Is this the Death of Canadian Private Company Tax Planning for Professionals?

With the release of a consultation paper and draft legislation on July 18 by Finance Minister Bill Morneau, doctors, dentists and other high-earning healthcare professionals should expect big changes to the Income Tax Act in the near future.

This government announced its intention to dismantle the long-held practice of tax planning using private corporations in an effort “to recoup at least $250-million a year,” according to reporting in the Globe and Mail.

The consultation paper – which you can read here – breaks down the proposed issues the government seeks to address:

Sprinkling Income Using Private Corporations

This can reduce income taxes by causing income that would otherwise be realized by a high-income individual facing a higher personal income tax rate to instead be realized (e.g., via dividends or capital gains) by family members who are subject to lower personal tax rates or who may not be taxable at all.

Holding a Passive Investment Portfolio Inside a Private Corporation

This practice has been distorted and falsely portrayed as being financially advantageous for owners of private corporations compared to individual investors.

This fallacy has been built on the fact that corporate income tax rates, which are generally much lower than personal rates, facilitate the accumulation of earnings that can be invested in a passive portfolio instead of recognizing that lower corporate tax rates represent, in effect, a tax instalment towards the total tax paid by the shareholder upon the eventual withdrawal of funds from the corporation at some future point.

The rationale for lower corporate tax rates being that corporate funds would be reinvested into businesses seen as being positive for economic growth.

Converting a Private Corporation’s Regular Income into Capital Gains

This can reduce income taxes by taking advantage of the lower tax rates on capital gains.

Income is normally paid out of a private corporation in the form of salary or dividends to its shareholders, who are taxed at the recipient’s personal income tax rate (subject to a tax credit for dividends reflecting the corporate tax presumed to have been paid).

In contrast, only one-half of capital gains are included in income, resulting in a significantly lower tax rate on income that is converted from dividends to capital gains.

What Next Steps Should You Consider?

Still, there’s opportunity to be proactive in the meantime so don’t delay.

Here’s one suggestion: consider income splitting with lower income family members who are shareholders of your professional corporation before these measures are enacted to take advantage of tax savings.

Of course, should future changes be enacted retroactively, this step would likely be a moot point.

Interesting to note is that the consultation paper calls on stakeholders – including anyone affected by the changes – to share their views and opinions about the proposal. Written comments should be sent to fin.consultation.fin@canada.ca.

The public consultation is ongoing until October 2, 2017 – so speak up to have your voice heard.

Stay tuned for updates as I’ll be writing on this topic as more information becomes available.

To discuss how the proposed changes may affect you – and what can be done to minimize the impact – contact Jonathan Tucker at 1-800-845-0540 or email jtucker@tuckerspc.ca.

Jonathan Tucker, CPA, CA, LPA, provides tax, accounting and advisory services for health professionals through Tucker Professional Corporation.

 

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