End of income sprinkling will affect one in eight small-business owners: study

TheGlobeandMail.com – Politics/Tax Changes
September 26, 2017.   

Only about one in eight small-business owners are likely to be affected by a Liberal proposal to end income sprinkling, according to new research from the Canadian Centre for Policy Alternatives.

A study from the left-leaning think tank says small-business owners most likely to be affected by the tax-savings measure are male, professionals such as doctors or lawyers who make more than $216,000 a year and with spouses or adult children who don’t work. Ending income sprinkling is one of three tax changes the Liberal government is considering.

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Business lobby groups have fought the changes, saying they will discourage Canadians from starting their own enterprises.

But David Macdonald, senior economist of the centre and author of the study, said family-run businesses such as restaurants or stores are not likely to be affected.

“It is hypothetically possible this [change] could affect a middle-class family, but in the real world it’s very unlikely,” Mr. Macdonald said.

His research suggests 77 per cent of small-business owners do not benefit from the tax break, while another 10 per cent wouldn’t gain enough to offset the cost of setting up the scheme.

About half of the annual value of the tax break goes to families in the top 5 per cent of earners, the study says.

Income sprinkling allows the owner of a private corporation to distribute dividends to family members, even if they haven’t contributed to business operations. If the owner is in a high-income tax bracket and the family member is in a lower range, the sprinkling will have an overall effect of lowering the taxes paid.

In July, the Liberal government proposed ending the practice, along with changing the rules for investing within a corporation and the tax treatment of capital gains. The government said the measures were designed to target Canadians with high incomes.

The CCPA study looked only at the effects of income sprinkling. But business groups have been fighting all the changes.

“These are legitimate ways for small business owners to grow their business, ensure the stability of the firm during uncertain times, or to save for the retirement. Without these measures, businesses will not be able to create as many jobs for Canadians,” said Dan Kelly, president of the Canadian Federation of Independent Business, in a statement last week.

The Canadian Medical Association has also defended income sprinkling, saying it’s a way for doctors with private corporations to care for their family.

Mr. Macdonald said that his study, based on data from Statistics Canada and tax filers, showed income sprinkling was almost entirely benefiting wealthy Canadians. And business owners who benefit from the tax measure save less than $10,000 a year.

“It’s interesting to see the examples that have been brought out. It’s certainly possible to make accounting examples or an Excel example where a family … would see their taxes go up $20,000 because of the closure of this tax loophole,” Mr. Macdonald said. “But there aren’t really a lot of families that fall into that in the broad scheme of things.”

In his study, Mr. Macdonald estimated the federal government would collect about $280-million more in taxes each year if income sprinkling is ended. Provincial governments would collect about $110-million annually.

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