By Fin MacDonald, Fin Tax Service
I was going to write about Tax Planning in this issue of The Beacon, but with a new Provincial Budget coming in September (helmed by our own MLA and Finance Minister, Carole James) I will leave that for the next issue. There will probably be some changes to comment on.
First, a few words concerning Federal Finance Minister Bill Morneau’s look at private corporations, and their use in tax planning. Various professionals have been able to incorporate – to use a tax structure originally meant for small businesses – and to reap the numerous tax benefits available. Tax benefits include paying tax at a lower rate than outside a corporation, deferring tax on income not currently needed, paying out the income as dividends or capital gains (which are taxed at lower rates than employment income), the so-called “income sprinkling” (splitting the income with adult family members) and holding passive investments inside the private corporation.
Those of us who can remember the Carter Commission in the 1960s, and it’s call to treat all income the same for tax purposes – “A Buck is a Buck” may have some hope that Minister Morneau’s consultations may lead to some reform. However, given the Trudeau government’s stalling on issues such as electoral reform and the implementation of fairness in the treatment of Indigenous Children, I’m not going to hold my breath! The backlash from professionals and their hired guns in the legal and accounting fields has been loud and prolonged. The opponents are trying to frame the question as one of fairness to risk-takers; this would be true, if we had not seen the rush to incorporate by those who are not the small businesses that these measures were designed to help.
Reform, if any, will be too late for the 2017 tax returns.
(By way of disclosure: Fin Tax Service does not do any corporation (T2) tax returns. I limit my work to individual (T1) and trust (T3) returns. However, when clients of mine would benefit from incorporation, and the tax benefits that would flow from that, I DO advise them to seek legal assistance to incorporate.)
What is tax policy?
Surprise! Nobody likes paying taxes. Governments set tax policy for a number of reasons, some worthy, some not. At the municipal level, the City of Victoria sets a “mill rate”. There is a different mill rate for different categories of property. For 2017 the Residential Mill rate (including for CRD, Schools, Hospitals) is 5.8006 per $1,000 of your home’s assessed value. For businesses the rate is 19.9298, and for farms 7.1536. On a property assessed at $600,000 this translates for a Residence to a tax bill of $3,480.36, for a Business to $11,957.88, and for farm property to $4,292.13. The rationale behind business paying more is that they use more civic services. For example, when is the last time you had to call VicPD because of a shoplifter at your home?
In 2006, in Oak Bay, tax planning took a bizarre turn. Assessed value of property is based on its use. Amongst the lowest valuations is for farm land. A Beach Drive resident, who sold her surplus garden produce, was able to convince the BC Assessment Authority that her waterfront property should be classified as “farm”. The value plunged to less than that of a one-bedroom condo, from being one of the top five most expensive properties in Oak Bay. Property taxes plunged in tandem with the “farm’s” value! Eventually, Oak Bay got the property classified once again as residential. In the mean time, Oak Bay raised the mill rate for farms to 2,974.4151, to recoup some of the lost revenue. So, if the farm was assessed at $10,000, the tax payable would be $29,744.15.
At the Federal and Provincial level, governments use tax policy for various reasons; some noble, some, not so much. A recent example was the Federal Public Transit Tax Credit. This enabled transit users, if they paid for at least twenty days service in a month, to claim a 15% tax credit on the cost (if they had federal tax payable). The BC government did not offer a similar credit. In this year’s budget, Federal Finance Minister Bill Morneau ended the credit, saying that it did not seem to increase transit usage. On your 2017 income tax return, bus passes for January to June will still be eligible for the credit.
Other examples of tax policy are seen in the treatment of income. At one time, there was a federal tax credit on the first $1,000 of interest income. This was to encourage people to save. It was ended. Capital gains on the sale of investments are taxed at half the normal rate. There was some speculation in the lead up to Morneau’s budget that the capital gains inclusion rate might rise to 66% or 75% (levels that it had been taxed at before the lowering to 50%); nothing was done and the delicacy of President Trump’s possible tax reforms in the USA was cited as a reason.
Dividends from Canadian corporations receive favourable federal and provincial tax treatment. An example: in British Columbia, a single (non-) taxpayer can have, in 2016, Eligible Dividends of $51,740, with no other income – and owe Zero dollars in taxes. If they had the same amount in employment income that would cost $8,017.49 in taxes.
Is it fair to have different tax treatment for different kinds of income? Does the person who has only dividends for income deserve to pay $8,000 less in taxes than the employed person? Personally, I prefer Carter’s position: A Buck is a Buck.
As always dear readers, I look at tax policy through my lens of Helping You to Keep More of YOUR Money. Next month: Tax Planning and an update on BC Finance Minister Carole James’ first budget.