Should this kind of tax dodge be legal?

[Gilchy]

The cap gains exemption exists to ensure double taxation is avoided. If the individual owned the investment and triggered the gain, 50% of the gain is received tax free. The reason for the CDA credit is to ensure that corps recover the same treatment.

Again, you're trying to make it more advantageous than it is. The primary point of having a holdco is to control the timing of the taxation more than reducing it.

[Merry]

[horrible rich people you hate so much.

I don`t hate rich people GB. Some of my best friends are rich.

What I hate is the unfairness of our tax system, which allows the wealthy to pay less tax by using tax breaks that were originally intended to help legitimate small business thrive, in the hopes those businesses would hire more workers and help spur the economy.

Private corporations that are created merely to help people reduce their tax bill, do not benefit the economy. They are not businesses in the sense that most of us understand the term. They are merely shells, usually numbered companies, where people often place the proceeds from the sale of a family business, in order to avoid paying tax on the lump sum.

And that part of it, I don`t object to. Because the tax rate on a lump sum of 3 to 5 million would be astronomical. So only paying tax on what you pick up annually seems fair to me.

However, that annual income should be taxed at the same rate as earned income. Because, at the end of the day, income is income, regardless of how you made it.

When people are investing by buying shares in operating businesses, the dividend income they receive is taxed at a lower rate, in part to encourage more investment in such businesses. And I don`t object to that. BUT, dividend income received from shares in a corporation that is NOT an operating business, should NOT be subject to the same preferential tax treatment. Because why should retired people, with 6 figure annual incomes, be getting a tax break not available to workers earning the same or less?

I don't hate the people who take advantage of such Government largesse GB. I hate the system that allows such unfairness in the first place.

[Merry]

The primary point of having a holdco is to control the timing of the taxation more than reducing it.

And that, in part, is the truth.

However, if you read through the material I provided, you will see that there is more to it than just tax savings gained by spreading out the timing of when you actually get your hands on the money. Tax is paid at a much lower rate on the investments both inside and outside of the private corporation. And tax on the original capital is deferred completely until it is withdrawn (allowing it to grow within the private corporation at a much faster rate than it would have done otherwise).

It's complicated, so it's difficult to explain it in laymans terms that are easy to understand. Which is why people need to hire accountants to set this kind of thing up. But wealthy people do use private corporations that are NOT operating businesses, as a means of reducing their tax bill. That much is indisputable.

And the laws they are using to save all that tax, are laws that were originally intended to help operating small business, not to help rich people pay less.

It's time these tax laws, which in many cases, are currently not being used as originally intended, were reviewed and improved upon, in order to ensure everyone pays their fair share for the Government services we all enjoy.

[Gilchy]

In between the attempts at patronizing responses, you are still ignoring the fact that passive income in a company is taxed at rates higher than the highest personal tax rate.

[The Green Barbarian]

I don`t hate rich people GB. Some of my best friends are rich.

Would they still be your friends if you knew you were lying on internet forums about how they aren't paying enough taxes, all because you don't understand basic tax policy? You really don't sound like much of a friend, more like someone who secretly is horribly jealous of them, and wants to use the government as some sort of revenge tool, via punitive and stupidly conceived tax policy.

[The Green Barbarian]

In between the attempts at patronizing responses, you are still ignoring the fact that passive income in a company is taxed at rates higher than the highest personal tax rate.

I don't think it's a matter of ignoring it, it's a matter of just not understanding it, and seeing the Canadian tax system through a flawed prism of jealousy and hate.

[The Green Barbarian]

I hate the system that allows such unfairness in the first place.

Then you must hate Ogopogo and Man-made climate change, as it seems you have a hate on for a lot of things that don't exist.

[Merry]

you are still ignoring the fact that passive income in a company is taxed at rates higher than the highest personal tax rate.

Investment income is income earned from property and is commonly referred to as inactive or passive income. Investment income typically includes rent, interest, dividends and royalties earned. The taxable portion of capital gains (net of capital losses) is included in investment income. Only one half of capital gains are included in taxable income; therefore, the effective rate of tax on capital gains is one half the rate of other investment income. And it should also be remembered that dividends from an eligible Canadian Corporation are also subject to a lower tax rate than other investment income.

So, while it is true that investment income (from sources other than Capital Gains and Dividend income) inside a Canadian Controlled Private Corporation is subject to quite a high tax rate, it is also true that retired individuals using a private corporation to reduce their tax bill, rarely hold much of that more highly taxed investment income within their private corporations. Most of their investment income is in the form of either Dividends or capital gains, which are taxed at a much lower rate.

In addition to which, when the corporation pays dividends out to the company shareholders (i.e. the husband and wife who own said corporation), the corporation receives a tax refund (which further reduces the tax amount owing).

When the owners (hubby & wife) receive their dividends, they are taxed at a much lower rate than they would be if the money had been paid to them as a salary. And, if they decide they want a bit more cash in a particular year, they can sell some of their shares back to the company, and claim the capital gains deduction.

Which brings me to the Capital Dividend Account.

Canadian Corporations can put any funds they receive tax free into their Capital Dividend Account, and then flow funds from that to their shareholders tax free by declaring them to be a "capital dividend". So, for example, if the Corporation has some capital gains, the 50% that wasn't subject to tax can be put into the Capital Dividend Account, and then paid out to the shareholders (hubby & wife) on a tax free basis.

This is an oversimplification, and there are many complex facets, but you get the picture.

The bottom line is that, for many people who sell a business and retire, it is to their benefit to defer tax on their capital by transferring the bulk of it into a non operating business, and then receive their income from that business in the form of dividends that are taxed at a much lower rate than regular investment income. (The reason they avoid paying tax upfront on the money they got from their business, is because there is no tax payable when money is flowed between two corporations with the same owner).

And, for all the reasons I outlined above, any profit made on that money while still within the Corporation, is taxed very favourably compared to what would be paid if it were not within the corporation. And, when it is finally paid out again to the shareholder who is also the owner, that also receives more favourable tax treatment (because it is subject to the dividend tax, not the income tax rate).

I can't explain it any better, or more simply, because it's too complex of a subject. But suffice to say that if there were absolutely NO tax benefits whatsoever to holding non operating businesses, there wouldn't be so many rich people who have them. Yet some folk have several such businesses. Why is that, if there is no benefit???????

[Merry]

To GB - in response to your rather rude comments, no I don't "hate" people for taking advantage of a tax system that is flawed. But I do strongly disapprove of a tax system that gives more breaks to the wealthy, than it does to everyone else.

This system has gone on for years, mainly because many of us ordinary folks who don't benefit from it, are largely unaware of the unfairness or, even when aware, often have difficulty arguing against it because of the complex nature of the subject.

Truthfully, one has to be an accountant to fully understand all the ins and outs of such a complicated system. Which is one VERY good argument for simplifying our tax system and making it more transparent.

Justin Trudeau has indicated he is aware of the inherent unfairness in the way non operating businesses are used to avoid taxes, and that he intends to do something about it. But, knowing the intense lobbying efforts that are likely happening to prevent such an eventuality, I think it is time the general public became more aware of what is at stake.

Because, at the end of the day, the Government requires X amount of revenue. So for every tax dollar they lose from one segment of the population, they have to charge another segment a little bit more to replace what was lost. Which means that for every tax dollar one person saves, the rest of us have to pay a little bit more.

And, while I don't mind paying a little bit more to help the needy, I sure as hell object to paying a little bit more to help the wealthy.

If you don't object to subsidizing rich people in the way I have described above, then I can only conclude that you personally benefit from one of these non operating businesses. And, if that is the case, it's not surprising that you don't want to see the tax benefit they currently offer, taken away. But you shouldn't be surprised that there are those of us who DO want to see such an unfair system changed.

[Gilchy]

[

In addition to which, when the corporation pays dividends out to the company shareholders (i.e. the husband and wife who own said corporation), the corporation receives a tax refund (which further reduces the tax amount owing).

Only when there's RDTOH, which, again, is only there to avoid double taxation.

You know what? I'm done. Merry, you clearly want to believe that "rich people" find ways to pay no tax, never mind the facts. Talking in circles at this point.

[Captain Awesome]

You know what? I'm done. Merry, you clearly want to believe that "rich people" find ways to pay no tax, never mind the facts. Talking in circles at this point.

Uninformed people + Google = deadly combination.

[Merry]

I never once said that rich people pay no tax. What I said was that they use non operating businesses as a tool to help them pay LESS tax than they otherwise would.

And the problem with that, is that every time someone finds a way to pay LESS tax than their tax rate should be (based on their income level) then everyone else has to pay a little bit more to make up the difference.

If we did away with a lot of these kind of tax loopholes, everybody (including the rich) would have a much lower tax rate on regular income than is currently the case.

In addition to which, the tax system would be a heck of a lot simpler, resulting in even ordinary folks being able to fully understand how it works, and consequently in a much better position to decide for themselves whether they think it's fair or not.

[rustled]

Many of us simply don't find our existing tax system as complicated, or as unfair, as you do Merry.

Your suggestions about how we should raise our taxes (and what we should spend those taxes on) often seem quite unfair to me.

[I Think]

The tax system may or may not be unfair, but the ways to cheat it are legion.

A private equity manager who bought a $2.3-million home in the hot Vancouver real estate market said he did that while earning just $19,000 a year. He also wired nearly $2-million to his family in Canada during the same period.

Jing Sun is among several foreign investors who bought property in Canada in recent years, but kept the extent of their wealth out of view of the tax authorities and the courts, a Globe and Mail investigation has found.

The Globe’s findings come amid a controversy in Vancouver, where many blame foreign buyers for soaring house prices that have made a single-family home unattainable for some long-time residents. The Urban Development Institute will tackle the topic for the first time in a sold-out public forum on Wednesday in Vancouver.

[Muzza]

A private equity manager who bought a $2.3-million home in the hot Vancouver real estate market said he did that while earning just $19,000 a year. He also wired nearly $2-million to his family in Canada during the same period.

Obviously, he is a foreigner who is not part of the Canadian tax system, so he can do whatever he wants. It is the country of which he is a citizen that should be concerned.

If you read the entire article, instead of picking and choosing:

"Court records show Mr. Sun’s wife lived without him in their pricey Vancouver home for six years while he sent her $260,000 a year from China. They paid $40,000 a year for their children to attend private school in Canada.

When the couple broke up, Mr. Sun stopped supporting the family. In his divorce case last year, he claimed he had been making $19,000 a year. The court asked for tax and other financial records, but he failed to produce any, the documents say."

He claimed he made $19,000 in his divorce case. He is trying to avoid spousal support. He didn't even live in Canada, so how is he avoiding income tax?

Now, if the wife didn't claim the $260,000 a year as income, then I would be concerned, but as the article is mainly about the increase in housing prices in Vancouver, that is not mentioned. It alludes that there may be people who are avoiding capital gains taxes, but that is all. What they are doing is likely not legal, so it is up to Revenue Canada to look in to this.

It is foreigners who may be able to take advantage of this, it is is occurring, not Canadian citizens.

It sounds like the spent a great deal of money in Canada, so to me Canada as a whole probably benefited.