Mr. Trudeau stated on Sept. 8 that his new tax plan is aimed at those earning more than $150,000 per year, and promised to ensure the controversial changes do not hurt middle-class business owners.
He also stated, "If you're making $150,000 a year or less you can max out your registered retirement savings plan (RRSP), and you can use a tax-free savings account. The private-corporation route only really benefits people making more than hundreds of thousands of dollars."
Let's use an example to review Mr. Trudeau's claim.
Suppose you have two young adults, Everleigh and Brittany, who happen to be neighbours. Both decide to go to the same university; Everleigh decides to study criminology, and Brittany wants to become a physician.
The criminology program is four years, as is the medical program: however before Brittany can get into medical school she has to have an undergraduate degree (that usually takes four years). Unlike criminology, most medical students don't get into medical school on their first attempt. The result is that most take an additional one to three years of undergraduate studies before they start their medical training.
Unlike medical graduates, when a criminology student graduates after four years, they're ready to enter the workforce. Before a physician can start to practice their profession, they have to go through a residency program (usually two to seven years).
Upon graduation, Everleigh was fortunate enough to get a job with the city of Edmonton police department. They offer her a position with a starting salary of $67,414 per year. On top of her salary they also offer her the following benefits:
- Defined contribution pension plan (DCPP)
- Employees benefit plan
- Matching Canada Pension Plan contributions
- Employer-paid Employment Insurance contributions
- Three weeks paid vacation (to start)
- 12 paid sick days per year
- 12 paid statutory holidays per year
From a tax point of view, a DCPP works exactly like an RRSP, except with a DCPP the employer must put in at least 50 per cent of the contributions. So, starting in her first year of work, Everleigh puts $6,067/year into the DCPP and her employer also contributes the same amount for a total of $12,134/year. After five years on the job, Everleigh's annual income is $100,619. By that time, her matching DCPP deposits total $18,000/year.
By the time Brittany finishes school, Everleigh's already been working for six years.
Based on the amount of time she's able to work, Brittany's pre-tax income before expenses is $150,000. After paying a 30 per cent overhead for her clinic, which is a common percentage for many family medicine clinics, she is left with $105,000, but is then required to pay for employer and employee portions of CPP (totalling $5,128.20 — exactly double what Everleigh pays).
After overhead and CPP, Brittany is left with $99,872 in taxable income. Assuming she makes an $18,000 RRSP contribution (as Trudeau suggests), she will pay $18,600 in taxes and be left with approximately $63,000 in after-tax income once her RRSP contribution has been made.
Allowing businesspeople to continue to use their private corporations to accumulate retirement assets shouldn't be about equality, but it should be about fairness.
Unlike Everleigh, Brittany had to go out and buy individual disability insurance, life insurance, health and dental insurance, and professional liability insurance. Additionally, Everleigh only has to contribute $9,000/year into her DCPP to get the full $18,000/year benefit, unlike Brittany who has to save the entire $18,000 herself.
I was curious to see what outcome they'd have if they both retired at 65 and they were both able to put that $18,000/year into an RRSP that Mr. Trudeau suggested. Let's look at the results.
Everleigh started work after four years of university at age 22. Brittany started work after 10 years of university (four years undergraduate, four years of medical school and two years of residency) at age 28.
During the first five years of Everleigh's career, her combined employee/employer DCPP deposits would be $12,134, $12,859, $15,032, $16,481 and $18,111. If she continued working until age 65, assuming additional deposits of $18,111/year and a six-per-cent average return, she'd retire with $3,433,564. Her personal deposits to her DCPP over her career would have been $390,473.
Brittany would get paid during residency, and if she made full RRSP contributions during that paid residency, she would be able to contribute $10,434 and $11,435 (18 per cent of her resident salary). Brittany's RRSP would be worth $2,668,210 at age 65 and her deposits would total $710,187, assuming she was able to contribute $18,111 per year ($111 more than Trudeau suggests) and get the same six-per-cent average rate of return.
According to Mr. Trudeau, his tax changes would have no effect on Brittany as long as she makes maximum annual RRSP contributions.
Does anyone other than me see a problem with this claim?
Businesspeople, including professionals, shouldn't be restricted by RRSP contribution limits. They should be allowed to continue to accumulate retirement funds in their private corporations, and here's a list of reasons why:
- They usually have little or no opportunity to set money aside in the first number of years after starting their business or completing their education.
- Many start out with large debts (that can be well over $200,000) that have to be paid before they can begin to save money.
- They're vulnerable to loss of income due to disability or family circumstances.
- They're often required to accumulate significant retirement assets later in life because of their late start (many professionals don't start earning significant money until their mid-thirties).
- They have added expenses that employees don't have.
- As you can see from Everleigh and Brittany, the sooner you can start, saving the more compound interest works in your favour. When you start six to eight years after someone else, you can't make up for the lost time.
Allowing businesspeople to continue to use their private corporations to accumulate retirement assets shouldn't be about equality, but it should be about fairness.
It's only fair that businesspeople should be treated differently since a business owner and an employee are inherently different. Business owners pay a price that employees are not asked to pay, and by eliminating the only equalizing opportunities available without providing an alternative, shows just how out of touch Bill Morneau and Justin Trudeau are with small business owners and medical professionals.
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