Federal Tax Reform: A Serious CTF Proposal

Renegade · February 14, 2008

No, expenses that are directly related to earning income should, generally, be deductible.

What does "directly related to earning income" mean? With an individual many expenses have a mixed business/personal purpose, however the business purpose is completely disregarded when it comes to deductions, however with business when a expense is of mixed purposed the business is allowed to partially deduct that expense. With individuals virtually all expenses are interpreted to have a personal component and are disallowed.

It makes more sense to disallow all people from deducting vehicle expenses for driving from home to work and back, for personal meals/groceries, and for personal clothing, and any other items where the personal element would be high.

It only makes sense because it simplifes tax collection and enforcement. It doesn't make for equity that the principle of expenses to earn income are unequally applied.

Given that this thread started out with simplicity being one goal for changes I do not think allowing all people to deduct expenses that are only partially related earning income makes practical sense.

Yes, if one of the goals is simplification then I agree that allowing individuals to deduct addiotional expenses simply makes things more complicated (similar to the complexity self-employed face). One solution, as I proposed, is to simply tax revenue. This both simplifies and puts both individuals and business on the same playing field.

Simplify, Simplify, Simplify

So, although simplification usually gets short shrift from many tax experts, it is actually an integral part of making the tax code both fairer and more growth oriented. Expensing of investments rather than depreciation,

moving to a revenue- or cash-flow based tax system for both companies and individuals, and eliminating the array of differentials in tax treatment of income from different sources are all ways of promoting fairness, simplicity and growth

. With an estimated six billion hours spent complying with the current tax system, there are substantial direct benefits to be obtained from simplification as well.

I also disagree with your notion of inequality. The business owner is deducting expenses that he/she incurs in order to earn income. If the business owner was an employee then he/she would not be incurring these expenses in the first place.
Why you and Jerry continue to overlook this fact is beyond me.

It is a presumption that the expenses are to earn income. When a business takes staff out for a lunch, the only real impact is to staff morale rather than to income. Sure it may or may not have in impact on revenue. Can an employee treat him self to a lunch to increase his morale and expect that he can deduct those expenses, afterall his morale and attitude will have a bearing on his overall compensation?

What about an employee who purchases a set of suits because his job role requires it? He would not have not purchased that set of suits except because it is the requirement of the job, and it is directly to earn income. Oh yeah, the suits are "personal" right, despite the fact that he may never wear those suits outside a work context.

No. Businesses are assumed to incur the expense for business purposes. If an employee is incurring an expense for the business he works for then he should ask to reimbursed for that expense and the business will deduct it.

An employee has no control of what expenses a business will allow reimbursement for and what they won't. This is usually dictated in the expense policy. Clothing is one example of this. Many professions require attire which is suitable for work but is not reimbursable. You can't just show up with whatever you have in the drawer and expect to keep your job for long.

My apologies but that is simply just ridiculous.
If the government were to take your complex plan and implement it then they would simply raise tax rates to protect their revenue base.

Employees would deduct all of their expenses, businesses would continue to deduct all of their business expenses and business people would deduct expenses just like the employees do (since you want to make vehicle between home and work deductible).

IOW, nothing word change - businesses would still, according to your logic, be getting a "benefit."

Assuming revenue neutrality, you assume that simply the tax rates on individuals would rise but not business. My belief is that the overall tax-rate for both business and individuals would rise, and we would see a shift of the burden onto business from individuals.

No the point is that only a small percent of the population is not realizing a full deduction for day care expenses.
A very small minority of rich people are the ones who spend more than the limits and there is no political appetite to give them full deductions.

Can't say I really care one way or the other.

Exactly what I've been saying all along msj. It is driven by political appetite, not any underlying principle, or notion of "fairness".

Your comment that "Can't say I really care one way or the other" illustrates why I don't expect any immediate change. You, the government, and others simply don't care that there is inequity in the system. The motivation is who shouts the loudest and who can generate the most political might.

This quote in context of my planned business trip is completely wrong. We are not stretching any rules - we are planning the trip well within the bounds of the rules since the trip is a bona fide business trip.

I know nothing about your business trip so I can't say one way or another, but you would be honest to acknowledge that part of the expertise you and other tax professionals provide is to understand the limits and how to stay within them in general. Many of these limits are guidance and is subject to interpretation. I have see many situations in which tax professionals will be agressive in their interpretation and would be consistent with the term "stretching the limits".

When the limits are rigid as they are with individuals, there is no opportunity to test the interpretation by "stretching the limits"

Your solution of extending deductions to individuals will not solve the complexity issue.

I agree. I didn't say it was a solution to that. Personally I would favour a user-pay model for services, combined with a consumption tax, combined with a flat-tax no-deduction income tax for both business and individuals/

The reason the rules do get complex is because the government is trying to ensure that only business expenses and no personal elements are being deducted.

Of course they do, that is why people like you are employed. Government is not anxious to extend those dedctions and complexity to individuals. Regardless, it leads to an inequity between individual and business tax systems.

That is reality and last time I checked reality isn't going to change.

So what? are we discussing the inequity or the propensity to change?

The answer here should be obvious - if an employee gets a job in Italy the employee would be well advised to sever his ties from Canada so as to not be taxable in Canada. In Italy that employee likely would be able to deduct the cost as a moving expense (I don't know since I don't know Italy's tax code).
Alternatively, if the employee qualifies for the overseas employment tax credit then he would want to maintain his Cdn residency in order to keep this credit which is very lucrative and would more than make up for this outrage of paying for his flight to Italy.

In either case, the employee should be getting the potential employer to pay for the trip so the hypothetical is ridiculous from the outset but I will continue to humor you.

A business person who travels to Italy for bona fide business reasons is doing so to generate more revenue (if he is looking for more customers) and/or decrease costs or improve productivity. In both cases this hits the bottom line of his business which continues to be a Cdn resident and continues to pay Cdn taxes.

I didnt' say he got the job. I said he looks for employment. In business if you drill for oil but don't find it, do you still get to claim the drilling expense.

To simplify the situation and remove the cross-border issues, lets say it wasn't Italy, but say it was a trip to Vancouver. The employee flew there, saw the sights, and while he was there applied for a job which he didn't get. Should a portion of his trip be tax deductable?

Which demonstrates that you don't know much about business.
Look at the income statements and balance sheets for, say, Royal Bank, Bombardier, Suncor, SNC Lavallin, and Danier Leather.

It should be obvious that each industry has different inputs for them to earn their income. To simply apply a revenue tax would mean that the government would have to apply a different tax rate for each different industry.

Not at all. So what if some business are low-margin businesses. They will simply pass on that cost to their customers or if they couldn't they would go out of business.

The system as is allows business which show no or very little income to avoid paying taxes yet consume services that are paid for by taxes of other businesses and individuals.

If you allowed individuals to deduct what are considered personal expenses (like clothing) then you would still have the business person deducting business expenses AND he would deduct clothing just like an individual.
Nothing would change (except for higher tax rates, more people having to file more complicated tax returns, and more funding for CRA audits) and you and Jerry would still be complaining about business people still deducting business expenses.

No I couldn't care less about business people still deducting business expenses. I do care about inconsistency between individuals and businesses.

Don't tell me - you're an employee now?
Your comments above make this clear.

Sure I am, but I also have businesses on the side, so I do take as full advantage as I'm allowed of the system. If given the choice I would take all my income as self-employment income.

Even if you could make things "equal" I would recommend self-employment to those who appear capable of it for the simple reason that it is nice to choose your clients/customers, it is nice to have a relatively flexible schedule and it is nice being the boss.
If a person isn't keen on the extra costs of more accounting/legal fees each year, isn't keen on the extra unpaid time for networking and office time, and isn't keen on the business risk and audit risk then he should continue to be an employee and live the simple life.

How about you answer the question directly. I asked from a TAX PERSPECTIVE. You assume that employees wouldn't spend the "extra unpaid time for networking and office time" or take on additional risk. Many employees earnings are related to the business performance.

So, when I say all things being equal, I mean assume the individual's behavior, clients, employment time, and acceptance of risk is all equal. Is it better from a TAX PERSPECTIVE to be self-employeed. If you don't see that it is, I wouldn't want you as my tax accountant.

If you look up how much time employees waste on the job you will find studies that show anything from 1-2.5 hours per day.
Even in my business where time is monitored closely and billed out I'm sure that our employees still waste some time.

That is an advantage to being an employee.

When I waste time at work it means that I have to make up for it later or I end up not making as much money.

So, lets look at an employee and a self-employed person separately.

The employee is paid $100,000 and wastes 20% of his employers time and money during the year. That's $20,000 in gross pay that this employee received for not being productive or about $12,000 net of tax.

A sole proprietor makes $200,000 in revenue and deducts $100,000 in business expenses.

Lets say that, objectively, this person is aggressive and claimed, say, $25,000 of expenses that really should not have been claimed because they were clearly personal. The other $75,000 of expenses are, objectively, clearly incurred in order to generate the $200,000 of revenue and are bona fide expenses that would not have been incurred if this business was not operating.

At a marginal tax rate of 40% that is a tax savings, or benefit, of $10,000.

In both cases it is clear that fraud is occurring and both employee and sole proprietor are benefiting at the expense of all honest people.

Sorry msj, but your example is completely irrelevant to anything we are discussing. Whether an employee waste time at work is a function of how he is incented and his personal character. If you point is that both employees and self-employeed can cheat, of course, that was never in dispute but is completey irrelevant to the tax code.

msj · February 14, 2008

Renegade, I don't have the time to directly respond to every point.

Clearly we disagree on this matter.

Yes, businesses get to deduct expenses that have personal elements to them for which the business benefits.

IMV, businesses also get screwed over with extra paper work, regulation, and employee's shirking.

Employees do not take the risks that self-employed do. Employees don't work as many hours (unpaid in particular) as self-employed people do.

All of this has to be considered when choosing between being self-employed vs an employee.

The fact remains that most business expenses are incurred and are deductible because they are made to earn income. Employees do not have many expenses (if any) that fit into this category.

Sure, you can argue about clothing and driving back and forth to work. But the business person does this too. It clearly makes more sense to deny both the deduction for this as being personal in nature rather than allow both to deduct these costs.

I buy suits and don't get to deduct them against business income - just like my employees who buy business attire and don't get to deduct them.

That is perfectly fair and makes the tax system easier to administer in that the CRA doesn't have to chase after 20+ million tax payers all claiming deductions for clothing, food, and vehicle expenses that may or may not be related to earning income.

You underestimate the importance of pragmatism with respect to tax policy.

You can also argue that the employer taking employees out to lunch is a perk of being in business. It clearly is not.

If I spend $1,000 taking staff out for lunch I'm out of pocket (after tax savings of my corporation - rate of 15.5%) a total of $922.50 (50% deductible).

I don't consider that to be such a benefit which is why such meals are done infrequently.

Unfortunately that's all the time I have for now. Got to go on a business trip soon but maybe I can get some wireless somewhere....

msj · February 14, 2008

You can also argue that the employer taking employees out to lunch is a perk of being in business. It clearly is not.
If I spend $1,000 taking staff out for lunch I'm out of pocket (after tax savings of my corporation - rate of 15.5%) a total of $922.50 (50% deductible).

I don't consider that to be such a benefit which is why such meals are done infrequently.

Unfortunately that's all the time I have for now. Got to go on a business trip soon but maybe I can get some wireless somewhere....

I know it's tacky to respond to your own post but in my haste I forgot to add this:

It is obvious that the one's getting the free lunch are my employees. At the end of the day my bank account has $1,000 less in it while the company will save $77.50 on it's tax return.

Yeah, what a benefit to be the boss.

Jerry J. Fortin · February 14, 2008

Tacky is what we have grown to expect from your elitist opinions. I hope you have lots of fun on your business trip. Us working class sub-humans will have to pick up the tab for it with your tax deductions. That is why we want tax reforms, so we don't have to pay the corporate welfare tab with our own taxes. It would be nice if you business folks just paid your dues like the rest of us, without special treatment.

msj · February 15, 2008

Ok, Renegade, I have given some more thought and a little more time to your question regarding whether it's better to be self-employed or an employee, all other things being equal.

I still think the question is absurd but here goes.

If I were an employee I would still be taking this business trip since the seminar is necessary for professional reasons (whether I'm a partner or an employee is irrelevant).

As an employee, the Partnership would pay for the airfare, hotel, two dinners (breakfast, lunch are included in the seminar), and vehicle from the office to the airport (ok, harbour) at 42 cents per km since that is the rate the firm pays for business use of one's personal vehicle.

So, at the end of the day, I would get paid for attending the seminar, and get reimbursed for all my business related travel expenses.

Now, since I'm a partner I will incur all these same expenses. The difference is that they are coming out of my pocket (at least they are shared with the other partners - but that just means when they do the same trip that I pay a portion of their expenses).

So, lets say the total comes to $1,000.

As an employee I am not out of pocket for any money since I get reimbursed. The firm would deduct these expenses since the seminar benefits the firm (as training).

As a self-employed person not only do I have to make up the time lost to the seminars by working over the weekend but I am out of pocket that $1,000 (for simplicity I'm ignoring the partnership split).

So I get a tax deduction of 15.5% (small business rate). So, in reality I'm out of pocket a total of $845 (ignoring GST for simplicity purposes too).

Ok, so remind me again just what benefit I'm getting by being self-employed?

Oh, and the seminar is about auditing - yeah, really fun. Must be solely for personal reasons.

Pliny · February 15, 2008

As I have pointed out in another thread this is clearly nonsense.
If we replaced all income taxes in Canada with a consumption tax then that tax rate would likely be in the range of 50-60%.

Any alleged savings from the CRA administration would be transferred to customs and patrolling Indian reserves since people would go to the US to buy and then smuggle things into Canada.

The tax rate is around fifty percent now (I think that went unacknowledged before) and I agree "attempts" to smuggle things already purchased would increase but you generally have to declare everything you have purchased upon your return today and honest people - the majority - do declare their purchases. I do not believe there would be too much of an increased cost at customs. Would smugglers bring goods in as being unsold and then deliver them to those who bought them? I think the cost of doing that sort of business would be in the 50-60% range, It is a risky and criminal activity, after all, what do you think? It won't be done for nothing and the goods will have to be prepaid before they are smuggled in. I don't like a consumption tax either but I think it fairer than an income tax. A person can at least save if he needs to under a consumption tax by simply not spending. A person has no chance to save under an income tax if he needs to except by trying to increase his income and that is more difficult than choosing to not spend in order to save.

I think if government were it's proper size, small in my opinion, the cost would be less than it is now so I think 50 -60% is a bit high. that rate would have to be determined by the demand for government services in proportion to how people chose to spend or not spend the money they now had that they didn't have under an income tax.

You are certainly a tax accountant and have valiantly and effectively defended your job and that's basically what I see you doing. I would say you are probably quite good at what you do and are thanking the powers that be their is an income tax. You have obviously invested a lot of time and effort to get to where you are. Without the tax code you would be simply a bookkeeper - an intolerable concept and deadly to your profession.

Pliny · February 15, 2008

Tacky is what we have grown to expect from your elitist opinions. I hope you have lots of fun on your business trip. Us working class sub-humans will have to pick up the tab for it with your tax deductions. That is why we want tax reforms, so we don't have to pay the corporate welfare tab with our own taxes. It would be nice if you business folks just paid your dues like the rest of us, without special treatment.

Oh! Come on, Jerry! We know the system is unfair and an income tax is counter-productive. MSJ is telling you how it is under the current tax code. He believes it attempts to be applied fairly and probably does but never could be and that doesn't negate the actual extortionist aspect of it.

Renegade · February 15, 2008

Ok, Renegade, I have given some more thought and a little more time to your question regarding whether it's better to be self-employed or an employee, all other things being equal.
I still think the question is absurd but here goes.

If I were an employee I would still be taking this business trip since the seminar is necessary for professional reasons (whether I'm a partner or an employee is irrelevant).

As an employee, the Partnership would pay for the airfare, hotel, two dinners (breakfast, lunch are included in the seminar), and vehicle from the office to the airport (ok, harbour) at 42 cents per km since that is the rate the firm pays for business use of one's personal vehicle.

So, at the end of the day, I would get paid for attending the seminar, and get reimbursed for all my business related travel expenses.

Now, since I'm a partner I will incur all these same expenses. The difference is that they are coming out of my pocket (at least they are shared with the other partners - but that just means when they do the same trip that I pay a portion of their expenses).

So, lets say the total comes to $1,000.

As an employee I am not out of pocket for any money since I get reimbursed. The firm would deduct these expenses since the seminar benefits the firm (as training).

As a self-employed person not only do I have to make up the time lost to the seminars by working over the weekend but I am out of pocket that $1,000 (for simplicity I'm ignoring the partnership split).

So I get a tax deduction of 15.5% (small business rate). So, in reality I'm out of pocket a total of $845 (ignoring GST for simplicity purposes too).

Ok, so remind me again just what benefit I'm getting by being self-employed?

Oh, and the seminar is about auditing - yeah, really fun. Must be solely for personal reasons.

Exactly what question are you answering? Either you are having trouble understanding what I am asking our I am have trouble communicating.

I DIDN'T ask if it is better to take a business trip as an employee or self-employed. What I asked is OVERALL from a TAX-Perspective all things being equal, (assume the individual's behavior, clients, employment time, and acceptance of risk is all equal), is it better from a TAX PERSPECTIVE to be self-employeed.

I'm not sure I can phrase it clearer than that.

Renegade · February 15, 2008

You can also argue that the employer taking employees out to lunch is a perk of being in business. It clearly is not.

If there is NO benefit or "perk" to someone attending the meal, why does any business EVER do so?

If I spend $1,000 taking staff out for lunch I'm out of pocket (after tax savings of my corporation - rate of 15.5%) a total of $922.50 (50% deductible).
I don't consider that to be such a benefit which is why such meals are done infrequently.

It is obvious that the one's getting the free lunch are my employees. At the end of the day my bank account has $1,000 less in it while the company will save $77.50 on it's tax return.

So the point is, the tax payer is indeed subsidizing you and your employees lunch. I don't know the arrangment between you and the company, but it is between you to figure out who absorbs the actual cost.

You have gone from initially arguing that there was no benefit awarded to business/self-employeed over employees to now acknowledging that indeed that "the company will save $77.50 on it's tax return" and that you "don't consider that to be such a benefit".

So all we are reduced to arguing, is how valuable the benefit is, not that there is one. You being the tax accountant, I'll take your word for the accuracy of the figures, but it reinforces what I have said before, there is a discrepancy between tax systems.

BTW, did you note how radically differnt that tax rate is between corporate rates and individual rates? I bet you already know which is significantly higher.

Jerry J. Fortin · February 15, 2008

MSJ is a tax accountant, don't ask such a person to think outside of the box. The reality is that they see everything through the rules and the rules are always right. To break the rules is a bad thing from their perspective. Therefore don't talk about breaking the rules because it is a bad thing. The entire concept of right and wrong is lost on such an individual. Income tax is wrong, but this individual lives off of that mistaken form of revenue stream creation.

August1991 · February 16, 2008

This is a fascinating thread and ideally, I would want to do it justice.

For example:

The reason is very simple: because the GST rate (assuming we also eliminate provincial and municipal taxes) would be in the neighbourhood of 50-60%.
Do you really think Canadians are going to go for that?

If the federal government abolished income taxes and moved entirely to a VAT (GST) for revenue, the GST would be in the area of 30% (not 50-60%). Many accountants and bookkeepers both in and out of government would be out of a job, and T4s, RRSPs would be a thing of the past. Huckabee has proposed this in the US and it's the general taxation system in Europe. Bermuda relies solely on a VAT.

But this discussion is far more complicated than a VAT (GST) vs. an income tax, size of personal exemption, spousal income splitting or even the difference between taxes paid by employees and those paid by the self-employed. And what of the complexity of tax differences between incorporation and partnerships (or self-employment)?

----

Reading through this thread, it struck me first that 30 million Canadians pay various taxes to government. Rather than argue different tax systems, imagine that one person knocks on your door every month and takes money from you. How much? God knows. All things considered, different Canadians give different amounts of money to governments.

Secondly, and in my mind it's the key idea, what do the different Canadians do now before this person comes next month?

Edited February 16, 2008 by August1991

Pliny · February 16, 2008

MSJ is a tax accountant, don't ask such a person to think outside of the box. The reality is that they see everything through the rules and the rules are always right. To break the rules is a bad thing from their perspective. Therefore don't talk about breaking the rules because it is a bad thing. The entire concept of right and wrong is lost on such an individual. Income tax is wrong, but this individual lives off of that mistaken form of revenue stream creation.

True. And I almost were one. My first job was as an articling student. One of the last before it became necessary to obtain a B. Comm. before you started articling.

Pliny · February 16, 2008

This is a fascinating thread and ideally, I would want to do it justice.
For example:If the federal government abolished income taxes and moved entirely to a VAT (GST) for revenue, the GST would be in the area of 30% (not 50-60%). Many accountants and bookkeepers both in and out of government would be out of a job, and T4s, RRSPs would be a thing of the past. Huckabee has proposed this in the US and it's the general taxation system in Europe. Bermuda relies solely on a VAT.

But this discussion is far more complicated than a VAT (GST) vs. an income tax, size of personal exemption, spousal income splitting or even the difference between taxes paid by employees and those paid by the self-employed. And what of the complexity of tax differences between incorporation and partnerships (or self-employment)?

----

Reading through this thread, it struck me first that 30 million Canadians pay various taxes to government. Rather than argue different tax systems, imagine that one person knocks on your door every month and takes money from you. How much? God knows. All things considered, different Canadians give different amounts of money to governments.

Secondly, and in my mind it's the key idea, what do the different Canadians do now before this person comes next month?

It depends upon whether or not he takes it coercively, begs or tells them where their money will go and how it will benefit them. What do you think? They will go out for the day and avoid the person? Not if there is some realized benefit.

Edited February 16, 2008 by Pliny

Jerry J. Fortin · February 16, 2008

I suppose that on balance all one can do is roll with the punches. The solution is to get everybody and their dog into small business and avoid as much tax as possible.

geoffrey · February 16, 2008

That is the reason I prefer a consumption tax. It is blind to the individual or business. It is applied equally. It reduces bureaucracy and reduces the expense of government which in turn reduces the burden on the tax payer.

Jerry, I don't want to shatter your world completely, but you do realise that almost no business pays GST? There are plenty of things businesses can't deduct as expenses (golf club dues... 50% of meals... ect. ect.), but they do have all the GST returned on their purchases, assuming they are operating profitably.

I know how much you hate small business, but come on. GST-only isn't the answer to your problem. Not that the problem exists to the extent you claim anyways.

Jerry J. Fortin · February 17, 2008

Jerry, I don't want to shatter your world completely, but you do realise that almost no business pays GST? There are plenty of things businesses can't deduct as expenses (golf club dues... 50% of meals... ect. ect.), but they do have all the GST returned on their purchases, assuming they are operating profitably.
I know how much you hate small business, but come on. GST-only isn't the answer to your problem. Not that the problem exists to the extent you claim anyways.

I don't hate small business, I don't even hate big business. I HATE the special treatment they get from the government that is all. I desire a level playing field with EVERYBODY treated equally. That is why I just posted my thoughts on starting a business to take advantage of that which has been denied to me by the special treatment given to business by the government.

Pliny · February 17, 2008

I suppose that on balance all one can do is roll with the punches. The solution is to get everybody and their dog into small business and avoid as much tax as possible.

Lots of small businesses have made the mistake of sub-contracting to individuals instead of hiring them as employees. Because then they don't have to pay their EI, CPP, taxes, holidays, vacation pay, sick days, overtime, maternity leave, bereavement leave, etc. The government doesn't like that because then the employee gets to be a small business himself and will pay less income tax since he doesn't get paid for his holidays, sick days, vacation, overtime, etc. and can claim some deductions on his income that he couldn't before.

The employee, or individual gets a lost of benefits that the business pays for and the government treis to allow for that thinking it is only "fair".

What it boils down to is the bigger the bottom line the more they feel you can afford t part with and they are not ashamed to take it.

geoffrey · February 17, 2008

That is why I just posted my thoughts on starting a business to take advantage of that which has been denied to me by the special treatment given to business by the government.

Income tax in this sense works much like GST. It's not charged on inputs, only on the finished product. I really don't see the difference between the two systems and how small business deals with it. For all realistic purposes, Business does not pay GST at all.

I understand that your concerned with a few small business owners stretching their 'business' expenses further than allowed... but remember this is breaking the law and people are reassed and sometimes charged as a result. The laws and regulations work. Perhaps enforcement is too lenient.

Jerry J. Fortin · February 17, 2008

Income tax in this sense works much like GST. It's not charged on inputs, only on the finished product. I really don't see the difference between the two systems and how small business deals with it. For all realistic purposes, Business does not pay GST at all.
I understand that your concerned with a few small business owners stretching their 'business' expenses further than allowed... but remember this is breaking the law and people are reassed and sometimes charged as a result. The laws and regulations work. Perhaps enforcement is too lenient.

I simply can't agree with you on this point. The system gives special treatment to business. I can see that there are not enough people to support the concept of real change so I will just shelve the idea to a certain degree. I will undertake a small business myself and realize the benefits others get that are denied to me. Since I am in the process of starting to build a house I will make this little plan work for me.

msj · February 17, 2008

This is a fascinating thread and ideally, I would want to do it justice.
For example:If the federal government abolished income taxes and moved entirely to a VAT (GST) for revenue, the GST would be in the area of 30% (not 50-60%). Many accountants and bookkeepers both in and out of government would be out of a job, and T4s, RRSPs would be a thing of the past. Huckabee has proposed this in the US and it's the general taxation system in Europe. Bermuda relies solely on a VAT.

But this discussion is far more complicated than a VAT (GST) vs. an income tax, size of personal exemption, spousal income splitting or even the difference between taxes paid by employees and those paid by the self-employed. And what of the complexity of tax differences between incorporation and partnerships (or self-employment)?

----

The difference between you and me is that I don't just pick numbers out of my butt.

My numbers are based on this article and also assume that Canada would need a slightly higher rate since Canada takes more tax revenue as a % of GDP:

http://www.safehaven.com/article-9206.htm

Scroll down to read the part under "Fair Tax Nonsense."

msj · February 17, 2008

If there is NO benefit or "perk" to someone attending the meal, why does any business EVER do so?
So the point is, the tax payer is indeed subsidizing you and your employees lunch. I don't know the arrangment between you and the company, but it is between you to figure out who absorbs the actual cost.

Given that I am the one who has paid for the meal and I am the one who is out $922.50 while the employees do not have to shell out any money I am simply saying that the employees are obviously not being screwed.

The government is out $77.50 (50% rule).

Sure, I benefit. Lets say my portion of the meal cost $50. The tax savings on that is $3.88.

So, by taking out my employees my business is out a net of $922.50 but I'm personally benefiting from tax savings of $3.88.

You have gone from initially arguing that there was no benefit awarded to business/self-employeed over employees to now acknowledging that indeed that "the company will save $77.50 on it's tax return" and that you "don't consider that to be such a benefit".

No, I am saying that when you consider the entire picture of what a business ends up spending money on that employees benefit more that any such tax savings I can derive from the business from personal items (without committing tax fraud, of course).

My examples above regarding travel and meals is proof of this - at the end of the day if I were an employee I would not be out any money. Indeed, for the travel I would also receive my full pay for those days.

As a self-employed business I pay those expenses (whether for the employee or for my own travel) and I am the one out of pocket for the after-tax savings portion of the cost.

For the meal, sure everyone's got to eat so there's a benefit from the tax deduction. But, as stated above, my bank account is still lower by $922.50 at the end of the day while the employees have enjoyed a free lunch.

So all we are reduced to arguing, is how valuable the benefit is, not that there is one. You being the tax accountant, I'll take your word for the accuracy of the figures, but it reinforces what I have said before, there is a discrepancy between tax systems.
BTW, did you note how radically differnt that tax rate is between corporate rates and individual rates? I bet you already know which is significantly higher.

Of course it is different. It's called tax integration. I'm not even going to try to explain that concept to a person who can't comprehend that spending $1 to save 20 cents is hardly a benefit (when fraud is not involved, of course).

Edited February 18, 2008 by msj

msj · February 17, 2008

I don't hate small business, I don't even hate big business. I HATE the special treatment they get from the government that is all. I desire a level playing field with EVERYBODY treated equally. That is why I just posted my thoughts on starting a business to take advantage of that which has been denied to me by the special treatment given to business by the government.

Businesses and employees are different from each other.

Businesses must incur expenses in order to earn income. Employees do not have to.

It is only fair to allow businesses to deduct legitimate business expenses because they incur these expenses on a frequent and, often, a regular basis in order to earn income.

An employee does not do this but if she does then she either will get reimbursed from the company and/or will be allowed to deduct legitimate employment expenses from her employment income.

See my meal and travel expense examples used above which clearly show that the employee(s) get a free lunch or get to travel for free (while getting paid no less) while I am the one who is out of pocket.

Jerry J. Fortin · February 18, 2008

Nonsense msj. I have to drive to work in order to make any money. But I can't claim those transportation expenses. I have to have four different sets of outdoor clothing just to do my job, but I don't get to deduct those expenses either. That isn't the point however. The point I have been making is how the taxes are paid, there is where the real question of fairness can be decided.

Employees suffer from withholding taxes, business do not. Employees wait all year to file taxes and then claw back excess payments through the income tax return filing system. Business work the opposite way, paying nothing all year while building credits and deductions, then pay only a small fraction of tax on their profits. Citizens pay on their gross income then calculate their tax load after giving away money all year long. Business pays nothing all year long then calculates taxes on profits after a huge set of deductions allowable only to them.

So tell me msj, how is that fair? Forget the I can deduct this and you can deduct that crap, just look at the problem from the perspective of who is paying when.

Pat Coghlan · February 18, 2008

What was I saying a while ago about how the wealthy don't pay the same tax (rates) as everybody else?

http://www.cnbc.com/id/23219770

msj · February 18, 2008

Nonsense msj. I have to drive to work in order to make any money. But I can't claim those transportation expenses. I have to have four different sets of outdoor clothing just to do my job, but I don't get to deduct those expenses either. That isn't the point however. The point I have been making is how the taxes are paid, there is where the real question of fairness can be decided.

I don't get to claim driving to work nor my business suits as an expense either. So that's fair.

Employees suffer from withholding taxes, business do not. Employees wait all year to file taxes and then claw back excess payments through the income tax return filing system. Business work the opposite way, paying nothing all year while building credits and deductions, then pay only a small fraction of tax on their profits. Citizens pay on their gross income then calculate their tax load after giving away money all year long. Business pays nothing all year long then calculates taxes on profits after a huge set of deductions allowable only to them.

Businesses pay tax installments during the year (corporate or personal if running a sole proprietorship or partnership).

Not only that, but businesses must match the employees' CPP and must add $1.40 for every $1 deducted for EI and send that to the government by the 15th of each subsequent month.

If incorporated then the shareholder, who has his employee hat on, will deduct payroll deductions and send them in just as if he was a regular employee.

You also forget that there are ways to reduce the amount of withholdings from an employees' pay cheque. Fill out a TD1 form properly, make RRSP contributions under the rules that allow you to decrease your tax withholdings from your pay cheque etc....

So tell me msj, how is that fair? Forget the I can deduct this and you can deduct that crap, just look at the problem from the perspective of who is paying when.

Given that you didn't know that profitable businesses do pay installments there isn't much to say.

Edited February 18, 2008 by msj