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A new federal blueprint for closing tax loopholes unfairly benefiting the wealthy will target Canadians who use private corporations to “sprinkle” income among family members to lower their collective tax burden, according to a Department of Finance document obtained by the Toronto Star.
Finance Minister Bill Morneau is scheduled to unveil a package of proposed reforms at a press conference Tuesday morning, part of an ambitious commitment to crack down on tax avoidance and evasion that emerged in the aftermath of the Panama Papers.
“There are signs that our system isn’t working as well as it should, specifically when it comes to private corporations,” writes Morneau in an opening letter contained in the 63-page report. “There are worrying trends. There is evidence that some may be using corporate structures to avoid paying their fair share, rather than to invest in their business and maintain their competitive advantage.”
“Over the last decade, the number of such private corporations has increased substantially and evidence indicates that a significant share of taxable income has been shifted from the personal to the corporate tax base,” reads the report.
CRA pursuing criminal charges against Panama Papers tax cheats
Wealthy Canadians can now legally reduce their tax obligations by routing their incomes through private corporations. They then pay salaries to family members, such as their children, who are subject to lower personal tax rates or none at all.
The government is working on new rules that would “help to determine whether compensation is reasonable, based on the family member’s contribution of value and financial resources to the private corporation,” reads the report.
Morneau writes: “When the rules are used for personal benefit, they are not contributing to growing our economy. Rather, such practices can undermine confidence in our economy by giving tax advantages to a select few. We don’t think that’s fair.”
As an illustration, the government report presents the hypothetical comparison of two wealthy Canadians who both earn $ 220,000.
The other, who owns a private corporation, pays $ 44,000.
That $ 35,000 tax break takes advantage of an accounting trick. The private corporation owner pays lower small-business tax rates and “sprinkles” a portion of the profits to a spouse and two children through low-tax dividends.
Britain adopted a public registry of “beneficial” corporate owners last year. It has been hailed by law enforcement and transparency advocates internationally as a breakthrough in removing the corporate veils that facilitate secret money flows.
While absent in the report, a public corporate registry remains on the table, said Dan Lauzon, a spokesperson for Morneau.
“We know we need to improve the availability of beneficial ownership information here at home to ensure law enforcement and tax authorities have timely access to this information to combat money laundering, terrorist financing, tax evasion and tax avoidance,” he said. “We can’t sit back and wait for another Panama Papers to tell us whether or not someone may be trying to hide their income from taxation.”
Lauzon said Morneau’s initiative on the registry was “well received” by provincial finance ministers at the table.