Friday, September 08, 2017

Entitled professionals should stop whining about tax reforms

I'm getting a little impatient with all the well-paid doctors and lawyers who are complaining so vociferously about the federal government's plans to close up tax loopholes that these people have been exploiting for years.
The Liberal tax reforms are aimed at clamping down on the kinds of shell companies that allow self-employed to pay lower corporation and dividend taxes, rather than the income taxes everyone else has to pay, as well as making further tax savings by "sprinkling" their incomes around their extended families (unless those payments are reasonable compensation for actual work done). It also clamps down on the practice of using private corporations as a means of making (and protecting from tax) passive investments not related to the business, as well as converting income into (less taxed) capital gains. In short, it aims to treat business owners just like any other salary- earner.
The tax plan, which is still a work in progress at the moment, has generated near panic in some quarters, although there is also a lot of misunderstanding and confusion, even among financial advisors. However, it is expected to only affect top-end professionals earning over $150,000 anyway, those who have already exhausted org we tax-saving methods like RRSPs and TFSAs: how much can they have to complain about?
Furthermore, it only applies to Canadian-controlled private corporations (CCPCs), and studies show us that richer individuals are much more likely to have a CCPC than the middle- and lower-income individuals that much of the media complaints seem to focus on. According to the Canadian Tax Journal, among tax-payers in the bottom half of the income spectrum, less than 5% have a CCPC, as compared to almost half of the top 1% of earners. So, the focus of the tax measures seems well-placed, and it is unlikely to affect the proverbial mom-and-pop corner store owners that so many reports and conservative commentators talk about with such outrage in their tone.
A Canadian Federation of Independent Business survey suggests that, although over two-thirds of business owners pay family members compensation from their businesses, and a similar proportion hold passive investments within their businesses for tac purposes, nearly two-thirds say that the proposed changes will actually have no effect on them.
These outspoken doctors and lawyers have such a culture of entitlement that they have come to see the current system as the norm and the planned reforms as unfair incursions on their cozy little schemes, complaining that they would no longer be able to save for their retirements and maternity leaves.
Well, how do they think other people manage it? Other people who earn the same as them pay a normal, reasonable amount of income tax. Other people who don't get maternity leave or pensions provided have to make their own arrangements. Other people have to pay off substantial student loans: that's life.
The average gross billings of doctors is a massive $339,000 a year. But, the medical profession argues, a good third of that goes on business-related overheads. Well, that still leaves a net taxable income of well over $200,000 (and this is the average remember), much more than most people have to play with, and surely more than enough for them to factor in maternity pay and repay student loans. It's hard to feel too sorry for them.
The tax reforms seem eminently reasonable to me, even long overdue. The whining of a bunch of entitled upper middle class professionals has no place in this discussion.

UPDATE
A new study by the Canadian Centre for Policy Alternatives confirms that the proposed new rules on income sprinkling would mainly affect male professionals (like doctors and lawyers), with spouses or adult children who don't work, and who make over $216,000 a year. It is unlikely to have any affect on family-run businesses like restaurants, stores or farms.
77% of small business owners do not benefit at all from the current tax break on income sprinkling, and another 10% would not gain enough to make it worthwhile setting up such a scheme. Thus, only about 13% do currently take advantage of income sprinkling, and about half of the annual value of the tax break is claimed by the top 5% of earners.
So, I still say the tax changes are justified, and that the belly-aching by small business groups and accountants is not.

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