As you may be aware, the Trudeau Liberals campaigned with a promise to “cancel income splitting and other tax breaks and benefits for the wealthy.” The Government reaffirmed its commitment to this policy in the most recent Federal Budget, released March 22, 2017, stating it was reviewing certain tax planning strategies using private corporations.
The Liberal Federal Government has stated that it feels that private corporations are being used to provide high-income individuals with unfair tax advantages. The 2017 Budget highlighted three common tax planning strategies that have the attention of the Government:
The Income Tax Act (Canada) (the “Act”) already includes various measures intended to limit the scope of the benefits realized with the use of private corporations. The Canada Revenue Agency has previously provided favorable income tax rulings on various private corporation planning strategies that work within the scope of the existing legislation, including the use of certain dividend sprinkling structures.
Nonetheless, the Government has indicated that it feels additional limits are required. The Government announced that it intends to release a paper setting out its concerns in greater detail together with its proposed policy responses. These proposals may be released in the coming months. We have not yet received any indication as to the nature of these changes. We note, however, that certain changes could be easily introduced that would have a profound impact on income sprinkling.
For example, under the current legislation dividends from private corporations typically cannot be used to split income with children under the age of 18, as such payments will generally be subject to tax at the highest marginal rates (the “kiddie tax”). The Act could quite easily be amended by Parliament to extend the application of these rules to children over the age of 18 (perhaps to the age of 25) or perhaps even to an individual’s spouse.
Given the Government’s past announcements on this matter, it would be prudent to review your remuneration planning for the 2017 and 2018 taxation years to maximize the benefit that may be realized from income sprinkling, as significant changes are probably coming.
As always, care should be taken to ensure that such income sprinkling complies with existing restrictions on the allocation of income to family members. Consideration should be given, for example, to:
Please contact us if you would like to discuss your remuneration for the coming year or if you have any questions or concerns on this matter.News