The benefits of small-business income splitting, also known as income sprinkling, are concentrated amongst Canada’s richest and not used by the vast majority of families declaring small business income, according to new myth-busting research from the Canadian Centre for Policy Alternatives (CCPA).
The report examines one of the federal government’s proposed reforms to Canadian Controlled Private Corporation (CCPC) tax rules—closing the income-splitting loophole—in order to determine the main beneficiaries of the policy, and who would be affected by its reform.
“Our estimates show that only five per cent of families receiving small business dividends are actively using income splitting—which means only 0.3 per cent of all Canadian families are impacted,” says the report’s author, CCPA Senior Economist David Macdonald. “Closing the income-splitting loophole will have almost no impact on small business families, much less Canadian families in general.”
Traditional small businesses like family farms and mom-and-pop restaurants are 2.5 times less likely to benefit from income sprinkling than high-earning professionals in the health care, legal and accounting, real estate and insurance industries.
The report reveals several surprising numbers:
At least 87 per cent of all small business families receive no net benefit from income splitting;
At most 13 per cent of families could see a net benefit from income splitting, but that assumes they all fail the new “reasonableness test” on dividends. The report estimates that just five per cent of families would likely fail that test, and therefore be impacted by the reforms;
Middle class families receive only three per cent of the benefits of small-business income splitting, while the richest 10 per cent capture almost two-thirds (64 per cent) of the gains. The top five per cent of families receive around half of the tax benefit;
Male-headed families are much more likely to benefit than female-headed ones. Of the 117,000 families that could be seeing a net benefit from small business income splitting, only 2,000 of them are headed by women.
“Canada’s income-sprinkling rules don’t incentivize entrepreneurship, and don’t help the middle class or most small businesses,” Macdonald adds. “Closing this loophole is an important first step, but it must be part of a more ambitious package of reforms that ensure the tax system works for more than just a rich few.”