Tax planning using private corporations

On July 18, 2017 the Canadian government’s Department of Finances released a discussion paper entitled “Tax Planning Using Private Corporations.” In it, significant changes are proposed to taxation of small business corporations and owners thereof. This paper is accompanied by draft legislation related to some of those changes. One of the major areas undergoing significant revisions is related to income tax planning using private corporations.

Specifically, the government is addressing the splitting of business income earned by a corporation amongst the family members of the principal business operator. For example, currently a person who is a plumber who operates a plumbing business can use a corporation to operate his business and issue the company’s shares to his wife upon incorporation. This would enable income which he worked to earn to be allocated to his wife in the form of dividends. Assuming his wife has little or no other income, this strategy enables the utilization of lower tax brackets available to the wife, resulting in a significant reduction in income tax as compared to the income being fully taxed in the plumber’s hands. It is the government’s view that such strategies provide an unfair advantage to business owners as compared to those who are employees of other businesses. Provisions are being included to establish a ‘reasonable contribution’ test for family members who work for the business to earn remuneration, which would distinguish those who earn the income from those who receive it for income splitting purposes. The proposed legislation imposes a high rate of tax (known as ‘tax on split income’ or TOSI) if certain conditions are met. Existing provisions of the Income Tax Act impose a TOSI on certain types of income earned by minors to prevent income splitting by parents by using lower tax brackets of minor children. The draft legislation would expand the scope of the existing legislation to include situations similar to the above scenario.

Professionals and business owners have raise concerns about this draft legislation. Some matters of concern raised by the Canadian public are as follows. While small businesses are able to utilize certain tax advantages, the ability to do so is unrestricted, meaning that anyone is free to open a business to benefit from such strategies. However, they would have to face the risks associated with starting and operating a business. Therefore, business owners feel that the comparison between employees and business owners isn’t ‘apples to apples’. Others have expressed that many small business owners already face tight cash flows and often inject their personal funds into their business to maintain operations. It is argued that tightening up tax rules would further constrain cash flows, making it difficult to operate, and therefore affect the economy and the tax revenue generated by those businesses. Further, some state that if tax advantages of small business corporations are diminished then it would create a disincentive for people to start businesses, and would affect employment, as a great portion of employment is created by small businesses. The biggest concern rising out of the proposed changes relates to family operated small businesses. Many ‘mom and pop’ shops are operated jointly by a family, and are started and operated by multiple family members. Such business owners are concerned that they may unfairly be punished even though they allocate income to their family based on actual contributions to their business. As mentioned above, the ‘reasonable contribution’ test is supposed to address this concern. There are also concerns about how existing businesses would transition into the new rules, if and when they are enacted, as many complicated scenarios would likely arise due to existing arrangements. Due to the above concerns, these new measures are being considered as ‘overkill’ to address limited abuse by some of the many small businesses in Canada.

Tax rules are not only complicated, but are constantly changing. Contact one of our professionals for information on how we can contribute to your business by providing professional service and valuable advice.



The contents of this article are written and published to provide general information and are not intended to substitute advice. As individual circumstances, which may be applicable in a specific situation, have not been addressed in this article, readers seeking specific advice may find the information misleading. Such readers are encouraged to consult a professional to obtain complete and relevant advice related to their situation. We have made every effort to prepare the information with care. However, we do not accept responsibility for its use and any outcome arising out of its use. Where opinions are expressed, such opinions do not reflect the facts of the subject matter and should not be considered as advice or recommendation(s).


Attaul Hamid

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