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CCPC tax proposals: Is the Liberal government dampening upward mobility?
7/18/2018 4:43:23 AM
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A regular feature on financial planning, including portfolio risk management and retirement planning.

By Doug Nelson  | Friday, September 08, 2017


When an employee joins a new employer, one of the most common questions will be, “If I work hard and do well, what is my upward potential mobility within this organization? What additional responsibilities and challenges could I take on, and what is my earning potential?” The last thing many employees wish to hear is, “Sorry, your potential is capped at your current level. Most of everything you generate for the business, from this point forward, will remain with the organization. Now get to work!”

In the same way in which a smart employer will strive to develop clear upward mobility targets for their employees, so that employees can see their hard work pay off and be rewarded and remain with the firm, what is the upward mobility path to the citizenry of Canada?

If an individual has conquered the ability to be a superstar employee, is their next natural step to then be an entrepreneur, and what is their incentive to do so? Current rules for Canadian Controlled Private Corporations (CCPCs) that govern income-splitting, passive income accumulation, and the multiplication of the lifetime capital gains exemption are the last remaining advantages and incentives to entrepreneurship in Canada. Yet it is these very advantages that the Department of Finance is now proposing to curtail.

If I work hard and manage my resources well, what flexibility do I have in terms of how I pay myself? Can I be rewarded by potentially keeping more of my hard-earned income by splitting additional income earned with other family members? Do I have the opportunity to deploy my income in multiple ways, such as accumulating wealth within my corporate structure, based on what is best for me in my personal circumstances? Do I have the opportunity to potentially sell my business down the road and be treated well from a tax perspective? Yes, the current rules provide some potential benefits to the entrepreneur, assuming the entrepreneur is successful, which is the incentive for people to take risks and be an entrepreneur.

Alternatively, if we focus the discussion only on areas such as “tax the rich,” “make everyone pay their fair share,” and “the importance of tax neutrality,” then we miss the point about our country having a clearly defined path of upward mobility.

Tax “the rich,” whoever they are

When the focus is on “tax the rich,” yet we fail to define what this really means, then everyone assumes that the discussion is about everyone else, because that person likely doesn’t feel too rich themselves, given the time it has taken to build their income and wealth and the risks they took along the way.

The “fair share,” whatever it is

When the focus is on “make everyone pay their fair share,” it is important to reflect on what this really means. Are you saying that everyone should pay the same percentage of tax on their income regardless of the amount of income they earn? If so, then a flat tax system with no tax credits is really the only way to go.

But is it fair to say that an entrepreneur, who may be generating GST and corporate tax revenue, in addition to creating jobs and the tax revenue that comes from those jobs, as well as paying their own personal tax, is not contributing their fair share, when in fact this person is creating 10 or more times the amount of tax revenue of the average individual in Canada today?

Even if the entrepreneur’s personal taxes are at an average lower tax rate than another individual with similar income, the total contribution to the community and the tax system is typically far greater from the entrepreneur over time, with always further upside growth potential. If this is the case, then how can it be said that this person is not generating their fair share of tax?

“Tax neutrality” is anything but neutral

This brings us back to the discussion about tax neutrality. Complete tax neutrality, whether it be dividends vs. interest, salaries vs. dividends, or employees vs. entrepreneurs, fails to recognize that the different types of income often require different levels of effort, time, or risk. If effort, time, and risk were neutral, then tax neutrality works. If effort, time, and risk are not the same, then the tax applied on that income should also not be the same, which is how most of our current system works today.

Tax proposals cap incentives for upward mobility

In the federal government proposals for tax reform using private corporations, the government runs the considerable risk of eliminating any incentive for people to grow personally or economically beyond a particular level, thus capping any incentive for upward mobility. If that upward mobility is capped, then people, talent, and capital will likely go elsewhere, to places where this cap is less restrictive.

Since the effort, time, and risk related to entrepreneurship are significant, and vastly different than the role defined for a typical employee, there must be clear incentives in place, driven by the tax system, to encourage, and reward this behavior, such as that which is present with the current rules. Why should the tax system be a driver in this discussion? Because tax is life’s single greatest expense. Without this incentive, why live in Canada?

My question to Prime Minister Trudeau is simple: Please explain to me what incentives there are in Canada to work hard and take risks? What is my upward mobility potential personally, professionally, and economically as a Canadian citizen?

Doug Nelson, B.Comm., CFP, CLU, CIM, is a licensed financial planner and portfolio manager at Nelson Portfolio Management Corporation based in Winnipeg, Manitoba, and a regular contributor to the Fund Library. You can reach Doug at Nelson Financial Consultants, 102 – 147 Provencher Blvd., Winnipeg, MB, R2H 0G2. Phone: 204-956-0519; Fax: 204-942-6890; Email: Twitter: @RetireMastery

Check out Doug’s book on personal retirement planning principles, Master Your Retirement.



Notes and Disclaimers

© 2017 by Fund Library. All rights reserved. Reproduction in whole or in part by any means without written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. No guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice. However, please get in touch with the author to discuss your particular circumstances.

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