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 12:45 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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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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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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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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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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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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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.
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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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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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eonibm wrote:
Oct 13th, 2017 11:38 am
Took the words right out of my mouth. Time this unfair loophole was closed.
Absolutely.

I don't really care if it only results in an extra $250M in income for the government. It's wrong for the dentist to be able to flow $40K in dividends to his kids in university, when the Trudeau couldn't wait to take back the $2K tax equalizer that some families briefly enjoyed.
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eonibm wrote:
Oct 13th, 2017 11:38 am
Took the words right out of my mouth. Time this unfair loophole was closed.
So out of curiosity, are you just as outraged that Trudeau/Morneau are also taking advantage of these "loopholes" but not acknowledging that they are?
Are you outraged millionaire CEOs don't get taxed fully on their stock bonuses?
Are you outraged pensioners can income split but everybody else can't?
Would you be okay if small business owners had access to a tax-assisted pension plan?
Last edited by notenoughsleep on Oct 13th, 2017 12:35 pm, edited 1 time in total.
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taxrage wrote:
Oct 13th, 2017 9:45 am
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.
Gotta ask what are your definitions of middle class??? Middle class family income and middle class individual income.

I would think that "middle class" would be around the median family income but it seems that is not the case in discussions.
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Sebastian6300 wrote:
Oct 13th, 2017 10:08 am
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?
Do you and your wife have the same class of shares?

What is her contribution to the business and her capital investment.
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May 22, 2003
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taxrage wrote:
Oct 13th, 2017 12:17 pm
Absolutely.

I don't really care if it only results in an extra $250M in income for the government. It's wrong for the dentist to be able to flow $40K in dividends to his kids in university, when the Trudeau couldn't wait to take back the $2K tax equalizer that some families briefly enjoyed.
I respectfully disagree with you about how the dollar amount does not matter (I do agree with you about income sprinkling with kids though). In my opinion, the increased dollar amount of tax revenue generated from these new rules will be an indicator how successful he was with his whole "tax unfairness" belief. For example, when they increased the personal tax rate on the highest income tax bracket, it led to a decrease in tax revenue - this indicates to me they were unsuccessful with trying to tax high income earners.

If these new proposals go through and he generates $250 million, which is the expected amount, then I guess he will achieve what he wanted. But if it generates only $50 million, it would show that not as many people are taking advantage of these loopholes as he accuses or they have found other ways to shelter their money. That again would suggest they were unsuccessful with their goal . Also, I have absolutely no idea how much cost to the taxpayers these proposals will cost, including the cost of their media campaigns. The net benefit in tax revenue is important.

I cannot speak for other businesses, but in my case, if the proposals go through as is, I believe I will actually pay less tax than I do now (have to double check with my accountant). I do not benefit at all from dividend sprinkling/capital gains exemption. The only rule that will affect me is the passive investing. I currently take slightly less salary and leave more in the corporation for investing (tax deferral purposes) and do NOT currently max out my RRSP/TFSA. If the rules go through as is, I will draw enough extra salary to max out my RRSP/TFSA (so essentially "tax-free" cash). Also, I will change my investment strategy, right now I have a mix of dividend/growth stocks. If the rules go through as is, I might switch out my dividend stocks for stocks with no distributions and hold long-term (e.g. BRK.B, AMZN, swap-based ETFs). I am not looking forward to any additional paperwork as a result of these changes though.
Last edited by notenoughsleep on Oct 13th, 2017 1:13 pm, edited 1 time in total.

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