Should this kind of tax dodge be legal?

[Merry]

as others have already told you, when you type sentences like this, you not only sound ignorant, you sound crazy.

So presumably you consider people like Justin Trudeau to be "crazy" too - because he also thinks small business tax laws need tweaking, in order to prevent rich people using them merely to reduce their personal income taxes.

And, if you read through some of the comments cited in my previous posts, there are many economists who agree with him.

Are they all "crazy" as well?

[Captain Awesome]

You are simply arguing about something you do not fully understand.

[Merry]

Which is the reason I resorted to posting all those quotes. Because, as I'm not an accountant, you're right when you say there may be some of the nuances of all this that I don't fully understand. However, I DO understand that there are a lot of people who are a lot smarter than I am who think that the small business tax code is being abused by some, in order to reduce their personal income tax bill.

Small business tax credits were intended to help small business thrive, with the hope that they would then create more employment. But, as the studies cited in the quotes I provided have shown, that is often not what happens. Because while legitimate, operating small business may hire more employees, it has not been shown that allowing wealthy individuals to use the same rules to benefit from the larger capital gains deduction, or the income splitting provisions, benefits anybody other than themselves (in the form of reduced taxes).

Nobody is suggesting we remove the tax credits available to legitimate, operating small businesses. What is being suggested is finding ways to prevent wealthy individuals from setting up their affairs in such a way as to be able to use those same rules to reduce their personal income taxes.

[logicalview]

there may be some of the nuances of all this that I don't fully understand. .

may be?

[Merry]

And your such an 'expert" are you?

Because some of your responses make it clear that you most certainly are NOT.

And, given that fact, how can you claim to know more about this than some of the folks I cited earlier?

There are many people who are more knowledgeable in this subject than either you or I, who insist that small business tax credits ARE being used by the wealthy few in ways that were never intended, resulting in benefiting nobody other than themselves by reducing their tax bill.

We're not talking about hurting legitimate small business here. We're talking about finding ways to prevent the small business tax credits being used for purposes other than those for which they were originally intended.

If you're so sure that isn't happening, then you should have no objection to having the CRA look into the matter to make certain. Because, if there is any chance at all that most of us are paying more tax than necessary, in order to subsidize unfair tax breaks for the wealthy, I assume you also would want to see changes made. Unless, of course, you're benefiting from this questionable scheme yourself???????

[I Think]

If you form a corporation to do work, then contract your own proprietorship to the corporation, you get loopholes big enough to drive a train through.
People have been doing that for years.

[Captain Awesome]

If you form a corporation to do work, then contract your own proprietorship to the corporation, you get loopholes big enough to drive a train through.
People have been doing that for years.

Do they also get paid in gold?

[I Think]

Lol, unfortunately I never did.

[Merry]

People should pay the tax rate appropriate to their income level. Period.

How you receive that income should be irrelevant. If you make $200,000 a year from investments, and that is your only source of income (because you have a few million invested), WHY should you pay less tax than someone who earns the same amount in employment income?

When considering those two scenarios, I would venture to suggest that the guy with a few million invested is likely wealthier than the smuck who goes to work every day to earn a similar annual amount. Yet, under current rules, the rich guy would pay less tax than the worker.

Both of them use the same Government Services, such as roads, airports and hospitals. Yet the rich guy pays a lot less for the Government services that he receives. And that is wrong, plain and simple.

I don't mind giving a bit of a tax break on investment income to encourage ordinary people to invest in Canadian companies. But there should be a top limit on how much tax you can save in this way, in order to avoid the type of scenario I outlined above.

[Captain Awesome]

How you receive that income should be irrelevant. If you make $200,000 a year from investments, and that is your only source of income (because you have a few million invested), WHY should you pay less tax than someone who earns the same amount in employment income?

Because "income from investments" is paid with after-tax money, and companies that are paying this income already sent a good chunk of taxes to the govt. Payroll though is paid with pre-tax money.

[Merry]

Maybe, but the company's tax rate is a lot lower than the rate of the guy who earned the same amount as salary.

[Captain Awesome]

Maybe, but the company's tax rate is a lot lower than the rate of the guy who earned the same amount as salary.

And the investment income is still taxable on personal side too, so you should compare "corporate tax rate + individual tax rate" vs. payroll tax rate.

[Merry]

For high income earners, whose personal tax rate now hovers around the 50% mark, the much lower corporate tax rate represents a HUGE saving. And Canadian Controlled Private Corporations also have the added advantage of allowing income splitting.

If a business owner retires, sells all the shares of his CCPC, claims the $750,000 Capital Gains Deduction for small business, then rolls the remaining balance over to a new CCPC on a tax free basis, makes his wife and adult kids shareholders, invests the money within that corporation and then pays himself, his wife, and his adult kids (must be over 18) annual dividends, the tax savings can be enormous.

This is a tax effective way for rich folks to fund their kids university education.

He's effectively created something similar to a huge RSP, but with an initial deposit larger than would be allowed in a regular RSP, and done it in such a way that the annual withdrawals will be taxed at a lower rate than they would be from a regular RSP (because all withdrawals from regular RSP's are taxed at the contributor's personal income tax rate, which is higher than the dividend tax rate).

All perfectly legal. But should it be?

[Veovis]

For high income earners, whose personal tax rate now hovers around the 50% mark, the much lower corporate tax rate represents a HUGE saving. And Canadian Controlled Private Corporations also have the added advantage of allowing income splitting.

If a business owner retires, sells all the shares of his CCPC, claims the $750,000 Capital Gains Deduction for small business, then rolls the remaining balance over to a new CCPC on a tax free basis, makes his wife and adult kids shareholders, invests the money within that corporation and then pays himself, his wife, and his adult kids (must be over 18) annual dividends, the tax savings can be enormous.

This is a tax effective way for rich folks to fund their kids university education.

He's effectively created something similar to a huge RSP, but with an initial deposit larger than would be allowed in a regular RSP, and done it in such a way that the annual withdrawals will be taxed at a lower rate than they would be from a regular RSP (because all withdrawals from regular RSP's are taxed at the contributor's personal income tax rate, which is higher than the dividend tax rate).

All perfectly legal. But should it be?

This is the error and the trouble with comments like yours. It holds enough truth to create anger, but leaves out enough of the reality to make a lie out of the truth.

In general can what you say occur....sure, does it actually create the end scenario you profess, no it doesn't. Don't get me wrong, there are certainly benefits to having a corporation, however many cannot be used in the ways you imply either. Based on what the company is doing as an active business it affects the tax rate it receives. There are thousands of pages of tax act that create a comprehensive tax system, though not perfect do not really create what you like to say. When you leave out the actual thousands of pages of details and sum it up as you have, yes it sounds bad, but it is just as faulty and bad as stating something like "poor people pay no tax ever and get a free ride".....though in a general view that is specified that can be shown to be true, over all it isn't as true as some will say. And neither is your point.

The devil is in the details and people often ignore the reality of details to play their side against another. You do it, for your left view and the strong right here do as well, though I am sure you will disagree and continue on the path of 1/16th truths

[Merry]

I don't profess to be a tax expert Veovis, so I can't get into the kind of detail you think is necessary to make my point. But I do know enough to realize that so many retired rich people wouldn't keep their money in Canadian Controlled Private Corporations unless there was some kind of financial benefit to them doing so.

That said, there are tax experts who say that rules intended to help small business have been hijacked by wealthy folks looking to pay less tax.

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.

http://www.huffingtonpost.ca/2015/09/16 ... 42968.html

The claim that the small business tax rate is a kind of loophole through which millions of dollars are taxed at the lower small-business rate is reaffirmed in a new report just released by the Canadian Council of Chief Executives (CCCE). In “An Agenda for Corporate Tax Reform in Canada,” Jack Mintz argues that “the small business tax rate provides substantial opportunities for high-income Canadians to avoid paying personal income tax.” Mintz says he has new research that shows roughly 60 per cent of the value of the small business deduction “accrues to households earning more than $200,000 a year.”

http://business.financialpost.com/fp-co ... g-business

And, Justin Trudeau, who you voted for and so vigorously defended during the election campaign, also holds that view.

Liberal Leader Justin Trudeau suggested recently that while small businesses should indeed be paying a lower corporate tax rate, the rules should be tweaked to ensure that wealthier Canadians don’t use the lower rate simply to reduce their tax bills.

http://www.theglobeandmail.com/report-o ... e26358808/

And as if saving tax on their own income isn't sufficient, the following article explains how rich people can also use a holding company to save on taxes when they die and their kids inherit all that lovely money.

Suppose I own a holding company (TimCo) with assets of $1-million in cash (in case my kids are reading: Don’t start jumping to conclusions, it’s just pretend). The shares of TimCo that I own, then, are worth $1-million, but my adjusted cost base (ACB) in those shares is a nominal amount, say, $100 – which is common. My kids are going to inherit these shares of TimCo (in addition to the nose hair trimmer) when Carolyn and I are both gone. At that time, the TimCo shares will be deemed to have been sold for their fair market value of $1-million, which will trigger a capital gain of $999,900 and a tax bill.

My kids will inherit the shares, and the ACB for my kids will be $1-million (the value of the shares on the day they inherit them). Now, here’s the best part. The kids will now sell the shares of TimCo to a new corporation they create (Newco). They’ll sell the TimCo shares to Newco for $1-million, and take back a promissory note worth $1-million as payment. There will be no capital gain, and no tax, on this sale to Newco because their ACB is $1-million. Get it?

At that time TimCo will then be owned by Newco. TimCo will pay its $1-million in cash as a dividend to Newco. This is a tax-free inter-corporate dividend. Tax free is good. Finally, Newco will take the $1-million in cash and pay off the promissory note of $1-million it owes to the kids. The kids will receive this $1-million tax free out of Newco because it’s a repayment of a loan owed to them. Presto – the kids have extracted the $1-million in cash from TimCo tax free. We’ve managed to eliminate one layer of tax upon death.

http://www.theglobeandmail.com/globe-in ... le1355871/

The end result of all this use of small business rules by rich people looking to pay less tax, is that the rest of us are all paying a bit more, just so all those rich folks can save a buck. And I, for one, am sick and tired of subsidizing people who have millions of dollars of investments.

The small business tax rules need to be revamped to make sure they only help their intended target, and are not being used merely as tax shelters for the rich.