more reasonable”?) or over 25 (is there such a thing as “less reasonable”?).

These new powers given to CRA officials will cause uncertainty and undoubtedly result in much more litigation. Also, I wonder if the rules will be applied uniformly across the country.  (If something is “reasonable” in Toronto, will it also be “reasonable” in Labrador?) Also, this will undoubtedly lead to the hiring of more people at the CRA to administer these rules.


The current government “signalled its intention to address specific tax planning strategies involving the use of private corporations” (see page 5 of the Explanatory Notes) in its 2017 Budget.  The rules have now been introduced and the Government wants feedback over the next 2½ months (until October 2, 2017) from the public with respect to these new rules.  However, some of these rules are effective immediately, which does away with the above-noted period for consultation.  Also, the rules, in several instances, do not allow for the normal “grandfathering” of transactions already in progress. There is also a limited window to unwind certain structures that are now deemed offensive.

Without going into too much detail, I find the transitional rules are not “transitional” nor are they fair.  As mentioned above, many of the new rules do away with tax concepts (such as “integration”) that have been in the Canadian tax system for more than 45 years (since January 1st, 1972). Why the rush to cause taxpayers uncertainty? Why not bring in the new rules in a manner that will be fair and in line with previous legislation that truly “transitions” the old law into the new legislation.


  1. The main “culprit” of “income splitting”, according to the Release, seems to be children from ages 19 to 24. If this is so, the rules could extend the “kiddie tax” to age 24 (from the current age of 18). This will do away with the CRA entering into each family situation involving private companies and determining what is “reasonable”.
  2. Instead of blindly tightening the rules involving inter-family transfers of corporations, there should be a review of what is currently not fair (such as, favouring an arm’s length sale of a family corporate business to a sale between family members). The law in this area reminds me of the expression “trying to kill a mouse with an elephant gun”. Some fresh thinking is required in this area to make it right; not to make it worse! Where there is abuse, I have no problem with the existing (or new) proposals; however, some common sense (and fresh thinking) must be brought to this problem.
  3. The rules should not prejudice estates and “post-mortem” tax planning for private companies. If an estate pays one round of tax (based on the deemed disposition of the shares of the private corporation), the existing rules should not be changed as they will, in many instances, cause double or even triple tax to arise.
  4. The transitional rules should be fair and provide taxpayers with the time to unwind tax structures that have been part of the Canadian tax system for years. These rules should also be drafted in a way that are understandable so that taxpayers will not have to spend considerable sums over the next year to comply with rules that, in my view, are unfair and not in accordance with what the public has come to expect when major changes are made to tax legislation.
  5. The Release asks for feedback from the public about various ways to deal with the “problem” of corporations earning income that is not reinvested in business assets and is then used to make investments. The proposed “solutions” to this problem are extremely complex and are based on the flawed assumption that the earnings inside a corporation of such “excess income” must ultimately attract the same tax as if the income was earned in the hands of an individual.  I would ask you to review the Explanatory Notes from pages 38 to 51, and let me know if you believe any of these various solutions will add clarity to the existing tax system. Again, it feels like these rules are trying to kill a mouse with an elephant gun.  A “solution” in this area should be easy to apply, rather than further confusing taxpayers. I have certain ideas in this regard but it is beyond the scope of this letter for me to go into detail about how I would deal with some of the perceived “abuses”.
  6. Why not have a committee that examines the effects of proposals such as these which are so extensive as to overturn the underlying structure of the Canadian tax system before they are brought forward and determines what “fairness” really means in the Canadian context? The Canadian tax system has greatly benefitted in the past from the work of such committees which are independent of the Department of Finance and CRA.


As a final note, I am upset by the narrative justifying these proposals as they negatively attribute “bad intentions” to many long-standing tax structures.  The use of words such as “loopholes”, “top 1%” and “split income” are not part of a healthy debate. As indicated above, I would suggest that the top earning taxpayers are paying more than their fair share and under the present Government are the only taxpayers whose marginal tax rates have increased.

The examples given in the Release deal with “easy situations” and ignore basic truths (such as the perks given to highly paid employees versus self-employed persons who use companies). There is almost a pejorative taint to anyone who uses a private corporation to defer tax; yet, the Government boasts elsewhere that Canada’s corporate tax rates are relatively low and this has helped the Canadian economy.

Finally, I am certain that these rules will negatively affect entrepreneurial families who have started businesses. This, I believe, will result in a net negative to our country as such entrepreneurs have been the biggest job creators for our economy.  (According to a recent article I read, small businesses in Canada employ over 8.2 million individuals in Canada, 70.5% of the total private labour force and 54% of payroll).  Undoubtedly, with tax rates well in excess of 50%, will cause a number of wealthy Canadian entrepreneurs to move from Canada which will result in a reduction of total taxes paid.  Also, the targeting (intentional or not) of estates and families makes little sense to me.

I would be willing to discuss my comments and other observations with you if you should so desire. Alternately, I would be glad to meet with any other persons who were involved with the drafting of the Release. Also, I have copied the Finance Minister on this letter, so he is aware of my thoughts in this matter.

Should you have any questions, please do not hesitate to contact me at the office.

Yours truly,