The Money Mustache Community
Around the World => Canada Discussion => Topic started by: Kmp2 on September 14, 2017, 10:11:52 AM
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Any thoughts on the proposed changes on income 'sprinkling' and passive investing from within a small business?
What I'm struggling with is if a business is a consultant/Dr./Farm etc... then why can't the main business member 'hire' his or her spouse to do domestic duties?
Why do they have to actually do work for the business... when there is a precedence in other business to have paid by the company personal assistants that do dry cleaning, shopping, picking up kids etc?
I have found Kevin Milligan Twitter's threads to be most insightful at explaining the actual proposed changes and cutting through the fear mongering. He's a UBC economics teacher so a fairly reliable source.
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Yeah, I'm honestly getting tired of all the whiny bullshit surrounding this.
A nice, rational discussion would be great, but I can't get that anywhere without people whining incessantly about how $150k/a is barely scraping by, nobody making less than $200k can possibly save for retirement, and how the "libtards" are out to crush the economy.
Maybe there are some side effects that might hurt farmers, or small businesspeople just staring out, or whatever. But I'm never going to believe anything that comes from someone with an axe to grind about the "middle class" or who thinks that $150k/a is part of the "middle class". Sweet Sky-Mother, $150k is in the top 10%. You're in the "middle" of the UPPER class.
Toque.
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I think the issue is that people were investing money in their small business Corps and then counting on the passive income to allow for early retirement. Additional taxation of that is an unanticipated issue.
Particularly tough for people who are already retired to adjust.
The whole thing is shortsightedconsidering it brings in less money than they handed out via tax free loan repayable whenever to bombardier.
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I think the issue is that people were investing money in their small business Corps and then counting on the passive income to allow for early retirement. Additional taxation of that is an unanticipated issue.
Particularly tough for people who are already retired to adjust.
The whole thing is shortsightedconsidering it brings in less money than they handed out via tax free loan repayable whenever to bombardier.
They've already said the effects would not be retroactive, so it shouldn't affect those already retired.
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Why should businesses be allowed to pay for domestic duties? It's clearly a loophole, and when loophole get visible enough, the government tries to close it. There's lots and lots of examples on it. They are still welcome to have personal assistants, or they just have to be able to prove that their S/O is doing enough for the business to earn the amount that she receives.
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I think it's a move in the right direction, but they're definitely taking an enormous amount of heat for it by the vested interests. It shows that it's easy to give tax breaks and benefits, but very difficult to take them away.
Personally I take a big issue with the fact that anyone can incorporate and get tax advantages to begin with. I also take issue with the claim that these incorporated individuals are "entrepreneurs" and that every "entrepreneur" is a special component of economic bliss and ingenuity that deserves special privileges from the government and other tax payers.
The reality is that most of these "entrepreneurs" are actually quasi-employees who take no substantial employment risks, have very little capital risk, and are in full control of their personal work. They are really just self-employed or maybe proprietors at best.
While the fighters are trying to claim they need tax breaks because they don't have any benefits of being an employee, they are false to claim that most employees have benefits, job security, pensions, and other stuff. Those days are largely gone unless you work for the government and even those are being slowly eroded in many places.
Any self-employed individual can claim health benefit plan costs, invest in RRSPs and TFSAs, and pay their family members for legitimate work done without being incorporated. My parents have done it for years and they have substantially reduced their tax bills by legitimate income splitting, home office, vehicle costs, and other sort-of business expenses (stationary, utilities, computers, eating out, etc.).
The farmer argument is also 99.9% false but draws emotional responses. Anyone who does agriculture accounting or knows successful farm operations will know that farmers (and fishers) enjoy very substantial tax benefits. Many farmers, incorporated or not, pay little to no tax even though they can be very profitable if they are generational farms. Imagine life where you don't have to pay for shelter, vehicles, fuel, utilities, some clothing, cell phones, and internet with after-tax dollars. Most farmers have a very very low declared income and split with family members almost effortlessly because everyone on the farm pitches in and the CRA rarely questions that. They can also do cash-based accounting, so leftover profits at the end of the year are easily reinvested into equipment to avoid tax or held over until the next year.
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I have found Kevin Milligan Twitter's threads to be most insightful at explaining the actual proposed changes and cutting through the fear mongering. He's a UBC economics teacher so a fairly reliable source.
Yeah, there are some good articles there:
http://www.macleans.ca/politics/ottawa/will-bill-morneaus-crackdown-on-tax-avoidance-work/
and generally here:
http://blogs.ubc.ca/kevinmilligan/2017/09/10/taxation-of-private-corporations-an-explainer-compendium/
He discusses income sprinkling, hiding investing in corporations (an extra tax shelter beyond RRSPs and TFSAs, not available to non-rich people) and other such things. Pretty handy primer.
Toque.
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I am so glad that I am not the only one that thinks everyone is screaming the sky is falling for no reason.
I am a small business owner and I conduct my business ethically and legally, at this point I am not one bit worried about this legislation. Maybe I am missing something but I don't need to shelter money in dividends to my kids or to a spouse or create a special trust.
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Any thoughts on the proposed changes on income 'sprinkling' and passive investing from within a small business?
What I'm struggling with is if a business is a consultant/Dr./Farm etc... then why can't the main business member 'hire' his or her spouse to do domestic duties?
Because people who aren't self-employed can't do this.
Why do they have to actually do work for the business...
Why would you advocate ghost employees?
when there is a precedence in other business to have paid by the company personal assistants that do dry cleaning, shopping, picking up kids etc?
Is there some cultural trend I'm missing? Married working couples can't do dry cleaning, shopping, or picking up kids? Because single parents do this all the time, and it's harder for them. Is there a trend that homemakers only marry self-employed people?
An employed (not self-employed) person already gets a tax credit for being married to a homemaker. This is called the spousal credit. It's hard to support a homemaker, as it requires a lot of income, and the Canadian tax system doesn't really support this (the spousal credit isn't that much) but I don't see why self-employed people should effectively have a larger spousal credit.
If you're a fan of homemaking and think it should be supported, fine. Vote in a party that supports that. But I see no reason why a self-employed doctor needs a bigger break for supporting a homemaker than a salaried doctor.
Here's a pretty decent breakdown of the proposed tax changes:
The first measure aims to combat so-called “income sprinkling.” If someone earns consulting income through a corporation, the income can be passed on to children and other family members through dividends or other lightly-taxed payments. This income being “sprinkled” across the family can confer a substantial tax advantage to the incorporated consultant compared to a family with a regular wage earner who would have to pay full tax on any money given to other family members. Since 1999, section 120.4 of the Income Tax Act has already cut back on income sprinkling through the so-called “kiddie tax” rules, which makes it difficult to sprinkle income to children under age 18. The new measures try to extend the “kiddie tax” idea to children and other family members older than age 18 who have not been actively involved in the business.
The second measure relates to passive income earned through a small-business corporation. Right now, if you retain profits from a small business inside the company there are special higher taxes imposed if the profits are invested passively—in bonds or stocks or real estate—rather than active investment in new machinery or equipment for employees. The idea here is to make sure that people face the same tax on passive investments whether inside or outside a corporation. Otherwise, people will just set up a small business corporation to avoid taxes on saving—and that’s not the point of giving advantaged tax rates to small businesses. There was $27 billion of passive income earned through small business corporations in 2015, so this is not a trivial issue.
The Department of Finance consultation paper argues that the current regime of extra taxes on passive investment is not sufficient to counteract the existing tax advantage for saving inside a corporation. The light taxation of small business profits gives the business owner a head start on saving, which confers an advantage not realized by those saving outside a firm. The new proposed measures aim to restore full neutrality and balance between the taxation of savings inside and outside a corporation. This is the right economic principle to pursue—the tax system shouldn’t bias the decision where to put your savings.
The third part of the tax package is more narrow in scope. It aims to clamp down on the use of passing income through multiple corporations to transform regular income into lightly-taxed capital gains.
Link: http://www.macleans.ca/politics/ottawa/will-bill-morneaus-crackdown-on-tax-avoidance-work/
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Yeah, I'm honestly getting tired of all the whiny bullshit surrounding this.
A nice, rational discussion would be great, but I can't get that anywhere without people whining incessantly about how $150k/a is barely scraping by, nobody making less than $200k can possibly save for retirement, and how the "libtards" are out to crush the economy.
Maybe there are some side effects that might hurt farmers, or small businesspeople just staring out, or whatever. But I'm never going to believe anything that comes from someone with an axe to grind about the "middle class" or who thinks that $150k/a is part of the "middle class". Sweet Sky-Mother, $150k is in the top 10%. You're in the "middle" of the UPPER class.
Toque.
I personally accept that the "middle class" argument is somewhat of convenient red herring, but I also think it is unfair to call professionals "rich". On a forum that is all about retirement, we should have some sympathy for those that have to work for a living.
That said, there seems to be a genuine potential for a chilling effect on business that is overlooked. If someone can make $150k in salary plus DB pension on the one hand as opposed to making an average of $250k in partnership or business income on the other hand, taking away the ability to income-split will make that person think twice about staying in business.
First of all, private practice tends to be all-consuming, so there is frequently a stay-at-home spouse involved. If you sell time (think doctors, lawyers, engineers as opposed to realtors), you will be spending a lot of time working.
Secondly, running a business is unpleasant. Most people don't like it. I was fortunate to recently make the switch to government and can attest that it is infinitely better. No chasing to find clients, no chasing after clients to pay the bill, no fear about overhead or "dry spells", no constant nipping of the competition on your heels, and no more client dinners or sporting events to suck up your evenings. And vacations without laptops and blackberries - and for longer than two weeks without losing clients. Plus, now we can finally think about my spouse returning to work. because I am no longer working 75 hours a week.
At least in my profession, the competition to get into federal and provincial governments is already extremely intense, as there is an oversupply of people wanting to trade the supposed freedom of running a business for the security of a salary and pension. I am in law (cue the jokes about there being too many lawyers), but I see the same thing in engineering. Even in the medical profession, why would a doctor not choose to take the salary rather than run a business if after tax reform the difference is only $50-75k per year?
Note that I am agnostic as to whether this tax reform is a good policy idea. But it certainly has taken away any remaining doubts as to whether I should have made the switch to salary.
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Such a great article just published today by Vice News
https://news.vice.com/story/we-obtained-the-conservatives-internal-strategy-on-trudeaus-tax-changes-heres-whats-wrong-with-it (https://news.vice.com/story/we-obtained-the-conservatives-internal-strategy-on-trudeaus-tax-changes-heres-whats-wrong-with-it)
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I am so glad that I am not the only one that thinks everyone is screaming the sky is falling for no reason.
I am a small business owner and I conduct my business ethically and legally, at this point I am not one bit worried about this legislation. Maybe I am missing something but I don't need to shelter money in dividends to my kids or to a spouse or create a special trust.
+1 for so glad I'm not the only one/maybe I am missing something. I got an email from MNP in July (I guess when the changes were first proposed/announced?), had a quick read and determined it was nothing that would affect me (shareholder in a business where I am also paid as an employee) or anything we were trying to do with our business. Nothing struck me as terribly unreasonable, but I suspected a few people I knew would not be pleased. Didn't hear much at first, but wow, the bitching has been LOUD on social media for the past month or so.
Posting mostly to follow.
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I am still waiting to get detailed info... I keep hearing blurbs and sound bites.
There is talk with changes to Capital Gains taxes and also messing with how retained earnings are treated. Those might affect me so I'm watching.
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I am still waiting to get detailed info... I keep hearing blurbs and sound bites.
There is talk with changes to Capital Gains taxes and also messing with how retained earnings are treated. Those might affect me so I'm watching.
There's a lot of good info on the Finance Canada website with the actual proposed draft legislation.
I kinda touch the surface in my blog. I really don't think it's as bad as it's made to be for the best majority of operating businesses. It will hurt people using a corporate investment account for personal saving, people who were distributing cash to adult children who don't work for or contribute capital to the business, and people who have businesses that increased substantially in value well beyond the $840k or $1m capital gains exemption.
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I hear you , I still have not seen anything that will affect me greatly and have been pushing a Facebook lets educate each other campaign on my personal facebook page hard lately. Those with small businesses like me seem to agree while those with a bit bigger businesses and those from say AB and SK provinces are loosing their mind stating we will loose all business as companies move to the US and that we will see companies closing their doors left and right. They almost want to see Trudeau lynched...serious crazy stuff thus why I am trying to be a moderate and facilitate discussion but as I said this morning here, still no answers just hype and fear.
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First post here… Thought I should post something since I’m in the middle of this. I’m near FIRE, own an incorporated small business, and these changes will likely hurt me… mainly due to being a saver/mustachian.
My corporation did very well in the past few years and currently has $500,000 in retained earnings. I’m planning on FIREing soon, so my plan was to draw this down earnings by paying my wife and myself $30,000 each in dividends every year. That would give us $60,000 per year with almost no taxes for 10 years or so (keep in mind small business tax of roughly $70,000 was already paid on this money so it’s not exactly tax free). My wife is an integral part of the business, so I’m not worried about the new income sprinkling rules… well I’m a little bit worried about it due to time and money wasted on complying with new rules, proving that we are both part of the business, and the fear that some CRA goon will decide that we’re lying and come after us. But the main issue is that the money in the company needs to be invested passively, or left to wilt away due to inflation, so the new passive investment rules might bite us.
Under the current rules, passive investments are already taxed rather unfavorably within a CCPC. The only reason I am leaving money in the company is to spread out our income over multiple years. Obviously taking $500,000 in one year would be a huge tax bill. No one knows exactly what the new passive investment rules will be, but the examples given in the government's proposal paper show extraordinarily high tax rates…
I’m really not sure about this though - the government, the economists, and the media all assume that only individuals in the highest tax brackets could possibly save money in a corporation. It would be nice to see an analysis of how the changes will impact middle income earners who save money in a corporation… I think the answer is that it’s quite bad for us, but it’s also very uncommon so no one cares.
The government has mentioned that existing investments might be exempt from the new rules. Even if true, I still wonder how much more I’ll have to pay my accountant every year.
So I’m estimating that the new rules will cost us between a few thousand dollars and a few hundred thousand dollars. Thousands of dollars if our business does poorly, our investments do poorly, and the only new cost is accounting fees. Hundreds of thousands if our business does well, our passive investments do well, and the taxes are as bad as some fear.
Does nobody else here use a corporation to hold investments?
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Sisko... You do realize you are a poster example of people who don`t need tax breaks, but are getting tax breaks because you have a corporation? If your corporation is making too much money, and you don`t want to take it out even as dividends, then you really shouldn`t need to have more tax shelters. (Though I'm sure it's nice to have them!)
I'm sure there are examples of people who are using the tax breaks to make their company/corporation work, but it`s the larger amount who are simply using it to reduce their income and that don't need it that are being targeted. (Can't change the rule for just one, so remove the rule!)
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I have well over $500K in retained earnings in my corp as well. Pulling that as a T5 each year you will be taxed at the standard personal income tax rates on that money. I personally feel pulling money out as a wage is a better option for a small corp. You are creating a taxable expense for the company and for you as an individual are building RRSP and CPP contribution. You can still both pull the $30,000 but now as a wage and with that low of an amount you are taxed extremely favourably. Heck in BC if you keep it at $20,000 you actually get an additional 15% tax rebate credit when you do your taxes.
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First of all, private practice tends to be all-consuming, so there is frequently a stay-at-home spouse involved. If you sell time (think doctors, lawyers, engineers as opposed to realtors), you will be spending a lot of time working.
The corp should pay the spouse a salary, then. That isn't being targetted here, AFAIK. Just the dividend stuff. And if the two partners are both owners and employees of the corp, there will be no issue paying both salary and dividends to both.
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Keeping cash in the corp is, as others have said, clearly just a nice tax shield so you can, basically, spread the income over more tax years. That's not fair.
Paying divis to non-working/owning people for the only purpose of lowering tax is also clearly not fair.
If they want to encourage small businesses (start ups) they should have programs/funds to do so. But the established businesses that are already stable should not be getting tax breaks like this. It just allows a lowering of prices/advantage vs larger companies that can't do the same. If the cost of doing business goes up, then these affected small businesses will just have to raise their prices - or not. But they are getting a random break for no good reason.
I mean, even small business owners without family members to split with can't do this - all the people talking about risk and so on and so on... Sure. It's risky running a business (at some time in its lifecycle). Doesn't mean some small business owners should get tax breaks.
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The entire plan seems to be designed to get professionals to unincorporate. Service professionals (like myself) have used the business model to keep retirement savings inside the corporation. With the tax increase on passive investment income, that will no longer be feasible.
Unlike a farm, which has an intrinsic value as a business, a professional really has nothing to sell at the end of a working life. Law, dentistry, accounting etc. are personal services. Most clients have a relationship with the individual rather than the firm. My impression was that incorporation was allowed in the first place to allow professionals to reap some of the benefits that regular business owners had, i.e., income-splitting and income-smoothing. Income-smoothing (spreading out income over several years), is especially nice since a professional can have large fluctuations in income. I had dry spells followed by absolute insanity and back to dry spells. The quid pro quo is that you cannot turn income into capital gains because you ultimately have to suck the corporation dry in retirement - no sane person would buy it.
I still see this move as a huge disincentive to becoming a professional: All the stress of running a business without any of the tax advantages.
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@Canadian Ben
I worked for ten years earning almost nothing trying to make this business work. Finally it has been successful. During those ten years of low earnings I “wasted” all the lower tax bracket room by not using them. I don’t want to get into arguments about fairness in general. I’ll just say that for me, had I been an employee, I would have contributed less to the economy, made more money, and paid less taxes (due to the progressive tax system favouring consistent year after year income).
@Stasher
Right now the company is still earning, and we do actually pay ourselves salaries rather than dividends. The RRSP room is great, though I’m not a big fan of CPP (I figure that the money will grow more and be safer from future clawbacks in my own index funds).
The reason for dividends in future years - if the business is no longer earning revenue any wages that you pay yourself won’t reduce the businesses tax. You’re just creating a loss in the business. You can carry back losses for 3 years but beyond that you’re out of luck. So dividends become the better options because they are taxed at a lower rate (not as good as eligible dividends, but essentially it factors in the small business tax that you’ve already paid).
Maybe I should actually run these number through the real tax forms, I’ve just been using simpletax.ca/calculator (http://simpletax.ca/calculator) as quick estimate. Roughly $30,000 in ineligible dividends per year seems like a sweet spot to get money out of the company fairly quickly, but still pay almost no personal taxes. If retained earning are going to get taxed out of existence, then pulling money out more quickly becomes a better option.
I’m in BC as well, what’s the 15% tax credit that you are referring to? Back when I was struggling to get by, I used the WITB, which is about 15%, but it gets reduced to nothing by $20,000.
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This year we kept the wife's wages just below $20K and on her personal tax calculations on the provincial form their was a line item that said tax reduction threshold limit or something to that effect.
Just read this article this morning.... very good stuff here.
https://news.vice.com/story/the-rich-are-set-to-go-to-war-over-trudeaus-tax-changes (https://news.vice.com/story/the-rich-are-set-to-go-to-war-over-trudeaus-tax-changes)
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@Canadian Ben
I worked for ten years earning almost nothing trying to make this business work. Finally it has been successful. During those ten years of low earnings I “wasted” all the lower tax bracket room by not using them. I don’t want to get into arguments about fairness in general. I’ll just say that for me, had I been an employee, I would have contributed less to the economy, made more money, and paid less taxes (due to the progressive tax system favouring consistent year after year income).
@Stasher
Right now the company is still earning, and we do actually pay ourselves salaries rather than dividends. The RRSP room is great, though I’m not a big fan of CPP (I figure that the money will grow more and be safer from future clawbacks in my own index funds).
The reason for dividends in future years - if the business is no longer earning revenue any wages that you pay yourself won’t reduce the businesses tax. You’re just creating a loss in the business. You can carry back losses for 3 years but beyond that you’re out of luck. So dividends become the better options because they are taxed at a lower rate (not as good as eligible dividends, but essentially it factors in the small business tax that you’ve already paid).
Maybe I should actually run these number through the real tax forms, I’ve just been using simpletax.ca/calculator (http://simpletax.ca/calculator) as quick estimate. Roughly $30,000 in ineligible dividends per year seems like a sweet spot to get money out of the company fairly quickly, but still pay almost no personal taxes. If retained earning are going to get taxed out of existence, then pulling money out more quickly becomes a better option.
I’m in BC as well, what’s the 15% tax credit that you are referring to? Back when I was struggling to get by, I used the WITB, which is about 15%, but it gets reduced to nothing by $20,000.
I'm in BC, recently incorporated, with a pretty similar plan to you. I'll be holding extra cash in the corporation and paying it out to myself as ineligible dividends now and after I've retired at about 30K a year. That avoids additional personal tax. I will not be investing within the corporation; instead, I'll be loaning myself money, investing it personally, and paying it back as required.
The changes don't affect me, since I don't income sprinkle at all. I incorporated to give myself the option to pay less should I have a big capital gains windfall one year, and so I can stop contributing to the mother of all rip-offs for self employed people, the Canada Pension Plan.
Incidentally, for the curious, I am paying *more* corporate tax than I was personal tax, but no CPP, so its better for me.
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First post here… Thought I should post something since I’m in the middle of this. I’m near FIRE, own an incorporated small business, and these changes will likely hurt me… mainly due to being a saver/mustachian.
My corporation did very well in the past few years and currently has $500,000 in retained earnings. I’m planning on FIREing soon, so my plan was to draw this down earnings by paying my wife and myself $30,000 each in dividends every year.
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Under the current rules, passive investments are already taxed rather unfavorably within a CCPC. The only reason I am leaving money in the company is to spread out our income over multiple years. Obviously taking $500,000 in one year would be a huge tax bill.
I believe you are exactly in the wheelhouse of why the tax rules are changing. If I, as a telecom worker, lucked out and made $500k in one year, I would put as much as I could into the savings vehicles available (RRSP and TFSA), and then pay taxes on all of my other earnings.
The tax bill would, indeed, be quite large. That's because [drum roll] I earned a lot of money and we live under a progressive tax regime.
I don't understand though, why someone earning money through a business gets to have different rules. You have the same access to RRSPs, RESPs and TFSAs that I have. The limits apply to you just as well, but you get an extra place to stash a tonne of money and spread it out over the next [very long period of time].
That doesn't seem right to the rest of us who don't have that way to dodge the tax man.
Toque.
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I don't understand though, why someone earning money through a business gets to have different rules. You have the same access to RRSPs, RESPs and TFSAs that I have. The limits apply to you just as well, but you get an extra place to stash a tonne of money and spread it out over the next [very long period of time].
That doesn't seem right to the rest of us who don't have that way to dodge the tax man.
Toque.
An employee can walk, especially in the tech sector. A professional does not have that ability, since the value is in the clients. One cannot simply walk off the job one day and be re-hired elsewhere.
An employee also has no overhead and is generally not subject to significant income fluctuations, unless it's in a bonus-heavy industry.
Look, many a professional career does not start until somewhere between 25 and 30. Let's assume by age 30 the student loans are paid back. Retirement at 60 would mean a 30-year working life. As a pensioned employee, this might mean about $60,000 a year in pension. The private-sector equivalent would be about $2.5 million in investable assets at age 60. That means socking away an average of around $80,000 a year. But by the time the professional earns enough to do so, he or she is already 35, going on 40. So realistically, it means socking away around $100,000 per year between age 40 and 60. That is hard to do when the surplus income is taxed at 50%. I did it for a few years, but for every one of those years I aged two. And without the corporation, I would not have succeeded in those years.
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I don't understand though, why someone earning money through a business gets to have different rules. You have the same access to RRSPs, RESPs and TFSAs that I have. The limits apply to you just as well, but you get an extra place to stash a tonne of money and spread it out over the next [very long period of time].
That doesn't seem right to the rest of us who don't have that way to dodge the tax man.
Toque.
An employee can walk, especially in the tech sector. A professional does not have that ability, since the value is in the clients. One cannot simply walk off the job one day and be re-hired elsewhere.
An employee also has no overhead and is generally not subject to significant income fluctuations, unless it's in a bonus-heavy industry.
Look, many a professional career does not start until somewhere between 25 and 30. Let's assume by age 30 the student loans are paid back. Retirement at 60 would mean a 30-year working life. As a pensioned employee, this might mean about $60,000 a year in pension. The private-sector equivalent would be about $2.5 million in investable assets at age 60. That means socking away an average of around $80,000 a year. But by the time the professional earns enough to do so, he or she is already 35, going on 40. So realistically, it means socking away around $100,000 per year between age 40 and 60. That is hard to do when the surplus income is taxed at 50%. I did it for a few years, but for every one of those years I aged two. And without the corporation, I would not have succeeded in those years.
I struggled with the math until I realized you were exaggerating the savings rate by saying the money wasn't invested and compounding at all. I can achieve the 2.5 million you write about by contributing half what you claim.
As Bill Morneau pointed out, the proposed tax rules around income sprinkling are primarily utilized by those pulling in $216,000/year. Lets not pretend that 216,000 is equivalent to a typical wage earner. FOr those small busionesses earning less, the tax rules will have less impact, all the way to no change.
Dividends, same thing, it was a tax loophole where money that is set aside for the business is then turned into dividends years after. The program was 100% intended to help companies invest in themselves, but then it became a way to fund retirements, exactly like a TFSA on steroids. To be clear, its often a second business that holds the dividends from the first business, that way the primary business can be sold off and the money remains in the second numbered company. That sort of tax structure, having a holding company for cash, us exactly the loophole being targeted. Legitimate companies that are reinvesting in the business are more likely to hold the money in the primary company, so it can be used. Most of the protesters would prefer you didn't know that though, its often very clear which ones are reinvesting and which ones are exploiting a loophole for retirement.
A wage earner could set up the same structure to shield investments. Its not done because the costs outweigh the benefits, until you make serious money. So anyone availing themselves is making serious money (>$200/year for several years, often a decade or more), real small mom and pops aren't, so they won't be effected.
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@Stasher
Right now the company is still earning, and we do actually pay ourselves salaries rather than dividends. The RRSP room is great, though I’m not a big fan of CPP (I figure that the money will grow more and be safer from future clawbacks in my own index funds).
This is important: There is no clawback of CPP.
You're thinking of OAS. OAS can be clawed back if you have your own source of income. OAS only exists to prevent the elderly from dying on the streets.
CPP: you get it if you put it into. Guaranteed. No clawbacks.
https://retirehappy.ca/the-differences-between-cpp-and-oas/ (https://retirehappy.ca/the-differences-between-cpp-and-oas/)
(Also, the OAS clawbacks are actually set at pretty high income levels. You can see them on that page.)
Toque
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@Stasher
Right now the company is still earning, and we do actually pay ourselves salaries rather than dividends. The RRSP room is great, though I’m not a big fan of CPP (I figure that the money will grow more and be safer from future clawbacks in my own index funds).
This is important: There is no clawback of CPP.
You're thinking of OAS. OAS can be clawed back if you have your own source of income. OAS only exists to prevent the elderly from dying on the streets.
CPP: you get it if you put it into. Guaranteed. No clawbacks.
https://retirehappy.ca/the-differences-between-cpp-and-oas/ (https://retirehappy.ca/the-differences-between-cpp-and-oas/)
(Also, the OAS clawbacks are actually set at pretty high income levels. You can see them on that page.)
Toque
Understood... I meant the non CPP source deduction years taking away from the amount calculated based on my contributing years. Future earnings have no bearing on the monthly CPP payments...only years working and years paying vs non paying. I have maxed the CPP source deductions for the past 21 years and would hate to loose that max entitlement because I FIRE'd this year (43 so thats 17 years that it would be nice to somehow keep it as high as possible until I am 60)
Thanks for taking the time to clarify @FrugalToque , I appreciate it
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I struggled with the math until I realized you were exaggerating the savings rate by saying the money wasn't invested and compounding at all. I can achieve the 2.5 million you write about by contributing half what you claim.
I might be bearish, but most people don't achieve anywhere near the 6% annual growth frequently used in projections. With a low-cost e-series portfolio, I have averaged about 4.5% over the past decade. The U.S. portion has done extremely well, the Canadian portion has lagged, the international one looks like an electrocardiogram taken during a heart attack, and the market value for the bond portion is less than the book value.
Subtract 2% for inflation and the real return is around 2.5%. Add boomers that have no money and will be liquidating their investments, increased taxes to pay for the increase in healthcare requirements and continued deficit budgets at the federal and provincial level that may increase inflation to more than 2%, and I am not inclined to assume any significant growth.
Lastly, I have always been skeptical about inflation numbers. It's wonderful that large-screen TVs (of which I have zero) are coming down in price. But electricity is increasing at twice the rate of inflation (and I actually use it), and so is public transit (which I use in winter) and groceries (which I eat every day).
Ah well. Not in business anymore, so it's a moot point...
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I struggled with the math until I realized you were exaggerating the savings rate by saying the money wasn't invested and compounding at all. I can achieve the 2.5 million you write about by contributing half what you claim.
I might be bearish, but most people don't achieve anywhere near the 6% annual growth frequently used in projections. With a low-cost e-series portfolio, I have averaged about 4.5% over the past decade. The U.S. portion has done extremely well, the Canadian portion has lagged, the international one looks like an electrocardiogram taken during a heart attack, and the market value for the bond portion is less than the book value.
Subtract 2% for inflation and the real return is around 2.5%. Add boomers that have no money and will be liquidating their investments, increased taxes to pay for the increase in healthcare requirements and continued deficit budgets at the federal and provincial level that may increase inflation to more than 2%, and I am not inclined to assume any significant growth.
Lastly, I have always been skeptical about inflation numbers. It's wonderful that large-screen TVs (of which I have zero) are coming down in price. But electricity is increasing at twice the rate of inflation (and I actually use it), and so is public transit (which I use in winter) and groceries (which I eat every day).
Ah well. Not in business anymore, so it's a moot point...
So how does any of that matter to a business owner making $300k/year? Repeatedly its been pointed out that tax changes will not affect those businesses at lower income, they were unable to afford the costs to strucutre the investments. Instead they had RRSP and TFSA to reach the same tax breaks.
You seem to be saying that low income people will struggle, which I agree with. How is any of that relevant to these tax changes though? the poor have never had it easy, but these tax changes are only going to effect high income small business owners who largely don't use public transit or can afford solar panels to insulate from electricity increases.
All the tacx changes do is remove a savings option, available to wealthy, and make them solely reliant on RRSP, TFSA and taxable accounts, just like the middle class. Life will never be easy, for anyone, but do the wealthy need additional savings tricks not available to everyone else? I would love to have my taxable account inside a numbered company, to avoid gains tax now for example, its not practical to set up on the amounts I have though.
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Life will never be easy, for anyone, but do the wealthy need additional savings tricks not available to everyone else?
Earlier on this forum I mentioned that I would not take a position as to whether this is good or bad tax policy. I obviously still have a vested interest in the issue since I have not been able to fully wind down my professional corporation despite now being a salaried employee.
But in my defence:
1) First they took away my universal child care benefit. I now get nothing.
2) Then they took away my expanded TFSA room.
3) Then they took away my service corporation.
4) Now they are taking away my regular professional corporation, and my retained earnings are at risk.
It is incredibly frustrating to see the goalposts moved like this in only two years. I spent years in a demanding and highly competitive professional program. I spent a decade of 70-hour work weeks to get to partnership level and build a client base. I married a spouse who is not a professional and does not have a lot of earning power, knowing that I could bring home the bacon and she could be the good mother she wanted to be. And I incorporated and saved for retirement inside that corporation, knowing that I was on my own. As such, I am taking this personally. I, too, would have liked to go home at 4:30 PM. I, too, would have like to marry a teacher or nurse and know what I didn't need to be the sole breadwinner. And I, too, would have liked to spend time with the kids when they were young. And know it looks like I would have been just as well off doing that, since my retained earnings will likely be taxed at the top marginal rate. As I reflect on the past decade, I can tell that none of the "middle class" people supporting this proposal were in the office at 7:00 AM on a Sunday morning regularly like I was.
I promise to stop venting now.
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Life will never be easy, for anyone, but do the wealthy need additional savings tricks not available to everyone else?
Earlier on this forum I mentioned that I would not take a position as to whether this is good or bad tax policy. I obviously still have a vested interest in the issue since I have not been able to fully wind down my professional corporation despite now being a salaried employee.
But in my defence:
1) First they took away my universal child care benefit. I now get nothing.
2) Then they took away my expanded TFSA room.
3) Then they took away my service corporation.
4) Now they are taking away my regular professional corporation, and my retained earnings are at risk.
It is incredibly frustrating to see the goalposts moved like this in only two years. I spent years in a demanding and highly competitive professional program. I spent a decade of 70-hour work weeks to get to partnership level and build a client base. I married a spouse who is not a professional and does not have a lot of earning power, knowing that I could bring home the bacon and she could be the good mother she wanted to be. And I incorporated and saved for retirement inside that corporation, knowing that I was on my own. As such, I am taking this personally. I, too, would have liked to go home at 4:30 PM. I, too, would have like to marry a teacher or nurse and know what I didn't need to be the sole breadwinner. And I, too, would have liked to spend time with the kids when they were young. And know it looks like I would have been just as well off doing that, since my retained earnings will likely be taxed at the top marginal rate. As I reflect on the past decade, I can tell that none of the "middle class" people supporting this proposal were in the office at 7:00 AM on a Sunday morning regularly like I was.
I promise to stop venting now.
UCCB was silly. The current version is sillier. It is FAR too much money.
TFSA, well. It was only $10k one year. It was bribery from the Conservatives. The UK gets ~$25k in ISA room, so it's frustrating, but OTOH if you allow people to sock away $300-$400k in a TFSA over their working life... they'll never pay tax again. It doesn't make sense from a taxation perspective.
Being a corp shouldn't be something that allows you to reduce the amount of tax you pay. The tax systems here are just loopy. They need drastically simplifying. All this nonsense with Sears severance/hardship, and with tax on employee discounts... it's infuriatingly played up in the media as 'ohh those poor people' - just like corps are currently being played as 'ohh those rich bastards'.
It's all nonsense. Nobody should be able to shield anything by corporate structuring. People whose companies go bankrupt shouldn't be subject to different rules based on how touchy-feely the media makes people feel. Employee benefits, if they are, should be taxed.
For Christ's sake, make the whole thing straight/clean/fair - and most of all, simple!
What makes me roll my eyes - on TVO - 'sponsored by Ontario's 100k CPAs' or something like that. Yeah. I wonder who's lobbying to keep a complex tax code.
Make it so that your average numpty can do a tax return, without having to send stuff in to the CRA that they sent you. And on. And on. And on.
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Life will never be easy, for anyone, but do the wealthy need additional savings tricks not available to everyone else?
Earlier on this forum I mentioned that I would not take a position as to whether this is good or bad tax policy. I obviously still have a vested interest in the issue since I have not been able to fully wind down my professional corporation despite now being a salaried employee.
But in my defence:
1) First they took away my universal child care benefit. I now get nothing.
2) Then they took away my expanded TFSA room.
3) Then they took away my service corporation.
4) Now they are taking away my regular professional corporation, and my retained earnings are at risk.
It is incredibly frustrating to see the goalposts moved like this in only two years. I spent years in a demanding and highly competitive professional program. I spent a decade of 70-hour work weeks to get to partnership level and build a client base. I married a spouse who is not a professional and does not have a lot of earning power, knowing that I could bring home the bacon and she could be the good mother she wanted to be. And I incorporated and saved for retirement inside that corporation, knowing that I was on my own. As such, I am taking this personally. I, too, would have liked to go home at 4:30 PM. I, too, would have like to marry a teacher or nurse and know what I didn't need to be the sole breadwinner. And I, too, would have liked to spend time with the kids when they were young. And know it looks like I would have been just as well off doing that, since my retained earnings will likely be taxed at the top marginal rate. As I reflect on the past decade, I can tell that none of the "middle class" people supporting this proposal were in the office at 7:00 AM on a Sunday morning regularly like I was.
I promise to stop venting now.
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.
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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.
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What makes me roll my eyes - on TVO - 'sponsored by Ontario's 100k CPAs' or something like that. Yeah. I wonder who's lobbying to keep a complex tax code.
Make it so that your average numpty can do a tax return, without having to send stuff in to the CRA that they sent you. And on. And on. And on.
Yes Yes Yes .... Accounting firms are doing the huge public open house meetings screaming murder the loudest. The tax advantages required the work of lawyers and accountants to do the complex work to get the big credits and breaks.
Take that system away and they loose a large portion of work. I don't dare say that on Facebook or I would be lynched.
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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?
I believe you are exactly in the wheelhouse of why the tax rules are changing. If I, as a telecom worker, lucked out and made $500k in one year, I would put as much as I could into the savings vehicles available (RRSP and TFSA), and then pay taxes on all of my other earnings.
The tax bill would, indeed, be quite large. That's because [drum roll] I earned a lot of money and we live under a progressive tax regime.
Government isn't going after the ability for business owners to smooth income over multiple years. No one should have an issue with that, because paying tax on 500k in a single good year would cripple businesses... as in most businesses with fluctuating income just wouldn't exist. The government's proposal will hurt income smoothing indirectly because it makes it less desirable to leave money in the company since passive income would be taxed so highly.
If you, as an individual, suddenly made $500k in one year, and had to pay full income tax on it... I would cry for you, it would be so unfair :). There actually used to be some ability for individuals to smooth income over multiple years, I haven't read much about it, I think they called it "income averaging". They got rid of it in the 80s. The progressive tax system is pretty good, but the fact that it is based on your yearly income is somewhat arbitrary and causes many problems. Not sure that there is a simple way to make it better though. Incorporating is what we've got right now, it solves many of the problems for people with highly variable income.
@Stasher
Right now the company is still earning, and we do actually pay ourselves salaries rather than dividends. The RRSP room is great, though I’m not a big fan of CPP (I figure that the money will grow more and be safer from future clawbacks in my own index funds).
This is important: There is no clawback of CPP.
You're thinking of OAS. OAS can be clawed back if you have your own source of income. OAS only exists to prevent the elderly from dying on the streets.
CPP: you get it if you put it into. Guaranteed. No clawbacks.
No, I understand the difference between CPP and OAS very well. Many business owners don't want to do CPP because they see the true cost of it (paying the full amount themselves). They look at the expected return, and realize that it's garbage compared to a DIY portfolio.
My comment about future CPP clawbacks... I mean the clawbacks that that the government might impose in the future. CPP might be guaranteed now, but in 30 years, when I would get it, it might not be. Imagine a wealth tested CPP - you have $1 million in assets??? You don't need CPP! The average voter with little savings will agree with that, it makes good political sense. Might happen, might not. But government does whatever they want, they make the laws, I absolutely do not consider CPP guaranteed.
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Well I have three stores and we will continue to chug along doing our small business like we have for the last 15 years. I will watch our retained earnings and how tax will affect that but I'm not really worried as my retained earnings actually just represent the inventory stock I am sitting on. Dump stock and there goes my retained earnings. As for the dividends , nope I will continue to take wages as it generates a full expense for the corp and helps keep my revenue down thus my corporate tax rate. I feel the benefits of the CPP deductions and maintaining some RRSP room each year is a benefit for us.
We all have different perspectives and different businesses, my are only my opinion and at this point not concerned with the proposed tax changes as earlier mentioned.
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My comment about future CPP clawbacks... I mean the clawbacks that that the government might impose in the future. CPP might be guaranteed now, but in 30 years, when I would get it, it might not be. Imagine a wealth tested CPP - you have $1 million in assets??? You don't need CPP! The average voter with little savings will agree with that, it makes good political sense. Might happen, might not. But government does whatever they want, they make the laws, I absolutely do not consider CPP guaranteed.
Facts are generally not appreciated in threads like this.
Stick to the party line.
Yay, more taxes !
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I think that was a pretty unfair comment don't you @Koogie? I am pretty sure nobody here has disputed laws or things generally accepted to be a fact.
DO you even know what value your savings will be in 30 years? We can only have faith that putting money into our TFSA, RRSP, LIRA or RESP means that when we need the money it will be there. Heck do we even know how the value of the Canadian dollar will fair in 30 years or what affect inflation will have on it. Nothing in life is guaranteed but we can make some safe assumptions and plan accordingly.
As for CPP, it is a fair system that anyone that pays into it is entitled to receive back from it. Personal net worth has no bearing on it and nor should it.
As for more taxes, some of us appreciate the social systems in place in Canada that benefit the country as a whole. I would thing that taxation that provides direct tangible benefit for my fellow Canadian is a good thing. I want healthcare, poverty, education and seniors taken care of as a start. What we all don't want is bureaucracy and wastefulness with those taxes. I also appreciate that there may be many that don't feel this way but I will not chastise them for it. I would rather listen to them and learn , trying to find a way to collective move forward with a majority consensus.
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As for CPP, it is a fair system that anyone that pays into it is entitled to receive back from it. Personal net worth has no bearing on it and nor should it.
It can be more or less fair depending on who you are. For example, it excludes your 7 lowest income years in its calculation. So if you went to post secondary school, took care of kids, retired early, or otherwise had non-earning years, this rule is fine. But if you worked every year of your adult life... well they just threw away 7 years of your contributions.
CPP is fine, it's a good safety net for the average person who can't save on their own. But we're pretty good at saving and expected CPP real returns for me are only going to be about 2% (older generations had much better returns). Combined with the chance that clawbacks will happen, that lowers my expected return even more (maybe you put this clawback chance at close to 0% but I'm thinking it's more like 30%). Of course my imagined clawbacks only happen if you have high income or high net worth in retirement, so losing CPP wouldn't matter that much (that's the argument they'll use too when they take it from us! :)) CPP does provide some diversification against other investments, so it's not all bad.
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I think that was a pretty unfair comment don't you @Koogie? I am pretty sure nobody here has disputed laws or things generally accepted to be a fact.
I would have said you were young and naive but I see we are more or less the same age. This is the second time a Canadian federal government has screwed me over (Income Trusts and now CCPC rules). Do you think you will get to skate through unscathed ? One day soon they will say it is only "fair" that they raid your RRSP or TFSA because you are a rich early retiree and others didn't save as much as you. Tin Foil hat you say ? ... like I said, it has happened to me twice now. Best of luck.
As for more taxes, some of us appreciate the social systems in place in Canada that benefit the country as a whole. I would thing that taxation that provides direct tangible benefit for my fellow Canadian is a good thing. I want healthcare, poverty, education and seniors taken care of as a start. What we all don't want is bureaucracy and wastefulness with those taxes. I also appreciate that there may be many that don't feel this way but I will not chastise them for it. I would rather listen to them and learn , trying to find a way to collective move forward with a majority consensus.
Like I said. "Yay, more taxes" The sheep cheering the butcher.
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It appears we will to just each take our own prerogatives on what type of government programs we want and what type of taxation we are willing to participate in. This neither makes me naive or ignorant and your condescending sarcasm makes it appear that you feel others aren't entitled to their own opinion. I just don't get it.
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It appears we will to just each take our own prerogatives on what type of government programs we want and what type of taxation we are willing to participate in. This neither makes me naive or ignorant and your condescending sarcasm makes it appear that you feel others aren't entitled to their own opinion. I just don't get it.
I never called you ignorant. Stop making things up.
Others are entitled to their opinions, misguided as I think they are. I don't bother with political arguments on this forum because will you REALLY be persuaded by my arguments for smaller government and less taxation or will you still just vote for the politicians with the promises you find most attractive ?
See, I just state my opinion and move on. Saves us both time.
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My intent was not to be confrontational and I apologize, just the tin hat and sheep comment is what I was referring to.
You have personal experiences with taxes that have you feel a certain way and I respect that Koogie. I agree with the political discussion, it derails fast awfully quick as it is often an emotionally charged subject for many.
As for my involvement, I vet out the local politician that has the greatest character, integrity and community involvement. I believe in voting locally rather than a political figurehead at the top.
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My comment about future CPP clawbacks... I mean the clawbacks that that the government might impose in the future. CPP might be guaranteed now, but in 30 years, when I would get it, it might not be. Imagine a wealth tested CPP - you have $1 million in assets??? You don't need CPP! The average voter with little savings will agree with that, it makes good political sense. Might happen, might not. But government does whatever they want, they make the laws, I absolutely do not consider CPP guaranteed.
Facts are generally not appreciated in threads like this.
Stick to the party line.
Yay, more taxes !
Oh, come on, now. This thread has been pretty good with the facts and discussion.
Toque.
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I find the government's desire to get rid of income sprinkling strange considering:
1. Benefit programs such as the Canada Child Benefit are calculated on family, not individual income. Why are income taxes assessed at the individual level then?
2. Pension income can be split between spouses. Alimony is deductible to the payer and taxable to the recipient. This essentially means retired and divorced couples can income split, but business owners can't.
3. In the event of a divorce of a marriage with no prenup, the business assets would be split equally between the spouses. Why are both spouses entitled to half the value of the corporation, yet during the marriage they are not entitled to distribute the earnings of the corporation equally?
I have issues with the government's proposed changes to the taxation of passive income. Canada's taxation system is largely integrated. What I mean by this is $1 of earnings by a corporation generates the same amount of tax (corporate plus personal) regardless of how it is distributed to the owner. Whether it is paid to the owner as salary or dividend, we have various mechanisms in place to ensure the same amount of tax is paid. If the government eliminates some of the refundable mechanisms, a business owner would pay significantly more tax when making passive investment inside a corporation; the system would be disintegrated. There are legitimate reasons for making passive investments inside a corporation (ie retaining excess funds as a buffer against potential future disruptions, or retaining funds to maintain banking covenants).
Lastly, I hate some of the rhetoric that small business owners are tax cheats. Many small business owners are incorporated and using these mechanisms not because they set out to cheat the government, but because it was recommended to them by their accountants and lawyers. Following mustachian principles, I believe they were correct to pursue the option that results in legally paying the least amount of tax. Mr Money Mustache himself wrote an article last year about the corporate structures he uses (on the advice of his accountant) to minimize tax.
http://www.mrmoneymustache.com/2016/02/10/should-you-do-your-own-taxes/
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I really like point 3.
That's some valid logic.
I don't think many people here have an issue with buisness owners who used the loopholes, but rather those that are unhappy that they are losing them. Yes, use everything you are allowed to, but if you have an extra advantage over other people, when you lose it, Deal with it! .People will be leery with those who demand it remain in place since you are essentially asking to keep an advantage over other people.
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I find the government's desire to get rid of income sprinkling strange considering:
1. Benefit programs such as the Canada Child Benefit are calculated on family, not individual income. Why are income taxes assessed at the individual level then?
2. Pension income can be split between spouses. Alimony is deductible to the payer and taxable to the recipient. This essentially means retired and divorced couples can income split, but business owners can't.
3. In the event of a divorce of a marriage with no prenup, the business assets would be split equally between the spouses. Why are both spouses entitled to half the value of the corporation, yet during the marriage they are not entitled to distribute the earnings of the corporation equally?
1. Because it would be silly to tax based on family income. It would unfairly penalize single parent families who cannot benefit from greater efficiency brought by dual income households. CCB is based on family income for this same reason. Also, family income taxation would incentivize people with uneven incomes to declare themselves a family even though they are not for the sole purpose of reducing tax bills. This can cause other legal problems related to property, etc.
2. Business owners who are retired and divorced can income split.
3. This is a false argument pushed by accountants and CFIB with no real basis. Read the actual legislation, I have. The way that it is worded it would still be possible for a married or CL couple to income split where the spouse contributed capital or employment to the business. If you were married for a few years, saved together, and started a business you can income split without punity as both spouses would have contributed to business capital. If you own a business, meet a nice partner, get married or CL, and they perform work for the business you started, you can split income.
If you have a successful business, meet a nice partner, get married or CL, and don't get a prenup. Well... caveat emptor when things go south.
I have issues with the government's proposed changes to the taxation of passive income. Canada's taxation system is largely integrated. What I mean by this is $1 of earnings by a corporation generates the same amount of tax (corporate plus personal) regardless of how it is distributed to the owner. Whether it is paid to the owner as salary or dividend, we have various mechanisms in place to ensure the same amount of tax is paid. If the government eliminates some of the refundable mechanisms, a business owner would pay significantly more tax when making passive investment inside a corporation; the system would be disintegrated. There are legitimate reasons for making passive investments inside a corporation (ie retaining excess funds as a buffer against potential future disruptions, or retaining funds to maintain banking covenants).
This is not true. Beyond just salary or ineligible dividends, an individual running a corporation can benefit from many factors in the tax codes which give them a distinct edge over employed individuals. Personal use of business property, capital gains tax exemptions, use of shareholder loans/credits, careful income planning to match personal expenses, income splitting, gifting shares to children, use of family trusts, and the list goes on and on. Running an even moderately successful business is generally very lucrative compared to most types of employment. Of course it does come with costs as well.
Again, the proposed legislation does not support your claims about passive investments. The proposal would only tax passive investment gains on retained earnings which provide direct personal benefit (ie. paid out as dividends). You can invest passively and use the proceeds to expand your business operations without paying the extra tax. You can hold passive income and use it to smooth future earnings without substantial impact. You can retain earnings to backstop business credit availability without impact. What you cannot do is use your retained earnings to grow a personal "Super-RRSP" for your retirement. If you want an RRSP, pay earnings out as salary and contribute up to 18% like other Canadians do.
Lastly, I hate some of the rhetoric that small business owners are tax cheats. Many small business owners are incorporated and using these mechanisms not because they set out to cheat the government, but because it was recommended to them by their accountants and lawyers. Following mustachian principles, I believe they were correct to pursue the option that results in legally paying the least amount of tax. Mr Money Mustache himself wrote an article last year about the corporate structures he uses (on the advice of his accountant) to minimize tax.
http://www.mrmoneymustache.com/2016/02/10/should-you-do-your-own-taxes/
Small business owners are not all tax cheats. (However, knowing many business owners it's my experience they do push the limits on personal/business expenses and other things but that's another story). Yes lawyer's and accountants recommend business owners to reduce tax bills, that's their jobs. The problem is that lawyers and accountants keep getting more and more creative and aggressive and that requires push back from time to time. Many of the proposed changes are the result of issues that were not a substantial problem years ago, but in the last decade or so have really picked up as the techniques became more widespread.
Quite frankly I, nor anyone else should care how MMM does his taxes. It doesn't change a thing and doesn't change the basic argument on this thread. Everyone here should pay as little tax as legally possible. I do myself. But that doesn't mean we have to spread lies to fight legislation changes which are largely rooted in the right direction. If business owner representatives could fight these changes with the truth, they wouldn't have a leg to stand on because the truth is these issues do give them substantial and arguably unfair advantages compared to employed people.
It's understandable to be upset when rules are changed against your interests. But maybe you (business owners in general) should shut up, get back to work, and smile smugly about the years of benefits you received because of these advantages.
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Small business owners are not all tax cheats. (However, knowing many business owners it's my experience they do push the limits on personal/business expenses and other things but that's another story). Yes lawyer's and accountants recommend business owners to reduce tax bills, that's their jobs. The problem is that lawyers and accountants keep getting more and more creative and aggressive and that requires push back from time to time. Many of the proposed changes are the result of issues that were not a substantial problem years ago, but in the last decade or so have really picked up as the techniques became more widespread.
Quite frankly I, nor anyone else should care how MMM does his taxes. It doesn't change a thing and doesn't change the basic argument on this thread. Everyone here should pay as little tax as legally possible. I do myself. But that doesn't mean we have to spread lies to fight legislation changes which are largely rooted in the right direction. If business owner representatives could fight these changes with the truth, they wouldn't have a leg to stand on because the truth is these issues do give them substantial and arguably unfair advantages compared to employed people.
It's understandable to be upset when rules are changed against your interests. But maybe you (business owners in general) should shut up, get back to work, and smile smugly about the years of benefits you received because of these advantages.
That's a wordy way to say '' I agree'' !
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1. Because it would be silly to tax based on family income. It would unfairly penalize single parent families who cannot benefit from greater efficiency brought by dual income households. CCB is based on family income for this same reason. Also, family income taxation would incentivize people with uneven incomes to declare themselves a family even though they are not for the sole purpose of reducing tax bills. This can cause other legal problems related to property, etc.
Families can opt to file taxes jointly in several countries including the United States, Ireland and Germany. In France and Portugal couples are jointly assessed. I don't think it's fair to label it a silly notion, especially when things like benefits are assessed based on family income.
3. This is a false argument pushed by accountants and CFIB with no real basis. Read the actual legislation, I have. The way that it is worded it would still be possible for a married or CL couple to income split where the spouse contributed capital or employment to the business. If you were married for a few years, saved together, and started a business you can income split without punity as both spouses would have contributed to business capital. If you own a business, meet a nice partner, get married or CL, and they perform work for the business you started, you can split income.
If you have a successful business, meet a nice partner, get married or CL, and don't get a prenup. Well... caveat emptor when things go south.
Let's say a couple gets married today. In 2018 that spouse A starts a company with no capital contribution from spouse B. Over the next 10 years spouse A works for the company while spouse B does not. Under the proposed rules spouse A would not be able to pay a salary or distribute dividends to spouse B. But if they were to divorce in 2028, spouse B would be entitled to half of the company.
I didn't say the situation applies to all families. When both spouses contribute capital and labour to a corporation they are both entitled to withdraw earnings, but in situation like I listed above that is not the case.
2. Business owners who are retired and divorced can income split.
And anyone can start a corporation. I don't see this as a valid argument for why people can income split/sprinkle in some situations but not others.
This is not true. Beyond just salary or ineligible dividends, an individual running a corporation can benefit from many factors in the tax codes which give them a distinct edge over employed individuals. Personal use of business property, capital gains tax exemptions, use of shareholder loans/credits, careful income planning to match personal expenses, income splitting, gifting shares to children, use of family trusts, and the list goes on and on. Running an even moderately successful business is generally very lucrative compared to most types of employment. Of course it does come with costs as well.
What did I say that wasn't true? I don't deny a business owner gets the above business benefits, but that has nothing to do with my complaints about the changes to the taxation of passive income inside a corporation.
Personal use of business property is a taxable benefit so I don't think it's fair to include in your above list.
Again, the proposed legislation does not support your claims about passive investments. The proposal would only tax passive investment gains on retained earnings which provide direct personal benefit (ie. paid out as dividends). You can invest passively and use the proceeds to expand your business operations without paying the extra tax. You can hold passive income and use it to smooth future earnings without substantial impact. You can retain earnings to backstop business credit availability without impact.
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.
But that doesn't mean we have to spread lies to fight legislation changes which are largely rooted in the right direction.
I don't believe I have spread any lies.
But maybe you (business owners in general) should shut up, get back to work, and smile smugly about the years of benefits you received because of these advantages.
I incorporated a side business in 2014 and have yet to withdraw any funds. My plan was to build up earnings inside the corporation, then distribute the earnings solely to my wife who would be leaving the work force for 5 years while our children are young. Her second maternity leave ends in March of 2018, when I had planned on starting distributions. I likely won't be able to do that anymore. I haven't received years of benefit, just time and expense to structure a corporation in a way from which I will likely no longer be able to benefit from.
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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.
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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.
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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.
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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).
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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.
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I was reading this quote in the globe and mail:
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:
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!
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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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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.
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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.
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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.
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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?
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That's a bummer Kash, sucks to see you had a plan, and now get caught in them changing the rules.
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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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Following.
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Here are the actual proposed changes to the ITA:
http://canada.ca/en/revenue-agency.html
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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?
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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.
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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.
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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.
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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.
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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.
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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)
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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).
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?
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.
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!
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?
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.
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@ 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?
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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?
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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.
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@ 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]
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.
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?
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...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.
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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.
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@ 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]
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.
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?
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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.
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.
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?
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.
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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.
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... 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?
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?
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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.
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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."
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... 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?
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.
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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?
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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.
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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.
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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.