Morneau’s folly

So you finally agreed to meet the tax accountant that everyone has been talking about. “He reduced my tax bill by thousands of dollars,” your neighbour says. “And it’s all perfectly legal.”

You live in the province of Quebec, and are married with two children, ages 19 and 22, both attending university. You are self-employed and earn $150,000 a year. Your husband works for a larger company, and has an annual salary of $50,000. Last year, you and your husband paid combined federal-provincial taxes of about $66,400, including Quebec Pension Plan and health-care levies.

You sit down with the tax adviser. “The amount of tax that you’re paying is ridiculous,” he says. Then he shows you … “The Plan.”

First, you set up a private corporation, “Taxco.” From now on, Taxco — not you — will carry on your business. Taxco will have four classes of shares: A, B, C and D. You will get one class A share, and your husband one class B. Each child gets one share as well, one gets a class C and the other gets a class D. Now here’s the trick. The directors can declare dividends on any single class of shares, to the exclusion of the other three classes. In other words, each share is entitled to discretionary dividends in whatever amounts you choose.

In the first year, Taxco earns the $150,000 you used to earn, and, at a federal-Quebec rate of 18.5 per cent, pays tax of $27,750, leaving the corporation with an after-tax amount of $122,250. Taxco’s directors — you and your husband — decide to pay you a dividend of $72,250, and your two children dividends of $25,000 each. Your husband receives nothing. Your children pay almost no tax on the dividends. In total, including the corporate tax paid by Taxco, the family pays tax of $51,600, a savings of close to $15,000.

Now, Finance Minister Bill Morneau comes along. On July 18, 2017, the federal government issued a consultation paper dealing with the taxation of private corporations, primarily Canadiancontrolled private corporations (CCPCs). The government business.” They ask why anyone would ever consider starting a small business in Canada after this.

We should all take a deep breath. Some of the government’s proposals actually make sense, and are long overdue. Others go too far and need to be reconsidered. And some are misguided and should be abandoned.

The “income sprinkling” proposals go well beyond the example described above. The proposals include complex rules that would impose a significant compliance burden on taxpayers, and have an adverse impact on many families that own CCPCs