Mar 29th, 2023
Nov 8th, 2017
By David H. Sohmer
Tax Planning Using Private Corporations (the “Consultation Paper”).
1. First Proposal: CCPCs should be permitted to make a one-time election to forgo the small business deduction and to have all active business income taxed at the general rate.
2. Reasons for the First Proposal:
3. The proposed measures were inspired by a study titled “Piercing the Veil: Private Corporations and the Income of the Affluent”, by Michael Wolfson, Mike Veall, Neil Brooks and Brian Murphy: 2016 Canadian Tax Journal , Vol 64, N0 `1, page 1. In the conclusion the authors state that the article is the first in a planned series of articles using the linked CCPC data and individual income tax sample database. Future articles will explore:
what difference CCPCs make to observed progressivity and effective income tax rates across the range of income;
These initial results clearly indicate an important role played by tax planning using CCPCs in Canada.”
4. There is no compelling economic reason why decisions with respect to passive investments by CCPCs should be made in 2017 on the basis of “ initial results”. There is no material economic detriment to the middle class from waiting until studies are completed and the results scrutinized by the public.
5. In a letter included in the Consultation Paper the Finance Minister states that “when it comes to paying tax, there is a sense that some may be getting a better deal than others.”. The 2017 Report on Federal Tax Expenditures indicates that the measures in the Consultation Paper are intended to address the middle class’s perceptions rather than the facts. The third largest tax expenditure by value in 2015 was the partial inclusion of capital gains ($11.6 billion). The fourth largest was the non-taxation of capital gains on principal residences ($6.2 billion). The value of the lifetime capital gains exemption was $1.4 billion. The non-taxation of imputed rent is not valued in the report but it contributed $4 billion to GDP in 2015, so the value of the related federal tax expenditure would be approximately $1 billion. (Note that these values do not include the value of related provincial tax expenditures). The additional revenue from the proposed income sprinkling measures is estimated to be $250 million and assuming that the additional revenue from the passive investment measures are the same, the amount of additional revenue from implementing the proposals is insignificant compared to the value of other tax expenditures which benefit the wealthy disproportionately. The middle class is well aware of Warren Buffet’s observation that he pays a lower share of his income to the government than his secretary because of the low tax rate on capital gains and dividends and because capital gains are only taxed on realization.
6. Just because the proposed measures will not have any material effect on income inequality does not mean that the mischiefs which they purport to address should be ignored. Any response, however, should be measured and should not attempt to achieve tax neutrality at the expense of complexity and compliance costs. Quebec has effectively prevented professionals from benefitting from the small business deduction with little blowback and without demonizing incorporated professionals. It is anticipated that providing an option to have active business income taxed at the general rate will be tolerated by professionals as well. If income sprinkling is blocked it is anticipated that many professionals (who comprise the vast majority of the top 1% of taxfilers) will disincorporate.
1. Second Proposal: Provisions accommodating Intergenerational business transfers should recognize that such transfers involve a series of transactions, typically from a parent to children and the from one or more siblings to one or more siblings.
2. Reasons for Second Proposal: