Personal Finance

Trudeau going after Personal Services Corps disguised as small businesses

  • Last Updated:
  • Dec 11th, 2017 10:42 am
Deal Addict
May 22, 2003
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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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Nov 24, 2013
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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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Jan 15, 2017
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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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May 22, 2003
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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
Deal Expert
Feb 29, 2008
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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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John47 wrote:
Oct 12th, 2017 12:45 pm
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.
The way we do it is as follows. My wife does not work for me but she holds a different class of shares than I do. She pays for groceries, child care and housing expenses. I pay the big stuff like mortgage and the car. We establish a budget for each of us, and declare a dividend for each of us to just barely cover our expenses. The rest stays in the corp and part of it is invested for retirement.

The new rules I understand will force me to take all the dividends in my name since my wife does not work in the corp. This will push up my tax bill.. furthermore the money left and invested will be subject to some surtax in some form.
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Jan 15, 2017
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mr_raider wrote:
Oct 12th, 2017 7:12 pm
The new rules I understand will force me to take all the dividends in my name since my wife does not work in the corp. This will push up my tax bill.. furthermore the money left and invested will be subject to some surtax in some form.
Actually, as long as they remain in the CCPC, there is no impact.

The impact comes when you take those funds out and you can't benefit from the RDTOH credit, so the investment returns will have been taxed at 50%, just like today, and again at your full rate.
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May 22, 2003
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Out of curiosity, for those of you in support of these new proposals. Do you not agree in the interest of "tax fairness", that it is better to do a royal commission on tax reform to ensure that everybody is paying their fair share of taxes, not just small business owners?
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Jermyzy wrote:
Oct 12th, 2017 11:09 pm
Out of curiosity, for those of you in support of these new proposals. Do you not agree in the interest of "tax fairness", that it is better to do a royal commission on tax reform to ensure that everybody is paying their fair share of taxes, not just small business owners?
Major overhaul of the tax code is contentious issue, since it leads to hard inspection of all the little perks and handouts that have been given to various groups over time. It is not in any governments interest to open up that can of worms. Everyone from families, big corps, small corps, farmers, seasonal workers, seniors etc... will start whining.
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Jan 15, 2017
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Jermyzy wrote:
Oct 12th, 2017 11:09 pm
Out of curiosity, for those of you in support of these new proposals. Do you not agree in the interest of "tax fairness", that it is better to do a royal commission on tax reform to ensure that everybody is paying their fair share of taxes, not just small business owners?
I think that's going to be necessary at some point soon, because there are glaring inequities in the system.

Business owners can sprinkle. Trusts are basically legal income-splitting vehicles. Pensioners can split unlimited amounts of pension income with a spouse, yet, Trudeau couldn't wait to remove the $2K tax equalizer from the $85K bus driver with a stay-at-home spouse, striving to join the middle class.
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Jul 20, 2017
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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 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.
I think it will affect daily operations, although it might be indirectly. In ON due to the minimum wage increases and adding the reduced reserves companies will be able to keep, I think you will see more temporary lay-offs. If business is slow, owners will pull the trigger on firing much faster...
Also regarding the taxation of benefits is out of the question:not just because of fairness ( it is not fair that is not taxed) but morneau company makes a lot of money on working with benefits companies..
I don't understand why not making the benefits taxable, associated with a corresponding medical deduction is not implemented. It should have a zero effect if the present system is fair...Actually for employee plans with high deductible it could be positive for employees...
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Jul 20, 2017
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I am not sure what the rules mean>
Presently I am 50% owner with spouse 50% owner..
how can I pay dividends to myself and not to my wife?
Any change needs shareholder approval....should company buy back shares from wife? at what price?
Should I buy my wife's shares?
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Aug 2, 2010
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taxrage wrote:
Jan 16th, 2017 11:00 am
A professional corporation is basically a licenced job. We don't allow income splitting from any other type of "job", so why does a licenced professional like a doctor/dentist etc. who basically has 2-3 staff in the office get to income-split with his/her spouse and adult children to the tune of $40K/year tax-free (other than small business tax paid by the corp.) every year he/she practices? What does the spouse and adult children contribute to that "business"?

Ask yourself, why does the income of an incorporated doctor/lawyer/dentist pay only 14% fed+prov tax? There is a reason for that in other businesses. It's to enable the business to invest in capital and grow, like a Magna Inc. The intent is not so that the doctor/dentist can pay a nice tax-free $40K dividend to a spouse and adult children every year to pay for nice things like Harvard educations, BMWs and sunny vacations. The rest of us do that on the 60% of each dollar that is left over after various levels of taxation.
Took the words right out of my mouth. Time this unfair loophole was closed.
Deal Guru
Aug 2, 2010
11024 posts
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Jermyzy wrote:
Oct 12th, 2017 11:09 pm
Out of curiosity, for those of you in support of these new proposals. Do you not agree in the interest of "tax fairness", that it is better to do a royal commission on tax reform to ensure that everybody is paying their fair share of taxes, not just small business owners?
No need to wait for some royal commission when there is already a loophole that should be closed. Ditch them as you find them.
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Jul 20, 2017
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eonibm wrote:
Oct 13th, 2017 11:39 am
No need to wait for some royal commission when there is already a loophole that should be closed. Ditch them as you find them.
what do you think about taxing the benefits of employees? that is a loophole too

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