The Private Corporation Tax Loophole and the Ultra Rich

The 2017 Economic and Fiscal Update provides some detailed data (see pp. 51-53) on who will be impacted by the government’s plan to limit how much passive investment income can be earned in a private corporation.

Income from investments held in a private corporation is taxed at a lower rate than investments held by a person in a non registered account such as an RRSP or TFSA. For most small businesses, there is no incentive to save in a private corporation rather than an RRSP of TFSA.

Responding to anguished cries from small business, the vast majority of which are not impacted at all, Minister Morneau will allow $50,000 of income to be earned within a private corporation. This is equivalent to assets of more than $1 million.

The government estimates that putting a cap on private corporation investment income will affect just 3% of private corporations with investment income. But this small group of just 8,400 companies accounts for a stunning 88% of private corporation passive investment income.

Crunching the numbers shows that the affected 8,400 companies have average assets of $35.7 million.

The Department of Finance estimate that earning investment income in a private corporation instead of a personal account provides a higher annual after tax rate of return over ten years of 12.5% compared to 6.9%.

Again crunching the numbers, this means that the after tax return for the average private corporation impacted by the changes will fall from about $4.5 million to $2.5 million per year. (This depends on the details of how the new cap is to be applied, which will be in future legislation.)

Minister Morneau is entirely correct to argue that his proposed changes to taxation of passive investment income will have no impact on genuine small businesses, and are squarely aimed at a very small group of wealthy Canadians seeking an unjustifiable tax advantage.

One comment

  • Letter in Toronto Sun (followed by Toronto Sun comment):

    Sept. 25, 2017

    CHANGES JUSTIFIED

    Re “Trudeau’s tax pitch is based on myths and class-envy” (Lorne Gunter, Sept. 19):

    Incorporated small businesses receive a special low tax rate so they can grow their activities. But instead of re-investing, more and more corporations are being used to split income among family members and to defer tax on passive investments such as stocks and bonds.

    The proposed tax changes will help ensure that professionals who incorporate will pay a more similar tax as those who do not. And these changes will mainly affect the top 1% of earners — hardly the definition of the Canadian middle-class.

    Toronto Sun:

    (Trudeau’s claim the changes are needed because more than half of small business owners are rich, is absurd)

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