Tax Fairness in Canada

[SpankyMcFarland]

The professional corporations can be a bit of a scam in Canada. For example, many hospital specialists do not have large overheads and can employ their families in their enterprises. These people are not entrepreneurs in any sense - there is virtually no risk of their customers going elsewhere. In my experience, the only docs with such corporations who went bust were guys who decided to stop paying CRA entirely for years.

[SpankyMcFarland]

For many years, South Africa has had strict controls on moving assets abroad and yet this family have 25 million to throw around. This story has legs, I think. It's an old tale, of course, that should embarrass both Liberals and Conservatives but the delay of years in getting something done here should become an issue in the current campaign. These days, CRA seems to be tougher on bird watchers than the big fish.

http://www.cbc.ca/news/politics/revenue-canada-targets-birdwatchers-for-political-activity-1.2799546

[ReeferMadness]

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.

For people who really have profit and loss risk, that's one thing. Like Spanky said though, a lot of small businesses are professionals (doctors, dentists, consultants) who've incorporated. I've worked with consultants who showed up to work every day the same as I did as an employee. However, because they were "independent", they could write off a ton of home office expenses. I had someone tell me she wrote off her pet expenses.

I know someone who used to run an accounting business and dealt a lot with independent professionals. He said that as long as expenses were within a reasonable amount of revenues, CRA would generally not even look at them.

It costs CRA money to audit so theyre going to focus on the obvious and big items.

Edited September 11, 2015 by ReeferMadness

[TimG]

I've worked with consultants who showed up to work every day the same as I did as an employee. However, because they were "independent", they could write off a ton of home office expenses. I had someone tell me she wrote off her pet expenses.

They are breaking the rules then. You can't really rant about the system and then use examples of people breaking the rules as "evidence" of flaws in the system. In this example the CRA can go after the employer too so I am surprised that they could get away with it. Many larger corporations have set rules about contractors working like employees and require that contractors convert to full time or quit after a while because the CRA can go after them. See:

http://www.cfib-fcei.ca/english/article/3057-do-you-know-if-your-worker-is-an-employee-or-a-self-employed-contractor.html

Failure to understand these government rulings on independent contractors can, in some instances, result in cost increases and penalties that may be greater than the cost of hiring the contract labour in the first place.

The system, as it stands now, is fairly reasonable. Most of the big loop holes have been closed. Of course, many people ignore the rules and hope they don't get caught but that will always be the case no matter what the rules. As a consultant the expenses you can "deduct" without breaking the rules don't add up to much.

Edited September 11, 2015 by TimG

[SpankyMcFarland]

Interesting document in the Marshall case from CBC:

https://www.documentcloud.org/documents/2303934-2015-03-09-xx-peter-marshall-cooper-notice-of.html

Mr. Marshall senior seems to have moved first to the US for a brief period and then to Canada.

[ReeferMadness]

They are breaking the rules then. You can't really rant about the system and then use examples of people breaking the rules as "evidence" of flaws in the system. In this example the CRA can go after the employer too so I am surprised that they could get away with it. Many larger corporations have set rules about contractors working like employees and require that contractors convert to full time or quit after a while because the CRA can go after them. See:

http://www.cfib-fcei.ca/english/article/3057-do-you-know-if-your-worker-is-an-employee-or-a-self-employed-contractor.html

The system, as it stands now, is fairly reasonable. Most of the big loop holes have been closed. Of course, many people ignore the rules and hope they don't get caught but that will always be the case no matter what the rules. As a consultant the expenses you can "deduct" without breaking the rules don't add up to much.

This is true when companies hire individual contractors directly. However, there is a work-around (people go through a 3rd party agency). They are employees of neither the company nor the 3rd party agency.

[ReeferMadness]

Interesting document in the Marshall case from CBC:

https://www.documentcloud.org/documents/2303934-2015-03-09-xx-peter-marshall-cooper-notice-of.html

Mr. Marshall senior seems to have moved first to the US for a brief period and then to Canada.

It's actually Mr. Cooper. It seems like he is very elderly and perhaps no longer able to look after his own affairs. CBC interviewed his son Marshall Cooper who pleaded ignorance of Canadian tax laws. He said he went to the experts so it's their fault if there's a problem.

Which totally makes sense. Why wouldn't it be totally legitimate for him to be receiving millions of dollars and pay not tax?

[msj]

This is true when companies hire individual contractors directly. However, there is a work-around (people go through a 3rd party agency). They are employees of neither the company nor the 3rd party agency.

We are really talking about PSB's: personal service businesses.

Higher tax rate; less deductions. If one gets caught, that is.

And as I tell my clients: if you can't find more than one "customer" then you be a PSB.

But if you do it for 15 years and then get audited and they nail you for 3 years then 12 out of 15 ain't bad.

That's reality folks.

No different than the server reporting tips at 10% of their T4 and getting away with it for years and years.

[TimG]

This is true when companies hire individual contractors directly. However, there is a work-around (people go through a 3rd party agency). They are employees of neither the company nor the 3rd party agency.

Does not make a difference to the CRA. If you are acting like an employee you can't pretend to be a business. The 3rd party agency might transfer the liability to the 3rd party agency but it does not go away.

[ReeferMadness]

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

Only if the kids are minors.

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.

I can pay my kids to clean my house but I can't deduct it from my income.

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.

I can't arbitrarily take any portion of my income and put it in my retirement plan and not pay tax on it.

[msj]

If you're incorporated as a CCPC (Canadian controlled private corporation) and not getting the tax breaks then you are doing it wrong ( and many are doing it wrong, as it turns out).

Trudeau is correct on this: the proposed tax cut is great for a guy like me and I make enough to not need a tax cut.

[TimG]

I can pay my kids to clean my house but I can't deduct it from my income.

We are talking peanuts because you can only pay fair value for work done.

I can't arbitrarily take any portion of my income and put it in my retirement plan and not pay tax on it.

Neither can any business owner. If they keep assets in the business and invest it they are paying the full corporate tax on any gains. It is no shelter. Any individual can move their assets into a corporation and start doing the same.

[TimG]

If you're incorporated as a CCPC (Canadian controlled private corporation) and not getting the tax breaks then you are doing it wrong ( and many are doing it wrong, as it turns out).

What tax breaks are you talking about?

[ReeferMadness]

No different than the server reporting tips at 10% of their T4 and getting away with it for years and years.

Do people make $200K a year in tips?

[TimG]

Do people make $200K a year in tips?

Do servers gave to carry liability insurance in case they screw up on the job?

[ReeferMadness]

Neither can any business owner. If they keep assets in the business and invest it they are paying the full corporate tax on any gains. It is no shelter. Any individual can move their assets into a corporation and start doing the same.

You can pay the corporate tax (which is quite low for small businesses) and then pay it back to yourself in dividends after your retire and have little or no other income.

Maybe you should hire msj - seems like he has it figured out better than whoever you're using.

[ReeferMadness]

Do servers gave to carry liability insurance in case they screw up on the job?

And the liability insurance costs $190K?

[msj]

What tax breaks are you talking about?

A 13.5% tax rate in BC versus my personal marginal tax rate that starts around 20% and goes up to 45%.

Gee, would I prefer to make $200,000 as a sole proprietor and pay those tax rates, or make $200,000 as an incorporated entity, pay myself, say $100,000, and then pay corporate tax on the rest at 13.5% rather than at 38% to 45%?

Hmmm, how dumb am I?

[msj]

Do people make $200K a year in tips?

An escort, yes (or chicken farmer as I call them : "I raised a 1,000 cocks last year").

A regular restaurant server, no.

I have some personal experience on this though and servers can make $28,000 on their T4 and about $35,000+ on tips if they are working at the right restaurant.

So that is some serious tax evasion going on.

Edited September 11, 2015 by msj

[msj]

Do servers gave to carry liability insurance in case they screw up on the job?

In BC servers can be held personally liable for over serving alcohol so it is a risk.

[msj]

You can pay the corporate tax (which is quite low for small businesses) and then pay it back to yourself in dividends after your retire and have little or no other income.

Maybe you should hire msj - seems like he has it figured out better than whoever you're using.

The thing about holding investments or rental property in a corporation is that it is not advantageous to do so. Eventually the income is high enough as to be reported on schedule 7 and or 3 which taxes it at higher rates and gets things like RDTOH and GRIP involved (don't go there, you don't want to know).

But there are tax efficient investments that help one to defer tax (corporate class shares, for example).

The real gravy is for those businesses that can operate and sell their shares for the $800,000 tax free capital gain deduction.

Now there's a sweet tax break (which is used rarely).

[TimG]

A 13.5% tax rate in BC versus my personal marginal tax rate that starts around 20% and goes up to 45%.

Money left in the corporation cannot be used to live on. If it is invested the rate goes up to the regular corporate rate. If you pay salary for living expenses you pay normal tax. If you pay dividends you pay corporate tax on the dividends and but get a reduced credit which leaves you with the same after tax if you paid income (except you don't have to pay CPP).

http://www.thebluntbeancounter.com/2011/12/should-your-investment-income-be-earned.html

In order to ensure taxpayers do not defer income tax on investment income by using a corporation, the Income Tax Act imposes an income tax rate that is essentially the same as the highest marginal personal income tax rate. Thus, an investment corporation in Ontario would currently pay 46.41% on all its investment income earned, which by coincidence is the exact same rate as the highest personal marginal income tax rate in Ontario. In order to ensure that double tax is not incurred, when corporate funds are distributed out to an individual by a dividend, the high rate of corporate income tax is partially refunded. This refundable tax prevents the corporation from having more after-tax dollars available to reinvest than the individual would have had if he or she had earned the money personally.

Edited September 11, 2015 by TimG

[msj]

Money left in the corporation cannot be used to live on. If it is invested the rate goes up to the regular corporate rate. If you pay salary for living expenses you pay normal tax. If you pay dividends you pay corporate tax on the dividends and but get a reduced credit which leaves you with the same after tax if you paid income (except you don't have to pay CPP).

There is a benefit here and I know it because I use it.

I pay less tax than the guy who gets a T4 for the same amount as my total net income (corporate plus add back my wages) because I shelter income within my corporation.

The system is not perfectly integrated and over long periods of time I am far better off.

Also something called time value of money related to the deferral of tax.

Edited September 11, 2015 by msj

[TimG]

I pay less tax than the guy who gets a T4 for the same amount as my total net income (corporate plus add back my wages) because I shelter income within my corporation.

Assets in the company cannot be removed from the company for personal use without being taxed. You have to factor this in when you compare yourself to a guy who gets a T4. A fairer comparison would be a guy who gets a T4 and maxes out their RRSPs each year.

I get the deferral argument but think it makes sense if taxes are going to be the same over the long term but if taxes are headed up the math changes.

Edited September 11, 2015 by TimG

[msj]

I have seen a person use a corporation for 4 years and she managed to pay less tax ( including the accounting fees) thanks to the company as compared to being a sole proprietor.

Tax integration is no where near perfect.

Extend it out further to decades ( in my case) and we are talking some serious tax savings.

I know cuz I'm a tax accountant who uses RRSP's, TFSA's and my corporation to save my money.