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Discussion Starter #1 (Edited)
I've received the following message from my tax preparer:

"On July 18, 2017 the Government released draft legislation that will have a significant impact on tax planning for private corporations and their shareholders. The draft proposals invite public consultations by October 2, 2017 and, due to the nature of the proposals, will undoubtedly result in significant feedback and (possibly) some amendment. However, whatever the result of the consultations, the Government has made their intentions clear and all private businesses should be prepared for significant changes."


The proposed changes fall into four categories:

1. Income Splitting
It appears that the days of paying discretionary dividends to family members is over. They will all be taxed at the highest marginal tax rate.

2. Lifetime Capital Gains Exemption
Family businesses and trusts will incur a higher tax burden.

3. Passive Investment Inside a Corporation
Tax deferral by retaining income in a private corporation will disappear (details TBA). Taxation on dividends received from a private corporation may change, depending on whether the corporation was using its funds for operations or investment.

4. Conversion of Income into Capital Gains
Disposition of shares to a related will be treated as dividends and taxed as such.

"Tax planning for private corporations and their shareholders will look very different post 2017."


If fully implemented, these proposals will put a damper on small family businesses trying to get ahead. They will also restrict the ability of self employed professionals to save for retirement. It remains to be seen whether this will be applied to holding companies. If so, the sustainability of my retirement will be in question. Dammit!

Edited to add: here is the original document.

http://www.fin.gc.ca/activty/consult/tppc-pfsp-eng.pdf
 

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Well the government needs to squeeze more money from Canadians and their small businesses to give to all the people holding their hands out, and of course the ever increasing refugees
 

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I think the gov't primarily wants to level the playing field between an employee and someone who uses the CCPC for passive income taX reduction. There really shouldn't be a loophole vis-a-vis investment income.
 

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Discussion Starter #5 (Edited)
I think the gov't primarily wants to level the playing field between an employee and someone who uses the CCPC for passive income taX reduction. There really shouldn't be a loophole vis-a-vis investment income.
It's not so much reduction as deferral. The tax system is integrated so that the sum of the taxes on corporate income followed by the taxes on personal dividend income is more or less equivalent.

http://www.mondaq.com/canada/x/434550/Corporate+Tax/Small+Business+Tax+Deferrals+Not+Tax+Savings
 

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The safer thing might be to allow individuals to smooth taxable income over time, rather than clamping down too hard on CCPCs.
 

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My accountant is also saying big changes are coming and they are still working through the impacts.

Should doctors and lawyers and other professionals be allowed to incorporate and shelter money at 10%? They dont take risk like regular businesses so I would say no.
 

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At least the passive income thing is intended to apply on a go-forward basis. I could imagine a lot of panic ensuing had they applied it to existing passive investments.
 

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At least the passive income thing is intended to apply on a go-forward basis. I could imagine a lot of panic ensuing had they applied it to existing passive investments.
It is applied to existing passive investments. Part IV taxes apply to passive investments in a corporation, they are taxed at the highest personal tax rate, not the small business rate.

The advantage to the corporation is that there is more money to invest. If you earn $1 in a corporation, you pay 15 cents tax and have 85 cents left to invest. If you earn the $1 as income, you have as little as 47 cents left to invest after tax.
 

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Discussion Starter #11
At least the passive income thing is intended to apply on a go-forward basis. I could imagine a lot of panic ensuing had they applied it to existing passive investments.
This is not new. Passive income earned inside a corporation has always been taxed at higher rates. Only operating income is taxed at the lower corporate rate.
 

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There is so much wrong with these proposed measures. I can see items (2) and (3) being worth looking into. Converting dividends to capital gains does feel abusive (though until now perfectly legitimate) and using trusts to multiply the LTGE again, was perfectly legitimate, but does on the face of it seem 'unfair'.

However the other two measures are simply punitive and pandering to the unwashed masses. To limit dividend income to any shareholder on the basis of the value of the work they provide to a corporation is simply destructive to the very concept of shareholders' being the owners of the corporation and distinct from its employees/directors. Income splitting is an artifact of this -- but is an intended artifact. TO change this goes against centuries of corporate law principals.

Similarly, applying a punitive surtax on retained earnings being invested is going to be an administrative nightmare and discourage growth. Corporations often hold and invest retained earnings for a period for all sorts of legitimate purposes. The net effect of all this will be a reduction of investment in Canada and a near instant inflation of professional fees for those affected with this change -- as someone who will be 'hit' by these changes, I have no intention of accepting such an increased tax burden and will undoubtably be passing on through fee inflations the entire net effect of the adverse taxation changes to my clients. Everyone else I've discussed this change with is of a similar position. Hardly the intent, but clearly what 95% of people who have had their tax burden increase substantially will do.

However contrived the examples in the consultation paper are, and no matter what the results of the consultation end up being, this is likely coming as a purely political decision (you can tell, in my opinion, this given the paltry net effect - $250 billion anticipated revenue - verses the significant departure from accepted corporate law principals and general common sense given the USA's articulated position of wanting to lower taxes on corporations).

This is not going to be pretty.
 

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There is so much wrong with these proposed measures... two measures are simply punitive and pandering to the unwashed masses... I have no intention of accepting such an increased tax burden and will undoubtably be passing on through fee inflations the entire net effect of the adverse taxation changes to my clients...
Gee, for a moment I thought you were just a self-entitled whiner. But since the impact can be passed on to the unwashed masses so that neither you nor your clients will face any pain or suffering, there is clearly no problem to complain about.
 

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Discussion Starter #14
Gee, for a moment I thought you were just a self-entitled whiner. But since the impact can be passed on to the unwashed masses so that neither you nor your clients will face any pain or suffering, there is clearly no problem to complain about.
Professionals such as physicians, whose billing is regulated, will not have the option of increasing charges. Instead, they may just walk with their feet.
 

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Professionals such as physicians, whose billing is regulated, will not have the option of increasing charges. Instead, they may just walk with their feet.
I suspect those who became doctors driven by the income splitting and tax saving advantages of incorporating are already in the US.
 

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Discussion Starter #16
I suspect those who became doctors driven by the income splitting and tax saving advantages of incorporating are already in the US.
No, you suspect wrongly. There are many physicians who depend on incorporation to fund their retirement. Because, you see, most physicians are not salaried. They don't have pensions, because they are independent contractors running small businesses.
 

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Lots of us don't have pensions. And I realize that contributing to CPP and paying out earnings to allow RRSP contribution room is not the norm these days. In sm5's case it might even make a person feel unwashed.
 

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Not very smart to introduce plans to make it even more difficult for us to keep our doctors in Canada, it's tough already to find a doctor. Many self employed and small business owners are in the same boat, using their CCPC to fund their own retirement. The Canadian government needs to start looking after it's own and not trying to squeeze everything they can from Canadians to fund helping everyone except Canadians.
 

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I see this as an attack on small businesses. I've made my mind up, for the first time in my life I'm voting conservative next election.
 

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Gee, for a moment I thought you were just a self-entitled whiner. But since the impact can be passed on to the unwashed masses so that neither you nor your clients will face any pain or suffering, there is clearly no problem to complain about.
"Unwashed masses" is just a euphemism, in case that isn't patently obvious. The point I was trying to make is that all this will do is decrease supply by the 'evil' 'rich' lawyers/doctors/dentists/accountants as they leave and increase costs will ultimately be passed on to the ultimate consumers creating inflation on costs of their services. Doctors may not be able to pass on these costs immediately, but dentists, lawyers, accountants, etc. sure will (as will other non-professional corporation small businesses). Doctors will undoubtably lobby for higher billing rates to the government in response to this in due course.

This says nothing of the 'social contract' being broken from when the rights of the professions to incorporate were originally given. But hey, since they are getting rid of the tax advantages of incorporation for professionals to make it 'fair', why not make it 'fair' by giving the professions the non-tax advantages of incorporation that every other corporation gets -- limited professional negligence liability (for obvious reasons, a non-starter).
 
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