Small businesses – with up to 20 employees – are important to our economy: they account for 20% of all Canadian jobs. The tax rules governing them should be simple and understandable, but many are not Ottawa should scrape them and start with a clean sheet.
Here is an example. Mary has been the owner of a bookstore in Orilia, Ontario for almost 30 years. To help him get started, his mother gave him a zero-interest loan of $ 50,000, which he has not yet repaid. Mary owns 80 percent of the shares in her private corporation and 10 percent each of her two adult children.
Last year, Mary received a salary of $ 60,000, and after payroll expenses, the company earned $ 20,000 before taxes. In addition, it has accumulated a small investment portfolio over the years that Mary hopes will help finance her retirement.
Mary went to her accountant and asked if the company would pay her and her two children a small dividend. The meeting is a fiasco. Mary’s accountant, Boris, reminded her that although the company pays about 12 percent tax on its business income, its tax rate on investment income is more than 50 percent.
“Why that?” Mary asks. “The personal tax on my salary is only 17 percent.”
Boris explained that there is a 50 percent rate on investment income because it is close to the top rate for high-income individuals. And with less than five percent of Canadians actually in the top brackets, Ottawa wants to get as much cash as possible.
“Now, there are a few things to think about when paying dividends,” Boris said. “First, there’s a small balance in the company’s GRIP account (general rate income pool)” – Mary’s eyes began to glaze over – “so it could pay eligible or ineligible dividends. Paying ineligible dividends will increase the cost of personal taxes, but this is the only way the company will recover from its NERDTOH account (in the hands of ineligible returnable dividend tax) and recover some of its tax on the investment. Come on. “
Mary listened enough and started to leave.
“Just a moment,” says Boris. “We really should talk about TOSI rules. If children receive dividends and the TOSI rule applies (tax on split income), they will pay personal taxes at the highest personal tax rate on the entire dividend, unless they are involved in the company’s business on a regular, continuous and significant basis. . ‘”
“They are not,” says Mary, “and I got it! Eligible Dividends; Ineligible Dividends; Grip; NERDTOH; TOSI. If I wanted to be a tax expert, I would get an accounting or legal degree. I just want to sell books.” “
Mary tells Boris that she will only forget about dividends, because she can hardly understand a word she says. Anyway, she has to leave to help her mom pack: her mom is moving to Arizona on a permanent basis.
“Is he leaving the state? Can you tell me about his debt to the company,” Boris asks.
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“There’s not much to say,” said Mary. “The loan does not carry interest: if it is not repaid, it is convertible into voting shares, but eventually I will repay it.”
Boris looks surprised. At the moment, the company is a CCPC – a Canadian-controlled private corporation. But the loan gives Mary’s mother the ancillary rights to control the company. So when he leaves, the company will stop being CCPC and will pay 26.5 percent tax on his future business income, not 12 percent. “And there’s more,” Boris said. “As a non-CCPC, the company is protected from a forfeited 50 per cent rate of return on investment, except for one new rule – out of the press from the April federal budget. The company will now be one No.– CCPC for most purposes but will become a ‘substantive CCPC’ and still owes 50 percent of its investment income. “
Mary closes her bookstore and decides to move to Arizona with her mother.
I hope this example is far-reaching and these rules are rarely applied. But they and their equally incomprehensible rules affect thousands of small businesses across the country. They are among the most complex rules in our entire tax code. If Ottawa politicians want to do something good for the economy, they should kick them out and start over.
Alan Lanthier is a retired partner of an international accounting firm and has been an advisor to both the Department of Finance and the Canadian Revenue Agency.