Accounting for Law

Changes to tax reform proposals not beneficial to lawyers

While the federal government recently moved to scale back the tax reforms it proposed for professional corporations last year, the changes that will be the most helpful are not available to lawyers, Canadian tax lawyer David J. Rotfleisch tells Law Times.

As the article notes, the government announced three proposals last summer, including restricting income sprinkling for business owners, barring the practice of transforming dividend income into capital gains and closing a loophole that allows business owners to pay lower taxes on passive investment income held in a corporation.

Following an outcry from lawyers and other professionals, however, Law Times reports federal Finance Minister Bill Morneau altered the proposals and abandoned the capital gains reform.

In mid-December, the government released draft legislation that will reportedly limit income sprinkling, except for a number of exemptions — family members who would be exempt include spouses who had “meaningfully contributed” to the business and owners age 65 and older.

Others who would qualify are members of the business owner’s family over the age of 18 who have worked at the corporation at least 20 hours a week during any of the previous five years and those over 25 who own at least 10 per cent of the company that is not a professional corporation and earns less than 90 per cent of its income from the provision of its services, says the article.

Family members who are 25 and older will have to undergo a subjective “reasonableness test” to determine how much income can be subject to income sprinkling, if none of the exceptions apply.

However, as Rotfleisch, founding tax lawyer with Rotfleisch & Samulovitch Professional Corporation, tells Law Times: “So the new rules will adversely affect lawyers and other professionals as originally announced in July, as opposed to non-professional corporations, where there are somewhat more liberal rules available now.”

Following the release of the proposed legislation, a consultation period was held from July 18 until Oct. 2. As Law Times reports, a the end of the summer, the Canadian Bar Association and a group of more than 70 business organizations formed the Coalition for Small Business Tax Fairness. The coalition responded to the mid-December release of the draft legislation by calling on the government to take more time to explore the changes before implementing them.

The new rules took effect Jan. 1.

Rotfleisch says the original consultation should have been longer and the government should have held a second round of consultations after the draft legislation was released.

“They should have provided a new consultation period, rather than giving you two weeks and bang, it’s a fait-accompli,” says Rotfleisch.

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