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By Erin Weir

Last week, federal Finance Minister Bill Morneau announced consultations on the use of private corporations in “tax planning” by wealthy professionals. These consultations provide an opportunity to close a significant tax loophole and present a key test for NDP leadership candidates.

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The ostensible purpose of a corporation is to raise capital for a business from investors while limiting investors’ personal liability. It is not immediately obvious why a professional such as a doctor or lawyer engaged in self-employment, rather than entrepreneurial activity, would need to structure their practice as a corporation. Indeed, provincial governments have generally allowed regulated professionals to incorporate only since the year 2000.

By doing so, doctors, lawyers and others can take advantage of low corporate tax rates for “small business” instead of paying regular personal income tax rates on self-employment income. They can then transfer money from their private corporations to themselves, or to family members in lower tax brackets, as dividends that receive tax credits or as capital gains that are partially exempt from tax.