Reforming our Tax System: What Prime Minister Trudeau Can Learn from the Carter Commission (and his Father).

• Author: Sprysak, Chris

On July 18, 2017, the Federal Government, under the leadership of Prime Minister Justin Trudeau, released a consultation paper entitled "Tax Planning Using Private Corporations" (Consultation Paper), which identified three tax strategies that shareholders of private corporations may be able to use to reduce their personal income taxes, increase their wealth, or do both, namely:

* Sprinkling income using private corporations, which can reduce income taxes by transferring income that would otherwise be taxed at a high rate to a high-income individual to a lower-income family member subject to lower personal tax rates (or who may not be taxable at all);

* Holding a passive investment portfolio inside a private corporation, which may be financially advantageous for owners of private corporations compared to other investors since they can make larger investments (and investment returns) using corporate income that has only been subject to low-rate corporate tax rather than using personal income that has been subjected to higher rates of tax; and

* Converting a private corporation's regular income into capital gains, which can reduce a shareholder's income taxes by taking advantage of the 50% inclusion of capital gains in taxable income (or even better, the lifetime capital gains exemption) compared to the full inclusion of employment income and the special tax treatment for dividend income (which "integrates" taxes paid by the corporation in determining the net taxation to the individual shareholder).

While in accordance with current taxation law, the Consultation Paper criticized these strategies as giving a select number of Canadians "a better deal than others" as well as using the tax system in unintended and inappropriate ways. More generally, it described the use of these tax strategies as being "unfair".

To improve the fairness of our tax system, the Consultation Paper (and associated draft legislation) proposed adding complex measures to the existing legislation to eliminate (or at least restrict) the use of each of these three strategies. It also asked Canadians for their feedback--and gave them 75 days to provide it.

Interestingly, in the 1960s, the Royal Commission on Taxation, chaired by Mr. Kenneth Carter (Carter Commission), raised similar concerns about the lack of fairness of Canada's tax system and what it perceived to be problems with the tax treatment of private corporations and their shareholders. Like the Consultation Paper...