Tax Fairness in Canada

[TimG]

Or are you agreeing with Tim in claiming that as long as you hire someone you feel entitled to not pay taxes?

You have not been following the conversation. No one is avoiding taxes. The ONLY major benefit one can get from a corporation if you have enough income is tax *deferral* which means you pay taxes later when (presumably) your marginal rate is lower. But even then that is no guarantee since tax rates can go up and cost you more later than if you had not chosen to defer. Edited September 11, 2015 by TimG

[Accountability Now]

WHAT? A couple of posts earlier, you're talking about how you use a holding company as a dodge to pay minimum tax and other people are using a life insurance scam to avoid paying any tax at all. But the system is fine, right?

CRA essentially believes that if you are avoiding taxes even through a loop hole then its wrong and they will move to close the loop hole and in some cases will go after you for using the hole. I'm not saying the system is perfect. It will always need tweaking because there are people out there constantly manipulating it just like our legal system. Having said that for the most part the system works.

[Accountability Now]

Or are you agreeing with Tim in claiming that as long as you hire someone you feel entitled to not pay taxes?

I see Tim already responded with what I was going to say but I will add that there does need to be some benefit to taking on the risk of starting a business. If it was easy then everyone would do it. But its not.

[ReeferMadness]

You have not been following the conversation. No one is avoiding taxes. The ONLY major benefit one can get from a corporation if you have enough income is tax *deferral* which means you pay taxes later when (presumably) your marginal rate is lower. But even then that is no guarantee since tax rates can go up and cost you more later than if you had not chosen to defer.

What nonsense. Go back and read through again. Be like msj and have the integrity to admit that there is a huge cottage industry in providing people like you tax advantages that don't exist for the rest of us.

[ReeferMadness]

I see Tim already responded with what I was going to say but I will add that there does need to be some benefit to taking on the risk of starting a business. If it was easy then everyone would do it. But its not.

Wow. So all that money you make from your business is of no benefit unless you get it without paying taxes?

And whenever a business owner talks publicly about his business, you always hear of him saying how he's proud of building something and he has this vision of what he wants his business to be. Are you saying that's all crap?

There does need to be some benefit (your words) and apparently it wouldn't be worth it if the CRA didn't slash your tax bill. Is that what you're telling us?

[ReeferMadness]

CRA essentially believes that if you are avoiding taxes even through a loop hole then its wrong and they will move to close the loop hole and in some cases will go after you for using the hole. I'm not saying the system is perfect. It will always need tweaking because there are people out there constantly manipulating it just like our legal system. Having said that for the most part the system works.

I think what you mean to say is that it works to your benefit.

[Accountability Now]

Wow. So all that money you make from your business is of no benefit unless you get it without paying taxes?

The money can be used to reinvest into your company or invest in real estate holdings or other companies. All things that help the economy. Having it in my holding company does not help me personally unless I feel like breaking the law and risk audits.

And whenever a business owner talks publicly about his business, you always hear of him saying how he's proud of building something and he has this vision of what he wants his business to be. Are you saying that's all crap?

Why does that have to be crap for my statement about risk being involved being true? A business owner is proud of something they built but at the same time they use the incentive of tax deferral to put money back into their business or to reinvest in other businesses. Is that seriously so hard for you to understand?

There does need to be some benefit (your words) and apparently it wouldn't be worth it if the CRA didn't slash your tax bill. Is that what you're telling us?

If you would read what I said, you would actually know what I am telling you. The advantage is tax deferral....NOT avoidance. If I take the money from my hold co then I pay the same tax as I would if I took it as salary. The only benefit is deferring the tax to a later date so that I can reinvest it today.

Do you not understand the definition of deferral?

[Accountability Now]

I think what you mean to say is that it works to your benefit.

I have never broken any tax laws nor have I walked a grey line. I use the tax deferral system to reinvest my money where needed and any money that I pull out pays the same amount of tax as if I were salaried.

As such you can take your insinuation of my personal benefit and pound sand with it. The tax deferral system is open to anyone that has a company. You are more than free to do it but apparently you are too busy feeling jaded by the fact that you didn't have the ability to do so.

[TimG]

What nonsense. Go back and read through again. Be like msj and have the integrity to admit that there is a huge cottage industry in providing people like you tax advantages that don't exist for the rest of us.

Sorry. You re-read. All I saw msj saying is 1) corporations can be used to reduce tax by deferring tax under the right circumstances and 2) that people break the rules and gamble on not being audited. Deferring tax is a consequence of the corporate structure and completely fair for anyone taking on financial risk in order to earn income. It is easy to get for people who expect to get a paycheck every 2 weeks to pontificate but ignorance of the world outside of their employers cocoon does not make their complaints reasonable. Edited September 11, 2015 by TimG

[ReeferMadness]

The money can be used to reinvest into your company or invest in real estate holdings or other companies. All things that help the economy. Having it in my holding company does not help me personally unless I feel like breaking the law and risk audits.

Or you pay your wife a dividend. Or your adult kids. Or you hold it until you are in a lower tax bracket and pay yourself then. All advantages that the average joe doesn't get. And don't give me the "help the economy" crap. Almost everything helps the economy. But if you seriously want to make the GDP spin faster, put it into the hands of people who will spend it locally - give your employees a raise.

Why does that have to be crap for my statement about risk being involved being true? A business owner is proud of something they built but at the same time they use the incentive of tax deferral to put money back into their business or to reinvest in other businesses. Is that seriously so hard for you to understand?

Go back and re-read your own words. You said there had to be some benefit to owning a business, as if it wouldn't be worth it if you had to pay the same taxes as everyone else.

If you would read what I said, you would actually know what I am telling you. The advantage is tax deferral....NOT avoidance. If I take the money from my hold co then I pay the same tax as I would if I took it as salary. The only benefit is deferring the tax to a later date so that I can reinvest it today.

So, that's 2 benefits. You get to invest the money that for other people would have been paid in taxes. And you can choose to pay yourself at a time when you are in a lower tax bracket. Or are you someone who is wealthy enough that you will never be in a lower tax bracket? If that's the case you can choose to pay your kids... or your grand kids.

[ReeferMadness]

I have never broken any tax laws nor have I walked a grey line. I use the tax deferral system to reinvest my money where needed and any money that I pull out pays the same amount of tax as if I were salaried.

Maybe so - but that makes you an anomaly. And this really isn't about you - it's about the system that is unfair and lends itself to abuse.

As such you can take your insinuation of my personal benefit and pound sand with it. The tax deferral system is open to anyone that has a company. You are more than free to do it but apparently you are too busy feeling jaded by the fact that you didn't have the ability to do so.

So.... instead of making the system fair, you think everyone should take advantage of it?

[ReeferMadness]

It is easy to get for people who expect to get a paycheck every 2 weeks to pontificate but ignorance of the world outside of their employers cocoon does not make their complaints reasonable.

Damn. I'm glad I don't work for you.

Is it acceptable for employees to kiss your ring or do you have them kneel and kiss your boots?

[TimG]

Or you pay your wife a dividend.

If the wife invested in the business then why shouldn't she get a dividend?

[ReeferMadness]

Seems like it's time to sum up what has transpired in this thread. The blatant and gross levels of unfairness with the tax system seem to stem from 3 areas:

1. Businesses have a legitimate need to hire staff, defer income to lean years, invest income and conduct activities that merit special tax code treatment. The problem is when business owners use these activities in ways that don't really benefit the business but are used to put themselves in advantageous positions from a tax standpoint. It can be really difficult from an auditing standpoint to differentiate in many circumstances.
2. Many independent professionals are using these same tactics, even if their business really doesn't need them. For example, does the consultant hire a maid when Johnny gets to be a teenager and doesn't want to clean the office anymore?
3. There appear to be significant numbers of people who push the system past any reasonable level, like what it happening with KPMG and their gifting scam. That the case has spent years in front of the courts shows that the system is unwieldly and needs fixing.

Edited September 11, 2015 by ReeferMadness

[ReeferMadness]

If the wife invested in the business then why shouldn't she get a dividend?

You're hilarious. You started out, like canuck, arguing there were no advantages. Now you're saying the advantages are reasonable. How can advantages that don't exist be reasonable?

[-1=e^ipi]

Businesses have a legitimate need to hire staff, defer income to lean years, invest income and conduct activities that merit special tax code treatment. The problem is when business owners use these activities in ways that don't really benefit the business but are used to put themselves in advantageous positions from a tax standpoint. It can be really difficult from an auditing standpoint to differentiate in many circumstances.

This issue is fixed with a flat tax + guaranteed income system. Marginally progressive and regressive tax systems are open to abuse.

Edited September 11, 2015 by -1=e^ipi

[TimG]

The problem is when business owners use these activities in ways that don't really benefit but the business but are used to put themselves in advantageous positions from a tax standpoint. It can be really difficult from an auditing standpoint to differentiate in many circumstances.

Who says you get to decide what benefits the business? The fact is the shareholders are only people who can decide what is good for the business or not. The only thing the CRA needs to concern itself with is that any personal benefit from corporate activities is properly taxed and the CRA has many rules designed to ensure that happens.

Many independent professionals are using these same tactics, even if their business really doesn't need them. For example, does the consultant hire a maid when Johnny gets to be a teenager and doesn't want to clean the office anymore?

So what? Businesses can hire who ever the want. Why can't they hire their kids? The CRA already has rules regarding payments made to non-arms length employees (i.e. they can only be paid fair value for the work done). If they do the work it is legitimate.

There appear to be significant numbers of people who push the system past any reasonable level, like what it happening with KPMG and their gifting scam. That the case has spent years in front of the courts shows that the system is unwieldly and needs fixing.

Define 'significant'. 10? 100? 1000? Where is the evidence to support whatever number you pluck out of your head? These kinds of dodges are always appearing. This is just the latest and they are usually shutdown by the courts and CRA. This gifting arrangement will be closed no matter what government. The Conservatives have closed many loop holes (ending the income trust tax exemptions) that were exploited.

[BC_chick]

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.

I know there has been a lot of conflating corporations/self-proprietors/professionals on this thread and I agree, there is a distinction.

However, even in the case of the professions you mentioned there is a reason they can conduct themselves as a business. Accountants, doctors and consultants work for various clients many of whom do not have a payroll number to withhold the taxes and submit to CRA.

Once the line is drawn that this profession can carry on as a business, then the expenses come into it. You can't write-off a home office unless you work there more than 50% of the time and/or you see clients on a regular basis there. You also need to have a separate part of the house designated for it. Same thing goes for meals and entertainment as well car-expenses. If the amount you are claiming is unreasonable, it's a red-flag and trigger an audit. A good accountant would not allow his/her client to be unreasonable in their claims.

As for the 'fairness factor' on the flip-side, these professions do not get vacation-pay, they are not protected under Employment Standards and without that protection there is still a bigger *risk* than working 9-5.

Then there's EI and mat-leave - I'm self-employed and anything I may have gained over the years in writing-off a few expenses here and there was peanuts to the money I didn't receive when I had to take mat-leave. My daughter is school-age now and I still shudder at the fact that I could've stayed home for 1 year and collected 60% of my pay and that very fact played a huge role in me not having another kid. It's give and take.

Having said all that, I do think the maximum RRSP for payroll employees is a joke and should be increased to even the playing ground.

Edited September 11, 2015 by BC_chick

[TimG]

You're hilarious. You started out, like canuck, arguing there were no advantages. Now you're saying the advantages are reasonable. How can advantages that don't exist be reasonable?

You posted all kinds of alleged 'advantages' which I debunked. I don't see this as an advantage because you falsely assume that there is something unfair about family member investing in a business. In fact, marital law usually implies that a spouse owns half of all assets so it follows that they should own half of any corporation. Do you have a problem with the 50/50 division of marital assets? Edited September 11, 2015 by TimG

[msj]

What nonsense. Go back and read through again. Be like msj and have the integrity to admit that there is a huge cottage industry in providing people like you tax advantages that don't exist for the rest of us.

Yep, I agree.

The funny thing is that the politicians have implicitly acknowledged this. The reason for the employment Canada Employment amount tax credit was/is to give a tax break to regular working stiffs who only get T4's.

The problem being that guys like me who get a T4 from my own corporation also get to this tax credit so presumably I am aggressively writing expenses off in my company while also getting this tax credit that is supposed to help level the playing field.

[TimG]

Yep, I agree.

So what specifically do you think should be changed?

[msj]

People don't seem to understand that there is the practice of the art of taxation.

Lots of people try, and succeed, at writing off more vehicle, office, meals, and travel expenses than they really should be claiming.

It is a fact and a reality although I happily do have a number of clients who are know are scrupulously honest.

The problem is with the ones who think they are being honest when they are really not - the hypocrites.

These people actually exist and have a sense of entitlement as if it is reasonable for them to deduct certain expenses because it is obviously for business purposes etc...

I hate these clients.

[ReeferMadness]

Who says you get to decide what benefits the business? The fact is the shareholders are only people who can decide what is good for the business or not. The only thing the CRA needs to concern itself with is that any personal benefit from corporate activities is properly taxed and the CRA has many rules designed to ensure that happens.

So what? Businesses can hire who ever the want. Why can't they hire their kids? The CRA already has rules regarding payments made to non-arms length employees (i.e. they can only be paid fair value for the work done). If they do the work it is legitimate.

You doth protest too much. Who are you trying to convince - me or yourself?

Define 'significant'. 10? 100? 1000? Where is the evidence to support whatever number you pluck out of your head? These kinds of dodges are always appearing. This is just the latest and they are usually shutdown by the courts and CRA. This gifting arrangement will be closed no matter what government. The Conservatives have closed many loop holes (ending the income trust tax exemptions) that were exploited.

So, I think $170 billion stashed in tax havens represents some kind of issue. But maybe that's just me.

The group estimates federal and provincial governments are losing out on close to $8 billion in revenues from the reported use of tax havens alone.

That would buy a lot of health care.

[ReeferMadness]

And the bigger corporations get, the worse the problem.

For instance, we found that Canadian Pacific Railway paid an average effective cash tax rate of just 1.8% over the past decade. Manitoba Telecom paid 4.1%. Gildan Activewear paid 5.5%. And First Capital Realty has gone for years without paying any cash taxes at all.

[ToadBrother]

People don't seem to understand that there is the practice of the art of taxation.

Lots of people try, and succeed, at writing off more vehicle, office, meals, and travel expenses than they really should be claiming.

It is a fact and a reality although I happily do have a number of clients who are know are scrupulously honest.

The problem is with the ones who think they are being honest when they are really not - the hypocrites.

These people actually exist and have a sense of entitlement as if it is reasonable for them to deduct certain expenses because it is obviously for business purposes etc...

I hate these clients.

That sense of entitlement can bite them. I've seen one small businessperson who had set themselves up as a corporation who was writing off vehicle expenses, and when the CRA audited them, it disallowed the expenses, declared them a personal benefit, and hence personal income, and the owner got slapped with a nice big bill for the employment income and related costs. So yes, people do dirty dishonest things, but they also put themselves at great risk of being nailed, and quite often two or three years after the fact, and then they get the interest and penalties and interest on the penalties.

Edited September 11, 2015 by ToadBrother