Trudeau’s right on taxes

Posted on in Governance Debates

TorontoSun.com – Opinion/Columnists – Personal services corporations give many professionals an unfair tax break that ordinary Canadians don’t receive
January 03, 2016.   By Alan Shanoff, Toronto Sun

Income tax laws should be equitable. They aren’t.

Take a newspaper employee who earns a gross salary of $100,000 annually. Compare her taxes to those paid by a lawyer employed by a law firm who earns the same salary.

Both should be treated equally from a tax point of view.

Each should pay the same taxes, subject to their specific deductions and credits.

But tax laws aren’t equitable.

Tax laws allow lawyers, accountants, dentists, and other professionals to provide services to their employers through personal services corporations, rather than as employees.

This is a fiction recognized by tax law; through the use of a personal services corporation the professional is not treated as an employee of his employer for tax purposes.

Salary that should have been treated as employment income is treated instead as small business income.

By virtue of this sleight of hand the professional receives many advantages not available to employees, most of whom are not permitted to provide services through personal services corporations.

These advantages are not mere trifles.

Professionals providing services through a personal services corporation are taxed at the lower small business rate on the first $500,000 of income.

In Ontario, the combined federal and provincial rate is 11%, dropping to 9% by 2019, while mere individuals face a marginal tax rate of 46%.

True, additional tax must be paid if and when corporate funds are paid to the professional.

However, any money remaining with the corporation as retained earnings may be invested with the investment income also taxed at a lower rate.

This serves to defer taxes until money is paid out to the professional as either salary or dividend.

Other employees pay tax on all earnings each year.

They cannot choose to defer taxes on the money they wish to invest or don’t need to spend.

And as any accountant will tell us, a tax deferral is almost as good as a tax savings.

After all, who wouldn’t want to put off paying taxes for years, even decades?

The use of a corporation also allows the professional to deduct various expenses as business expenses that would not have been deductible for mere employees.

The corporation’s income may also be eligible to be paid out as dividends to family members with lower incomes and corresponding lower marginal tax rates.

Accountants call this “sprinkling dividends” and “income splitting”.

There’s also a capital gains tax exemption on the first $813,600 of gains on the sale of shares of the company.

This allows the professional to pay out up to $813,600 to a spouse or other family member on a tax free basis.

These rules provide lower tax rates and preferential tax treatment for many professionals.

While I am fond of my dentist and accountant, I don’t see why they should receive favourable tax treatment or tax cuts not available to the general population.

Sure, small businesses deserve some preferential tax treatment. We want to encourage the growth of small businesses. It’s good for the economy.

But allowing professionals to convert their salaries into small business income does nothing to benefit the economy.

All it does is put more money into the pockets of professionals and their families.

So, I agreed with Prime Minister Justin Trudeau when he stated during the election campaign that while small businesses should be paying less taxes, some small businesses are “just ways for wealthier Canadians to save on their taxes.”

Quebec’s recent budget took a targeted yet blunt approach to this problem by taking away the Quebec small business deduction, as of Jan. 1, 2017, to businesses in the service and construction sectors that employ less than four full-time employees.

Whatever we do, let’s be sure to target true personal services corporations and not take steps that would penalize small professional firms or businesses.

Correction: While there are many advantages to incorporating a professional practice, receiving the small business tax rates is not one of them. Paying dividends to family members is also not allowed for all professional corporations. There may also be adverse tax consequences for some professionals who incorporate. Readers should consult their tax advisers to determine their rights.

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This entry was posted on Sunday, January 3rd, 2016 at 4:53 pm and is filed under Governance Debates. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

One Response to “Trudeau’s right on taxes”

  1. I believe a “personal services corporation” is a United States tax term. In Canada, we have rules for Personal Services Businesses (PSB). A Personal Services Business is, basically, an incorporated employee. The tax results of carrying on a PSB can be disastrous.

    For a detailed summary of the PSB rules, check out http://www.bdo.ca/en/Library/Services/Tax/pages/Tax-Factors/2007-03/Independent-Contractors-and-Personal-Services-Businesses.aspx. It’s a few years old, but the rules haven’t changed in the meantime. And no, I’m not affiliated with BDO.

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