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Feds could reap up to $660M a year from new ‘income sprinkling’ rules

Finance Minister Bill Morneau shakes hands with Prime Minister Justin Trudeau as he arrives in the House of Commons prior to tabling the federal budget.
Finance Minister Bill Morneau shakes hands with Prime Minister Justin Trudeau as he arrives in the House of Commons prior to tabling the federal budget. Sean Kilpatrick/CP

Parliament’s fiscal watchdog says the federal government stands to gain up to $659 million in extra tax revenue in the next year as a result of one of the controversial changes made to small business tax regulations.

The Parliamentary Budget Officer (PBO) has provided some rough estimates on revenues stemming from the new limits placed on so-called “income sprinkling,” but the PBO was careful to note that even it can’t be sure who exactly will be affected.

“The Parliamentary Budget Officer was unable to clearly identify the individuals who will be subject to the (sprinkling) rules,” a report published on Thursday noted.

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“Consequently, the PBO computed possible revenue outcomes for the government based on three different scenarios.”

READ MORE: What you need to know about Morneau’s changes to ‘income sprinkling’ rules

The rosiest outlook for the government has tax revenues for 2018-2019 bumped up by $659 million. The provinces, in that same scenario, would get $412 million more, for a total increase in tax revenue of over $1 billion.

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A second scenario, which uses a slightly different set of variables, turns out increased revenues of only $262 million for federal coffers and $173 million for the provinces.

WATCH: Bill Morneau clarifies small business tax changes for income sprinkling

Bill Morneau announces small business tax changes
Bill Morneau announces small business tax changes

But the PBO believes that its third, middle-of-the-road scenario, which results in increased federal tax revenues of $356 million and $233 million for the provinces, is likely closest to reality.

Under that scenario, the PBO assumed that all spouses of business owners (aged 25 or over) would be permitted to accept “sprinkled” income and have it taxed in a lower tax bracket.

“The rationale behind this scenario is that it is likely that most spouses have assumed some risk in the family business (for example, using the house as collateral for a bank loan to start the business),” the PBO explains. “Therefore, we assume they would pass the reasonableness test.”

The income sprinkling changes, which came into force on Jan. 1, directly affect a small percentage of Canadians who have incorporated, establishing a Canadian-controlled private corporation (CCPC) for business purposes, and who divert some business income to family members sitting in lower tax brackets.

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Finance Minister Bill Morneau said his government wanted to stop the practice only among business owners whose family members are not involved in the business on any level.

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Morneau made some tweaks to the plan last December after a major backlash from small business owners and the federal Conservatives.

According to the Department of Finance, the number of businesses potentially affected is fewer than 45,000, less than 3 per cent of the total number of CCPCs in Canada.

The PBO puts the number of families affected at 38,000.

“In general, these families are likely to have a household taxable income of more than $150,000 and have a male controlling owner,” the PBO notes.

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“They would also likely reside in Ontario or Alberta, and in an urban area with a population of more than 100,000.”