Should this kind of tax dodge be legal?

[Static]

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.

We all try to reduce our personal income taxes so I do not blame anyone in the top tax bracket to try to lower their 50% income tax. I am certain you would use the tax shelters too.

It is BS that these rules do not benefit anyone else. Tell me what would happen if wealthy people decided to pull their capital out of Canada because the return on their investment after tax is no longer competitive. It would be devastating to our economy because we would lose jobs, resulting in lost tax revenue to our governments. Investment is what builds a healthy economy which generates tax revenue, and if our tax polices begin to discourage capital from entering our borders well then you are shooting yourself in the foot. At the end of the day, these tax shelters attract investment and result in higher tax revenues via job creation.

[neroas]

Which jobs, the ones outsourced to other countries, the ones moved to other countries or the ones that don't pay enough to get by?

[Merry]

We all try to reduce our personal income taxes so I do not blame anyone in the top tax bracket to try to lower their 50% income tax.

I am on the record in these forums as saying that I don't agree with the Liberal's plan to raise personal income tax rates for those earning over $200,000. Because those folks are already paying a high rate, and raising it even more could drive professionals to seek employment in countries with lower income taxes - resulting in a brain drain.

And I've also already said in previous posts, that I don't blame anybody for using legal methods to reduce their tax bill. What I'm questioning is whether or not the Government should be allowing retired wealthy people, who are not currently running an "operating" business, to save taxes by using rules originally intended to help "operating" businesses. In other words, should this particular use of those rules continue to be legal?

I have no problem with rules that help operating small business thrive. But, if we want to find ways to help rich people pay less tax, then let's create a transparent process that everyone is aware of, and understands. Instead of allowing those wealthy enough to hire fancy accountants and tax advisors, to find ways to utilize rules intended for an entirely different purpose.

The overall aim of tax policy is to levy taxes in an efficient and fair manner with minimal compliance and administrative costs.

Fairness is achieved by imposing similar burdens on individuals with similar resources.

http://policyschool.ucalgary.ca/sites/d ... l-business

what would happen if wealthy people decided to pull their capital out of Canada because the return on their investment after tax is no longer competitive.

I doubt very much that most wealthy Canadians would suddenly "pull all their money out of Canada" just because they were losing a lucrative tax deduction. Granted they'd be annoyed, but most of them would continue to live here, and pay tax here. Because this is their home.

Note that stopping people who are not currently running an operating small business, from using rules originally designed to help operating businesses, is NOT the same thing as changing the tax rules that apply to investment income. That is another debate, for another forum. For now, let's just focus on the small business tax deductions that are currently often used by very rich people to help them pay a lot less tax.

many small business are created to enable individuals to reduce personal tax rather than grow companies

http://policyschool.ucalgary.ca/sites/d ... l-business

People who want to live in places like Mexico to save on tax, are already doing it. But those who live here and are currently spending a fortune on accountants and tax advisors to find creative ways to save tax, might be pleased if the system were reformed in such a way that they could save on all those professionals fees, and still pay a lower tax rate than is currently the case.

Canadian taxes on investment and savings are excessive...........They make it more difficult for the population to save for contingencies in the future, whether these are retirement, private medical expenditures, or education. We must address this urgent problem if we are to improve Canada’s rate of economic growth.

https://www.ctf.ca/ctfweb/Documents/PDF ... _mintz.pdf

My point is that, instead of allowing questionable practices that are only available to those wealthy enough to afford expensive tax planners and accountants, why not reform the system so that everybody benefits. Or to put it another way, instead of giving one nice big tax reduction to a very small group, why not give a smaller reduction to a very large group?

[Muzza]

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.

I'm sure they have. In fact an ex-associate of mine has been doing it for years. However, it is not a loophole, as it is not legal.

I checked with my accountant to see if I could do the same, as it seemed to be great idea, only to be informed that it was not legal. Therefore I have never done it.

The only reason I did not turn this individual in to Revenue Canada was that it would hurt his kids, who I cared about.

Just like most of the "loopholes" that have been mentioned here, this "loophole" does not exist, except in people's imagination.

[Static]

Merry, what small business deductions are you referring to? The small business tax credit can only be used on $500k of business income from active businesses, the last time I checked. How would wealthy people use this to lower taxes?

[Veovis]

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........

You needed to either stop at "I don't profess to be a tax expert" or at least ended the sentence "know enough to.....make wild assertions about taxes while also stating I don't know what I am talking about".

What you do know is some hearsay and partial truths that you spin into huge theory's of tax evasion.

IN your view this scenario

"A man creates a business, over 25 years he builds his corporation into a very successful enterprise and pays himself a a wage over those years paying taxes as he goes while his company employs many who also pay taxes, plus CPP and EI taxes by the company and many other taxes, all paid. After 25 years the man retires and sells his business, the active operations of the company go to someone else and the proceeds of the sale of the active business go to the corporation that owned them. This money is again taxed. Now there is a sizable amount of money in the company and the man can no longer claim income as there is no active business to be paid a wage on, so he must claim dividends, also due to no more active business, the corporation loses it's tax break for active income in small business, tax rates now are higher in the company, though a bit smaller on the dividends but overall the same money is going to the government."

you see all of that and then yell

"Rich man hides money in corporation."

It isn't true and you don't care how corporations may come to be investment holding no matter how legitimate, you desire a wrong to exist so you say it is so and that is the end of it, because if we can get enough people to believe a lie then you might find a way to have people punished over what is effectively jealousy.

All the other loopholes claimed here as well, they aren't loopholes, they are crimes, and are still a crime no matter how many people say "I know a guy who knew a guy...."

[Merry]

Here's an example:

Mr. and Mrs. Owner are joint shareholders of an operating small business which is registered as a Canadian Controlled Private Corporation.

They want to sell their business and retire.

They create a second CCPC, (which is only a holding company, not an operating business) making themselves the sole shareholders.

They then sell the original business for $10 million, claim the $750,000 small business capital gains deduction, and transfer the remaining proceeds from the sale to their new CCPC (there is no tax payable when money is flowed between two corporations with the same owner).

They invest that money within the corporation. The original capital investment can remain within the new CCPC tax free until it is withdrawn. So, by spreading out the rate of withdrawal, there is an immediate tax saving. Although in most cases, the owners prefer to leave the capital intact within the corporation, and use the proceeds from the investments to live on.

When the proceeds from those investments are in the form of dividends, they will be taxed at the dividend tax rate BUT when dividends are paid out to the new CCPC shareholder (Mr. Owner & Mrs. Owner), the CCPC will receive a tax refund (to make sure the dividends received aren't taxed twice).

And "Low-taxed small business income distributed as dividends to high-income owners is typically taxed two to three and half points less than salary income" (Jack Mintz)

The non taxable portion of capital gains made on the investments (50%), will be paid into a Capital Account within the CCPC, the proceeds of which can flow tax free to shareholders.

And if either of the shareholders choose to "sell" any of their shares back to the company, a capital gain will be triggered but they will only pay tax on 50% of the gain, subject to their lifetime capital gains exemption limit of just over $800,000 (which means they'll only pay tax on half that amount).

The bottom line is that, when compared to an RSP that most people use, there is no top limit on the amount that can go into the CCPC tax free and, when the money proceeds are paid out in the form of dividends, the tax rate is a lot lower than that of money from an RSP (which is taxed at the full personal income tax rate). Consequently, the higher the personal income tax rate of an individual, the greater the saving if they use a CCPC to shelter their capital (as opposed to using an RSP like the rest of us).

But keep in mind that RSPs and TFSAs are still available to these people. So, if they need to shelter any additional money from tax, they can use those two options as well.

[Merry]

To Veovis:

Anybody who is able to generate a good annual income from his or her business, and then sell it for millions, has already been well compensated for the hard work and time they put into that business.

So they don't need any additional tax breaks in retirement, that are not available to everyone else.

If we simplified the tax code so that everyone earning a similar income pays a similar rate, we could all pay a little bit less than we do now (and rich people could save a bundle on accountants and tax planners).

[Gilchy]

Here's an example:

Mr. and Mrs. Owner are joint shareholders of an operating small business which is registered as a Canadian Controlled Private Corporation.

They want to sell their business and retire.

They create a second CCPC, (which is only a holding company, not an operating business) making themselves the sole shareholders.

They then sell the original business for $10 million, claim the $750,000 small business capital gains deduction, and transfer the remaining proceeds from the sale to their new CCPC (there is no tax payable when money is flowed between two corporations with the same owner).

Again, if they sell the shares in the business, they pay any applicable cap gains taxes, and then the money is in their hands personally. There is no getting around the cap gains tax at this time, and if the capital is now in their hands personally, there is no immediate tax gain to then rolling the capital into a corporation.

[Merry]

Your forgetting about the lifetime capital gains exemption.

[Static]

Here's an example:

Mr. and Mrs. Owner are joint shareholders of an operating small business which is registered as a Canadian Controlled Private Corporation.

They want to sell their business and retire.

They create a second CCPC, (which is only a holding company, not an operating business) making themselves the sole shareholders.

They then sell the original business for $10 million, claim the $750,000 small business capital gains deduction, and transfer the remaining proceeds from the sale to their new CCPC (there is no tax payable when money is flowed between two corporations with the same owner).

They invest that money within the corporation. The original capital investment can remain within the new CCPC tax free until it is withdrawn. So, by spreading out the rate of withdrawal, there is an immediate tax saving. Although in most cases, the owners prefer to leave the capital intact within the corporation, and use the proceeds from the investments to live on.

When the proceeds from those investments are in the form of dividends, they will be taxed at the dividend tax rate BUT when dividends are paid out to the new CCPC shareholder (Mr. Owner & Mrs. Owner), the CCPC will receive a tax refund (to make sure the dividends received aren't taxed twice).

And "Low-taxed small business income distributed as dividends to high-income owners is typically taxed two to three and half points less than salary income" (Jack Mintz)

The non taxable portion of capital gains made on the investments (50%), will be paid into a Capital Account within the CCPC, the proceeds of which can flow tax free to shareholders.

And if either of the shareholders choose to "sell" any of their shares back to the company, a capital gain will be triggered but they will only pay tax on 50% of the gain, subject to their lifetime capital gains exemption limit of just over $800,000 (which means they'll only pay tax on half that amount).

The bottom line is that, when compared to an RSP that most people use, there is no top limit on the amount that can go into the CCPC tax free and, when the money proceeds are paid out in the form of dividends, the tax rate is a lot lower than that of money from an RSP (which is taxed at the full personal income tax rate). Consequently, the higher the personal income tax rate of an individual, the greater the saving if they use a CCPC to shelter their capital (as opposed to using an RSP like the rest of us).

But keep in mind that RSPs and TFSAs are still available to these people. So, if they need to shelter any additional money from tax, they can use those two options as well.

I am lost as to what you see wrong with this.

[Static]

To Veovis:

Anybody who is able to generate a good annual income from his or her business, and then sell it for millions, has already been well compensated for the hard work and time they put into that business.

So they don't need any additional tax breaks in retirement, that are not available to everyone else.

If we simplified the tax code so that everyone earning a similar income pays a similar rate, we could all pay a little bit less than we do now (and rich people could save a bundle on accountants and tax planners).

I agree. A simple flat-rate tax of 15% on all income would be nice. It would promote honesty, tax efficiency, and attract capital

[Merry]

That wasn't quite what I had in mind Static.

I approve of the graduated tax system. What I don't approve of is the myriad tax credits, particularly the so called "boutique" ones, all of which overly complicate the system and often result in the kind of tax unfairness we all so hate.

We need to set our tax rates at what we consider to be reasonable and fair levels (lower than they currently are), and then stick with that. As opposed to constantly making exceptions for certain groups, the way we do now.

Even though abandoning all the various credits would be politically unpopular, I predict that at the end of the day most individuals would be paying a lot less tax than we do now. Particularly if the Government promised to make all the changes revenue neutral.

[Merry]

I am lost as to what you see wrong with this.

It is the unfairness of it.

Ordinary people are not allowed to put unlimited amounts into their RSP. And, when money is withdrawn from an RSP it is taxed at the owner's full personal income tax rate (even if it had generated dividend income and/or capital gains within the RSP). So those two facts alone make it a lot less likely that ordinary folk will be able to benefit from their RSP's in the way folks rich enough to put their retirement savings into a CCPC can.

As Jack Mintz pointed out

Low-taxed small business income distributed as dividends to high-income owners is typically taxed two to three and half points less than salary income

If everybody paid the same rate of income tax (based on their annual earnings), then the majority of us could pay a lot less tax than we do right now.

[Static]

That wasn't quite what I had in mind Static.

I approve of the graduated tax system. What I don't approve of is the myriad tax credits, particularly the so called "boutique" ones, all of which overly complicate the system and often result in the kind of tax unfairness we all so hate.

We need to set our tax rates at what we consider to be reasonable and fair levels (lower than they currently are), and then stick with that. As opposed to constantly making exceptions for certain groups, the way we do now.

Even though abandoning all the various credits would be politically unpopular, I predict that at the end of the day most individuals would be paying a lot less tax than we do now. Particularly if the Government promised to make all the changes revenue neutral.

A flat rate tax would solve all of this.