“But,” she argued, “absolutely all of my colleagues have one.” And I’m sure they do, I said. They’ll learn.
Yes, another encounter with a physician. Poor soul. She has no idea what’s coming. First Wild Bill Morneau went after the moisters with his hated mortgage stress test, and now – instructed by his boss T2 – he’s about to diddle the doctors.
You may remember that long ago when Stephen Harper still stalked the land (doesn’t he seem so, well, reasonable these days?) that a campaigning Trudeau said if elected he’d be lowering the boom on rich people. He didn’t actually mean people with great wealth. He just meant professional folks earning more than you do.
So the first target was anyone with an income above about $220,000. The feds created a brand new special income tax bracket of 29% for them, which (combined with the provincial levy) raised the marginal tax rate to more than 50%. Each year they start working for themselves sometime in July. Then he slashed the TFSA contribution by half, because only rich people could afford to take advantage of it (while leaving the RRSP – the real gift to the well-heeled – intact).
And the Liberals said this about incorporations: “We will ensure that the small business status is not used to reduce personal income tax obligations for high-income earners rather than supporting small business.” Huh? Whazzat mean?
We’ll know soon enough. There’s a budget coming in the next few weeks. But it would appear the government – which apparently wants everyone to be an employee, not an entrepreneur – is contemplating two changes which will shock doctors and seriously diminish some of the tax advantages other people get in return for taking risks most could never stomach.
Until now lots of self-employed have left earnings inside their corporations thinking it could grow there, be taxed at the lower small business rate, then fund their retirement through a steady stream of tax-advantaged dividends. Well, the CRA is already putting the kibosh to that plan. Corporations which cease to actively earn income are being restated as passive, investment entities, with a tax rate jacked to the 50% level. Ouch. The logic is simple: you did this to avoid tax. So according to the GAAR (general anti-avoidance rule) the feds can Hoover you. There are thousands of retired docs soon to learn this reality.
But it may get worse after the next budget (I hear). On the first $500,000 in business income, owners currently pay tax rate about half that of individuals, encouraging them to leave money there, invested, rather than paying it out as salary or taxable dividends. While the small biz rate is unlikely to increase, expect surplus funds – money not used to fund the operation, buy stuff, pay salaries or create jobs – to be taxed at a separate, higher level. This retained earnings tax would have accountants dancing in the streets (the complexity of reporting – and fees – would swell) and be spun as an eat-the-rich win for the Libs.
The second target’s income-splitting. Big. Today you can set up a corporation holding a business and issue shares (voting or non-voting) to your squeeze or your useless basement-dwelling spawn, then pay them a portion of the profits through dividends or (if they actually do some work) salary. This structure is common among doctors – in fact, squads of accountants and lawyers descend upon medical schools to preach exactly these strategies. It allows a doctor making, say $300,000, to escape T2’s new tax bracket and even out his income by paying half to his non-working spouse. That, says Ottawa, is tax avoidance. Bad doctors. You will pay.
While many Canadians would support this (as Trudeau is counting on) it could mean higher medical costs and a squeeze on the health care system as doctors demand higher compensation to balance out fatter taxes. Meanwhile, legitimate working couples, who both contribute to a small business and are paid by it, will face more hurdles in proving their status.
How all this will be structured is yet to be seen. We’ll know soon enough. It won’t be simple.
If you are incorporated, pay attention. Ditto if you’re thinking of becoming an indy contractor or starting a gourmet dog biscuit bakery. Life might be simpler, or cheaper if you use a sole proprietorship structure rather than establishing a corporation. And, yes, your doctor might also decide to go to Minneapolis, where she’ll make more and pay less. Changing how risk-taking business operators are taxed could mean there are fewer of them – and fewer jobs – since a large incentive is being removed.
The US president is a billionaire who brags about paying no tax. Can you imagine?