Personal Finance

Trudeau going after Personal Services Corps disguised as small businesses

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  • Apr 8th, 2022 5:08 pm
Sr. Member
Jul 20, 2017
568 posts
125 upvotes
Just to show how convoluted tax returns are, here are some lines from the GIFI return all businesses have to fill out ( I have taken some farming income lines, but it gives you an idea)
9473 Poultry
revenue received from the sale of chicken, ducks, geese,
and turkeys
9474 Sheep and lambs
9475 Pregnant mare urine (PMU)
9476 Milk and cream (excluding dairy subsidies)
9477 Eggs for consumption
9478 Hatching eggs
9479 Aquaculture (hatching and raising)
9480 Horses (breeding and meat)
revenue received from the sale of ponies, and other
equine animals
9520 Other commodities
revenue received from ginseng, mushrooms, ostriches,
and stud services
9521 Maple products
9522 Artificial insemination
9523 Semen production
Is this the level the government wants to control small businesses? Does " Pregnant mare urine" really deserve to have its own tax line? That is so middle -class super-rich. Imagine how many times this was printed out...how many computer programs need to be maintained...etc...All the free marketing the urine receives compared to other bodily fluids and solids...:-)))))
But hey, when it comes to the government nothing is waste...even mare urine....
Banned
Sep 19, 2012
1253 posts
1867 upvotes
Calgary
Mike15 wrote: These changes would be 'significant' in the sense of changing how small corps, especially PSCs plan their tax minimization, but it should change little on operations & business side.
The proposed passive income will, sadly, impact the operations/business side. There is an entire segment of CCPCs who make their money via "investment income" (ie: generates passive income that, ASFAIK, is never treated as active income). A friend of mine runs an Alt-A lending business - this will certainly impact him and his company. In fact, he'll be better off running his business outside of a corporate structure (IMO, a bizarre result).

Even outside of the folks who's main source of business income is corporate passive income, these changes will impact the business/operations side of the rest of the CCPC world. It will encourage every CCPC to distribute all free cash flow outside of growth or maintenance capital, because leaving it in the corp earning passive income/no income is not good (ie: make it look like an income trust). That fundamentally changes their business model and frankly, their valuation. Potential investors will look at those CCPCs through a different lens completely.

I've chatted to a number of tax professionals and many think that of the three changes, the changes to the passive income rules are likeliest to not go forward. In the words of one of my colleagues: "they haven't gotten a real solution yet, and are throwing out ideas - I would only be worried once there is draft legislation in place". You highlighted it as well: the complexity of tracking active/passive split shouldn't be underestimated and I don't the government has a good workable solution.

Fun times!!
Nikola Alaica, CPA, CA | Tax, Accounting, Mortgages
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User avatar
Jan 15, 2017
2365 posts
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ahlaker wrote: I've chatted to a number of tax professionals and many think that of the three changes, the changes to the passive income rules are likeliest to not go forward. In the words of one of my colleagues: "they haven't gotten a real solution yet, and are throwing out ideas - I would only be worried once there is draft legislation in place". You highlighted it as well: the complexity of tracking active/passive split shouldn't be underestimated and I don't the government has a good workable solution.
For that to happen, they'd really have to tighten up on the income sprinkling provisions, so the owner is eventually required to have that income taxed in his own hands.
Sr. Member
Jul 20, 2017
568 posts
125 upvotes
ahlaker wrote: The proposed passive income will, sadly, impact the operations/business side. There is an entire segment of CCPCs who make their money via "investment income" (ie: generates passive income that, ASFAIK, is never treated as active income). A friend of mine runs an Alt-A lending business - this will certainly impact him and his company. In fact, he'll be better off running his business outside of a corporate structure (IMO, a bizarre result).

Even outside of the folks who's main source of business income is corporate passive income, these changes will impact the business/operations side of the rest of the CCPC world. It will encourage every CCPC to distribute all free cash flow outside of growth or maintenance capital, because leaving it in the corp earning passive income/no income is not good (ie: make it look like an income trust). That fundamentally changes their business model and frankly, their valuation. Potential investors will look at those CCPCs through a different lens completely.

I've chatted to a number of tax professionals and many think that of the three changes, the changes to the passive income rules are likeliest to not go forward. In the words of one of my colleagues: "they haven't gotten a real solution yet, and are throwing out ideas - I would only be worried once there is draft legislation in place". You highlighted it as well: the complexity of tracking active/passive split shouldn't be underestimated and I don't the government has a good workable solution.

Fun times!!
Nice summary... I have to agree that the passive income issue is the most painful one...it is anyway already taxed at a higher rate, unless one can disguise it as active income...Given the high interest rate that small businesses can borrow at, forcing owners not to keep money inside the CCPC will reduce their profitability...
There were some comments by others that the changes will not affect the operations side of the business.. I have to disagree...owners will have to have a hard look: if they actually have less in net income then their employees, they might be better just shutting down and getting a regular job...Why would they try to run a corporation with all the head aches if their is no benefit...
From now on job creation will become a government duty...small businesses will do much less of that....I also predict a trend to take more jobs out of the legal framework...There are lots of professions were some of the work can be done for cash, I see a lot of garage sales with new stuff, selling new stuff on ebay, kijiji etc....there will be no much trace of it for the government... Is pretty hard to audit a business that does not really exist officially.....
Deal Guru
Feb 9, 2009
12381 posts
11307 upvotes
Trudeau just needs to find ways to pay for his lavish trips to aga khan private island ... pos has the gall to talk about the middle class when the dork is a millionaire trust fund baby who expenses his nannies and has his wife come travel with him to lavish places.
Deal Fanatic
May 22, 2003
9325 posts
6385 upvotes
Vancouver
Yes, the passive income rule is the one that will affect me the most. I'm not even sure how to properly track my different sources of income if they pass it, my accountant will love it.
Sr. Member
Jul 20, 2017
568 posts
125 upvotes
Sebastian6300 wrote: Nice summary... I have to agree that the passive income issue is the most painful one...it is anyway already taxed at a higher rate, unless one can disguise it as active income...Given the high interest rate that small businesses can borrow at, forcing owners not to keep money inside the CCPC will reduce their profitability...
There were some comments by others that the changes will not affect the operations side of the business.. I have to disagree...owners will have to have a hard look: if they actually have less in net income then their employees, they might be better just shutting down and getting a regular job...Why would they try to run a corporation with all the head aches if their is no benefit...
From now on job creation will become a government duty...small businesses will do much less of that....I also predict a trend to take more jobs out of the legal framework...There are lots of professions were some of the work can be done for cash, I see a lot of garage sales with new stuff, selling new stuff on ebay, kijiji etc....there will be no much trace of it for the government... Is pretty hard to audit a business that does not really exist officially.....
Not sure if there will be any draft legislation...I think the government can just change the rules...anyway is a formality, the liberal MP's have device built in for voting by an unsuspecting surgeon: trudeau presses a button and all the MP's vote according to the button, in this case it will be all for YES...back benchers in the parliament should be categorised as unvertebrated species...
Banned
Sep 19, 2012
1253 posts
1867 upvotes
Calgary
taxrage wrote: For that to happen, they'd really have to tighten up on the income sprinkling provisions, so the owner is eventually required to have that income taxed in his own hands.
I'm not sure what you are referring to when you say "for that to happen". Are you saying that you think that the government will go ahead with the changes to the passive income rules and one of the solutions they've put forward will be put into legislation in the near term?

For those folks that do support this proposed change, why do you think that capital should be forced out of a company if it doesn't meet certain rules? What if my hypothetical company (that earns well in excess of the small business deduction) wants to set aside capital to fund a pension plan for its employees? The investment income being earned will be "double taxed" because integration has been destroyed (passive income taxed at highest rate, but there is no longer a dividend refund from the RDTOH). The shareholders will not be happy because value is being destroyed (from increased taxation) therefore the company's cost of doing business will increase. Alternatively, the company will distribute all of the free cash flow to the shareholders who will now be happy; however, employees have no pension. Surely this isn't good result is it?
Nikola Alaica, CPA, CA | Tax, Accounting, Mortgages
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User avatar
Jan 15, 2017
2365 posts
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ahlaker wrote: I'm not sure what you are referring to when you say "for that to happen". Are you saying that you think that the government will go ahead with the changes to the passive income rules and one of the solutions they've put forward will be put into legislation in the near term?

For those folks that do support this proposed change, why do you think that capital should be forced out of a company if it doesn't meet certain rules? What if my hypothetical company (that earns well in excess of the small business deduction) wants to set aside capital to fund a pension plan for its employees? The investment income being earned will be "double taxed" because integration has been destroyed (passive income taxed at highest rate, but there is no longer a dividend refund from the RDTOH). The shareholders will not be happy because value is being destroyed (from increased taxation) therefore the company's cost of doing business will increase. Alternatively, the company will distribute all of the free cash flow to the shareholders who will now be happy; however, employees have no pension. Surely this isn't good result is it?
I meant that the government can't really back off the passive investment changes without first ensuring that income left in the corporation is difficult to sprinkle to family members unless actively involved. If you're going to allow up to $500K (okay, $425K after-tax) to be left in the corporation and only taxed 15%, then it eventually has to be taxed in the owner's hands...or left in the corp.

Income isn't supposed to be left in the CCPC as if it were some kind of savings plan, otherwise, it's a misuse of the 15% tax rate. Think about it. Does the government only tax CCPCs @ a 15% rate so the owner can personally benefit? If that's the case, do like the USA does and have retained earnings be subject a
retained earnings tax: http://smallbusiness.chron.com/net-tax- ... 26310.html
Deal Addict
Mar 10, 2010
1888 posts
656 upvotes
Sebastian6300 wrote: Not sure if there will be any draft legislation...I think the government can just change the rules...anyway is a formality, the liberal MP's have device built in for voting by an unsuspecting surgeon: trudeau presses a button and all the MP's vote according to the button, in this case it will be all for YES...back benchers in the parliament should be categorised as unvertebrated species...
How often did Conservative MP's vote against Harper's wishes?
Sr. Member
Jul 20, 2017
568 posts
125 upvotes
Vitalogy80 wrote: How often did Conservative MP's vote against Harper's wishes?
you have a good point. The system we have is a democratically elected dictatorship.
Deal Addict
Mar 10, 2010
1888 posts
656 upvotes
Sebastian6300 wrote: you have a good point. The system we have is a democratically elected dictatorship.
Yep, it's atrocious...and I think it's the same in Provincial politics in BC anyways. They just vote with their party, doesn't matter about their constituents.
Banned
Sep 19, 2012
1253 posts
1867 upvotes
Calgary
taxrage wrote: Income isn't supposed to be left in the CCPC as if it were some kind of savings plan, otherwise, it's a misuse of the 15% tax rate. Think about it. Does the government only tax CCPCs @ a 15% rate so the owner can personally benefit?
What if the income didn't get the small business tax rate? Why should a CCPC be treated differently than a public company? Would your answer change? Any comment on my pension example? Surely you can't think that result is good, right?
Nikola Alaica, CPA, CA | Tax, Accounting, Mortgages
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Jan 15, 2017
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ahlaker wrote: What if the income didn't get the small business tax rate? Why should a CCPC be treated differently than a public company? Would your answer change? Any comment on my pension example? Surely you can't think that result is good, right?
Regarding the pension example/plan, those should be managed outside the corporation with a separate administrator. The CCPC shouldn't be the pension fund. If you're not convinced, Google what happened to the Nortel disability pension plan members.

I agree that there's a problem with professionals who have a CCPC that want to save for retirement. Removing the 15% rate would be a prerequisite to allow some savings for personal needs like retirement. Introducing a US-style maximum on the amount that can be kept in the CCPC should probably also be considered. Simply allowing $500K/yr to accumulate @ 15% tax is not designed for personal savings.
Deal Addict
Jun 27, 2015
2281 posts
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East York, ON
ahlaker wrote: ...
I've chatted to a number of tax professionals and many think that of the three changes, ..

Fun times!!
Can you guys please help me to recap what are the changes proposed so far?
-no more income splitting is one of them
-change to the way the PIR is taxed is the second one

What else?
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Jan 15, 2017
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CuriousC wrote: Can you guys please help me to recap what are the changes proposed so far?
-no more income splitting is one of them
-change to the way the PIR is taxed is the second one
I believe it involves active business income being treated as a capital gain.
Banned
Sep 19, 2012
1253 posts
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Calgary
taxrage wrote: I believe it involves active business income being treated as a capital gain.
Yeah - it's actually "capital stripping" that they're trying to eliminate. It's an interesting tax strategy where at a HighLevel you use a related HoldCo to buy your OpCo, converting a distribution from the OpCo that would've been otherwise taxed as a dividend into a capital gain. Government has fought it in court a number of times and have lost, so they're just proposing to change the legislation.
Nikola Alaica, CPA, CA | Tax, Accounting, Mortgages
Sr. Member
Jul 20, 2017
568 posts
125 upvotes
Sebastian6300 wrote: you have a good point. The system we have is a democratically elected dictatorship.
There is an interesting court case in Ontario (just google Sudbury by-election trial) that exposes how the candidates are enticed to step away, by being offered gov appointments, etc
The real election is the nomination of candidates, and the public has little say there...it's all insiders who decide/influence the nomination
Deal Expert
Feb 29, 2008
30106 posts
5547 upvotes
Montreal
Vitalogy80 wrote: Yep, it's atrocious...and I think it's the same in Provincial politics in BC anyways. They just vote with their party, doesn't matter about their constituents.
That is standard in British PArliamentary politics. PArty solidarity is absolute, which makes parliament just a rubber stamp. The only tool available to the opposition is public humiliation.

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