VIEWPOINT
Debating the Proposed Tax Changes Made by the Federal Government By : Cricia Rinchon
T
he Institute of Medical Science (IMS) is known for its doctoral research stream, but an up-andcoming program is the Translational Research Program (TRP). The TRP targets students aiming to integrate their domain expertise with projects that emphasize experiential learning and translational thinking. It offers modules such as Intellectual Property Foundations, Translation Thinking, and Health Economics. As an IMS student, I had the privilege of taking the Health Economics Module, coordinated by Dr. Tatiana Lomasko, CEO and founder of Science to Business New Zealand and Science to Wellness New Zealand. The module had an intimate class size of 20 participants. Throughout the module, we were introduced to the fundamentals of economics and economic analysis, and the interplay between economics and evaluation in health care policy. We applied these principles in an entrepreneurial scenario. Equipped with this knowledge, our challenge for the final class was to work as a group to present on a topic of our choice and facilitate a subsequent class discussion. One group decided to discuss the proposed tax changes made by the Federal Government towards private corporations. In brief, on July 18, 2017, the Canadian Federal Department of Finance released its proposals for tax reforms that apply 36 | IMS MAGAZINE FALL 2017 CANCER THERAPEUTICS
to private corporations. The aim of these reforms are to tighten loopholes for the wealthy. The proposed rules identified in Budget 2017 by Finance Minister Bill Morneau will: 1. limit sprinkling income using private corporations, 2. prevent holding a passive investment portfolio inside a private corporation, 3. restrict the conversion of a private corporation’s regular income into capital gains. Incorporation is the legal process used to form a corporate entity or company, and two-thirds of practicing members of the Royal College of Physicians and Surgeons of Canada (Royal College) in Ontario are incorporated. Of note, income sprinkling is a prominent loop hole. Income sprinkling is described as a tax-planning arrangement resulting in income that, in the absence of the particular arrangement, would have been taxed as income of a high-income individual, but is instead taxed as income of another lower-income individual, typically a family member of the highincome individual. The effect of the arrangement can be to have income subject to a lower effective income tax rate. Income sprinkling is advantageous to high-income individuals, in particular the principals of private businesses, as they can ‘opt out’ of all or part the progressivity
of the personal income tax system to their own benefit. For example, two neighbours living and working in Ontario can each earn $220 000 in 2017. Neighbour #1 is an employee of a mid-sized company, and Neighbour #2 is the owner of an incorporated consulting business and works from home. Neighbour #1 pays $79 000 in income tax for the year. On the other hand, the owner of the incorporated consulting business paid $44 000 in income taxes due to income sprinkling. The government believes that this $35 000 difference is “fundamentally unfair” and erodes the tax base and the “integrity” of the tax system. If the legislation passes with the addition of Mr. Morneau’s recommendations, owners of professional corporations, specifically doctors and dentists, will feel the most acute tax-planning pain due to their reliance on income sprinkling. The Ontario Medical Association (OMA) once negotiated the right of its members to incorporate, and recent negotiations resulted in the government committing to share structure of physician professional corporations to include non-voting shares for family members. Thus, these changes may have a huge negative impact on Ontario healthcare, as this law could discourage physicians from practicing in Canada, expanding clinical services, and hiring new staff. All these lead to increased waitlist times.