Canadian Family Business Affected by 'Income Sprinkling' Rules

Advisor says many small business owners in crucial industry will move to United States.

The government’s new rules to tighten “income sprinkling” will hit one of the most important industries in Canada, according to one advisor.

Arthur Salzer, CEO and CIO of Northland Wealth Management, said the clients he deals with most that are affected by the restrictions – designed to prevent dividends being paid out to family members not involved in the business – were those in the medical profession who owned practices. Salzer said many of these could be lost to the United States where they will pay a “fair share” of taxes.

Salzer, himself, understands the attraction: he plans to move a large part of his firm to the States in “12-18 months” and is currently eying up an acquisition. A number of his staff share the view that the future is brighter business-wise south of the border.

In Canada, a recent Parliamentary Budget Officer analysis said that about 33,000 families could be impacted by the “income sprinkling” rules. These typically have a household taxable income of more than $150,000, a male controlling owner and reside in urban areas of Ontario or Alberta. The Canadian Federation of Independent Business, however, said the rules were so confusing it “was nearly impossible to figure out who will be potentially affected”.

Salzer believes the issue is less about confusion but more about the tens of thousands of dollars better off a doctor, for example, would be if he or she moved to the States.

He said: “When they look at that [kind of money] it’s a case of, there is my kids’ tuition or there’s my car payment. Whatever they articulate it to, it starts to look more attractive in the US.

“If you look at Florida and Texas, their top marginal bracket, because they don’t have state income tax, is 37% on the equivalent of $620,000 Canadian – that’s a lot of money you can make before you even hit  37%. Here we’re hitting the number with just over $70,000. So it’s becoming a much easier decision to make for many people.”

Salzer said any such exodus of medical talent is not in Canada’s interest and blames a government that has a “spending problem” and that has “cozied up to the public services union”. He said: “[Doctors] were encouraged by the provincial government to set [income sprinkling] up and utilise it because they were not getting compensated enough through their practices. People talk above revenues but really it’s the bottom line and there’s not a lot of bottom line as a doctor once you’ve paid for everything, and given the work that they do.”

He added: “A lot of the professional CAs (chartered accountants) that we deal with had advised on that. Now they’re in a bit of a pickle because the net after-tax income for their family is going to drop substantially and they are considering moving to the United States. I don’t think that’s what Canadians want to see given we already have issues with doctors having too many patients, not taking on new patients or retiring from practices.”

Click here for the original Wealth Professional article.