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July 30, 2017 | Risk & Reward

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.


If you have a chance, and a fresh bottle of single malt close by, read this: ‘Tax Planning using Private Corporations.

It’s the 63-page detailed discussion document on exactly how Ottawa intends to gore small business owners and incorporated professionals, including doctors, lawyers, dentists and the guy who fixes your furnace. You have until just before Thanksgiving to submit your thoughts, and here’s the addy: [email protected] Try to contain yourself when you do so. Telling the Minister of Finance what he can do with his orifices is generally frowned upon.

As you know, Ottawa is doing exactly what this blog warned you a year ago was coming. Soon the hammer will come down on business owners or medical professionals who income-split with spouses or family members, as well as the common practice of building up retirement savings within a corporation. Bill Morneau is serious. The consult period is, of course, a stunt. These moves will be effective with the 2018 taxation year.

Now, why is it necessary to suddenly pull the rug out from under people who have been legally using small businesses to defer tax because they lack pensions or benefits and shoulder greater risk (while creating jobs)? Huh?

Here it is: “The Government is considering approaches that will improve fairness and neutrality of the tax system, such that savings held within corporations are taxed in a manner that is equivalent to savings held directly by individuals, for example salaried employees.”

This resonates with T2’s Millennial voter base, since the moisters today seem over-educated, late-maturing, helicoptered, under-employed and non-entrepreneurial, while believing in fictions like a shared economy. Overwhelmingly, the young have become risk-averse. They see ‘fairness’ as meaning every dollar should be taxed equally, regardless of the risk or effort needed to earn it, and they’re hot about equality. More on that quacking canard later.

But tax codes are not about social justice. They’re meant to build economies while raising the money to run government. Tax rules have always been designed to encourage behaviours. That’s why you get a tax credit for making an RRSP contribution, for example, because without that carrot far fewer people would save for their futures. It’s the same principle behind getting a grant when you invest money for your kid’s schooling. Or why capital gains are taxed less when you take on risk and invest in stock that could rise or fall in value.

There have always been larger rewards (in the form of lower taxes) to encourage activities people would be reluctant to be engaged in otherwise. Like starting a dog grooming business and hiring two assistants. Or completely losing your mind, rebuilding a crumbling pile of bricks and opening an ice cream parlour. Or maybe spending 12 years in med school and residency, amassing $300,000 in student debt, then building a career as a doctor. In all of these things not only is the risk higher than that which salaried employees normally take, but there are no pensions, no paid vacations and no benefits.

Starting a business and creating jobs usually involves shovelling life savings into an enterprise or a professional office, taking on debt, shouldering big insurance costs, paying your workers’ EI and CPP, collecting and paying tax, then hoping you don’t crash and burn (which most do). The reward for all this investment and risk (instead of just being a employee)  is the potential for success and a tax break for trying.

Until now. The Liberal government now seeks to make every dollar taxed equally. Neutrality, Bill Morneau calls it. Money hard earned and held inside a small business should be taxed as if had been paid, no risk, to a salaried person. In T2’s world we’re all equal. When we aren’t. Not even close.

Well, income-splitting will be toast next year. Impacted will be medical professionals who will be looking for higher compensation, shorter hours or other jurisdictions – since the ability to split income with a spouse compensated for a truncated career and zero pension.

Gone, too, will be the ability to effectively build a retirement nestegg within a corporation, the way salaried people do inside the registered pension plan offered by their employer. Ottawa is studying several models to ensure that money a business has already been taxed on has its growth taxed at the highest personal marginal rate prior to being available to the retiring business owner. It may also increase business tax rates to about 50% on any earnings not immediately reinvested in the business. In short, the goal is fairness between boss and worker. And it makes you wonder, why would anyone want to be the boss?

Finally, the government is studying differing taxes for men and women.

Seriously. More tomorrow.

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July 30th, 2017

Posted In: The Greater Fool

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