I’m Rob Tetrault, welcome to Straight Talk.
What we’re talking about today is the proposed taxes changes from Trudeau and Morneau. Now they announced this earlier this year, and in kind of a big brouhaha and kerfuffle and they used words such as closing loopholes, making sure the rich pay their taxes and bringing fairness to all taxpayers. In reality, the only people they targeted here were business owners and business owners are the lifeblood of our country. They create jobs, they make the market move, they create wealth through their own businesses and through the jobs that they create.
So let’s actually figure out what they have done here.
So income sprinkling means if I want to pay dividends to my kids, my wife, my grandkids, and they are shareholders of the corporation, they can receive dividends. And they are paying dividends at a favourable tax rate. Now income sprinkling is on the way out according to the government. So they are no longer going to let you pay dividends to those people.
So if I’m a shareholder at Tim Horton’s or at Canadian Tire, I don’t need to actually go serve coffee in order to collect my quarterly dividend from owning that stock. I don’t need to sell hockey sticks to get a dividend from Canadian Tire. Now in privately held corporations, like business owners across this wonderful country, they can no longer do that unless the wife or the kids or the husband is actively involved in the corporation, which is ridiculous in my mind, and in fact it is the only place in the world where they are going to have a reasonableness test for dividends.
Holding passive investments in a corporation
Now this is the second thing that they wanted to attack. So if I hold a corporation, I have a holdco, I can take the excess capital and I can grow my net worth and I pay a smaller tax rate there. Because remember, we don’t have pensions. Business owners don’t have pensions—They have to fund their own pensions. Well this is one way to even out the playing field. Well, they attacked that. The good news is that they did decide that they were not going to follow through on that. The only ones that they will attack are corporations that have passive income of $50,000 or higher. That is good news.
Three. They took a look at the capital gains strip.
The capital gains strip is an effective strategy to move an income to a capital gain thus reducing tax payable. A lot of people are doing it at a high net wealth level. They decided that they are not ready for it, they brought some measures forward, it’s not happening at this point.
So here is the Straight Talk.
With respect to dividends, if you are currently paying your children or your spouse dividends and being taxed at a low rate, continue to do that aggressively. Why not. The tax changes aren’t coming yet and when they do come, then we are going to want to consider potentially other strategies, such as an IPP, which is an individual pension plan, or other high-level tax planning strategies.
Two. With respect to passive income in a holdco or in an investment company, you want to get that passive income as high as you can before the tax changes come into effect, because they are likely going to grandfather any previous income.
Three. You’ve got to be aware of any and all potential future tax changes that are going to come. And for that, make sure that you are on top of things when Morneau or Trudeau announce anything, likely in 2018 or potentially in 2019.
Thanks for your time.