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.