I can still vividly recall the first time I attempted to complete my own tax return. I was living away from home as a student and had only minimal annual income from my summer employment. Indeed, my income was well below the threshold at which I would have to pay tax due to the basic personal amount. But my friend, Jonathan, convinced me that it was worth filing since by doing so I would be eligible for the GST credit, which, back in the day, was worth nearly $200 — enough to cover almost a month’s rent on my shared student apartment.

So, Jonathan and I got copies of the tax return packages containing numerous schedules and forms, all of which was completely foreign to me. We worked our way through the forms together and after an hour or so of mind-numbingly tedious calculations (which turned out to be pointless since the tax owing was zero), we had completed our returns and mailed them in. Then, that summer, I received my first GST cheque — jackpot!

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Small business owners, along with incorporated doctors, lawyers and other professionals, breathed a collective sigh of relief on Tuesday night as they started to parse through the government’s entirely new approach to dealing with passive investment assets held by Canadian controlled private corporations (CCPCs).

You’ll recall that the small business tax debacle began last summer when the government announced that it was conducting a review of tax planning strategies involving private corporations. The Department of Finance released a paper in July 2017 outlining three areas of concern: income sprinkling using private corporations, converting a private corporation’s regular income into capital gains and passive investments inside private corporations. The government announced in October 2017 that they were not proceeding with the proposals regarding converting regular income to capital gains. The income sprinkling proposals were revised in December 2017 and the detailed rules concerning restricting the earning of passive investment income inside a corporation were to be released as part of the 2018 federal budget.
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Investors who wish set up a prescribed-rate loan to split investment income with a spouse, common-law partner or even their kids need to act quickly as the prescribed interest rate is set to double to two per cent on April 1, 2018 as a result of Tuesday’s Treasury Bill auction yield.

The prescribed rates are set by the Canada Revenue Agency (CRA) quarterly and are tied directly to the yield on Government of Canada 90-day Treasury Bills, albeit with a lag. The calculation is based on a formula in the Income Tax Regulations, which takes the simple average of three-month Treasury Bills for the first month of the preceding quarter rounded up to the next highest whole percentage point (if not already a whole number).

To calculate the rate for the upcoming quarter (April through June 2018), we look at the first month of the current quarter (January) and take the average of January’s T-Bill yields, which were 1.17 per cent (Jan. 9, 2018) and 1.20 per cent (Jan. 23, 2018). That average is 1.185 per cent but when rounded up to the nearest whole percentage point, we get 2 per cent for the new prescribed rate for the second quarter of 2018.

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U.S. tax reform has changed everything — even if the prime minister refuses to believe it. Justin Trudeau evidently missed the news that companies in the U.S. have been using the sudden shift to lower corporate taxes to shower bonuses and raises on workers, and plowing yet more investment into new productivity and growth. In his speech to the World Economic Forum in Davos Tuesday, Trudeau offered his own ill-informed approach, saying he would refuse to try competing with U.S. business tax cuts because “People have been taken advantage of, losing their jobs and their livelihoods … (as) companies avoid taxes and boost record profits with one hand, while slashing benefits with the other.”

This is no time for clapped-out anti-corporate cant. If Canada fails to respond to America’s resurgent competitiveness, it’s at our peril. The old rules no longer apply. Pre-2018, companies looking to invest in North America knew they had a business tax advantage in Canada, even though it suffered from having smaller market than the U.S., a weaker labour pool and colder climate. With NAFTA, businesses operating in Canada could also count on decent access to the U.S. market, despite all the border frictions that come from dealing with two different regulatory systems.

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There may not be much sympathy out there for the top one per cent high-income earner who, in 2018, will face a marginal tax rate of over 50 per cent in more than half the provinces in Canada. But there should be some attention given as to why a lower-earning parent of a dual-earning couple, with two kids and a combined family income of $50,000, can face a marginal effective tax rate of over 70 per cent.

To better understand what’s going on here, we first need to revisit the concept of a statutory tax rate and compare that to your marginal and average tax rates. Then we can look at your marginal effective tax rate (METR) and participation tax rates (PTR), two concepts highlighted in a new report out this week from the C.D. Howe Institute entitled, “Two-Parent Families with Children: How Effective Tax Rates Affect Work Decisions.”

In the report, researcher Alexandre Laurin finds that working parents with children — particularly low-income families — “face prohibitive tax rates that discourage taking on extra employment to get ahead … (with) mothers and poorer families … the most adversely affected by this tax trap.”

Before we look at Laurin’s findings and potential fixes, let’s take a look at the different types of tax rates.

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