Income sprinkling reforms to take its toll on Canadian households

Income sprinkling reforms to take its toll on Canadian households | Smart Association - PCMA

Income sprinkling reforms to take its toll on Canadian households

While new rules restricting income sprinkling may bring twice the expected revenue into the federal government's coffers, they could hurt around 33,000 Canadian families who are likely to have to pay more taxes.

A report from the Parliamentary Budget Officer (PBO) said the new policy changes would increase taxation revenues by $589m, with $356m or 60% going to the federal government.

This means that families in Ontario will pay $224m more in federal taxes, with 95% of this coming from households with taxable income above $150,000.

The government said the changes in income-sprinkling rules would prevent higher earners from distributing income to their children or their spouses when these household members do not actively engage in the business.

The report found that around 11% of households affected by the changes earn less than $150,000 annually while 83% make less than $500,000. Additionally, 2% of the affected households have a higher income of more than $1m per year.

The policy would also impact about 900 families with yearly income of below $100,000.

Deputy parliamentary budget officer Mostafa Askari told The Canadian Press that the Canada Revenue Agency would likely face challenges as a result of these changes.

"There are so many rules and exemptions that it would be extremely difficult for the CRA to implement this – there are still a number of loopholes and exemptions," he said.

Askari added: “So, how the companies, the firms will respond to this and how that will affect the overall result, that's something that we cannot do at this point."

In a separate report for iPolitics, conservative finance critic Pierre Poilievre said the figures released by the PBO indicate the policy is overcomplicated.

"If the leading financial minds of the nation can’t determine who will pay what under these rules, how is the family-run burger shop or laundromat supposed to do so?" Poilievre said.

He agreed with Askari's sentiments, adding that this policy would be hard to enforce.

"We don’t know who is going to pay what, we don’t know what the rules are, and we don’t know how the tax collectors over at CRA are going to interpret [the new rules]. All we know is that this policy is a costly and complex cobweb of rules that are going to burden our small family-run businesses,” Poilievre claimed.

Defending the new rules, Finance Minister Bill Morneau reiterated that the changes will impact a very small percentage of people who are privately incorporated and will make the tax system fairer.

“We saw that a relatively small number of Canadians were reducing their taxes by sprinkling income to family members in a private corporation when their family members, their children or their spouses, weren’t actually engaged in that business," he said.

Morneau added: "What we found is that most Canadians understand it’s not fair that people can lower their taxes just because they’re privately incorporated. So that’s clearly a goal that we set out to achieve. We think we’ve given some pretty clear rules.”