"On July 18th, 2017 the Department of Finance released a blockbuster package of proposed tax law changes aimed at private corporations and their shareholders. The proposed changes target common tax management practices available to private business owners: income splitting among family members, investing in passive assets with corporate funds and repatriation of corporate earnings as capital gains rather than dividends". 1
What this means could be very bad for everyone including the middle class. Of course the government’s argument is that it makes for a fairer tax system and thus helps the middle class. The same sermon has been given many times before because it’s an easy sell to the masses. But will it? Here’s an example.
Dr. Bob runs a medical clinic. He is incorporated under the laws of Canada and pays taxes according to the law. Now, because Dr. Bob is a private enterprise he gets to incorporate his business.
This means that Dr. Bob can place some or all of his income into a private corporation and have his corporation pay him dividends. One disadvantage of this, is that dividends are not counted towards RRSP eligibility, so, it’s not all roses.
In addition, Dr. Bob can pay other members of his family dividends for services rendered. If there is money left over he can invest this money in a corporate investment account with preferable tax treatment.
At first glance. you may take the side of the government and that’s fine but let’s look at it more objectively.
Dr. Bob went to medical school and had over $300,000 in tuition costs, which he is still paying. When he graduated he opened a clinic, but he didn't’ have any money. So the bank took his personal assets such as his home as collateral against the loan.
Now Dr. Bob doesn't have any patients. He has to get money to market his practice. It takes a number of years before he makes any meaningful income. He’s not sure if the practice will be financially viable and he and his family are worried they could lose their home.
As time progresses, Dr. Bob sees things improving. He contacts his personal accountant and says "what can I do to pay less tax?" His accountant informs him that he can open up a small business corporation and take dividends etc.
Now Dr. Bob has given up about 10 years of non-productive income years because he went to university. He has school debt in the tens of thousands and a bank loan for his practice, putting his personal assets at risk.
Furthermore, Dr. Bob gets no pension, no benefits and has to pay for an office assistant, equipment, insurance costs, courses, and basically has no life.
Because Dr. Bob has the moniker of Dr. everyone believes he is wealthy and while some are, many are not. The after tax, take home pay after all costs and taxes can be shockingly quite small relative to the gross amount.
Now the government in their "wisdom" wants to take private corporations away and the benefits to small business people. Why on earth would Dr. Bob want to keep his clinic open? Or, Dr. Bob says, "enough is enough" and plans on heading to another country where they are welcomed with open arms, less taxation and fewer hours.
Business." I would add, that this warfare not only on small business owners but on Start to multiply the Dr. Bob’s practice by hundreds of thousands of small business owners, from electricians to butchers to stay at home workers, it’s not rocket science to see what the Financial Post refers to as "Class Warfare Manifesto against Private everyone, because one less doctor or one less electrician, dentist, radiologist etc is a detriment to the wellbeing of everyone.
Small business is the backbone of our country, without which, I would argue, there would be no middle class. Small business owners take the risks and hire people. Many people, without which, would be unemployed, so is it not reasonable to give them something extra for risks they take?
But when it all comes down to it, is it really something extra, when you compare what the middle class receive, especially those employed within the various levels of governments? So here is what I believe would be fair.
If the government wants to level the playing field give all small business owners the same respect and treatment that government workers receive. Let’s start with a nice gold plated pension based on say 60% of their best five years. Then cover their benefits such as disability insurance, life insurance and other health care benefits and waive their tuition.
While they are at it, pay for all of the equipment, office rental space, courses, and office workers. And, give them one year of maternity paid leave, paid holidays and a guaranteed income equivalent to CEO’S of major corporations, like Ontario Hydro who earns millions every year.
After all, isn’t a doctor the CEO of your health? And, I haven’t even begun to talk about all of the other small business owners who just get by and are inundated with paperwork, red tape and more.
The world is changing. We have many issues including the risks of living longer; pensions underwater, technology poised to render many jobs obsolete and a health care system that is dis-jointed and inefficient.
The government has to stop defaulting to a welfare state mentality. People need to have more money. The more they can invest in tax free savings accounts and RRSP’s the less dependence on government. Also, remove the archaic practice of locked in accounts and minimum RIF’S. This is our money and having big brother telling us what to do with it, is an insult to anyone’s intelligence.
Is all of this simply political posturing to get the sheep in line? I think so. As George Santayana the philosopher once said "Those who do not remember the past, are condemned to repeat it."
ROBERT F ROBY
SENIOR WEALTH ADVISOR
1. The whole article written by Kim Moody and Kenneth Keung can be read at : http://business.financialpost.com/opinion/kim-moody-and-kenneth-keung-proposed-tax-rules-like-class-warfare-against-private-businesses
2. This commentary is provided as a general source of information and is intended for Canadian residents only. The views and opinions expressed in this commentary may not necessarily reflect those of IPC Securities Corporation.