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BEAR CREEK LAW LLP Vincent Guo B.Sc., J.D.

Suite 205 13588 88th Avenue

Surrey, B.C. V3W 3K8

Phone: (604) 259-6200 Mikhael Magaril B.Sc., J.D.

Fax: (604) 259-6202

September 26, 2017

Mr. Bill Morneau, M.P. Mr. Grard Deltell, M.P. Mr. Alexandre Boulerice, M.P.
Minister of Finance Treasury Board Critic Finance Critic
House of Commons House of Commons House of Commons
Ottawa, O.N. K1A 0A6 Ottawa, O.N. K1A 0A6 Ottawa, O.N. K1A 0A6

Mr. Pierre Poilievre, M.P. Mr. Peter Julian, M.P. Mr. Gabriel Ste-Marie, M.P.
Finance Critic Local M.P. Finance Critic
House of Commons House of Commons House of Commons
Ottawa, O.N. K1A 0A6 Ottawa, O.N. K1A 0A6 Ottawa, O.N. K1A 0A6

Mr. Sukh Dhaliwal, M.P. Mrs. Carole James, M.L.A. Financial Consultation Commitee
Local M.P. Minister of Finance (B.C.)
House of Commons 1084 Fort St.
Ottawa, O.N. K1A 0A6 Victoria, B.C. V8V 3K4

Dear Honourable Members of Parliament and the Legislative Assembly,

Criticism and Suggestions to Proposed Tax Changes

1. Personal Background and Aim of this Letter

I am a practising lawyer residing in New Westminster, B.C. and I provide services through a law
corporation. I practice in limited liability partnership with another lawyer. Our main office in Surrey,
B.C. We are looking to grow the firm to have enough work to support a full-time junior associate, and a
full-time legal assistant. My wife is now a stay-at-home mom receiving maternity benefits and has
primary care over our newborn. I am currently taking unpaid paternity benefits in order to bond with my
newborn son.

I write to provide a detailed criticism of the proposed changes to the taxation of Canadian Controlled
Private Corporations (CCPCs) and how it will impact Canadians who begin their entrepreneurial
journey and build their own business. I will focus only on two aspects of the proposed changes: income
sprinkling and the taxation of passive investment income generated by corporations.

I will also provide suggestions for alternate legislation so that the intention of Parliament can be effected
without causing significant unintended consequences towards individuals who are genuinely using their
corporations to build a business and drive Canadas economic growth. Lastly, throughout this letter I
will provide clear numerical examples of the impact of the changes upon business owners to move the
discussion from the abstract into the concrete. Whenever examples are used I will assume that the
individuals are residents of B.C. for the purposes of provincial taxes.

2. Extent of Proposed Legislation

While the proposed legislative changes have received press coverage as aimed at closing loopholes for
wealthy Canadians and in particular professionals such as doctors, lawyers, dentists, etc., a review of
the proposed legislative changes confirms that these rules apply to all CCPCs. Accordingly, the scope of
the legislative change will not only include professional corporations, but the overwhelming majority of
corporations in Canada that are used for small to large businesses businesses such as automotive
repair, local delis and restaurants, painters, plumbers, retailors, landscapers, cleaners, construction
companies, etc.

As a result, the examples I will use will be equivocal as to the occupation of the individuals or their
business activity undertaken through a CCPC as the impact will be the same regardless if they are a
doctor, a lawyer, or a coffee shop.

3. Criticisms of the Proposed Changes to Income Sprinkling

One of the proposals of the draft legislation is to curb income sprinkling amongst family members if
their contribution to the business is not reasonable. Such a suggestion is problematic as it:

A. Amplifies an existing inequality in our tax system;

B. Stifles economic development for business owners;
C. Conflates the notion of property ownership and employment; and
D. Minimizes the impact and value that women bring to a marriage / common-law relationship.

Each factor will be examined in turn to show that the approach proposed by the legislative amendments
is ineffective at meeting at its objectives, and provides unintended consequences that will have a
negative impact on Canadas economic growth.

A) Amplifying an existing inequality in our tax system

It is a well-established principle of our taxation system that the tax system should achieve horizontal
equality. This means that individuals in similar economic situations should receive the same tax
treatment. For instance, household where the total family income is $120,000 should receive the same
tax treatment as any other family with the identical family income. However for couples in a marital or
common-law relationship horizontal equality is rarely achieved and there is a significant tax penalty for
having a difference in income amongst the household members.

To put it another way, families with identical household incomes, but with a difference in the income
earned by each partner will pay more taxes than households where the members earn the same income.
This creates an inequality in our tax system because a family with the same pre-tax income, will have
different post-tax disposable income with all other factors being equal. The changes proposed by the
Liberal government only widen that inequality.

In many common-law and marital relationships there is a partner who will earn a substantially larger
income than the other. This is particularly true if one partner is involved in running a business through a
CCPC or otherwise. It is of course acknowledged that there are relationships in which both members
achieve identical or quite similar incomes such as the case with many teachers or other civil servants
that are married to others in the same profession. Such examples are not dismissed or ignored, but are
used as the benchmark to highlight the difference in tax treatment, and accordingly the lack of horizontal

The problem of higher taxes for households with differences in the amount earned by each member has
been identified many times by many academics through the years. The Carter Report the more
common name of the Royal Commission on Taxation (1962 1967) identified this anomaly and goes
into far more analysis about the impact. It recommended that such a result could be avoided in its
entirety by making the basic tax unit that of a family, rather than an individual. These recommendations
however were never adopted into legislation.

Despite the Income Tax Act imposing tax liability on an individual basis, many provincial and federal
government programs, grants, and subsidies look at (adjusted) family income to determine eligibility1.

i.e. the Canada Child Benefit Program, Canada Learning Bonds and Additional Canada Education Savings Grants,
Guaranteed Income Supplement, GST/HST credit, etc.

This is simply a reflection of the reality that many married and common-law couples have a single joint
bank account that they use to pay for all their expenses.

To demonstrate the size of the inequality we begin by following the lives of Chris and Jamie, who are
married and have a single joint bank account that they use for all of their expenses. We will consider
mandatory payments such as federal and provincial income tax, CPP premiums, and EI premiums. For
simplicity, WCB premiums, which are solely the responsibility of the employer, are excluded. We will
follow their journey of building a family business together.

Our first example will show the difference in disposable income when there is a difference in their
incomes through either employment, or self-employment. All numbers obtained throughout were
calculated using SimpleTax2.


Example 1.1 Comparing disposable income among differing incomes and self-employment
Scenario 3 unequal
Scenario 2 unequal
Scenario 1 equal income income & self-
Chris Jamie Chris Jamie Chris Jamie
Personal $95,000
$60,000 $60,000 $95,000 $25,000 $25,000
income pre- self-
employment employment employment employment employment
tax employed
income pre- $120,000 $120,000 $120,000
Federal tax $7,342 $7,342 $14,692 $1,607 $14,151 $1,607
$2,904 $2,904 $6,182 $674 $5,910 $674
CPP and EI $3,400 $3,400 $3,400 $1,472 $5,128 $1,472
$13,647 $13,647 $24,275 $3,753 $25,189 $3,753
income $46,353 $46,353 $70,725 $21,247 $69,811 $21,247
income $92,706 $91,972 $91,058

A few observations are worthy of note. In all three scenarios, the household income is identical yet the
first scenario results in the highest amount of disposable (i.e. after tax) income. This is despite the fact
that in each scenario the eligibility for government programs would be identical.

The next observation is that the difference in incomes in the second scenario results in approximately
$750 in tax penalties. Such an amount is not insignificant and represents approximately 30% of the

Canada Child Benefit that this couple would have received for the 2016 taxation year. It also likely
represents a few months worth of car payments, or a sizeable portion of rent or a mortgage payment.

In the last scenario, Chris and Jamie earn the same distribution of income as in the second scenario.
However as a result of the rules surrounding CPP contributions for self-employed persons3 the end result
is that they end up with approximately $900 less disposable income than in the second scenario, and
approximately $1,700 less than in the first scenario noticeable amounts for these income earners.

Despite the fact that in the third scenario, Chris likely has had to take more risk in order to achieve
$95,000 in self-employment income, is ineligible for EI benefits if things dont work out, and will still
receive the exact same amount of CPP benefits upon retirement as in the second example, Chris and
Jamie take home noticeably less if Chris is self-employed. In essence, Chris and Jamie are punished for
attempting to have one partner start a business, and for having different levels of income.

Following this, Chris and Jamie decide that given Jamies modest salary it makes sense to have Jamie
quit and work with Chris at their small family business to try and increase its revenue. As they are still
in the early stages of their business they decide to not incorporate as the cost is something that they
cannot afford and they are not sure if the business will really pan out.

In this subsequent example we look at the disposable income that this couple would have if both work in
the same unincorporated business and if the revenues were split in various ways.

A person earning self-employment income pays both the employers portion (4.95%) and the employees portion (4.95%)
of the contribution a total of 9.9% of the income earned.

Example 1.2 Comparing disposable income when both work in the same company

Scenario 1 self- Scenario 2 self- Scenario 3 one self-

employed even split employed uneven split employed, one employed
Chris Jamie Chris Jamie Chris Jamie
All income
$60,000 $60,000 $95,000 $25,000
Distribution after $25,000
self- self- self- self -
of income employment employment
employed employed employed employed
Income prior
to cost of $120,000 $120,000 $120,000
Cost of
n/a n/a n/a n/a $25,000 n/a
Included Included Included Included
CPP $1,064 $0
Below below below below
Employer EI
$0 $0 $0 $0 $571 $0
Total cost of
n/a n/a n/a n/a $26,635 $0
Net business
$120,000 $120,000 $93,365
Personal $60,000 $60,000 $95,000 $25,000
$93,365 self- $25,000
income pre- self- self- self- self -
employed employment
tax employed employed employed employed
Federal tax $6,942 $6,942 $14,151 $1,509 $13,782 $1,607
Provincial tax $2,749 $2,749 $5,910 $641 $5,709 $674
CPP and EI $5,128 $5,128 $5,128 $2,129 $5,128 $1,472
Tax payable $14,820 $14,820 $25,189 $4,278 $24,619 $3,753

income $45,180 $45,180 $69,811 $20,722 $68,746 $21,247
income post- $90,360 $90,533 $89,993

Here we see that despite Chris and Jamie continuing to make the same amount of household income
prior to paying taxes, and by taking on a greater risk by working at the same family business, they are
falling further and further behind. We see that in all three scenarios in the second example the couple
has less disposable income to spend on goods and services, to put away into a TFSA, or to otherwise
save for a rainy day than even the worst scenario in the first example.

We also note an interesting observation that an uneven splitting of income results in a higher amount of
disposable household income as can be seen in comparing the first and second scenario. This because of
two factors. The first is that the initial $3,500 of self-employment income is exempt from CPP
contributions which for a self-employed person is the equivalent of a 9.9% tax as they are responsible
for both the employer and employee portions. Further, there is a maximum amount of CPP payable by a
person in any one given year, after which point their marginal tax liability decreases essentially by 9.9%.

In the last scenario we see that Chris and Jamie are further penalized for having Jamie work as an
employee. The rate of EI insurance is 1.63% for the employees contribution and 2.282% for the
employers contribution. Since Chris is acting as an employer he is responsible for paying these
amounts. However because EI is not payable for self-employed individuals, the household actually loses
money if they characterize one of themselves as an employee.

We now turn to the last example in which Chris and Jamie decide that they are going to incorporate.
Their business now has passed its infant stages and they feel more secure that it will continue to provide
for their family. Lets look at the tax treatment that results when Chris and Jamie work in the same
incorporate business and draw their money out in different ways.

Example 1.3 Comparing disposable income with a private corporation

Scenario 1 even split Scenario 2 un-even

Scenario 3 one employed
of dividends4 split of dividends
Chris Jamie Chris Jamie Chris Jamie
All dividends
Distribution of
50% 50% Remainder $25,000 after $25,000
dividends dividends as dividends dividends employment employment
Income prior
to cost of $120,000 $120,000 $120,000
Cost of
n/a n/a n/a n/a $25,000 n/a
CPP $0 $0 $0 $0 $1,064 $0
Employer EI
$0 $0 $0 $0 $571 $0
Total cost of
n/a n/a n/a n/a $26,635 $0
Net business
$120,000 $120,000 $93,365
Corporate Tax
$15,144 $15,144 $11,782

Income after $104,856 $104,856 $81,583

All dividends are assumed to be non-eligible dividends, i.e. the business is assumed to earn less than $500,000 per year.
Corporate tax is the combined Federal and Provincial (B.C.) rate at rate of 12.62% which reflects a change in the rate
partway through the year

Personal $52,428 $52,428 $79,856 $25,020 $81,583 $25,000
income pre- dividend dividend dividend dividend dividend employment
Federal tax $1,850 $6,942 $5,140 $0 $5,453 $1,607
Provincial tax $1,842 $2,749 $4,125 $326 $4,329 $674
CPP and EI $0 $0 $0 $0 $0 $1,472
Tax payable $3,692 $3,692 $9,265 $326 $9,782 $3,753
Personal $48,736 $48,736 $70,591 $24,674 $71,801 $21,247
income post- $97,472 $95,265 $93,048

Again a few observations are in order. First, we see that there is a significant disadvantage to having
Jamie work as an employee compared to getting money out the business as dividends. We also see that
an equal splitting of income through dividends results in a significantly better post-tax result.

Another key point is that each of these scenarios result in a larger amount of disposable income
compared to the result in which both partners were receiving employment income or were self-
employed. Under the subsequent heading I will argue that this is a fair result and rewards business
owners for taking on significantly larger risk.

Lastly, using these numbers we are able to see the significance of the tax savings. Recall in the first
example when both partners made equal income their post-tax income was $92,706. The difference
between receiving equal employment income vs. equal dividend income through their own business is
approximately $4,500. This is a sizeable chunk of change however it is far less than what the media
appears to portray it as, and comparable to the tax penalty that arises when a couple receives self-
employment income rather than income from employment, as well as when a couple has a discrepancy
in what they earn.

Accordingly I invite the reader to consider the following conclusions:

1) Our current tax system penalizes couples in which there is a difference in their incomes
compared to couples who earn the same amount of income;
2) Our tax system heavily penalizes individuals who run an unincorporated business
because of the heavy additional drag of CPP contributions payable;
3) Families members are penalized for being treated and paid as employees within a family
business whether incorporated or not. This is because of the employers portion of the
EI contribution is an expense that would not otherwise exist if the family member was
self-employed; receiving dividend income; or employed anywhere else;
4) The tax advantage in disposable income using a corporate structure optimally is on par
with the difference disadvantage of having a difference in income or being self-
employed; and
5) The only way that business owners can ever catch up and have the same disposable
income as their employed counterparts is to incorporate and use dividends.

When Finance Minister Bill Morneau discusses the rise of CCPCs as inviting the inference that wealthy
Canadians are increasingly using these vehicles to protect their wealth, I would invite the reader to
consider the possibility that the rise of CCPCs can also be explained by the increasing number of
businesses and that a CCPC is the only structure that makes sense from a tax perspective.

B) Stifles economic development for business owners

After going through the above examples I will now discuss how the changes to income sprinkling will
harm economic development for business owners.

The tax system has a broader impact than simply raising money that the government spends on projects
and services. Indeed, through tax credits, deductions, and other tax treatments the government can
exercise significant policy changes by making it more attractive for individuals to take certain steps6.

As an example, consider the charitable tax credits that are given to individuals who donate money to a charity
particularly the enhanced credit given to first-time donors. This encourages individuals to donate to charities. A more
complicated example may by the mining exploration tax credits, or B.C.s scientific research & experimental development
tax credits which encourage the creation and development of businesses within those areas.

Aside from the sense of fulfillment that arises from owning a business, there are many important
obstacles and difficulties faced by business owners that have no comparison in the realm of
employment. Many articles have been written by academics and journalists over the past few weeks and
I do not intend to provide a review of them. I will instead focus on the following:

1) The absence of disability benefits, vacation days, pension, or other benefits;

2) The need to collect accounts receivable;
3) The need to find work; and
4) The capital requirement to start a business.

If an employer is unable to find work for their employees, the usual result is termination which would
result in the employee qualifying for E.I. benefits which can be very generous. Aside from replacing a
significant part of an employees income, there is the opportunity to take advantages of programs that
retrain an individual for other forms of employment. Many employees also benefit from paid vacation
days, or in lieu of actual vacation having it paid out to them. In addition many employees also receive a
formal of disability insurance through their employment, or other types of benefits such as extended

None of these safety nets or programs exist for self-employed persons. If a business owner goes on
vacation they do not earn income unless the business is large enough to run itself. Likewise they do not
have the benefit of group benefits and the significantly reduced price they offer for the level of coverage
provided. A business owner is taking a significant gamble on themselves.

If I do a bad job as a business owner I may not get paid. I may be required to spend additional time on
my own dime to fix my mistakes, or to return money to a client in order to keep some good faith. None
of that is analogous for employees. If they make mistakes they will likely keep their job and have to
spend additional paid time to rectify their mistakes. Depending upon the circumstances they may even
receive overtime at the rate of 1.5x or 2.0x.

Employees are entitled to significant protections under Provincial and Federal legislation. Employees
are entitled to receive their paycheques promptly after their wages become due and owing. If they are
terminated without cause they are entitled to receive a minimum amount of notice, or payment in lieu of
notice (i.e. severance). Business owners who do not receive the entirety of their fee up-front have the
added task of trying to collect on the fees they have already earned. This is creates cash flow constraints

as invoicing is to be done on an accrual system meaning that the taxes are paid when the work is
completed regardless if the business owner has been paid yet.

The payment of taxes on an accrual basis is a very significant point that is not captured in the preceding
numerical discussions. If a business owner only gets paid on 90% of the invoices they render, the taxes
are calculated as owing on the full 100% until such time the business owner declares the debt to be bad
debt and written off. Further, no business owner would ever take all of the companys profits out.
Every business must have a reserve of cash to pay for business expenses, including employees, and as a
margin of safety for unexpected expenses or decreases in revenue.

Lastly, employees are not obligated to bring anything but themselves to work. They do not need to pay
rent on a commercial property, purchase equipment or pay for the phone lines. They do not need to pay
for a business license, a corporate bank account, or annual filing fees. There is no risk to an employee of
losing money when they get a job. A business venture is an entirely different beast.

Against this constellation of challenges there is of course the upside of significantly higher earning
potential, increased flexibility to the extent of not having to report to any manager, and increase
mobility to the extent that a business owner can theoretically take their job with them if they relocate.

Small and medium sized business are the cornerstone of Canadas economy. As a business grows from
its infancy as a one-person operation it will expand and increase revenue, hire individuals, and
contribute to Canadas GDP and lower unemployment. Increased business revenues result in more taxes
going towards the public coffers. Businesses, particularly those that are new, require cash in order to
operate and grow.

The proposed changes would increase the total tax payable by individuals and reduce the amount of
capital that a business can spend reinvesting in itself in order to grow as more needs to be taken out in
order to pay the business owners individual tax bill. This is counterproductive and adds another
obstacle to a business owner being successful. Canada needs to incentivize individuals to take up the
prospect of growing our economy through building businesses. The simple reality is, not everyone can
be an employee and we need to avoid making the prospect of running a business lack any reward

C) Conflates the notion of property ownership and employment

The proposed changes surrounding income sprinkling allows for family members who contribute to a
business to still receive dividends that are in line with the fair market value of their services. Such a
proposition confuses the principle that dividends are received not as a result of doing any work but are
the fruits of ownership of shares.

While this entire letter is concerned with CCPCs it is important to remember that there are many other
types of corporations. Take for instance, publically traded corporations: i.e. Royal Bank of Canada,
Johnson & Johnson, or British Petroleum. A publically traded company allows individuals to purchase
shares on a secondary market, and if the Board of Directors agrees, a dividend will be paid out to each
shareholder in the amount agreed upon.

As an individual investor, when I own shares of a publically traded corporation and receive a dividend in
return, I have done absolutely no labour and contributed nothing to the corporation. I am entitled to this
as a result of owning the shares, which themselves are property. I am being compensated for risking my
money with one company, as opposed to putting it into another, or into a different type of investment
vehicle, whether it be a savings account or a bond.

In the context of a CCPC, let us consider a couple that purchases for example a Subway franchise. They
will open it up for business and hopefully overtime it will become a self-sustaining business that will
require minimal involvement on their end and generate passive income. Once these individuals reach the
point where their business does not require their continued contribution and they have a well-trained
staff why should the amount of dividends that either one is able to take out of the corporation be limited
to the value of their labour contribution each year?

In the context of a small business run by a couple its quite likely that the funds that were initially used
to capitalize the business operation came from one of the following: a joint bank account; a home equity
line of credit against the matrimonial home, or a loan from a financial institution in which both partners
act as guarantors. If the business goes bust, both partners in a marriage or common-law relationship will
end up suffering a significant financial loss. Both partners took significant risk in having either one of
them open up a business. Against such a factual framework there is nothing sinister about both members
receiving a form of dividend payment from the corporation they are entitled to receive it for having

been directly or indirectly involved in the risks of building a business and owning a share of the

Further, let us consider when a couple separates or divorces. While each Province can set its own
legislation with respect to property division, there appears to generally be a consensus that upon
separation each spouse (or common-law partner) is entitled to a half-interest in all family property. The
definition of family property is broad and depends upon each province, however in British Columbia it
will generally include all assets acquired while in the relationship. This usually means that if the couple
purchases real estate while married then each will be entitled to half of the net value once separated.
Similarly, if one partner starts a business while in the relationship there is a legislative presumption that
the other partner is entitled to half of the business as it is a family asset.

In cases where a partner has pre-existing assets then the law usually excludes the value of those assets
from the family property regime, but includes the appreciation in those assets while in the relationship.
For instance, if one partner brought a home into the relationship and it appreciates in value, the other
would be presumptively entitled to half of the net increase. A similar situation arises if a partner has a
pre-existing business venture.

The proposed changes by the Liberal government are at direct odds with decades of jurisprudence
written by the judiciary across Canada and the values of fairness enshrined in family proceedings. If a
couple separates, one partner may very well obtain half of the value of the other partners business
even if they do not contribute directly or add any labour or provide any service to the business. Despite
this, the Liberal government feels that a couple should not be entitled to a distribution of the earnings of
a business while the couple is together. However it seems that such distribution of business earnings is
kosher while getting separated. It is unclear how this advances any policy objective.

D) Minimizes the impact and value that women bring to a marriage / common-law

The current proposed changes advanced by the Liberals allow distribution of dividend income to family
members and other related persons to the extent that they are reasonable. One of the statutory factors to
consider whether a payment is reasonable includes the amount of direct contribution that the family
member puts towards the business. The requirement for showing a direct contribution undermines not
only the property division regime that exists in family proceedings throughout Canada, but also goes

against several seminal decisions from our Supreme Court of Canada that established resulting and/or
constructive trusts in favour of homemakers in long-term common law relationships. The lineage of
cases from our Supreme Court of Canada consists of Kerr v. Baranow, 2011 SCC 10, Sorochan v.
Sorochan, [1986] 2 S.C.R. 38, Peter v. Beblow, [1993] 1 SCR 980, and Pettkus v. Becker, [1980] 2 SCR

While I do not intend to go into a detailed review of the cases, particularly because a lot of their
principles have become moot given recent legislative reform to provide a structure to the division of
family assets in long-term relationships, the analysis of the Court remains compelling. Perhaps the most
instructive case is that of Peter v. Beblow. The case involved a common law relationship of 12 years in
which one partner did the domestic work of the household and raised the children of their blended
family without compensation. As a result of undertaking homemaker services, the other partner was able
to earn a higher income, pay the mortgage off faster, and purchase other assets such as a vehicle.

Justice McLachlin (as she then was) wrote the majority decision. One of the main arguments advanced
was that some types of services in some types of relationships should not be recognized as supporting
legal claims for policy reasons. More particularly, homemaking and childcare services should not, in a
marital or quasi-marital relationship, be viewed as giving rise to equitable claims against the other

After reviewing the judicial history that lead to that position in times foregone, the Court said the

It is my view that this argument is no longer tenable in Canada, either from the point of view of
logic or authority. From the point of view of logic, I share the view of Professors Hovius and
Youdan in The Law of Family Property, at p. 136, that "there is no logical reason to distinguish
domestic services from other contributions". The notion that household and childcare services
are not worthy of recognition by the court fails to recognize the fact that these services are of
great value, not only to the family, but to the other spouse. As Lord Simon observed nearly 30
years ago: "The cock-bird can feather his nest precisely because he is not required to spend most
of his time sitting on it" ("With All My Worldly Goods," Holdsworth Lecture (University of
Birmingham, March 20, 1964, at p. 32). The notion, moreover, is a pernicious one that
systematically devalues the contributions which women tend to make to the family economy. It
has contributed to the phenomenon of the feminization of poverty which this Court identified in
Moge v. Moge, 1992 CanLII 25 (SCC), [1992] 3 S.C.R. 813, per L'Heureux-Dub J., at pp. 853-

Moreover, the argument cannot stand with the jurisprudence which this and other courts have
laid down. Today courts regularly recognize the value of domestic services. This became clear
with the Court's holding in Sorochan, leading one author to comment that "[t]he Canadian
Supreme court has finally recognized that domestic contribution is of equal value as financial
contribution in trusts of property in the familial context" (Mary Welstead, "Domestic
Contribution and Constructive Trusts: The Canadian Perspective", [1987] Denning L.J. 151, at p.
161). If there could be any doubt about the need for the law to honestly recognize the value of
domestic services, it must be considered to have been banished by Moge v. Moge, supra. While
that case arose under the Divorce Act, R.S.C., 1985, c. 3 (2nd Supp.), the value of the services
does not change with the legal remedy invoked.

I cannot give credence to the argument that legal recognition of the value of domestic services
will do violence to the law and the social structure of our society. It has been recognized for
some time that such services are entitled to recognition and compensation under the Divorce Act
and the provincial acts governing the distribution of matrimonial property. Yet society has not
been visibly harmed. I do not think that similar recognition in the equitable doctrine of unjust
enrichment will have any different effect.

From a personal perspective I could not agree more with the analysis of the current Chief Justice of the
Supreme Court of Canada. I have seen how much work my wife does at home with our son. When I
return from my paternity leave I know the only reason I will be able to make any reasonable level of
income is because of the work she does at home. The law recognizes that historically it was women that
had to stay home and raise children and otherwise provide homemaker benefits. The law recognized that
as a result they were entitled to receive a portion of the appreciation in family assets and business
ventures undertaken. Despite the state of the law for at least the past 31 years, the Liberal government is
proposing to undo and undermine the contribution that homemakers bring to the family because they are
indirect contributions, rather than direct.

4. Criticisms of the Proposed Changes to Taxation of Passive Investment Income

I now turn to a much briefer criticism of the proposed changes to taxation of passive income earned by a
corporation. Many of the themes surrounding the impact on businesses have already been developed in
my criticism on the changes of income sprinkling which makes it unnecessary to repeat them. With
respect to the proposed changes on the taxation of passive investment income I only raise one major
objection: corporations should not be punished for raising capital for business purposes.

Let us consider for example a business that wants to make a major purchase be it real estate, a large
piece of equipment, a massive software upgrade, etc. A CCPC can get sufficient funds to make a large
purchase several ways: it may borrow money from a bank, it may engage in a form of seller-financing
and offer some form of collateral, or it may purchase it outright.

If a CCPC does a form of financing, there is no question that the shareholders should not have any
income imputed to them from such a transaction. However if the CCPC decides to use a savings account
to save over a period of years to make such a transaction the Liberals propose to impute those
investment gains towards the individuals behind the corporation. This will require the payment of
personal income tax on those gains not just corporate income tax. If a CCPC choses to invest to meet
its objectives through mutual funds, individual stocks, bonds, ETFs, GICs, or other vehicles then again it
will be hit with a significant tax bill on those investment gains and greatly increase the time taken before
it can make its acquisition, as well as create cash flow constraints.

While I understand the tax advantages that wealthy Canadians can use with a CCPC to reduce and defer
their tax liability in order to accumulate wealth faster, the Liberals are proposing a very blunt tool that
will completely ignore whether the investment is for a bona fide business purpose, or whether it is a tax
deferral mechanism.

5. Alternatives to Consider

As promised at the beginning I intend not just to offer criticisms on the unintended consequences of the
proposed legislative changes, but also to offer productive suggestions that I submit would be more
practical solutions to address the mischief that the Liberal government has identified. In that regard I
offer three proposals that could be used individually, or in conjunction with each other to achieve the
legislative goals. The three options are:

1) Impose similar legislative changes on CCPCs that only derive any income through investments,
are not related to a CCPC that engages in an active business, and that does not offer their
services to the public;
2) Allow spouses or common law partners to split their income by filing as a household; and
3) Allow unincorporated business owners to opt out of CPP.

A) Impose similar legislative changes on a small subset of CCPCs

Much media coverage has been made by the Liberal government indicating that this was a tax change
aimed at wealthy Canadians however the legislative changes will impact all CCPCs if adopted as is.
If the intent is to address a very specific problem in which individuals incorporate to defer and minimize
their tax liability on their investments, then the legislative changes should be refined to target those
corporations specifically, as opposed to all CCPCs

My proposal is to impose a similar form of these proposed legislative changes to corporations that are
not actively engaged in generating jobs and increasing GDP. After some thought I believe that if a
corporation derives all, or substantially all of its income through investments, if it is not related to a
CCPC that carries on an active business, and if it does not offer its services to the public then it likely is
a CCPC that is being used solely for the purposes identified by the Finance Minister. There are many
other examples in the Income Tax Act of tax treatment that is specific to one type of corporation for
instance mutual fund trusts, and mortgage investment corporations.

Such discernment would remove the harmful effects on legitimate business owners.

B) Allow for income splitting with a spouse or common-law partner

The subsequent suggestion is to adopt one of the key recommendations from the Carter Commission. If
the Liberal government suggests professionals and others are using CCPCs to sprinkle income across
family members then one solution is to allow individuals to distribute income with their spouse without
a corporate structure. This will obviate the need to incorporate altogether.

As demonstrated above, households with the same total income but differences in the income earned per
partner have less disposable income than other households with equal income earned per partner.
CCPCs are the only way to currently obtain some level of horizontal tax equality. If individuals could
achieve the same result without incorporating I would expect to see fewer individuals using a CCPC for
their business purposes. This would in turn reduce the use of other favourable tax planning strategies
identified by the Liberal government as fewer CCPCs would exist. While it is beyond the scope of my
abilities, a comparative exercise between the rise of CCPCs and similar corporate vehicles in the United
States of America might be fruitful in this regard.

Further, Canadians that have more disposable income may use that towards further spending and thus
stimulating the economy, reducing debt, making charitable donations, or achieving any number of policy

C) Allow business owners to opt-out of CPP

Reviewing the numerical examples in the first part of this letter it can be seen that for self-employed
persons CPP has the effect of increasing the tax payable by almost 10% for roughly the first $50,000 of
net income earned. Given the dividend gross up and tax credit it simply never makes sense for a
business owner to remain unincorporated from a tax perspective. Put another way, there is simply no
level of income at which there is a tax advantage to remaining unincorporated. Eventually all business
owners realize this usually around the time that they file their taxes and speak to an accountant.

The discrepancy between the tax payable by an unincorporated business owner and one using a CCPC
can be reduced by allowing business owners to opt-out of CPP. Incorporated business owners do not
contribute anything towards CPP when they pay themselves dividends. If there is greater tax treatment
achieved without the need for a corporate structure, it will reduce the use of CCPCs as the preferred
business vehicle.

6. Conclusion

In summation I am hopeful that going through this detailed review will allow the reader to have a more
thorough appreciation of the scope of the consequences to all business owners if the proposed legislation
is adopted in its present form. I do not disagree that there are valid objectives in mind, however the tools
suggested are far too blunt and must be refined down in order to effectively reach its target.

I would be happy to answer any questions you may have or to continue this discussion to enact targeted
legislation that is effective and in the best interest of Canadians.

Yours truly,

Mikhael Magaril
Barrister and Solicitor