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

[Cigarbutt]

My humble take on this.

Underlying problems:
-Incorporation rules are way too lax.
-The tax code is way too complex.
-Incorporated entity tax rules are based on the template of the tax code.
-Incorporated entity tax rules allow the potential for significant abuse.
-Significant abuse occurred. (big surprise!)

Let's say you are the Finance Minister with noble intentions (interesting to remember that Mr. Morneau has had quite a rewarding personal experience from the fiscal perspective). I think it was FDR who hired Joe Kennedy to head the SEC in order to "understand" what went wrong in 1929.

http://ciec-ccie.parl.gc.ca/EN/PublicRegistries/Pages/PublicRegistry.aspx#k=morneau%2C%20bill*

To solve the issue, you propose to add another level of complexity.

Tax rules often fail at predicting 2nd and 3rd order effects, fail to predict fiscal "adaptation" and contribute to regulatory uncertainty costs.
Personal note: I followed the rules (both the letter of the law and in substance) and I find out that I likely underestimated the political costs. 

My opinion is that current trajectory suggests that, overall, total society costs will outweigh benefits. Negative NPV. Reject the project as submitted.

Why not address the underlying incorporation issue from the start?
Why not just simplifying the tax code?
Too complicated?

[rb]

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.

It's because small businesses have a lower tax rate than large corps.

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.

As far as i know trusts in Canada already pay tax at the largest income bracket. Essentially they're treated as holding corps. So there rules were extended to trusts long ago.

[SharperDingaan]

Just to mention one abuse ...

I start a small business and split the ownership between myself (55%), my spouse (25%), and 2 kids aged 5 & 8 (10% each). The business puts up some equity to buy the house/building the business will operate out of, and pays the mortgage. And each owner is made a director, by virtue of their high ownership stake. The very common practice.

The mortgage interest & all associated shelter cost is a 100% deductible expense, along with directors fees. Assume the business is operated at a very modest profit (after deducting these expenses) for 10 years, wound up, and the house/building liquidated at a net gain of 300K. 

Over the 10 years the kids directors fees are paid directly into their RRSP's (or RESP's to be really abusive), ensuring that anything earned on those contributions will be tax deferred. Legal income sprinkling.

Over the 10 years mortgage interest was deductible, and when the property was sold EACH partner got to use a portion of their lifetime exemption - eliminating the tax they would have otherwise paid. Each kid gets 10% of the proceeds and mortgage principal repaid over the years - for zero money down. As this property is a 2nd residence, if you or I had done this there would have been NO mortgage interest deduction AND tax paid on the gain on sale. Legal tax avoidance.

Were it just an ordinary property, and used mostly by folks operating those truly small businesses (retail store, baker, grocer, etc.) that we all would like to do business with - the view might be 'good on them'. The problem is that its not generally used by those truly small businesses (who don't have the capital), and it's often $1 million+ property. Abusive.

And at the extreme, the guys/gals running that business may well be paying less total tax (income + GST/HST) than the temp they have collectively hired to man the phones. Abusive.

Nobody did anything wrong, but most would see it as a sh1tty way of doing business that really needs to be changed.
Which is Morneau's point.

SD





 
 

[Cigarbutt]

Abuses, there are.
Need to make amend, there is.

Simply asking: Are we trying to solve the right problem?

Real life example. If the issue is teen abuse of digital privileges, the answer may be to make them sign a 35 page contract that will periodically be updated with a team of specialists.
Maybe another way is to have a clear discussion about rules with them beforehand. And to turn off the router or recuperate the device after, if applicable.

Apparently Einstein would have said: "If I were given one hour to save the planet, I would spend 59 minutes defining the problem and one minute resolving it."

In the old days, blood-letting was used to treat hypertension (too much blood). I submit that underlying assumptions sometimes have to be tested.

[TBW]

RB - some clarifications please - small corps earnings will now be effectively taxed at personal tax rates, that is much higher than large corp rates, no?

[SharperDingaan]

Abuses, there are.
Need to make amend, there is.

Simply asking: Are we trying to solve the right problem?

Real life example. If the issue is teen abuse of digital privileges, the answer may be to make them sign a 35 page contract that will periodically be updated with a team of specialists.
Maybe another way is to have a clear discussion about rules with them beforehand. And to turn off the router or recuperate the device after, if applicable.

Apparently Einstein would have said: "If I were given one hour to save the planet, I would spend 59 minutes defining the problem and one minute resolving it."

In the old days, blood-letting was used to treat hypertension (too much blood). I submit that underlying assumptions sometimes have to be tested.

The push back is valid, and many would argue you shouldn't be punishing people for simply using what is available to everyone - & being very good at it. Its quite correct of course, but the underlying assumption of the times when this was put in place; was that these people would be hiring lots of worker bees in the process of building their organizations - and the tax rake on those worker bees would more than offset this loss.

In todays world most every young person has to be an entrepreneur in some fashion, and it is highly desirable. The old world of working for someone else that this existing tax structure serves very well, just isn't the norm anyone. Arguably we would all be a lot better off if we simply made the first $X of entrepreneurial net income tax free, subject to a maximum revenue limit. Simply embrace the 'gig' economy, move with the times, & change the incentive structure to favour self employment over working for someone else, for total incomes under $Y.

SD
 

[Cigarbutt]

Yes, the world is changing.
Reforms, essential.

It has been reported that Mr. Morneau has been saying that the targeted groups have difficulty understanding his message.
Mr. Morneau has been a very successful entrepreneur himself and may very well be a good man but when the message does not reach destination, the logical step back is to wonder about the message or the messenger.

Somehow, a well intentioned plan comes across as a direct blow to small entrepreneurs.

Comparing to the 1995 budget speech may be insightful.
It is possible to move forward a difficult path.
But you need a good plan and clear/effective communication.

May need to think outside the box.
When facing an obstacle, an alternative is to use a different route.

[Cigarbutt]

Through publicity on this specific site, was taken to a link allowing, if applicable, the signature of an on-line open letter.
I submit that the letter tends to be lyrical and does not offer material solutions that may be necessary nonetheless, but worth a look (and a signature?).
www.wtfjt.ca

[rb]

RB - some clarifications please - small corps earnings will now be effectively taxed at personal tax rates, that is much higher than large corp rates, no?

Sorry for the delay in answering this.

No. Small corps will not be taxed at personal tax rates. Passive investment income earned in small corps will be taxed at personal rates. Active business income will still be taxed at the low business tax rate. Basically you can't use your small corp to shelter your investment income.

[Cigarbutt]

For those interested, "modifications" will be announced on Monday.

Message was (my read on it): Small business owners have a tendency to fraud and we are taking measures to correct the situation.

Perhaps message should have been and should be: We (the government) have set up a poor set of rules with loose definitions that allowed abuse and, for several years now, we have not used tools that already exist that would have curbed at least some of these abuses. So we want to correct the situation.

Hopefully the message has evolved because there are relevant problems with the present legislation and, yes, appropriate measures have to be taken.
Hopefully, instead of adding complex rules to an already ineffective mix (fiscal "experts" are already racing ahead here), simplification and common-sense grounded principles will apply.
Maybe a clear tax based definition of what a small business is would be a good starting point.