If we could come to order, first, on behalf of the committee, my apologies to the witnesses. We had an informal meeting with the Finnish finance committee, and we went a little longer than we thought we would. My apologies for having you stand around outside for a while.
In this session, pursuant to Standing Order 108(2), the committee will do a study of tax planning using private corporations. This will be contributions to the Department of Finance's consultations.
Just to inform you, because the consultations end on October 2, it was decided that we would do hearings with 24 witnesses, I believe it is, and the . The minutes, the submissions, and everything you present to us today will be forwarded to the Department of Finance and the minister, without recommendations from this committee. It's to add to the process of consultations.
I thank those who were able to submit briefs. They are on members' iPads. I thank each and every one of you for the fairly quick—super-quick—notice that you've had to prepare and come before the committee.
To start, if we could hold the opening statements to about five minutes, it would be helpful.
Starting with the Canadian Federation of Agriculture, we have Mr. Bonnett, who is the president, and Mr. Ross, who is the director of business risk management and farm policy.
Ron, the floor is yours.
Thank you, Mr. Chair and committee members, for the opportunity to share our perspectives on the proposed changes on tax planning using private corporations.
Through its member organizations, the Canadian Federation of Agriculture represents nearly 200,000 farm families from coast to coast. In my eight years as CFA president, it's hard to recall an issue that has evoked so much concern from farmers across Canada. Farmers have concerns with the breadth of the proposals, the limited consultation occurring during harvest, and the immediacy of their coming into force.
The CFA maintains significant concerns with the lack of time to provide feedback on such broad reforms to tax policy. We would be pleased to work with government on improving tax fairness, but such objectives can only be truly achieved through a comprehensive review of Canada's Income Tax Act that engages the broader business community. As such, we have signed on to the Coalition for Small Business Tax Fairness to advocate for a more deliberate and comprehensive process that proactively engages with Canada's small business community.
Today we'll focus our comments on farm sector impacts, but we believe a broader review is still required to address the concerns of the entire small business community.
We were pleased to see Minister and Minister publicly state that Canada's family farms and legitimate farm practices are not the focus of these changes. Despite these assurances, farmers could be hit with unintended consequences, given the tight timeline before final legislation is to be introduced.
Canadian agriculture is evolving at rapid pace. Approximately 25% of family farms are now incorporated, while farms continue to increase in size and complexity. The average age of farmers is now over 55. Succession planning can take years, and many plans will become unusable as a result of these changes, leaving farmers having spent tens of thousands of dollars with little to show for it. The current proposals require significant amendment if legitimate practices are to remain unaffected.
I will now pass it over to our policy director, Scott Ross, to lay out a few of our specific concerns.
I'm going to stress that, due to the timeline, our assessment is not yet complete. We continue to hear of new issues and have come together with other farm groups to commission a more detailed analysis of the farm-specific impacts, but this won't be available until October 2. Preliminary results indicate additional tax liabilities well in excess of $1 million on a typical family farm over a 20-year period.
On income sprinkling, we note a few key concerns. Farm families live where they work, and contributions to the farm come about in numerous direct and indirect ways, to which a one-size-fits-all reasonableness test will not do justice. Family farm transfers can take place over decades, with farm children often holding interests in the farm while pursuing an education or working off farm to build skills and diversify revenue. The strict reasonableness test for those between the ages of 18 and 24 creates particular challenges on this front.
Family farms also have access to the farm rollover provisions, which allow for transactions below fair market value. The vagueness in the current proposals creates uncertainty for any assets currently transferred in this manner.
On passive investments, the question remains as to how rented farmland and AgriInvest funds will be treated. Broader concerns persist about farmers' plans for retirement and future investment. The latter would directly undermine the industry's capacity to meet the ambitious growth targets for agrifood exports set in budget 2017.
Finally, changes to the capital gains treatment create undue complications for intergenerational farm transfers. Changes to prevent converting income to capital gains would reinforce inequities the CFA has long noted, which discourage selling family farms to family members. Limitations on access to the capital gains threaten long-term succession plans put in place under the current tax regime, creating additional complexity and costs.
The 2018 special election is also fraught, creating unmanageable tax liabilities through alternative minimum tax treatment and a series of potential tax traps.
Each of these concerns speaks to the potential for significant unintended consequences.
I'll now pass this back to Ron to lay out CFA's views on the path forward.
In our meetings with Finance, the Prime Minister's Office, and the , it was noted that family farms are not a target of these changes, but we are struck by the magnitude of the changes required and the time available to make those corrections.
We have two recommendations to address the concerns of the farm sector.
The first is that Finance Canada commit to a clear process with farm stakeholders to address these concerns, focusing on, first, exempting legitimate farm income from the new income sprinkling rules because they cannot be applied fairly in the context of a family farm; and, second, exempting qualified farm property because the new rules are detrimental to farm transfers and are inconsistent with current farm transfer tax rules. Finance Canada must extend this arrangement over 2018 to ensure that any unintended or unforeseen consequences following the new legislation can be immediately addressed.
Second, the implementation of these proposals must be delayed until no earlier than 2019, and any transitional rules must be further refined to avoid unintended consequences.
I thank you and look forward to your questions.
Thank you for the opportunity to speak to this issue.
One of the challenges with tax policy is that the wealthy have the most to lose or gain, so they are the most vocal. When governments listen only to them, we end up with a whole lot of tax cuts or a tax policy that exacerbates a growing income inequality.
When governments offer tax cuts or close tax loopholes, it's not likely to make much difference in what middle-income and lower-income Canadians pay in taxes. As a result, ordinary Canadians don't speak up, and we've seen the progressivity of our taxes eroded by more and more tax cuts and loopholes that primarily benefit the rich. A recent study by the Canadian Centre for Policy Alternatives found that, on average, the richest 10% get a discount of more than $20,000 a year on their taxes from tax loopholes. That's an increase of $6,000 since 1992.
However, middle- and lower-income Canadians are affected when governments don't have enough revenue to properly fund programs such as child care, public transit, or public services. For example, the Liberal government did introduce day care funding in the 2017 budget, but it was $7.5 billion over 11 years, which the IMF has said is totally inadequate. They are saying that $8 billion a year is what's needed and that the investment would be recovered in increased taxes and a higher labour force participation rate.
Canadians for Tax Fairness has been calling on the government to conduct a public consultation on tax expenditures—what we call “tax loopholes”—and close those that are unfair or ineffective. We welcome the proposed measures to curb the use of private corporations to reduce taxes as a step toward tax fairness, but we urge the government to follow up with closing other unfair and ineffective tax loopholes, such as the stock option deduction, the capital gains exemption, and the business entertainment tax deduction, just to name a few.
We have exposed wealthy individuals using tax offshore accounts and tax havens to evade taxes, and we call for government action to tackle tax havens. We're pleased that some steps have been taken in that regard, but we have never accused those who use private corporations to reduce their taxes of being “tax cheats”. What they do is legal, but that's the problem. Their legal tax avoidance is just as big a problem in terms of loss of government revenue as the illegal tax evasion. It is the government's responsibility to reform laws that do not serve the public good or that are allowing a few wealthy individuals to pay less than their fair share of taxes.
At the root of this issue is inequality. Our tax system has become less progressive over the past several decades and has been a major contributor to growing inequality. The International Monetary Fund and the OECD have determined that the current level of inequality in Canada is negatively impacting our economy. It is slowing down our economic growth. Data shows that inequality also undermines everyone's well-being, including population health outcomes, even for the rich.
Stagnant incomes of middle- and lower-income Canadians reduce the consumer demand for goods and services that business depends on. In fact, the Canadian Federation of Independent Business survey of its members in 2015 found that the main factor limiting the ability of small businesses to increase sales or production was insufficient domestic demand. Their biggest problem is not the tax rate, but the lack of purchasing power of Canadians. They would benefit from government policies to boost aggregate demand, such as raising minimum wages, investing in day care, and investment in other social and physical infrastructure.
Our tax system is also one of the best tools that could be used to help reduce inequality by raising revenue that will enable governments to invest in programs that will help reduce inequality and also curb unfair and ineffective tax expenditures that exacerbate income inequality.
The research clearly shows that the wealthy are far more likely than middle- or low-income Canadians to own a private corporation, and the wealthy are far more likely to take advantage of these tax loopholes. Fewer than 10% of those with incomes under $51,000 have a significant interest in a private company. For the top one-percenters, about 50% own a significant interest in a private company. For the top 0.01%, the number rises dramatically to almost 80%.
This isn't just a small business issue. Two-thirds of Canadian small business owners are earning less than $73,000. For them, this tax loophole really doesn't provide much benefit at all. It's not much help for start-up businesses, because they don't make much money in the initial years. Also, small businesses have other options to save for retirement. The RRSPs and the tax-free savings accounts are already benefiting from very generous government subsidies.
Thanks very much. John and I will share the presentation.
I did wear a different suit this week, Chair, just to try to throw you off, but it didn't work.
I am here today not in my capacity as head of the Canadian Federation of Independent Business, but as a member of the Coalition for Small Business Tax Fairness. This coalition started less than a month ago with 35 business associations coming together to raise their concerns over these issues and now has grown to over 70 business associations across the country, representing hundreds of thousands of Canadian employers and millions of Canadian employees.
The coalition members are listed in the deck that I presented to you and include members from construction, agriculture, professional services, retail, and restaurants. All of those groups came together to try to express concerns to government about these proposed changes.
By way of background, I'm very pleased to hear that those who are in favour of this legislation—government—and those who are opposed have agreed that the vast majority of small firms have fairly modest levels of income. Two-thirds have under $73,000 in income. I'm very pleased that we're not getting into a debate over that.
Our point has been that business owners at all levels of income potentially will be affected by at least one of the three measures in this package, including those who are earning well below $150,000 per year, a number that was put out by the minister.
Many of these businesses, if not most, will also find that their tax burden will increase. That's something that I think we need to make sure government knows. For for the majority of business owners, their overall aggregate level of taxation that they will pay as a result of these changes will be higher in the future, obviously meaning less money for the other things that we may view as important.
Also, through these changes, there many examples, which the coalition is illustrating, of where Canadian business owners will pay higher rates of taxation than other taxpayers at similar levels of income. This isn't just about making small business owners pay the same. In many cases, we find that business owners will pay more. Of that, there seems to be no question. All of the reviews by tax professionals have suggested that there are many examples where business owners will pay more than other taxpayers at similar levels of income.
On income sprinkling, this has the potential of affecting all taxpayers at almost all levels of income. Really, at the income level of about $50,000, business owners will start to be affected by these changes.
We are also deeply concerned about the lack of clarity of the enhanced reasonableness test that will be used by the Canada Revenue Agency.
With respect to passive income rules, many businesses do have requirements to retain earnings in the corporation or policies that limit the amount that can be distributed to their shareholders. Many businesses incur losses in their start-up years that the shareholders just can't use to offset against personal income. We also want to note that successful businesses, particularly in the high-tech sector, use these retained profits in the corporations to invest in other start-up businesses, so that source of financing for other businesses, we worry, will start to dry up.
While some have suggested that an enhanced use of RRSPs or TFSAs may be a solution for business owners, there are the practical limitations of this. Your policies will encourage business owners to take more money out of their businesses, leaving less money in their businesses to protect them against economic downturns or problems in the business, or to invest in future business opportunities.
I'm going to turn things over to John to take it from here.
I don't think the tax rates on this slide are in dispute. They show the substantial increase in the tax costs for these types of passive income.
I think the question here, the policy question that really needs to be examined, is whether a deferral is appropriate tax policy for Canadian private businesses. We believe there are good reasons for why this is appropriate tax policy. Dan has already alluded to some. I want to add two points to that.
I think a source of savings inside a corporation ensures a pool of capital available to invest in the business. Those types of substantial investments can happen only every few years, particularly for a smaller business. I think it's very important that they're able to save these funds to have access to that.
Second, these types of savings can help businesses through years in which income fluctuates or through economic downturns. We had a lot of clients in our firm—for example, those in Alberta—who, during the recent economic downturns, used their savings in private corporations to maintain employment levels in the Alberta market, where larger corporations had a lot more layoffs than the private business sector did.
Moving on to slide 9, I have a couple of comments with respect to the impact of the changes to intergenerational transfers. I have a couple of comments with respect to the impact of the changes intergenerational transfers. I want to make a couple of points to help you understand that the tax cost of intergenerational transfers will increase, and increase substantially, under these proposals. They're going to increase for a number of reasons. You can see that this slide talks about the tax cost increasing by as much as 70%. Let me explain that for a minute.
Many intergenerational transfers are structured so that parents pay capital gains tax on the sale of shares to their children, even forgoing the capital gains exemption, the ability to claim that exemption, and allowing the children to use the future profits of that business to pay back the parents. The changes are effectively going to change the tax cost on that type of planning from a capital gains rate of approximately 27% to the tax rate that applies to dividends, which is 45%. Do the math. It's about a 70% increase.
By selling to an arm's-length party, the business owner would only have to pay tax at a capital gain rate of 27%, and if they added a capital gains exemption there, they could lower that rate even further. There's a bias now being created towards an arm's-length sale of the family business over intergenerational transfer.
In the interests of time, I'm going to stop right there, but we do have other examples to show how the answer is even worse if the new rules for splitting income apply.
Good morning. My name is Jerry Dias. I am the national president of Unifor, Canada's largest union in the private sector.
We represent over 315,000 working people from coast to coast to coast. Our members work in every sector of the economy and are represented at every income level. Our members pay their taxes and contribute in multiple ways to building a society that we want to live in every single day.
On behalf of our members, their families, and their communities, I am pleased to provide our views on the fair taxation of income of CCPC owners in Canada.
Unifor advocates for and supports a progressive tax structure that ensures our governments at all levels have the revenue necessary to provide high-quality, efficient, and effective public services. That tax structure also needs to acknowledge the income and wealth inequality present in our society today and ask those who earn more to pay more.
Taxes pay for the basic services that we rely on every day, from health care to infrastructure and to addressing some of the most pressing needs of today, including poverty elimination, reconciliation, and leadership on the environment. The issue we're discussing today is an inequity in our tax system that allows some people to opt out of paying their fair share of the revenue governments need to pay for those services.
The Government of Canada is proposing to close some tax loopholes that allow incorporated small business owners to avoid paying the same amount of tax on their income as an earner who works for employment income and makes the same amount of money. Sixty per cent of the top 0.1% of income earners in Canada own shares in a CCPC. Only 5% of middle-income families do the same. That means that 60% of those who earn the highest incomes in Canada have the ability to opt out of our progressive tax system through these loopholes, while the rest of us have been paying our fair share all along.
Most small business owners do not benefit from these loopholes either. A business owner has to have a very high income and a particular family structure in order to accrue significant benefits from the loopholes that are being discussed, but two-thirds of small business owners make less than $73,000 a year. Most small business owners do not earn enough money to exploit the loopholes.
Unifor supports the government's initiative to increase fairness in the income tax system by closing unfair tax loopholes: loopholes that are currently available to high-income earners who have incorporated a small business, but not available to people who work for a salary or wages, both high- and low-earning. The result of exploiting these loopholes means that some earners have higher disposable income or a larger investment portfolio than others simply because of the structure of their business.
The loopholes under scrutiny today have meant that two earners with similar incomes, and in a similar family structure, one with a CCPC and one without, will pay two very different effective tax rates. Those differing effective tax rates result in two very different levels of disposable income today, and two very different levels of savings in the future.
We know that the tax benefits of these loopholes accrue to the highest-earning CCPC owners. Furthermore, the research from virtually every economist and policy expert who has weighed in on this subject has found that the benefits of the tax loopholes only accrue once a CCPC owner's income has surpassed a certain level. Income splitting, for example, does not provide a significant benefit to anyone making less than $90,000.
Business associations and other advocacy groups have tried to paint the proposed changes as a tax grab on the middle class. This is not the case. The tax changes will lead to more high-income earners paying the same tax rate as their salaried and wage-earning peers. Where this issue does affect the middle class is in ensuring that income earners in the same income decile before tax are in the same income bracket after tax.
Business associations and other advocacy groups have tried to paint the proposed changes as a drag on investment, innovation, and entrepreneurship. The reality is that these tax loopholes have very little to do with innovation or business investment. Governments can and should develop systems that support innovation and business investment, but the current system is one that incentivizes neither.
This proposal is about protecting the integrity of Canada's progressive tax system. Canadians believe in paying their fair share of taxes. While there is more to be done, this is certainly a step in the right direction.
Thank you very much, Chair, and thank you, members, for convening the meeting.
I'd like to make two quick points this morning. The first one is about the goals of the reform, and the second one is about the implementation of the reform.
As I see it, the main goal of the reform is to push towards neutrality of the tax system. A neutral tax system is one in which business decisions are made based on business merits and not pushed one way or the other by the tax system. That's a free market principle, and I think it's a good one.
The current tax system fails neutrality in a number of ways. Let me give you an example of the way our system fails neutrality right now. Imagine someone who has some skills, a hammer, and a truck, and she wants to start a business for herself. She talks to her friend who's an accountant and who says that it doesn't make sense for what she's doing to incorporate. For business reasons, her friend says, she doesn't need to do that at the income level she has at the time.
The problem is that she has to compete out there with people who are incorporated and who get a whole bunch of tax benefits that she, as an unincorporated person, does not get. What this does is create a barrier to starting up a business. There are a lot of businesses out there, a lot of people with a whole bunch of entrepreneurial spirit, who are not incorporated. They're equally hard-working, care equally about their families, and equally help out the economy. We want to make sure that the balance between incorporated and non-incorporated business is there. That's what I mean by neutrality.
The second point is about the implementation of these reforms. Many tax practitioners have raised a number of concerns about things such as succession planning, intercorporate holdings, and also the exact transition rules for the passive income measures. In these complaints that we've heard, or these suggestions that we've heard, there are a lot of interesting and useful suggestions. What I hope we see is that the and the Department of Finance, after October 2, are able to respond seriously and thoughtfully to the concerns that have been raised.
I do think these things should be taken seriously; however, I don't think we should stand frozen in inaction because of fear of some transition costs. Tax changes always require transitions. They always require some disruption. I'm pretty sure that in 2019 members from parties around the room here are going to have some tax proposals they want to bring forward, and every single one of those tax proposals will involve some transition and some changes.
What I think is the right way forward is to balance off the cost of those transitions and the complexity that might arise with the benefits you get from pushing towards a goal that we think is important. That's the way I think we can build a better tax system for Canada.
I'd like to thank you and the other committee members for inviting me to appear today to address this important issue.
I'll restrict my opening statement to certain aspects of the passive income proposal. The proposal is contentious and would result in significant harm to our Canadian economy, and therefore to the middle class, which depends on that economy.
A Canadian-controlled private corporation, or CCPC, is, as you know, taxed at preferential rates on business income. The government is concerned that a CCPC that acquires portfolio investments therefore has a deferral advantage that is not available to individuals.
The government’s concern has merit. Investment income of private corporations increased from $9 billion in 2002 to $27 billion in 2015. The government’s proposal would tax the investment income of a CCPC at a non-refundable rate of 50%, equal to the assumed highest personal tax rate for individuals, the so-called one-percenters. Then there would be a second tax when the corporation pays dividends to its owner. The result would be a combined tax on investment income of more than 70% for business owners in the highest rate bracket.
The impact on middle-class business owners would be even worse. While middle-class owners are not the real target, by using a non-refundable corporate rate of 50%, the proposal would severely overtax every business owner in this country who is in a rate bracket below the top rate. For example, a middle-class owner who is in the 30% bracket would suffer a combined rate of 59%, not 30%. That's a 75% increase over existing law. Canada already imposes an immediate tax of 50% on the type of income we're talking about here. That is more than enough. There are about 200 countries in world. There is only one country in the world that has a corporate tax rate above 50%.
Still, the amount of investment income of private corporations is increasing. Why is that? Outside of the professional sector, there is no reason to believe that businesses are incorporating for tax advantages. A business incorporates for a number of non-tax reasons, and none of these have changed in the last 50 years.
Professional income is quite different. Many high-rate doctors, lawyers, and accountants, including many partners of large national legal and accounting firms, are incorporating solely for tax benefits. This is certainly the major cause of the recent increase in the amount of investment income earned by private corporations.
I therefore suggest a different approach: the introduction of a special refundable tax for professional income of a CCPC for most medical doctors, lawyers, and accountants. This tax would be similar to the tax that was enacted in 1979 and repealed in 1984 for mechanical reasons, not tax policy reasons. The tax would not apply to any other industry sectors, so it would address the government’s concern but avoid most of the economic damage that applies under the current proposal. It would be simple and understandable, and the revenue from the tax could be easily and accurately tracked. All additional tax revenue from incorporated medical doctors should be earmarked for health care funding, and the balance for debt reduction.
Mr. Chair, I am a retired accountant. I have no clients. I hold no interests in private corporations or in any trusts. I have no dog in this fight. I simply want to see tax changes that address tax policy concerns, but that do so in a sensible and thoughtful manner, and that strike an appropriate balance between tax revenue for the government and the inevitable damage to our economy that any additional taxes cause. As part of this process, we also need a comprehensive review and reform of the taxation of private corporations.
Thank you, Mr. Chair.
I thank all of the witnesses very much for their presentations. I learned a lot from them.
One of the privileges members of Parliament have is that they can learn things about topics they never examined before.
I am the son of immigrants. When my father arrived in Canada, he worked, and my mother stayed at home. My father always received a salary, so his income tax returns were not complicated. I also earned a salary during all of my career, and so my tax returns were not complicated either.
Since this summer I have had the opportunity of learning a lot about the private companies controlled by Canadians.
I have a very specific and quick question for all of you. I'd appreciate it if you could keep your comments to 15 seconds in terms of an answer. It's a pretty direct question.
Does the current tax system offer tax advantages to Canadian-controlled private corporations that are not available to salaried workers, to salaried men and women like me?
Well, the answer is that there is no advantage to incorporation in a tax sense, because of course all income earned within a corporation is taxed at exactly the same rate as it is in the hands of a salaried employee, just at a different time. Small businesses pay 15% up front, and then they pay the balance of their tax owing on distribution.
So no, there is not an advantage. There is a different circumstance in that salaried employees don't need to keep capital in a particular enterprise, because their enterprise is their employer, which is separate from their own holdings.
My question is for Dr. Milligan, an economist for whom I have great respect.
I do want to politely challenge one of your assertions. You said that we need a neutral tax system. I think most people agree that we need more neutrality. These changes are being sold as though they are turning our tax system more into Switzerland—neutral—but there are examples of the contrary.
The passive income measure will mean that a business will pay higher taxes when investing in another business's operations than it pays when investing in its own. This is a bias further compounded by the fact that publicly traded companies will not face these higher tax rates on passive income held within the corporation, nor will their shareholders.
Finally, amendments to section 84.1 and the creation of proposed section 246.1 would make a family farm or a family business pay higher taxes to sell its enterprise to the children rather than to a stranger.
These are examples of where these proposals would seem to render the tax system less neutral, rather than more neutral. How would you respond to those matters?
I thank the member for the question. There are a couple of things.
First, I think it's great that we can agree on the principle of neutrality as being an important goal to strive for. I think that is the right goal for our tax system: to make sure that it encourages growth and also is fair to all Canadians. I think it is a good goal. It's good to identify places where the system is not currently neutral. We could have a very long discussion about all the ways that's true.
The member has identified some important issues that may be challenges with the current proposal, those being the intercorporate holdings, the secession planning, and other elements that may lead to situations in which people in seemingly similar circumstances face different tax situations. These are some of the concerns that I hope are addressed after October 2, when we hear the response from the . I encourage the member to continue those questions when we see that response.
The second point I'd like to make is about the small business deduction. I have raised that because it's kind of the core of the non-neutrality that we've have introduced, which is that we have a different tax rate for some kinds of businesses than for other businesses. One way we could get got rid of that would be to remove the small business deduction entirely.
Now, that might be something a lot of people would have a challenge with. Back in 1971-72 when this was first introduced, that was the exact nature of the discussion. We were going to have a small business deduction because we liked to encourage growth in small businesses. The challenge we faced, though, is how to make sure we focus those efforts on these small businesses to grow their businesses and the economy, and not use it as a place to accumulate savings away from taxation.
I also thank all of the witnesses for having enlightened us on this topic and having provided us with more information. Although the information provided by witnesses is sometimes contradictory, I expect that their research was well done. It will be up to us to sort it all out.
May I remind you that during the last election campaign, the current made a rather unusual statement. In his opinion, many people were creating small and medium businesses in order to avoid paying their fair share of tax. We could say that the Prime Minister was speaking from experience, since that is something he did himself on several occasions. Indeed, he created four numbered companies in order to reduce his income tax rate. His comment poisoned the atmosphere to some degree. Still today, many SME owners consider that this does not correspond to their reality.
The Liberals had also promised to reduce the income tax rate for small and medium businesses from 11% to 9%. This was not done, however. In the 2015 Liberal platform, no mention was made about targeting small and medium businesses in particular. However, the Liberals said that they wanted to eliminate the tax loophole that benefits CEOs and allows them to save about $800 million, money we lose which could allow us to improve social programs or our infrastructures.
Mr. Dias, earlier you said that you were in favour of reducing tax unfairness between salaried workers and small businesses that can choose to incorporate. However, you also said that we could do more than that.
In your opinion, does doing more mean that we should target the tax loopholes that benefit CEOs, as well as the proliferation of agreements with tax havens?
Mr. Kelly, in the Liberal Party's 2015 electoral platform, the Liberal Party stated that it wanted to “conduct an overdue and wide-ranging review of the over $100 billion in increasingly complex tax expenditures that now exist”.
I agree with the Coalition for Small Business Tax Fairness on the fact that that consultation was too short, aside from having been conducted in the middle of summer, and that it only covered part of the reality, whereas we were promised a wide-ranging review.
I agree with your last recommendation. If a tax reform is to be conducted, should we not review all tax measures, rather than targeting only one economic sector? In your opinion, should we not also review all of the regulations, not only the ones that apply to small businesses, but also to multinationals, large companies, CEOs, as well as the tax agreements we have with certain tax havens?
Thanks to all of you for being here. I could ask each and every one of you a question, but I have limited time so I'm going to start with Mr. Bonnett or Mr. Ross.
First, let me thank you for the recommendations you put on the record. Those constructive recommendations are actually helpful, because this is a consultation period to make sure there aren't unintended consequences.
In terms of my colleague's earlier question about the advantages and inequities, I want to ask a question. Even amongst incorporated farmers, let's say.... I had my first job when I was 16. It was not in a small business, but the idea is that a lot of young people work when they're 16 or 17. In an incorporated small business with a child of that age whose parents own a farm, say, those parents would not be able to sprinkle income. In comparison, a farm maybe right next door with children who are 21 and working in the business has a very clear advantage of being able to sprinkle income.
Both are legitimately working on the farm, but one has a sprinkling advantage that the other doesn't. Can you not acknowledge the fact that even within incorporated businesses this arbitrary age for sprinkling creates some inequality that should at least be reviewed and determined?
Sure. Thank you for the question. I am an academic, so I'm going to start at the principles, but then I'll get into the specific example.
The principle here again is one of neutrality. We want a tax system that doesn't either favour or disfavour saving inside the companies. What this means is that we have to compare the taxation of savings inside a company with savings outside a company.
Right now, because of that small business deduction, there is an advantage for saving inside the firm. What the proposals do is try to peel back that advantage by imposing an extra tax inside the firm. That's what it does to balance the saving inside and outside the firm.
Now, to do that, one has to impose this extra tax inside the firm, and this is where you get numbers like the one that you suggested for particular circumstances. For example, if you're a high-bracket Ontario taxpayer who already has $220,000 of other income, your extra tax that you would pay, should you flow through your passive income, would be in the range you've suggested, but that's not something that's universal.
I can take another example, which would be that of someone who's making $50,000 as a small business person and immediately flows it through to their pocket, because they're not saving big pots of money: they're trying to feed their family. That person faces a tax rate of about 30%, whether it's taken through dividends or through employment. That's the kind of thing that I think matters to most small business people.
In thinking about what is the taxation of a big portfolio of hundreds of thousands of dollars of assets, we have to get that right. We don't want to do that unfairly, but I don't think that's the main focus for most business people.
Thank you to all of our witnesses. We certainly appreciate your input on this important measure.
I'm going to start with you, Mr. Milligan, since we're both British Columbians and proud to say that. I would like to go back to your example of a woman with a truck and some tools getting out there. I haven't been in construction, but I've been in the industry, where you start off as a sole proprietor. Then you find a partner. In British Columbia, it's six months, and you're considered common law.
Let's say your common-law partner has a condo. You are liable not just for what you do on the job, but also, you can be sued if you drop a hammer on someone, and suddenly your partner's assets come into play. That's something that employees don't have to consider. Is that correct?
Also, when someone signs up as a salaried employee, they usually agree to a certain salary, and they can actually plan to set aside money using the tax system.
I know that from the perspective of a small business owner.... It could be that something goes wrong with their equipment and suddenly what money they thought would go towards saving for something, such as their retirement, isn't there. In fact, again, after 10 years, I think that even then we still have close to 80% or so of small businesses failing.
Do you see how difficult it is for someone who works every day in their small business and is trying to make it when they see you put that out? Not wrongly, but again, in terms of saying $50,000 on this side when you're a salaried person versus when you do it in your business, you cannot say it's the same and look at how much more they have, because they are subject to so many more risks than a regular salaried employee. Do you see that there's a disconnect between the logic...?
Now, I agree from one perspective. The academic vision I understand, where you're saying it, but they are subject to completely different circumstances. Do you understand that?
Thank you to the witnesses for coming today. I really appreciate it.
To try to summarize a lot of your comments, there is a lot of passion and emotion about the proposed tax changes, and I really want to highlight the word “proposed” and put an emphasis on the ongoing consultation. I think we're missing something, which is that, in my humble opinion, this is how democracy in policy works best: something was proposed and now we're getting feedback from Canadians across this country on how we can change it.
Ron and Scott, thank you so much for comments on really making sure that there are no unintended consequences and that there are appropriate transitional rules. We don't want to put any businesses in a position where.... These things happen so quickly—and I do want to highlight the fact that the tax changes are going forward and are not retroactive—but you don't want any unintended consequences, because people do work really hard, especially on the family farm.
Mr. Milligan, I really appreciated your comment that it should be neutral in terms of your decision-making. Why should somebody benefit from a lower tax percentage when they incorporate for the sole benefit of having that lower tax threshold? Can you comment on that and why that's not fair for all Canadians?
I will give you an example. I used to be a corporate lawyer for a big firm on Bay Street, and partners were able to take advantage of incorporation, whereas a seven-, eight-, nine-, or ten-year associate was still a salaried employee.
The challenge we have is twofold.
One is that the additional measures that the proposals are intending to bring we think are going to eliminate or reduce the amount of opportunities for younger people to get involved, even in a small way, in the family business. We do worry about that from a succession perspective, because you do want the entrepreneur to involve that next generation.
I was just in Winnipeg and met with a business owner who runs a successful trucking company. He said that he has had so many offers from private equity businesses to buy his business, but he knows the minute that he does that the jobs in Winnipeg and Manitoba are going to dry up, and they're going to be moved elsewhere. He's resisting that and wants to make sure that he can pass on that business to the next generation, so I do think that we don't want to discourage that kind of activity, and much of this does.
On the rules around income sprinkling, I also want to make the point that specifically with respect to dividends we want to make sure that government doesn't get to decide who owns the business. I understand what you're talking about with respect to income. That's why we already have the reasonableness test for income at the CRA, but applying this to dividends means that government is going to be able to determine essentially who owns the business. That is a concern for younger people. It's also a concern for us for female entrepreneurs. Two-thirds of business owners are owned by—
Thanks to all of you for coming in and providing us your expert testimony.
I want to talk about retroactivity. Some of it is related to succession planning, so I'm glad that we were leaning in that direction. There's a lot of misinformation about it. Some of it is due to the government side. Minister has said these will not be retroactive, but the way I read proposed section 246.1 on CDAs, it will become retroactive. In fact, even well-known tax specialists and tax accountants have been writing and saying that if you inherit a family business you could pay tax on it, on gains that your predecessor made. Retroactive double taxation is the effect of some of the rules and proposals that have been made.
I see Mr. Kelly already pointing to Mr. Wonfor, who wants to comment on this, but I want to talk about this retroactivity and about the double and sometimes triple taxation on income already earned. If you want to talk about neutrality, it's patently unfair to double-tax someone as that's making its way intergenerationally.
Maybe we'll start with Mr. Wonfor, but I'd like to hear from Mr. Lanthier on that as well.
I'm happy to speak for a minute.
With respect to the surplus stripping changes that are proposed by the government, there definitely is retroactivity built into those rules. The Department of Finance is receiving a lot of representations on that.
They say that the changes in section 84.1 only apply to dispositions on or after July 18, but that's not true, because you have to look back at all the transactions in determining whether you have a section 84.1 problem. You have to go back and look at all the transactions all the way back to when it was first enacted, I believe in 1984, and that can create some situations where you thought you had proceeds that you could extract because capital gains had already been paid, but now you're going to be forced to pay tax at a dividend rate if you extract those funds out of a company.
It's the same thing with the changes in proposed section 246.1. It talks about the amounts “received” or “receivable on or after [the] Announcement Date”. If you have a transaction that triggered tax beforehand, that triggered a capital gain before the announcement date, but you did not receive the funds until on or after the announcement date, there are problems with the planning right now. We don't believe it's fair. We respect the government's right to change their tax policy in respect to this area, but it should be going forward, not being retroactive—
Thank you to everyone who's come here today and has provided some good stuff to think about.
I've sat down with a number of tax experts over the last couple of weeks. I spent half of my Labour Day going over all the proposals in the consultation paper. I understand that tax fairness is important and how we need to get it right. I think the spirit of tax fairness and the road we're on the right path.
We need to ensure our tax system has the right incentives in place to encourage capital formation and to encourage small businesses to grow, not to just stay at the 15% level but to move up to the 26% level on taxation, which is a good thing, because it shows that businesses are succeeding. We also need to ensure that we have the right proposals in place.
I've looked at this consultation paper as being in two buckets in terms of—I think someone alluded to this—the professionals and what I would deem as the small businesses like your manufacture and your engineering firm. We don't want to impede the second bucket from doing what they're doing. They're doing things very well in Canada. We have a growth rate of 3.2% this year, the best in the G7. We've created hundreds of thousands of jobs, and I attribute that to a lot of SMEs investing in their businesses and hiring Canadians.
In looking at the buckets, two of them, I think, do have merit. One is extending the income sprinkling not just to include income, because that's already covered, but to also include dividends, because if someone is working for an organization or farm, they can still work for them and they'll still be paid. Now, there's some clarification needed around “reasonableness” and “continuous” and words like that, and on the conversion of dividends to capital gains, and the multiplication of lifetime capital gains exemption. There are some things there that do have a lot of merit in the initial set.
On passive income, obviously a lot of questions need to be answered. I represent an area where we have 13,000 private businesses. York region is very dynamic. There's a lot of growth is going on, driven by private business. I know that we're consulting. I'm consulting. I speak to business owners every day. I know that our government's consulting. I encourage everyone to submit a brief by October 2.
Mr. Kelly, don't you agree there is merit in those first two measures, on examining them in the spirit of tax fairness, which we really need to do?
I heard this yesterday from one of our presenters. Thank you to everyone, because I appreciate it when people avoid using the rhetoric versus what is really the meat of the issue. Again, we need to look at tax fairness. We need to look at tax fairness for all Canadians.
We've done this on tax avoidance. As a government, we've put in hundreds of millions of dollars to ensure that all Canadians are paying their fair share of taxes, to ensure those services that Canadians depend on day in, day out are available to Canadians, and that people have confidence in our tax system. We've done that. I applaud our government for doing that. I'm proud to be part of a government that's doing that.
On the tax fairness side, again, there are measures there that we need to look at, such as, for example, extending on income sprinkling, because if your son or daughter is still involved in the business.... Again, what are we talking about? We're talking about moving the age limit from 18 to 24, where arguably you could see that the uptake is in reference to a lot of parents paying their kids—and paying them in a tax-advantaged way—to go to university. Going to university is a great thing, but a lot of businesses are using that loophole or tax advantage situation to fund someone's endeavour whereas other folks can't fund that endeavour on that basis. I think there's a real chance for us to do this right, to consult with businesses.
Look, in B.C., 25 years ago, I was awarded an entrepreneur of the year award by Grace McCarthy. I love entrepreneurs, but—
We'll call the meeting to order. Just for the record, pursuant to Standing Order 108(2), we're doing a study of tax planning using private corporations.
Witnesses, just so you're aware, the minutes from this committee and any paperwork, etc., that you give us will be passed on to the 's office as part of the consultations on document that is out there on tax planning using private corporations. That information will go, without recommendations from this committee, to the minister. With that, we will start.
Welcome to all of you. Thank you for putting your thoughts together on quite short notice, in many cases. We really do appreciate you appearing today.
We'll start with Mr. Weissman, who is a chartered professional accountant.
Welcome. The floor is yours.
Thank you for inviting me to this session. I really appreciate the opportunity to express not just my views but the views of many tax people out there.
Earlier, I was in the gallery listening. I just kept shaking my head and saying, “Wow.” Why are we here? Is this really necessary?
It will be—I hate to say it—30 years next month that I have practised in tax, and I've never seen such outrage and anxiety, not just in the business community but in the tax community as well, about items that in my opinion are quite simple to address, and you'll hear why.
We have proposals that were released in the middle of July with a 75-day consultation period. The website says submissions are due no later than midnight on Friday, September 29, but we've been told submissions are due October 2. Yesterday at the Canada Tax Foundation conference there was some inconsistency. Maybe we could get some clarity. I don't have a submission for you today because of short notice, but I would like to give you one.
I think we all need to take a step back. It's important because, in my opinion, you can't pick solutions without knowing what the problems are, and no one can see the forest for the trees in this case.
I do think that the government's policies and objectives in terms of income splitting with respect to corporate deferral are valid policy objectives. I think they're in line with the election platform that they ran on. I think they are achievable objectives in a much simpler manner than is proposed now. I'll give you some suggestions. I'll throw a lifeline out there and say that if you want to end this, if we want to salvage what's going on now and actually move ahead with objectives in the economy and reduce uncertainty for businesses, here are some ideas.
Again, I think the policy intent is fundamentally sound and in line with the election platform. However, I think the proposals—not “I think”, but “I know”—go way beyond that. I'm speaking to you as someone who has been in the trenches for 30 years dealing with tax legislation and tax changes. I started in tax when tax reform came around in 1987. I've seen the capital gains exemption eliminated on capital gains on property. I've seen it restricted. I've seen the kiddie tax brought in to deal with income splitting and income sprinkling—a term that has now been coined—so I have ideas.
Before I forget to get this out there, there are no ifs, ands, or buts: these rules, most of them, are absolutely retroactive. It's not true to tell the Canadian people that these rules are just for going forward. As we heard earlier, tax attributes of the shares that you own in your family business that were created 10 years ago because of transactions last year or 20 years ago impact the calculation of the tax that will be calculated under these rules. While they may say it's for transactions after July 18, these rules are retroactive, because there's no grandfathering and there's no transition.
It's like telling someone that they have their house and they've accumulated all that growth tax free, but we're changing the rules. Their house is going to be taxable, but on the go-forward, only if they sell it from then on. If they sold it before this was announced, okay, they're fine. That's retroactive tax planning, and that's what some of these rules do to businesses.
What I'd like to say in the brief time I have is that I think income splitting is a valid policy target. I know that reasonability is not the way to go. Uncertainty and subjectivity in the tax code is a recipe for litigation and for costs, and for unhappy taxpayers who don't have the funds to litigate. As much as possible, you have to take judgment out of the Income Tax Act. We need objectivity.
The reasonability test on dividends just can't be determined. Reasonability on salary is hard enough, but at least there are ways to do a functional analysis. You can't do that with dividends.
I've heard one example of extending the kiddie tax to age 24 as maybe a compromise of how to deal with curtailing income splitting. How about figuring it out this way? If someone spends more than x number of hours per year in the business, the rules will apply or won't apply. This kind of rule is actually used in the disability tax credit area, an area that I was involved in many years ago in terms of advising. With respect to life-sustaining therapy, we couldn't define what that meant, so the rule was put in that if you spend more than 14 hours per week on life-sustaining therapy, you're eligible for the DTC. Something like that could be used, as opposed to a reasonability test.
When it comes to corporate deferral, I just shake my head. Why are we talking about passive income and taxing passive income? You're getting people up to 70% and penalizing people for earning passive income in a corporation. The reason is that there's this corporate deferral because my corporate rate is lower than my personal rate. This has been dealt with. I'm just shocked that we get these proposals about passive income.
We have personal service business rules in the act. A long time ago, athletes and entertainers would incorporate themselves. A hockey player who was working for a hockey team would incorporate and say to pay his company, because he was going to get corporate rates instead of employment rates. The government brought in the personal service business rules and said that if you don't employ more than five full-time employees, you don't get the small business rate. They got rid of the small business deduction for incorporated athletes.
More recently, it was used for computer programmers and other professionals who incorporated to get access to the corporate rates. Computer programmers fall under the personal service business regime if they are incorporated, and there is now a surtax on personal service businesses. That surtax brings up the corporate rate without increasing corporate rates on everyone, which I don't think is what the government wants to do. The surtax increases the effective rate, reduces the deferral, and can be targeted at the people I think the government is really trying to target. I'm one of them. I'm throwing myself on my sword here.
If you want to stop people like me from incorporating just to get the benefits of the low corporate rate, stop me from doing it. Tell me that if I incorporate I'm going to have a surtax, but don't tell me that you need to affect all the family businesses across Canada.
These proposals could stop there because I think those are the government's policy objectives, but they go way beyond. The anti-surplus stripping rules in proposed section 246.1, which we won't get into, are so ripe with ambiguity and uncertainty that they are impossible to plan for.
Finally, because I imagine I'm running out of time—
Thank you very much, Mr. Weissman.
I'd like to clear up what I think is the confusion on the dates. The end of consultations with the Department of Finance is Monday, October 2. They don't have midnight on it, but usually it is midnight. Our deadline for submissions to this committee, the finance committee, is September 29 at midnight, which is Friday, the reason being that we want to pass that information on to the Department of Finance on Monday morning or Monday during the day.
The firm deadline for Finance is October 2, which is Monday. We may have confused it a little with our separate deadline, but we had to do that in order to get the information there.
We're turning to Ms. Workun, who is appearing as an individual.
I also very much appreciate the opportunity to appear before you today and share my thoughts. I'm someone who was raised in Alberta, and I have lived in Quebec for 25 years. I'm a lawyer who has practised human rights and employment law in Ontario for close to 30 years now. I'll make it very clear: I don't practise tax law, so I am by no means a tax expert, unlike my colleague here to my right. I also want to make it clear that these are my personal views.
I was prompted to engage myself in this tax debate on a more public level, in response to an email that I received from the president of the Canadian Bar Association a couple of weeks ago—three weeks ago, perhaps—basically encouraging members of the CBA such as me to write to their MPs in opposition to these tax reforms, and also informing us as members that the CBA was going to take a public position in opposition to these tax reforms. That got my attention, and I immediately responded to the CBA president, as well as copying my MP, to ensure that it was known that the CBA does not speak for me. I'm a lawyer, and I very much support the tax reforms that are currently being proposed.
I think it's important to speak up, and so that's what I've done. I'm joined in that by a number of physicians as well, many of whom are young female doctors who, I'm sure you are aware, have published a very public and articulate letter that similarly supports the tax reforms being proposed, and also states publicly that they are not in agreement with the position being taken by their professional representative in that situation, the CMA. The author of that letter—I heard her being interviewed on The Current a couple of weeks ago—is a very articulate young woman who is currently on maternity leave.
My starting premise is that it's a good thing to build a society in Canada where we all have access to a solid education, health care, housing, safe and vibrant communities, recreation and sports opportunities, and a clean environment. Perhaps it's misguided on my part to believe that the revenues generated by these tax reforms will funnel down toward the collective good, but certainly that's my hope.
The bottom line for me is that it obviously requires tax revenues to sustain and improve the public institutions and social programs that Canadians, I think in general, support. My view is that the most effective and just means to generate those revenues is through a fair, transparent, and actually progressive tax system. To me it doesn't make sense that those individuals most financially and otherwise privileged in Canadian society—including me—who've had access to publicly subsidized post-secondary education, are further advantaged by the tax system.
I do, however, think that tax reform should be comprehensive, and in that regard I think we need to start with the private corporations, as the government is currently doing, but I also think we need to revisit those other aspects of the tax system that are similarly regressive, for example, income splitting of pensions. There has been some criticism, I think justifiable criticism, by small businesses saying that, look, recipients of federal government pensions, for example, are entitled to split those pension incomes. I agree. That's not consistent in terms of giving, effectively, an income splitting benefit to pension recipients.
Turning to RRSPs, why should it be that the more money I make, the greater access I have to RRSP contributions? It's up to a maximum cap, I appreciate, but it is fundamentally based on a percentage of income up to a cap.
Why should it be that someone like me, who can most afford to send my kids to university and pay for them, has access to government grants through an RESP system, whereas others earning family incomes of $49,000, the average in Canada, are barely able to pay their mortgages or rent, let alone put monies into an RESP to help fund their kids' education with the support of government grants? The tuition rates are going up because we're lacking public resources to adequately fund those public post-secondary institutions.
The last couple of comments I'd make relate to gender. I've heard a lot of spin around the subject of gender and that these tax reforms are somehow damaging to women. I don't buy that for a moment.
I don't have the data to prove it, but I think somewhere the government could improve upon coming up with data that answers the question of whether this tax reform is going to disproportionately adversely impact women. My intuitive sense is that women, single mothers in particular, who I believe are disproportionately represented in terms of the poverty figures in this country, will be the beneficiaries of added tax revenue, assuming, of course, that those revenues are used to fund social programs and public institutions on which these women and their children rely.
Finally, in response to a comment that was made earlier that I heard in the gallery about the risk that small business people are taking, I appreciate that risk, the theory being that you need to save within a corporation and your business so you can fund the years that are not so great. As a lawyer who works daily with employees who have been laid off from their jobs, many of whom don't have pensions or benefits once their employment is terminated, I can say that those individuals are left with having to rely on their personal savings, just like everybody else, to fund them through difficult times. They also work very hard for the money they save.
As I say, I feel there should be a more level and equitable treatment of all working people in Canada. Thank you.
Good morning, Mr. Chair and committee members. Thank you for the opportunity to speak here today.
My name is Terry Soloman and I have practised public accounting in Charlottetown, P.E.I., for the past 27 years.
I can say without a doubt that these proposals are very damaging to the small business clients I represent, as well as to small business across Canada. I don't think it's an overstatement to say that these are the most significant tax changes that have been put forward since the royal commission in the early 1970s. I really feel that changes of this magnitude need to be done with genuine stakeholder engagement.
The proposals, as well, were accompanied by rhetoric such as “closing loopholes” and “using corporate structures to avoid paying their share of tax”. Frankly, members of the business community find this type of communication offensive and are made to feel as though they're being some sort of tax cheats even though they are complying with the laws of the land. I believe the business sector needs to be encouraged, because when they have success, it creates jobs in their community.
I am going to talk about a few specific concerns I have with the proposals in the time I have this morning.
First of all, my main concern is that the proposals actually miss their stated target of targeting the wealthier sector of society. I believe there will be a flight of capital from Canada. I believe these changes will impact recruitment and retention of skilled labour such as physicians and others.
The proposals with respect to income splitting will actually disproportionately impact the middle class more than the upper class. These proposals devalue the real contribution a spouse makes to a family business, whether that contribution is direct or indirect, whether they're actually going to the business every day, or whether they're supporting the other spouse in order for the business to maximize its profit and the amount of tax it will generate for governments.
I have already provided my written submission to Finance. In it I note that even a family with $70,000 in annual income could be faced with a 30% to 40% tax increase if these proposals go through. We're not talking about the high-end income; we're really talking very much about your neighbours, small business owners in Canada.
The discussion paper that was issued by the department compares a business person with an employee and how much income tax each of them would pay. It contains an overly simplistic analysis. There are many factors to consider other than the pure upfront tax calculation.
My second concern is with the significant uncertainly around the new reasonableness test. This test will give the Canada Revenue Agency the power to unilaterally determine the value of certain adults' contribution to a business. This test will be very subjective and fact-based. This is a significant new burden on small businesses, which are not even going to have tracked the information that would be needed to defend themselves. It will be the subject, I am quite confident, of much new litigation and disagreement.
Just as one example, is a wage that's paid in Prince Edward Island for a service different from a wage paid in Ontario? How is CRA—and I almost feel bad for them—going to actually administer this test in reality?
I would say that in my view, the most egregious proposal relates to the taxation of passive income. Passive corporate income is already taxed between 50% and 55% in Canada. It depends on the province. In fact, it's taxed at a higher rate than most personal rates. Without question, there is a tax deferral on the initial capital that the passive income may have generated, if that capital came from a small business deduction. However, that is not a loophole. That was something that government intended to give small business access to capital for either future expansion or for working capital during slower periods. These proposals will eliminate the long-standing concept of tax integration in Canada, at least on the payment of some dividends. The effect of this for a P.E.I. corporation is a passive tax rate that could reach 74.55% and would have a similar result in other provinces.
This is clearly unacceptable and I'm hopeful the government would not have intended this tax result.
Holding companies are also used as a vehicle to accumulate funds for retirement, in lieu of an RRSP. Funds accumulated are similar, in some ways, to an employee who has a registered pension. However, employee and employer contributions to a pension and the income realized bear no tax whatsoever until withdrawn, which could be many decades later. Conversely, the business owner who uses a holding company for investment has already paid a tax of between 15% and 30% on the initial capital and an annual tax of 50% on the earnings that are realized.
For all these reasons, I would strongly recommend that the proposed changes for passive investment be abandoned entirely.
A fourth concern I have relates to some of the proposed changes to section 84.1. While I do agree that some changes here are required to address certain planning that was happening, the proposed changes, as currently worded, lead to double, and even triple, taxation and will negatively impact estates and common post-mortem techniques, some of which were already in progress at the time of the announcement.
Government has recognized that section 84.1 does impede succession planning for family business and, as part of this consultation process, I encourage them to also deal with that and not just have that in the discussion paper and not actually deal with it.
I've been up since three o'clock. I took the flight out of Cape Breton this morning, one which Ms. Raitt might have taken in the past, so it's been a long morning so far.
I could just say ditto to what Denise said, but I will read what I have here.
I am a family physician from Cape Breton, Nova Scotia. I am the daughter of a small business owner. I am here to speak to the content of a letter that was signed by close to 500 physicians and medical students across the country. The letter's signatories and I are in favour of the proposed federal tax changes for Canadian-controlled private corporations, or CCPCs. The reason we are in favour is that we support greater equity amongst Canadians.
Let me say first that this is not unequivocal support. It is regretful that the federal government has not closed the tax loophole of being able to be paid the stock options used by CEOs and other high-income Canadians. Given that Canada's top CEOs earn 193 times what the average worker earns, it is imperative that the government keep its election promise. As well, various other policies that can be implemented, as was mentioned particularly in the last session, should also be considered.
Cape Breton is a beautiful island with rolling hills and exquisite ocean views. That's the image you tend to see in tourist brochures. In contrast to those scenes, one third of our children on the island under age six live in poverty. There is a first nation just down the road from me, and they cannot drink, cook with, or bathe in their water. A patient I had in clinic yesterday holds three minimum wage jobs, barely sleeps, and is struggling to take care of her daughter as a single parent.
In contrast, the vast majority of physicians remain amongst the top 1% to 5% income earners in Canada. We as doctors recognize that adequate tax revenues are needed to fund such social programs as affordable housing, social assistance, legal aid, hopefully one day national pharmacare, and the health care system itself. These programs directly impact the health of our patients. We believe it is important for us to contribute to their sustainability through an adequate tax base. We do ask that any tax revenue that is gained through these tax changes go to funding policies and programs needed to ensure the health of our patients.
Now, physicians are in a unique situation of being publicly funded but mostly self-employed, often running practices with varying amounts of overhead. Many physicians do have legitimate concerns about their work situations, including a lack of extended health benefits, parental leave, or pensions. We have long training periods, incur significant student debt, enter the workforce late, and have high rates of burnout. However, we feel that these issues are best addressed at their root, with the best of all available policy solutions, and not in inherently unstable ways such as through our tax system, which is constantly evolving.
It is important to note, however, that the methods that have been primarily used by some doctors—lower tax rates on passive investment income through a corporation and income sprinkling—are legal, and were in fact encouraged by several provinces in lieu of fee increases as part of negotiations, despite federal jurisdiction over relevant tax policy. We know that these benefits are advantageous, as was pointed out earlier, primarily for certain incorporated doctors with specific family situations and those who earn enough to supersede traditional saving vehicles available to all Canadians. This seems unfair to single parent physicians, of whom I am one, and those with young children or those who are unincorporated. It also seems unfair that these benefits are not available to Canadians with similar incomes who cannot incorporate. It is also worth remembering that only 60% of physicians are incorporated, and this option has only been available in some places in the past decade or so.
That said, the changes we are supporting cannot be made without a transition plan, nor in isolation, but rather as part of a comprehensive review of tax policy with a view to equity. As such, we call on the federal government to do four things.
One, implement proposed reforms to CCPCs as a first step in a comprehensive reassessment of tax policy in Canada, especially mechanisms that disproportionately benefit large corporations and the wealthiest Canadians.
Two, outline a clear transition plan for savings held in medical professional corporations. Physicians who have used these methods under existing agreements to prepare for retirement should not be unfairly penalized.
Three, work with the provinces and territories to review options for access to extended health benefits, parental leave, and pension plans for all Canadians, as well as payment reform options that would be available to all physicians and address these important aspects.
Four, work with provinces and territories to tackle the issue of increasing medical student debt, namely, by lowering tuition for incoming students and implementing forgiveness programs for existing debt.
I realize that the federal tax changes go far beyond the concerns of physicians, but this is the world that I know, so it's the one I'm speaking to. What I feel and what many physicians across the country feel is that an equitable tax system is a goal that we can support and can pay into.
Thank you very much Mr. Chair.
I also thank the members of the committee for giving me the opportunity to speak with them and the other witnesses on this important review of tax planning through the use of private corporations.
I am an economist and professor of economics at the Université du Québec in Montreal. I have worked at the university since 1988, with the exception of a nine-year period during which my class was bigger and less disciplined, and I was the one taking the exams; I was a member of the National Assembly. I occupied different positions there, but whatever position I was in, I acted as the premier's senior economic advisor, and was one of the senior drafters who contributed to preparing the government's economic program between 2003 and 2012. I also had the opportunity of being the chair of the Public Finance Committee for seven years. And so this to me is like a homecoming, but on the other side of the table and in another of the country's parliaments. For a few years I was also minister delegate for Finances, the equivalent of the Minister of State for Finance at the federal level.
And so I was often privy to matters related to the budget. I knew both the theoretical and empirical aspects as a professor and researcher, and the practical aspect, since I dealt with budget preparation and the issues the various persons concerned had to debate. Ultimately, when we talk about taxation, we are talking about its impact on the economy and on the people who participate in the creation of wealth and the distribution of that wealth.
In that context my preliminary remarks will bear on a certain number of principles. I will probably have the opportunity to talk about them more in detail in the subsequent discussion.
The last broad tax reform in Canada goes back to 1971, following the 1966 Carter report. In many regards our current fiscal system is based on that. There have been a few ad hoc important changes made. Among others, the very good economic reform of putting in place the GST, and the improvements that followed.
Other elements were introduced following the report tabled by Jack Mintz in 1997. This allowed businesses to benefit from a tax reduction, which was necessary at the time, in addition to improving the neutrality of the taxation system, a principle I will get back to.
However, the economy has changed in the meantime. For instance, the service sector is increasingly important within our economy. This does not mean that we should sacrifice other aspects of the economy; however, we have to take economic reality into account as a whole, and ensure that taxation really attains its goals. These goals are established and analyzed in particular from the perspective of fairness and efficiency. These two principles are the subject of a public debate that is sometimes very rapid, unfortunately. The newspapers have a tendency to systematically present those elements as being opposed to each other, but that is not always necessarily so.
In the context of the elements of reform and the principles behind them that are being put forward by the Department of Finance, the , and the government, it is clear that in some regards, one of the elements identified does pose a fairness or non-neutrality problem. In fact, we may encourage businesses or entrepreneurs to incorporate in order to benefit from the tax system in a legal way, insofar as the current laws and regulations apply. However, we have to pay the costs, deploy resources and find ways of reducing taxes, not only to improve the growth of businesses but also for fiscal reasons, quite simply.
In my opinion, you should not do indirectly what could better be done in a direct manner. As to whether taxation is too high or too low, that can be debated. There are in fact several debates on that topic, and several positions, and I would be happy to contribute to that debate myself. One thing is certain, we have to make sure that taxation does not become excessive. To meet that objective, we encourage very careful planning. This is done in particular through income distribution by incorporation. People resort to this not to become entrepreneurs but for taxation purposes. Passive investment portfolios can also be used, but these do not allow the corporation to grow and to prepare for the future. In my opinion, certain elements could be improved in various ways. We could encourage income distribution through capital gains in order reduce taxation.
Neutrality means ensuring that comparable situations are treated in the same way. We should aim to improve that neutrality, which is in my opinion an important principle. In principle, the proposals which have been made are a step in the right direction.
That said, we have to avoid what may appear to be exceptions—the point is not to provide for all possible scenarios—where the same income might be imposed in different ways, as well as cases where there would be retroactive taxation. Such situations need to be avoided, both in economic theory and economic practice.
There are also issues related to transferring businesses. That is one concern that was submitted to me. Some work needs to be done in that regard, and we will have an opportunity to discuss it further. When I was with the Quebec government, I examined that issue. There were epic debates with government taxation experts. These were not partisan debates, but the taxation people wanted to avoid creating precedents when some problems could be solved.
Comprehensive tax reform that would take all of the principles into account would be desirable. That does not mean, however, that there aren't specific aspects that could be better calibrated to eliminate the unfairness that exists in the current system.
In conclusion, may I repeat that the point is not to jeopardize the tax competitiveness of Canadian businesses. That being said, there is certainly cause for concern regarding what is looming, that is to say the measures the American Congress will be taking in the next weeks or months, whatever form they take.
We must certainly maintain the principle of tax competitiveness, but we have to do it the right way. That does not mean that we should allow unfairness in taxation, as we see now in certain cases.
In conclusion, I'd like to refer you to a few words from a recent article entitled “Les enjeux d'efficience et la fiscalité”—efficiency and taxation issues—which I penned with a colleague. Without aiming for perfection, and while taking into account imponderables and democratic requirements, with leadership and education, we can do better.
Today's hearings and the work that must be done should not be rushed, but this process should not lead to inaction either.
Thank you very much, Mr. Chair, I appreciate it.
This question is for Dr. Dutt.
I share a common birthplace with you, Cape Breton Island, and this past weekend, Dr. Dutt, I was in Nova Scotia and I actually attended the Doctors Nova Scotia town hall, which was attended by over 400 physicians. What I learned there was that there's a serious concern of the physicians in Nova Scotia about the effect on patient care and health care that will come from these tax reforms, these tax changes, being put into place.
You gave a stat that about 60% of doctors are incorporated. Doctors Nova Scotia tell me that 75% of Nova Scotia doctors are incorporated and it's important for this reason, when they surveyed their membership, they found that 451 doctors out of 864 who responded said that they would consider moving away from Nova Scotia.
Dr. Dutt, you and I, coming from Cape Breton, both know one thing, that there is a serious problem with the lack of family physicians in Cape Breton. You know the outcry from the community and you know the emotion in the community over this, so I was very surprised to hear that your first recommendation, being a physician in Cape Breton, knowing the impact that will have on health care for Cape Bretoners, would be that you would say to the Liberal government to go ahead and implement these things.
I'm wondering if you can tell me why you think these changes will not have an impact on Cape Breton health care when your colleagues in Nova Scotia overwhelmingly say it will.
I appreciate that you attended that meeting. I know it was well attended. I also do know that there were quite a few people there who do support the changes.
It is a difficult environment, I think, to try to bring some of those perspectives forward. I'll just say that, clearly, the sentiment there was against the changes, and I fully recognize that. As we've said in the letter, and I've tried to speak to, there are definitely concerns that physicians have about the system, and it's feeling as if tax policy is not the best way to address those concerns. That's kind of the main reason.
I feel as if coming from Cape Breton influences me even more, knowing the kinds of incomes that my patients have, knowing that I can have a pretty decent income. I work not too many extra hours. I work decent hours. I am on call and I do things that physicians do, but I earn much more than they do. I also recognize that, as physicians, when we're working in a low-income area, we need to look at that aspect also.
I will also say that, given that the medical associations came out so strongly against the changes, and I know because members asked them to, there hasn't been a space to put out surveys that ask if we support the changes. That was never a question on that survey. That's one thing: I think there hasn't been a space to bring that voice forward.
Last, I'd just say there have been many times throughout history when physicians have said that patient care will be harmed, and they'll leave the country or leave the province. There are already challenges to recruiting to small places, to rural places, to places where the pay might be lower than other provinces, and there hasn't been the evidence to show that the tax policy changes will exacerbate that. We've actually seen physicians coming from the U.S. to Canada in recent years, much less than physicians leaving Canada. That's not to say there won't be impacts, but I think it actually harms us when we are trying to negotiate for specific things in our provincial negotiations to make these kinds of threats now that may or may not come to be, because the tax changes likely will come to be, and when we want to try to negotiate for something else later, it gives us a weaker position.
Thank you very much, Mr. Chair.
Mr. Soloman, thank you very much for coming today. I was also in Charlottetown on Friday actually, and I ended up having a chat with your partner, Lloyd Compton, who came to one of my town halls.
Mr. Soloman, what I understand from what I heard in Charlottetown is that the three main industries—and maybe the chair can correct me—are farming, fishing, and tourism. In fact, tourism is about 6.5% of the GDP. Eighty per cent of the people who work in tourism are small businesses. There are 1,300 fishermen who are incorporated in P.E.I., another huge number. Of course when it comes to farms, 98% are family-owned businesses. They're farm families.
Mr. Soloman, I'm wondering if you think this is going to have a disproportionate impact in Prince Edward Island, given the fact that the economy is so intrinsically tied to small business and the impacts this will have on small business.
I thank all the witnesses for their comments.
I will do what Mr. Fergus did earlier and ask a brief question in the hope that you can provide a yes or no answer.
I would like to know if we can begin with the obvious, regarding the possibility that businesses distribute revenue among the members of a family without any requirement that they contribute to the business.
Do you think, yes or no, that it would be appropriate or wise to put such a criterion in place? We may not agree on criteria and modalities, but would it be wise to put in place a requirement that family members contribute to a business so that income may be shared amongst them?
Mr. Weissman, you may answer first.
Yes, I think it would be possible to do that.
We need to avoid ambiguous scenarios where people would again try to directly or indirectly bypass the system. There would have to be guidelines, since the objective is to have a lower tax rate for businesses than for individuals. The entrepreneurs have to face risks that a salaried employee does not face. As such, it is not better or worse in either case. We need all of these people in our economy.
I would like to go back to a question you raised earlier concerning the risks and the synchronization businesses must aim for, i.e. the chronology that demands that a business have funds to meet opportunities that may arise. There too, it's conceivable that there be some way of defining a criterion, such as a percentage—the base of which remains to be determined—of revenue that could be compared to a passive investment, one that would be well framed and would allow the business to take advantage of positive growth opportunities.
However, things would not be as they are now, where even if its objectives do not guarantee its growth nor align well with some situations, a business can still indirectly benefit from lower taxes through incorporation.
Mr. Soloman, you mentioned this in your opening remarks, and then on that last question you went further in terms of saying that spouses should be seen as a family unit. You talked in your opening statement about sprinkling of income for those who legitimately work in the business and then even for those who don't. I assume you're referring again to the spouse as that unit.
I have two questions.
One, how could you justify building into a system a benefit for married individuals and leaving out single individuals who would not have that benefit?
Two, if you're referring to the idea that a small business owner, for example, works really hard and their spouse might have to take care of the kids or do something in addition to allow that small business owner to do what they do and put in the hours they put in—because I've heard that argument—I would draw the comparison to not only a doctor, but a firefighter or a paramedic who may have to get up in the middle of the night for a greater community service, but doesn't actually have the ability to sprinkle income to, let's say, a family member or a spouse, in order to be able to do the job and to do the things they do in that position.
Could you elaborate on how you would justify spouses being a family unit despite the inequality in that couple of examples that I've provided?
I could say two things.
It's been painted as a for or against, and doctors divided, but in the end I often find with physician colleagues who may adamantly oppose the tax changes that we come to agreement. We know that there are problems in the system that we need to deal with. That's often the common place.
We may differ on how to address tax policy, but I fully support my colleagues who work incredibly hard and work long hours. I want to say that.
I think one issue that comes up in this discussion, which isn't going to be solved by tax policy, is the differential in physician earnings between different specialities. Family doctors, emergency physicians, pediatricians are some examples of lower-earning physicians on the spectrum. They are also often the ones who may have higher overhead. A physician who is running their own one-person family doctor practice may be using more of the income they have to run that practice.
Whether we're going to lose physicians, again, I don't know that we have the evidence from the past to say that we will. I will say that there may be differential impacts on some physicians, especially those who may be using these tax incentives to support their businesses rather than as their own savings.
I'll start with a quick correction.
It has been said that small businesses have a lower tax rate on their passive income. In fact, they pay a higher tax rate on their passive income under the present rules.
Moving on to Ms. O'Connell's remarks, she was commenting on this inequality that she sees in retired business owners sharing their income with their spouses, as though they are the only ones who are able to do that. We have something called pension splitting in this country. For small business owners, with the income, the dividends they take out of the business that they have built throughout their lives, that is their pension.
We public servants all get a public pension, and we are allowed to split that pension. The will be able to split his government pension with his spouse for the express and sole purpose of lowering his tax burden.
Do you think that's fair?
Thank you to all of our witnesses for your testimony today. It's very helpful.
Further to Mr. Fergus's line of questioning earlier about whether there are certain advantages and whether or not the system is fair, I would make sure it's on the record, Mr. Chair, that it's very much akin to our highway or public transport system. Some people choose to use a car because it fits their needs. Some people choose a van or a larger truck. They have different features. Obviously we require trucks to stop over and put on chains in certain areas and to comply with certain documentation, because of how they are used and there should be more checks and balances. This is not a matter of whether something is advantageous or not. This is a question of what feature they're operating under.
Concerning TOSI, the tax on split income, I want to talk to Mr. Weissman.
Mr. Weissman, these rules are well established. The government's own document just says it's not winning at court enough. That's why it's putting on these reasonableness tests. There's no definition of what is reasonable. It's going to end up being ultimately the court that decides what is reasonable, given the law.
Do you feel that CRA has the capacity to handle this increased scrutiny of tax on split income?
Dr. Dutt, thanks for your testimony.
I've spoken to a number of people in my riding. First of all, whenever I'm in Keremeos, Cawston, Princeton, Logan Lake, or Merritt, the first thing mentioned is doctor recruitment and doctor retention. I've spoken to doctors in the Princeton area who have said that these current rules will incentivize them to no longer work in a clinical setting, but instead go to places.... One doctor in Summerland said they'll stop working in the clinical setting and go to emergency or work for Medeo, which is like a Skype service for medicine.
Will that affect the way patients interact with their doctors, and is that good?