In July of 2017, The Government of Canada announced that they intended to move ahead, after consultation, with policy that would "improve fairness in the tax system by closing loopholes and addressing tax planning strategies".
The government announced a consultation period from July to October 2, 2017 with a focus on three tax practices being used to gain - what they call - an unfair tax advantage. These are (as quoted from the Department of Finance web-site):
1. Income Sprinkling
Income sprinkling involves diverting income from a high-income individual to family members with lower personal tax rates, or who may not be taxable at all.
2. Passive Investment Income
Some individuals ... (retain) passive investments in a corporation, taking advantage of the fact that corporate income tax rates are much lower than personal tax rates for higher-income individuals.
3. Capital Gains
Converting a private corporation's regular income into capital gains can also provide an opportunity to reduce income taxes, this time by taking advantage of the lower tax rates on capital gains ... Income is normally paid out of a private corporation in the form of salaries or dividends to the principals of the corporation, who are taxed at their respective personal income tax rates.
However, if these forms of income are converted to capital gains, this can result in a significantly lower tax rate, providing an unfair tax advantage.
(Above section quoted from Department of Finance web-site, but edited for brevity.)
For more detail on the proposed Federal Tax changes regarding private corporations, please click on these links:
Summary Overview: Consultations on Tax Planning Using Private Corporations
Consultation Document: Tax Planning Using Private Corporations
Draft Legislation and Explanatory Notes
PowerPoint Presentation on Tax Planning Using Private Corporations (pdf)
When these proposals were announced, a number of members expressed concern. Many lawyers organize their professional corporations and other business interests with private corporations. While "income sprinkling" is not allowed for lawyers within their professional corporations, other provisions here could have an impact on those members who have organized themselves using these corporate structures and will see their tax burden rise considerably. Many others have pointed out that their small business clients who utilize private corporations will also face steep tax increases and that, in turn, will have an impact on their bottom-lines too.
In response, FOLA joined a coalition of over 65 business groups across Canada, including the Canadian Chamber of Commerce, Canadian Federation of Independent Business, Canadian Bar Association and many others in a coalition called the "Coalition for Small Business Tax Fairness".
This coalition represents our best and most effective vehicle to represent the interests of the practising bar in Ontario and let the Federal government know that these changes will have a negative impact on the ability of lawyers - particularly those in solo and small practice - to sustain their practice and continue providing access to justice in their communities.
FOLA was a signatory to a letter sent to Minister Morneau on August 30th and we continue to be active in the Coalition.
We are urging all members of the practising bar in Ontario who agree with this position to call their local MP's and express them to that:
NOTE: We appreciate that not all lawyers in Ontario agree with this position and we are always careful to point out that lawyers do not speak with unanimity. However, on this issue the overwhelming sentiment of lawyers who have communicated with FOLA has been that these changes will have a negative impact on them and their business. We believe a more comprehensive and thorough consultation on tax changes to make the system more fair should be conducted as soon as possible.
For more information on the efforts of the Coalition for Small Business Tax Fairness, check out this link.
The Canadian Federation of Independent Business and the Knowledge Bureau - a leading financial education company - have teamed to produce a video that describes the changes in greater depth.