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  • Charles Rotenberg


Need for less, not more complexity

  • System cannot be fair if it is not understandable, or only understandable with the assistance of paid professionals

  • System cannot be fair if it cannot be administered (further comment below regarding “reasonable contribution”

  • Brian Bloom, a well respected partner in the firm Davies Ward Phillips & Vineberg, who was responsible for drafting significant tax provisions in the period 1992 to 1998, has estimated that the new rules on passive income will require at least 100 pages of new legislation to implement.


The 1972 tax reform took almost 8 years to implement. The Carter Royal Commission took 6 years and then it took 2 further years to implement.

This is the most massive tax reform since 1972.

Finance Minister Morneau set a 75 day consultation period, ending on October 2nd. He did this in the middle of summer with Parliament not sitting, many taxpayers on vacation, and all farmers in the middle of seeding and harvesting.

After the “consultation period” within 2 weeks Finance announced changes to the proposed rules. They had received in excess of 21,000 written submissions, some in excess of 100 pages. If they spent 10 minutes on each submission, it would take 465 work days to read them all. It suggests that they haven ‘t considered the submissions of taxpayers and tax professionals.

Income Splitting using dividends

This has been labelled as a “loophole”. A loophole is a provision that yields an unintended tax result.

The very fact that this has been part of our system for 45 years suggests that this is not unintended.

The Liberal Ontario Finance Minister, in his 2005 Budget Speech said that allowing doctors and dentists to include family members as shareholders “was part of our agreement with the Ontario Medical Association”. It is difficult for a different Liberal Finance Minister to say that dividend payments to those family members is an unintended tax consequence.

The Supreme Court of Canada in its decision in Neuman, in 1998, said, “the distribution of the dividend is not determined by the quantum of a shareholder’s contribution to the corporation”

In 1990, Finance Minister Paul Martin introduced the Tax on Split Income (Kiddie Tax) which eliminated the tax benefit of paying dividends to minors.

Finance Minister Morneau now proposes to expand those rules to any family members who have not made a “reasonable contribution” to the company, and has different tests depending upon whether the taxpayer is under age 25, or over age 24.

Here are the problems that I see with the administration of these provisions:

  1. Are CRA auditors trained to determine what is reasonable? If a taxpayer is actively involved in the business in one year, but not in a previous or subsequent year, what is the impact? Presumably, if the determination of reasonableness is upheld, dividends could be treated differently from year to year, i.e. subject to TOSI or not, based upon the recipient’s level of contribution in any year. a) 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. b) 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?

  2. Especially for farm families, where most family members work on farm and off farm, how is a determination to be made as to their “contribution”?

  3. It is impossible for an ordinary taxpayer to make the determination of what level of contribution will be “reasonable”.

  4. An auditor will now be required to review every dividend paid to every shareholder in every taxation year that is the subject to an audit. The level of contribution in one year may not be the same as the level in another taxation year. If six family members receive dividends, consider the additional time required in every audit for every small and medium business for every year.

  5. We know from experience that it will be years before the courts have an opportunity to decide on the issue. Given the significance, we can safely assume that the initial appeals will, no matter who wins at the Tax Court of Canada, be appealed at least to the Federal Court of Appeal, and, perhaps, the Supreme Court of Canada.

  6. Given this extreme level of uncertainty being introduced, it will be my recommendation to all of my clients to file a Notice of Objection to any assessment under the new rules, since we don’t know how the courts will deal with these rules. From my discussions with other tax practitioners, this recommendation will be made universally.

  7. At present, a taxpayer filing a Notice of Objection will wait approximately 8 to 10 months before there is an appeals officer available to discuss the file. If we are now faced with multiple notices of objection for every company that is assessed, what will this do to the backlog?

  8. I assume that the Appeals section will invariably confirm any assessments under the new rules.

  9. This is, of course, unfair, since it will require the affected taxpayers to go to the trouble and expense of filing Notices of Appeal to the Tax Court. We know that the Court is already displeased at the backlogs in the appeals system. How will the number of pending appeals increase under the new proposals?

  10. We are told to expect more details about the TOSI rules “later in the fall”, but the rules will take effect January 1st, 2018. How are taxpayers supposed to adapt years, and in some cases, decades, of tax, estate and succession planning in less than 2 months?

Taxation of Passive Income

Finance Minister Morneau has referred to money held in a private corporation as “dead money”, and has proposed a series of complex and confiscatory rules to force companies to pay the funds out to the shareholders to be taxed in their hands personally. Remember that the Liberal government has increased personal tax rates to the point that among G7 countries, only those earning top dollar in France will pay more tax than in Ontario.

If funds are invested in a company or personally, presumably the funds are equally “dead” or “alive”. The difference is that the government will take a substantial piece out of the funds when they are paid out. Based upon this Governments economic record, I am not satisfied that they will do better with these funds than the business community.

Again, these rules are to take effect January 1st, 2018, but we will not see any legislation until the spring Budget in 2018. How are taxpayers supposed to deal with this level of uncertainty? Uncertainty is not good for the economy.

Under the new rules, public corporations in Ontario will pay 26.5% tax on their investment income and Canadian Controlled Private Corporations will pay 50.17%. Results in the other provinces are similar.

The complexity of the new rules will be terribly onerous on taxpayers who will have to rely more and more on their professional advisors.

October 16th Amendments to Proposals

Finance Minister Morneau has now proposed that all accumulated savings, presumably up to December 31st, 2017, in a Canadian controlled private corporation (CCPC) and any earnings generated by those savings will not be subject to the new passive income rules. This flies in the face of his “dead money” argument. Presumably the large accumulation of capital to which he constantly refers will remain “dead” if it isn’t subject to the new rules.

In respect of any future accumulations of capital, there will be a limit of $50,000 per year of passive income that will be exempt from the new rules. Presumably, any investment income in excess of this amount will be subject to the new rules, and the tax could be as high as 73%.

The additional problem is one of complexity. The Finance Minister has been told repeatedly that his proposals are too complex.

The proposed system will require tracking multiple pools of investment income:

  • Income on pre-2018 capital

  • Income on post-2017 additions to capital

  • Tracking the $50,000 investment income taxed under the existing system

  • Determination of whether capital held in corporation is investment capital or active business asset

  • Funds held for banking covenants

  • Funds held for bonding

  • Funds held for capital investment or inventory

  • Funds held for downturn in business cycles

  • If the funds referred to are passive, then they will be subject to the passive investment income rules; if they are active, they will be subject to business income rules. Is a CRA auditor qualified to determine what level of funds a corporation needs to keep on hand?

  • The Supreme Court of Canada in the Stewart case in 2002, cited an earlier decision of Justice Bowman of the Tax Court, where he said,

[The taxpayer] made what might, in retrospect, be seen as an error in judgment but it was a matter of business judgment and it was not one so patently unreasonable as to entitle this Court or the Minister of National Revenue to substitute its or his judgment for it, or penalize him for having made a judgment call that, with the benefit of 20-20 hindsight, that Monday morning quarterbacks always have, I or the Minister of National Revenue might not make today....

Applying that principal, how is the CRA to treat a business decision to keep a certain level of funds on hand for, what the taxpayer believes, are reasonable business purposes?

Barrier to Entry

The grandfathering of existing capital, while welcome, protects old money. It is a barrier to those who want to become part of the “so-called” 1%. Any newer entrepreneurs will have a harder time to accumulate savings.

Incentive for Capital to leave Canada

I, and many colleagues, have already had inquiries from clients about the consequences of moving some or all of their capital out of Canada. The tax rates in Canada, and even more so the proposed rates, are out of line with our major trading partners.

I am actively working with one client who is expecting an inheritance of approximately $30M. We are working on a structure to invest these funds in the U.S., as the client is not prepared to bring them to Canada in the current tax environment.

With the U.S. in the midst of introducing lower tax rates and Canada introducing higher tax rates, it is easy to see where capital will go.

More concerning is where our new entrepreneurs will go. I have spoken with clients and their adult children. For middle aged, or older, business clients, the changes proposed will make it more expensive to continue in Canada. But, for their children, who are much more mobile, the thought that I have heard on numerous occasions, already, is that there is no barrier to where they can set up new businesses. They don’t have to set up new divisions or new businesses in Canada if the environment isn’t tax competitive.

Reduction of corporate tax rate for small businesses

The October 16th announcement of the reduction of the corporate tax rate is simply a reinstatement of the tax cut already introduced by the Harper government and repealed by the Trudeau government. It will reduce the tax that a CCPC will pay on its first $500,000 of active business income, gradually, starting in January 2018. The rate will reduce from 11% to 10% in January, 2018, and to 9% in January 2019.

A cynic might observe that the 9% rate will kick in before the next federal election.

This reduction, when fully implemented would amount to a tax saving of $7,500 for a CCPC earning the full $500,000. Most CCPCs do not earn close to that amount, so the benefit will be small.

And, if the business then invests the savings, it will be subject to the new higher rate of tax on its investment income.


The proposed tax changes were introduced precipitously, without proper drafting, without consideration of all of the potential unintended tax consequences, without considering the long standing tax, estate and succession plans of Canadians. The have not considered the competitive disadvantage to which they are subjecting Canadian farms and small businesses. And, they have not adequately considered the impossibility of implementation of the proposed rules, nor the complexity and significant professional costs to which they are subjecting Canadian business.

We are probably due for a reform of our tax system. But it should be a full review and reform, not a patchwork that is merely an expedient way for the Liberal government to fund its excess spending.

Senators, thank you for taking the time to come and listen to the concerns of Canadian farm families and small businesses.

Chuck Rotenberg


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