Much has been said about Bill Morneau's proposed tax changes relating to small businesses who are unfairly taking advantage of alleged tax "loopholes."
According to a discussion paper released on July 19, 2017, starting in January 2018 professionals (along with all other business owners) will lose the ability to benefit from earning income within a company, rather than earning it personally. Specifically, they will no longer be able to:
- Income split with family members
- Benefit from the use of deferred income
- Convert a private corporations income into capital gains
While the changes may seem fair and reasonable, when you work through the challenges that these professionals face, the proposed changes seem anything but reasonable and would most definitely not be labelled as fair.
Many professionals in Canada have spent an extended period of time in school before entering the workforce. While most Canadians are finishing their post-secondary education in their early 20s, many professionals are only just beginning their education. General dentists in Canada spend 4 years of additional schooling after their undergraduate degree before they enter their workforce, while many physicians will require 11 years of additional training before entering the workforce. These are valuable years of saving that are not available to these individuals, as they begin their careers much later than the majority of Canadians.
The education costs associated with these programs are substantial, and many professionals are left with hundreds of thousands of dollars in debt. Banks are currently providing over $250,000 in available credit for medical and dental professionals, and this is in addition to federal and provincial assistance. It is not unusual to see a graduate with well over $300,000 in outstanding debt upon completion of their program.
To give an idea of the financial challenges faced by professionals, we have provided an example of what many of these new graduates are facing under Morneau's new tax plan.
He has no pension. He does not receive sick pay. He would not receive any paternity benefits if they decided to have another child.
Meet John. John is 30 years old and has just finished dental school. John has a spouse and two young children at home. He has found a position in Ontario as an associate dentist and is excited at the prospect of finally earning money so that he can start to pay off his loans and save for a home. John's household income and expenses are as follows:
- John Professional Earnings: $200,000 (The average, according to PayScale.com)
- Spouse Earnings: $0
- Household Expenses: $84,263 (The average, according to a 2015 Stats Canada survey)
- Bank issued student Loans: $250,000 at 2.95 per cent interest
- Government student loans: $50,000 at 5.45 per cent interest
John will be paying approximately $72,000 in income taxes on his $200,000 in income. Additionally, he will be required to pay CPP on his self-employed earning. This amounts to $5,128.20 and is twice the amount that is currently paid by other employed Canadians, even though his CPP retirement benefit is exactly the same as everyone else.
With his remaining $122,871 in income, John will be able to pay for day-to-day household expenses and will be left with $38,608/yr ($3,217/month).
By paying $3,217/month towards his loans, John will be debt free in around nine years (assuming interest rates don't increase). John will be 39 years old before he is debt free. At this point, he can begin saving for a home, his children's education and eventually his own retirement.
According to the Canadian Real Estate Association, the average benchmark housing price for the Greater Toronto Area was $810,000 in June of 2017. For a 20 per cent down payment, it will take John a little over four years to accumulate the $162,000 required for a conventional mortgage.
At age 43, John can finally begin saving to retire at age 65. He has no pension. He does not receive sick pay. He would not receive any paternity benefits if they decided to have another child. If he goes on vacation, he does not get paid. Disability insurance, life insurance, and medical expenses are all paid out of pocket and are definitely not included in his pay.
Morneau's proposed changes are meant to make the system more equitable amongst Canadians. Professionals already face significant challenges in getting their professional lives in order. They are not guaranteed a lavish life and are often less financially secure than a public employee with a guaranteed pension and benefits for the entire family.
John is still earning a great income and will not be living an impoverished life; however, to paint him as a tax avoider is simply misleading and ignores the many challenges faced by young professionals today.
If Morneau is successful in bringing these changes to legislation, he will be doing the exact opposite of what he intends to do. The system will be unfairly targeting professionals, especially those who are looking to start their careers.
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