October 29, 2019 | Compliance

By Wednesday afternoon – for the first time in a few years – US interest rates will be lower than those in Mapleville. Our central bank is universally expected to hold the line and make no cut. The Fed’s widely anticipated to trim once again by a quarter point. That’ll make three.

Donald Trump, who has the same formal monetary training as your mom, said Tuesday the US bankers “don’t have a clue.” He wants yuge cuts to the cost of money, claiming the Dow (now fluttering around record territory) could be 10,000 points higher if only people listened to him.

Ironically the Fed is cutting because of Trump’s trade war, which Scotiabank this week estimates is responsible for willowing out the US economy. Other than the spitting match with Beijing, things are kinda boffo in America lately. Unemployment at a 50-year low. Bidding wars in major cities. Acceptable corporate profits. Stock markets arcing to new heights. Girl astronauts getting their own suits. Tesla making big bucks. And US households (unlike us) are carrying far less debt than a decade ago, with a savings rate of 8.8%. Yes, peeps, that’s eight times higher than ours. Americans actually save more than $1 trillion every quarter, a lot of it flowing into 401k retirement plans and Roth IRAs (like our TFSA).

So yesterday’s dreary post detailed how everyone who does not read this blog is likely pooched. Debt is rampant. Cash flow is sucked off by servicing costs. Savings are minimal. Seven in ten families could not afford a new fridge if they had to pay cash for it. (You can charge one at The Brick and take 36 months to pay, but if you miss one payment, interest applies. It is currently “RBC prime + 33.29%. Yes, you read that correctly.)

Canada can’t lower its bank rate because citizens have no discipline. Just like their leaders. Cheap credit has inflated houses, lured millions into owing trillions and wiped out retirement savings. Given the election results we now face significantly increased public borrowing, more upward pressure on real estate values and, sadly, increased tax on the few (not the many).

If you think people with solid incomes and accumulated wealth should pay more, please enter the door on the left. Remove your pants, then wade through the vat of fire ants. Thank you.

For the rest of you, tax avoidance is critical. Yesterday’s blog made reference to those who have small businesses, professional corps, holding companies or other structures in which you earn cash flow. The Liberal plan was revealed last year when Bill Morneau stated clearly the tax advantage business owners enjoy should be (and will be) eliminated.

This led to the end of ‘income-sprinkling’ which means no dividends hived off to your spouse or kids. It also established a lid on the amount of invested retained capital a corp can have before taxes turn punitive. So now if your company kicks out more than $50,000 a year in passive income (earned through investments, not operations), there’s a target on your back. That equates to roughly a million in retained earnings. For every dollar above this amount earned passively, the corp loses $5 worth of income at the reduced small business rate. It sure adds up.

Since the precedent has been established, it’s now a minor move to amend the numbers. The next budget could chop that starting point to $35,000, or less, for example.

There’s a good chance the Libs (and their new friends) will target professionals and small businesses once again, since most people think they’re rich and screwing the system. So it’s probably a bad idea to be accumulating capital inside a corporate structure, where it’s a sitting duck. Also understand that paying yourself in dividends (rather than taxable salary) does not really save any tax. That’s because your corp pays tax at its rate, then the dividend is taxed in your hands, and the sum of the two equals the same tax you’d generate taking the income as salary.

But by collecting dividends (and not salary) you earn no RRSP room – which is a shame since that’s probably the safest place to keep money these days. Plus, when you take salary your corporation can write it off earned income, reducing or eliminating corporate tax. Given what’s likely to come, this is a worthy strategy. If your accountant doesn’t understand this and tells you to go for divvies, eschewing a fat RRSP for corporate savings, get a new one. It’s called compliance. By law your accountant works for the CRA.

Over the coming weeks, along with fetching canines and the gratuitous demeaning of moisters, wrinklies, people with GICs and anyone wearing a tattoo, this blog will focus more on tax avoidance. Until Peter MacKay saves us.

Garth Turner October 29th, 2019

Posted In: The Greater Fool

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