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OTTAWA (Reuters) - The Canadian government on Tuesday announced proposed tax reforms meant to close loopholes for those that use private corporations to reduce the amount of tax they pay as part of the Liberals' promise to end such tax breaks for the wealthy.
The government said in a consultation paper it will seek input on three specific tax practices to fix the unintended consequences of having a lower corporate tax rate than the personal tax rate, and encourage executives to reinvest profits in their companies.
While the government wants to prevent private companies from distributing income among family members to reduce their taxes, a practice known as "income sprinkling," changes would not affect public companies.
Prime Minister Justin Trudeau's Liberals won a surprise majority in 2015 on a pledge to cut taxes on the middle class while raising taxes on the wealthiest.
The issue of tax avoidance, where the wealthy use legal methods to reduce the amount of income tax they owe, has also become a key issue globally in the wake of the Panama Papers released last year which shone a spotlight on the use of offshore banking devices to hide wealth.
The Canadian government estimates the number of Canadian-controlled private corporations in Canada has increased to 1.8 million in 2014 from 1.2 million in 2001. An estimated 50,000 families are using income sprinkling to avoid an estimated C$250 million ($198 million) in net taxes.
Among the changes proposed, dividends and other income received by a family member may be subject to a reasonableness test that would evaluate the person's connection to the business.
The government is also taking aim at passive investment income, where money is held in a private corporation and is therefore taxed at a lower rate, and the practice of converting a corporation's income into capital gains, which are also taxed at a lower rate.
"We see these approaches to managing people's affairs through a private corporation as creating an unfair playing field," said Finance Minister Bill Morneau.
"We're trying to tighten these loopholes to make sure that it's fair."
The government said it will consult with the public until Oct. 2.
Reporting by Leah Schnurr; Editing by Phil Berlowitz