Government Simplifies Measures to Restrict Income Sprinkling
December 13, 2017 – Ottawa, Ontario – Department of Finance Canada
When you have an economy that works for the middle class, you have a country that works for everyone. As the Government of Canada lowers the federal small business tax rate from 11 per cent in 2015 to 9 per cent in 2019, it will ensure the system is fair and supports owners who invest in their business, create jobs, strengthen the middle class and grow the economy.
Under current tax rules, an incorporated individual earning $300,000 can, in some circumstances, save as much in taxes as the average Canadian earns in a year. The Government is taking steps to limit the ability of owners of private corporations to lower their personal income taxes by sprinkling their income to family members who do not really contribute to the business.
Following extensive consultations with small business owners, professionals and experts, the Government is taking steps to make the tax system more fair with simplified measures that are easy to understand and implement.
Today, the Government published details of its proposals to simplify and improve the treatment of income sprinkling, which are proposed to be in effect for the 2018 tax year and beyond. The Canada Revenue Agency (CRA) has also released guidance with respect to these measures. The revised measures are designed to ensure that they do not affect family members who make meaningful contributions to a family business. The measures include several automatic, bright-line tests to make eligibility easy and simple to assess.
As announced in October, in response to concerns raised by farmers and fishers during the consultation, the Government will not move forward with changes that would limit access to the Lifetime Capital Gains Exemption or changes to rules on conversion of income to capital gains. The simplified measures on income sprinkling announced today contain rules for determining whether a family member has made a significant contribution to, or investment in, a business.
Owners of private corporations will have until the end of 2018 to adjust to the proposed exclusion for significant shareholdings.
"Since 2015, Canadians have created nearly 600,000 new jobs, and unemployment is lower than it's been in nearly a decade. Hard-working business owners—including small, family-run businesses—are a big part of that success. We are cutting taxes for 1.8 million small businesses while making sure that the wealthiest Canadians pay their fair share."
- Bill Morneau, Minister of Finance
- Under the new simplified proposals, the number of family businesses that would be affected annually is estimated to be fewer than 45,000, or less than 3 per cent of Canada's 1.8 million Canadian-controlled private corporations.
- In 2017, Canada's combined corporate tax rate is the second-lowest among G7 countries. The Government intends to provide further support to small businesses in Canada through a reduction of the federal small business tax rate to 9 per cent.
- Backgrounder on Simplified Measures to Address Income Sprinkling
- Technical Backgrounder on Measures to Address Income Sprinkling
- Amendments to the Income Tax Act and Regulations and Explanatory Notes
- CRA Guidance on Proposed Measures
- Targeted Tax Fairness Measures Will Protect Canada's Next Generation of Innovators and Entrepreneurs
- Targeted Tax Fairness Measures Will Protect Small Business Owners Including Farmers and Fishers
- Targeted Tax Fairness Measures Will Protect Middle Class Small Business Owners
- Government Moves to Reduce Small Business Tax Rate and Support Fairness for the Middle Class
- Next Steps in the Government's Plan for Tax Fairness and a Strong Middle Class
- Minister Morneau Discusses Tax Fairness With Standing Committee on Finance
- Ministers Morneau and Chagger Kick Off National Listening Tour With Small Business Owners
- Minister Morneau Announces Next Steps in Improving Fairness in the Tax System
- Minister Morneau Brings Message of Tax Fairness to Toronto Region Board of Trade
Media may contact:
Office of the Minister of Finance
Department of Finance Canada