OTTAWA — Two sectors were responsible for the majority of corporate capital gains earned in Canada over five years but added no new jobs over that time span, a new study found.
And in fact, increasing the tax on profits makes it much, much more valuable to reinvest in the business.
Like, lets say your business is expecting a net profit of $200K after a year. You can either choose to reinvest that into the business to buy new equipment and hire new staff, or you can record that as profit, pay the taxes, and then put the after tax dollars money directly into your and your investors pockets.
With our current corporate tax rate of 15%, it’s really tempting to just pay the 30K in taxes and personally keep $170k as take-home, which gets taxed at a MUCH lower rate than regular income, rather than keep it in the business. $30K as a fee to keep $170K in personal income is pretty cheap.
However, if taking money our of the business was much more expensive, say 45% or something comparable to the marginal personal income tax rate for a working professional, then maybe as a business owner you might think that paying $90K to keep $110K is not as good a deal, and so you will think about whether there are other opportunities WITHIN the business you could invest in, putting those profits towards new equipment or training, rather than losing 45% of it to taxes just to add a small amount to your own pocket.
Wait… It turns out businesses always want to be more efficient, and whether they pay a tax they have no control over makes no difference?
And in fact, increasing the tax on profits makes it much, much more valuable to reinvest in the business.
Like, lets say your business is expecting a net profit of $200K after a year. You can either choose to reinvest that into the business to buy new equipment and hire new staff, or you can record that as profit, pay the taxes, and then put the after tax dollars money directly into your and your investors pockets.
With our current corporate tax rate of 15%, it’s really tempting to just pay the 30K in taxes and personally keep $170k as take-home, which gets taxed at a MUCH lower rate than regular income, rather than keep it in the business. $30K as a fee to keep $170K in personal income is pretty cheap.
However, if taking money our of the business was much more expensive, say 45% or something comparable to the marginal personal income tax rate for a working professional, then maybe as a business owner you might think that paying $90K to keep $110K is not as good a deal, and so you will think about whether there are other opportunities WITHIN the business you could invest in, putting those profits towards new equipment or training, rather than losing 45% of it to taxes just to add a small amount to your own pocket.