Liberal Small Business Tax Proposal

[suntan]

This quote is hidden because you are ignoring this member. Show Quote

If the advantages are so few, why don't small business owners today pay themselves big salaries every year? Why the need for the dividend schemes?

What triplep said. But also it should be mentioned that if you're a fat cat lawyer pulling in $500K, there's no scheme, today, that saves you any sort of tax money.

[msommers]

http://www.macleans.ca/politics/trud...-b-c-townhall/

[soloracer]

This quote is hidden because you are ignoring this member. Show Quote

What dividends schemes? The fact that a shareholder can receive a dividend? I wouldn't call it a scheme as the spouse has to be a legal shareholder of the corporation in order to receive these dividends. Further, it takes away from the fact that a lot of these small business owners take on great risk to do what they do. In most cases, the spouse doesn't work and stays at home and supports the other spouse in a different way. If the other spouse is working and making a good salary, this whole "dividend sprinkling" is a moot point.

Small business owners can pay themselves via dividends or salaries. If they pay themselves via dividends, the corporation doesn't get a tax deduction for this payment, so in essence the corporation is paying higher taxes. If the owner takes salaries, the corporation gets a deduction and ends up paying less tax. In turn with dividends, there is less of a personal tax obligation due to the way dividends get taxed, as they are paid from after tax dollars from a corporation. Further, if an owner decides to take dividends, their RRSP room does not increase, so basically they can't set money aside for retirement.

If an owner takes salaries, the owner is exposed to higher personal tax obligations, but the corporation is exposed to lower taxes. The salary generates RRSP room, thus they can put money away and defer the taxes owing (similar to what people do with small business corporations). The owner in most cases also pays CPP. The reason that a lot of small business owners stay away from salaries is because it just creates more administrative work for them. They need to remit payroll remittances, calculate CPP, withholdings etc. So instead of doing this on a monthly basis, they owner just takes a dividend and make personal tax installments.

In general it is very specific for each individual and what their end goal is to figure out whether dividends or salary works better for them. In general the income tax act is designed so that taxes are integrated, I.e. 1$ earned personally is taxed the same if you earned it within a corporation and then paid it out to yourself, or if you earned it personally. Yes there is leakage, but this leakage has been greatly reduced over the last couple of years.

Except that the first $30k of dividends is tax free - per shareholder. Hence the rationale for dividend sprinkling. I imagine most stay at home relatives end up getting a dividend. If my wife stays home we get nothing for her labour. Not even income splitting any more. Your administrative argument has little merit. We have former employees who work for our company now as "consultants". The sole reason was the tax avoidance/deferment and write offs that they are able to receive. That is the real reason these people do not take a salary from their businesses - they want to keep the money in their possession as opposed to giving it to government. I don't blame them but you are not being honest by saying the only reason to avoid paying a salary is to avoid paperwork. As for the RRSP argument, there is a limitation on the amounts one is able to put away in an RRSP. But in a business there is no limit. If you have a very good business you will most definitely have a larger savings to invest and grow. Yes you will pay tax on the gains from investments but 50% of something is better than 100% of nothing. A salaried worker has up to 40% gone before they have the chance to put anything away - and then has a miniscule limit that they are allowed to contribute tax free.

[soloracer]

For the record, in regards to the idea of "tax fairness" if given the choice of Option A: Make others pay more or B: Let me pay less I will always choose option B.

[Chandler_Racing]

This quote is hidden because you are ignoring this member. Show Quote

What dividends schemes? The fact that a shareholder can receive a dividend? I wouldn't call it a scheme as the spouse has to be a legal shareholder of the corporation in order to receive these dividends. Further, it takes away from the fact that a lot of these small business owners take on great risk to do what they do. In most cases, the spouse doesn't work and stays at home and supports the other spouse in a different way. If the other spouse is working and making a good salary, this whole "dividend sprinkling" is a moot point.

Small business owners can pay themselves via dividends or salaries. If they pay themselves via dividends, the corporation doesn't get a tax deduction for this payment, so in essence the corporation is paying higher taxes. If the owner takes salaries, the corporation gets a deduction and ends up paying less tax. In turn with dividends, there is less of a personal tax obligation due to the way dividends get taxed, as they are paid from after tax dollars from a corporation. Further, if an owner decides to take dividends, their RRSP room does not increase, so basically they can't set money aside for retirement.

If an owner takes salaries, the owner is exposed to higher personal tax obligations, but the corporation is exposed to lower taxes. The salary generates RRSP room, thus they can put money away and defer the taxes owing (similar to what people do with small business corporations). The owner in most cases also pays CPP. The reason that a lot of small business owners stay away from salaries is because it just creates more administrative work for them. They need to remit payroll remittances, calculate CPP, withholdings etc. So instead of doing this on a monthly basis, they owner just takes a dividend and make personal tax installments.

In general it is very specific for each individual and what their end goal is to figure out whether dividends or salary works better for them. In general the income tax act is designed so that taxes are integrated, I.e. 1$ earned personally is taxed the same if you earned it within a corporation and then paid it out to yourself, or if you earned it personally. Yes there is leakage, but this leakage has been greatly reduced over the last couple of years.

Here is the problem for me, this will have a huge impact:

"Dividends and other amounts received from a business, by an adult family member of the principal of the business, may be subject to a reasonableness test, which will be stricter for 18-24 year olds. Reasonableness will be based on the contributions made by the family member to the business. Top tax rates would apply."

The ability to distribute dividends to family members (often not active in the business) to reduce the "family unit's" effective tax rate is gone.

"Measures are also proposed to address other income sprinkling issues, including the multiplication of claims to the Lifetime Capital Gains Exemption. No LCGE in respect of capital gains from a disposition after 2017 (subject to the transitional rules) for minors, for gains while the corporation was held by a trust, and where income relating to the gain period was caught by point 1)"

This is a tax planning problem.

"Several proposes issued to discourage passive investments in corporations. This includes a new "elective" taxation method."

.... shit.

"An expansion of Section 84.1 to reduce the ability to strip value out of corporations as capital gains rather than dividends."

... shit x2

[rage2]

This quote is hidden because you are ignoring this member. Show Quote

Except that the first $30k of dividends is tax free - per shareholder. Hence the rationale for dividend sprinkling. I imagine most stay at home relatives end up getting a dividend. If my wife stays home we get nothing for her labour. Not even income splitting any more. Your administrative argument has little merit. We have former employees who work for our company now as "consultants". The sole reason was the tax avoidance/deferment and write offs that they are able to receive. That is the real reason these people do not take a salary from their businesses - they want to keep the money in their possession as opposed to giving it to government. I don't blame them but you are not being honest by saying the only reason to avoid paying a salary is to avoid paperwork. As for the RRSP argument, there is a limitation on the amounts one is able to put away in an RRSP. But in a business there is no limit. If you have a very good business you will most definitely have a larger savings to invest and grow. Yes you will pay tax on the gains from investments but 50% of something is better than 100% of nothing. A salaried worker has up to 40% gone before they have the chance to put anything away - and then has a miniscule limit that they are allowed to contribute tax free.

It's not really tax free. That money has already been business taxed at 27%, which is actually higher than income tax of 25% in that bracket. Sure there's advantages to things that can be written off, but the gap isn't as wide as you make it out to be. It also doesn't apply if you have other income, so for me having a salary, my dividends are immediately taxed at the highest bracket, and using dividends is purely for administrative purposes as I'm already maxxed out on EI, CPP etc.

[soloracer]

This quote is hidden because you are ignoring this member. Show Quote

It's not really tax free. That money has already been business taxed at 27%, which is actually higher than income tax of 25% in that bracket. Sure there's advantages to things that can be written off, but the gap isn't as wide as you make it out to be. It also doesn't apply if you have other income, so for me having a salary, my dividends are immediately taxed at the highest bracket, and using dividends is purely for administrative purposes as I'm already maxxed out on EI, CPP etc.

Is that $30k the first $30k you make? Or the last? My first $30k may be taxed at 25% but the last $30k I earn is taxed at a much higher rate. Besides, you are missing my point. Say my total income for the year is derived from my salary. Now let's say I made enough money to live on half of my gross salary and wanted to invest the other half. But the government takes their 50% of that amount before I have the chance to invest it - effectively reducing any future gains I could have made on that money. The point I am trying to make is I have to pay higher tax rates on all my earnings that year - with the exception of a the limited amounts I am allowed to put into an RRSP. In your business you pay a lower rate on that money and are able to use it to invest and get an even bigger final return.

Note: I was wondering about if a company pays a dividend is there a tax credit and found this:

Dividend income is first taxed at a corporate level, so owners can claim the tax credit to offset personal taxes. They claim a grossed-up amount of income based on the approximate corporate taxes paid, and the dividend credit returns some of this inflated amount.

If I understand correctly this means some of the taxes paid by the business on the income are returned. The article also explains why people don't pay themselves salaries - no it's not because of paperwork - it just allows them to keep more of their money. I realize the article might be older but here it is:

http://www.advisor.ca/tax/tax-news/d...-owners-112844

[rage2]

This quote is hidden because you are ignoring this member. Show Quote

Is that $30k the first $30k you make? Or the last? My first $30k may be taxed at 25% but the last $30k I earn is taxed at a much higher rate. Besides, you are missing my point. Say my total income for the year is derived from my salary. Now let's say I made enough money to live on half of my gross salary and wanted to invest the other half. But the government takes their 50% of that amount before I have the chance to invest it - effectively reducing any future gains I could have made on that money. The point I am trying to make is I have to pay higher tax rates on all my earnings that year - with the exception of a the limited amounts I am allowed to put into an RRSP. In your business you pay a lower rate on that money and are able to use it to invest and get an even bigger final return.

Note: I was wondering about if a company pays a dividend is there a tax credit and found this:

Dividend income is first taxed at a corporate level, so owners can claim the tax credit to offset personal taxes. They claim a grossed-up amount of income based on the approximate corporate taxes paid, and the dividend credit returns some of this inflated amount.

If I understand correctly this means some of the taxes paid by the business on the income are returned. The article also explains why people don't pay themselves salaries - no it's not because of paperwork - it just allows them to keep more of their money. I realize the article might be older but here it is:

http://www.advisor.ca/tax/tax-news/d...-owners-112844

I'm just talking about dividends vs salary. The profit going into the corporation is taxed at a flat 27% so the money going towards dividends have already been taxed at that rate before dividends are paid out, taxes, gross up etc. The gross up amount is just an adjustment that's made to make the playing field even between dividends vs salary, and has already been adjusted years ago so it's fairly close aside from CPP/EI and expense writeoffs.

No arguments on investment part of your post. That's cleared covered in the above posts.

The article you posted mainly focuses on CPP savings and income sprinkling in terms of savings, so yea, you're keeping more of your money because you don't have to pay CPP on payroll as well as match CPP on payroll. There's a reason why companies pay contractors more than employees on an hourly basis for the same job. Benefits, CPP, EI, administrative, severance at the end, all that shit costs the company money, and don't have to deal with these costs with a contractor. Fuck, this just reminded me what a PITA it was to pay our nanny as an employee and not a contractor.

To sum it up, someone making a $30k salary will take home around the same money as a contractor with their own corporation, taking in $30k of revenue and paying themselves $22k of dividends ($8k already taxed). The difference is that the former is in the form of income tax, while the latter is in the form of business tax. There's no free ride here.

[nzwasp]

So regarding the income sprinkling - on the CBC lunch hour program they had people on talking about it and one doctor said the reason she uses income sprinkling is to pay her husband a salary to look after her kid because she cant have maternity leave. To me this seems like this biggest BS reason for income sprinkling. Just get a fucking nanny like every other rich person and stop complaining plus the husband can claim EI for half the maternity leave anyway.

[Cash Money Hoes]

This quote is hidden because you are ignoring this member. Show Quote

I keep hearing this one come up, but I can't make the math work in any situation that would make this statement true. Even just looking at the corporate tax rate of 10.5%, that comes out to $31,500 before it comes out of the corporation. Most provinces a person making $50,000 would end up paying $12,000ish. Did this example start off as a discussion of some kind of tax rate comparison and morphed into the current example?

In case you too thought the above quote was so ridiculous it was made up, here is the article that quotes him as saying 'I want to be clear, people who make $50,000 a year should not pay higher taxes than people who make $250,000 a year': http://www.cbc.ca/beta/news/politics...ipeg-1.4278330

The only scenario where this could come close to being true is in the case where he is referencing tax rates with all (or vast majority) income earned left within the small business corp that qualifies for the small business active income tax exemption being taxed at a rate of 12.5% (using Alberta as an example) vs. an overall tax rate of 18% to an individual earning $50k. But even in this case the total tax paid by the corp is substantially higher than that of the individual.

The irony in this care is that the 3 changes proposed do not address the small business tax exemption that the above statement relies upon to be true. If using the case of income sprinkling the overall tax rate paid by earner and spouse (splitting $250k equally) is 27% vs 18% and significantly higher on an aggregate basis.

I don't blame Trudeau for looking at ways to extract more from the small proportion of the population that likely didn't vote for him in the first place, rather what really bothers me is that he is making extremely misleading statements to rally support for poorly thought out small business tax reform which will have a significant negative impact on real small businesses and the economy, all in an effort to properly tax 'consultants' and professionals that share few defining characteristics of the small business owner.

This leads me to ask whether he is intentionally making misleading statements to the public or does he actually believe what he is saying is true. Not sure which is worse.

He is not addressing the core issue: this being that many 'small business' are in fact just incorporated individuals that use tax incentives established for real small businesses. Realtors, 'consultant engineers', etc. being a perfect examples. But in an effort to rally support for policy (that were it otherwise properly thought out and implemented would be widely supported) is propagating a false perception among the general population that 'high income earners are not paying their fair share'. The policy proposed in its current form is simply there to build support among middle-class voters and follow through with a campaign promise... for better or worse.

In reality these changes disincentivized risk taking among small business owners with the possible net effect of lower aggregate tax receipts, a result similar to revision of personal tax rates which provided a tax break to 'the middle class' that was to be significantly offset by increases in marginal tax rates to higher earners. (http://globalnews.ca/news/2385855/li...orneau-admits/).

Also I'd like to point out what should be obvious to most. The median income for Canadians in 2015 (too lazy to find projections for 2017) was $33,920. A person in Quebec would pay $6,250 in tax that year (Quebec used to show highest tax payable across provinces at this income level).

Just federal Gov't spending (excluding provincial spending) in 2017 is projected to be over $8,300 per capitia in 2017, spending on every canadian, working and paying taxes or not.

It's not much of a jump to come to the conclusion that 'wealthy canadians' who earn more and pay more tax are massively subsidizing the majority of the population, and further the median earner is far from contributing to the country what they are likely taking out. I understand that this is a reality when you live in a quasi socialist society and I don't think this is a bad thing, but the way in which Trudeau is characterizing the people that do the heavy lifting for Canadians (for no other reason than to bolster his base) is sickening.

On top of it, higher income Canadians are the ones least likely to use the services that their tax dollars fund (Education System, Healthcare System, Prisons, Law Enforcement, Immigration, etc.).

I am happy to contribute to the country that has afforded me prosperity, freedom and stability, but don't tell me that I'm not paying my way and then some.

[kertejud2]

This quote is hidden because you are ignoring this member. Show Quote

So regarding the income sprinkling - on the CBC lunch hour program they had people on talking about it and one doctor said the reason she uses income sprinkling is to pay her husband a salary to look after her kid because she cant have maternity leave. To me this seems like this biggest BS reason for income sprinkling. Just get a fucking nanny like every other rich person and stop complaining plus the husband can claim EI for half the maternity leave anyway.

Most spouses of doctors are "office managers" but the nanny angle is a fresh new take.

[rage2]

This quote is hidden because you are ignoring this member. Show Quote

Also I'd like to point out what should be obvious to most. The median income for Canadians in 2015 (too lazy to find projections for 2017) was $33,920. A person in Quebec would pay $6,250 in tax that year (Quebec used to show highest tax payable across provinces at this income level).

Just federal Gov't spending (excluding provincial spending) in 2017 is projected to be over $8,300 per capitia in 2017, spending on every canadian, working and paying taxes or not.

It's not much of a jump to come to the conclusion that 'wealthy canadians' who earn more and pay more tax are massively subsidizing the majority of the population, and further the median earner is far from contributing to the country what they are likely taking out. I understand that this is a reality when you live in a quasi socialist society and I don't think this is a bad thing, but the way in which Trudeau is characterizing the people that do the heavy lifting for Canadians (for no other reason than to bolster his base) is sickening.

On top of it, higher income Canadians are the ones least likely to use the services that their tax dollars fund (Education System, Healthcare System, Prisons, Law Enforcement, Immigration, etc.).

I am happy to contribute to the country that has afforded me prosperity, freedom and stability, but don't tell me that I'm not paying my way and then some.

This. Well said.

[Masked Bandit]

This quote is hidden because you are ignoring this member. Show Quote

Also I'd like to point out what should be obvious to most. The median income for Canadians in 2015 (too lazy to find projections for 2017) was $33,920. A person in Quebec would pay $6,250 in tax that year (Quebec used to show highest tax payable across provinces at this income level).

Just federal Gov't spending (excluding provincial spending) in 2017 is projected to be over $8,300 per capitia in 2017, spending on every canadian, working and paying taxes or not.

It's not much of a jump to come to the conclusion that 'wealthy canadians' who earn more and pay more tax are massively subsidizing the majority of the population, and further the median earner is far from contributing to the country what they are likely taking out. I understand that this is a reality when you live in a quasi socialist society and I don't think this is a bad thing, but the way in which Trudeau is characterizing the people that do the heavy lifting for Canadians (for no other reason than to bolster his base) is sickening.

On top of it, higher income Canadians are the ones least likely to use the services that their tax dollars fund (Education System, Healthcare System, Prisons, Law Enforcement, Immigration, etc.).

I am happy to contribute to the country that has afforded me prosperity, freedom and stability, but don't tell me that I'm not paying my way and then some.

This is probably one of the most relevant points in the entire thread. This whole exercise is a witch hunt to incite rage amongst the lowest 50% of income earners by rubbing it in their face that the top 10% income earners are somehow only there because they screwed the system and didn't pay their fair share...those fat cats! Maybe the news should report on how the bottom 50% of income earners are a net drain on society and in fact don't contribute THEIR fare share and are actually being propped up by the top 20% who pay MORE than their fair share. But hey, that doesn't make good news and it's easier to sell votes to the enraged 50% of the population who lap up every piece of crap "news" story that comes out versus the others who are too damn busy working their asses off with no benefits, no paid vacation and no government safety net to be bothered.

http://business.financialpost.com/op...t-be-surprised

[Buster]

If you rob Peter to pay Paul, you will always get the vote of Paul.

[ExtraSlow]

It's really smart actually. There's way more people at the bottom than the top of the income scale. And they are quite evenly distributed across the country.

[Buster]

sure. progressive tax policies are really just institutionalized envy.

[Masked Bandit]

This quote is hidden because you are ignoring this member. Show Quote

It's really smart actually. There's way more people at the bottom than the top of the income scale. And they are quite evenly distributed across the country.

Yep, and a vote is a vote. It's pretty easy to see what these fuckers are doing, but I don't have to like it.

[triplep]

This quote is hidden because you are ignoring this member. Show Quote

Your administrative argument has little merit. We have former employees who work for our company now as "consultants". The sole reason was the tax avoidance/deferment and write offs that they are able to receive. That is the real reason these people do not take a salary from their businesses - they want to keep the money in their possession as opposed to giving it to government.

From the point of your company I would say the administrative argument has plenty of merit, as Rage indicated in a subsequent post. There would be a lot more work for your company if these individuals would be considered employees. Now being "consultants" all that happens is the company cuts them a cheque, makes sure GST is appropriately claimed, and that is the end of the story.

Further, in this specific example you provided, the "consultants" are most likely considered PSBs so there are rules in place already to address this. The fact that in most of these cases CRA does nothing with these, is their prerogative. But the rules exist. If the "consultants" ever got audited and could not defend their position that they are not PSBs, it would be super punitive. The fact of the matter is that probably 80% of the O&G small business companies would be screwed and end up effectively getting double taxed.

This quote is hidden because you are ignoring this member. Show Quote

I imagine most stay at home relatives end up getting a dividend.

The issue with this is that the relatives need to be shareholders of the company. So if you have an in-law and they are not a shareholder they are not receiving any sort of dividend from the company. Making someone a shareholder of your company is not a simple decision, as it gives them certain rights. A smart business owner will not make individuals they don't want to be shareholders. There are also rules in place to prevent having minors as shareholders.

[triplep]

This quote is hidden because you are ignoring this member. Show Quote

This is probably one of the most relevant points in the entire thread. This whole exercise is a witch hunt to incite rage amongst the lowest 50% of income earners by rubbing it in their face that the top 10% income earners are somehow only there because they screwed the system and didn't pay their fair share...those fat cats! Maybe the news should report on how the bottom 50% of income earners are a net drain on society and in fact don't contribute THEIR fare share and are actually being propped up by the top 20% who pay MORE than their fair share. But hey, that doesn't make good news and it's easier to sell votes to the enraged 50% of the population who lap up every piece of crap "news" story that comes out versus the others who are too damn busy working their asses off with no benefits, no paid vacation and no government safety net to be bothered.

http://business.financialpost.com/op...t-be-surprised

The problem with this witch hunt is that even thought they are going after the top 10%, it is impacting everyone who has a small business corporation.

Further, it negatively impacts individuals who want to pass their business on to their children. For example, if a family is trying to pass on the business to the next generation under the current rule (on a $6M capital gain in Ontario), there would be something like $1.6M in taxes owing, under the new proposed rules, this would increase the taxes owing on this to approximately $2.7M. I don't see how this make someone want to pass their business on to their children who would want to continue the family legacy, especially if the parents could just sell it to an unrelated third party and only incur taxes of $1.38M. I don't see how paying almost double is fair.

[phreezee]

Starting to become an Andrew Scheer fan.