Canadian Contractor

Ottawa’s plan to close “loopholes” in professional corporation tax rules

Let us know if you think you will be affected.

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September 8, 2017 by Steve Payne

We had a question from Bob in British Columbia, who runs a small contracting firm in which one his partner’s wives makes a thousand dollars a month doing the books. He asked us, will his firm get badly hammered by Federal Finance Minister Bill Morneau’s plan to tighten up on tax breaks for professional corporations?

Here is our reply…

Bob, thanks for your question. The Federal Government is currently in a “consultation” period until October to tweak Finance Minister Bill Moreau’s plans to close “loopholes” in the tax code that allow self-employed individuals (largely professionals, such as doctors and lawyers, but also farmers, business people and – yes – residential contractors) with inherent tax advantages.

One of the biggest advantages of a corporation for a small business person is the (quasi-offside, depending on the specifics) ability to engage in “income sprinkling,” in which the income of the business is attributed to individual family members – who may not actually be working in the business itself (different from the situation apparently in your firm, in which the family member DOES legitimately work in the business). Morneau’s plan seeks to stamp this out, among other changes. Critics of Morneau’s plan counter that there are already plenty of rules in place to prevent illegal types of income attribution.The Liberals say that some 50,000 families in Canada engage in illegal income sprinkling, depriving Ottawa of some $250-million in income taxes.

Another “loophole” the Morneau’s plan aims to close, is the building of various investment vehicles within private corporations, allowing the owner “passive income” from these investments, when the money is not really building the main business, but is merely stashed inside it to benefit from lower (capital gains, rather than income) taxes. If held outside the business, this money would be subject to RRSP contribution limits and, above that, taxed at the personal rate. Obviously, the Liberals want to grab that money, too. How many residential contractors have significant investment vehicles within their contracting firms? We don’t know.

If you do benefit from these tax reduction strategies, you will definitely want to be talking to your accountant about your options. But we need to see the actual final proposals from Morneau. In the meantime, let us know how you think you will be affected. You can post using a “stage name,” of course. And your identity will never be divulged to our friends at Revenue Canada.

Steve Payne

Steve Payne

Steve Payne is the editor of Canadian Contractor magazine
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1 Comment » for Ottawa’s plan to close “loopholes” in professional corporation tax rules
  1. Disgruntled says:

    This is literally robbery. They will force a business owner basically to declare all income/profit from the business as his salary. They do not allow for boom and bust scenarios. Suppose you have a great year, you pay yourself a modest salary. Business declines, you continue to pay yourself a modest salary even though the business isn’t as profitable. Yes it is a holding vehicle of sorts but businesses don’t always have profitable years and they need to ‘save for a rainy day’. Something governments are not aware of since they tax at will.