Should this kind of tax dodge be legal?

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Merry
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Should this kind of tax dodge be legal?

Post by Merry »

There has often been talk about the ways the very rich can legally avoid paying the same tax rate as those who earn similar annual amount via employment income. But rarely do any improvements to the system become law, usually because the masses don't really understand the processes used by the rich to lower their tax bills.

Most rich people, when they sell their business, invest the proceeds into a new corporation, that was created purely and simply for tax purposes. In other words, it's a corporation that exists only on paper, because it doesn't really perform any other function.

I personally know people who have employed this strategy, who have invested millions from the sale of a legitimate business into a corporation that was created as a means of sheltering the proceeds from tax. I also know of people who currently own a legitimate business, yet still have several additional "on paper" type businesses which were created purely and simply to lower their tax bill.

Some may argue what's wrong with that? Well, the reason it's a problem is because every time rich people find ways to pay less tax, the rest of us have to pay more tax in order to make up for the shortfall.

I've raised this issue before, and been shouted down by the right wingers on these forums, some of whom I suspect have benefited from this particular tax loophole themselves. So no wonder they don't want to see it disappear. But, for the rest of us, I think it's important we try to understand how this kind of tax dodge really works, and then decide for ourselves whether we think it's fair or not.

The following article explains the process a lot better than I ever could. So I urge all those of you who are interested in this subject to read it. But be sure you read it all the way to the end, if you want a really good understanding of how this particular tax dodge really works.

http://induecourse.ca/corporate-tax-cuts-cui-bono/
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The Green Barbarian
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Re: Should this kind of tax dodge be legal?

Post by The Green Barbarian »

Merry wrote: usually because the masses don't really understand the processes used by the rich to lower their tax bills.


And neither do you.

Most rich people, when they sell their business, invest the proceeds into a new corporation, that was created purely and simply for tax purposes. In other words, it's a corporation that exists only on paper, because it doesn't really perform any other function.


If they sell their business, they have to pay tax on it. That's how it works. Anything else and they should be audited and assessed. This whole post is complete gibberish.

I personally know people who have employed this strategy,


No, you don't.
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Merry
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Re: Should this kind of tax dodge be legal?

Post by Merry »

GB - you responded so quickly to my post that I seriously doubt you took the time to even read the link I cited.

Instead, you simply made your usual negative knee jerk reaction to anything that remotely resembles a criticism of the right wing status quo.

Consequently, I'm going to ignore your response.
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Re: Should this kind of tax dodge be legal?

Post by The Green Barbarian »

Merry wrote:GB - you responded so quickly to my post that I seriously doubt you took the time to even read the link I cited..


I did read the link you cited and it had absolutely nothing to do with this complete fallacy you are trying to sell. Instead it was just another radical leftist NDP'ers lament about how people create corporations and then pay themselves through their corporations. So what? In the end, it's all tax neutral, but somehow, you NDP gang just can't be bothered to figure that out, because it's so much easier to be lazy and just cry about loopholes that don't exist. Why you people continue to sell this myth about how "rich" people somehow avoid taxes just baffles me. It has to be because of a sense of sheer jealousy and selfishness, as trying to punish rich people because they are rich is such a stupid, brain-dead, and backward strategy, that only results in them leaving, and you being poorer for it. That the NDP can never figure this out is why they continue to lose election after election after election. And why NO ONE bought the giant load of blarney you and the rest of the NDP gang was trying to peddle that the NDP was somehow "centrist". They're not "centrist" and never will be. They are and will always be one thing, and one thing only: "dumbest".
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Re: Should this kind of tax dodge be legal?

Post by rustled »

If someone has worked harder than me, made better financial choices, taken bigger financial risks, focused less on their family and friends and more on their business, and as a consequence that person ends up wealthier than I am, I am okay with them using legal means to defer paying punitive taxes on that success.

No, I will never be in a position to take advantage of this. I will never have responsibility for a business that injects a great deal of money into our economy through my employees and their services, since I'm not cut out for that. And none of my immediate ancestors sacrificed family or enjoying their own lives to build a fortune, thank goodness, so there's no risk I'll inherit wealth either.

But some are willing to make those sacrifices and take those risks, and we need them. Our economy needs them. So why would we insist on punishing them? Merry, punitive tax law is just that, punitive.

You usually describe your proposals as "fair" because you like to focus on the "we will have to make up the shortfall". But if you can truly consider all aspects of making sure those who are financially successful pay through the nose for their success, and insist that it is fair because it allows the rest of us to enjoy more of what they have already given up to get where they are, your idea of fair is a very far cry from mine.

Will you ignore my post, too? I found the information in your link whiny and biased. The comments below it speak volumes.
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Re: Should this kind of tax dodge be legal?

Post by I Think »

Read another tax dodge being used in Vancouver some years ago, don't know if it still works;
Instead of owning your house, you buy it with a corporation, when you want to sell, you sell all the shares in the corporation for whatever price is agreed upon, that way the property never changes hands, it remains owned by the corporation.

Of course if the corporation is offshore..............................
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Re: Should this kind of tax dodge be legal?

Post by The Green Barbarian »

I Think wrote:Read another tax dodge being used in Vancouver some years ago, don't know if it still works;
Instead of owning your house, you buy it with a corporation, when you want to sell, you sell all the shares in the corporation for whatever price is agreed upon, that way the property never changes hands, it remains owned by the corporation.

Of course if the corporation is offshore..............................


and if the CRA finds out about it, it will be assessed under GAAR and it won't be a "dodge" at all. And if you are resident in Canada then it doesn't matter if that corporation is offshore Canada or off-shore in Lake Okanagan. These aren't "loop-holes", but simply stupid folklore you've chosen to believe.
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Re: Should this kind of tax dodge be legal?

Post by Muzza »

You can only use a corporation as a tax dodge if there is income coming in to the corporate entity. You cannot just create an incorporated company and get tax breaks, when there is no income. Putting money in to a corporation is not income.
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Re: Should this kind of tax dodge be legal?

Post by The Green Barbarian »

Muzza wrote:You can only use a corporation as a tax dodge if there is income coming in to the corporate entity. You cannot just create an incorporated company and get tax breaks, when there is no income. Putting money in to a corporation is not income.


Don't bother. There are those here who have chosen to believe a bunch of myths they have heard, that must be true, because those evil rich people they hate so much are just plain evil and would never pay taxes because of all of these mythical loopholes out there. This is why it was so imperative that the NDP not be elected into even a minority position. The punitive measures that they would have taken chasing imaginary rabbits down holes to fix problems that don't exist would have been frightening and economically damaging, all in the name of "if we don't get them then others will have to make up the shortfall". Total gibberish.
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Re: Should this kind of tax dodge be legal?

Post by Gilchy »

I Think wrote:Read another tax dodge being used in Vancouver some years ago, don't know if it still works;
Instead of owning your house, you buy it with a corporation, when you want to sell, you sell all the shares in the corporation for whatever price is agreed upon, that way the property never changes hands, it remains owned by the corporation.

Of course if the corporation is offshore..............................



Let's walk this through...

Ignoring the fact that primary residences are tax-free, let's pretend a Holding company is created (at a cost of several thousand dollars in set up fees and annual accounting fees) solely to purchase a house for, let's say for example purposes, $500,000. That house goes up in value to $1,000,000 and the shares of the company are sold. I don't care what price you claim for the share sales, according to the CRA, the shares went up in value by $500,000, and so a $500,000 capital gain is triggered. Tax!

For the 1,243,546,789 time, these "magic loopholes" do not exist.

Even for the OP, for funds to be paid into a Holdco from an Opco, tax has to be paid on that.
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Re: Should this kind of tax dodge be legal?

Post by Rwede »

Merry wrote:Most rich people, when they sell their business, invest the proceeds into a new corporation, that was created purely and simply for tax purposes. In other words, it's a corporation that exists only on paper, because it doesn't really perform any other function.



Your theory is missing one of the basic tenets of tax law in this country: the newly-created corporation must have a reasonable expectation of profit, and if it doesn't, it will be deemed a shell and the individual assessed full tax and interest and penalties for trying to evade taxes.

End of conversation.
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Re: Should this kind of tax dodge be legal?

Post by Tacklewasher »

According to the article:
Let me sketch out roughly how things go. Suppose you are earning $500,000 per year, living in Ontario. Now the first thing you have to realize is that T4 income is for the little people. Nobody who is anybody makes T4 income. Why? Because you pretty much have no choice but to pay taxes on it, and there are practically no deductions. So once your income starts creeping above $150,000, you start looking for ways of converting it into non-T4 income (e.g. you work as a “consultant” on contract, rather than as an employee). Then you create a corporation (cheap and easy to do), and get people who hire you to pay your corporation instead of giving the money directly to you. This is called “shifting to more tax-efficient modes of compensation.”

Once you have the money coming into your corporation, you start by paying yourself a salary, around $136,270 – enough take you up to the point at which the top marginal rate kicks in. Maybe a bit more, so you can max out your RRSP contributions and TFSAs. Now it’s time to get creative with the rest. Does your spouse make less than you? Hire her (for simplicity, let’s say her) as a bookkeeper. Got young kids? Don’t pay your nanny out of regular income (the childcare deduction is ridiculously low), have the corporation hire her as an “executive assistant.” Kids gone off to university? Don’t pay their rent, have the corporation buy a condo and hire them as “property managers.” And don’t buy a second car, have your corporation buy it. Don’t go on vacation, go on business trips paid for by the corporation. The only limits are your imagination (and of course the law, loosely interpreted).


Now every item listed is illegal. Taking it to the extreme in the article will land you in jail. Not going to go through each example, but whoever wrote this is a complete idiot. And has no clue as to what is in current tax code.

Merry, posting junk like this just goes to prove GB's points about you. Not sure that is what you should be doing.
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Re: Should this kind of tax dodge be legal?

Post by Rwede »

And the author of that bunk?

http://www.trudeaufoundation.ca/en/comm ... seph-heath

Whodathunkit. Money from the Trudeaus.
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Re: Should this kind of tax dodge be legal?

Post by I Think »

GB
folklore you've chosen to believe.


The "dodge" I noted, was well documented in 1998 +/- in Vancouver, related to the sale of condominiums, and well discussed in the media. It was an attempt to avoid Property transfer taxes.
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Re: Should this kind of tax dodge be legal?

Post by Captain Awesome »

The thing about talking about loopholes and tax dodges is that usually the talking is done by people who have a very vague idea how taxes work. So, anytime somebody starts shouting "Hey, there is this loophole, and people are not paying taxes!", there's an accounting professional rolling his eyes who can explain how this is wrong on seven different levels, and how people who don't know how taxes work should just educate themselves on it instead of shouting nonsense.

Every time somebody brings in the example of Warren Buffet paying less taxes than his secretary, I wish I was able to slap people over IP protocol.
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