Author Topic: Small business tax reforms  (Read 2733 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.
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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: Today at 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?


Canadian Ben

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Re: Small business tax reforms
« Reply #61 on: Today at 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: Today at 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.
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