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 | Surfing
Ontario's New Tax Law
by J. Chevreau (National
Post, October 2003) | | |
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Incorporation
one way of avoiding McGuinty's bite
Like the province's corporations, Ontario's high-income professionals
are resigned to paying significantly higher taxes under the
new Dalton McGuinty administration. Since last Thursday's
election, professionals have been calling to find out how
to minimize the coming wave of taxes, says David
Chong Yen, a North York accountant
whose clientele is mainly dentists.
"Frankly, most of them voted
for the Conservatives," Chong Yen says. One lost bit of relief on the personal
tax front involves the provincial surtax. The Ontario surtax is higher than any
other province's, and even the federal government abolished its version.
Had Ontario's Tories remained in power, the surtax would have been phased out
for those earning between $59,000 and $70,400. Someone earning $70,000 can expect
to pay $400 more in tax in 2004 because of the planned Liberal rollbacks, says
Paul Hickey, national tax partner for KPMG.
Far harder hit are taxpayers
with children in private schools. Had the Eves Tories stayed in power, the private
school tax credit would have been worth $3,500 a year for each child by 2006.
Next year, someone with two kids in private school will pay $4,622 more taxes
than they would have under Eves, Hickey says.
Professionals also face
higher taxes from the Liberal plan to roll back Tory cuts to corporate taxes.
Consider the tax bit if a professional's income is earned and taxed like
a salaried employee.
Someone with $400,000 would lose $170,000 to taxes.
Those at the lofty level of $l-million will forfeit almost half - $448,400 -to
income tax.
Few high-income professionals pay that much, however. Because
of various structures, doctors and dentists have flexibility in avoiding or deferring
the top marginal tax rates.
Since 2001, Ontario professionals have been
able to establish professional corporations (PCs). A PC is a sophisticated tax-deferral
vehicle like an RRSP. The first $225,000 of income is taxed at just 18.62% instead
of the top marginal rate of 46%. After that, corporate taxes rise with profits,
and the rollback to corporate tax rates will also affect those with PCs, Chong
Yen says.
However, accountants and tax professionals have other techniques
to rebuff the Liberal tax tide.
Dentists have three options: being an
independent contractor, an employee or a professional corporation (PC). The Liberal
landslide will be an impetus to push more professionals into PCs, Chong Yen predicts.
"Given the fact taxes will not be lowered, you want to investigate the
PC option more vigorously if you have virtually no personal non tax deductible
debt."
Those with high debt should pay it off before going the PC
route, he says.
One strategy is for the PC to establish the dentist as
a salaried employee of the corporation. The dentist's PC would pay him $85,000
a year, which allows maximization of the RRSP this year, and raise the salary
in future years in line with the new RRSP maximums established in the last federal
budget. Everything else remains in the corporation.
The PC also facilitates
income splitting. Other family members can be paid a reasonable salary to handle
certain, routine office tasks and other functions.
An alternative to
PCs is a technical or hygiene service corporation, which operate the hygiene or
technical service components of a dental practice. This corporation does not charge
GST.
Chong Yen recommends the THSC be owned through a discretionary family
trust. Profits remaining in the THSC can be paid out as dividends to individuals
to facilitate income splitting among family members. More than $29,000 of dividends
can be received tax free if the individual is 18 or older and has no other source
of income.
Shares of a THSC also qualify for the $500,000 capital gains
exemption and can provide protection against creditors.
Professionals
can also defer taxes with retirement savings vehicles such as Individual Pension
Plans (IPPs) and Retirement Compensation Agreements (RCAs). An RCA allows millions
of dollars to be tax-sheltered in retirement savings, versus the current $14,500
annual limit for RRSPs. IPPs are a form of Defined Benefit pension plan for business
owners.
For those who plan to retire in foreign countries with a tax
treaty with Canada (i.e. the United States) Chong Yen recommends RCAs. For those
who intend to retire in Canada, Chong Yen prefers IPPs.
Despite set-up
costs of $3,000 for IPPs and $5,000 for RCAs, "whenever tax rates become
more punitive the use of these vehicles will only expand," says Trevor Parry,
senior vice president for Gordon B. Lang & Associates.
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