Author Topic: Small business tax reforms  (Read 9811 times)

Prairie Stash

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Re: Small business tax reforms
« Reply #50 on: October 13, 2017, 12:04:30 PM »
Your post raised these facts.

1) If they took away your UCCB it was replaced with the CCB, unless you're earning over $200K/year. CCB is income based, its even higher if you have more than a single child that was eligible for UCCB.
2) You are the sole breadwinner, your wife is a SAHP.
3 You chose to have annual expenses of $80k/year requiring a nest egg of 2.5 million.
4) TFSA was a single year at $10,000. At the time you had $20,000 in room (wife and you), $23,000 in RRSP and the rest in retained earnings. That year you saved a minimum of $43,000 in deferred accounts if you hit the limit. Again, it was a single year and you knew it at the time, you are a smart individual so don't pretend otherwise.
5) You are actually a wage earner and not a small business at all. You incorporated to shelter your taxable investment account, since you are a high income individual. You created no jobs nor provided services from your company, it was merely structured to avoid tax. The company you were a partner in created a job for you and many others.

Did I get all the points correctly? If we are to discuss this at all its important that we understand the situation correctly. This is what I read, I hope I got it right.

Regarding point number 5, work does not grow on trees. Work is something one finds through building up a client base, keeping the competition from stealing those clients, and constantly keeping those clients happy or they walk. I am now in an employed position where I do not need my own clients, and it is infinitely less stressful. I have also seen people who worked in-house or in government try to make it in private practice. Most fail because they do not understand that clients are something you have to hustle for every single day, not something handed to you by some benevolent God.

Further regarding point number 5, no work means no money. There is no salary when one is a partner - there is only money brought in minus overhead. A slow year means no money.

As such, how is this not a business? Finding clients plus risk of non-payment equals business, no?

Anyways, I promised to stop venting and I will keep this promise. I have obsessed about retirement since my second day in the labour force (hence my being on this forum in the first place), so it's not surprising to took this a bit more personally than I should have.

And I don't miss running a business (or non-business according to point 5). In a way, this tax proposal validates a decision I had already made.
In point 5, I was talking about the your incorporated tax structure you use to shield your money from the tax man. It had nothing to do with your partnership, they paid out annually and you then put it in a second business, your own. Am I wrong? Do you not own an incorporated numbered company that all your partnership payouts flow to? It was a smart tax structure if you did, why I assume you did it. I'm bringing you back in because you are the only example of this posted so far, its not personal, this is a very obscure point that most people don't know even exists. Lots of small businesses were incorporated to hold investment accounts that can pay dividends out as corporate dividends instead of personal dividends, generally only the wealthiest bother with this. This allows payments to be paid out over decades instead of annually, at lower tax rates.

Since you are no longer part of the partnership, these changes shouldn't effect you, unless you have a numbered company shielding your taxable account....How exactly is that a business? I assume it exists, else you wouldn't be caring so much as a regular wage earner. As you pointed out, you are no longer in the partnership, you no longer are part of the company, you no longer should care about the tax rules inhibiting the growth of that company.

Among the protesters is an awful lot of people you can't purchase goods or services from, but somehow they claim to be a small business.

Prairie Stash

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Re: Small business tax reforms
« Reply #51 on: October 13, 2017, 12:11:38 PM »
The current proposals would generate no changes when passive earnings are reinvested in the corporation, I don't deny that.  The problem is when the funds are distributed out of the corporation.  Currently a portion of the corporate tax paid on passive income is refundable when distributed, by getting rid of the refundable portion the income would be taxed twice.  I don't think that is fair, nor do I think it aligns with the integration principles prevalent throughout most of our tax system.
Fascinating, so you really agree that the tax rules won't affect your business at all. Its sole effect is on your personal side, so we'll be in agreement here, that the tax rule won't effect businesses, just the owners income. A fine distinction, thank you for making it.

Kashmani

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Re: Small business tax reforms
« Reply #52 on: October 17, 2017, 01:53:05 PM »
Since you are no longer part of the partnership, these changes shouldn't effect you, unless you have a numbered company shielding your taxable account....How exactly is that a business? I assume it exists, else you wouldn't be caring so much as a regular wage earner. As you pointed out, you are no longer in the partnership, you no longer are part of the company, you no longer should care about the tax rules inhibiting the growth of that company.

Among the protesters is an awful lot of people you can't purchase goods or services from, but somehow they claim to be a small business.

I still have retained earnings. Being a good Mustachian, I lived frugally and saved, so the kitty is still there. And here is my biggest point of frustration:

I myself, like many retired people who have a corporation, have retained earnings that need to be paid out by dividend. I was planning to do this over several years and then wind down the corporation. Arguably, it does not make sense to pay salary from a corporation that no longer carries on active business. However, it also does not make sense to pay everything out at once at pay at the top marginal rate.

The technical paper discusses the "reasonableness" test. How is that test supposed to work in a company that has several shareholders but otherwise has shut down operations? If nobody carries on active business any longer, do you get to choose who receives dividends? Or do they have to be equally distributed between shareholders? Or do you look back years as to who ran the business when it was still active, i.e., effectively apply the attribution rules? How the hell to you plan for this? All I see is a shot across the bow in the technical paper coupled to a very ambiguous term of "reasonableness". You cannot plan your financial affairs on such a concept. Even GAAR is a haven of clarity in comparison.

Sisko

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Re: Small business tax reforms
« Reply #53 on: October 18, 2017, 11:54:16 AM »
The technical paper discusses the "reasonableness" test. How is that test supposed to work in a company that has several shareholders but otherwise has shut down operations? If nobody carries on active business any longer, do you get to choose who receives dividends? Or do they have to be equally distributed between shareholders? Or do you look back years as to who ran the business when it was still active, i.e., effectively apply the attribution rules? How the hell to you plan for this? All I see is a shot across the bow in the technical paper coupled to a very ambiguous term of "reasonableness". You cannot plan your financial affairs on such a concept. Even GAAR is a haven of clarity in comparison.

It really calls into question what it means to own shares in a business. If you can't take dividends from your shares, then do you really own that business at all? I agree with all the ambiguity around "reasonableness" - even in my business, it's a 50/50 split of work with my wife right now, so there should be no problems with income splitting rules, but if one of us stops working on the business, then how do you decide what is a reasonable amount of dividends for the other person to take? This tax implications of this are huge, so clarity is needed.

The big news over the past couple days is that they've lowered the small business tax rate to 9%... that's good, it was even an election promise. It might even help some businesses a bit that need it to grow. The other news is on passive income, they'll only be taxed at absurd rates if the corporation makes over $50,000 in investment income per year. I'll likely never earn that much, so good news for my situation. Seems like a pretty small number of people that this rule will affect. You have to be small enough to benefit from the small business tax rate ($500,000 per year), but also have saved millions in the company to generate over $50,000 per year in passive income. Incorporated doctors are the main target?

The new income splitting/"sprinkling" rules are the ones that government seems to be holding on to. I guess that makes sense, they are the easiest to explain why they are "unfair". But it has nothing to do with good policy, it's all completely political. If government can implement the income splitting rules, they can claim that they have won their battle for the middle class. They can also say they fulfilled their election promise of lowering small business rate, thereby helping real small businesses.

In reality they caused a lot of uncertainty for small business in Canada, this will have a negative effect on growth. As for middle class fairness and tax revenue - they just increased the deficit because the cost of lowering small business tax rate will be much higher than any money they collect from the other changes (especially after including cost of enforcing the new rules).

Missy B

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Re: Small business tax reforms
« Reply #54 on: October 19, 2017, 09:41:28 PM »
I'll be loaning myself money, investing it personally, and paying it back as required.
I've never tried that, I thought the rule is that if you don't pay it back within one year, CRA considers that it was income. So consequences of screwing it up would be disastrous. I figured CRA would frown at loaning myself all of the businesses retained earnings and then paying it back the next year, only to repeat the same pattern year after year. If that strategy were viable, no one would care about the new passive investment tax?


Yes - to be precise, the rule is you must pay back by the end of the next fiscal year, or it will be declared income. So if your year end is Dec 31st, and you borrow money in January 2018, it has to be paid by Dec 31st of 2019. That means that, depending on when your borrow, you could get almost 2 years on the loan.

You can't give yourself rotating loans - when you pay off the 2018 loan in Dec 2019, any additional loans you made to yourself 2019 also have to be paid. Otherwise the govt will say you didn't really pay it back.

In addition, it means either liquidating your holdings at least every two years -or- borrowing a lot of money on margin to pay the loan back. In a down market, that's risky. It means you keep an eye on your investments personally, and quite frankly most business owners, like most people, can't be bothered. It also means taking capital gains regularly, also eligible dividends in your investment account. For someone who is already paying themselves very well out of their corporate earnings, that may not be something they want.
And I don't disagree that taking our your entire corp's capital every year for a personal loan year after year -- even following the rules exactly -- would look sketchy. I haven't found what if any other rules they apply to that situation. Personally, I'm not looking at taking everything out every year, or doing loans over a long time frame.

scottish

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Re: Small business tax reforms
« Reply #55 on: October 20, 2017, 07:39:04 PM »
I was reading this quote in the globe and mail:

Quote
Trudeau seemingly doubled-down on the comments when pressed about them in Edmonton on Wednesday, saying that several studies have shown that more than half of small business owners are "high net worth individuals who incorporate...to avoid paying as high taxes as they otherwise would."

and I have to wonder if it should have read:

Quote
more than half of high net worth individuals incorporate to avoid paying taxes.

Personally, I have faith in the Liberals good intentions to help the middle class.    I have much less faith in the government's ability to execute and deliver on those good intentions.   Heh, or any intentions!   


Stasher

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Re: Small business tax reforms
« Reply #56 on: October 21, 2017, 11:58:18 AM »
Personally, I have faith in the Liberals good intentions to help the middle class.    I have much less faith in the government's ability to execute and deliver on those good intentions.   Heh, or any intentions!

Typically this is our worry with government, I have always stated I support taxation that makes sense but always fear the mismanagement of it.

Prairie Stash

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Re: Small business tax reforms
« Reply #57 on: October 23, 2017, 09:49:39 AM »
Since you are no longer part of the partnership, these changes shouldn't effect you, unless you have a numbered company shielding your taxable account....How exactly is that a business? I assume it exists, else you wouldn't be caring so much as a regular wage earner. As you pointed out, you are no longer in the partnership, you no longer are part of the company, you no longer should care about the tax rules inhibiting the growth of that company.

Among the protesters is an awful lot of people you can't purchase goods or services from, but somehow they claim to be a small business.

I still have retained earnings. Being a good Mustachian, I lived frugally and saved, so the kitty is still there. And here is my biggest point of frustration:

I myself, like many retired people who have a corporation, have retained earnings that need to be paid out by dividend. I was planning to do this over several years and then wind down the corporation. Arguably, it does not make sense to pay salary from a corporation that no longer carries on active business. However, it also does not make sense to pay everything out at once at pay at the top marginal rate.

The technical paper discusses the "reasonableness" test. How is that test supposed to work in a company that has several shareholders but otherwise has shut down operations? If nobody carries on active business any longer, do you get to choose who receives dividends? Or do they have to be equally distributed between shareholders? Or do you look back years as to who ran the business when it was still active, i.e., effectively apply the attribution rules? How the hell to you plan for this? All I see is a shot across the bow in the technical paper coupled to a very ambiguous term of "reasonableness". You cannot plan your financial affairs on such a concept. Even GAAR is a haven of clarity in comparison.
I think we're getting to the heart of the issue. If you retain earnings to help your company grow, most people agree that's reasonable. If you retain earnings as a tax shelter, with no regard to helping the business, that's not a business decision at all. You mistake your financial affairs as the same as the business, you crossed the line there. A business isn't your affairs, otherwise you wouldn't have incorporated. If the nuance is being lost, people forget the price of incorporation and forget that its not just bankruptcy protection they get.

I agree that it sucks that the rules are changing. I don't think the situation should have been allowed to happen to begin with. When you incorporated though you agreed the business must act as an entity unto itself and all decisions must be made to benefit the business. That's the point of incorporating, it becomes a separate entity, it can go bankrupt without taking out your personal property. When the line between business and owners becomes blurred and the business is making decision that don't benefit itself, that's a problem. For example, can you explain the benefit to the company of having additional ongoing paperwork due to retained earnings? From the business perspective the cheapest and best solution is to pay you out immediately, but that would incur a huge tax penalty to you, which is bad for you, but doesn't matter to the business. Pretty much every answer involves personal benefit, rarely can the case be made to show that it benefits the company.

scottish

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Re: Small business tax reforms
« Reply #58 on: October 23, 2017, 03:45:40 PM »
Really?   I remember being told many many times at work that our objective is to build shareholder value.

I don't believe corporations have any strict mandate to grow and grow.

Prairie Stash

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Re: Small business tax reforms
« Reply #59 on: October 23, 2017, 05:28:28 PM »
Really?   I remember being told many many times at work that our objective is to build shareholder value.

I don't believe corporations have any strict mandate to grow and grow.
Fair enough, I still can't find the value of a company depleting its assets to zero with out ever providing a goods or service. At least a company that can sell me a service I understand, in this case I couldn't buy his service or a product from his company.

Shareholders aren't the only ones at the table, on the other side of the legal contract of incorporation is the Government of Canada. It probably takes the view that all companies will strive (often failing) to increase the output and provide increasing tax revenues (rarely do they set out with the intention that the company will be designed to fail, that usually only happens after large bailouts). In this case the incorporated structure takes the opposite approach, its active mission is to reduce government revenues, it provides no other services. I wonder why any government would allow such tax breaks to the wealthy to occur? What benefit to Canada is there in companies with the sole intent to fail?

I think most people would agree that small businesses seek to create jobs, provide services, sell goods or something along those lines. Starting companies to avoid taxes, that seems a little dodgy to most.

Kashmani

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Re: Small business tax reforms
« Reply #60 on: December 15, 2017, 10:49:35 AM »
Well, the reasonableness criteria have now been released. The implication is that Kashmani will pay about $50K more in taxes in winding down the professional corp for good, thus delaying retirement a full year.

Despite a corporation no longer being active (thus nobody really contributing anything), attribution rules still apply because of a five-year lookback. The only exception is age 65 and older. Given my  medical history, it's a crapshoot if I will even see that age, plus it's still 26 years into the future. Genetic robustness is not exactly my strong suit.

On the same day the criteria were released, mother-in-law (who is a financial basketcase) starts asking to borrow $250 to tide her over the latest financial emergency.

Lovely day. Cannot decide whether the message is that the universe wanted me to stay in private practice to be able to bail out irresponsible parents or in-laws or whether the universe is trying to punish me for having done it in the first place, hence the tax changes.

How long does it take until the feeling of dejection passes?


Lews Therin

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Re: Small business tax reforms
« Reply #61 on: December 15, 2017, 11:17:20 AM »
That's a bummer Kash, sucks to see you had a plan, and now get caught in them changing the rules.

Koogie

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Re: Small business tax reforms
« Reply #62 on: December 15, 2017, 01:09:24 PM »
Well, the reasonableness criteria have now been released. The implication is that Kashmani will pay about $50K more in taxes in winding down the professional corp for good, thus delaying retirement a full year.

Despite a corporation no longer being active (thus nobody really contributing anything), attribution rules still apply because of a five-year lookback. The only exception is age 65 and older. Given my  medical history, it's a crapshoot if I will even see that age, plus it's still 26 years into the future. Genetic robustness is not exactly my strong suit.

On the same day the criteria were released, mother-in-law (who is a financial basketcase) starts asking to borrow $250 to tide her over the latest financial emergency.

Lovely day. Cannot decide whether the message is that the universe wanted me to stay in private practice to be able to bail out irresponsible parents or in-laws or whether the universe is trying to punish me for having done it in the first place, hence the tax changes.

How long does it take until the feeling of dejection passes?

+1     ...  Most disheartening.   Further disincentive.    Who really cares anymore.  Let someone else do it, I say.  Greater fool theory.

joonifloofeefloo

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Re: Small business tax reforms
« Reply #63 on: December 16, 2017, 12:38:10 PM »
Following.

Kashmani

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Re: Small business tax reforms
« Reply #64 on: December 17, 2017, 06:14:09 AM »
Here are the actual proposed changes to the ITA:

http://canada.ca/en/revenue-agency.html

Sisko

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Re: Small business tax reforms
« Reply #65 on: January 13, 2018, 11:14:21 AM »
Sure please tell us more.
Using the dividend strategy I outlined before - $30,000 per person, per year of ineligible dividends results in almost no additional taxes (less than 2%). That seems hard to beat. But I've never heard of a "monthly payment program", what is it?

RichMoose

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Re: Small business tax reforms
« Reply #66 on: January 13, 2018, 11:29:12 AM »
Sure please tell us more.
Using the dividend strategy I outlined before - $30,000 per person, per year of ineligible dividends results in almost no additional taxes (less than 2%). That seems hard to beat. But I've never heard of a "monthly payment program", what is it?
I'm guessing he's talking about a creative use of shareholder loans using the Sec 20 provision. You can roll it over and over. But it's not going to result in much tax savings in your situation.
It might give some estate benefits but that's dependant on your bigger financial picture. You can talk to any CPA about this...
Unfortunately @petersingleton seems to have found MMM to try promote his business rather than being a meaningful contributor.
« Last Edit: January 13, 2018, 10:37:34 PM by Mr. Rich Moose »

Sisko

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Re: Small business tax reforms
« Reply #67 on: January 13, 2018, 09:11:33 PM »
Yeah, I guess 1% refers to the amount of interest that shareholder has to pay company (which will likely go up with interest rates eventually).

You're right about @petersingleton - he sent me PM with the same copy and paste sales pitch that he posted in other threads.

Beard N Bones

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Re: Small business tax reforms
« Reply #68 on: February 05, 2018, 09:15:18 AM »
I have found this thread to be extremely interesting.  Certainly different viewpoints.  I certainly resonate with Kashmani and others that challenge/question the tax proposals/changes.
I think it is really easy for non-professionals and non-farmers and others that cannot incorporate to tow the Liberal line regarding tax reforms.  Those that are unhappy with the changes have good reason to.  Many of the arguments have been already been touched on.  I think the biggest issue that I have with changes has to do with incentive.

From a tax standpoint (financial) and geographical standpoint, there is no financial incentive to be a medical doctor, lawyer, optometrist, judge, dentist, medical specialist or any other professional in Canada.  When my father asked if I would do the 7 years education again to work as a health care professional, I couldn't answer one way or the other - I probably wouldn't.  I don't think I will encourage (or discourage) my kids to go that route.  To give up/"sacrifice" 7 years of my life, busting my b@lls so that I can put a designation behind my name, and end up with more than $100,000 in student loans (tuition alone was greater than $21,000/yr), is not ideal if financial independence is the goal.  I would argue that going down the Frugal Toque, MMM, Mr. Rich Moose or Prairie Stache road and getting a high paid tech job (or the like) after getting far less education is far more advantageous if you are wanting to be FI by 30. 

And for a professional to be heavily taxed on the income they are finally able to make, certainly doesn't put them at an advantage over others who haven't had to do the schooling and the loans.  It doesn't surprise me then, to see most health professionals in our health region, move to other locations, largely due to higher wages and less taxes.  This was the case for my late aunt who was a nurse in Hawaii.  This was also the case for an uncle who was a chiropractor that move to Seattle and then Spokane.  This was also the case for my other aunt who is an Ob-Gyn.  If the government gives you a salary of $300,000 but you can only net half of it, why wouldn't a person move to a location where you are taxed less and make more?!  So from a health professional standpoint, I would suggest that these changes will not save the government of Canada any money at all.  I'd guess our governments health care costs will increase because they will need to pay a higher wage to retain these professionals.   

joonifloofeefloo

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Re: Small business tax reforms
« Reply #69 on: February 05, 2018, 10:37:53 AM »
Yep.

And we certainly need a lot of reform in our health care system overall. We need more nondoctors allowed to do the social work, notes and documentation, referrals, and lab reqs that currently rely on doctors. That would let us see how many actual doctors we still need to do direct medical care. And then we need doctors to have more time per patient, more rest between shifts, and more continuing education so that each one's work is as up-to-date and effective as possible.

With the current shortage, I'd like to see more incentives for people to go into (and stay in) health care in Canada -so more trained immigrants approved more quickly, student loans written off after a period of work, etc.

My long-term doctor recently brought into his clinic a practitioner of some sort who can do a lot of the paperwork and so on. That leaves him more available for the direct medical care, and that's important.

I think everyone or no one should be able to hire domestic help and write it off, incorporated or not. And I would lean heavily toward "everyone." Create jobs, perhaps create incentives for domestic workers to be paid more, free more people up to focus on their (different) career.

RichMoose

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Re: Small business tax reforms
« Reply #70 on: February 05, 2018, 11:29:12 AM »
From a tax standpoint (financial) and geographical standpoint, there is no financial incentive to be a medical doctor, lawyer, optometrist, judge, dentist, medical specialist or any other professional in Canada.  When my father asked if I would do the 7 years education again to work as a health care professional, I couldn't answer one way or the other - I probably wouldn't.  I don't think I will encourage (or discourage) my kids to go that route.  To give up/"sacrifice" 7 years of my life, busting my b@lls so that I can put a designation behind my name, and end up with more than $100,000 in student loans (tuition alone was greater than $21,000/yr), is not ideal if financial independence is the goal.  I would argue that going down the Frugal Toque, MMM, Mr. Rich Moose or Prairie Stache road and getting a high paid tech job (or the like) after getting far less education is far more advantageous if you are wanting to be FI by 30. 

And for a professional to be heavily taxed on the income they are finally able to make, certainly doesn't put them at an advantage over others who haven't had to do the schooling and the loans.  It doesn't surprise me then, to see most health professionals in our health region, move to other locations, largely due to higher wages and less taxes.
I think you are not factoring in the whole picture. Of course if you want to be FI by 30, you shouldn't go to school/intern for 10 years. The best route might be to taken an apprenticeship in high school, get your ticket by 19, and be a plumber, electrician, welder, diesel mechanic, CNC machinist, HVAC tech, or the like and make $40/hour plus overtime. Some tech jobs like network pro or similar could also have you making $40/hour or more by 20 years old. If you are a really good saver, you will be rich by 30. If you are a great investor as well, you will live as good or better than your town doctor.

On the other hand, if you want to earn a high, stable income for 35-40 years, are not a great saver, and pursue a lavish lifestyle, you should become a doctor or dentist. In Canada the tuition for med school is cheap, especially factoring in the immense number of scholarships available at most schools for the average student. I know people who have gone through med school here in Alberta and came out debt-free including living expenses with no help from parents.

Once you grad, you immediately earn well into the 6-figures and your clientele is guaranteed due to the restrictive nature of the profession. You don't have to deal with the litigation & insurance nightmares of the U.S. and you still make a really good living. Most doctors live in upper-class neighbourhoods and have little to complain about. It is all but guaranteed you will retire a multi-millionaire. Best part, you only have one true client and the cheques never bounce.

In the U.S., many doctors (and other people who take extensive studies) have HUGE student loan debt. Malpractice insurance has gone nuts and dealing with healthcare insurance companies is a paper nightmare. They earn more money, but arguably have higher expenses and a less pleasant practice experience. It probably takes them a decade or more just to get out of the hole. Over a lifetime and all things considered, I bet the average doctor in the U.S. doesn't do much better than one in Canada.

Now, if you are in Canada and do your med school here taking advantage of the government subsidized education, then move to the U.S. once certified to earn more, thank your Canadian tax payers...

I don't like high taxes as much as the next guy, but I think it's ridiculous that someone can avoid those taxes just by incorporating even though they are hardly running a real corporation in the more traditional sense of the word. It is morally wrong and unfair. I don't care if you are a political "special" like doctors and farmers.

In my view, the government should reduce income taxes for all, spend a lot less, and restrict incorporation to businesses with multiple arms-length shareholders who have no meaningful impact on day-to-day business decisions. It would make businesses more accountable and our society better off. However, this will probably never happen in the forseeable future as there are too many vested interests and just 2 (or 3) real political options who all follow the same broader mindset with a few twists to appeal to their little electorates.

Stasher

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Re: Small business tax reforms
« Reply #71 on: February 05, 2018, 11:44:27 AM »
In my view, the government should reduce income taxes for all, spend a lot less, and restrict incorporation to businesses with multiple arms-length shareholders who have no meaningful impact on day-to-day business decisions. It would make businesses more accountable and our society better off. However, this will probably never happen in the forseeable future as there are too many vested interests and just 2 (or 3) real political options who all follow the same broader mindset with a few twists to appeal to their little electorates.
Love it !  (and agree with the rest of your post)

Beard N Bones

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Re: Small business tax reforms
« Reply #72 on: February 05, 2018, 03:49:18 PM »
From a tax standpoint (financial) and geographical standpoint, there is no financial incentive to be a medical doctor, lawyer, optometrist, judge, dentist, medical specialist or any other professional in Canada.  When my father asked if I would do the 7 years education again to work as a health care professional, I couldn't answer one way or the other - I probably wouldn't.  I don't think I will encourage (or discourage) my kids to go that route.  To give up/"sacrifice" 7 years of my life, busting my b@lls so that I can put a designation behind my name, and end up with more than $100,000 in student loans (tuition alone was greater than $21,000/yr), is not ideal if financial independence is the goal.  I would argue that going down the Frugal Toque, MMM, Mr. Rich Moose or Prairie Stache road and getting a high paid tech job (or the like) after getting far less education is far more advantageous if you are wanting to be FI by 30. 

And for a professional to be heavily taxed on the income they are finally able to make, certainly doesn't put them at an advantage over others who haven't had to do the schooling and the loans.  It doesn't surprise me then, to see most health professionals in our health region, move to other locations, largely due to higher wages and less taxes.
I think you are not factoring in the whole picture. Of course if you want to be FI by 30, you shouldn't go to school/intern for 10 years. The best route might be to taken an apprenticeship in high school, get your ticket by 19, and be a plumber, electrician, welder, diesel mechanic, CNC machinist, HVAC tech, or the like and make $40/hour plus overtime. Some tech jobs like network pro or similar could also have you making $40/hour or more by 20 years old. If you are a really good saver, you will be rich by 30. If you are a great investor as well, you will live as good or better than your town doctor.
I certainly am factoring in the whole picture!  (How am I not factoring the whole picture?!  From where do you get a fuller picture than I do?)
My main points in summary are: (and a few I touched on in my previous comment).
1.  There is very little incentive to be a professional in Canada from a taxation standpoint.
2.  There is no way a person can be financially independent and retire early (before 35 yoa) as a doctor, lawyer, etc.
3.  Even on this thread, there are some that poo-poo high income earners getting a perceived advantage in the way they are taxed.  (This thought at its extreme would be socialism/leftism/welfarism, correct?)  Hey, these people will pay more tax than you will in your lifetime, and at a higher tax percentage - Income Splitting present or absent!
4.  And those that complain about these perceived advantages haven't had to put in the time (7 years +), energy (required to learn immense body of knowledge) and resources ($10,000 - $35,000 in Canadian institutions) to obtain the privilege of earning high incomes that these professions get.
5.  If the time, energy, and resources are used to get a job that is high paying, why are they getting "punished" with very high taxes?  If your money was taxed at a 48% rate, you'd be pissed - and looking for ways to lower it as well. 
All this to say, why put in the time, energy and resources in being a doctor, lawyer, etc when you can be a plumber and do just as well financially in this country? (If FREEDOM and TIME is the goal, you'd certainly be better off being something other than a professional that can incorporate - this assumes the same spending habits of all earners, those incorporated and otherwise). 

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On the other hand, if you want to earn a high, stable income for 35-40 years, are not a great saver, and pursue a lavish lifestyle, you should become a doctor or dentist. In Canada the tuition for med school is cheap, especially factoring in the immense number of scholarships available at most schools for the average student. I know people who have gone through med school here in Alberta and came out debt-free including living expenses with no help from parents. 
Hey man, its not about the lavish lifestyle.  We are on the MMM forum.  I'm here because I think a frugal lifestyle is far more beneficial than a lavish one. “If you buy things you don’t need, soon you will have to sell things you need.” Warren Buffet  Living frugally allows a person to buy time and freedom.  The process for your friends to become MDs required more than just money - its time and their freedom.  Giving up time and freedom to a job/profession doesn't sit well with most mustachians.  Does it for you?  So then why not thank the high wage earner for the time, energy and money they've put into their job/profession, and the contribution they are making to society, and allow them the "benefit" of income sprinkling?
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Once you grad, you immediately earn well into the 6-figures and your clientele is guaranteed due to the restrictive nature of the profession. You don't have to deal with the litigation & insurance nightmares of the U.S. and you still make a really good living. Most doctors live in upper-class neighbourhoods and have little to complain about. It is all but guaranteed you will retire a multi-millionaire.
You may be surprised how much litigation and malpractice insurance a professional needs to carry in this country.  But yes, you are right, the legal costs are lower here in Canada.  I think the care in the US is often legal-centric and not as patient-centric as it could be (as it is in Canada). 
Just because you make 6-figures and live in an upper-class neighbourhood, doesn't mean you will be guaranteed a retirement as a multi-millionaire.  A person who makes $20,000 and spends $20,000, is just as wealthy as a person who makes $2 mill and spends $2 mill. 
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Best part, you only have one true client and the cheques never bounce.
  Does big brother pay you?  I'm happy I am not fee for service and getting paid by the government.  I've experienced that, and I am better off without it!
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In the U.S., many doctors (and other people who take extensive studies) have HUGE student loan debt. Malpractice insurance has gone nuts and dealing with healthcare insurance companies is a paper nightmare. They earn more money, but arguably have higher expenses and a less pleasant practice experience. It probably takes them a decade or more just to get out of the hole. Over a lifetime and all things considered, I bet the average doctor in the U.S. doesn't do much better than one in Canada.
  I'd bet you are wrong.  The reason MMM himself went to the States was the increased wages he could get there, and the favourable tax situation the States has.  Even if a MD graduated in the US with twice the debt, they have far greater capacity to pay it off far quicker.  Isn't it true that a high savings rate is the most important factor that determines when they can retire/become FI?
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I don't like high taxes as much as the next guy, but I think it's ridiculous that someone can avoid those taxes just by incorporating even though they are hardly running a real corporation in the more traditional sense of the word. It is morally wrong and unfair. I don't care if you are a political "special" like doctors and farmers. 
In my view, the government should reduce income taxes for all, spend a lot less, and restrict incorporation to businesses with multiple arms-length shareholders who have no meaningful impact on day-to-day business decisions. It would make businesses more accountable and our society better off. However, this will probably never happen in the forseeable future as there are too many vested interests and just 2 (or 3) real political options who all follow the same broader mindset with a few twists to appeal to their little electorates.
I'm good with paying taxes.  Taxes benefit society as a whole.  But note that high wage earners are still getting taxed at a high rate.  Income sprinkling helps soften the blow.  But they are still getting kicked in the @$$ when they make the money, and then later on in life when they retire and withdraw their investment income.  Over the course of their life they will still be taxed far greater than the "average" Canadian, and at a higher overall percentage.  From a pure financial perspective, this fact does not encourage a person to excel in their job pursuits and take risks to better their lives or the lives of those around them - and make a large wage in doing so.

Regarding "morally wrong and unfair."  You would do well to explain that. 
I don't see how allowing a group of people to Income Sprinkle so that they aren't getting absolutely punished for doing well in life is an issue of morality.  If it would be, having some Canadians (usually minorities, the lazy, or the like) gaming the Canadian society through handouts (ex. refugees, welfare, Ambulance taxi service, extra RESP contribution for the "low income", "emergency-I've-got-a-cough-and-slightly-sore-throat" health care, etc) would be a far greater issue of moral "wrongness." 

Regarding "our society better off."  Our society would be better off if a person was encouraged to excel in their work, in their knowledge, in their financial well being. 
Our society/government does us no favour when every child is given a medal for playing a sport, win or lose; or kids pushed through the school system and telling every single one of them they can be whatever they want to be; or telling people that pumping gas is just as valuable a job as diagnosing and treating people's problems - and telling them as much by the wages/benefits earned and taxes/no taxes issued.

daverobev

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Re: Small business tax reforms
« Reply #73 on: February 05, 2018, 04:38:43 PM »
@ Beard N Bones: You do know we have a progressive tax system, right? High income earners pay more in tax yes, but they still get more money than those that earn less (excluding some very small ranges with clawbacks)?

So you're earning $300k and have to pay 50% on some of that. Um. Nice problem to have.

Income sprinkling is bullshit. If you employ your SO, they should work. If they work to keep your house running smoothly... well, that's cool. But no, you can't just pass $40k of dividends to them and pay no tax at all. You, the Professional, did the work. You charged christ knows what an hour. You pay the tax. Or, perhaps, in a roundabout way - maybe make a proposal to the government that they do NOT do away with income sprinkling, but all healthcare people cut their prices by 20% instead because they can?

RichMoose

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Re: Small business tax reforms
« Reply #74 on: February 06, 2018, 07:27:45 AM »
I'm good with paying taxes.  Taxes benefit society as a whole.  But note that high wage earners are still getting taxed at a high rate.  Income sprinkling helps soften the blow.  But they are still getting kicked in the @$$ when they make the money, and then later on in life when they retire and withdraw their investment income.  Over the course of their life they will still be taxed far greater than the "average" Canadian, and at a higher overall percentage.  From a pure financial perspective, this fact does not encourage a person to excel in their job pursuits and take risks to better their lives or the lives of those around them - and make a large wage in doing so.

Regarding "morally wrong and unfair."  You would do well to explain that. 
I don't see how allowing a group of people to Income Sprinkle so that they aren't getting absolutely punished for doing well in life is an issue of morality.  If it would be, having some Canadians (usually minorities, the lazy, or the like) gaming the Canadian society through handouts (ex. refugees, welfare, Ambulance taxi service, extra RESP contribution for the "low income", "emergency-I've-got-a-cough-and-slightly-sore-throat" health care, etc) would be a far greater issue of moral "wrongness." 

Regarding "our society better off."  Our society would be better off if a person was encouraged to excel in their work, in their knowledge, in their financial well being. 
Our society/government does us no favour when every child is given a medal for playing a sport, win or lose; or kids pushed through the school system and telling every single one of them they can be whatever they want to be; or telling people that pumping gas is just as valuable a job as diagnosing and treating people's problems - and telling them as much by the wages/benefits earned and taxes/no taxes issued.
I already agreed with you on the points of which path to take to get FI the fastest. But I'll try to explain my thought process on the morally wrong and unfair part.

Adam and Bob are brothers. Both went to college and got an undergrad degree in science. Adam went to med school to become a doctor, Bob went to grad school and became a PhD physicist. Adam graduated, opened his office, incorporated himself and makes $250,000 a year after office expenses. He gets a cheque in the mail every month from the government. Bob works at a research lab and makes $250,000 a year as a head researcher. He gets a cheque bi-weekly from his employer. Both are married and have the same number of kids. They live in the same town/province.

Could you please explain why Adam deserves to pay less tax than Bob?

Beard N Bones

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Re: Small business tax reforms
« Reply #75 on: February 06, 2018, 08:40:47 AM »
I'm good with paying taxes.  Taxes benefit society as a whole.  But note that high wage earners are still getting taxed at a high rate.  Income sprinkling helps soften the blow.  But they are still getting kicked in the @$$ when they make the money, and then later on in life when they retire and withdraw their investment income.  Over the course of their life they will still be taxed far greater than the "average" Canadian, and at a higher overall percentage.  From a pure financial perspective, this fact does not encourage a person to excel in their job pursuits and take risks to better their lives or the lives of those around them - and make a large wage in doing so.

Regarding "morally wrong and unfair."  You would do well to explain that. 
I don't see how allowing a group of people to Income Sprinkle so that they aren't getting absolutely punished for doing well in life is an issue of morality.  If it would be, having some Canadians (usually minorities, the lazy, or the like) gaming the Canadian society through handouts (ex. refugees, welfare, Ambulance taxi service, extra RESP contribution for the "low income", "emergency-I've-got-a-cough-and-slightly-sore-throat" health care, etc) would be a far greater issue of moral "wrongness." 

Regarding "our society better off."  Our society would be better off if a person was encouraged to excel in their work, in their knowledge, in their financial well being. 
Our society/government does us no favour when every child is given a medal for playing a sport, win or lose; or kids pushed through the school system and telling every single one of them they can be whatever they want to be; or telling people that pumping gas is just as valuable a job as diagnosing and treating people's problems - and telling them as much by the wages/benefits earned and taxes/no taxes issued.
I already agreed with you on the points of which path to take to get FI the fastest. But I'll try to explain my thought process on the morally wrong and unfair part.

Adam and Bob are brothers. Both went to college and got an undergrad degree in science. Adam went to med school to become a doctor, Bob went to grad school and became a PhD physicist. Adam graduated, opened his office, incorporated himself and makes $250,000 a year after office expenses. He gets a cheque in the mail every month from the government. Bob works at a research lab and makes $250,000 a year as a head researcher. He gets a cheque bi-weekly from his employer. Both are married and have the same number of kids. They live in the same town/province.

Could you please explain why Adam deserves to pay less tax than Bob?

It has everything to do with risk
Adam has greater risk from where he is getting paid.  Adam getting paid by the government - not a guarantee as you probably assume.  Bob has his employer - and many other employers out there - that are willing to pay for his services.
Adam has greater risk in his job than Bob.  My uncle was a researcher at the UofS in the oncology department.  He said that approx. 20% of medical specialist are not working in the medical field after 5 years because they don't have the work/clients/patients.  I haven't felt the need to verify this info, but have no reason to doubt what he said.  Certainly this would apply to professionals that are self employed/fee-for-service.
Adam is taking on far greater risk.  The success of his business is solely dependent on himself.  Not the case with Bob.
Bob will have sick benefits, maternity leave, and a pension.  Adam has to pay for them himself.
Adam needs to pay for his own Disability Insurance/Disability.  Bob does not - his employer does.

I'm confident that most people get hung up on the idea of Professional Incorporating and Income Sprinkling because they don't make the wages that they do.  And when they hear about income sprinkling, they think that these "rich people" are paying far less tax than they are - which would be false.  I am comfortable saying that income splitting is less "immoral" than people leaching from our beautiful country by: choosing welfare because they don't want to work; by living off of Child Benefits rather than their own income or investment income; or choose to bank on Old Age Security rather than their own retirement income. 

Thank you for your scenario Mr. Moose.  I do see where you are coming from.  But I would suggest to you that your hypothetical scenario is still a good example as to why one should be able to incorporate, and the other not. 

Beard N Bones

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Re: Small business tax reforms
« Reply #76 on: February 06, 2018, 08:56:43 AM »
@ Beard N Bones: You do know we have a progressive tax system, right?

Yes, I'm acutely aware of how this tax system works daverobey.  I am heavily invested in the Government of Canada.  I pay big money into it every year.  This helps the government pay you your high level of Child Benefits because you choose not to work.  It also helps the government pay your higher level of OAS because you are considered a "recent resident."  Welcome to Canada, enjoy your stay!  [/s]
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High income earners pay more in tax yes, but they still get more money than those that earn less (excluding some very small ranges with clawbacks)?
And why shouldn't they earn more?  As I've said, they've put in the time, energy and finances to do so.  You obviously don't understand what that entails, and you aren't planning for your kids to excel in their post-secondary education and obtain an MD, lawyer, dentist, optomotrist, etc designation.  I get the impression you would be a person to enjoy the benefits of high quality care and service, but complain about the cost to get that high quality of care and service. 
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So you're earning $300k and have to pay 50% on some of that. Um. Nice problem to have.

Income sprinkling is bullshit. If you employ your SO, they should work. If they work to keep your house running smoothly... well, that's cool. But no, you can't just pass $40k of dividends to them and pay no tax at all. You, the Professional, did the work. You charged christ knows what an hour. You pay the tax. Or, perhaps, in a roundabout way - maybe make a proposal to the government that they do NOT do away with income sprinkling, but all healthcare people cut their prices by 20% instead because they can?
You gave an emotional, non-logical response to comments that I previously made.  It didn't add to the discussion.  Consider adding to the discussion next time by addressing the points that I made.  Or the points that Maverick1 made.  Or the points that Kashmani made.  See Mr. Rich Moose's response - it was meaningful and thoughtful.  Consider going for a ride in your new car to cool off.  Or, maybe play a video game instead while you count your Child Benefit money?

joonifloofeefloo

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Re: Small business tax reforms
« Reply #77 on: February 06, 2018, 09:10:51 AM »
...the government pay you your high level of Child Benefits because you choose not to work.

These examples...  This one and ones you presented earlier...

I need to speak up here. Many of us work AND receive child tax benefits, etc. This is because our wages or salaries are wildly low, not because we are lazy. When I worked 50-70 hours per week (before my child was born, after which I reduced my out-of-home hours), I was paid $300/mo directly and $1100/mo all told. This is also true for many workers taking risks (entrepreneurs, etc), the people producing our food, etc.

The government pays doctors, and it pays its social workers, teachers, fruit pickers, entrepreneurs, etc -just not always through large direct "paycheques." i.e., Some of the payments are indirect, through other government pay programs. How our paycheques are organized and administered does not correlate with our ethics, work effort, etc.

RichMoose

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Re: Small business tax reforms
« Reply #78 on: February 06, 2018, 09:17:05 AM »
I already agreed with you on the points of which path to take to get FI the fastest. But I'll try to explain my thought process on the morally wrong and unfair part.

Adam and Bob are brothers. Both went to college and got an undergrad degree in science. Adam went to med school to become a doctor, Bob went to grad school and became a PhD physicist. Adam graduated, opened his office, incorporated himself and makes $250,000 a year after office expenses. He gets a cheque in the mail every month from the government. Bob works at a research lab and makes $250,000 a year as a head researcher. He gets a cheque bi-weekly from his employer. Both are married and have the same number of kids. They live in the same town/province.

Could you please explain why Adam deserves to pay less tax than Bob?

It has everything to do with risk
Adam has greater risk from where he is getting paid.  Adam getting paid by the government - not a guarantee as you probably assume.  Bob has his employer - and many other employers out there - that are willing to pay for his services.
Adam has greater risk in his job than Bob.  My uncle was a researcher at the UofS in the oncology department.  He said that approx. 20% of medical specialist are not working in the medical field after 5 years because they don't have the work/clients/patients.  I haven't felt the need to verify this info, but have no reason to doubt what he said.  Certainly this would apply to professionals that are self employed/fee-for-service.
Adam is taking on far greater risk.  The success of his business is solely dependent on himself.  Not the case with Bob.
Bob will have sick benefits, maternity leave, and a pension.  Adam has to pay for them himself.
Adam needs to pay for his own Disability Insurance/Disability.  Bob does not - his employer does.

I'm confident that most people get hung up on the idea of Professional Incorporating and Income Sprinkling because they don't make the wages that they do.  And when they hear about income sprinkling, they think that these "rich people" are paying far less tax than they are - which would be false.  I am comfortable saying that income splitting is less "immoral" than people leaching from our beautiful country by: choosing welfare because they don't want to work; by living off of Child Benefits rather than their own income or investment income; or choose to bank on Old Age Security rather than their own retirement income. 

Thank you for your scenario Mr. Moose.  I do see where you are coming from.  But I would suggest to you that your hypothetical scenario is still a good example as to why one should be able to incorporate, and the other not.
Once again, you drift and fall to logical fallacies. No one here has talked about welfare, OAS, or CCB. You can always "win" an argument if you create worse strawman to compare.

In the private sector and public sector, there is no such thing as job security anymore. Employees get fired all the time for little reason. Pensions in the traditional sense are rare and even in the public sector are being whittled away. The co-pay's on public DB pensions are ridiculous because every public employee today is paying for the underfunded pensions of the former employees now drawing pensions. It's hardly the deal it once was and I can show you the math if you care. The insurances and other benefits you mention are at least 50% paid by the employee in many workplaces.

In many ways I would argue that in today's environment, it might actually be less risky to be self-employed than to be employed by another. Twenty-five or thirty years ago it was the other way around.

I'm not going to be the mosquito biting an iron bull. My point is simple. If two people walk away at the end of a year with the same take-home income and have the same family situation, they should pay the same amount of tax. Whether that's 10% or 50% makes no difference to my position.

I suspect that nothing is going to change your beliefs and that's OK. Judging by the emotional nature of your posts, I would not be surprised if you are a high-income incorporated individual yourself or have some similar vested interest. I'm not saying you shouldn't take advantage of a ridiculous system while it is in place (I do the same myself), but that doesn't mean I will defend it.

daverobev

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Re: Small business tax reforms
« Reply #79 on: February 06, 2018, 09:50:58 AM »
@ Beard N Bones: You do know we have a progressive tax system, right?

Yes, I'm acutely aware of how this tax system works daverobey.  I am heavily invested in the Government of Canada.  I pay big money into it every year.  This helps the government pay you your high level of Child Benefits because you choose not to work.  It also helps the government pay your higher level of OAS because you are considered a "recent resident."  Welcome to Canada, enjoy your stay!  [/s]
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High income earners pay more in tax yes, but they still get more money than those that earn less (excluding some very small ranges with clawbacks)?
And why shouldn't they earn more?  As I've said, they've put in the time, energy and finances to do so.  You obviously don't understand what that entails, and you aren't planning for your kids to excel in their post-secondary education and obtain an MD, lawyer, dentist, optomotrist, etc designation.  I get the impression you would be a person to enjoy the benefits of high quality care and service, but complain about the cost to get that high quality of care and service. 
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So you're earning $300k and have to pay 50% on some of that. Um. Nice problem to have.

Income sprinkling is bullshit. If you employ your SO, they should work. If they work to keep your house running smoothly... well, that's cool. But no, you can't just pass $40k of dividends to them and pay no tax at all. You, the Professional, did the work. You charged christ knows what an hour. You pay the tax. Or, perhaps, in a roundabout way - maybe make a proposal to the government that they do NOT do away with income sprinkling, but all healthcare people cut their prices by 20% instead because they can?
You gave an emotional, non-logical response to comments that I previously made.  It didn't add to the discussion.  Consider adding to the discussion next time by addressing the points that I made.  Or the points that Maverick1 made.  Or the points that Kashmani made.  See Mr. Rich Moose's response - it was meaningful and thoughtful.  Consider going for a ride in your new car to cool off.  Or, maybe play a video game instead while you count your Child Benefit money?

Your whole post is 'waah, waah, look at me - look at how much tax I pay'. You still get to keep more money.

I don't get any OAS because I'm not of the right age. Whether or not I'll be here to collect it, or be here to qualify for much of it - or even whether or not it'll be here when I get there - is something none of us knows.

I've paid plenty of tax in during the years I did work in Canada, thanks. I paid plenty of cap gains on stuff that 'had nothing to do with Canada', thanks.

CCB is far too generous. Far. However, like everyone who tries to - within the law - maximise what they get - I will absolutely get people to contribute to RRSPs to avail themselves of it.

Being a Doctor (etc) is a hard slog at the start, lots of hours, and lots of debt. BUT. Banks bend over backwards to give low rate loans knowing that same Doctor will one day be rich. Or, at the least, have a very sizeable disposable income.

It sounds to me like you're bitter because of the path you've chosen. You could've become a welder/plumber/whatever and retired already.

I'll say it again: The government needs to make it more sane for a person to go down the path of being a doctor (etc). But also make it less financially rewarding. Being a doctor is a great thing - it is a life's work, meaning etc. It should not be miserable during training, it should not be financially miserable during and after training. It should be a *very well* paid job. Like, $150k or something. Maybe a bit less.

Taxation should pay for doctors. I don't *personally* want to pay to see a doctor; I want my taxes over the years - remembering that there is more than just payroll tax - to be at the right level that I, and everyone else, should get top tier care. That's what society is *for*. Being a doctor is a virtuous and honourable profession (assuming no sellouts to big pharma...). But "and I can push a certain amount of my income off onto my spouse and pay less tax than an employee earning the same" is nonsense. Pure nonsense.

By the way: You don't "pay into the government" every year. That money is the government's, never yours. Also, Child Benefit is mostly coming from debt, not tax, so.. yeah. Again: CCB is far too generous. I do our tax returns, then money just appears in my bank account. What should I do - send it back?

Beard N Bones

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Re: Small business tax reforms
« Reply #80 on: February 06, 2018, 11:19:52 AM »
Once again, you drift and fall to logical fallacies.  No one here has talked about welfare, OAS, or CCB. You can always "win" an argument if you create worse strawman to compare.
My "argument"/reasoning has everything to do with risk and reward.  And I will stand on that reasoning alone.  The hypothetical scenario you presented to me was a good one.  I'm comfortable in saying it is a hypothetical scenario - and not so much a scenario based on reality.  The $250,000 employee is an exception/minority to the majority, no?  But it certainly made your point clear and I appreciate that. 

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In the private sector and public sector, there is no such thing as job security anymore. Employees get fired all the time for little reason. Pensions in the traditional sense are rare and even in the public sector are being whittled away. The co-pay's on public DB pensions are ridiculous because every public employee today is paying for the underfunded pensions of the former employees now drawing pensions. It's hardly the deal it once was and I can show you the math if you care. The insurances and other benefits you mention are at least 50% paid by the employee in many workplaces.

In many ways I would argue that in today's environment, it might actually be less risky to be self-employed than to be employed by another. Twenty-five or thirty years ago it was the other way around.
And this is where Maverick1, Kashmani, myself and most high wage earners would disagree with you I'd reckon.  It is easy for an employee to tell the self-employed individual that it is more risky being an employee.
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I'm not going to be the mosquito biting an iron bull. My point is simple. If two people walk away at the end of a year with the same take-home income and have the same family situation, they should pay the same amount of tax. Whether that's 10% or 50% makes no difference to my position.
And I respect your opinion.  Would you apply the same ideology to the refugee, the First Nations, and the low income earner - regardless of their high net worth? 
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I suspect that nothing is going to change your beliefs and that's OK. Judging by the emotional nature of your posts, I would not be surprised if you are a high-income incorporated individual yourself or have some similar vested interest. I'm not saying you shouldn't take advantage of a ridiculous system while it is in place (I do the same myself), but that doesn't mean I will defend it.
Hey man, you won't.  And I can't change your mind.  But a good discussion that gets to the heart of the matter is worth having!  I'm not too sure how you see my responses as being emotional.  Cause they ain't.  I'm truly content with my job, my place in life, and the taxes I pay.  I do have a high income wage.  I'm thankful for that.  I chose to join in on this conversation because there are a few people supporting the tax changes and others that don't.  I felt I could add a slightly different perspective to the discussion.  Maybe make people think about the way people get taxed and the benefits that are (partly) a spin-off because it it.  I don't have a professional corporation that has been Income Sprinkling.  Wouldn't that be nice though!  My vested interest is that I do have a high income.   

joonifloofeefloo

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Re: Small business tax reforms
« Reply #81 on: February 06, 2018, 11:48:52 AM »
If two people walk away at the end of a year with the same take-home income and have the same family situation, they should pay the same amount of tax. Whether that's 10% or 50% makes no difference to my position.
Would you apply the same ideology to the refugee, the First Nations, and the low income earner - regardless of their high net worth? 

What do you mean here, Beard N Bones? We're all taxed on income, as the money comes in each year. If any of us puts our after-tax income aside each year to build net worth, we've already paid the income taxes.

Beard N Bones

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Re: Small business tax reforms
« Reply #82 on: February 06, 2018, 12:20:34 PM »
... This is because our wages or salaries are wildly low, not because we are lazy. When I worked 50-70 hours per week (before my child was born, after which I reduced my out-of-home hours), I was paid $300/mo directly and $1100/mo all told. This is also true for many workers taking risks (entrepreneurs, etc), the people producing our food, etc.  ...How our paycheques are organized and administered does not correlate with our ethics, work effort, etc.
Yep, I agree with you.  I am very happy we have social programs like welfare, OAS, and the like.  They certainly help those that are truly in need.  I'm all for it. 
My contention is when there are people in society that "game the system" by trying to get whatever handouts they can (welfare, OAS, refugee benefits, etc) when they are fully able to provide an income to support themselves and their family (and their retirement).   

If two people walk away at the end of a year with the same take-home income and have the same family situation, they should pay the same amount of tax. Whether that's 10% or 50% makes no difference to my position.
Would you apply the same ideology to the refugee, the First Nations, and the low income earner - regardless of their high net worth? 
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What do you mean here, Beard N Bones? We're all taxed on income, as the money comes in each year. If any of us puts our after-tax income aside each year to build net worth, we've already paid the income taxes.

And so my other contention is with people who will argue against one exception/benefit the Canadian Government has made (in this case income sprinkling in professional corporations), and yet seem to be supportive of other benefits the Canadian Government has put into place (such as welfare, OAS, refugee benefits, First Nations benefits) because they have a vested interest or it suits their personal or political agendas.  The benefits the government has put into place are there for the betterment of the people (or they should be!)  I am okay with special circumstances or social programs.  If there are benefits for the minority groups, why not have an exception for a specific population that are high earners?  If someone has paid the price in time, effort and finances to allow them to make huge contributions to society and make a high income wage in doing so, why not make exceptions in the way they are taxed?

joonifloofeefloo

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Re: Small business tax reforms
« Reply #83 on: February 06, 2018, 12:44:12 PM »
Got it.

I see many of the exceptions (including those that apply to me) as bizarre and arbitrary. I accept all the ones offered to me, and am comfortable with anyone else doing likewise. Each of us experiences benefits from some programs and is excluded from others. Rarely is a system fair, or inclusive of everyone who needs it. That sucks, but with our current system, this is the crappy reality. And then each gift comes and goes, as different governments, laws, and policies change. I'm bummed when one goes (reduction in TFSA amount, for example) but, again, accept it.

My concern isn't with the level of exemptions and gifts for the regular Joe Blow, including a relatively high earning one. In my view, the overarching structure of our society is wasteful and inefficient. Until we clean up much larger funding pots -politicians' benefits; a massive business permitted to gift its top dogs generously before clearing its slate of responsibilities; ridiculous levels of administration of $3- I'm unconcerned with what happens in much smaller dollar amounts.

And I'm a huge fan of systems that support at least one adult to SAH as needed/desired, only because I see the acute difference this can make in an individual's or family's health, financial security, child rearing, etc. I expect these gains would save the country money as well.

Beard N Bones

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Re: Small business tax reforms
« Reply #84 on: February 06, 2018, 01:30:29 PM »
Got it.

I see many of the exceptions (including those that apply to me) as bizarre and arbitrary. I accept all the ones offered to me, and am comfortable with anyone else doing likewise. Each of us experiences benefits from some programs and is excluded from others. Rarely is a system fair, or inclusive of everyone who needs it. That sucks, but with our current system, this is the crappy reality. And then each gift comes and goes, as different governments, laws, and policies change. I'm bummed when one goes (reduction in TFSA amount, for example) but, again, accept it.

My concern isn't with the level of exemptions and gifts for the regular Joe Blow, including a relatively high earning one. In my view, the overarching structure of our society is wasteful and inefficient. Until we clean up much larger funding pots -politicians' benefits; a massive business permitted to gift its top dogs generously before clearing its slate of responsibilities; ridiculous levels of administration of $3- I'm unconcerned with what happens in much smaller dollar amounts.

And I'm a huge fan of systems that support at least one adult to SAH as needed/desired, only because I see the acute difference this can make in an individual's or family's health, financial security, child rearing, etc. I expect these gains would save the country money as well.

jooniFLORisploo - I like your approach, the mentality and ideology you've shown in those short few sentences.  I'm confident we'd get along fine if we met face to face and had a conversation about politics.  (I especially resonate with your last two sentences.) 

I always find the "this-is-unfair/fair" discussions to be interesting.  Not often helpful though.  Usually its often one group looking at another group saying "you've got it better, and I want what you have."  Unfortunately, when that person/group finds themselves in the "other group," they finally realize its not as great as they think it is.  I once heard someone say, "the grass is always greener on the other side, but we fail to take into account that it takes a lot of bull$h!t to make the grass that green."

Prairie Stash

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Re: Small business tax reforms
« Reply #85 on: February 07, 2018, 09:55:26 AM »
... This is because our wages or salaries are wildly low, not because we are lazy. When I worked 50-70 hours per week (before my child was born, after which I reduced my out-of-home hours), I was paid $300/mo directly and $1100/mo all told. This is also true for many workers taking risks (entrepreneurs, etc), the people producing our food, etc.  ...How our paycheques are organized and administered does not correlate with our ethics, work effort, etc.
Yep, I agree with you.  I am very happy we have social programs like welfare, OAS, and the like.  They certainly help those that are truly in need.  I'm all for it. 
My contention is when there are people in society that "game the system" by trying to get whatever handouts they can (welfare, OAS, refugee benefits, etc) when they are fully able to provide an income to support themselves and their family (and their retirement).   

If two people walk away at the end of a year with the same take-home income and have the same family situation, they should pay the same amount of tax. Whether that's 10% or 50% makes no difference to my position.
Would you apply the same ideology to the refugee, the First Nations, and the low income earner - regardless of their high net worth? 
Quote
What do you mean here, Beard N Bones? We're all taxed on income, as the money comes in each year. If any of us puts our after-tax income aside each year to build net worth, we've already paid the income taxes.

And so my other contention is with people who will argue against one exception/benefit the Canadian Government has made (in this case income sprinkling in professional corporations), and yet seem to be supportive of other benefits the Canadian Government has put into place (such as welfare, OAS, refugee benefits, First Nations benefits) because they have a vested interest or it suits their personal or political agendas.  The benefits the government has put into place are there for the betterment of the people (or they should be!)  I am okay with special circumstances or social programs.  If there are benefits for the minority groups, why not have an exception for a specific population that are high earners?  If someone has paid the price in time, effort and finances to allow them to make huge contributions to society and make a high income wage in doing so, why not make exceptions in the way they are taxed?
"Cost of medical training estimates may also vary depending on whether residency (postgraduate medical
education) is included in the estimate. One recent estimate puts the cost of undergraduate medical
training in Canada at $45,000 to $75,000 per resident per year. In contrast to this, the cost of residency
training in Canada at $68,500 to $77,000 per resident per year. In the latter case, the figures include
$52,000 in salary and $15,600 to $25,000 in benefits and other expenses."

I get that you pt in a lot of sweat and time to become a doctor and considerable personal expense. However, how much has the government paid to have a doctor trained? How long before the government breaks even, on strictly financial terms?

Becoming a doctor is expensive, its an expensive program to run. Retiring at 35 would leave the taxman in a position of having paid more for your training than you paid in taxes...

For the record, most people pay about 30% (tuition) of the total cost of their education. The taxman covers the rest. In my case I paid roughly $25,000, the taxman paid $50,000 to educate me (at University). Most highly paid professionals forget how much funding the respective governments put into them. To start a medical school costs between $1-1.5 million/student, its a really expensive program.

What about that benefit that you directly received? Over $100,000 in education benefits, even more if you did a surgical specialty. Higher Education is a benefit, just like the rest, of living in Canada.

If you're going to bring up welfare, what about your own benefits you received? We all get benefits, its a myth to assume only the poor get them. To further poke a hole in Mr. Rich Moose's hypothetical, the problem is the taxman spent roughly $200,000 more to educate a doctor over the brothers PHd in Physics.

Goldielocks

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Re: Small business tax reforms
« Reply #86 on: February 15, 2018, 05:36:26 PM »
Beard and Bones.... 

I will show my lack of depth of understanding here, but I have a question or two for you about professional incorporations as a tax-optimized strategy...

Background

As I understand it, professionals set up incorporations to balance out high / low earning years, optimize the benefits, and reduce (or defer) taxes, all while retaining backup funds in the business for future emergencies.   

One of the advantages was "income sprinkling" and the ability to dribble out income and profits over a series of years.  For example, you could have drawn a $60k salary every year, and then take dividends for extra income as you need it, to balance the taxes and benefits from year to year, including over several years of non-work or part time work when you wind up.   You can also shelter and invest in other businesses / opportunities to grow your holdings within the incorporation (or HOLDCO) with various taxation impacts.

The income sprinkling tax advantage (that pays out at a low tax rate during "retirement") is now being shut down.

So far correct?  I know some income splitting dividends to family was also shut down, but I think the core issue here is sprinkling income back to yourself, correct?.


Question

With the income sprinkling advantage being shut down, why can't you sell your non-operating incorporation for somewhat less than the value of the after tax retained earnings to someone else?   

You would then pay capital taxes for the sale on a stepped up basis and take the small business exemption and save a whole wagon load of taxes.   The buyer would get the deal on buying your retained earnings on a discounted basis.

For many incorporations, the owner only has this one business so the lifetime limit is waiting to be used.

If you have enough buyers (e.g., 5 couples with $100,000 each would pay $1 million for your $1.3 million of retained earnings.)

  You would pay capital gains on maybe zero if your ACB is high enough.  If these people have enough low income otherwise, they could draw the retained earnings down as dividends into their own low-ish tax brackets (lower than max, anyway) and make a profit because they bought at a discount (for them), but at a profit (for you).

Why doesn't that work?

Question 2
Is there now a rule that you can't have retained earnings that pay a dividend over the years, if you have at least SOME operating income?   In what way exactly is the sprinkling shut down if you pay dividends to yourself?

Could you generate a small amount of operating income solely to maintain the income sprinkling advantage?


Sisko

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Re: Small business tax reforms
« Reply #87 on: February 15, 2018, 06:52:33 PM »
So far correct?  I know some income splitting dividends to family was also shut down, but I think the core issue here is sprinkling income back to yourself, correct?.
I think you might be misunderstanding income sprinkling here. That's understandable, as it's a vague term that our government made up. But what they generally mean by "income sprinkling" is splitting income among family members. So a doctor incorporates and gives half their company shares to their spouse. Then they each could take out equal dividends, thereby splitting income and drastically reducing income tax.

Government is not trying to prevent a business owner from splitting their income into future years. You can still have one windfall year, and then take dividends out over the next 10 years - thereby paying a lot less income tax than taking it all as income in one year. As long as the people getting the dividends were active in generating that income, it's all good.

why can't you sell your non-operating incorporation for somewhat less than the value of the after tax retained earnings to someone else?   
Rules for qualifying for the lifetime capital gains exemption are quite strict. If passive assets represent more than 10% of the companies value, you won't qualify for the exemption. So a company selling for $500,000 could only have $50,000 in cash/investments in order to qualify for the capital gains exemption. That's my understanding anyways, but the rules are pretty complicated I think.
« Last Edit: February 15, 2018, 06:59:16 PM by Sisko »

Goldielocks

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Re: Small business tax reforms
« Reply #88 on: February 15, 2018, 08:38:40 PM »
Ah, thanks.

I knew about the family splitting income changes, but the way it was written above made it sound like the core benefit ( future years collecting of dividends in retirement) was also being impacted.

Passive assets may not qualify for the exemption, but the original operating income still does qualify for the exemption.      Passive assets are supposed to be removed / taxed as they are earned or subject to tax.

I guess I don't see what the problem is if you can still trickle out the money to yourself (like an RRSP) to reduce the marginal taxes paid across several years.  Family that have worked in the business and are also valid owners or significant employees are also allowed to get dividends, too.

 Well, okay, I do get the point that this is a substantial shift in what is allowed to be done, and it is sudden, and many people have worked for years on their corporate structure to optimize it and now the floor has been pulled out.  And it sucks because of the suddenness.  I believed Harper's campaign promise about REITS many years ago, too.   (that beneficial taxation on them would continue like the USA rules).   Governments change the rules.  Sometimes suddenly.

Kashmani

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Re: Small business tax reforms
« Reply #89 on: February 16, 2018, 11:10:32 AM »
Following the discussion with interest. Two quick comments:

1) The rules against income splitting have always been a pet peeve of mine. For all benefits (child tax, GST rebate, etc.) we treat households as one economic unit. Yet for income tax we treat them as two separate individuals. That seems to be a logical disconnect based more on the desire to have both partners working ("only rich people can afford to have a stay-at-home spouse") than the economic reality of how households operate. So now we have a system where the optimal strategy is assortative mating to have roughly equal incomes. Easier said than done. I certainly never succeeded in attracting another budding professional back in the day when it counted. Kudos to those who were emotionally reasonably well-adjusted in their 20s.

2) If I am reading the federal proposals correctly, the Feds are throwing one bone to incorporated professionals: The rules don't apply if a corporation is no longer a professional corporation. So to wind down a corporation, turn it into a regular corporation, turn non-voting shares into voting shares, pay out the remaining retained earnings under the old rules, but don't use the company to earn any new money. Since having that realization, I have mellowed out a lot because it takes away the confiscatory aspect with respect to income already earned inside the corporation. I don't mind rules being changed on a go-forward basis.