Income Sprinkling

at the heart of the tax reform

The federal government announced in the 2017 budget a series of changes in corporate tax system.

Income sprinkling consists of sharing business income among family members, even if they are not part of the business, through dividend payments. The  small business owner will not be placed in the highest tax bracket as the relatives receive a portion of the income. Today this practice is perfectly legal and this is precisely what the Trudeau government want to change.

The government has introduced a number of “bright-line” tests. These tests will weed out those who stand to benefit financially from business operations but have few day-to-day  dealings with the company.

What is the impact of eliminating income sprinkling? The new rules will only affect 5% of Canadian households, generating about $280 million a year for the federal government and around $110 million at provincial level.

Income sprinkling is one of the two pillars in which the tax reformed is based.

The Canadian Federation of Independent Business has requested the federal government to review the $50,000 threshold for passive investment income as it might be insufficient for those who are saving to grow.

How the new corporate tax proposal views passive investments in a private corporation? 

Tax on passive investment image

Passive investments in a corporation should be taxed the same way to those held outside corporations. This is known as tax integration. This is not how passive investment income is treated today. 

Low taxation rates designed to encourage investment have increased the rewards associated with tax planning in a private corporation, and have been partly used to opt out of higher personal income tax rates.Changing the status quo will necessitate the introduction of new rules.

The federal government will be consulting Canadians on the different approaches.  This will help ensure that the corporate tax system continues to support economic growth and job creation.

Other tax changes

There are various other changes that received less media attention; they will nonetheless have an impact;

– professionals are now required to value inventory at the lower cost and fair market value

–  small business deduction restrictions

– eligible capital property rules



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