Personal Finance

Trudeau going after Personal Services Corps disguised as small businesses

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  • Aug 24th, 2018 11:56 am
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John47 wrote:
Oct 12th, 2017 12:28 pm
I'd be interested to know in what ways specifically the Morneau tax plan will affect. Would you mind sharing. Thanks.
1. I can't split dividends with my wife.

2. I only use a part of CCPC income to live on and leave the rest in the corp, until retirement. I will now be forced to take it out now to avoid a tax penalty.

#1 will cost me probably 5k to 10k a year in taxes.

#2 will be brutal since I can't smooth out my withdrawals from year to year. I'll essentially pay full tax on my business income each year. It will push me into the highest tax bracket some years.
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John47 wrote:
Oct 12th, 2017 12:28 pm
I'd be interested to know in what ways specifically the Morneau tax plan will affect. Would you mind sharing. Thanks.
Fact is nothing is final BUT the proposals are adding uncertainty to small and medium businesses already facing higher costs in 2018.

Uncertainty means putting expansions, hiring and investment on hold. It's all bad and anti-business. Small business drives the economy but our PM and financance minister don't get that as they were both born into wealth.
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mr_raider wrote:
Oct 12th, 2017 12:33 pm
1. I can't split dividends with my wife.

2. I only use a part of CCPC income to live on and leave the rest in the corp, until retirement. I will now be forced to take it out now to avoid a tax penalty.

#1 will cost me probably 5k to 10k a year in taxes.

#2 will be brutal since I can't smooth out my withdrawals from year to year. I'll essentially pay full tax on my business income each year. It will push me into the highest tax bracket some years.
Not sure if Revenu Quebec rules are any different, but you could look into doing a "Bonus" (not dividend) to yourself to get the money out of the corp, and then using the RRSP room generated to smooth out the tax bracket situation.
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Thanks for sharing.

1. Regarding this, do you mean you won't be able to split your salary paid out by the corp with her, or that the corp won't be allowed to issue dividends to her? If she's an equal shareholder holding the same category shares, she will no longer be able to receive dividends?

2. If you leave the business income in the CCPC, what penalty/tax do you expect that income will be subject to upon withdrawal? Compared to paying it out immediately.
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kool1 wrote:
Oct 12th, 2017 12:41 pm
Fact is nothing is final BUT the proposals are adding uncertainty to small and medium businesses already facing higher costs in 2018.

Uncertainty means putting expansions, hiring and investment on hold. It's all bad and anti-business. Small business drives the economy but our PM and financance minister don't get that as they were both born into wealth.
I'm skeptical that the proposals are really going to have an impact in this way.

Can you give me an example of a business that will change the way it operates because of these changes. Not a specific business, just a fictional example to illustrate the impact of the proposals.

My impression is that the main impact is exemplified by what the poster mr_raider describes, namely tax-minimization (which is a perfectly legitimate objective), but hardly any with what you describe --- expansion, hiring, investment.

I understand the notions of uncertainty and pro/anti-business environment, but when you get down to the specifics of these proposals, I don't see how they should actually negatively affect how businesses operate, which I think is a fair standard to judge the proposals by.
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John47 wrote:
Oct 12th, 2017 12:54 pm
I'm skeptical that the proposals are really going to have an impact in this way.

Can you give me an example of a business that will change the way it operates because of these changes. Not a specific business, just a fictional example to illustrate the impact of the proposals.

My impression is that the main impact is exemplified by what the poster mr_raider describes, namely tax-minimization (which is a perfectly legitimate objective), but hardly any with what you describe --- expansion, hiring, investment.

I understand the notions of uncertainty and pro/anti-business environment, but when you get down to the specifics of these proposals, I don't see how they should actually negatively affect how businesses operate, which I think is a fair standard to judge the proposals by.
As pointed out before, I don't think these new rules will affect daily business operations per se. However, with the new passive income rules it would limit the ability for business owners to save both for future growth/retirement.

As an employee, if you lose your job, it sucks but you can find a new job. As a business owner, if you lose your business, you lose all the investment you've made in the company, in some cases people have even mortgaged their homes for their business. Some people could literally lose everything if their business goes under. It comes to the point where a business owner will question whether or not it's worthwhile to continue a running a business. I can't remember the exact number, but I read somewhere the average small business owner makes about $70,000. If I can make the same amount working for a company, where I get benefits/vacation/pension and work 40hrs/week why would I want to take the financial risk and work 60-80 hrs/week with no benefits? For some small businesses that are paying their workers minimum wage, combine this with the new increased minimum wage, higher payroll taxes, and their bottom line will be hit even further.

As for taking out the money as salary and investing in RRSPs instead, not all business owners can do that. Especially if you're a seasonal business, you need to keep that cash on hand for slow seasons. Also, if you have a pension plan,keep in mind the funds in your pension are growing tax-free too.

I left my government job to own my own business. At the time, my rough math showed that I could break even at age 55. With the new current rules, I would have been better off staying in my government job.

But the reality is, these new rules are coming into place because the government has run out of money. If they truly believed in tax fairness, do a royal commission on tax reform and do it properly. Why is Trudeau's and Moreneau's (who are millionaires) trust funds not being targeted? Why are the CEO's stock bonuses not being targeted? They're just targeting the lowest-hanging fruit, even though majority of small business owners ARE the "middle class" people they're supposedly trying to help. When you consider all the taxes businesses pay, we are already paying more tax than an employee.
Last edited by notenoughsleep on Oct 12th, 2017 3:06 pm, edited 4 times in total.
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mr_raider wrote:
Oct 12th, 2017 12:33 pm
#1 will cost me probably 5k to 10k a year in taxes.

#2 will be brutal since I can't smooth out my withdrawals from year to year. I'll essentially pay full tax on my business income each year. It will push me into the highest tax bracket some years.
Don't understand #2. Business profits left in the business are still only taxed @ 15%, so why can't you leave them in during good years and draw them out during lean ones?

Regarding #1, this is why Canada needs a US-style joint tax return.
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Jermyzy wrote:
Oct 12th, 2017 3:06 pm
As pointed out before, I don't think these new rules will affect daily business operations per se. However, with the new passive income rules it would limit the ability for business owners to save both for future growth/retirement.
As regards retirement, for the small percentage of business owners who max out their TFSA and RRSP space, I agree.

As regards future growth of the business, if the money the business earned is kept in the business and re-invested in the business ---- not withdrawn ---- , what do you figure will be the impact exactly?
Jermyzy wrote:
Oct 12th, 2017 3:06 pm
As an employee, if you lose your job, it sucks but you can find a new job. As a business owner, if you lose your business, you lose all the investment you've made in the company, in some cases people have even mortgaged their homes for their business. Some people could literally lose everything if their business goes under. It comes to the point where a business owner will question whether or not it's worthwhile to continue a running a business. I can't remember the exact number, but I read somewhere the average small business owner makes about $70,000. If I can make the same amount working for a company, where I get benefits/vacation/pension and work 40hrs/week why would I want to take the financial risk and work 60-80 hrs/week with no benefits? For some small businesses that are paying their workers minimum wage, combine this with the new increased minimum wage, higher payroll taxes, and their bottom line will be hit even further.


Specifically how will the tax proposals affect businesses that are not profitable? How will they make profitable businesses unprofitable?

If a business is not even profitable in the first place, and has no viable prospect of becoming so, am I right to believe that the tax proposals will have zero impact on its operations and its viability?

I'm looking for specifics here. I'm not familiar with all the ins-and-outs of the tax proposals so I'm open to being educated.
Jermyzy wrote:
Oct 12th, 2017 3:06 pm
I left my government job to own my own business. At the time, my rough math showed that I could break even at age 55. With the new current rules, I would have been better off staying in my government job.
So I'd be right to think that the main implication for you is with regards to the taxation of "passive investment", and not with expansion, hiring and growth?
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Jermyzy wrote:
Oct 12th, 2017 3:06 pm
As for taking out the money as salary and investing in RRSPs instead, not all business owners can do that. Especially if you're a seasonal business, you need to keep that cash on hand for slow seasons. Also, if you have a pension plan,keep in mind the funds in your pension are growing tax-free too.
Am I right to believe that if your private corporation's income is low enough that you can't max out your TFSA and RSSP because you need to keep the income in the business on a seasonal basis in order to cover short-term expenditures,
then your private corporation will hardly be affected by the new passive investment rules?

If you need the money on a short-term basis to cover expenditures --- say within a 12 month horizon ---, then you won't be investing in volatile equities, right?

You'll be investing it in short-term bonds or money market funds or just leaving it in a savings account.

Now the maximum contribution to an RRSP in 2017 is $26,010.

So let's say you leave $26,010 in the business because you're going to need it to cover expenditures, and you invest it in one of those vehicles, then at the end of the year you can expect to have generated perhaps $260 in extra income in the business --- 1%.

Now under current rules, that $260 would belong to the business entirely.

Under new passive investment rules, you might pay out half of that money to the government.

I fail to see how the new rules are going to have the impact that critics have been talking about.
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taxrage wrote:
Oct 12th, 2017 3:11 pm
Don't understand #2. Business profits left in the business are still only taxed @ 15%, so why can't you leave them in during good years and draw them out during lean ones?

Regarding #1, this is why Canada needs a US-style joint tax return.
My understanding is that they penalize retaining income and force you to dividend or salary it all out.
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John47 wrote:
Oct 12th, 2017 3:33 pm


Specifically how will the tax proposals affect businesses that are not profitable? How will they make profitable businesses unprofitable?
As a business owner I look beyond just the profitability of the business. Let's say after I pay myself a $70,000/year salary I have $5000 leftover. You are correct, the new rules will not change my $5000 profit. My retirement plans took into account investing my profits from the business. My business is a mature business with lots of competition, so it is unlikely my business will grow that much. If I could find a job that paid $70,000/year with benefits, I'm actually worse off financially than running my own business (not to mention I'm working 60+ hours/week). Nobody in their right mind would take all the additional risk/work of owning a business unless there was a substantial incentive to do so. To make it an "even playing field" with the new rules, essentially takes away a significant incentive to a run a small business. Don't forget as a small business owner, I am making employer contributions to CPP/EI on behalf of the employee, we are also collecting/remitting GST/PST for the government for free. The new rules will also make tax-filing more complicated which will lead to higher accountant fees.

If a business is not even profitable in the first place, and has no viable prospect of becoming so, am I right to believe that the tax proposals will have zero impact on its operations and its viability?
From my understanding, you are correct.
I'm looking for specifics here. I'm not familiar with all the ins-and-outs of the tax proposals so I'm open to being educated.

So I'd be right to think that the main implication for you is with regards to the taxation of "passive investment", and not with expansion, hiring and growth?
For me personally, yes. I currently have 3 employees, and may look into hiring a 4th if possible so I can actually get some time off, but I am not looking into expanding further than this. Like I mentioned, my business is a mature business with minimal growth outlook. However, I do give my employees a raise/bonus every year. With the new passive income rules, there are ways I can adjust my investment strategy to mitigate this, but the additional paperwork is definitely not welcome. Also, with the current rules, my investments will grow larger over time, which allows the government to collect more total tax over my lifetime. But the government wants the money now because of their huge deficit.

I'm all for tax fairness (although IMHO, we as Canadians are already paying too much tax). But if the government truly believes in tax fairness, then make sure everybody is being treated fairly. Do a royal commission on tax reform, why are you targeting just small business owners?


edit: the government keeps saying these new rules are to target the 2% of corporations that are holding the majority of the wealth, but in reality it is affecting all small businesses, that is why there is such a huge uproar. Also the fact that Morneau's/Trudeau's millions are not affected by the changes is pure hypocrisy when they keep preaching "tax fairness". http://business.financialpost.com/opini ... -you-cant I also believe that these new rules will yield significantly less revenue than the government believes but put added burden on small businesses.
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mr_raider wrote:
Oct 12th, 2017 3:55 pm
My understanding is that they penalize retaining income and force you to dividend or salary it all out.
There was no retained-earnings penalty in Morneau's proposal. The change isn't penalizing retained earnings, it's changing RDTOH treatment to effectively increase taxation on passive (investment) income from investing the retained earnings within the corp. Retaining earnings so you have cash in the corp is fine, they just don't want you to use your corp as a mega-RRSP where you're tax-deferring a portfolio of investment gains.
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mr_raider wrote:
Oct 12th, 2017 3:55 pm
My understanding is that they penalize retaining income and force you to dividend or salary it all out.
The USA does that (accumulated earnings penalty), but so far the only income that would be subject to high tax rates is secondary (passive) investment returns. You could earn $500K this year, pay 15% tax and leave $425K in the corporation, and that money would be available to be div'd out next year.
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Mike15 wrote:
Oct 12th, 2017 4:38 pm
There was no retained-earnings penalty in Morneau's proposal. The change isn't penalizing retained earnings, it's changing RDTOH treatment to effectively increase taxation on passive (investment) income from investing the retained earnings within the corp. Retaining earnings so you have cash in the corp is fine, they just don't want you to use your corp as a mega-RRSP where you're tax-deferring a portfolio of investment gains.
That is my understanding too
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The white paper spoke of a third rfundable dividend tax that was proposed in 1970 and never implemented that would have withheld a portion of retained earnings.

What form exactly will the passive investment penalty take? Maybe I'm confused. RdTOH only applies to interest income. Dividend income goes into grip and cap gains into the CDA account.

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