Author Topic: Small business tax reforms  (Read 2611 times)

Kmp2

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Small business tax reforms
« on: September 14, 2017, 10:11:52 AM »
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.

FrugalToque

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Re: Small business tax reforms
« Reply #1 on: September 15, 2017, 10:56:22 AM »
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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Re: Small business tax reforms
« Reply #2 on: September 15, 2017, 11:03:53 AM »
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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Re: Small business tax reforms
« Reply #3 on: September 15, 2017, 11:27:56 AM »
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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Canadian Ben

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Re: Small business tax reforms
« Reply #4 on: September 15, 2017, 11:34:47 AM »
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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Re: Small business tax reforms
« Reply #5 on: September 15, 2017, 11:48:23 AM »
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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Re: Small business tax reforms
« Reply #6 on: September 15, 2017, 12:25:40 PM »
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.

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Re: Small business tax reforms
« Reply #7 on: September 15, 2017, 06:09:33 PM »
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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Kimera757

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Re: Small business tax reforms
« Reply #8 on: September 16, 2017, 07:20:40 AM »
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.

Quote
Why do they have to actually do work for the business...

Why would you advocate ghost employees?

Quote
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:

Quote
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/
« Last Edit: September 16, 2017, 07:32:39 AM by Kimera757 »

Kashmani

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Re: Small business tax reforms
« Reply #9 on: September 18, 2017, 11:34:47 AM »
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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Re: Small business tax reforms
« Reply #10 on: September 18, 2017, 12:25:47 PM »
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Step37

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Re: Small business tax reforms
« Reply #11 on: September 20, 2017, 09:58:17 PM »
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.

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Re: Small business tax reforms
« Reply #12 on: September 21, 2017, 09:34:05 AM »
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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Mr. Rich Moose

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Re: Small business tax reforms
« Reply #13 on: September 21, 2017, 12:36:29 PM »
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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Re: Small business tax reforms
« Reply #14 on: September 21, 2017, 06:14:22 PM »
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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Sisko

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Re: Small business tax reforms
« Reply #15 on: September 22, 2017, 12:51:27 AM »
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?

Canadian Ben

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Re: Small business tax reforms
« Reply #16 on: September 22, 2017, 06:28:45 AM »
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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Re: Small business tax reforms
« Reply #17 on: September 22, 2017, 09:06:00 AM »
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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daverobev

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Re: Small business tax reforms
« Reply #18 on: September 22, 2017, 11:59:31 AM »

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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Kashmani

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Re: Small business tax reforms
« Reply #19 on: September 22, 2017, 12:09:47 PM »
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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Re: Small business tax reforms
« Reply #20 on: September 22, 2017, 12:14:42 PM »
@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 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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Re: Small business tax reforms
« Reply #21 on: September 22, 2017, 12:44:22 PM »
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
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Missy B

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Re: Small business tax reforms
« Reply #22 on: October 09, 2017, 11:28:56 PM »
@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 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.

FrugalToque

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Re: Small business tax reforms
« Reply #23 on: October 10, 2017, 07:31:48 AM »
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.
...
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.

Kashmani

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Re: Small business tax reforms
« Reply #24 on: October 10, 2017, 09:41:12 AM »
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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Re: Small business tax reforms
« Reply #25 on: October 10, 2017, 10:31:23 AM »
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.

FrugalToque

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Re: Small business tax reforms
« Reply #26 on: October 10, 2017, 11:26:27 AM »
@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/

(Also, the OAS clawbacks are actually set at pretty high income levels.  You can see them on that page.)

Toque

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Re: Small business tax reforms
« Reply #27 on: October 10, 2017, 03:17:53 PM »
@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/

(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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Kashmani

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Re: Small business tax reforms
« Reply #28 on: October 10, 2017, 03:40:18 PM »
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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Re: Small business tax reforms
« Reply #29 on: October 11, 2017, 09:25:07 AM »
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.

Kashmani

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Re: Small business tax reforms
« Reply #30 on: October 11, 2017, 12:30:39 PM »
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.

daverobev

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Re: Small business tax reforms
« Reply #31 on: October 11, 2017, 01:48:11 PM »
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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Re: Small business tax reforms
« Reply #32 on: October 11, 2017, 03:04:14 PM »
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.

Kashmani

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Re: Small business tax reforms
« Reply #33 on: October 11, 2017, 04:06:39 PM »
Your post raised these facts.

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

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

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

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

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

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

And I don't miss running a business (or non-business according to point 5). In a way, this tax proposal validates a decision I had already made.

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Re: Small business tax reforms
« Reply #34 on: October 11, 2017, 04:33:23 PM »
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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Sisko

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Re: Small business tax reforms
« Reply #35 on: October 12, 2017, 12:53:35 PM »
I'll be loaning myself money, investing it personally, and paying it back as required.
I've never tried that, I thought the rule is that if you don't pay it back within one year, CRA considers that it was income. So consequences of screwing it up would be disastrous. I figured CRA would frown at loaning myself all of the businesses retained earnings and then paying it back the next year, only to repeat the same pattern year after year. If that strategy were viable, no one would care about the new passive investment tax?

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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Re: Small business tax reforms
« Reply #36 on: October 12, 2017, 01:05:53 PM »
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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Koogie

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Re: Small business tax reforms
« Reply #37 on: October 12, 2017, 01:42:15 PM »
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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Re: Small business tax reforms
« Reply #38 on: October 12, 2017, 02:09:17 PM »
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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Sisko

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Re: Small business tax reforms
« Reply #39 on: October 12, 2017, 03:33:09 PM »
Quote from: Stasher
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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Re: Small business tax reforms
« Reply #40 on: October 12, 2017, 03:55:21 PM »
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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Re: Small business tax reforms
« Reply #41 on: October 12, 2017, 04:37:06 PM »
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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Koogie

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Re: Small business tax reforms
« Reply #42 on: October 12, 2017, 05:04:55 PM »
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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Re: Small business tax reforms
« Reply #43 on: October 12, 2017, 06:05:38 PM »
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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FrugalToque

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Re: Small business tax reforms
« Reply #44 on: October 13, 2017, 07:04:50 AM »
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.

Maverick1

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Re: Small business tax reforms
« Reply #45 on: October 13, 2017, 09:20:05 AM »
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/
« Last Edit: October 13, 2017, 09:24:11 AM by Maverick1 »

Canadian Ben

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Re: Small business tax reforms
« Reply #46 on: October 13, 2017, 10:21:34 AM »
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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Re: Small business tax reforms
« Reply #47 on: October 13, 2017, 10:37:37 AM »
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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Canadian Ben

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Re: Small business tax reforms
« Reply #48 on: October 13, 2017, 10:41:32 AM »
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'' !

Maverick1

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Re: Small business tax reforms
« Reply #49 on: October 13, 2017, 11:24:47 AM »
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.

Quote
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.

Quote
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.

Quote
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.

Quote
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.

Quote
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.

Quote
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.
« Last Edit: October 13, 2017, 11:31:26 AM by Maverick1 »