Seymour Schulich blasts Morneau's Tax plan, Warns it’s 'political suicide'

[alpha]

http://www.bnn.ca/billionaire-seymour-schulich-blasts-morneau-s-tax-plan-warns-it-s-political-suicide-1.869864

When I first read about these proposed tax changes I thought I must be missing something because they seemed so ridiculous, but it looks like I was correct. Opposition seems to be gaining momentum.

What do fellow Canadians think?

[rb]

I'm cool with the tax changes. I'm surprised they actually got away with doing some stuff that is being banned.

I also think that Schulich's letter is disgraceful.

[MikeTheCannon]

Any chance you have a good article that explains the whole things from start to finish? I've been keeping my eye out for one but have yet to come across it.

My murky understanding is that the current structure allows small corporations to keep earnings inside of the structure and away from taxes (as the earnings are only taxed once they leave the structure). The set up allows for business investments to be made tax free. A doctor I was talking to stated that he uses it as a method to save for new equipment. The Liberals, however, are suggesting that people are using it "unfairly" (<-- a disputed term for sure) as a personal savings vehicle. That is, it's akin to having an unlimited RRSP. The result (from the Liberals perspective) is two fold: 1) It results in a reduction in taxes being paid and 2) it provides an unintended advantage to small corporations when compared to non-corporation earners. More importantly, perhaps, is that those who are in a position to take advantage of such a perk are the wealthy, as they can afford to leave more money inside of the corporation. That is, a corporate structure in and of itself is not enough to take advantage of the "perk"; you have to have a corporate structure and you have to be wealthy enough to not have to withdraw money from the corporate structure for normal living expenses.

There were a few other tangents on the conversations about this topic:

1) Apparently Doctors (at least in Ontario) negotiated their right to keep this setup during the last round of wage discussions with the province. That is, doctors traded a lower wage for the right to keep the structure. <-- This was according to the doctor I was talking to.

2) The "people will move to the US" argument is really just a "what are (enter profession here) worth?" argument. We can get rid of the structure and replace it with cash. Alternatively, we can determine that doctors really are paid too much (I'm not suggesting that's the case) and just do without. So perhaps this is the real discussion we should be having.

3) A similar argument (legitimate vs illegitimate use of a corporate structure) has already been raised and settled in the past. That is, at one time the concern was that owners of corporation would "hire" their family members to do nothing yet pay them a salary (effectively circumventing taxes). I believe the law now states that family members must make a wage (or at least not make more than a wage) equal to the value of the work being done. I have no doubt that some people are still abusing this to a certain degree, but at least the law now allows the CRA to call out blatant abusers. Perhaps we can make a similar rule for investments.

4) The value of the RRSP is really the value of the tax drag for an investment over its life time. That value can be very large and thus is a very nice perk to have.

Again, I've only picked up my understanding from small pieces here and there. A full blown, start to finish explanation is something I haven't come across yet. That said, the idea of handing out unlimited RRSPs to people who are already wealth seems regressive to me... but I'm not convinced I fully understand the situation.

[rb]

Any chance you have a good article that explains the whole things from start to finish? I've been keeping my eye out for one but have yet to come across it.

My murky understanding is that the current structure allows small corporations to keep earnings inside of the structure and away from taxes (as the earnings are only taxed once they leave the structure). The set up allows for business investments to be made tax free. A doctor I was talking to stated that he uses it as a method to save for new equipment. The Liberals, however, are suggesting that people are using it "unfairly" (<-- a disputed term for sure) as a personal savings vehicle. That is, it's akin to having an unlimited RRSP. The result (from the Liberals perspective) is two fold: 1) It results in a reduction in taxes being paid and 2) it provides an unintended advantage to small corporations when compared to non-corporation earners. More importantly, perhaps, is that those who are in a position to take advantage of such a perk are the wealthy, as they can afford to leave more money inside of the corporation. That is, a corporate structure in and of itself is not enough to take advantage of the "perk"; you have to have a corporate structure and you have to be wealthy enough to not have to withdraw money from the corporate structure for normal living expenses.

There were a few other tangents on the conversations about this topic:

1) Apparently Doctors (at least in Ontario) negotiated their right to keep this setup during the last round of wage discussions with the province. That is, doctors traded a lower wage for the right to keep the structure. <-- This was according to the doctor I was talking to.

2) The "people will move to the US" argument is really just a "what are (enter profession here) worth?" argument. We can get rid of the structure and replace it with cash. Alternatively, we can determine that doctors really are paid too much (I'm not suggesting that's the case) and just do without. So perhaps this is the real discussion we should be having.

3) A similar argument (legitimate vs illegitimate use of a corporate structure) has already been raised and settled in the past. That is, at one time the concern was that owners of corporation would "hire" their family members to do nothing yet pay them a salary (effectively circumventing taxes). I believe the law now states that family members must make a wage (or at least not make more than a wage) equal to the value of the work being done. I have no doubt that some people are still abusing this to a certain degree, but at least the law now allows the CRA to call out blatant abusers. Perhaps we can make a similar rule for investments.

4) The value of the RRSP is real the value of the tax drag for an investment over itself time. That value can be very large and thus is a very nice perk to have.

Again, I've only picked up my understanding from small pieces here and there. A full blown, start to finish explanation is something I haven't come across yet. That said, the idea of handing out unlimited RRSPs to people who are already wealth seems regressive to me... but I'm not convinced I fully understand the situation.

I think you've covered most of it. The other thing that's being terminated is split shareholdings in personal corporations for income splitting. Essentially a doc will give family members shares in his personal corporation/practice in order to further split income.

What surprises me about the outrage about this is that most of this stuff is already prohibited either expressly or under GAAR. So the outrage really is more along the lines of "How dares the gov't make us stop breaking tax rules".

The retained earnings/using you're company as a tax shelter for investments was already prohibited. I really don't know how these guys got away with that.

Splitting income with family members by paying them wages they don't deserve was already against GAAR. This was however hard to enforce and I believe it will continue to be hard to enforce even after current changes.

There may be a larger conversation to be had around family shareholdings in personal corporations. But my instinct is that when it's done purely for tax avoidance it smells fishy.

[SharperDingaan]

Morneau is correct in that there is abuse, in some cases it is wide spread in particular professions, and the result is often extremely unfair (to put it mildly). The problem is that he is using a hammer to swat a flea, and painting everyone with the same brush. The vast majority of business people who could use the loopholes, don't, because of the GAAR issues.

Frankly his political capital would be far better spent, simply banning 1-2 of the major tax consulting firms from all government business for a period of X years, & dragging out the expected law suits in the courts. Freeze them out for any extended period of time; their business collapses, and their competitors behave for fear of it being them next. Use the protection of the courts, air the dirty laundry in public discovery, and make the targets wear it in the media. If it is as bad as claimed, they are unlikely to escape the fire unscathed.

The man is very good at what he does, & we wish him luck
... but I guess we all have our idiot moments!

SD

[Cardboard]

Morneau is the same guy who wants to raise the inclusion rate on capital gains. He can go to hell!

Too bad that the smart Liberals of the past including Paul Martin are no longer. This bunch spends their time looking to increase taxes, legalizing pot and endlessly apologizing at the U.N. for Natives instead of having Canada as a world leader trying to solve existential issues such as North Korea.

Cardboard

[tengen]

My 2 cents: Doctors should be compensated fairly and the income tax system should not provide special advantages to highly paid professionals.

[EliG]

Any chance you have a good article that explains the whole things from start to finish? I've been keeping my eye out for one but have yet to come across it.

https://www.cibc.com/content/dam/small_business/day_to_day_banking/advice_centre/pdfs/business_reports/private-corporation-tax-changes-en.pdf

[MikeTheCannon]

Any chance you have a good article that explains the whole things from start to finish? I've been keeping my eye out for one but have yet to come across it.

https://www.cibc.com/content/dam/small_business/day_to_day_banking/advice_centre/pdfs/business_reports/private-corporation-tax-changes-en.pdf

Thanks!

[TBW]

Having given this a lot of thought, but still may be wrong about this, I think most of the changes are good. 

Income sprinkling, paying dividends to family that didn't buy equity is wrong and should rightfully be stopped.  However, salaries paid to family is likely more legit and the tax savings is very small as only the first $30k paid to a family member in income is tax efficient, so making a huge burden for corps to prove income is 'fair' may be overdoing it.

Lifetime capital gains and converting dividends to capital gains are also loopholes that shouldn't exist, so I am happy to see these closed.

Finally, taxing passive income is where I have issues and think these measures are overreaching.  Small businesses have higher risk and no pensions, they should not be treated like employees at bigger corps.  Also, large corporations get the benefit of lower taxes on retained earnings, why is it fair that small corp can't get the same benefit?  I am very against these proposed changes.

One other thing, rich people I know use the above measures but mostly through family trusts.  By not extending these rules to family trusts, then I don't think you are really achieving much.  You are penalizing small businesses, likely causing too much paperworks, and you aren't getting at the real schemes that actually do dodge taxes.

I would love to hear if I have any of this wrong, so please let me know.  I want to be sure I completely understand this.