Investment income in a CCPC

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izzy
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Re: Investment income in a CCPC

Post by izzy » 11 Aug 2017 15:40

fireseeker wrote:
11 Aug 2017 14:35
izzy wrote:
11 Aug 2017 14:08
Indeed ! and guess what Morneau did for a living in real life!
In his last year in the private sector, Morneau earned $1,071,859. As a cabinet minister, he is earning ~$250,000.
If he's trying to feather his nest, he's getting the math wrong.
It's not what he earned but how he earned it that I was referring to.I expect his company will come up with a creative way of overcoming the restrictions by setting up IPPs or RCAs or some such-with a healthy commission to the house of course.
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Re: Investment income in a CCPC

Post by tdiddy » 11 Aug 2017 16:44

izzy wrote:
11 Aug 2017 15:40

It's not what he earned but how he earned it that I was referring to.
How about where he earned it :shock:

http://www.cbc.ca/news/business/bahamas ... -1.3773041

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Re: Investment income in a CCPC

Post by kcowan » 11 Aug 2017 17:41

DavidR wrote:
11 Aug 2017 12:10
Rysto wrote:
11 Aug 2017 10:36
One of the issues is, what's stopping the Amazon programmer from incorporating?
The programmer's corporation would be taxed as a personal services business.
https://www.google.ca/search?q=personal ... e&ie=UTF-8
Right but as I said, this was done 20 years ago and they did not close the loophole until 2011! So for 1997 until 2011 it was a loophole and even after 2011 it was a risk that the CRA had to discover. I did not close mine until 2009.
For the fun of it...Keith

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Re: Investment income in a CCPC

Post by izzy » 12 Aug 2017 08:52

tdiddy wrote:
11 Aug 2017 16:44
izzy wrote:
11 Aug 2017 15:40

It's not what he earned but how he earned it that I was referring to.
How about where he earned it :shock:

http://www.cbc.ca/news/business/bahamas ... -1.3773041
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Re: Investment income in a CCPC

Post by RPABVG » 16 Aug 2017 07:14

Hi All,
I'm new to the forum here and am interested in getting thoughts on holding securities in an OpCo and/or HoldCo vs. drawing them out paying personal tax and investing in TFSA or RRSP.

Assuming a long term horizon for retirement, top marginal tax bracket and a mix of interest, cap gains and dividends. Is one way advisable over another?

If you know of a current thread that discusses this already, please point me there. Thanks!
R

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Re: Investment income in a CCPC

Post by ClosetIndexer » 16 Aug 2017 15:29

RPABVG wrote:
16 Aug 2017 07:14
Hi All,
I'm new to the forum here and am interested in getting thoughts on holding securities in an OpCo and/or HoldCo vs. drawing them out paying personal tax and investing in TFSA or RRSP.

Assuming a long term horizon for retirement, top marginal tax bracket and a mix of interest, cap gains and dividends. Is one way advisable over another?

If you know of a current thread that discusses this already, please point me there. Thanks!
R
This is going to depend on the outcome of the changes the government is making this year, discussed in the few previous pages. The exact format for the changes is unknown, so it's impossible to answer your question with certainty right now. Most likely though, there will be no advantage to keeping securities in the corporations vs investing them personally, especially if you have RRSP/TFSA space.

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Re: Investment income in a CCPC

Post by soldToSoon » 21 Aug 2017 16:01

A question on the usage of investment income within a corporation.
What happens if you use the investment income generated within a corporation for paying office rent, salaries to employees, IT expenses, marketing and other things?
For example. Let's say you have ccpc that generates $150k in investment income. You have the following corporate expenses:

Rent:12k
IT:10k
Salaries for staff: 60k
Subcontractors:20k
Your own salary: 48k

Resulting in 0 gross profit. Is this a kosher situation? Are there any issues with this?

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Re: Investment income in a CCPC

Post by adrian2 » 21 Aug 2017 19:43

soldToSoon wrote:
21 Aug 2017 16:01
Resulting in 0 gross profit. Is this a kosher situation?
Yes.
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Re: Investment income in a CCPC

Post by StuBee » 21 Aug 2017 20:25

soldToSoon wrote:
21 Aug 2017 16:01
Resulting in 0 gross profit. Is this a kosher situation? Are there any issues with this?
On the one hand, it is assumed that your corporation does indeed produce active income (otherwise all of your mentioned expenses would be for no purpose). Therefore, your active income would be your net income and this (presuming the realization of the government's proposition) would be taxed roughly equivalent to the maximal personal marginal tax rate. Hence you have gained nothing.

On the other hand, imagine (for the sake of argument) that investment income covers all corporate expenses except for your salary. The net income of your corporation equals your salary and is thus taxed as if it were your personal income (because it is your personal income). Again, you have gained nothing.

ISTM that there is only one way of making the CCPC profitable (in so far as it is a CCPC): The reinvestment of active income in the primary buisness.
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Re: Investment income in a CCPC

Post by soldToSoon » 22 Aug 2017 13:20

Thanks for the great response. Let's take this a little bit further in our analysis and change the numbers as follows:

Investment income: $150k
Business expenses: 30k
My salary: 120k
Active income: 0 for the next couple of years while a new product or service is launched.
How would this get categorized?

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Re: Investment income in a CCPC

Post by StuBee » 22 Aug 2017 14:22

soldToSoon wrote:
22 Aug 2017 13:20
How would this get categorized?
From my understanding of the federal proposal, all of your investment income would be taxed immediately at nearly 50% since it is passive income. If I am right (and I am not sure) then you would not have the funds necessary to pay your full 120K$ salary.

Setting aside your salary (i.e. pretending that you did not pay yourself a salary), if at a later date you paid yourself a dividend, some of the excess tax paid on the investment income should be returned to you depending on your overall income situation in the year you receive the dividend.

What I am not sure about is whether or not passive income is taxed before or after all buisness expenses are considered. If it is taxed after expenses then your salary will bring all corporate income to zero and you would have no taxes at the corporate level. In fact it would be as if that year you had no CCPC at all.

IOW there is no real advantage tax wise for your CCPC irrespective of how the passive investment income is taxed (i.e. before or after corporate expenses...)
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Re: Investment income in a CCPC

Post by soldToSoon » 22 Aug 2017 14:32

Good points and this is where there's lots of uncertainty. My accountant expressed similar doubts. If one can take out salary without paying the corporate taxes first, it would not be a horrible situation.
But if the government enacts measures to tax the investment income before reaching the hands of ccpc, there's going to be lots of trouble. It would be regulatory nightmare as well because our entire system is based on self reporting. If something like automatic deduction of ccpcs' investment income is implemented, it would be a huge nightmare, regulation wise.
And we haven't even started with monitoring of income from foreign investment sources and its regulation.

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Re: Investment income in a CCPC

Post by tdiddy » 22 Aug 2017 16:14

StuBee wrote:
22 Aug 2017 14:22
If it is taxed after expenses then your salary will bring all corporate income to zero and you would have no taxes at the corporate level. In fact it would be as if that year you had no CCPC at all.
But then you have converted passive investment income to personal employment income tax. Unless that investment income was all interest (ie no cap gains/divid) you are taking a loss vs holding investments personally as far as i can see

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Re: Investment income in a CCPC

Post by soldToSoon » 22 Aug 2017 16:46

tdiddy wrote:
22 Aug 2017 16:14
StuBee wrote:
22 Aug 2017 14:22
If it is taxed after expenses then your salary will bring all corporate income to zero and you would have no taxes at the corporate level. In fact it would be as if that year you had no CCPC at all.
But then you have converted passive investment income to personal employment income tax. Unless that investment income was all interest (ie no cap gains/divid) you are taking a loss vs holding investments personally as far as i can see
Which may not be entirely bad. If you look at the major beef the government has with CCPC investment income, it isn't in the rates per se, but the deferral advantage offered.

Sure, conversion of investment income to salary is not an optimal choice, but if you add the deferral advantage the funds enjoyed, that is bringing down the tax rate to about 12 or 13% from what would have been north of 47%, it looks like a good plan. That is the government allows it.
On a go forward basis, it may be less than optimal, but I'm not sure if that's going to be the case as the deferral advantage is just too strong.

I think the small business tax rate should really be eliminated and there should be just one class of rates for all corporations. Then at about 25% to 30% tax rate(based on province), nobody should have any beef with the incorporation story. Lots of people will stop incorporating and those who really mean to incorporate will do that.

If they want to promote investments in small businesses, let them earn tax credits when the said investments are made. This is the easiest answer to all the troubles and it's very likely to get zero consideration. So if a small business makes an investment of 100k out of retained earnings that were taxed at 27%, they can earn back a credit of 15% or more when they actually make the investment.

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Re: Investment income in a CCPC

Post by tdiddy » 22 Aug 2017 19:31

Actually I think you are right

Say you have amount P active small business income

If you invested in capital gains after paying small business tax
you would have [(0.85)P exp(n)] * 0.5=.425 Pexp(n) for simplicity assuming 15% small business, 50% personal, growing exponentially at n, capital gains tax of 25%
same amount personally (.5)P exp(n) - 1/4( 0.5Pexp(n)-0.5P) = .375Pexp(n) + 0.125P
So assuming a good return over extended period .425Pexp(n) > .375Pexp(n) +0.125P
when Pexp(n)>=2.5P you are ahead (still nowhere near as far ahead as before, and now behind RRSP/TFSA)

may want to double check my math undergrad was a long time ago :)
soldToSoon wrote:
22 Aug 2017 16:46
tdiddy wrote:
22 Aug 2017 16:14
StuBee wrote:
22 Aug 2017 14:22
If it is taxed after expenses then your salary will bring all corporate income to zero and you would have no taxes at the corporate level. In fact it would be as if that year you had no CCPC at all.
Which may not be entirely bad. If you look at the major beef the government has with CCPC investment income, it isn't in the rates per se, but the deferral advantage offered.

Sure, conversion of investment income to salary is not an optimal choice, but if you add the deferral advantage the funds enjoyed, that is bringing down the tax rate to about 12 or 13% from what would have been north of 47%, it looks like a good plan. That is the government allows it.
On a go forward basis, it may be less than optimal, but I'm not sure if that's going to be the case as the deferral advantage is just too strong.

I think the small business tax rate should really be eliminated and there should be just one class of rates for all corporations. Then at about 25% to 30% tax rate(based on province), nobody should have any beef with the incorporation story. Lots of people will stop incorporating and those who really mean to incorporate will do that.

If they want to promote investments in small businesses, let them earn tax credits when the said investments are made. This is the easiest answer to all the troubles and it's very likely to get zero consideration. So if a small business makes an investment of 100k out of retained earnings that were taxed at 27%, they can earn back a credit of 15% or more when they actually make the investment.

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Re: Investment income in a CCPC

Post by StuBee » 22 Aug 2017 21:38

tdiddy wrote:
22 Aug 2017 16:14
StuBee wrote:
22 Aug 2017 14:22
If it is taxed after expenses then your salary will bring all corporate income to zero and you would have no taxes at the corporate level. In fact it would be as if that year you had no CCPC at all.
But then you have converted passive investment income to personal employment income tax. Unless that investment income was all interest (ie no cap gains/divid) you are taking a loss vs holding investments personally as far as i can see
I absolutely agree.
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Re: Investment income in a CCPC

Post by StuBee » 22 Aug 2017 21:59

tdiddy wrote:
22 Aug 2017 19:31
Actually I think you are right

Say you have amount P active small business income

If you invested in capital gains after paying small business tax
you would have [(0.85)P exp(n)] * 0.5=.425 Pexp(n) for simplicity assuming 15% small business, 50% personal, growing exponentially at n, capital gains tax of 25%
same amount personally (.5)P exp(n) - 1/4( 0.5Pexp(n)-0.5P) = .375Pexp(n) + 0.125P
So assuming a good return over extended period .425Pexp(n) > .375Pexp(n) +0.125P
when Pexp(n)>=2.5P you are ahead (still nowhere near as far ahead as before, and now behind RRSP/TFSA)
I have utterly failed to follow your logic... :?

I think that your "[(0.85)Pexp(n)]" refers to the amount of money remaining after the net active corporate income has been taxed. Unfortunately, the government appears to have proposed that if this active income is used for passive purposes then this same active income is subjected to a greater level of taxation so that the [(0.85)Pexp(n)] becomes the equivalent of [(0.5)Pexp(n)].

If this is true (and I think that I am right) then active income not used for active purposes receives worse treatment taxwise then if it were simply removed from the CCPC (no matter how it is removed).
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Re: Investment income in a CCPC

Post by StuBee » 22 Aug 2017 22:27

soldToSoon wrote:
22 Aug 2017 16:46
tdiddy wrote:
22 Aug 2017 16:14


But then you have converted passive investment income to personal employment income tax. Unless that investment income was all interest (ie no cap gains/divid) you are taking a loss vs holding investments personally as far as i can see
Which may not be entirely bad. If you look at the major beef the government has with CCPC investment income, it isn't in the rates per se, but the deferral advantage offered.

Sure, conversion of investment income to salary is not an optimal choice, but if you add the deferral advantage the funds enjoyed, that is bringing down the tax rate to about 12 or 13% from what would have been north of 47%, it looks like a good plan. That is the government allows it.
On a go forward basis, it may be less than optimal, but I'm not sure if that's going to be the case as the deferral advantage is just too strong.
:?

I think that you are saying that it would be more profitable (presuming enactment of the government proposition) to take all net income out as salary. Indeed it does not matter at all how you take out the net active income. Any net income remaining within the CCPC that is not used for active purposes will receive worse treatment than if it were removed from the CCPC.

To treat the CCPC as if it were not a CCPC (which would be exactly the case if no net income remained within it) is probably the best way to go if, at this time, you have no use for any of the net income within the underlying buisness.
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Re: Investment income in a CCPC

Post by adrian2 » 23 Aug 2017 10:13

Canada’s tax proposals read like a class-warfare manifesto against private businesses
Kim Moody and Kenneth Keung wrote:In many ways, the broad-sweeping proposals and the accompanying “Consultation Document,” heavily laced with offensive rhetoric, reads like a class-warfare manifesto against private businesses.

One of the proposals is particularly egregious: new rules to prevent income splitting. What is income splitting? An example is the paying of dividends to family shareholders — active or non-active — which often results in a reduced overall family tax burden as compared to the situation where dividends were simply paid to the active shareholder. Is income splitting really that offensive and unfair as suggested by our government?

[...]

It turns out that the Royal Commission on Taxation already thought about many of these questions over 50 years ago. The commission noted the substantial contribution each family member usually makes to the family’s finances, and strongly recommended the family unit be the appropriate taxing unit: “we believe firmly that the family is today, as it has been for many centuries, the basic economic unit in society.”

While many things have changed over the last 50 years, we submit that this assertion remains just as true today, particularly with respect to families that run businesses. A spouse/common-law partner who stays home to raise children and manage the household is as much a key ingredient to the family’s success as the other spouse’s day-to-day hustle for the business. When you combine that with the further fact that non-active spouses/common-law partners have property rights with respect to family assets that have been used — directly or indirectly — to grow the business, is it really offensive from a tax-policy perspective for the non-active spouse/common-law partner or other family member to receive dividends or realize capital gains notwithstanding they may not have expended the same level of direct effort in the business as other family members?

[...]

The resulting tax rules that the government is proposing to prevent income splitting are some of the most complicated set of tax rules we have ever seen. The average small business owner — who usually does not have the resources to have an internal tax department to interpret and navigate complex tax rules — will be burdened with extreme complexity. Is this fair? Not in our view.

We believe that what is old is new again. Just as it was in 1966 and for many centuries, the economic unit today is still the family unit. Rather than playing an endless cat-and-mouse game with taxpayers on income splitting which results in very complex legislation which will likely not be workable in practice — all in the name of “fairness” — we believe the government should revisit the Royal Commission’s recommendation of basing taxation on the family unit. This, in our view, would be a worthwhile tax reform initiative for Canada. And it would be fair.
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Re: Investment income in a CCPC

Post by tdiddy » 23 Aug 2017 14:04

StuBee wrote:
22 Aug 2017 21:59

Unfortunately, the government appears to have proposed that if this active income is used for passive purposes then this same active income is subjected to a greater level of taxation so that the [(0.85)Pexp(n)] becomes the equivalent of [(0.5)Pexp(n)].
Did you take a second look at proposal? My understanding was this is what they said they are not interested in pursuing. Rather they are turning passive refundable taxes (ie rdtoh and cda)into nonrefundable Corp taxes.

Anyways we will see. I've signed a few petitions, wrote to my MP, morneau, and emailed feedback to mof, going to try and forget about this until Oct now

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Re: Investment income in a CCPC

Post by slim » 23 Aug 2017 15:35

From what you people have read, do you think there is any reason to sell stocks in our corporations to realize capital gains before the liberals announce what they plan on taking from us?

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Re: Investment income in a CCPC

Post by Koogie » 23 Aug 2017 16:04

I can't find the citation right now but, no. I believe the new rules will be backdated to the time of the announcement (July something).
Buy very little, sell even less.

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Re: Investment income in a CCPC

Post by StuBee » 23 Aug 2017 17:01

tdiddy wrote:
23 Aug 2017 14:04
StuBee wrote:
22 Aug 2017 21:59

Unfortunately, the government appears to have proposed that if this active income is used for passive purposes then this same active income is subjected to a greater level of taxation so that the [(0.85)Pexp(n)] becomes the equivalent of [(0.5)Pexp(n)].
Did you take a second look at proposal? My understanding was this is what they said they are not interested in pursuing. Rather they are turning passive refundable taxes (ie rdtoh and cda)into nonrefundable Corp taxes.
Well, I read the relevant portion yet again (from page 32 to 45 with particular attention to table 7). Indeed the government does not want to adopt the "1972 approach". However, if you carefully go through the math of table 7 comparing the ordinary individual to the governments proposal (where the refundable portion of taxes has become nonrefundable) you will discover that mathematically the treatment is identical.

ISTM that (with the proposal) all gains are maximally taxed annually and then (when a dividend is paid) a corrective tax is applied that not only cancels out the favorable tax treatment of the initial active income but also cancels out the fact that this higher initial capital was generating higher returns simply because there was more capital to produce returns.

Here is my demonstrationn of the equivalence of the math (running through table 7):

Individual: 100K$ X (1 - 0.5) X [1 + 0,03 X (1 - 0.5)]10

CCPC proposal : 100K$ X (1 - 0.15) X [1 + 0,03 X (1 - 0.5)]10 X [1 - (0.5 - 0.15)/(1 - 0.15)]
and (after simplifying the last clause)...
CCPC proposal : 100K$ X (1 - 0.15) X [1 + 0,03 X (1 - 0.5)]10 X [(1 - 0.5)/(1 - 0.15)]
and after noting that the two (1 - 0.15) cancel out each other...
CCPC proposal : 100K$ X [1 + 0,03 X (1 - 0.5)]10 X (1 - 0.5)
and after rearranging :
CCPC Proposal : 100K$ X (1 - 0.5) X [1 + 0,03 X (1 - 0.5)]10

Hence CCPC proposal becomes identical with the tax treatment as if it were all along treated as personal income.

However, what clearly favours the individual is that personal taxation is progressive (i.e. MTR's go up as income goes up). With the government's CCPC proposal all the passive investment gains will be taxed at maximal MTR's. The initial active income will be corrected to perfectly reflect the individuals tax situation at the time of withdrawal. Also all of his gains (which have already been taxed at maximal levels) will also undergo the same corrective measure.
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Re: Investment income in a CCPC

Post by tdiddy » 23 Aug 2017 18:28

StuBee wrote:
23 Aug 2017 17:01
ISTM that (with the proposal) all gains are maximally taxed annually and then (when a dividend is paid) a corrective tax is applied that not only cancels out the favorable tax treatment of the initial active income but also cancels out the fact that this higher initial capital was generating higher returns simply because there was more capital to produce returns.

Here is my demonstrationn of the equivalence of the math (running through table 7):

Individual: 100K$ X (1 - 0.5) X [1 + 0,03 X (1 - 0.5)]10

CCPC proposal : 100K$ X (1 - 0.15) X [1 + 0,03 X (1 - 0.5)]10 X [1 - (0.5 - 0.15)/(1 - 0.15)]
and (after simplifying the last clause)...
CCPC proposal : 100K$ X (1 - 0.15) X [1 + 0,03 X (1 - 0.5)]10 X [(1 - 0.5)/(1 - 0.15)]
and after noting that the two (1 - 0.15) cancel out each other...
CCPC proposal : 100K$ X [1 + 0,03 X (1 - 0.5)]10 X (1 - 0.5)
and after rearranging :
CCPC Proposal : 100K$ X (1 - 0.5) X [1 + 0,03 X (1 - 0.5)]10

Hence CCPC proposal becomes identical with the tax treatment as if it were all along treated as personal income.
Right if passive income is subject to both non refundable corporate tax and then dividend tax it is mathematically the same as earning personally.

However, what I was trying to show is that IF somehow we are able to apply soldtosoon's strategy of converting passive corp income to personal salary, thus not paying corporate tax on it or dividend tax, just personal income rate there may be a modest advantage to capital gains held for a long period. If expenses cannot be used against corporate investment income then this strategy will of course not work.

Note that with capital gains they are only taxed when realized (table 8 more applicable to my example than table 7)

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Re: Investment income in a CCPC

Post by StuBee » 23 Aug 2017 19:14

tdiddy wrote:
23 Aug 2017 18:28
However, what I was trying to show is that IF somehow we are able to apply soldtosoon's strategy of converting passive corp income to personal salary, thus not paying corporate tax on it or dividend tax, just personal income rate there may be a modest advantage to capital gains held for a long period. If expenses cannot be used against corporate investment income then this strategy will of course not work.

Note that with capital gains they are only taxed when realized (table 8 more applicable to my example than table 7)
Ok now I understand.
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