04 October, 2017 Tax Planning

The proposed Liberal tax changes – be very scared!!

If you are a self employed incorporated individual, you should be quite upset about the proposed Liberal tax changes.  Based on my interpretation, these new rules are punitive and will create economic hardship for business owners and their employees.

There are three parts to the proposed legislation that have cause for concern.  They are:

  1. A crackdown on income splitting for incorporated business owners.
  2. Increased taxation of passive income in a corporation.
  3. Potentially ending business owners who take income as capital gains from their corporation instead of interest and dividends.

The premise of this legislation is that someone who is an employee earning $50 K / year should not pay more tax that the entrepreneur who earns $250 K?  After all, that’s not fair as entrepreneurs and employees are equal.

But that’s where this proposed tax change is wrong.  It’s not an even playing field to begin with, so the definition of “fair” and “equal” is not warranted.  What do I mean?   Well, entrepreneurs have  taken risks to establish their businesses.  They have invested both capital and time into their ventures. Often business owners pledge the security of the home to fund their entrepreneurial dream.  Sometimes, when the dream turns into a nightmare, they can go bankrupt and lose their home.

The employee has no such risk. Employees, they get paid whether or not the business is profitable. If it’s a slow month and payroll needs to be met, the business owner dips into his / her line of credit.  And what about other expenses such as rent, utilities, phone systems, Cloud services, insurance, marketing and advertising costs…the list goes on.  The business owner is responsible for these costs while the employees are not, so, the employer and employee are not on equal footing. 

But wait, I’m just getting warmed up.  Let’s talk about pensions. Business owners do not have access to a pension plan like government employees.  The person who earns $50 K /year working for IBM or the government of Ontario has access to a pension plan that is funded by his employer.  It potentially pays his / her salary at retirement and might be worth a few million dollars.  The business owner has no such thing. Infact, most business owners don’t earn much in their early business building years.  So, business owners lose out on being able to contribute heavily to an RRSP in his/her early years. 

The legislation calls for fairness, yet the playing field isn’t level.  As well, it seems that this legislation is being rammed down our throats.  It was initiated during the summer with a 75-day reading. Bill Garneau was hoping you would be enjoying a relaxed summer while he slipped this legislation through.  I propose that we need to all write our MPs and complain bitterly about the proposed “fair” tax treatment.

 I am all for fair. But let’s establish what fair is first.  Ok – why don’t we add up what a defined pension plan would be worth for a $50 K / year employee who works 35 years at a job until age 65.  If we give him a raise of 3 percent per year for 35 years, resulting in an income of $140 k / year at retirement.  The typical defined benefit plan would offer him 2 percent per year of service, resulting in a 70 percent pay (35 x 2) of his best five years. It’s close to $100,000 per year that he/she would receive from the age of 65 until death.  And typically, these pensions are indexed, so they increase each year.  So,  there is a big chunk of dough sitting in this pension to fund that retirement. It could be worth 2 million dollars conservatively speaking.

Why don’t we allow business owners to accumulate these types of monies in their corporations on a tax preferable basis.  Once they hit the equivalent of a pension plan funding ($2 million), then you can start taxing them.  Now that’s fair!!

If you are unhappy with the proposed changes, please write your MP and tell him/her that you are for fair treatment, but let’s level the playing field.


John is President of Northwood Mortgage Life and an advisor with Investment Planning Counsel. You can reach John at 416-783-PLAN (7526) or email john@northwoodfinancial.ca.


This commentary is provided as a general source of information and is intended for Canadian residents only. The views and opinions expressed in this commentary may not necessarily reflect those of IPC Investment Corporation.