Tax planning through private corporations is in jeopardy

Proposed new rules may eliminate tax advantages of remunerating family members not active in corporate business.

Matthew Elder 19 September, 2017 | 5:00PM

Private corporations and their favourable tax treatment are now in the tax man's sights. The specific target is income and other benefits passed on to shareholders who are not actively engaged in the corporation's business, such as a business owner's spouse or adult children.

In July, the federal government proposed legislation intended to end tax planning that, in its view, allows executives of private corporations to gain unfair tax advantages by transferring income to family members. If the regulations as proposed become law, dividends and other amounts paid by the corporation to family members would be taxable at the top marginal rate rather than at the lower rate normally payable on dividend income.

"The scope of the proposals, if enacted, will negatively affect how all Canadian business owners carry on business through a private corporation," according to a recent commentary from Kerr Financial Group, a Toronto- and Montreal-based firm specializing in investment, tax and estate planning for multi-generation families. "The proposals represent a broad-based change to the way the Canadian tax system has been set up to support small businesses to date. In some instances, they seek to equate taxation for small-business owners with that of salaried employees, without recognizing the additional risk involved in running a business."

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Matthew Elder

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