Tax Fairness in Canada

[ReeferMadness]

There have been a number of issues that have come up lately related to tax fairness and how people with similar incomes can pay dramatically different tax amounts. Some people are living lives of relative luxury while paying little or no income taxes.

Note this thread isn't intended to debate whether we're paying too much or too little - you can open a separate thread if you want to discuss that.

[ReeferMadness]

Today, it was revealed that the CRA is investigating an offshore tax scam that resulted in at least one family paying no taxes despite having income on $26 million in assets.

A wealthy Victoria, B.C., family paid virtually no tax over a span of eight years – and even obtained federal and provincial tax credits – while being involved in an offshore tax "sham" developed by one of the country's most respected accounting firms, the Canada Revenue Agency alleges.

The Canada Revenue Agency (CRA) believes there may be many more like them.

So far the Green Party has announced a policy on tax havens:

Tax havens and tax credits used by the extremely wealthy are unethical, inequitable, and detrimental to our economy. The Green Party will close all tax haven loopholes and stop the wealthy from cheating our country," said Green Leader Elizabeth May, candidate in Saanich-Gulf Islands.

[ReeferMadness]

Harper has been slamming Justin Trudeau for claiming that wealthy individuals are using small businesses as a way of dodging their share of taxes. For anyone who hasn't been paying attention over the past few years, small businesses are sacred cows in politics. They are considered the economic engines that create most of the jobs. Everyone wants to lower their taxes and give them other benefits. So, what's the truth?

According to the Financial Post, Trudeau is correct.

In a 2011 paper for the University of Calgary’s School of Public Policy, economists Jack Mintz and Duanjie Chen concluded that reducing the small business tax rate actually discourages the growth of companies and, therefore, of job creation.

Among other problems, they wrote: “Many small businesses are created to enable individuals to reduce personal tax rather than grow companies … With corporate organization, it is easier to split income among family members holding shares of a corporation.”

[ReeferMadness]

Ever wish you could make $47,888 tax free? Well, you can - assuming that you are wealthy enough to earn it all in dividends.

What they may not know is that, depending on the province, it’s possible for an individual with no other sources of income to earn nearly $50,000 in dividends without paying any tax at all.

[Argus]

Ever wish you could make $47,888 tax free? Well, you can - assuming that you are wealthy enough to earn it all in dividends.

Do you really think a crummy $47k is wealth? Where do you live, in a slum?

Donald Trump probably pays several times that for his hair.

[Hal 9000]

My parents both had full time jobs and decided to open a small business. They worked there part time, but it was more of a hobby and something that employed school aged kids. They weren't doing it for any tax break, but these are the types that Trudeau thinks are scamming. He should define what he considers a small business before spouting off.

Whatever, the 2% will be peanuts compared to the hit that small business takes when minimum wage increases as Mulcair wants to do.

[ReeferMadness]

Do you really think a crummy $47k is wealth? Where do you live, in a slum?

Donald Trump probably pays several times that for his hair.

You're missing the point. A person who has a job and makes the same amount will pay thousands of dollars in income tax. This thread isn't about the definition of wealth, it's about tax fairness.

[ReeferMadness]

My parents both had full time jobs and decided to open a small business. They worked there part time, but it was more of a hobby and something that employed school aged kids. They weren't doing it for any tax break, but these are the types that Trudeau thinks are scamming. He should define what he considers a small business before spouting off.

Whatever, the 2% will be peanuts compared to the hit that small business takes when minimum wage increases as Mulcair wants to do.

Maybe you should read the article.

Based on his research, Mintz told the Huffington Post earlier this year that “60 per cent of the small business deduction goes to households with more than $150,000 in income. That’s because you tend to have a relatively high number of high-income households who own small businesses.”

[Freddy]

There have been a number of issues that have come up lately related to tax fairness and how people with similar incomes can pay dramatically different tax amounts. Some people are living lives of relative luxury while paying little or no income taxes.

Note this thread isn't intended to debate whether we're paying too much or too little - you can open a separate thread if you want to discuss that.

there is no such thing as tax fairness. Especially when anyone above 120 000$ a year can probably move to a different country and take his money with him.

[BC_chick]

there is no such thing as tax fairness. Especially when anyone above 120 000$ a year can probably move to a different country and take his money with him.

So we only should only tax people who are trapped in Canada?

[TimG]

Ever wish you could make $47,888 tax free?

It is not tax free. Every cent paid in eligible dividends was taxed at the 38% corporate rate before it was paid to the shareholder. The reason for the tax credit is to make the choice between paying dividends or receiving a salary tax neutral. The credit does not apply to corporations that do not pay tax in Canada.

[cybercoma]

Do you really think a crummy $47k is wealth? Where do you live, in a slum?

Donald Trump probably pays several times that for his hair.

$47k is 50% greater than the median personal income in Canada.

Edited September 11, 2015 by cybercoma

[Freddy]

So we only should only tax people who are trapped in Canada?

In a ideal world we could tax everyone right into the dust. Unfortunately rich people have more resources to bypass any regulation and punishment we make. And you'll spend more money policing it then the revenues you'll get from it. If reality didn't exist, Communism would work too.

[bush_cheney2004]

So we only should only tax people who are trapped in Canada?

Well, Elections Canada took away their right to vote, so why pay taxes ?

[cybercoma]

Well, Elections Canada took away their right to vote, so why pay taxes ?

You're in the states anyway. Don't worry about what Elections Canada does. You can't vote in our elections anyway even though the amount of time you spend on a Canadian politics forum suggests you'd like to.

[cannuck]

I wish it was just a simple as everyone seems to want it to be. It is not.

Small business itself (assuming incorporated) pays tax at the small business tax rate...so far, so good. BUT: if the business owner takes any money out of that business (which is pretty much essential) he or she will pay income tax at the same rate as anyone else on that income. There are no doubt some small enterprises that rack up some deductible expenses in the name of the business that are really for personal benefit, but that is what CRA will find when they audit. I have been a "small business" for most of my life, and I can assure you that there is no free ride. Personal income is personal income, regardless of who pays you.

As to the Calgary study: I am sure you can find a "study" from academia that will support just about anything you postulate. From my experience, the result of ANY study is merely the product of the bias with which it was conceived and written. The vast majority of EVERYTHING I have ever read concludes that small business is the largest creator of new employment. Other than some rare exceptions, to get to the big business stage, it usually begins with a small business. I guess Trudeau - who I doubt has ever signed the front side of a paycheque - borne with the silver spoon, etc - is so far away from knowing what it takes to start and run a business I can understand why he wishes to invoke the politics of envy in his desperate struggle to be noticed.

That being said, where there ARE some very big loopholes is for business that creates little or no wealth to use the rules to pay next to no tax at all. The money "made" from speculative gains has always received preferential treatment in most Western tax systems. When you think about it, a speculative gain simply makes one investor a winner while another is a loser. Instead of beating up on the most productive part of the economy, what kind of idiot would give a pass to activity that creates no wealth at all? The answer is: almost every country gives a capital gain a free ride.

Dividends, on the other hand, often get double taxation applied. Our little break for the first $50k sounds like a gift, but the income that EARNED the money to be distributed by dividend has already been taxed. Not all dividend income comes from productive work, but the problem is when you give a break to speculation and ALWAYS tax creation of wealth, you drive the investment side of economic activity away from Main Street and onto Bay Street.

I used to have the mantra of "one tax, flat tax" and eliminate ANY exemptions as a goal. However, I have come to realize that this should apply only to wealth that has been created (add value to a resource or deliver service in support of same). But, watching Wall Street destroy the largest economy in the world after dismantling the protective legislation that kept its greed somewhat contained, I have come to believe EVERY speculative/capital gain should be taxed at 99% on day one, 95% on month one, and decreasing to nominal tax rate over a span of 5 years. Then, NEVER tax a dividend (as virtually all will be paid from actual operating profits - as investment will go towards real business instead of stock scams, real estate inflation, etc.) Everything else should get taxed at flat rate with some kind of basic exemption on the first $10k or whatever.

[TimG]

I have been a "small business" for most of my life, and I can assure you that there is no free ride. Personal income is personal income, regardless of who pays you.

Most people don't get this. I could leave money in the business but any money I make on investments does not qualify for the small business tax rate. The result is I actually save taxes by taking money out, paying tax like everyone else and then investing it personally. Edited September 11, 2015 by TimG

[ReeferMadness]

I wish it was just a simple as everyone seems to want it to be. It is not.

Small business itself (assuming incorporated) pays tax at the small business tax rate...so far, so good. BUT: if the business owner takes any money out of that business (which is pretty much essential) he or she will pay income tax at the same rate as anyone else on that income. There are no doubt some small enterprises that rack up some deductible expenses in the name of the business that are really for personal benefit, but that is what CRA will find when they audit. I have been a "small business" for most of my life, and I can assure you that there is no free ride. Personal income is personal income, regardless of who pays you.

This isn't true - it's not even close to being true. Maybe you need a better accountant.

When a business pays the owner salary, it is treated the same way as anyone else. But a lot of the money gets paid out in dividends, which are treated preferentially. And suddenly, the wife and kids are all shareholders, which allows income splitting in a way that is not available to normal employees. But this is only the tip of the iceberg.

All kinds of personal expenses suddenly become business expenses

- part of your home is suddenly an "office".

- your wife is now your bookkeeper and director of marketing

- your kids get paid for cleaning your office

- a percentage of your car expenses are now business writeoffs

- your lunches are now business writeoffs

Also, after your retire, your corporation can live on. In practical terms this means that you can split income across years in a way that normal employees can't. For example, if as an employee, you make 100k per year, you pay tax on that every year. Then you try to save money on what's left. But the corporation can pay you only what you need to live (say 60k) per year. Then you can save the rest and when you retire, continue to collect dividends. Over time, this can save you and enormous amount of income tax.

As to the Calgary study: I am sure you can find a "study" from academia that will support just about anything you postulate. From my experience, the result of ANY study is merely the product of the bias with which it was conceived and written. The vast majority of EVERYTHING I have ever read concludes that small business is the largest creator of new employment.

You didn't bother to read the article, did you.

That being said, where there ARE some very big loopholes is for business that creates little or no wealth to use the rules to pay next to no tax at all. The money "made" from speculative gains has always received preferential treatment in most Western tax systems. When you think about it, a speculative gain simply makes one investor a winner while another is a loser. Instead of beating up on the most productive part of the economy, what kind of idiot would give a pass to activity that creates no wealth at all? The answer is: almost every country gives a capital gain a free ride.

Certainly Canada does.

Dividends, on the other hand, often get double taxation applied. Our little break for the first $50k sounds like a gift, but the income that EARNED the money to be distributed by dividend has already been taxed. Not all dividend income comes from productive work, but the problem is when you give a break to speculation and ALWAYS tax creation of wealth, you drive the investment side of economic activity away from Main Street and onto Bay Street.

Lots of people would like a little break on their first $50k of income.

[Freddy]

When your working for someone else you don't control any of that. That's what employees don't understand.

[-1=e^ipi]

You haven't adequately defined tax 'fairness'. Could you try to define it please?

Also, after your retire, your corporation can live on. In practical terms this means that you can split income across years in a way that normal employees can't. For example, if as an employee, you make 100k per year, you pay tax on that every year. Then you try to save money on what's left. But the corporation can pay you only what you need to live (say 60k) per year. Then you can save the rest and when you retire, continue to collect dividends. Over time, this can save you and enormous amount of income tax.

Flat tax fixes all this.

[bush_cheney2004]

Hard to do, as "tax fairness" is an oxymoron.

[TimG]

This isn't true - it's not even close to being true. Maybe you need a better accountant.

No. You need to learn what the rules are.

And suddenly, the wife and kids are all shareholders, which allows income splitting in a way that is not available to normal employees.

Kids pay tax at the highest marginal rate. Generally not worth it. Wife benefits from income splitting only if she has minimal income.

- part of your home is suddenly an "office".

So? If the home is being used as an office this is real expense. The cost of renting a separate office is often much more.

- your wife is now your bookkeeper and director of marketing

- your kids get paid for cleaning your office

Employees who do not have an arms length relationship with the owner must be doing something equal in value to salary paid. i.e. you can't pay your kids thousands for cleaning your office. It would be minimum wage at most. People think they can get away with this but it is against the rules.

- a percentage of your car expenses are now business writeoffs

Only if like being audited. Personal vehicle used for business purposes require detailed logs. It is generally not worth the hassle unless you really use the car for business.

- your lunches are now business writeoffs

Business lunches are only 50% deductible. Better than nothing but hardly a significant perk.

Also, after your retire, your corporation can live on. In practical terms this means that you can split income across years in a way that normal employees can't.

Nothing stops anyone from setting up a corp to hold their retirement savings. You don't need a business prior to retiring to do this. Edited September 11, 2015 by TimG

[BC_chick]

All kinds of personal expenses suddenly become business expenses

- part of your home is suddenly an "office".

- your wife is now your bookkeeper and director of marketing

- your kids get paid for cleaning your office

- a percentage of your car expenses are now business writeoffs

- your lunches are now business writeoffs

Also, after your retire, your corporation can live on. In practical terms this means that you can split income across years in a way that normal employees can't. For example, if as an employee, you make 100k per year, you pay tax on that every year. Then you try to save money on what's left. But the corporation can pay you only what you need to live (say 60k) per year. Then you can save the rest and when you retire, continue to collect dividends. Over time, this can save you and enormous amount of income tax.

I agree with the second part. The equivalent would be no-maximum RRSP where the payroll employee also has the means to control their taxable income and withdraw on it at a later point in life.

However, I think the business expenses are a perk of being a business owner and unless they are being abused, I don't see a problem with it. A business owner risks profit and loss unlike the employee who clocks in and out and gets paid a salary. If it were that easy everyone would open a business.

[eyeball]

I am sure you can find a "study" from academia that will support just about anything you postulate. From my experience, the result of ANY study is merely the product of the bias with which it was conceived and written. The vast majority of EVERYTHING I have ever read concludes that small business is the largest creator of new employment.

And you conceived this postulation all on your own?

[SpankyMcFarland]

there is no such thing as tax fairness. Especially when anyone above 120 000$ a year can probably move to a different country and take his money with him.

Go ahead. Not as easy as it seems.