Personal Finance

[July 2017] Morneau makes tax loophole announcement

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  • Jul 31st, 2017 11:07 am
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Penalty Box
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Apr 21, 2004
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[July 2017] Morneau makes tax loophole announcement

http://www.bnn.ca/video/live2-morneau-m ... ment~68597

Ottawa set to target tax loophole for rich professionals with announcement today
The Finance Minister is expected to tighten rules that allow high earners like doctors and lawyers to incorporate in order to reduce their tax rate
http://business.financialpost.com/perso ... 0f1f26425e
10 replies
Deal Addict
Feb 25, 2007
1149 posts
569 upvotes
Ottawa
And here's a (similar) Globe and Mail article on the same.

We have a 20+ page discussion thread mainly on whether it's fair incorporated professionals/CCPC's get various forms of preferential tax treatment here on this board already, so maybe let's try to keep this thread about the specific proposed changes rather than philosophical and political debate.

As someone who benefits from income tax deferral by retaining consulting income in a CCPC, I'm of course curious about the details, more than in these articles. Has anyone seen them?

So far, it looks like the primary focus is reducing income sprinkling to family members, which may have significant impact on sole-breadwinner incorporated professionals who essentially income split, but use most of their income as soon as it is earned. It seems the use of one's corporation to income smooth over time, i.e. implement a private RRSP-equivalent, is only minimally affected. That is in comparison to more heavy-handed options that were available, e.g. increasing the small business tax rate wholesale, or decreasing (similar to Québec) what sorts of businesses are eligible for the small business exemption.

I didn't see quite enough detail to really understand the other changes, i.e. (FP) to "tighten rules on retaining 'passive investments' to avoid higher tax rates for high earners, going forward only [and] changing rules to prevent conversion of dividends and salary into lower-taxed capital gains." I'm guessing this will generally whittle down on loopholes and techniques to recategorize types of income in a corporation, and workarounds on getting around "integration", i.e. the taxing of passive income in a corporation at a rate at least as high as top marginal income tax rates. Anyone more knowledgeable?
Deal Addict
Sep 23, 2009
4294 posts
1341 upvotes
As you allude to, it would make little sense to close one loophole while leaving others open.

It could be that they are closing one now with the intention of closing others in the near future.

That's in line with the current regime's philosophy towards PSC and CCPC.
Deal Addict
Oct 7, 2007
4548 posts
1464 upvotes
I found this announcement a bit concerning given that the information provided was quite vague and non-committal. My understanding of current tax laws suggests to me that it is not easy anymore (unlike twenty years ago or so) to really take advantage of these so-called loopholes and that if people are deliberately abuse taxing laws for tax avoidance or tax evasion that these situations are illegal and would be dealt with accordingly by the Canada Revenue Agency. The lack of transparency in WHAT is really coming and WHY suggests to me that something heavy-handed may be coming that may be punitive to more than the "doctors" and "lawyers" that keep getting pointed to as the so-called culprits of these tax loopholes. The amount of money (i.e. the benefit of taking such steps) the Finance Minister is claiming to be available for recovery also sounds relatively small compared to the exercise he is mentioning although something doesn't reconcile because all the laws to ensure that the appropriate amount of tax is paid currently exist (concept of "integration"). What is lacking is the transparency in what the Finance Minister is really trying to accomplish and why. Full disclosure of such information would enable all of us to have a proper discussion on the subject before implementing laws that may punish hardworking small business owners who already pay more than enough tax on the measley amount of earnings they are able to save in their small business.
Deal Addict
Sep 23, 2009
4294 posts
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Again, the answer is political/philosophical, how do you appease to the demands of the base of your constituents?

By doing it over a period of time - and not all at once - you can keep pointing to the ongoing efforts to make things "fair" and that you are screwing the wealthy.

Next election, you can point to efforts like this and people vote for your party.

Tax the rich and evil is in vogue and ensures you get voted in by the masses.

It's hard to not talk about this politically/philosophically because that is what it is at it's core.
Deal Fanatic
User avatar
Jan 27, 2007
5027 posts
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Peterborough
I would much rather see them take on the underground economy and black market.

If everyone paid their fair share, the economy would be way further ahead.
Newbie
Jan 18, 2017
95 posts
64 upvotes
It's a clever strategy of targeting a minority body first, before moving on to the majority body. There aren't enough in the minority to really fight back, so they are an easy target. So first you sneak in legislation targeting said minority, because the majority won't speak out.

Once that is in place, it's an easy jump to apply the legislation used against the minority (Professionals) against the majority (Small Business). And ironically it will be pitched as an argument in "fairness": "Well the Professionals aren't allowed to do "X", so it's only fair that ALL businesses aren't allowed to do "X" either. Otherwise it's not fair..."

If you want to see some "vague and non-committal" legislation, look in to the Specified Corporate Income rules introduced last year. There is a clause that basically says "We will interpret tax transactions at the Minister's discretion." When pressed for clarity on this at a recent CRA Round Table, CRA's response was basically "We have no plans to comment on this, or to provide clarity."


choclover wrote:
Jul 19th, 2017 11:28 am
I found this announcement a bit concerning given that the information provided was quite vague and non-committal. My understanding of current tax laws suggests to me that it is not easy anymore (unlike twenty years ago or so) to really take advantage of these so-called loopholes and that if people are deliberately abuse taxing laws for tax avoidance or tax evasion that these situations are illegal and would be dealt with accordingly by the Canada Revenue Agency. The lack of transparency in WHAT is really coming and WHY suggests to me that something heavy-handed may be coming that may be punitive to more than the "doctors" and "lawyers" that keep getting pointed to as the so-called culprits of these tax loopholes. The amount of money (i.e. the benefit of taking such steps) the Finance Minister is claiming to be available for recovery also sounds relatively small compared to the exercise he is mentioning although something doesn't reconcile because all the laws to ensure that the appropriate amount of tax is paid currently exist (concept of "integration"). What is lacking is the transparency in what the Finance Minister is really trying to accomplish and why. Full disclosure of such information would enable all of us to have a proper discussion on the subject before implementing laws that may punish hardworking small business owners who already pay more than enough tax on the measley amount of earnings they are able to save in their small business.
______
Canadian & US tax guy
Sr. Member
Jul 20, 2017
559 posts
120 upvotes
I have found some news in the media that they plan to tax employee benefits...but that was pretty controversial...So divide and conquer: increase tax on the small businesses first calling them super rich with all employees cheering in the background...then tax employee benefits and strike pay with small businesses cheering in the background.. then increase MP salaries...
Superb plan to pay for a 30 bil accumulated yearly deficit when the economy is doing really great based on statistics...
Not sure when the young people will realize that they have to get organized..all of these changes mean that their life is getting worse:
-they pay 3 times more CPP then their parents who are retired now did pay
-graduated driver licensing
-car insurance: in Ontario a young male can easily pay $3000 a year for a liability only insurance
-no good jobs
-no summer jobs
-rent and housing costs ( no need to give numbers here)
-gas prices
-electricity prices ( Wynn can you read me)
-health tax ( Wynn can you read me)
-billed as villains who collect dividends from small corporations by the same people who did the same
-tuition trough the roof and tuition and text book credits taken away
-banking and credit card fees
Guys is time to create your own party. Just because Trudeau is young, they do not represent you unless your dad was a prime minister!
Sr. Member
Jul 20, 2017
559 posts
120 upvotes
crossborderguy wrote:
Jul 19th, 2017 1:06 pm
It's a clever strategy of targeting a minority body first, before moving on to the majority body. There aren't enough in the minority to really fight back, so they are an easy target. So first you sneak in legislation targeting said minority, because the majority won't speak out.

Once that is in place, it's an easy jump to apply the legislation used against the minority (Professionals) against the majority (Small Business). And ironically it will be pitched as an argument in "fairness": "Well the Professionals aren't allowed to do "X", so it's only fair that ALL businesses aren't allowed to do "X" either. Otherwise it's not fair..."

If you want to see some "vague and non-committal" legislation, look in to the Specified Corporate Income rules introduced last year. There is a clause that basically says "We will interpret tax transactions at the Minister's discretion." When pressed for clarity on this at a recent CRA Round Table, CRA's response was basically "We have no plans to comment on this, or to provide clarity."
I think you just pointed out the biggest obstacle against economic growth: the vagaries of the CCRA! Nobody can predict how transactions would be assessed by them..It is hard to have a dynamic business environment when at every step you have to ask KPMG for opinion...

I remember a funny case I had with Revenue Canada, I called to ask a relatively simple question related to the RRSP Home buyer plan...The person asked me to hold on till she checks in the Arthur Andersen tax guide. They needed a third party to interpret their own rules.!!! Maybe now KPMG has replaced AA, but things are the same...
Sr. Member
Jul 20, 2017
559 posts
120 upvotes
CBC re-aired yesterday the doc about Government taking on KPMG. Everybody should watch that...

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