Canada: Kim Moody And Kenneth Keung: Canada’s Tax Proposals Read Like A Class-Warfare Manifesto Against Private Businesses
Last Updated: August 21 2017

On July 18, the Department of Finance released a blockbuster package of proposed tax law changes aimed at private corporations and their shareholders. The proposed changes target common tax management practices available to private business owners: income splitting among family members, investing in passive assets with corporate funds and repatriation of corporate earnings as capital gains rather than dividends.

In many ways, the broad-sweeping proposals and the accompanying "Consultation Document," heavily laced with offensive rhetoric, reads like a class-warfare manifesto against private businesses.

One of the proposals is particularly egregious: new rules to prevent income splitting. What is income splitting? An example is the paying of dividends to family shareholders — active or non-active — which often results in a reduced overall family tax burden as compared to the situation where dividends were simply paid to the active shareholder. Is income splitting really that offensive and unfair as suggested by our government? 

Matrimonial property regimes grant property rights to spouses regardless of who contributes to the business

A typical private business is often started and capitalized with family assets. In many cases, the operations of the business are run by family members. Often, but not always, one of the spouses/common-law partners stays home to raise the children while the other focuses on the operations of the business. In many cases, both spouses/common-law partners (and sometimes the children either directly or indirectly) are shareholders of the business. Such an arrangement allows the eventual rewards of the business — often after many, many years of struggles to make the business successful against the odds — to be split among the family. Any dividends or capital gains realized are taxed according to each family member's individual tax brackets (with the exception of minors who are generally always taxed at the top marginal tax rate under the current "kiddie tax" regime).

Part of the proposals will extend the "kiddie tax" regime to adults. Starting in 2018, not only will minors be taxed at top marginal tax rates, but any dividend or capital gain realized by family members — including spouses and common-law partners — over a "reasonable" amount will also be taxed at the top marginal tax rate (with additional requirements applying to those between 18 and 24 years old). Repealing the common practice of income-splitting with a spouse/common-law partner (or another family member) who does not directly contribute to the business has intuitive appeal at first glance: Why should someone get something unless they worked for it?

Part of the proposals will extend the 'kiddie tax' regime to adults

However, is a reasonableness test appropriate in a spouse or common-law partner scenario when the provinces' various matrimonial property regimes grant property rights to such persons regardless of who contributes to the business? Is basing taxation on an individual-by-individual basis, rather than on a family-unit basis, the right or fair approach? Do the proposals contradict our current government's emphasis on gender equality when many entrepreneurial families have a stay-at-home parent?

It turns out that the Royal Commission on Taxation already thought about many of these questions over 50 years ago. The commission noted the substantial contribution each family member usually makes to the family's finances, and strongly recommended the family unit be the appropriate taxing unit: "we believe firmly that the family is today, as it has been for many centuries, the basic economic unit in society."

A partner who stays home to raise children is a key ingredient to the success of the family

While many things have changed over the last 50 years, we submit that this assertion remains just as true today, particularly with respect to families that run businesses. A spouse/common-law partner who stays home to raise children and manage the household is as much a key ingredient to the family's success as the other spouse's day-to-day hustle for the business. When you combine that with the further fact that non-active spouses/common-law partners have property rights with respect to family assets that have been used — directly or indirectly — to grow the business, is it really offensive from a tax-policy perspective for the non-active spouse/common-law partner or other family member to receive dividends or realize capital gains notwithstanding they may not have expended the same level of direct effort in the business as other family members?

Today, the Royal Commission report largely forms the foundation of the modern Canadian tax regime. However, the government went against the commission's recommendation with respect to adopting the family as the taxing unit and decided on the individual as the proper taxing unit. This is why today we file tax returns as individuals, whereas in the U.S. there is a form of the family as the taxing unit (for example, couples can file joint tax returns if desired). As expected, over the years, taxpayers have found many ways to split income despite the taxing unit being the individual and the Canadian government has occasionally responded by compounding the complexity of the income tax act to prevent such income splitting.

By extending the kiddie tax rules to adults, the government will completely deny a family's ability to income split among adults who are not active in the business, thereby ignoring the reality that the family is the basic economic unit of society, that non-active spouses/common-law partners contribute significantly to the success of the family business and the fact that those spouses/common-law partners have property rights with respect to such family business assets. We routinely deal with many successful entrepreneurs and almost all of them credit their success to their family, irrespective of whether they are active in the business or not. Such entrepreneurs also acknowledge that every member of their family bears some degree of risk associated with their business. In their eyes, their own success is indistinguishable from their family's success.

The government's proposals will specifically disallow the splitting of dividends or capital gains from private corporations but in contrast our government has allowed the splitting of pension income between spouses/common-law partners since 2007. This results in a glaring taxation distinction between pension income and business income. Is this fair? Not in our view.

The proposed rules to prevent income splitting are some of the most complicated tax rules we have ever seen

The resulting tax rules that the government is proposing to prevent income splitting are some of the most complicated set of tax rules we have ever seen. The average small business owner — who usually does not have the resources to have an internal tax department to interpret and navigate complex tax rules — will be burdened with extreme complexity. Is this fair? Not in our view.

We believe that what is old is new again. Just as it was in 1966 and for many centuries, the economic unit today is still the family unit. Rather than playing an endless cat-and-mouse game with taxpayers on income splitting which results in very complex legislation which will likely not be workable in practice — all in the name of "fairness" — we believe the government should revisit the Royal Commission's recommendation of basing taxation on the family unit. This, in our view, would be a worthwhile tax reform initiative for Canada. And it would be fair.

Financial Post

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Press Releases from this Firm
Recent Content from this Firm
By Moodys Gartner Tax Law LLP
By Greg Gartner
By Kenneth Keung, Kim G.C. Moody
By Kim G.C. Moody
By Kim G.C. Moody
By Kim G.C. Moody, Kenneth Keung
By Alexander Marino
By Moodys Gartner Tax Law LLP
By Elan Harper, Kim G.C. Moody, Greg Gartner, Lauchlin MacEachern
By Roy Berg, Kevin Kirkpatrick
Font Size:
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.