Piercing the Veil: Private Corporations and the Income of the Affluent

A great deal of attention has been given recently to trends in income inequality, especially to observations that the most dramatic changes have been occurring among the top 1 percent. The key source of data in Canada for these results is individuals' income tax returns. This study extends these analyses by considering the potentially important role played by private companies. Even though individual income tax data are based on an inclusive definition of income, that definition does not include economic income received via privately owned companies. Having a private company offers a number of benefits, especially limited liability. It further offers potentially significant income-tax-planning benefits, including access to lower effective income tax rates through the small business deduction, tax deferral, and opportunities for income splitting. The omission of such economic income means that estimates of inequality levels and trends may be significantly biased. This study draws on a new anonymous linkage of income tax returns filed by Canadian-controlled private corporations (CCPCs) with a sample of their owners' individual income tax returns under the authority and protection of the Statistics Act. We first describe the conceptualization of the role of private corporations in income inequality analysis, and the methods adopted for this study. We present our initial results, including the extent of use of private corporations in various forms, and the impacts on measured income inequality, especially in the upper tail of the distribution. In sum, top income shares are significantly higher when CCPC incomes are included.