A new study shows the actual income of Canada's top earners is much greater than thought as many have been funnelling income through private corporations taxed at a much lower rate.
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Ultra-rich Canadians actually earning up to 71% more than thought

A new study shows the gap in income inequality in Canada is actually greater than previously thought.  Previously, studies looked only at individual tax returns which showed the top one percent earned ten percent of all income. In 2011 this figure remained unchanged from 2001.

The study shows however that many individuals were in fact setting up private companies due to the tax advantages. Income from those companies is not included in published material gathered from personal income tax returns meaning that income data for the rich has been long underestimated.

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The 2011 National Household listed some 272,000 Canadians as being in the top one percent of earners. A new study shows that figure is almost certainly underestimated through funneling income through creation of private corporations © Canadian Press

The study, entitled “Piercing the Veil — Private Corporations and the Income of the Affluent” was completed by three of Canada’s leading researchers on income and inequality issues: Dr. Michael Wolfson of the University of Ottawa, and professors Mike Veall of McMaster University, and Neil Brooks of York University.

Wolfson said he realized years ago when he worked for the federal Finance Department that many individuals were setting up private companies – known for tax purposes as Canadian-controlled private corporations (CCPCs) – because there were numerous tax advantages to the structure.

In other words, the riches one percent in Canada took home an average of $500,200 in 2011 when the income from private corporations is added, which is 39 percent more than the $359,000 figure  from traditional tax data.

The study showed income figures for top 10 percent of earners increased by 16 percent when income from CPCC’s was included, the top one percent actual income figures grew by 39 percent, and the top 0.1 percent of wealthy saw their actual income figures grew from an average of $1.3 million to $2.1 million when income from CPCC’s was added, an increase of 55 percent. While the ultra-elite 0.01 wealthy in Canada saw their average reported income jump 71% from $4.7 million to $8 million when CPCC’s were added.

The report shows some Canadians have a stake in four or more CPCC’s

These can be set up by stores, restaurants, and often by doctors, lawyers, accountants and other professionals who incorporate their business activities, which means the corporation is paid income instead of having it paid directly to individuals as a salary

In an interview Wolfson said “You have people who would ordinarily be receiving a big salary and they’re able to flow their income through a company and they get to pay tax at 25 per cent or less rather than 50 per cent in the top marginal tax bracket.”

In the province of Ontario for example, if a CPCC is eligible for a small business deduction, it could be taxed at 15.5 percent and  if not, then at 26.5 percent, both of which are far lower than the top tax rate for individuals at 49.5 percent

Other advantages include income deferral, income splitting with a spouse, and reducing capital gains tax.

Wolfson says the researchers plan to dig a little deeper as it’s likely the top income earners are still being underestimated  due to the complexity of unraveling income from CPCC’s, especially when someone has a stake in several at once.

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