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October 1, 2017 | Carpe Diem

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.


In the three days leading up to Monday’s deadline, lots happened. The second of October is worth remembering. That’s the date the government will stop listening to how people feel about crushing new taxes on small businesses, and prepare legislation. Soon we’ll see if the brief, 75-day, consultation period was a sham, or meaningful.

As you know on Friday the finance minister was hammered at his carefully-staged Town Hall event in Oakville. It did not go the way Finance officials had planned. The minister surely was furious. On the weekend 260 significant business leaders delivered a letter of protest to Bill, saying his changes could seriously hurt the economy. Meantime Ottawa’s proposals have been pilloried by labour unions, farming organizations, manufacturers, exporters, entrepreneurs, medical associations, vets and the Royal Canadian Association of Bloggers (heh, heh).

Those who misunderstand the changes may agree with them. Others who swallowed the disingenuous messaging that landscapers, convenience store operators, welding shop owners, anaesthesiologists and lawyers are tax cheats and loopholers, are supporters of the far-reaching proposals. In the wake of this exercise there is far less harmony and mutual respect than at the beginning. The techniques used by the T2 gang have been geniously Trumpian, pitting one group (employees) against another (self-employed). Not much here to be proud of.

Well, let’s move on. If you fancy being an entrepreneur, starting out on your own – being self-employed, accepting risk in return for more freedom, independence, choice and potential return – there are alternatives. One is establishing a sole proprietorship.

Simply stated, this is you deciding to start a business under your own name and without a legal entity. In most provinces you can go online, register a name (it might cost you a few bucks), get a master business license, and be done. The income generated from the enterprise will be added to whatever other cash you bring in, and virtually every expense a corporation could claim is also deductible by a sole proprietor. That goes right down to a portion of your mortgage interest, wardrobe and property tax. You file income taxes on the usual form (but with a simple addendum) and this can avoid the two or three grand an accountant will charge for an incorporation filing. Some people worry they have more personal liability operating as a SP rather than an Inc., but this is a false concern. If somebody wants to sue you, after all, a company you own all the shares of will not protect. Ask a lawyer.

So what are the advantages?

Well, when Bill & Justin get their way, money earned inside a corporation (retained earnings) will be taxed at the rate of 50.5% and then taxed again when it is taken out by shareholders/owners as dividends. The total tax grabbed by Ottawa will end up being between 70% and 73%. Now do you understand why millions of people are outraged?

In contrast, the maximum marginal tax rate for an individual is 53%, and that clicks in around the $250,000 mark. Besides, if you take it all as income, you get to make a $25,000 RRSP contribution, which reduces your tax load by about $12,500.

Then there’s the spousal effect. Once the T2 hammer comes down, a husband and wife who together funded, created and built a business will not be able to efficiently share the proceeds of its success in the form of income (salary or dividends) unless they’re both employees and can pass a CRA test to prove it. Ironically, if the two were not married, they could each receive tax-efficient dividends in recognition of their financial contribution. Instead, all money received will be taxed at the highest personal rate. Since over 80% of the people negatively affected by this ban on ‘income-sprinkling’ are women, it makes a lie of the Trudeau government being “feminist.” Quite the opposite.

In any case, with a sole proprietorship, no sweat. If your husband or wife sacrifices to support the business, they can be compensated by you from your after-tax (after deductions) income, whether they toil as employees or not. You can also establish a partnership with your spouse – cheap, quick and online. Partners are then taxed on their business earnings in proportion to their share of the enterprise. Any losses from the enterprise can be used to reduce taxes owing from other sources of income (like your day job as a CRA auditor). Plus, wages paid to a spouse are deductible from the income of the business. There’s no test to ensure a marketable task is being performed – no bureaucrat crawling over your sole proprietorship. Nobody from Ottawa will denigrate and embarrass your mate.

Naturally this won’t help someone who incorporated, played by the rules for the past 15 years and built up their retirement savings in the business because they do not have a pension. They now face a 70% tax, plus the scorn of myopic citizens who never took a similar risk.

I hear the changes might not raise enough to pay for the bureaucracy required to enact them. Maybe that’s the point. When we all work for government, nobody’s a rebel.

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October 1st, 2017

Posted In: The Greater Fool

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