Sprinkles

Another day, another detour. In Washington, Donald Trump used some average families as props while announcing a “giant, really giant” tax cut. A household making $75,000, he said, would see their federal taxes “cut in half.” At the same time the US corporate tax rate is being gutted, from 35% down to 21%.

In Ottawa, our multi-millionaire Minister of Fairness was burdening small business owners with a new raft of regulations designed to extract an extra $220 million in taxes from their hides. To make up a little, the small business tax rate is bring cut by one-half of one per cent. The target this time (more are coming in the March budget) is “income-sprinkling”, the made-up and pejorative phrase used to describe how families divide compensation to try and reduce tax (which has been perfectly legal).

The real celebration, however, was taking place over at the stone castle near Parliament Hill which houses the CRA. Just imagine how many more bodies and overtime will be required now to ensure the following is adhered to by hundreds of thousands of small enterprises:

“These tax changes (which are proposed to be effective for the 2018 and subsequent taxation years) will clarify the process for determining whether a family member is significantly involved in a business, and thus is excluded from potentially being taxed at the highest marginal tax rate (known as the tax on split income or TOSI). The changes include clear, “bright-line” tests – or off ramps – to automatically exclude individual members of a business owner’s family who fall into any of the following categories:

  • The business owner’s spouse, provided that the owner meaningfully contributed to the business and is aged 65 or over.
  • Adults aged 18 or over who have made a substantial labour contribution (generally an average of at least 20 hours per week) to the business during the year, or during any five previous years. For businesses with seasonal operations, such as may be the case with farms and fisheries, the labour contribution requirement will be applied for the part of the year in which the business operates.
  • Adults aged 25 or over who own 10 per cent or more of a corporation that earns less than 90 per cent of its income from the provision of services and is not a professional corporation.
  • Individuals who receive capital gains from qualified small business corporation shares and qualified farm or fishing property, if they would not be subject to the highest marginal tax rate on the gains under existing rules.

“Individuals aged 25 or over who do not meet any of the exclusions described above would be subject to a reasonableness test to determine how much income, if any, would be subject to the highest marginal tax rate. In certain cases, adults aged 18 to 24 who have contributed to a family business with their own capital will be able to use the reasonableness test on the related income. For additional clarity, the Canada Revenue Agency (CRA) has released guidance with respect to these measures. The CRA’s guidance will seek to help businesses and family members understand the operation of the measures and, in doing so, effectively reduce their compliance burden in relation to these new rules.”

And what about gender equality, I hear you cry?

Well, if you and another person start a business as co-owners, you can each divide the profits as tax-efficient dividends, whether you work there or not. But if you marry your partner, too bad. Their tax rate jumps to the highest level, unless s/he is an employee, according to the strict CRA guidelines.

And check out this hunk of federal logic:

Gender considerations previously communicated with respect to the proposed income sprinkling measures are not affected by these revised draft legislative proposals. Data show that men represent over 70 per cent of higher-income earners initiating income sprinkling strategies, and women represent about 68 per cent of recipients of sprinkled income. While this income is of benefit for recipients, it also creates incentives that reduce female participation in the workforce.

There you have the rationale for a small business dude being prevented from paying income to his wife for a venture they started together using joint matrimonial funds, or through a shared risk. It makes the babes lazy! They stay home all day snorfling Cheetos!

Seriously. This is your government at work. Making life complicated. Offering disincentives to be an entrepreneur. Creating bureaucracy. Dissing women. Trying to reengineer society. Fostering an employee mentality. Meanwhile family trusts, which both Morneau and the prime minister have and receive income from, are exempted from the rules. Kids, wives, pets – anyone can receive tax-deferred cash from a trust, for no work. Do as they say. Not as they do.

And another detour on rates. Last week the Bank of Canada took a pass, refusing to raise despite a strong labour market, romping economic growth and galloping growth in household debt. This week the US Fed hiked its benchmark rate for the fourth time in 12 months, and promised three more to come in 2018 as it resolutely normalizes the cost of money.

Canadian houses, overall, cost about double those in the States. And you blame the Chinese. Hilarious.

Blame game

The most hateful comments to this pathetic blog which end up being DELETED? Yes, without a doubt, one topic only. The Chinese. Trump openly blames Muslims and Mexicans for America’s ills. We hang family debt and disappointment on dudes from Guangzhou.

Because nobody’s proven immigrants or offshore investors are largely responsible for stupid house prices, and yet the evidence is overwhelming that local speculators are, this blog has been a lightning rod for xenophobes, racists and disentitled whiners. It’s human nature that we want to be victims. Meanwhile realtors have played the race card beautifully, convincing millions they must buy before all the houses are gone or become forever unaffordable. Politicians can’t resist currying favour running against people who are scary, and don’t vote. It’s a perfect anti-Chinese storm. Sadly, Canadian-born folks of Asian heritage have been swept into this cauldron, too. In Vancouver – where the two founding races were anglos and Chinese – this has turned ugly.

Will things change on Tuesday?

Maybe. Probably not. But we’ll see. That’s when StatsCan releases new numbers on foreign ownership levels in the GTA and YVR – the result of T2 spending $40 million on a project to measure market activity. The feds have been looking at tax data and land registrations to determine who’s buying what. The result will probably be consistent with what we’ve already been given, which the bigots and stubborn (who send me awful notes) will dismiss. That’s the thing about prejudice. It stains deep.

Desperately-unpopular governments in both BC and Ontario brought in massive taxes on foreign buyers, catering to the unproven belief Chinese dudes make houses cost $1 million. Because so many have bought into the offshore-buyer myth, the tax caused the market to swoon as everyone stopped buying and waited to see the impact. Now the tax is a non-event, because foreigners are a non-event. As a major survey showed a few months ago, most newcomers buying here actually move here and become residents. They also tend to purchase properties costing less than the average.

Without a doubt, rich Chinese, Iranians and Americans do scoop up high-end, high-profile homes, let their spawn roar around in Lambos and cause a fuss. But this is at the margins of the market. They’re not behind a 23% increase in condo prices in Vancouver, nor were they multi-bidding against 15 other buyers in Toronto last Spring. We did that. Cheap money and idiot governments did it. Lax lending and CMHC. First-time buyer incentives. The RSP home buyer’s plan. Newbie tax credits. Voracious bankers. The Bank of Mom. And the CRA.

After all, here’s the data collected to date: Ontario reported that 4.7% of properties selling at the very height of the market last March and April went to foreign buyers. So, 95.3% did not. The Toronto Real Estate Board’s research showed 4.9% of transactions had a foreigner on the buy side. Thus, 95.1% were local buyers.

When Ontario’s finance guy Charles Sousa slapped on the 15% anti-Chinese tax he said 8% of deals were going to offshorers. When actual numbers surfaced he recanted: “This indicates to me that the degree of foreign buyers is not as intensive as many may have contemplated.”

In BC, believed to be the epicentre of foreign ownership, the province puts the number at 6% of transactions over the past year. In some areas, like Richmond, it’s higher (at 10% recently), as in portions of the GTA (like Markham/Unionville). Of course there have always been ethnic concentrations – Little Italy, or Chinatown or Toronto’s Greek Village. In fact whole subdivisions can sell out in hours or days to one community – which doesn’t mean all these folks are foreigners, newcomers, immigrants or interlopers. Mostly, they’re Canadians who like having neighbours like them. Just like you.

There are many reasons why unaffordable real estate should tick you off. The biggest culprit is loose monetary policy, which gave us 2% mortgages. That bred unbridled borrowing, epic family debt and rampant speculation. Now 14% of Toronto households own multiple properties and up to 50% of condo sales in recently years went to ‘investors’. This helped foster the real estate porn that spilled onto TV screens and create stars out of speckers and flippers. It was only months ago that ten thousand people crowded a Toronto hall to hear housing investment tips from a contractor and a rap artist.

Did the Chinese make us do this? Not a chance. But realtors, politicians and media messed with your head.

On Tuesday I bet the new data reaffirms the old.

If I’m wrong, you can export me.

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And here we go in Ottawa. With a mere 10 business days to prepare for the 2018 taxation year, and Parliament conveniently adjourning, Bill Morneau brings down the hammer. Merry Christmas, small biz suckers. Its so much easier to be a multi-millionaire with a billionaire spouse and an inherited fortune…

Government to Announce Next Steps on Tax Fairness for the Middle Class

Minister of Finance Bill Morneau will announce next steps to simplify the Government’s plan to improve the treatment of income sprinkling for owners of Canadian-controlled private corporations, on Wednesday, December 13, 2017.

Department of Finance Canada officials will provide a background briefing immediately following the release of the simplified proposals.

Time and location:

1:00 p.m. EST
National Press Theatre
150 Wellington Street
Ottawa

A question and answer session with media will follow.