RMT Clients are Speaking Up

We have been overwhelmed with the thoughtful responses our clients have prepared in response to the Liberal governments attack on entrepreneurs and will be releasing a series of those responses in the coming weeks.  Here is an example of a letter written to our clients MP and the Minister of Finance:

Dear Finance Minister,

I am writing on behalf of myself and my co-founder.

We are now a respected small business with 8 partners, 35 employees and 100’s of clients in Canada and across North America. But when we started in 2001 we financed our business by mortgaging our homes.  It was a big risk but we took it. We worked hard (70+ hour weeks) and in the early years we wouldn’t have survived if our spouses didn’t work. But we persevered and eventually achieved success, growing our business several 1000% and creating employment for over 40 people. And we pay a lot of money each month into EI and CPP and payroll tax – money that wouldn’t be generated if we hadn’t founded our business. We’ve never asked for help. We’ve never looked for government funding or grants. And if we had failed we wouldn’t have had access to EI or support.

We had difficult times in the early days and hit many thresholds where we struggled deciding whether to continue. If the restrictions you’re proposing had existed when we started, we may not have even gone forward. We took risks in search of long-term success. Your proposed legislation discourages risk taking and entrepreneurship. If you strip out the returns that entrepreneurs can realize, fewer of them will be willing to take the risk to start their businesses and will stay in the security and comfort of being an employee. And employees don’t drive growth – entrepreneurs do!

Canada is just beginning to experience an entrepreneurial renaissance. If your intention is to treat entrepreneurs like employees, you’ll suppress the burgeoning economic momentum that is just beginning to take hold in Canada. That willingness to take risk and create jobs should be rewarded so that we have a better future.

RMT Clients are Speaking Up

We have been overwhelmed with the thoughtful responses our clients have prepared in response to the Liberal governments attack on entrepreneurs and will be releasing a series of those responses in the coming weeks.  Here is an example of a letter written to our clients MP and the Minister of Finance:

Dear Minister Morneau,

I write to you as a small business owner on a matter of great concern, the proposed changes to tax planning options for entrepreneurs.  Your department’s stated objective of eliminating all tax advantages that currently accrue to entrepreneurs is simply wrong and will result in serious damage to the small business and entrepreneurial community in this country.

I own and operate an advertising agency that serves the not-for-profit sector exclusively.  We help our charitable clients raise more money and recruit more donors and volunteers.  We do our best to keep our prices down, recognizing the important work that our clients do.  We are profit-making but not excessively so.  I employ almost 40 staff, for whom I pay CPP, Employment Insurance and Ontario’s health tax in addition to their salaries.  I pay regular income taxes on the salary I draw from the business.

I also use some of the tax planning options that are currently available to entrepreneurs.  I do so to provide for my eventual retirement as I have no pension entitlements.  The most salient difference between my employees, indeed all employees, and I is the economic risks that I have taken personally to found and run a small business.  Even today, the bank requires my personal guarantee on any financing associated with my business.  The future of my family and I depends on the success of our business, and that is always far from a sure thing.

Entrepreneurs like me don’t have the security of a pension or the protection of a union, but your department wants to characterize the few modest tax planning options I have access to as “tax loopholes” and seeks to do away with them. That is a shame.  I believe you and your government should be encouraging entrepreneurs and small-business operators and recognizing the fundamental differences between those who enjoy the security of a steady pay cheque and those of us who risk everything to build something worthwhile, a business that accomplishes something while employing others.

Please don’t allow your jealous bureaucrats to destroy the future prospects of Canada’s entrepreneurs.

RMT Clients are Speaking Up

We have been overwhelmed with the thoughtful responses our clients have prepared in response to the Liberal government’s attack on entrepreneurs.  Here is an example of a letter written to our clients MP and the Minister of Finance:

I’m writing to you with respect to the proposed tax changes which will negatively impact many Canadian entrepreneurs and small businesses.  I began my career as an entrepreneur, and for the first 20 years of my working life ran a privately-held small business that had about 75 employees.  As a result, I’m well-aware of the commitment, risks, frustrations and rewards associated with running a small business in Canada.  The second stage of my career was as an employee of a multi-national corporation.  As a result, I am also well aware of those same items as they pertain to being an employee.  In my experience there are significant differences between the two worlds – most having to do with risk and reward.

As an entrepreneur and owner of a growing business, I can well remember looking at my personal tax bill and noting that I got less for my overall tax paid than my employees did.  It was frustrating to think that I was creating employment for many people directly and indirectly, and yet there was little recognition of the risks my family and I were taking to provide the platform for this.  The only way to level the playing field was through careful tax planning.  As an employee I did my job well, growing a business in the corporate world.  I was unable to take advantage of some of the tax planning that I had done in my small-business life, but was not concerned because the personal risks I took were lower and not as fundamental, and the systemic advantages that are available to employees were available to me.

When I read Minister Morneau’s article in the Globe and Mail yesterday, I must say that I was taken aback by its populist tone and irritated by Mr. Morneau’s statement that his business background puts him in the position to understand what it takes to run a business. I think this is only partly true.   I would respectfully submit that when he assumed control of his family business it was well past the stage where he would have had to undertake many of the personal risks that most entrepreneurs and small business owners shoulder.  This takes nothing away from his outstanding success in growing that business to what it has become.  It’s just that I don’t think he can claim to truly understand what it takes to run most of the businesses that the proposed changes will impact.

A colleague of mine, who heads an accounting firm focused on small business, has written a thoughtful letter to Minister Morneau which illustrates far better than I can the impact of the proposed changes. You can find it directly below this article.

It’s all about balance.  These changes will remove some of things that level the playing field and make taking the risks associated with starting and growing a small business worthwhile.  Don’t we want to encourage people to start and build businesses in Canada?  I think we do.  Do you?  If so, please pay attention to what’s happening with respect to these proposed changes and to the reaction that’s being generated by them.  If we want to introduce more fairness into our tax system, let’s be brave and rethink the model totally rather than unfairly singling out a diverse group.

RMT’s Letter to the Minister of Finance

Dear Minister,

Your department has created a plan that is the death of tax planning for entrepreneurs. Rather than commenting on the details, we wish to provide our view of the bigger picture. Please reflect on the importance of  entrepreneurs and  don’t  equate  the  entrepreneur’s  tax  regime  with  the  significantly  different landscape of an employee.

I am writing on behalf of my partners at Rosenswig McRae Thorpe Chartered Professional Accountants. Formed in 1980, we are a respected accounting firm with 4 partners, 25 employees and more than 200 clients-most of whom are entrepreneurs. Our clients represent a diverse group of entrepreneurs who have taken risks to grow and expand their businesses. A number of our clients have been cited on lists recognizing top entrepreneurs in Canada.

These clients will be impacted negatively in a significant way if you proceed with your current plan-and in my conversations, many have indicated a high level of anger and frustration. I estimate that these clients alone employ more than 3,000 Canadians. In addition to personal and corporate income tax, they have contributed more than $75 million in payroll taxes over the past five years.

We believe that a complete rethinking of your department’s policy direction is needed. Your big picture objective of eliminating all tax advantages that currently accrue to entrepreneurs is simply wrong and will result in serious damage to the small business and entrepreneurial community in this country.

Your plan states that the government’s intention is to “help businesses grow, create jobs and support communities.” However, the result of the plan will be to eliminate virtually all broad based tax-planning strategies for entrepreneurs while creating outrageously high tax rates for estates.

We think that the current tax system-while not perfect-has worked well for Canadians and has helped create a thriving small business sector. We have many entrepreneurial clients who have left the comfort of secure jobs with fixed salaries and less risk in exchange for the risks and returns available to entrepreneurs. We know that many of these individuals have been prepared to take entrepreneurial risk in exchange for the opportunity to win financially and to gain tax benefits that are not available to those who don’t take such risks.

Given the importance of entrepreneurs to Canadian society, we were deeply dismayed and disappointed by your comparison of entrepreneurs to employees. The suggestion that the changes you are proposing create a “fairer” tax system and that you are closing loopholes discounts the realities facing entrepreneurs. Although entrepreneurs enjoy some benefits, they also face significant costs and downsides not shared by employees. Among these:

1.   Contribution to government programs

Employers fund 50% of CPP, 60% of Employment Insurance and 100% of Ontario’s health tax. These contributions are made irrespective of the profitability of a company.  For many employers, the cost of these plans exceeds the profits of their companies. This is a significant additional form of taxation that is borne by employers.

2.   Administration of tax collection

Entrepreneurs establish and administer the collection of various government taxes at their own expense. The cost of this administration is not insignificant for small business owners.

3.   Risk

Most importantly, entrepreneurs take risk with uncertain returns-and these risks are what create opportunities for both the entrepreneurs and their employees. In many cases those risks include taking on personal debt or contributing their after-tax dollars to support their businesses. In all cases they involve relinquishing the security of paid statutory and other holidays, benefits and fixed hours. That risk-taking spirit is what drives our economy.

4.   Payment of tax prior to receipt of cash

In general, employees pay tax when they receive their pay cheques; however, employers are responsible for paying tax based on accrual accounting. As a result, most corporations are paying tax well before they have received the associated revenue.

Over the last decade, the tax benefits of corporate structures have already been tightened to reduce the advantages available to entrepreneurs. Among the significant changes:

(a)    The introduction of a higher tax rate on dividends that come from income taxed at favourable small business tax rates. This has significantly reduced the benefit of the small business deduction; and

(b)    The elimination of the ability for professionals to defer taxation of revenue not yet invoiced.

The proposed legislation discourages risk taking and entrepreneurship. It appears to be drafted from the perspective of employees who resent perceived advantages for entrepreneurs. Those employees, however, take advantage of government pensions, employer paid benefits, CPP, EI, EHT and other benefits.  A wiser approach would recognize that those who create employment and opportunity should be incented and also treated with respect.

Creating a tax system that rewards entrepreneurs with some deferral and income-splitting opportunities was smart economic policy. Your government and previous governments have already restricted these policies in significant ways. Calling these benefits loopholes is a mistake and ignores the reality that entrepreneurs contribute and take risks in a materially different way than employees. That willingness to take risk and create jobs should be rewarded so that we have a better future in Canada.

If your intention is to treat entrepreneurs identically to employees, then we think you should also address the numerous costs of entrepreneurship noted in this letter. As just one example, shouldn’t the entrepreneur have payroll taxes treated as credits against tax payable?

You may think that tweaking the tax system to take more dollars from entrepreneurs will help you meet your overall objectives. But in fact targeting Canadian entrepreneurs by eliminating virtually all their tax benefits will be a terrible mistake for our economy and our country.

Yours very truly,


Jeff McRae, CPA,CA


Finance Proposes Significant Negative Tax Changes for Canadian Entrepreneurs

The 2017 Federal Budget suggested possible changes to legislation affecting common tax planning techniques for entrepreneurs. This week the Finance Department introduced proposed legislation and announced it was starting consultations with the public. Although early in the legislative process and any final legislation may be different than what has been proposed, the proposed legislation would yield significant changes for owners of private corporations.

Reduced Income Sprinkling

Application of Split Income Tax

There are split income tax rules currently in place (referred to as the “kiddie tax” rule as they currently are in place only for minors) which have the impact of split income being taxed at the highest marginal rate and not the effective rate of the individual reporting the income.

Under the proposed rules:

– The application of the split income tax is being expanded to
o remove the age barrier (the tax could apply to adults as well as minors)
o at any time during the year an adult receives income derived from the business of a             related, Canadian resident, individual
– The types of income to be classified as “split income” has been expanded to include income such as capital gains from certain property after 2017 where that property earned income to which split income applied, and compounding income for recipients under 25 (income from monies on which split income tax was paid)

A simple example would be an adult child receiving a dividend on shares of a corporation owned by the child’s parent.

There is a reasonability test whereby, if the payment received is reasonable compensation that would have been paid to someone who was at arm’s length, then the amount would not have the split income tax apply. This is to allow for family who are actively involved in the business to be reasonably compensated.

Constrain multiplication of the capital gains exemption

The impact of these changes is to prevent multiple family members to access their lifetime capital gains exemption.

On dispositions after 2017 (though there are transitional rules to be aware of):

– in order to claim a capital gains exemption, the individual would have to be the age of 18 or older at the end of the year
– the exemption is not available to the extent the taxable capital gain would be included in split income per above and
– No exemption would be available related to gains accrued during the time property was held by a trust, subject to certain exceptions (spousal or common law trusts, employee share ownership trusts)

The proposals also include anti-avoidance rules to prevent taxpayers from removing corporate surplus in the form of capital gains by converting certain gains realized between non-arm’s length parties to deemed dividends.

The Finance Department provided comment on their intention to increase the tax rate payable by private corporations on after tax funds of active business which are not reinvested in the active business, but instead into passive investments. There are various potential approaches noted which are quite complex, though all work to increase this tax rate.

The consultation period provided by the government is scheduled to close in early October. If you would like to provide your views directly to the government, you can do so by e-mailing to fin.consultation.fin@canada.ca.

Low Interest Rate Loans

In today’s low interest rate environment, there is growing opportunity to reduce your tax burden by splitting income among family members. Our tax experts are able to identify such opportunities.

We were recently approached by a 65 year old client who had $40M worth of non-registered investments, earning him an annual return of $2M. He was paying $800k- in tax on this investment, leaving him with 1.2M.

Our client was also paying for his four grandchildren’s private school tuition, a grand total of $80K a year ($20K per child). Due to the fact he was paying these tuition expenses on behalf of his grandchildren, we recognized a more beneficial way in which these payments could be made. Rather than withdrawing from his personal after-tax funds, we were able to shift the amounts so that the taxes were borne by the grandchildren who had no other income.

RMT devised a plan in which a trust was set up for the direct benefit of his grandchildren. Our client then lent that trust $2M at an interest rate of 1% per annum*. The trust then turned around and invested the $2M, earning a 5% return that resulted in $100K of annual investment income. The trust pays $20K as interest to our client on the $2M, and pays the remaining $80K in school tuition.

As a results of the trust and loan, rather than paying $800K in tax, he paid $770K in taxes on the remaining $38M in non-registered investments, including the $20K in interest earned on the loan. Each grandchild reports $20K in income in order to account for the trust paying their tuition. The grandchildren have no taxes to pay in this situation, as they had no other income.

As a result of our set up, our client has saved $30K in taxes on an annual basis.

(*This rate is set by Canada Revenue Agency and does not vary once you make the loan)

Incorporation for Ontario Lawyers


Canada has a tax system whereby individuals can pay up to 53% tax but corporations in Ontario pay 26.5% and in some cases as low as 15.5%.  If structured correctly, lawyers can receive their partnership income inside a corporation thereby reducing their immediate tax by 27%.

As long as the money is left inside the corporation, there is no additional tax. Once the money is withdrawn, additional tax must be paid.

Another benefit to incorporation is having the opportunity to pay personal tax on the partnership income when you are in a lower tax bracket – possibly when you are retired. Therefore, instead of paying tax at the top rates, you will pay tax on the income at the middle rates.

Let’s say that you make $500K a year, and need $200K pre-tax to live on. Therefore you have $300K pre-tax to invest. If you don’t incorporate, you will pay 53% tax on $300K and have $141K to invest. If you do incorporate, you will pay 26.5% tax on the $300k and have $221k to invest. That’s an additional 80k to invest!

Further, you remove the $300K from the corporation when you retire and are in a lower tax bracket. Therefore, instead of paying 53% tax, you pay 46% (income up to $150K is taxed at this rate). This is a true tax savings of 7%.