Investment income in a CCPC

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

Post by kcowan » 12 Sep 2017 13:01

Yes the proposals would provide an enormous incentive for everyone to join the civil service for the guaranteed pension, just what the Liberals would love!
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Re: Investment income in a CCPC

Post by ghariton » 12 Sep 2017 13:57

izzy wrote:
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.
"What's sauce for the goose-----"!!! :)
I also support the principle of taxing each dollar of income once, and once only. For example, the dividend tax credit is a darn good tax measure. As regards inherited wealth, I would distinguish what has been taxed already and what has not yet been taxed, e.g. uncrystalized capital gains. The latter should be taxed -- and is, under our system. Of course, if unrealized capital gains were taxed as incurred, there would be no concerns about taxing estates. Adding an estate or inheritance tax over and above that would be double taxation, in my view.

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Re: Investment income in a CCPC

Post by izzy » 12 Sep 2017 16:32

My suggestion WAS tongue in cheek George.It would never happen anyway.Too many of our "masters" in Ottawa are living off Inherited money or the investment of same! But I was trying to make the point that the rationale for the "reasonableness" test for dividends they propose is hypocritical if they don't use the same criteria for other sources of income not "earned by the sweat of the brow".
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Re: Investment income in a CCPC

Post by izzy » 12 Sep 2017 16:52

perhaps "undeserved enrichment". would be a better term
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Re: Investment income in a CCPC

Post by ghariton » 12 Sep 2017 17:14

izzy wrote:
12 Sep 2017 16:32
My suggestion WAS tongue in cheek George.
I knew that. I just couldn't resist another opportunity to get on my soapbox. :wink:

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Re: Investment income in a CCPC

Post by tdiddy » 12 Sep 2017 18:13

ghariton wrote:
12 Sep 2017 13:57

I also support the principle of taxing each dollar of income once, and once only. For example, the dividend tax credit is a darn good tax measure. As regards inherited wealth, I would distinguish what has been taxed already and what has not yet been taxed, e.g. uncrystalized capital gains. The latter should be taxed -- and is, under our system. Of course, if unrealized capital gains were taxed as incurred, there would be no concerns about taxing estates. Adding an estate or inheritance tax over and above that would be double taxation, in my view.

George
How do you feel about GST then? :) Frankly I think an inheritance tax is more "fair" in terms of ability to pay than uber progressive income tax for young hard working SMB owners/professionals with negligible net worth

Sorry for contributing to off topicness! I'm sure this forum will come back around once changes are finalized and we have to figure out what to do

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Re: Investment income in a CCPC

Post by kcowan » 13 Sep 2017 08:40

tdiddy
You think ability to pay should be a factor in taxation? Now that is a slippery slope!
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Re: Investment income in a CCPC

Post by ghariton » 13 Sep 2017 14:18

tdiddy wrote:
12 Sep 2017 18:13
How do you feel about GST then? :)
Well, since not much can be said on the original topic of this thread until we get more detail from Mr. Morneau as to his proposal, I don't feel too badly continuing off-topic. However, it might be helpful if some kind moderator could split off the last dozen posts or so into a separate thread on, say, "Tax Policy".

When originally implemented, the GST was supposed to be a partial substitute for the personal income tax, Revenues from GST were supposed to be matched by reductions in personal income tax rates. In that sense, personal income tax and GST are supposed to be substitutes, not piling on. Somke of us would like to see this continue, and the complete elimination of the income tax, substituting GST/HST and various "externality" taxes and user fees instead.

In practice, of course, the GST turned out to be a real money generator for the government, and a large part of why Paul Martin was able to get the deficit under control. So it did turn out to be double taxation in some measure. But then, I think that was an abuse of the system, rather than something to celebrate.

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Re: Investment income in a CCPC

Post by Rysto » 14 Sep 2017 20:16

ghariton wrote:
13 Sep 2017 14:18
When originally implemented, the GST was supposed to be a partial substitute for the personal income tax, Revenues from GST were supposed to be matched by reductions in personal income tax rates.
This is the first I've ever heard this claim. The GST was supposed to be a replacement for a tax on manufacturers, which was indeed repealed. The GST was revenue neutral.

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Re: Investment income in a CCPC

Post by ghariton » 14 Sep 2017 21:02

Rysto wrote:
14 Sep 2017 20:16
The GST was supposed to be a replacement for a tax on manufacturers, which was indeed repealed. The GST was revenue neutral.
You're right of course. I don't know what I was thinking when I wrote that.

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Re: Investment income in a CCPC

Post by Penquin007 » 01 Oct 2017 08:14

Anybody else will be looking at Individual Pensions Plans after the Morneau's fiscal reform?

Catch the IPP wave
https://retirehappy.ca/catch-the-ipp-wave/

IPP vs RRSP
https://www.integris-mgt.com/publish/Ta ... RRSP.pdf

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Re: Investment income in a CCPC

Post by ghariton » 01 Oct 2017 21:35

Penquin007 wrote:
01 Oct 2017 08:14
Anybody else will be looking at Individual Pensions Plans after the Morneau's fiscal reform?

Catch the IPP wave
https://retirehappy.ca/catch-the-ipp-wave/

IPP vs RRSP
https://www.integris-mgt.com/publish/Ta ... RRSP.pdf
I looked onto IPPs some ten years ago, when there were three options available: IPPs, PPSPs and retained earnings in the corporation. The third option is probably gone, although we can't be sure yet. However, as between RRSP and IPP, my conclusion was that IPPs were better than RRSPs only if your income was very high. The main attraction of an IPP is that you can contribute more than in a RRSP. The downside is that you have lots of expenses with an IPP, both to set up and ongoing, that you don't have with a RRSP, such as accounting and actuarial professionals. Ten years ago I estimated these expenses at a couple of thousand a year. That was enough for me to rank the RRSP higher than the IPP. (The retained earnings option ranked even higher and that was the road I took.)

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The plural of anecdote is NOT data.

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Re: Investment income in a CCPC

Post by Koogie » 02 Oct 2017 10:05

Tax decisions you can make now to get ahead of the Liberals’ proposed changes
http://business.financialpost.com/perso ... ed-changes

"So, if your private corporation has other shareholders, such as your spouse, partner, or other adult relatives as shareholders, consider whether it makes sense to pay additional dividends to family members who are in lower tax brackets in 2017 to maximize any income sprinkling opportunities before the proposed rules could increase the tax rate on such income in 2018."

~ do we know for sure that the changes are not retroactive at this point ?
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Re: Investment income in a CCPC

Post by izzy » 02 Oct 2017 10:39

ghariton wrote:
01 Oct 2017 21:35
Penquin007 wrote:
01 Oct 2017 08:14
Anybody else will be looking at Individual Pensions Plans after the Morneau's fiscal reform?

Catch the IPP wave
https://retirehappy.ca/catch-the-ipp-wave/

IPP vs RRSP
https://www.integris-mgt.com/publish/Ta ... RRSP.pdf
I looked onto IPPs some ten years ago, when there were three options available: IPPs, PPSPs and retained earnings in the corporation. The third option is probably gone, although we can't be sure yet. However, as between RRSP and IPP, my conclusion was that IPPs were better than RRSPs only if your income was very high. The main attraction of an IPP is that you can contribute more than in a RRSP. The downside is that you have lots of expenses with an IPP, both to set up and ongoing, that you don't have with a RRSP, such as accounting and actuarial professionals. Ten years ago I estimated these expenses at a couple of thousand a year. That was enough for me to rank the RRSP higher than the IPP. (The retained earnings option ranked even higher and that was the road I took.)

George
Of course IPPs RCAs and their ilk will now become more popular with LOTS of lovely commissions for actuarial firms (like Morneau Shepell). Talk about "fox and hen house"!!
Meanwhile completely under the radar is a new stratification of tax liability by age.We now have minors under age 18 ,young adults attending university and racking up lots of debt aged 18 to 24,"normal adults",and us old folk for whom the inability to make RRSP contributions is sort of offset by the pension credit etc.I suppose they will now introduce a new (enhanced and more complex) RESP to mollify the 18 to 24 year old taxpayers :shock: .Age discrimination is alive and well in "Liberal" Canada!! Each group lobbying for its own interests.
"Divide and conquer"seems to be the new government maxim!
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Re: Investment income in a CCPC

Post by Koogie » 10 Oct 2017 13:26

Small business people are tax cheats. Male small business people are even more evil.

Next Steps in the Government's Plan for Tax Fairness and a Strong Middle Class
http://www.fin.gc.ca/n17/17-091-eng.asp


"""5.Conduct a gender-based analysis on finalized proposals, to ensure any changes to the tax system promote gender equity. About 83 per cent of passive investment income is earned by Canadian-controlled private corporation (CCPC) owners making more than $250,000. About 70 per cent of these individuals are men. """
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Re: Investment income in a CCPC

Post by AltaRed » 10 Oct 2017 13:37

Other than the gender stupidity part which is hocus pocus JT, I don't get the bitterness. Why should someone making $250k in a CCPC need the benefit of generously low corp tax rates to invest AT income passively? They are leveraging taxpayer money (deferred tax) to invest passively. Take it like a man and pay a one's MTR personal tax rate first. That is what it should be about.
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Re: Investment income in a CCPC

Post by Rysto » 10 Oct 2017 14:14

Or take the money as salary and save it tax-deferred in an RRSP like the rest of us working schlubs.

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Re: Investment income in a CCPC

Post by BRIAN5000 » 10 Oct 2017 14:27

I'm trying to understand the argument it seems to me this is just a tax break and when tax breaks are taken away, if there are a lot of people getting it, there is an outcry. People getting the tax break are coming up with all kinds of rationale for keeping it?
"An investment analyst is supported by his wife while he earns his degrees and apprentices, afterward he earns $800,000 a year he's unincorporated, should he be able to form a corporation and sprinkle dividends to his wife in my opinion NO, he's just avoiding tax. If you want to consider some people "special" we maybe need doctors and dentists not sure about lawyers I'm reasonably ok with giving those people a break because they support society in general but definitely not because they are intelligent people but financially inept. ( you make a lot of money so you look for a loophole so you can make ends meet. )

As for your investment analyst: people making that kind of income are going to incorporate if they can because even under the proposed rules it makes more sense to invest money held in a corporation than to pay >50% in taxes. The problem here is not the corporate structure but the ridiculously high personal tax rates.
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Re: Investment income in a CCPC

Post by tdiddy » 10 Oct 2017 15:02

AltaRed wrote:
10 Oct 2017 13:37
Other than the gender stupidity part which is hocus pocus JT, I don't get the bitterness. Why should someone making $250k in a CCPC need the benefit of generously low corp tax rates to invest AT income passively? They are leveraging taxpayer money (deferred tax) to invest passively. Take it like a man and pay a one's MTR personal tax rate first. That is what it should be about.
People are bitter because they are going to be paying far more tax. Nobody likes paying more tax and no body likes getting singled out. The people this affect are generally entrepreneurial hard working small business owners and professionals. They view these tax policies as a reward for the additional risk they take in starting their business (SMB), or to be part of the overall pay package previously negotiated (physicians). I understand your viewpoint that this was never the intention of the small business tax rate. That would be completely reasonable if the small business rate had just come into effect a few years ago. It is less reasonable given that it has been around for decades. At this point these changes should be made in the context of a more extensive tax review and overhaul with more prolonged consultation. People are further embittered because of how the Liberals totally botched the presentation of this change vilifying people, and are concerned of unintended consequences.

This is in the context of a tax system that in the last 10 years has become far too progressive. Our combined top tax brackets are nearly as high as Belgium, Sweden, Finland etc yet the tax on an employee making 100K a year is ~20% less than in these same countries. Many view this as placating their voter base rather than good policy. This is also in the context of a labor environment that is shifting further costs towards employers (CPP, minimum wage) in a legal environment that is already very employee focused.
Last edited by tdiddy on 10 Oct 2017 16:00, edited 1 time in total.

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Re: Investment income in a CCPC

Post by AltaRed » 10 Oct 2017 15:26

I agree with your assessment for some groups, e.g. small business and perhaps limited use by certain individuals, but for many who have used (and abused) the CCPC for purposes other than originally intended, I'd suggest those specific individuals who now feel harmed should instead be thankful that the barn door stayed open as long as it did.

The income trust debacle was another abuse of unintended consequences of the system. The bitching and moaning subsided after a few years.
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Re: Investment income in a CCPC

Post by couponstrip » 10 Oct 2017 23:25

AltaRed wrote:
10 Oct 2017 15:26
I agree with your assessment for some groups, e.g. small business and perhaps limited use by certain individuals, but for many who have used (and abused) the CCPC for purposes other than originally intended, I'd suggest those specific individuals who now feel harmed should instead be thankful that the barn door stayed open as long as it did.

The income trust debacle was another abuse of unintended consequences of the system. The bitching and moaning subsided after a few years.
Well of course you are right, but your rational view does not ease my pain. :)

It's acutely painful in Alberta where the high bracket tax rate went from 39% to 48% with the election of the Notley and Trudeau governments. The CCPC was a way to "weather the storm" until someone gets elected and flattens out the tax rates again. Even better, if money could be saved in the CCPC on high yearly income today, the withdrawals from the CCPC in retirement were never going to approach the high tax brackets for many, so they would never have to pay a penny of tax in the new high tax brackets.

That is why there wasn't a whole lot of whining from high income earners when these governments introduced these high bracket tax rates. There was shelter.

Now Trudeau plays a masterful card and we have none left. It's a helpless feeling.

But yes, by all means, I am happy to have had the opportunity while it existed. And Trudeau/Morneau have promised that the tax reform will not affect existing passively invested assets within a CCPC (although it remains to be seen how they will effect that), and I am thankful for this as well.

I also remain hopeful that one of the three pillars of the tax reform will be phased in over years or even be left alone. The passive tax deferral seems like the most difficult hole to close, so maybe that gets delayed or goes untouched.

*edited for spelling
Last edited by couponstrip on 11 Oct 2017 00:47, edited 1 time in total.

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Re: Investment income in a CCPC

Post by AltaRed » 11 Oct 2017 00:19

couponstrip wrote:
10 Oct 2017 23:25
But yes, by all means, I am happy to have had the opportunity while it existed. And Trudeau/Morneau have promised that the tax reform will not effect existing passively invested assets within a CCPC (although it remains to be seen how they will effect that), and I am thankful for this as well.

I also remain hopeful that one of the three pillars of the tax reform will be phased in over years or even be left alone. The passive tax deferral seems like the most difficult hole to close, so maybe that gets delayed or goes untouched.
Thank you for the thoughtful post. Was waiting to hear that from someone.

As regards grandfathering existing passively invested assets, I suspect there are a few ways to do that. One of them might be a series of 'tax' credits that can be used later against future taxes. I recall (with some fuzziness) that was the case on Feb 22, 1994 when $100k cap gains exemption was eliminated. Investors could effectively claim a pool of unrealized cap gains credits aggregated across all capital assets (up to $100k) and then use the credits against realized cap gain income for the next 10 years. I remember meticulously managing that for several years.
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Re: Investment income in a CCPC

Post by kcowan » 11 Oct 2017 01:36

How about allowing the first $2 million of capital to accrue? That would provide an taxable income of $60K at 3%, equivalent to a DB pension that the Liberals own civil servants enjoy.

(My son runs his rental business through a CCPC and, rather than income sprinkling, he hires his kids to help with the weekly turnover, and deducts the full amount at market rates as an expense.)
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Re: Investment income in a CCPC

Post by soldToSoon » 11 Oct 2017 12:07

The big problem with this whole 'reform' is that it hurts a significant number of genuine private businesses. While everyone is focused on trying to establish a parity between individuals and the CCPCs, no one talks about the widening disparity between CCPCs and their public company counterparts.
The big policy question that the feds have forgotten- Why should a public company in Canada be taxed more favorably than a CCPC of the same size and standing.
I saw a town hall recording in which the CEO of Hatch- a sizable CCPC- complained about the changes impacting them. There would be thousands of similar companies across Canada.
Public companies pay only 27% tax on both active and passive income. When the money flows out to shareholders, it gets taxed very favorably as everyone here is familiar with. There's no distinction between active and passive company if it's publicly listed.
Are we going to see a rush of listings on TSE or Venture exchanges? For those who must stay in Canada, the additional cost might be a worthwhile expenditure. For others, shifting headquarters might make more sense.

The underlying message of this new policy seems to be- we want an employee class and we want a public company class. Everyone that's not in either class will be taxed in a punitive way. There can't be any other way to interpret this.

They are also talking about eliminating the CDA account entirely, as a mechanism to achieve the deferral advantage.
If there's an asset sale within CCPC, it's going to be very punitively taxed if CDA goes away.

Why should anyone with a good idea setup their location independent business in Canada with all these punitive taxes in place? Why should any tech company that doesn't ultimately become a public co stay here?

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Re: Investment income in a CCPC

Post by tdiddy » 13 Oct 2017 14:41

seems we won't have much longer to wait for updates...

http://www.bnn.ca/morneau-to-unveil-tax ... h-1.884035

i'm thinking that it is too soon for them to have made major progress on passive investment piece, so either this will be put off or --fingers crossed -- dropped altogether.

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