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Tax

Loopholes likely to remain after tax act amendments

Although the government recently announced plans to tighten a number of tax rules — including a move to prevent ‘income sprinkling’ amongst family members — there are likely to be loopholes in these new provisions, Canadian tax lawyer David J. Rotfleisch tells BNN. Read The Lawyer's Daily  Read Financial Post

As Rotfleisch, founding tax lawyer at Rotfleisch & Samulovitch Professional Corporation, notes, the government is proposing three distinct changes to the Income Tax Act — one to prevent ‘income sprinkling,’ another dealing with the concept of passive income in corporations and a third aimed at preventing people from shifting high-rate income to capital gains. So far, it has only released draft legislation on the first proposed change.

“The concept of income sprinkling is transferring money from one income earner to a spouse and kids. And the purpose of doing that is to reduce the overall tax burden caused by progressive tax rates, which mean the more money you earn, the higher the rate of tax, not just the amount of tax that you pay,” he explains.

Although Rotfleisch says taxpayers will have to wait and see what the new amendments entail, the Income Tax Act, is so “mind-bogglingly complex that it’s impossible for anyone to really close all loopholes because there are competing policies.

“There’s a huge tax planning industry out there, there are a relatively small number of Department of Finance officials drafting this legislation, and they are certainly smart people, but when you put the combined brain talent of the entire tax planning industry, there will be loopholes that we come up with,” he tells BNN.

“My job as a tax lawyer is to serve the interest of my clients. If you’re my client, you’re coming to me and saying ‘how do I reduce my taxes?’ and I’m going to tell you what we can legally do to reduce your taxes. So that’s what I have to do, and that’s what the system is. So, the government will tighten it, we’ll come up with new ways of getting around it,” adds Rotfleisch.

Ultimately, with Ontario’s marginal tax rate of more than 53 per cent, Rotfleisch says “the government is a senior partner in your paycheque.

“Anytime the government becomes a senior partner and takes more home than you do, people really have an incentive to legally reduce taxes or in some cases — in a lot of cases — to illegally reduce taxes through tax evasion. It’s a problem when tax rates get too high,” he tells BNN.

“My personal point of view is that a tax rate of over 50 per cent is too high and that some of these rules are not necessarily fair,” adds Rotfleisch.

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