Starting Oct 16th 2017, the Federal Government declared they were reducing small business tax rates and, stepping away from their proposal to limit access to lifetime capital gains exemption – one of three Canadian loopholes Minister Morneau announced back in July were being exploited by higher earners and small business.
The issue of Canadian Tax loopholes, has put a target on privately held domestic corporations in Canada and their uses of business tax rates and personal income tax rates. Differences between tax rates have allowed higher-income earning Canadians pay lower tax rates instead of personal income taxes – through income conversion.
CRA Tax Loopholes
In 2015 the Liberals pledged that corporate tax rules, especially the business rate wouldn’t be “used to reduce personal income tax obligations for high-income earners rather than supporting small businesses.”
What are some Tax loopholes?
Back on Tuesday 28th, Finance Minister Bill Morneau proposed to close three loopholes that let high-income earners pay lower corporate tax rates.
Capital Gains Deduction Loophole
- Restrictions that have now been nixed regarding capital gains deductions, would have targeted – the money earned from the sale of property/shares over and above a purchase
- For example when selling investments, individuals usually pay taxes on only half the amount the earn. However, those with investment income can still benefit from tax deferral and not pay payroll taxes
What is Income Sprinkling
- Income sprinkling, which will restricted by Jan 1st 2018, allows business owners to split income – by paying salaries amongst family members
- Money is transferred from a higher tax bracket member, to a lower tax bracket member, allowing the income to be taxed at a lower rate.
- A reasonableness test will then be implemented to evaluate, against what a third party would be paid and whether the salary matches the contribution.
Passive Investment Loophole
- Passive Investment is strategy where private companies make investments unrelated to the company, allowing for significant tax deferral advantages.
- Money is parked in a business – investing in real estate, stocks and financial products so individuals pay lower corporate taxes on income earned from those investments.
- These measures are not made available to individual investors who do not hold savings in a business.
Who Will It Affect?
According to the government, changes are aimed at privately held domestic corporations and won’t affect public companies in Canada. This is an attempt by the government to avoid “unfair tax advantages to certain — often high-income — individuals.”
How to get more money back on taxes Canada?
According to the Finance Minister Bill Morneau these changes are the result of “some people… paying less than their fair share for… services Canadians rely on.” They are not about business but about, “people using their corporate structure to shield their income.
The lesson in this being, that taxpayers need to think about long-term investment implications and not be blinded by immediate tax saving prospects. The best advice, is not to make investments solely for tax advantages but based on they’re own merits.
Canadian Tax Tricks
There are numerous tax avoidance strategies, which take advantage of rules, offer generous tax breaks and are not frowned upon or illegal.
A great example of a safe tax-avoidance strategy is the RRSP (Registered Retirement Savings Plans). The government is not against helping tax payers minimize their tax bills legally. In face they encourage “tax-assisted investments”.
If interested in serious tax avoidance maneuvers and tax shelters, you’ll need to enlist the methodical eyes of skilled accountants to beat a system set up by bureaucrats and legislators.