Tax Proposals Target Tax Planning Using Private Corporations

On July 18, 2017, Canada's Minister of Finance released a consultation paper and draft legislative proposals that target the use of private corporations to sprinkle income among family members, hold passive investments and strip surplus by converting corporate surplus into capital gains. In the government's view, such tax planning strategies provide tax advantages that unfairly help the wealthiest Canadians. The proposals, if enacted, will affect both small and large private corporations and their shareholders.

I. INCOME SPRINKLING USING PRIVATE CORPORATIONS

Income sprinkling, also known as income splitting or shifting, generally occurs when income that would otherwise be realized by a high-tax-rate individual is realized by family members who are in a lower tax bracket. Income sprinkling is often achieved through a private corporation and, until now, has been viewed as perfectly legal and acceptable tax planning. For instance, the high-income individual, in his