Personal Finance

Trudeau going after Personal Services Corps disguised as small businesses

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Feb 29, 2008
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taxrage wrote: I think the changes people want to see is the ability of these professional corporations to be able to split income with spouses and family members to end. It is less about whether they should pay a 14.5% vs the normal corporate tax rate on retained earnings.
That requires changing the regulations for all CCPCs, and would prevent income splitting for all families that own an incorporated business, as well as medical professionals who own a genuine practice with an office and employees. Sauce for the goose is sauce for the gander.

BTW, income splitting is available fro any self employed person who chooses to incorporate. There plenty of IT professionals, accountants, architects and caterers who do this. Any contractor can do it. Your main hand up seems to be that doctors are making 400k, paid by the province and they benefit from incorporation. If they were paid privately or making 100k, would we be having this discussion?
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mr_raider wrote: That requires changing the regulations for all CCPCs, and would prevent income splitting for all families that own an incorporated business, as well as medical professionals who own a genuine practice with an office and employees. Sauce for the goose is sauce for the gander.

BTW, income splitting is available fro any self employed person who chooses to incorporate. There plenty of IT professionals, accountants, architects and caterers who do this. Any contractor can do it. Your main hand up seems to be that doctors are making 400k, paid by the province and they benefit from incorporation. If they were paid privately or making 100k, would we be having this discussion?
Many facets to this issue, which is why I suspect the change couldn't go into the budget yet.

Why does the ITA specifically mention doctors, dentists, veterinarians and lawyers in the definition of professional corporation? If this group is prevented from splitting income with family members, I can see that the other self-employed persons should be limited as well. Perhaps they can incorporate, but not issue shares or pay dividends to family members.

It's not impossible to define some criteria to prevent what is basically someone going to work every day for him/herself, never hiring more than 1-2 staff or expanding the business, from having the ability to split income with family members every year of a 30-year self-employed career for the sole purpose of saving taxes.

Bottom line: I'd really like to hear someone explain why someone like a dentist with a $200K net income in the corp. should be able to have $50K taken and taxed in the spouse's hands @ 20.5% (minus DTC) rather than in the dentist's hands @ 42%, when Canada's tax system does extreme backflips to ensure that salaried folk can barely move even $1 of salary income to a spouse?
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taxrage wrote: Many facets to this issue, which is why I suspect the change couldn't go into the budget yet.

Why does the ITA specifically mention doctors, dentists, veterinarians and lawyers in the definition of professional corporation? If this group is prevented from splitting income with family members, I can see that the other self-employed persons should be limited as well. Perhaps they can incorporate, but not issue shares or pay dividends to family members.

It's not impossible to define some criteria to prevent what is basically someone going to work every day for him/herself, never hiring more than 1-2 staff or expanding the business, from having the ability to split income with family members every year of a 30-year self-employed career for the sole purpose of saving taxes.

Bottom line: I'd really like to hear someone explain why someone like a dentist with a $200K net income in the corp. should be able to have $50K taken and taxed in the spouse's hands @ 20.5% (minus DTC) rather than in the dentist's hands @ 42%, when Canada's tax system does extreme backflips to ensure that salaried folk can barely move even $1 of salary income to a spouse?
It's been said a few times... most salaried folk have other benefits and a pension.

Whether you want to hear that or not is up to you!
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Feb 9, 2016
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taxrage wrote: I think the changes people want to see is the ability of these professional corporations to be able to split income with spouses and family members to end. It is less about whether they should pay a 14.5% vs the normal corporate tax rate on retained earnings.

The reason: fairness. An $85K/year bus driver with a stay-at-home spouse just had his $2K FTC tax savings killed off by Trudeau, so why should the doctors, dentists, lawyers, veterinarians etc. be able to keep their $10K-$50K or more tax savings by shifting income into the hands of their family members?
You seem to be confusing a CCPC and a Professional Corporation. CCPC stands for “Canadian Controlled Private Corporation”. The definition has 2 elements-
Canadian controlled- it must not be directly or indirectly controlled by either a public corporation or non-residents; and
Private Corporation- the shares must not be traded on any exchange. In short a CCPC is a “small business”. The concept and definition for CCPC was created federally with specific Income Tax effects, and is governed federally.

A CCPC provides 3 key benefits:
1. The small business exemption on active income;
2. Dividend get the small business dividend tax credit; and
3. $800k lifetime capital gains exemption.

A “Professional Corporation” is a creature of statue and created/administered at the provincial level. Professional Corporations may be incorporated by professions operating in approved professions, including: doctors, dentists, lawyers, engineers etc. PC’s were created as a compromise between the benefits of a full-fledged limited liability corporation (“LLC”) and a sole proprietorship. Professional Corporations have more restrictions and offer less protection than a LLC in a non-professional field would.

The following rules generally apply to PC’s:
1. No limited liability for professionals. One of the main benefits of a LLC is that shareholders are not liable for the debts or damages of the LLC beyond their initial investment. Given the nature of professional’s role they are not granted this benefit (and thus pay for large insurance coverage). Thus if a doctor kills a patient, or a lawyer commits malpractice, each is fully liable for the damages caused, and the said professional’s personal assets are fully exposed to creditors and or tort victims.
2. Non-professional cannot hold voting shares. This is to ensure that professionals are not beholden to the financial incentives of non-professionals.

Generally speaking Professional Corporations are also CCPC’s (I can’t think of a way they wouldn’t be) and the bulk of the tax advantages available to CCPC’s are available to Professional Corporations as well. These include dividend splitting and leaving accured income in the corporation. These benefits are available to all CCPC's and not just Professional Corporations.

You seem to be implying that professionals have been provided special, overly advantageous, tax rules because of Professional Corporations. In reality, the rules for professionals’ incorporations are stricter than a similar non-professional endeavour offering less protection for professionals and more protection for the general public. The beef you have with dividend sprinkling and income splitting are with all CCPC’s and not just Professional Corporations.
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HBP wrote: It's been said a few times... most salaried folk have other benefits and a pension.

Whether you want to hear that or not is up to you!
I hear it, but it's irrelevant. Nowhere is compensation fairness a stated goal of any tax system. You will find the following, however: http://gregmankiw.blogspot.ca/2008/01/f ... olicy.html

If self-employed people aren't receiving enough compensation, they need to find ways to increase their revenue, not ask the government to give them favourable tax treatment. The government only does that when it wants to encourage certain types of economic activity, like starting small businesses and growing them into large ones. Most of the self-employed professions we're talking about in the context of this thread will mostly always be one individual working for themselves. The reward for doing so should be high per diems and the ability to defer taxes for a rainy day, not lopping off $50K from a $200K income and having it taxed in a spouse's hands at the same rate paid by McDonald's employees.
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YegGuy wrote: The beef you have with dividend sprinkling and income splitting are with all CCPC’s and not just Professional Corporations.
Works for me.

I don't think corporations ever came into being so that a self-employed person could just show up to work every day for 30 years and more or less earn a static amount of income capable of being shifted into the hands of family members to minimize tax liability at the family level. In many/most of the cases, though, that is exactly what's happening.

Minimal tax rates are better used to allow some income to be retained in the corporation for a rainy day or to allow for capital accumulation and growth of the company. Any other loopholes should be plugged tight.

The self-employed professionals are free to join salaried folk to lobby for a US-style joint tax return, if the objective is to ensure that all families with the same ability to pay tax do so, unlike the system in place today.
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Even if you want to stop "dividend sprinkling" I think the challenge in stopping it will be differentiating between "legitimate" but family-related investors, vs family-related investors who are there only for dividend sprinkling. Just being a family member can't be a disqualifier for receiving dividends since it is very common and legitimate for family members to co-own a business. Small businesses often start with minimal capital so "who put up money" isn't a great indicator.

As someone posted above this is likely why a change wasn't in the budget.
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taxrage wrote: Works for me.

I don't think corporations ever came into being so that a self-employed person could just show up to work every day for 30 years and more or less earn a static amount of income capable of being shifted into the hands of family members to minimize tax liability at the family level. In many/most of the cases, though, that is exactly what's happening.

Minimal tax rates are better used to allow some income to be retained in the corporation for a rainy day or to allow for capital accumulation and growth of the company. Any other loopholes should be plugged tight.

The self-employed professionals are free to join salaried folk to lobby for a US-style joint tax return, if the objective is to ensure that all families with the same ability to pay tax do so, unlike the system in place today.
If that's truly what you think happens with many/most professionals who have a PC you are sorely mistaken.

Just myself, across a dozen physicians, lawyers and accountants that I'm close with, every single one treat their PC as a business, take on significant liability and work double the hours of what a typical salaried employee does.

I'm not saying they should be allowed to do any dividend sprinkling - I don't necessarily agree with that. But they work extremely hard and do grow their businesses while having significant overhead and employees to manage.

For some reason I feel like the majority of your posts are targeting physicians as if they work like salaried employees and have been given this unfair advantage in that they can use a PC to employ themselves.

I tell you this - in the current climate physicians would love to work as salaried government employees. Show up for 35-40 hours per week, have full benefits, paid sick leave, paid vacation, less stress and liability, etc. Then let's see what happens to all these clinics, patient access and healthcare in general.
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joey003 wrote: For some reason I feel like the majority of your posts are targeting physicians as if they work like salaried employees and have been given this unfair advantage in that they can use a PC to employ themselves.
If you search my posts I think you'll find dentists mentioned more than physicians.

Most people working for themselves work hard, not just physicians. That hard work should get rewarded with higher revenue and control, not the ability to shift income into the hands of family members.

We've all seen what happens with family businesses. The spouses on payroll despite never doing any work. The owner buying all the school supplies for the kids and writing it off against the business. You're never going to be able to police all of that, but corporations were not created to enable self-employed professionals to have self-employment income in the hands of family members, and the use of CPCCs for this purpose cannot remain off the radar of a government that clearly does not support the idea that two families with the same total income should pay the same taxes.
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JWL wrote: Even if you want to stop "dividend sprinkling" I think the challenge in stopping it will be differentiating between "legitimate" but family-related investors, vs family-related investors who are there only for dividend sprinkling. Just being a family member can't be a disqualifier for receiving dividends since it is very common and legitimate for family members to co-own a business. Small businesses often start with minimal capital so "who put up money" isn't a great indicator.

As someone posted above this is likely why a change wasn't in the budget.
That was me.

I'm sure the great minds at Revenue can come up with some criteria. Perhaps look at how it's done in other countries.
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taxrage wrote: If you search my posts I think you'll find dentists mentioned more than physicians.

Most people working for themselves work hard, not just physicians. That hard work should get rewarded with higher revenue and control, not the ability to shift income into the hands of family members.

We've all seen what happens with family businesses. The spouses on payroll despite never doing any work. The owner buying all the school supplies for the kids and writing it off against the business. You're never going to be able to police all of that, but corporations were not created to enable self-employed professionals to have self-employment income in the hands of family members, and the use of CPCCs for this purpose cannot remain off the radar of a government that clearly does not support the idea that two families with the same total income should pay the same taxes.
The issue is you keep making general assumptions that everyone does the dividend sprinkling, which really isn't fair. Consistently making these professionals out to look like wrong doers.
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I'm not sure why you wouldn't consider a dentist like a small business? My dentist has to pay rent, pay for equipment, has multiple staff on payroll (and pays employer portion into CPP/EI just like any other small business).

Also, you are making the assumption the spouse doesn't do any work just because you don't see them at the office. I own a small business. My wife is never at the actual store. But she does all my book-keeping for me. She handles all the visits to the accountants/lawyers for the business for me. She goes and buys supplies for my store. Ironically, she chooses not to draw any salary/dividends from the corporation as she also has a full-time job and already makes more money than me! One of my relatives is a doctor and his wife works as the receptionist.
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Jermyzy wrote: I'm not sure why you wouldn't consider a dentist like a small business? My dentist has to pay rent, pay for equipment, has multiple staff on payroll (and pays employer portion into CPP/EI just like any other small business).

Also, you are making the assumption the spouse doesn't do any work just because you don't see them at the office. I own a small business. My wife is never at the actual store. But she does all my book-keeping for me. She handles all the visits to the accountants/lawyers for the business for me. She goes and buys supplies for my store. Ironically, she chooses not to draw any salary/dividends from the corporation as she also has a full-time job and already makes more money than me! One of my relatives is a doctor and his wife works as the receptionist.
They are businesses, but probably shouldn't be treated as corporations, with the ability to shift income into the hands of family members as dividends. It's too easy for that corporation to just be used for income splitting.

If the only way someone other than another licensed professional can become a part owner in the business because of their family status, then clearly it's to be able to income-split.
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joey003 wrote: For some reason I feel like the majority of your posts are targeting physicians as if they work like salaried employees and have been given this unfair advantage in that they can use a PC to employ themselves.
Didn't have the grades for med school Face With Stuck-out Tongue And Tightly-closed Eyes
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joey003 wrote: The issue is you keep making general assumptions that everyone does the dividend sprinkling, which really isn't fair. Consistently making these professionals out to look like wrong doers.
Almost every such firm I've worked in did exactly that from Architects to doctors. I'm talking taking advantage to the point that it is fraud. Spouse/kids on payroll when they have nothing to do with the business, spouse getting dividends when they have put nothing in nor have any involvement with the business, etc. Lots of personal expenses being expensed through the corporation.

And yes, I work full time in the firm, and no the spouse has absolutely nothing to do with anything. I run the office and there is NO involvement on any level (this is for someone who said their spouse is doing stuff at home).

I have no doubt that you are honest, and there are honest ones out there, but I've rarely seen it in my years of doing the books for these types of businesses.
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Chickinvic wrote: Almost every such firm I've worked in did exactly that from Architects to doctors. I'm talking taking advantage to the point that it is fraud. Spouse/kids on payroll when they have nothing to do with the business, spouse getting dividends when they have put nothing in nor have any involvement with the business, etc. Lots of personal expenses being expensed through the corporation.

And yes, I work full time in the firm, and no the spouse has absolutely nothing to do with anything. I run the office and there is NO involvement on any level (this is for someone who said their spouse is doing stuff at home).

I have no doubt that you are honest, and there are honest ones out there, but I've rarely seen it in my years of doing the books for these types of businesses.
Being a shareholder (who receives dividends) has nothing to do with being on the payroll or active in the business in any way.
Family shareholders are typically set up at the inception of the business when the value of the business is $0, so $1 for the shares is appropriate.
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JWL wrote: Being a shareholder (who receives dividends) has nothing to do with being on the payroll or active in the business in any way.
Family shareholders are typically set up at the inception of the business when the value of the business is $0, so $1 for the shares is appropriate.
And...therin lies the rub. In these professional corporations, does there exist even a remote possibility that someone other than a peer (e.g. another dentist) or a family member would be a shareholder? Did you ever see a doctor/dentist/lawyer have a co-owner in the corporation that wasn't a doctor/dentist/lawyer or a family member?

If the answer is no, then the only reason the family member is a co-owner is to split income and reduce taxes on the family income, nothing else.

Another poster asked how it would be possible to distinguish shareholder participation in this type of corp vs other types. I think there has to be a reasonable expectation that anyone other than a peer professional or family member could also be a shareholder.

In the case of incorporated doctors, lawyers, dentist and veterinarians, that expectation is essentially zero. I think the same test of reasonability (?) could be applied to any type of professional, including consultants, painters, plumbers etc.
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Chickinvic wrote: Almost every such firm I've worked in did exactly that from Architects to doctors. I'm talking taking advantage to the point that it is fraud. Spouse/kids on payroll when they have nothing to do with the business, spouse getting dividends when they have put nothing in nor have any involvement with the business, etc. Lots of personal expenses being expensed through the corporation.

And yes, I work full time in the firm, and no the spouse has absolutely nothing to do with anything. I run the office and there is NO involvement on any level (this is for someone who said their spouse is doing stuff at home).

I have no doubt that you are honest, and there are honest ones out there, but I've rarely seen it in my years of doing the books for these types of businesses.
That's a fair point, and I don't disagree, it obviously must be happening. Just bothers me that all these professionals are being lumped in the same basket here.
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Just out of curiosity, is there a minimum age before a child can receive income? I mean, it would be awfully suspicious if a 1-year old infant is drawing salary/dividend.

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