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April 21, 2017 | The War on Wealthy

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

Jim’s a lawyer and, by several accounts, a good one. But he’s not one of those $700-an-hour dudes with the dedicated parking spot below a bank tower for his Panamera. Instead, he’s an entrepreneur with a partner, one employee and an office above a dry cleaner in the west end. Last year he scored with a personal injury case and made a bundle.

“That kinda thing only comes around once,” he said. “Now it’s back to making way less than my plumber.” Jim operates through a small business corporation, of course. He and Brenda (wife) are the sole shareholders, so they try to be tax-efficient by both taking a combination of salary and dividends from the business.

Sadly, Jim reads this blog. Some posts a few months ago speculating the T2 gang wants to Hoover guys like him got his juices going. So he sent this brief note to his local MP, Arif Virani:

Hello Honourable MP Virani:

Could you please advise as to the government’s position (future plans) regarding the tax treatment of retained earnings for professional corporations as well as your stance on the government’s future plans for same.

Actually he sent it five times. No response. The sixth time he got lucky. The reply below was received yesterday. It’s important enough to every self-employed person that it is reprinted in full.

Thank you for writing to me about the tax treatment of retained earnings for professional corporations.

A recent review of federal tax expenditures conducted by the Government have highlighted a number of issues regarding tax planning strategies using private corporations, which can result in high income individuals gaining unfair tax advantages. A variety of tax reduction strategies are available to these individuals that are not available to other Canadians. These strategies include:

*         Sprinkling income using private corporations, which can reduce income taxes by causing income that would otherwise be realized by an individual facing a high personal income tax rate to instead be realized (e.g., via dividends or capital gains) by family members who are subject to lower personal tax rates (or who may not be taxable at all).

*         Holding a passive investment portfolio inside a private corporation, which may be financially advantageous for owners of private corporations compared to otherwise similar investors. This is mainly due to the fact that corporate income tax rates, which are generally much lower than personal rates, facilitate accumulation of earnings that can be invested in a passive portfolio.

*         Converting a private corporation’s regular income into capital gains, which can reduce income taxes by taking advantage of the lower tax rates on capital gains. Income is normally paid out of a private corporation in the form of salary or dividends to the principals, who are taxed at the recipient’s personal income tax rate (subject to a tax credit for dividends reflecting the corporate tax presumed to have been paid). In contrast, only one-half of capital gains are included in income, resulting in a significantly lower tax rate on income that is converted from dividends to capital gains.

The Government is further reviewing the use of tax planning strategies involving private corporations that inappropriately reduce personal taxes of high-income earners… The Government intends to release a paper in the coming months setting out the nature of these issues in more detail as well as proposed policy responses…

Yours sincerely,
Arif Virani, MP
Parkdale-High Park

This letter is not written by Virani, of course. Jim’s question was sent by Virani’s staff to the constituent communications division of the Finance Department where the response was crafted then returned to the MP to put into letter form. It comes straight out of the fine print in the 2017 budget. No government backbench MP has the authority or permission to freelance on government fiscal policy – thus what you have in this missive is the Trudeau-Morneau party position. So, Jimbo, look out!

The war against self-employed professionals, small business operators, high-income earners, commissioned workers and anyone who doesn’t toil for a salary is definitely heating up. While Trumphobia kept Ottawa from diddling with the tax laws (plus capital gains and dividends) in this year’s budget, it’s a safe bet to assume the hit’s coming next Spring. What can you expect?

  • No more income-splitting with spouses, relatives or children by making them shareholders of a professional corporation.
  • Possible restrictions on the ability of the self-employed to pay themselves through dividends rather than salary (even though there’s no real tax advantage).
  • A tax on retained earnings within a corporation, by ensuring funds invested in a corporate account are taxed at the highest personal level – eliminating the advantage of keeping them there.
  • Hiking the capital gains inclusion rate in selected circumstances to 100%, and in all others to (possibly) 75%.

The appetite of the current government is as insatiable as its spending is profligate. In less than two years we’ve seen a ‘temporary’ deficit to create jobs become one which will be structural for decades. With salaried high-income types already handing over 50% of their incomes, the guns will soon be leveled at the others – doctors, lawyers, sales execs, IT contractors and all who operate through incorporations for a host of reasons, usually getting by with no benefits, no pensions and dubious security.

Record household debt. Record house prices. Record spending. Record tax.

Is it just me, or does it feel like we’re going bigly in the wrong direction?

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April 21st, 2017

Posted In: The Greater Fool

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