Proposed tax changes - what will that mean for us

[ralk]

4 hours ago, distressedpremed said:

http://www.investopedia.com/terms/l/laffercurve.asp

The Laffer Curve is theoretically sound, but wildly misused and not really applicable to the current situation. There is a point where higher taxes reduce revenue by reducing the incentive to work, but we're nowhere near that point under current tax rates. The most methodologically rigorous estimates put the peak of the Laffer Curve at a marginal tax rate of 70%, with even low estimates above the 60% range. At present, all major economies, including Canada, have tax schemes well to the left of where the peak of the Laffer Curve is theorized to be. This has borne out in practice, as any attempts to cut marginal tax rates have reduced overall revenues, while attempts to increase them have raised overall revenues. 

The top marginal tax rate in Canada is 54% on income, well bellow the peak of the Laffer Curve. These tax changes will increase some people's overall effective tax rate and, for a select few, may change their marginal tax rate, but will never increase it beyond that 54% maximum (unless someone makes unbelievably stupid decisions on how to manage their money for tax purposes). Higher tax rates may incentivize some people to work less, but considering physicians work far more than full time on average and the job market has been tightening to the point that we're talking about (further) reducing overall physician supply, that's less of a problem than some make it out to be. In many cases, that just means more jobs for new graduates.

[la marzocco]

16 minutes ago, ralk said:

The Laffer Curve is theoretically sound, but wildly misused and not really applicable to the current situation. There is a point where higher taxes reduce revenue by reducing the incentive to work, but we're nowhere near that point under current tax rates. The most methodologically rigorous estimates put the peak of the Laffer Curve at a marginal tax rate of 70%, with even low estimates above the 60% range. At present, all major economies, including Canada, have tax schemes well to the left of where the peak of the Laffer Curve is theorized to be. This has borne out in practice, as any attempts to cut marginal tax rates have reduced overall revenues, while attempts to increase them have raised overall revenues. 

The top marginal tax rate in Canada is 54% on income, well bellow the peak of the Laffer Curve. These tax changes will increase some people's overall effective tax rate and, for a select few, may change their marginal tax rate, but will never increase it beyond that 54% maximum (unless someone makes unbelievably stupid decisions on how to manage their money for tax purposes). Higher tax rates may incentivize some people to work less, but considering physicians work far more than full time on average and the job market has been tightening to the point that we're talking about (further) reducing overall physician supply, that's less of a problem than some make it out to be. In many cases, that just means more jobs for new graduates.

Canada's tax policy is also largely influenced to maintain international competitiveness. We are seeing one of the lowest corporate tax rates in the G7. However, most of the leakage is actually not in personal income tax nor corporate income tax, it is in international taxation. A few recent examples that come to mind are the Panama Papers and the alleged KPMG-assisted Isle of Man tax avoidance schemes. Taxing passive investment income is not a bad proposal in my honest opinion and I feel that the $50,000 cap provides some relief for small business owners who bear the brunt of business risks. However, I am surprised Canada has not adopted some form of wealth tax as opposed to income tax. As a side note, there are other cases of massive tax revenue loss for the Canadian government, but many are at a much higher level: many businesses based in other countries can deduct interest on borrowed money to invest in a foreign company even though dividends from the foreign company, when repatriated, will be either exempt or mostly free from home country tax. This happens between Canada and many treaty of TEIA countries. 

[MarsRover]

The argument that having to pay more taxes will decrease physician work ethic is pretty weak IMO. Yes you will be taxed more when you come into the high income tax bracket. But guess what? So is literally like every other Canadian and we have in general a hard working country, even among high earners. You get taxed more, but you are still making more than the average person. 

Physicians worked just fine before this tax loop hole existed, and will work just fine after. There are a lot of problems with the health care system, but this isn't nearly the biggest. I get it though no one wants to give up money. 

[Bambi]

Time will be the final judge of what happens in the future.

[NLengr]

4 hours ago, MarsRover said:

 

Physicians worked just fine before this tax loop hole existed, and will work just fine after. There are a lot of problems with the health care system, but this isn't nearly the biggest. I get it though no one wants to give up money. 

This isn't a loophole!

The government knew exactly what they were doing when they encouraged physician incorporation. The system is working exactly how the government set it up. 

The liberals are using the phrase loophole incorrectly in order to try and sell this as an us vs them class conflict because they think it will appeal to their core base of voters and steal away voters from the NDP. They calculated that the number of small business owners pissed off would be acceptable (likely because they are statistically more likely to support the cons anyway). Unfortunately for the Liberals, they massively miscalculated public opinion and have spent a ton of political capital for no real gain. They may have even permenantly damaged thier government reputation amoung voters.  

[ralk]

28 minutes ago, NLengr said:

This isn't a loophole!

The government knew exactly what they were doing when they encouraged physician incorporation. The system is working exactly how the government set it up. 

The liberals are using the phrase loophole incorrectly in order to try and sell this as an us vs them class conflict because they think it will appeal to their core base of voters and steal away voters from the NDP. They calculated that the number of small business owners pissed off would be acceptable (likely because they are statistically more likely to support the cons anyway). Unfortunately for the Liberals, they massively miscalculated public opinion and have spent a ton of political capital for no real gain. They may have even permenantly damaged thier government reputation amoung voters.  

It is a loophole. The federal government, the ones whose tax policy is at question here, did not intend for small businesses to be used the way physicians and other have been using them in increasing numbers. The provincial governments, particularly Ontario's, encouraged physicians to exploit that loophole, but that doesn't make it any less of a loophole. That the OMA accepted a deal with the Ontario government based on incorporation, when many of the benefits of incorporation were not the purview of the Ontario government in the first place and couldn't be guaranteed in any deal, was just stupidity on their part. The federal and provincial governments are distinct entities that act largely independently.

[Bambi]

44 minutes ago, NLengr said:

This isn't a loophole!

The government knew exactly what they were doing when they encouraged physician incorporation. The system is working exactly how the government set it up. 

The liberals are using the phrase loophole incorrectly in order to try and sell this as an us vs them class conflict because they think it will appeal to their core base of voters and steal away voters from the NDP. They calculated that the number of small business owners pissed off would be acceptable (likely because they are statistically more likely to support the cons anyway). Unfortunately for the Liberals, they massively miscalculated public opinion and have spent a ton of political capital for no real gain. They may have even permenantly damaged thier government reputation amoung voters.  

NLengr has hit the nail on the head in my opinion. The liberals are in utmost bad faith and due t the pressure being put on them by many any groups, I believe they will think twice before proceeding as originally intended. They have certainly damaged their reputation for me!

[MarsRover]

44 minutes ago, NLengr said:

This isn't a loophole!

The government knew exactly what they were doing when they encouraged physician incorporation. The system is working exactly how the government set it up. 

The liberals are using the phrase loophole incorrectly in order to try and sell this as an us vs them class conflict because they think it will appeal to their core base of voters and steal away voters from the NDP. They calculated that the number of small business owners pissed off would be acceptable (likely because they are statistically more likely to support the cons anyway). Unfortunately for the Liberals, they massively miscalculated public opinion and have spent a ton of political capital for no real gain. They may have even permenantly damaged thier government reputation amoung voters.  

Can't rely sum it up any better than ralk did on this one. Exactly right. The federal government made those tax breaks for small business owners to pay less tax, and therefore have more money to reinvest into growing their companies. Whether that be hiring more staff, expanding, merchandizing etc.  This was all done because small businesses had a hard time getting loans from banks. This was not done for some common myths people spew about the risk small businesses take on, it being because small businesses don't have pensions or maternity leave either. That is not the purpose of these tax loop holes. 

Never did the federal government say "okay, physicians you can use these tax breaks not to grow your companies like their intended purpose - but, to get around paying income tax" .. Therefore it is a loophole. The federal government when making these tax breaks should have specified that the tax break money need be reinvested.

[MarsRover]

1 minute ago, Bambi said:

NLengr has hit the nail on the head in my opinion. The liberals are in utmost bad faith and due t the pressure being put on them by many any groups, I believe they will think twice before proceeding as originally intended. They have certainly damaged their reputation for me!

The federal government set up the tax breaks for small business owners to pay less tax and therefore have more money to invest in growing their companies. Provincial governments told physicians to start using the tax breaks to avoid paying tax as a way to psedu-increase their pay. So yes it is a loop-hole, as physicians were not using the federally legislated tax break for its intended purpose, just because the provincial governments told them too doesn't make it less of a loop hole. 

[Bambi]

It's not a loop-hole, it's the law. Tax accountants advised their clients to apply the law in their best interests. This was not an oversight by the government regardless of what they say now. We will agree to disagree. 

[ralk]

14 minutes ago, Bambi said:

It's not a loop-hole, it's the law. Tax accountants advised their clients to apply the law in their best interests. This was not an oversight by the government regardless of what they say now. We will agree to disagree. 

All loopholes are part of the law... if they weren't, they'd just be illegal and it wouldn't take a bill changing the law to eliminate them, it would just take police officers with handcuffs. A loophole is, by definition, legal.

[MarsRover]

50 minutes ago, Bambi said:

It's not a loop-hole, it's the law. Tax accountants advised their clients to apply the law in their best interests. This was not an oversight by the government regardless of what they say now. We will agree to disagree. 

Tax accountants literally try to find laws to be used in ways they weren't intended (loophole) while still being legal for people to maximize their money. They also look for laws to claim under that not many people understand or know about. 

Attempting to save money outside of the law is just called tax fraud 

[Bambi]

We are not talking about tax fraud here. If this was a loophole it would have been plugged long ago. Tax accountants and lawyers have made very cogent arguments why the government is considering going down the wrong path. It needs to play out for us to see what happens in the end. My money is on the government not doing what they propose.

[MarsRover]

2 minutes ago, Bambi said:

We are not talking about tax fraud here. If this was a loophole it would have been plugged long ago. Tax accountants and lawyers have made very cogent arguments why the government is considering going down the wrong path. It needs to play out for us to see what happens in the end. My money is on the government not doing what they propose.

I know it's not tax fraud I was referring to you saying its not a loop-hole its the law, which implies that a loop hole would be outside the law. I will definitely always agree that the government targeted a pretty random spot to make tax reform though. Why not come down on family trusts and the like which actually hides much more money from the federal government taxing. Obvious reason being that those changes would affect politicians like trudeau and morneau more 

[ralk]

5 hours ago, Bambi said:

We are not talking about tax fraud here. If this was a loophole it would have been plugged long ago. Tax accountants and lawyers have made very cogent arguments why the government is considering going down the wrong path. It needs to play out for us to see what happens in the end. My money is on the government not doing what they propose.

The reason these tax changes are being considered now and not years ago is that the number of people taking advantage of professional corporations has increased significantly. And, as a result of this, more and more wealthy individuals are paying less and less tax, while doing no additional work or providing added benefit to society, contributing to already-problematic wealth inequality. In short, this loophole wasn't closed before because it wasn't a problem before.

[NLengr]

3 hours ago, ralk said:

The reason these tax changes are being considered now and not years ago is that the number of people taking advantage of professional corporations has increased significantly. And, as a result of this, more and more wealthy individuals are paying less and less tax, while doing no additional work or providing added benefit to society, contributing to already-problematic wealth inequality. In short, this loophole wasn't closed before because it wasn't a problem before.

The real reason is because the Liberals are coming up to the second half of thier mandate and they:

1. Haven't accomplished much in the way of major policy. They thought this could be sold to thier base as a major policy change. It would firm up most traditional liberal voters while at the same time steal votes from the NDP who are likely to get a bit of a boost with a new leader (especially now that the new leader is cooler and hipper than old man Trudeau).

2. Have a massive spending issue that's going to kill them come election time. They would collect a small amount more tax (which wouldn't really help the massive deficit but any small but help I guess). More importantly it would let them answer all the expected "why do you have a spending problem" questions with some BS like "we have a good handle on finances, in fact look how we are strengthening the middle class by increasing taxes on the most wealthy and clamping down on loopholes. We're commited to tax fairness in order to strengthen the middle class". That's a good dodge of that question and resonates with the target Liberal voters (the Liberals have shifted left very close to NDP territory under JT).

This has always been about votes. The liberals (like all politicians) don't give two shits about the middle class or the working poor.  

However, like I said, this was a major miscalculation and has likely hurt the Liberal brand quite severely, especially if you consider the finance minister is basically done as a major political player. 

[ralk]

1 hour ago, NLengr said:

The real reason is because the Liberals are coming up to the second half of thier mandate and they:

1. Haven't accomplished much in the way of major policy. They thought this could be sold to thier base as a major policy change. It would firm up most traditional liberal voters while at the same time steal votes from the NDP who are likely to get a bit of a boost with a new leader (especially now that the new leader is cooler and hipper than old man Trudeau).

2. Have a massive spending issue that's going to kill them come election time. They would collect a small amount more tax (which wouldn't really help the massive deficit but any small but help I guess). More importantly it would let them answer all the expected "why do you have a spending problem" questions with some BS like "we have a good handle on finances, in fact look how we are strengthening the middle class by increasing taxes on the most wealthy and clamping down on loopholes. We're commited to tax fairness in order to strengthen the middle class". That's a good dodge of that question and resonates with the target Liberal voters (the Liberals have shifted left very close to NDP territory under JT).

This has always been about votes. The liberals (like all politicians) don't give two shits about the middle class or the working poor.  

However, like I said, this was a major miscalculation and has likely hurt the Liberal brand quite severely, especially if you consider the finance minister is basically done as a major political player. 

Yes, they're politicians who make decisions based on political pressure and votes. So does every politician... ever. That says nothing about the merits of the plan. Good policy can and usually is done as a result of political self-interest, since voters (we hope) want sensible policies enacted.

Edit - To further clarify, the change in the use of professional corporations is still the motivation here. There were no political points to score when professional corporations existed in smaller numbers. Now that they're being used in ways not originally intended to pay fewer taxes for non-productive reasons, it's become (potentially) politically advantageous to close that loophole

[Let'sGo1990]

So what's the most recent word on these changes?

[la marzocco]

2 hours ago, Let'sGo1990 said:

So what's the most recent word on these changes?

I think the DoF abandoned most of its proposed measures that were originally in their exposure draft from July 2017. They did go ahead with two measures (effective 1 Jan 2018): 

1. The government confirmed intentions to proceed with the income tax measures released on 13 December 2017 to address income sprinkling:
   • No reasonableness test will be needed for family members:
     • A spouse over age 65
     • Over 18 who make a "substantial labour contribution" of at least 20 hours per week
     • Over 25 who own 10 per cent or more of a business that earns less than 90 per of its income from the "provision of services"
   • Those who do not meet the above 'bright-line' tests will have their files reviewed by the CRA to be assessed for reasonableness
2. Budget 2018 proposes a further reduction to the $500,000 small business limit for Canadian Controlled Private Corporations (CCPCs) that have passive investment income in excess of $50,000.The entire small business deduction would be unavailable if income from passive investments of the associated group exceeds $150,000.

The counterbalance these two tax measures, the CCPC net federal tax rate went down from 10.5% to 10% [with a proposed further reduction to 9% by 2019].

That's the summary in a nutshell  

[Snowmen]

54 minutes ago, la marzocco said:

I think the DoF abandoned most of its proposed measures that were originally in their exposure draft from July 2017. They did go ahead with two measures (effective 1 Jan 2018): 

1. The government confirmed intentions to proceed with the income tax measures released on 13 December 2017 to address income sprinkling:
   • No reasonableness test will be needed for family members:
     • A spouse over age 65
     • Over 18 who make a "substantial labour contribution" of at least 20 hours per week
     • Over 25 who own 10 per cent or more of a business that earns less than 90 per of its income from the "provision of services"
   • Those who do not meet the above 'bright-line' tests will have their files reviewed by the CRA to be assessed for reasonableness
2. Budget 2018 proposes a further reduction to the $500,000 small business limit for Canadian Controlled Private Corporations (CCPCs) that have passive investment income in excess of $50,000.The entire small business deduction would be unavailable if income from passive investments of the associated group exceeds $150,000.

The counterbalance these two tax measures, the CCPC net federal tax rate went down from 10.5% to 10% [with a proposed further reduction to 9% by 2019].

That's the summary in a nutshell  

Regarding point #2, couldn't you create 2 separate corporations that each receive a part of your billings? One that is for you to take an income every year and would be able to take advantage of small-business tax rate and another dedicated to passive investments.

[la marzocco]

3 minutes ago, Snowmen said:

Regarding point #2, couldn't you create 2 separate corporations that each receive a part of your billings? One that is for you to take an income every year and would be able to take advantage of small-business tax rate and another dedicated to passive investments.

Nope - will clarify below.

59 minutes ago, la marzocco said:

Budget 2018 proposes a further reduction to the $500,000 small business limit for Canadian Controlled Private Corporations (CCPCs) that have passive investment income in excess of $50,000.The entire small business deduction would be unavailable if income from passive investments of the associated group exceeds $150,000.

'Associated group' is an Income Tax Act term which essentially peers through all the corporations that one & one's spouse control. You will be assessed at the group-level (i.e., the summation of all the corporations under your control). This is to prevent tax avoidance.