Investment income in a CCPC

Income tax policy, rules, problems, strategy and software. Property and consumption taxes too.
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Koogie
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Re: Investment income in a CCPC

Post by Koogie » 09 Sep 2017 08:14

AltaRed wrote:
08 Sep 2017 17:15
I support shutting the door on unjustified income sprinkling to level the playing field. Pay fair wages to family members for actual work performed, but no more than that. The current situation is unfair tax leakage.I dont think any of us want to unduly squeeze small business or professionals but there is a limit to how big the barn door opening should be.
There is that word "fair" again. Tough to quantify it, isn't it. I have always considered it "unfair" and borderline suspicious that politicians get paid thousands, tens of thousand or hundreds of thousands of dollars for a speech that might last 30 minutes. But, if the income is taxed at the legal level..
AltaRed wrote:
08 Sep 2017 17:15
I also don't like the concept of general income being changed into cap gains for a 50% tax break but I profess not to know sufficient details to really take a stand.
I confess to barely understanding this one. It doesn't sound kosher but if someone could explain it to me, perhaps I could be convinced. Otherwise, yes, it does sound like a loophole.
AltaRed wrote:
08 Sep 2017 17:15
As for non-associated passive income investing, again I don't have a firm opinion other than perhaps a cap on how big this can be.
A cap ? Why ? Lots of us are using that room to save for our retirements. Because of integration the tax rates remain the same (in fact, there is a slight disadvantage to corporate income as you know) and the money is taxed when it is removed (after it has grown to the benefit of the owner AND the government). The problem seems to be that a particularly greedy government wants that tax money now instead of waiting. Perhaps one day they will make the same argument about how "unfair" it is that rich people have saved so much in their RRSPs.
AltaRed wrote:
08 Sep 2017 17:15
I dont think any of us want to unduly squeeze small business or professionals but there is a limit to how big the barn door opening should be.
Provocative phrasing. Seems to imply that small business owners are tax cheats. Class warfare of this type, if successful, has a nasty habit of being repeated on other target groups...
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Re: Investment income in a CCPC

Post by AltaRed » 09 Sep 2017 10:32

Your first retort is the one where you lose your argument. It is a deflection of the real issue. It is time to change the law to close unintended abuse of current law. In other words, loopholes used to permit a group of people unfair advantage. That is the definition of a loophole, isn't it?

Anyways, there will be changes to take away unfair advantages. The real concern should be what changes are made and whether they get them right and not result in unintended consequences. I suspect there will be a phase in of changes.
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Re: Investment income in a CCPC

Post by izzy » 09 Sep 2017 11:12

There are ALWAYS unintended consequences,especially when legislators forget why such a"loophole"was introduced ,for doctors especially, in the first place.Don't forget that there was a Liberal government in power in Ottawa at the time most provinces passed the legislation! It was introduced to keep us in the country ,especially in rural areas,and that need was pressing.They certainly could have used more direct incentives but government never seems to use the simple solution which would ,for one instance, have been to provide additional direct financial support for the education of children in remote areas who would not be able to live at home if they wanted to attend university and for spouses who would not be able to pursue THEIR vocations which were some of the reasons I personally relocated at an earlier date.Of course that would have required them to actually think about what WAS deterring doctors from locating in remote areas! With the majority of medical graduates now being female it's pretty obvious what is going to happen if/when this passes!
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Re: Investment income in a CCPC

Post by soldToSoon » 09 Sep 2017 11:26

Disappointing to see such arguments on this board. I liked this board because of politeness.

The language used by the Government in all its communication is unfortunate. Something that has been used by mainstream tax planners, so much so that anyone with $200 could set it up can't be termed as a loophole. It has to be perfectly sanctioned way of doing things. It has been mainstream. It became too popular because of otherwise regressive policies on the personal side and hence the usage exploded.
But if more than a million corporations have been doing something for decades, the whole arrangement has to totally kosher. Can't be called a loophole.

Other than that, I find it appalling that none of the mainstream media brings up the issue of CEO/top management stock option taxation. It seems to me that the bosses of the politicians and the media don't want the little people and illiterate masses to become aware of the daylight robbery that these big guys are getting away with. Instead, little people are fighting with each other over petty things.

If the government really wants fairness, it should start by plugging the biggest loophole- stock option taxation.
Close to a billion dollar or more slips out of government coffers and straight into the hands of the elite and the richest .001%. About 10,000 or so people. And this isn't any tax deferral. This is outright tax free gifts to the bosses of corporations that enjoy so many protections from the government to begin with.

The Big banks get no competition from outsiders. Their CEOs take no personal risks. They pay 26% tax on stock options of millions of dollars. Why?
The big utilities have no competition. Their CEOs have ZERO personal risk in the business. They also pay 26% on about 90% of their earnings.
The big telecom companies have government guaranteed oligopolistic structures. No foreign competition allowed. Their CEOs make millions of dollars. They pay only 26% or less on taxes.
The Airlines enjoy the same protection. Their CEOs and top management don't mortgage their homes. Yet their compensation is taxed in the most favorable way. Why?
Same thing with the pension plans for these CEOs and top management. They get unlimited pension plan deferral benefits when the value of their pension plan is in tens of millions of dollars.
Why?

Even more, all the big tech monopolies make billions in sales in Canada. How much tax do you think Apple pays to Canada? ZERO. How much tax does Google pay to Canada? ZERO. How much tax does Microsoft pay to Canada. ZERO. How much does Facebook pay to Canada. ZERO. How about everyone's favorite Starbucks. ZERO. Thanks to double dutch Sanwich Irish. How about Amazon?

The academic economists at UBC, Ottawa and other universities should spend their time trying to go after these guys. Not the little people who do everything by the rule book.

For big guys, there is no rule book. They create their own rules and not even a word comes out of either the government or media. Why?

It's saddening and disappointing that the group that typically pays the most taxes-property tax, GST/PST, corporate tax and income tax-small business is getting targeted. Why? Because of petty class envy?
Small businesses don't enjoy any economies of scale. Or any barriers to entry. Or government sanctioned monopolized structure (okay except doctors and dentists, but their tales of woe are of different nature). They take too much risk for little return. The few that manage to succeed often good service and payback to the local communities of which they are part of. Yet, the government wants to go after the most transparent and reliable source of taxation available to them. Why?

Small businesses don't go offshore. They mostly employ local Canadians. They rarely bring in Temporary foreign workers, unless they are a part of big franchised chains. Yet the government wants to steal puny advantages they may have. Why?

All the government's star eyed economists should be creating their spreadsheets and rather than trying to see the petty compounding advantage that some businesses get by retaining cash in companies should go after the big fish.

Sorry for the long post, but it's sad to see the little guys (relatively speaking) getting called tax cheats and exploiters of loopholes. The real loopholes are the ones that nobody is even talking about. A few are mentioned above. Hundreds of other loopholes exist that are not even known to a tiny majority.

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Re: Investment income in a CCPC

Post by adrian2 » 09 Sep 2017 14:03

Koogie wrote:
09 Sep 2017 08:14
AltaRed wrote:
08 Sep 2017 17:15
I support shutting the door on unjustified income sprinkling to level the playing field. Pay fair wages to family members for actual work performed, but no more than that. The current situation is unfair tax leakage.I dont think any of us want to unduly squeeze small business or professionals but there is a limit to how big the barn door opening should be.
There is that word "fair" again. Tough to quantify it, isn't it.
AltaRed wrote:
08 Sep 2017 17:15
I dont think any of us want to unduly squeeze small business or professionals but there is a limit to how big the barn door opening should be.
Provocative phrasing. Seems to imply that small business owners are tax cheats. Class warfare of this type, if successful, has a nasty habit of being repeated on other target groups...
I agree with Koogie. The Liberals even invented a new terminology, "income sprinkling" to elicit group envy, when an older term "income splitting" would have sufficed.
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Re: Investment income in a CCPC

Post by izzy » 09 Sep 2017 15:31

Bear in mind that there is more than one way of making things fair.They COULD make it possible for EVERYONE to split income among those supported by that income and avoid the whole issue but they prefer a punitive approach.I am a retired doctor aged 76,whilst I am incorporated my income splitting opportunities these days are mainly confined to splitting RRIF income with my wife.The main impact for me will be on my estate- less of it will now go to charity if there is a surplus after our passing.
Tax policy always has an impact on human behaviour.
Had I been able to income split with my wife and children in my earlier years I might well have remained in rural practice rather than relocating so that they could live at home whilst studying at university.I don't regret the move into specialty practice-it worked out well for me -but my decision was based mainly on the economics of the situation in which I found myself and my family .I somehow doubt I was unique in making such a decision either.This is something government should be aware of in making drastic changes in tax policy.
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Re: Investment income in a CCPC

Post by newin96 » 09 Sep 2017 16:20

adrian2 wrote:
09 Sep 2017 14:03
I agree with Koogie. The Liberals even invented a new terminology, "income sprinkling" to elicit group envy, when an older term "income splitting" would have sufficed.
That's because they already got rid of "income splitting" as part of the election promise. Once the income splitting tax credit was removed.... the income splitting issue no longer exists😉.... therefore... income "sprinkling" 😀

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Re: Investment income in a CCPC

Post by Park » 09 Sep 2017 16:47

As has been raised by others, the issue of incorporation goes back no less than 17 years. There have been other Liberal governments (Chretien, Martin) during this time period. Why does the present Liberal government feel differently about incorporation?

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Re: Investment income in a CCPC

Post by izzy » 09 Sep 2017 17:15

Park wrote:
09 Sep 2017 16:47
As has been raised by others, the issue of incorporation goes back no less than 17 years. There have been other Liberal governments (Chretien, Martin) during this time period. Why does the present Liberal government feel differently about incorporation?
"Fairness"
Just as it's "fair"that the pension limit is based on this years income whereas the RRSP limit is based on last years income,that two members of a couple each earning the maximum RRSP limit not only pay less tax than one member earning twice as much in spite of the total family income being the same but they also are able to contribute twice as much to RRSPs etc.
Obvious eh?
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Re: Investment income in a CCPC

Post by newin96 » 09 Sep 2017 19:10

Especially since the majority of services are based on family income...

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Re: Investment income in a CCPC

Post by tdiddy » 09 Sep 2017 22:54

Great post soldtosoon, sums up a lot of my views. Morneau/Trudeau lose integrity on their language and stock options.

On a more practical note, since this forum is full of bright people i have been thinking about something as a way around this + side project, wondering if anyone can tell me if there are major flaws in this very early stage idea

If one were to setup a separate corporation NewCo, obtain a sizeable loan and start a franchise with NewCo. Moving forward, transfer excess retained earnings from current OpCo to NewCo and pay back debt on loan; net income from NewCo would also go towards loan. If all goes well, several years down the road, loan is paid off, sell NewCo shares, utilize lifetime capital gains exemption remainder is taxed as capital gain?

Obviously this entails WAY more risk, and a lot harder than simply buying an ETF, but is there an issue with this otherwise?

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Re: Investment income in a CCPC

Post by AltaRed » 09 Sep 2017 23:03

soldToSoon wrote:
09 Sep 2017 11:26
Other than that, I find it appalling that none of the mainstream media brings up the issue of CEO/top management stock option taxation. It seems to me that the bosses of the politicians and the media don't want the little people and illiterate masses to become aware of the daylight robbery that these big guys are getting away with. Instead, little people are fighting with each other over petty things.

If the government really wants fairness, it should start by plugging the biggest loophole- stock option taxation.
Close to a billion dollar or more slips out of government coffers and straight into the hands of the elite and the richest .001%. About 10,000 or so people. And this isn't any tax deferral. This is outright tax free gifts to the bosses of corporations that enjoy so many protections from the government to begin with.
FWIW, I agree much of this should be pursued too. A cap at least. Some stock options are worthwhile for employee profit sharing plans, and middle managers to incentivize them. Its the senior execs that make out like bandits. I hate looking at annual reports and AGM materials to see how obscene stock option grants can be. So I tend to avoid those sections to avoid acid reflux.

IIRC, some constraints on stock options were floated at one time by the Libs to see the reaction. Maybe the reaction was severe, i.e. all the corps would move their head offices to somewhere else and take the senior executives with them. Maybe the Libs backed down. Who knows...
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Re: Investment income in a CCPC

Post by AltaRed » 09 Sep 2017 23:10

soldToSoon wrote:
09 Sep 2017 11:26
Even more, all the big tech monopolies make billions in sales in Canada. How much tax do you think Apple pays to Canada? ZERO. How much tax does Google pay to Canada? ZERO. How much tax does Microsoft pay to Canada. ZERO. How much does Facebook pay to Canada. ZERO. How about everyone's favorite Starbucks. ZERO. Thanks to double dutch Sanwich Irish. How about Amazon?
I think you are mistaken where multi-nationals have corpoate entities in Canada. Every incorporated subsidiary pays income taxes on income generated in Canada. I worked for a subsidiary of a multi-national and substantial income taxes were paid. There were also withholding tax on dividends re-patriated back to the mother ship, i.e. the mother ship holds the majority or all of the shares of its subsidiary in Canada. The subsidiary is a corporation in its own right and the typical way cash comes back to the mother ship is via dividends on those shareholdings.

Obviously, there are a variety of business structures so each would be handled a bit differently....but profits do not go ex-Canada without being taxed.
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Re: Investment income in a CCPC

Post by ghariton » 10 Sep 2017 00:00

As AltaRed says, to the degree a multinational has a presence in Canada, it pays Canadian taxes. To the degree it has employees in Canada, they pay taxes here too. And yes, Google and Netflix do have Canadian employees.

To the degree a foreign company does not have a presence in Canada, why should it pay any taxes here? They don't use any of our services or infrastructure. They don't get security or other benefits. And so on.

Put it another way. If Canadian softwood lumber is used in housing projects in the U.S., should the producers pay corporate income taxes to the U.S. government?

On the other points mentioned upthread, I would eliminate all tax expenditures, and have everyone at a similar income level pay the same amount of tax. A dollar is a dollar is a dollar. If the government wants to incent certain behavior, let it pay out subsidies that will have to be renewed no less frequently than every five years. Let the subsidies be very visible. The largest ones could be listed on a single sheet of paper or web page that pops up before you file your tax return.

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Re: Investment income in a CCPC

Post by izzy » 10 Sep 2017 10:23

Given your background George I presume it is no accident that you spoke of similar income levels but the same tax.And of course therein lies the problem! People with similar incomes do NOT always have the same expenses.The cost of living varies according to location and other factors.
Medications etc can be atrociously expensive.My own wife takes one life preserving medication which used to cost over $4000 a month-it is a bit cheaper now that it has gone generic but she is on a number of others including continuous oxygen and none of it is cheap.We live a fairly frugal existence but if I was not able to deduct some of it and she was not eligible for the disability tax credit we would be in serious trouble.At age 76 I could theoretically continue to work but continuing competence is always an issue at this age and if I had not been able to save for retirement I am well aware of the likely outcome and the consequences to my patients!
We are lucky that I was relatively high earning and incorporation helped a bit to compensate for the fact that I was unable to contribute to RRSPs until I was nearly 40 due to being an immigrant and having to train in my specialty .
I'm not complaining.Many have it much worse but being in this situation makes one very aware that tax preferences have a place!
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Re: Investment income in a CCPC

Post by soldToSoon » 10 Sep 2017 12:15

AltaRed wrote:
09 Sep 2017 23:10
soldToSoon wrote:
09 Sep 2017 11:26
Even more, all the big tech monopolies make billions in sales in Canada. How much tax do you think Apple pays to Canada? ZERO. How much tax does Google pay to Canada? ZERO. How much tax does Microsoft pay to Canada. ZERO. How much does Facebook pay to Canada. ZERO. How about everyone's favorite Starbucks. ZERO. Thanks to double dutch Sanwich Irish. How about Amazon?
I think you are mistaken where multi-nationals have corpoate entities in Canada. Every incorporated subsidiary pays income taxes on income generated in Canada. I worked for a subsidiary of a multi-national and substantial income taxes were paid. There were also withholding tax on dividends re-patriated back to the mother ship, i.e. the mother ship holds the majority or all of the shares of its subsidiary in Canada. The subsidiary is a corporation in its own right and the typical way cash comes back to the mother ship is via dividends on those shareholdings.

Obviously, there are a variety of business structures so each would be handled a bit differently....but profits do not go ex-Canada without being taxed.
This is the problem. This is how it should be. How do you think Google, MSFT, Starbucks, FB and others have amassed such massive war chest of 100s of billions of dollars?
Please do a search on http://www.investopedia.com/terms/d/dou ... ndwich.asp
These schemes are way beyond the intellect of average or even sophisticated CRA people. They probably don't even know what's going on.
Transfer pricing is a contentious issue mostly, but in case of most of these companies, it's an art form.
Look at what Starbucks pay to the UK:
https://www.theguardian.com/business/20 ... ion-pounds

Why do you think Canada is any different? Because these guys like Canada eh?

If you think Apple sells let's say $10 billion of products in Canada, does it pay any corporate tax here? No Chance.
How much do you think Google pays on well over billion in revenue it collects in Canada? ZERO.
Heck, Google doesn't even collect GST for ad sales here and I've been a customer of Google for a long time.
Same thing with Facebook. You can try these by creating a simple account and spending $10 to see if my statements are correct.
Kijji (an eBay company) used to do the same thing until a little while ago and then they started collecting GST.
Linkedin and a whole bunch of companies are based in the Netherlands. If you ever post an ad on LInkedIn, it will be billed from LinkedIn BV based in the Netherlands.

This is the behavior of these companies worldwide. If you think they all Love Canada, then perhaps they are playing like little good boys and gals and sending their weekly remittances to the CRA. Instead, all these guys are accumulating tens of billions of dollars every year in jurisdictions that are outside their native areas.

You won't hear anything about this from anyone in academia or government, because they are too busy foisting a class warfare between doctors and nurses, drycleaner and their customers and so forth.

I'll be very happy to be corrected if someone shows that these companies are indeed paying their taxes here.

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Re: Investment income in a CCPC

Post by AltaRed » 10 Sep 2017 12:20

I am not about to defend any company....but they do pay taxes to Ottawa and they actually prefer to keep their money in their subsidiaries rather than re-patriate it to the USA where it would be taxed at 35%. You are tone deaf to the grousing in the USA by Republicans et al about the hordes of cash NOT coming back to the USA to be taxed.

FWIW, transfer pricing was always looked at closely by CRA. Our resident CRA person who watched our business like a hawk focused on any 'leakage'. We had to come up with Cdn equivalents and justify them. It is not nearly as bad as you think. Get over your exaggerated views.

Added: This debate on asserted corporate leakage would be better off in its own thread. The focus here really should remain on CCPC issues.
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Re: Investment income in a CCPC

Post by ClosetIndexer » 10 Sep 2017 15:30

AltaRed wrote:
10 Sep 2017 12:20

Added: This debate on asserted corporate leakage would be better off in its own thread. The focus here really should remain on CCPC issues.
Agreed; this is going a bit off the rails.

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Re: Investment income in a CCPC

Post by kcowan » 11 Sep 2017 11:50

After we get the stock option loophole plugged, let's make sure executives don't make a windfall profit on their principal residence. Put caps on all the loopholes rather than eliminating them...
For the fun of it...Keith

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Re: Investment income in a CCPC

Post by izzy » 11 Sep 2017 16:23

kcowan wrote:
11 Sep 2017 11:50
After we get the stock option loophole plugged, let's make sure executives don't make a windfall profit on their principal residence. Put caps on all the loopholes rather than eliminating them...
Yes indeed!
and let's tax all capital gains on an annual accrual basis as we do with interest!
After all,it would only be "fair" since a buck is a buck !
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Re: Investment income in a CCPC

Post by ghariton » 11 Sep 2017 17:56

izzy wrote:
11 Sep 2017 16:23
and let's tax all capital gains on an annual accrual basis as we do with interest!
After all,it would only be "fair" since a buck is a buck !
That was the original proposal. It wasn't implemented because it was too hard to do, and the record-keeping would be horrendous. But the principle makes sense.

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Re: Investment income in a CCPC

Post by izzy » 11 Sep 2017 18:35

I'm not sure it is ever fair to tax someone on unrealized gains since it may force the taxpayer to liquidate his/her investment prematurely in order to pay the tax.Think what would happen in somewhere like Vancouver if people had to pay tax on the increase in value of principle residences on an annual accrual basis.I believe the saying is that hard cases make bad law and often what SEEMS fair is equally nonsensical!
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Re: Investment income in a CCPC

Post by ghariton » 11 Sep 2017 21:03

izzy wrote:
11 Sep 2017 18:35
I'm not sure it is ever fair to tax someone on unrealized gains since it may force the taxpayer to liquidate his/her investment prematurely in order to pay the tax.
If the taxpayers had adequate notice -- if it was built into the tax system -- they would adjust and make provision for it. The real problem, as I said before, is the administrative complexity of gathering and keeping the necessary information, not the unfairness. After all, why should taxes payable vary according to whether you have crystalized the capital gain or not/ To my mind, that induces distortions, such as holding on to an investment you should really sell, just because you want to defer taxes. It encourages people to let the tax tail wag the investment dog (to coin a phrase).
Think what would happen in somewhere like Vancouver if people had to pay tax on the increase in value of principle residences on an annual accrual basis.
Perhaps we would have less of a bubble in house prices, again a good thing in my view. In my opinion this is a p4erfect example of the unfairness of th3e current tax system. To those who already have -- a house -- more is given -- an opportunity to accumulate value tax-free. To those unfortunates who do not have a house in Vancouver, and who look as if they will be obliged to rent forever, whether they want to or not, we tax any gains on their investments.

As to the timing of the payment of taxes, why should capital gains, which can be deferred, get a better tax treatment than dividends or interest? That biases investment decisions -- my investment decisions anyway -- toward growth stocks, In turn, that biases companies' ease of raising capital towards the Amazons and Googles and Netflix,and away from manufacturers. Is this a good thing?
I believe the saying is that hard cases make bad law and often what SEEMS fair is equally nonsensical!
I agree that fairness is in the eye of the beholder. But, as I've mentioned above, I think there are economic efficiency arguments (the reduction of artificial distortions) at play here as well.

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Re: Investment income in a CCPC

Post by jackson » 12 Sep 2017 00:31

Interesting perspective on proposed taxes that looks to be gaining some traction, if you agree give it a share - https://www.linkedin.com/pulse/response ... -macintosh

I would be really interested to know what the definition of "rich" is, basing it on salary or last years earnings is a pretty poor measure. Lot's of businesses are cyclical or have higher risks associated with them.

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Re: Investment income in a CCPC

Post by izzy » 12 Sep 2017 02:08

How about taxing inherited wealth such as that enjoyed by Trudeau and his cronies whilst we are at it? Other countries do it ! We could use a similar test to determine what is "reasonable" too! It's only "fair" to tax those who have not contributed to the accumulation of the wealth at a higher rate of course.
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