Investment income in a CCPC

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Koogie
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Re: Investment income in a CCPC

Post by Koogie »

Seems like perhaps a bigger squawk is finally being raised about these changes. Although the cynical side of me says that "public consultation" is always political window dressing and the legislation has already been written.

morneau-calls-nervous-liberal-mps-as-backlash-to-small-biz-tax-proposals-grows
http://business.financialpost.com/perso ... sals-grows


Here is a decent piece that Perrin Beatty wrote as well:

perrin-beatty-small-business-gets-scapegoated-in-the-finance-ministers-unfair-tax-attack
http://business.financialpost.com/opini ... ments-area


Finally, a lot of business advocacy groups are banding together under the moniker of "The Coalition for Small Business Tax Fairness"
Looking at the list of members, I can see why Liberal MPs are starting to tremble a little.

Advocis – Financial Advisors Association of Canada
Canadian Advanced Technology Alliance
Canadian Association of Farm Advisors
Canadian Association of Management Consultants
Canadian Association of Optometrists
Canadian Association of Radiologists
Canadian Bar Association
Canadian Cattlemen’s Association
Canadian Chamber of Commerce
Canadian Construction Association
Canadian Dental Association
Canadian Federation of Agriculture
Canadian Federation of Independent Business
Canadian Home Builders’ Association
Canadian Horticultural Council
Canadian Institute of Financial Planners
Canadian Institute of Heating and Plumbing
Canadian Medical Association
Canadian Mortgage Brokers Association
Canadian Pork Council
Canadian Taxpayers Federation
Canadian Water Quality Association
Coalition of Ontario Doctors
Conference for Advanced Life Underwriting
Family Enterprise Xchange
Federation of Ontario Law Associations
Grain Farmers of Ontario
Grain Growers of Canada
Independent Financial Brokers of Canada
Mechanical Contractors Association of Canada
National Exempt Market Association
Ontario Association of Radiologists
Ontario Medical Association
Restaurants Canada
Retail Council of Canada
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Re: Investment income in a CCPC

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That's unfortunately the only way. There's no underlying rationale or economic logic except some muddled fairness concept preached by disconnected academics and statcan bureaucrats.
If they want to really reform and make everyone pay their fair share, they should go after stock options awarded to top executives at half the top rate.
They could also go after taxing CCPC and non-CCPC the same way.
If they think there's little advantage to the Small biz deduction, they can just remove it beyond say 100k in profit. Tax the rest at the regular corporate rate. And treat active income and passive income the same in CCPC as it's done for non-CCPCs.
Their obsession with incorporated professionals will kill tens or hundreds of genuine businesses that have a real shot at growing into something much bigger and possibly get listed on TSE or other exchanges.
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Re: Investment income in a CCPC

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Closed my Opco last year but planned to continue to maintain my Holdco for an extended period.

Most of the commentary regarding the proposed tax changes seem to take the perspective of an Opco
What is the impact of the proposed change vis a vis passive income in a Holdco?
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Re: Investment income in a CCPC

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qasimodo wrote: 01 Sep 2017 12:54 Closed my Opco last year but planned to continue to maintain my Holdco for an extended period.

Most of the commentary regarding the proposed tax changes seem to take the perspective of an Opco
What is the impact of the proposed change vis a vis passive income in a Holdco?
adrian2 wrote: 22 Jan 2017 20:38
Katou wrote:Does this apply to a Holdco or a Operating Company also!
Once again, the terms of Holdco or OpCo are not defined anywhere in the Income Tax Act.
A CCPC is a CCPC, is my understanding.
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Re: Investment income in a CCPC

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Koogie wrote: 01 Sep 2017 13:04
qasimodo wrote: 01 Sep 2017 12:54 Closed my Opco last year but planned to continue to maintain my Holdco for an extended period.

Most of the commentary regarding the proposed tax changes seem to take the perspective of an Opco
What is the impact of the proposed change vis a vis passive income in a Holdco?
adrian2 wrote: 22 Jan 2017 20:38
Katou wrote:Does this apply to a Holdco or a Operating Company also!
Once again, the terms of Holdco or OpCo are not defined anywhere in the Income Tax Act.
A CCPC is a CCPC, is my understanding.
Agreed. (I was using it as a shorthand)
What is the impact of the proposed changes when there is no active income just passive income?
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Re: Investment income in a CCPC

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qasimodo wrote: 01 Sep 2017 13:11 What is the impact of the proposed changes when there is no active income just passive income?
As I understand it, there aren't enough solid details out to say for sure. Here are two good current opinions based on the facts so far.

Tax Planning Using Private Corporations - The New Liberal Proposals
http://www.thebluntbeancounter.com/2017 ... tions.html
"""Currently if a corporation earns less than $500,000 the company pays tax at 15.5% in Ontario and a similar amount in each province. This results in a tax deferral, not a tax saving of up to 38%. This deferral provides corporations money to grow and invest and create jobs. The government is concerned that where this money is not used to grow the company but invested passively in GIC's stocks, others companies, real estate, etc. it is unfair when compared to a salaried person. The government is proposing to now tax this 38% deferral.
The proposals of how to do this are beyond complicated and I really don't understand the concern here (the government is asking for feedback to determine to how best implement this, thus, there is no timeline on these provisions as of yet). This is a tax deferral on risk capital and not an absolute tax saving"""

Strategies to Reduce the Damaging Changes to Private Corporation Taxes
https://www.milliondollarjourney.com/st ... -taxes.htm
"""The proposal is not clear on the exact changes with passive investing within a corporation, but one proposed change is to eliminate the capital dividend account (CDA) from passive investment income. The CDA basically allows 50% of the capital gain to flow through to a shareholder tax-free, and the other 50% to be taxed at a high corporate rate (~47%).
I suspect that they’ll come up with more schemes to make it very unattractive to build a portfolio within a corporate account. Some good news though, there is some indication that existing corporate passive investment accounts will be exempt."""
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Re: Investment income in a CCPC

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Koogie wrote: 01 Sep 2017 13:20
qasimodo wrote: 01 Sep 2017 13:11 What is the impact of the proposed changes when there is no active income just passive income?
As I understand it, there aren't enough solid details out to say for sure.
Thanks for those links.

A comment:
I get the optics and rationale of the “kiddie tax” which "prevents dividend sprinkling to children under the age of 18" but I find the proposed reasonableness test to be very strange. Dividends are for shareholders no matter their active involvement. A reasonableness test for salaries would be more ... reasonable :shock:
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Re: Investment income in a CCPC

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Koogie wrote: 01 Sep 2017 13:04 What is the impact of the proposed changes when there is no active income just passive income?
Unfortunately, if I understand correctly, that going forward it is the government's intention to ensure that there is no advantage in any way whatsoever to earn income passively within a CCPC as compared to outside of a CCPC.

A few days ago, I did the math of table 7 (of the federal governments proposition) which demonstrates the equivalency of the treatment of 100K$ of active (before corporate tax) CCPC income and 100K$ of individual (pretax) income if it is invested in a 3% GIC (for 10 years). Here is the math:
StuBee wrote: 23 Aug 2017 17:01 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.
For the individual, 0.5 is the MTR, 0.03 is the 3% interest rate on the GIC and the 10 is the term of the GIC. For the CCPC, 0.15 is the corporate tax and the [1 - (0.5-0.15)/(1 - 0.15)] clause represents the impact of removing the final investment from the CCPC in the form of a dividend.

Notice that ultimately the treatment of the initial active income (be it individual or CCPC) is the same (i.e. 100K$ X (1 - 0.5) is the same thing as 100K$ X (1 - 0.5). Notice also that ultimately the treatment of the passive CCPC income (i.e [1 + 0,03 X (1 - 0.5)]10) is the same as for the individual.

However, it is worth noticing that within a CCPC, the highest marginal tax rate will always apply (i.e. the 0.5 will always be 0.5) throughout the 10 year period (of this example). This need not be the case for the individual since for the individual tax rates are progressive (i.e. MTR's increase as income increases and 0.5 only applies at the highest MTR). Therefore, for some (many?) individuals, earning passive income within the CCPC may be worse than outside of the CCPC.

Notice that my example is applied to interest income. I presume (but do not know for sure) that it is the government's intention to adopt the same sort of "identicality" approach to other forms of passive income.
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Re: Investment income in a CCPC

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For those that want to get involved check out: https://www.videotax.com/web-tips-artic ... t-involved

Has some more information on changes and a petition to sign. I plan to shoot off an email to my MP and PM this weekend.
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Re: Investment income in a CCPC

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Good luck.. I would say the fix is in.

Justin Trudeau ‘will make no apologies’ for proposed tax changes that anger small business owners
http://globalnews.ca/news/3714143/justi ... x-changes/
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Re: Investment income in a CCPC

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Except for the passive income part where my accountant says there's some hope, other items are baked in the cake now.
Even for passive income, I wonder for how long could this be deemed as a reliable shelter.
Depending on the hunger and 'needs' of the government at some point in future, they could come in raid these amounts.
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Re: Investment income in a CCPC

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soldToSoon wrote: 03 Sep 2017 13:46 Except for the passive income part where my accountant says there's some hope, other items are baked in the cake now.
Even for passive income, I wonder for how long could this be deemed as a reliable shelter.
Depending on the hunger and 'needs' of the government at some point in future, they could come in raid these amounts.
What does your accountant mean by "there's some hope"? ISTM that there is no hope at all for passive income. If you are referring to all that has been accumulated passively up until now (i.e. before any legislation is enacted pursuant to their proposition/consultation process), it is probably quite safe. This aspect should not be "raided".

ISTM that the CCPC in so far as it is/was an investment vehicle for the accumulation of passive wealth will have been destroyed. I would appreciate it if someone were to contradict me on this point (if I deserve to be contradicted...). I say this for the benefit of FWF (especially all those who have a CCPC).

Disclaimer: I do not have a CCPC (though I was tempted to do so a few years ago...)
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Re: Investment income in a CCPC

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StuBee wrote: 03 Sep 2017 14:24
soldToSoon wrote: 03 Sep 2017 13:46 Except for the passive income part where my accountant says there's some hope, other items are baked in the cake now.
Even for passive income, I wonder for how long could this be deemed as a reliable shelter.
Depending on the hunger and 'needs' of the government at some point in future, they could come in raid these amounts.
What does your accountant mean by "there's some hope"? ISTM that there is no hope at all for passive income. If you are referring to all that has been accumulated passively up until now (i.e. before any legislation is enacted pursuant to their proposition/consultation process), it is probably quite safe. This aspect should not be "raided".

ISTM that the CCPC in so far as it is/was an investment vehicle for the accumulation of passive wealth will have been destroyed. I would appreciate it if someone were to contradict me on this point (if I deserve to be contradicted...). I say this for the benefit of FWF (especially all those who have a CCPC).

Disclaimer: I do not have a CCPC (though I was tempted to do so a few years ago...)
The original proposal is most ambivalent about the passive income part. For other two-income splitting and dividend stripping- it seems they will have legislation in effect very soon. They want to do something about the passive income, but they can't figure out an easy way of doing it.
They talk about creating three different pools of capital- Original shareholder equity, income taxed at SBD rates and finally income taxed at regular rates-that will then be taxed in three different ways. I think there should be a fourth pool, which would be the for income generated from retained passive earnings.
Some veterans of the tax industry (see the link below) have categorically asked for an outright rejection of the passive investment proposals.
https://www.dropbox.com/s/ktbban2a95lof ... 7.pdf?dl=0

But then when has such complexity stopped bureaucracy from creating more bureaucracy?
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Re: Investment income in a CCPC

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soldToSoon wrote: 03 Sep 2017 20:30 The original proposal is most ambivalent about the passive income part. For other two-income splitting and dividend stripping- it seems they will have legislation in effect very soon. They want to do something about the passive income, but they can't figure out an easy way of doing it.
They talk about creating three different pools of capital- Original shareholder equity, income taxed at SBD rates and finally income taxed at regular rates-that will then be taxed in three different ways. I think there should be a fourth pool, which would be the for income generated from retained passive earnings.
Some veterans of the tax industry (see the link below) have categorically asked for an outright rejection of the passive investment proposals.
https://www.dropbox.com/s/ktbban2a95lof ... 7.pdf?dl=0
But then when has such complexity stopped bureaucracy from creating more bureaucracy?
A very good read, thank you.
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Re: Investment income in a CCPC

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Koogie wrote: 04 Sep 2017 10:17
soldToSoon wrote: 03 Sep 2017 20:30 The original proposal is most ambivalent about the passive income part. For other two-income splitting and dividend stripping- it seems they will have legislation in effect very soon. They want to do something about the passive income, but they can't figure out an easy way of doing it.
They talk about creating three different pools of capital- Original shareholder equity, income taxed at SBD rates and finally income taxed at regular rates-that will then be taxed in three different ways. I think there should be a fourth pool, which would be the for income generated from retained passive earnings.
Some veterans of the tax industry (see the link below) have categorically asked for an outright rejection of the passive investment proposals.
https://www.dropbox.com/s/ktbban2a95lof ... 7.pdf?dl=0
But then when has such complexity stopped bureaucracy from creating more bureaucracy?
A very good read, thank you.
+1 :D

Thank-you soldToSoon. I think I have been too hasty with my opinion. I stand corrected.
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Re: Investment income in a CCPC

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This is what the big guy said today:

https://beta.theglobeandmail.com/report ... e36161429/

For those business owners and professionals who have saved and planned for their retirement under the existing rules, I want to be clear: We have no intention of going back in time. Our intent is that changes will apply only on a go-forward basis and neither existing savings, nor investment income from those savings, will be touched.

Does it mean, they will freeze passive assets in the corporation as of say 1st Jan 2018. And you'll continue to enjoy RDTOH on these assets afterwards?
And when these assets grow, then what? They'll need to create at least an additional pool for grandfathered assets. What a nightmare it's going to be tracking all this.

So much for less than 1%/year 'unfairness' in returns for CCPC vs non incorporated assets.
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Re: Investment income in a CCPC

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Well, some of that sounds like the right noises. Couched in a lot of trendy class warfare jargon and political doublespeak, mind you.

I guess the proof will be in the pudding. Seems to me that the changes they want to make could have been avoided if they had of just enforced the rules better on existing legislation and not tried to reinvent the wheel. They seem particularly aggrieved by what the doctors in Ontario, in particular, have done. There must be a political reason behind it because even if they manage to bring in every cent they feel is "fair" it certainly doesn't seem like enough to be taking such political risks.

October shall tell.
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Re: Investment income in a CCPC

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A less obvious few things (by no means exhaustive)to bear in mind about incorporated doctors
1.It is still difficult to recruit doctors for solo practices in small rural towns and to keep them once recruited.
2.There are now more female medical students than male and female doctors are much less likely to be willing to enter practice where there is no back up to cover maternity leave or children's illnesses which necessitate them staying home and where their spouses are less likely to be gainfully employed in THEIR professions
3.Doctor's children are much more likely to want to attend university , some of them may even become doctors themselves,and daily commuting from a small town to a university is not practical so they are not likely to be able to live at home which means higher costs.
4.Most of today's Canadian medical graduates are dual qualified which means it is much easier for them to relocate to the US.
5.The right to incorporate was negotiated with provincial governments.If the Feds can over rule the the results of collective bargaining in this way who will be willing to accept that any future such bargaining with government will be in good faith.?
and
6.A professional corporation acts as a pair of "golden handcuffs"to keep the incorporated professional a resident of Canada since there will be a deemed disposition if he/she expatriates.Remove the incentive and you remove the handcuffs.
The results are entirely foreseeable!
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Re: Investment income in a CCPC

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A question asked by my son-in-law. If the allowance for passive investment income in a CCPC is grandfathered, would it make any sense for him (via his corporation) to immediately borrow a significant amount and invest it now? Of course, I can well imagine the government will choose an earlier grandfathering date in anticipation of such a manoeuvre :?
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Re: Investment income in a CCPC

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Conservative leader pleads for small business today on BNN. Mentions saving more money by not making gifts to Bombardier.

Also a consultant from BC who has 100s of CCPCs as clients.

100% negative and belief the government just wants more money no matter what. Don't care about killing job creation and family farms.
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Re: Investment income in a CCPC

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I believe grandfathering ended the day Morneau announced his initiative......to end the rush to do things. This is standard practice.
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Re: Investment income in a CCPC

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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 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.

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.

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.
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Re: Investment income in a CCPC

Post by kcowan »

It is so fundamental to our tax system that no bureaucrat could hope to understand the implications so I think the notion of caps is just beyond their thinking. If AR can't get it, what hope would Trudeau have?
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Re: Investment income in a CCPC

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kcowan wrote: 08 Sep 2017 22:21 It is so fundamental to our tax system that no bureaucrat could hope to understand the implications so I think the notion of caps is just beyond their thinking. If AR can't get it, what hope would Trudeau have?
Oh, I get it. I just have no reason to delve deep enough to understand all the implications to know specifically just which doors should necessarily be shut or be constrained. I've learned more in the past few months than I've ever known about CCPCs and do get that some doors need to be left open and some need to be shut.
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