Should this kind of tax dodge be legal?

[Tacklewasher]

The list is endless.

And either illegal or never happened.

I'm voting for the latter but even if it is the former, what's your point?

[Tacklewasher]

"Josh Zweig, CPA, CA and principal of the liveca.ca website, highlights this as an important point. "In simple terms, if you're earning more than you need to live on, incorporation can be advantageous," he says.

He gives an example of a business earning $100,000 and the owner needing $60,000 to live on; in this case, that owner can leave $40,000 in the corporation, and pays reduced income tax on that amount.

Income Splitting and Dividends

Incorporating your business and splitting your business income with family members can result in significant tax advantages beyond those available under reduced tax rates for corporations.

If you hire your spouse or children, the corporation can deduct the amount it pays them as an expense, and your family members pay tax at their own personal income tax rates, often substantially lower than your own.

Even if you can't hire family members to carry out work, you can make them shareholders and pay them dividends, which are taxed at a reduced rate. The corporation still pays taxes on this money but, depending on the personal incomes of your family members and the province in which you are residents, there may be an overall tax savings."
https://turbotax.intuit.ca/tax-resource ... ntages.jsp

All of this is severely restricted through the laws concerning "Personal Services Corporation".

http://sbinfocanada.about.com/od/taxded ... ration.htm

Try it and see what the CRA does about it. I dare you.

[Merry]

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.

It generates investment income if you take 3 million dollars of capital and invest it in the stock market.

[Merry]

Trudeau last week told CBC's Peter Mansbridge that a "large percentage" of small businesses have been created strictly to help wealthier Canadians save on their tax bills.

he says the small business tax system needs "tweaking" to ensure it's aimed at small businesses that actually create jobs, not used as a tax dodge by wealthy individuals, such as doctors and lawyers.

http://www.huffingtonpost.ca/2015/09/12 ... 28138.html

[Merry]

Various academic and think tank studies have found that reductions in the small business tax rate disproportionately benefit wealthy individuals who incorporate their businesses in order to reduce their personal income tax burden, split income with family "shareholders" and avoid capital gains taxes.

Many small businesses are created to enable individuals to reduce personal tax rather than grow companies ... With corporate organization, it is easier to split income among family members holding shares of a corporation."

Another study, co-authored in 2014 by Michael Wolfson, Canada's former assistant chief statistician, found that the wealthiest Canadians disproportionately take advantage of the preferential small business tax rate.

From 2001 to 2011, that study found that fewer than five per cent of Canadian taxpayers in the bottom half of the income scale owned at least 10 per cent of the shares in at least one Canadian-controlled private corporation (CCPC). By contrast, as much as 80 per cent of taxpayers in the top 0.01 per cent of income earners were CCPC owners.

In another study soon to be published in the Canadian Tax Journal, Wolfson and economist Scott Legree linked personal income tax returns to corporate returns. They found the federal treasury lost at least half a billion dollars in tax revenue that would have been paid had individuals not been able to funnel their personal income through corporations.

And that's a conservative estimate because the study did not include families who funnelled income through corporations to children no longer living under the same roof.

"The popular rhetoric is that the special low small business tax rate that is available to CCPCs is designed to support small businesses, in part because they face greater challenges than large businesses in areas such as financing and because they are believed to be major sources of job creation and entrepreneurship," concludes the study.

"However, our analysis suggests that roughly half a billion dollars annually is foregone in ways related primarily to income splitting, where no such benefits are generated."

http://www.cambridgetimes.ca/news-story ... iness-tax/

[Merry]

One of Canada's foremost tax experts argues in a new paper that it's time to raise small-business tax rates because too many wealthy Canadians are using the rate to reduce their tax bill.

Economist Jack Mintz argues that about 60 per cent of the value of the small-business deduction — the amount small businesses are allowed to claim on their tax return if their total capital is low enough — accrues to households earning more than $200,000 a year.

Liberal Leader Justin Trudeau caused a stir last week when he said that more than half of small businesses are really an avenue for wealthy Canadians to reduce their income tax bill.

http://www.simcoe.com/news-story/584388 ... ess-taxes/

[Merry]

Small business owners, at least those with incorporated businesses, have another option for income splitting that makes sense once they start bringing in the big bucks: paying dividends instead.

A dividend is a portion of a company’s earnings. It can only be released to someone who owns shares, though, so in order to use this option, the corporation must be set up so that the family member owns them. The upside is that the CRA’s requirement that you pay a “reasonable” salary is taken off the table, says Kevin Stienstra, a certified accountant and senior manager for tax services at Grant Thornton LLP, an accounting and business advisory firm in Beamsville, Ont.

“You can pay someone a dividend of whatever you want, assuming they own shares of the company,” Mr. Stienstra says.

http://www.theglobeandmail.com/report-o ... e24207847/

[Merry]

I would like to make it clear that my criticism of our tax system is NOT about objecting to giving tax breaks to legitimate small business.

It is about how our tax system allows many wealthy individuals to create businesses that serve no other purpose than to generate tax savings.

I know several people who use this particular strategy and, while it appears to be perfectly legal, it ought not to be. Because why should the very wealthy pay tax at a lower rate than many ordinary Canadians do? Particularly when every dollar the wealthy avoid paying, has to be made up for in the form of higher tax rates for the rest of us.

Trudeau is right about this particular abuse of our small business tax system. And it's time something was done about it.

[Gilchy]

Also not mentioned in this thread, passive (investment) income inside corporations is taxed at 46%. Great tax shelter, there!

[Muzza]

It generates investment income if you take 3 million dollars of capital and invest it in the stock market.

And if you take it out of the company you will pay tax. What is your point?

[I Think]

Tacklewasher wrote;

And either illegal or never happened.

I'm voting for the latter but even if it is the former, what's your point?

The point is that there are lots of ways, some illegal to hide income, I just mentioned some of the ones I am aware of.
You and others here, GB, may choose to disbelieve, but that is your monkey and its not in my circus.

[LANDM]

If it is illegal, why are you concerned, other than the obvious reason that they shouldn't be doing it?

It is then an enforcement issue rather than a systemic tax system issue. The example that was brought up about small vendors not declaring cash income from trinket sales is hardly a case of the wealthy hiding income but it is certainly illegal.

As for tax avoidance, if the rules are in place and allow for ways of lowering a tax burden, a person would have to be a moron if they didn't do the measures that are legal and possible for their situation.

Tax evasion is a different matter and would be illegal.

All of the other nonsense about corporate tax rates and paying to family members is well covered under the tax code and the sweeping claims about how people use these measures have already been pointed out as either illegal or allowable, with nowhere near the claimed benefits.

If your monkey is in a circus that is entirely fantasy-based, that's fine. But the responses you are getting are valid and real. They just don't fit the rhetoric that is being thrown about.

[Tacklewasher]

The point is that there are lots of ways, some illegal to hide income, I just mentioned some of the ones I am aware of.
You and others here, GB, may choose to disbelieve, but that is your monkey and its not in my circus.

Can we either move this thread to bickering, or conspiracy?

Cuz the lies that these folks are trying to spread can't really be responded to in a civil matter.

[I Think]

Please point out any thing in my posts that is a provable falsehood.

[Captain Awesome]

Also not mentioned in this thread, passive (investment) income inside corporations is taxed at 46%. Great tax shelter, there!

That's a great loophole right there.

With the remaining proceeds you can buy gold and buy things with it!

Dang rich people.