Thank you very much, Mr. Chair.
I'd like to thank the committee for the invitation to attend this morning.
Of the three measures proposed, given the time, I'd like to constrain my comments to the income sprinkling portion, although I'm happy to respond in the question period to questions on the other issues. I'll also refer you to my recent report “Splitting the Difference: Who really benefits from small business income splitting?” It contains more detailed analysis than I'll present verbally today.
Data in that report and presented here today utilizes Statistics Canada's tax modelling software to determine statistically accurate impacts of small business income splitting.
What's immediately clear is how concentrated the benefits of income sprinkling are among Canada's richest families. The top 20% of families receive 91% of the tax benefit from the income sprinkling of CCPC dividends. The top 5% of families, making over $216,000 a year, get half of the benefits. The bottom 70%, including essentially all middle-income families making under $100,000 a year in combined pre-tax income, share only 3% of the benefits of small business income splitting. The households that benefit the most are almost exclusively male headed.
Despite all the fuss, the benefits are incredibly narrow, even among families receiving CCPC dividends. Of the 904,000 economic families receiving such dividends, 13% could be using income splitting, although assuming that all CCPC dividends wouldn't pass the reasonableness test, clearly representing an upper bound. Put another way, at least 87% of small business families don't benefit from income splitting.
Further refinement reveals that only about 5% of small business families are actively using income splitting. They would likely fail the reasonableness test and, therefore, be impacted. This represents only 0.3% of all Canadian families.
The federal annual cost that I've estimated in 2017 is $280 million, with a provincial cost of $110 million, for small business income splitting. Interestingly, the average tax benefit is lower than recent rhetoric would suggest, even for families in the top 1%, making over $416,000. The average benefit is only $10,000 for those receiving a net benefit.
Professionals are far more likely to be using this tax strategy, statistically. Most likely to benefit are families with a household head in health care. This group is going to contain doctors and lawyers, where 26% of families are receiving a benefit of over $1,000 from small business income splitting. The second most likely group is a broad grouping of professionals, including lawyers and accountants. The third is a grouping of real estate and insurance salespeople; these types of businesses are not generally thought of as traditional small businesses. In fact, the agriculture category, which would contain family farms, and the accommodations and food services category, which would contain things like family restaurants, are about 2.5 times less likely to see a net benefit from small business income splitting compared with families with a head in health care.
Given the concentrated nature of benefit by professionals and in high-income families, I'd encourage this committee to continue on its path to close income sprinkling for CCPC dividends. That being said, I'd also encourage this committee to consider bigger fish when it comes to tax expenditures, including the stock option deduction and things like the capital gains inclusion rate. Hopefully, these can be part of a larger public discussion on reviewing tax expenditures.
Thank you. I look forward to your questions.
That's part of the professor's job: to be quick.
Firstly, I'd like to thank the Standing Committee on Finance for its invitation.
Since 2007, I have been a professor at the University of Ottawa School of Rehabilitation. My training and my field of research are in the organization of care, particularly as it relates to musculoskeletal disorders.
I am going to discuss the bill from the angle of doctors' practices, as that is the only perspective I can really speak to.
Health care expenditure data published by the Canadian Institute for Health Information show that in 2014, the most recent year for which data is available, physicians accounted for 21.4%, or $32.5 billion, of all public health spending. However, that amount underestimates the total public financial resources allocated to doctors, since there were also funds allocated to doctors in the funding of hospitals and other establishments, for a total of $73.3 billion, or 48.4% of public expenditures. Unfortunately, the institute does not specify how much of the funding given to hospitals and other institutions went to physicians.
Be that as it may, one single profession accounts for one of the highest expenditure items, raking in about a quarter of total public spending on health in Canada. And that percentage has in fact been increasing constantly since 2005.
May I remind the committee that in Ontario, for instance, there are 26 regulated health care professions. In several provinces, doctors may also incorporate. The effect of that is to reduce their tax rate considerably, of course, and there are corporate tax deductions. Moreover, by declaring a smaller annual salary, incorporated physicians gain access to numerous generous benefits generally given to the lower-income middle class, such as more generous family allowances, subsidized day care, student bursaries for family members, a lower threshold for medical cost credits, and so on.
Their incorporation has consequences not only for federal and provincial finances, but also municipal ones. I'll give you a somewhat anecdotal example, but it will give you some idea: where I live, a doctor who declares an annual income of less than $40,000 can by presenting his tax assessment obtain a municipal services access card for half the going rate.
It is estimated that approximately 60% of physicians are currently incorporated, although rates have greatly increased these past years. Since incorporation demands a yearly investment of time and money, this indicates that incorporation provides clear tax advantages.
Lower corporate tax rates were brought in mainly to foster job creation in competitive sectors. However, the medical profession is more akin to a monopoly, given the highly regulated and controlled offer of services. As opposed to other employment sectors, doctors run few risks, since they can count on a constant, highly solvent single-payer source of income, the government.
The few jobs created in physicians' offices are essentially a transposition of jobs that would be in the hospitals if doctors' offices did not exist. One can thus question the real net job creation derived from the incorporation of physicians.
The amounts that would be recovered though fairer taxation could be reinvested into initiatives aimed at fostering the health of the Canadian population.
The health care system is but one of the 12 recognized factors that determine health. The funds could be reinvested into other health determinants, for instance a subsidized day care network, which is an early childhood development determinant, or improvements to public transit, which is a determinant of air quality and the physical environment, or a public pharmacare system.
Once again, I thank the committee for its invitation. I will be pleased to answer your questions.
Thank you very much, Wayne. It's great to see a Maritimer up there. It's a nice friendly face. We are in the middle of harvest but it's great to be here all the same.
Thank you, Mr. Chair and committee members, for the opportunity to share my thoughts on the proposed tax plan to use in private corporations. I am speaking to you today as an individual apple producer from New Brunswick and not as a representative of any farm organization. My farm is River View Orchards. I'm a first generation farmer and the 2016 Canadian Outstanding Young Farmer Award recipient. My wife and I have two children, a son who is 12 and a daughter who is five.
I want to start off by saying that there are nearly 200,000 farms across Canada, almost entirely small businesses. They contribute a little over $108 billion a year to Canada's GDP and employ approximately 2.2 million Canadians. Canadian agriculture has been a resilient economic driver for years in Canada. This government acknowledges its immense potential but doesn't seem to acknowledge the contribution that farmers make to our economy, food security, and climate change.
I appreciate the comments made recently by and noting that farmers aren't the intended targets of these proposed changes, but it doesn't seem to be clear. Unless these proposals are dramatically reformed they will negatively impact family farms across Canada and we will see a decline in the number of farms in our country, adding to our unemployment rate and a decrease in GDP. Both of these will require more tax increases to the middle class to compensate for the increased expense of lost jobs and the lost revenue from the GDP.
On that note I want to share some thoughts on the fact that these proposals were released on July 18 with a 75-day consultation window during harvest when most farmers don't have time to sit down and review tax changes with their accountants. I hardly have time to spend with my family sometimes. For many farmers it was weeks before the potential consequences for farmers started to become clear and I'm still hearing of new ways they could affect my business. Since that time, I don't think I've had a conversation with another farmer where this issue hasn't come up.
While the target may be a select group of wealthy individuals, the current proposals don't line up with that mark. To give you a sense of what I mean I'll lay out a few potential issues.
There's income sprinkling. Family farming isn't a nine-to-five job. Families live on their farms and work takes place at all hours of the day with family members contributing in countless ways. There aren't any punched cards here. I understand the intent is to account for those contributions but the intent and the reality of the test are very different things. How can any test truly account for all the ways in which family members help out on the farm, not to mention the subjectivity introduced through the CRA? Farming is definitely a family affair. Making decisions to invest in the future requires capital and certainty. Even playing by the book, the vagueness and uncertainty this test introduces creates new risks and questions I need to consider. It leaves me wondering if it is worth it to expand or to even keep going.
The strict test applied to 18- to 24-year-olds further complicates this. Farm children don't take the ownership of farms in a vacuum. My son Robert has been involved in the operation from a young age and he's 12 today. Even when he goes away for school as he gets older or works off farm, I know he's still going to come home and contribute to the farm that he loves. In fact, he already grows his own strawberries and gourds, which he sells himself. Will these contributions pass the CRA test?
If Robert were to have shares in my farm corporation would any dividends he received be reasonable? I ask about him, alone, for now because my daughter is still a little young to work, although she certainly keeps her mother and I working. These questions affect my ability to plan for the future.
Then there are the changes to the capital gains exemption and the treatment of capital gains. The new limitations on access to the capital gains exemption also complicate passing farms from one generation to the next. I need to plan succession. I have to do this in advance to ensure my farm stays within my family. How is doubling my tax fair if I want to pass the farm on to my children?
Farming is capital intensive and my business is my retirement savings plan. Passing along the farm is already complicated and this just limits the options I have to make it work for both parties. When you factor in the proposed changes on converting income to capital gains that incentivize selling the farm outside the farm, difficult financial decisions must be made as to whether to maintain the family farm, take on punitive tax liability, or simply sell to a stranger.
These aren't decisions that farmers or parents should have to make. Farming is part of our heritage. Traditions would direct us, as farmers, to pass the farm to our children. Are my children valued less today than they were 100 years ago? I don't think so.
On passive investment income, investments are held within corporations for a variety of reasons. They can help manage income declines or ensure you have capital gain to invest when the opportunity arises. Passive investments are already taxed at 50%, and I've seen tax rates of over 70% identified with these proposals. Again, this raises new questions around how to plan for the future.
Farming already faces volatility from weather, diseases, pests, and the market, just to name a few. Canada's tax policy should be not about introducing new barriers, but about managing risk and growing my business. This year, we had a drought in New Brunswick. I am facing huge crop losses. How do I plan for Mother Nature?
I'd like to speak a little about my thoughts on potential solutions.
First and foremost, farmers across Canada have no issue with ensuring that everyone pays their fair share, or with government addressing abuses in the tax system. In fact, when we look at dollars generated on farms, they are probably multiplied five or six times inside our economy. However, changes extend far beyond tax avoidance among wealthy Canadians. They impact all private corporations. Some of the capital gains changes would even affect qualified farm property residing outside of corporations. It's not just incorporated farms that are affected.
I appreciate 's comments when he said that he wanted to see family farms succeed, and that family farms weren't the intended target of these changes. There is a wide gap between that intent and the reality of what the current proposals would do to farms and other small businesses. While these may be unintended consequences, they are not minor, and they would have an impact on farms across Canada unless significant changes are made. This means exempting farm income from income sprinkling proposals, exempting farm property from the new capital gains rules, and working to find a way to truly differentiate real intergenerational transfers.
Farm groups across Canada are ready to work on solutions, but timelines are a concern. I suggest taking a step back and considering removing all farms from this proposal so they don't end up as collateral damage.
With that, I would like to thank you for your time. I welcome any questions you might have.
Mr. Chair and members of the committee, thank you for the invitation to come to address you here.
I have been a professor of taxation at the Université du Québec in the Outaouais since May 1, 2015. My interests and field of research are mainly in the area of aggressive tax planning, whether by SMEs or others.
Before joining the Université du Québec in 2015, I worked in the income tax area for over 25 years, about half of that time being spent at the Canada Revenue Agency. When I began at the agency, I worked as a tax avoidance auditor. Afterwards, I worked at the agency, here in Ottawa, for the Income Tax Rulings Directorate.
Before joining the agency, I worked for a little over 10 years for a tax accounting firm. My clients were SMEs for the most part. And so I worked in tax planning for SMEs.
In short, I have worked in taxation since 1990.
There is no doubt that the proposed reform will be changing the tax planning landscape for SMEs. That is why I am here. I like putting things in layman's terms, I like to understand the rules and explain them. That is what I have been doing in the media since July 18. On several occasions I have had the opportunity of commenting on the file, or rather of explaining the rules and helping people to understand the tax policy.
It must be said from the outset that tax planning, either through income splitting or passive investments, that is to say the first two categories of measures, was legitimate and acceptable in tax policy. It was a change in tax policy. The fact that people used it does not mean that it was a loophole.
The third category of measures involves the conversion of dividends into capital gains. These are very specific measures that are intended to plug holes, if you will. There are tools in the act, but the government did not have much success regarding certain transactions. Tax planners were very creative in finding ways to bypass the law. That is why certain more specific tools were created, in order to prevent the possibility of tax avoidance.
My specialty is tax avoidance. Although I understand the overall system well, I have a few comments or reservations as to the last category of measures, that have to do with tax avoidance. Measures have been proposed that will certainly solve the problems, but may cause collateral damage in the case of legitimate transactions. This is going to cause some uncertainty.
This week, the Department of Finance held an information day with some tax specialists' associations. They were told that the purpose of these new measures was to counter tax avoidance transactions, but the fact remains that this is creating some uncertainty.
I am not here to lobby nor to exert pressure for either side. I am at your disposal to answer questions or comment the proposed measures in a general way.
Thank you very much.
I'd like to thank the committee for the opportunity to speak to you today.
My area of practice is corporate commercial, and my clientele is primarily small business, so while I'm applying some of my knowledge to these matters, I'm also hoping today to pass along the concerns of my clients, the real people on the ground who are going to be affected by these changes and who have studied this intently because it impacts them.
I would like to put three propositions before the committee.
First, that income splitting, as it is currently structured, is fair and puts self-employed people in the position to achieve the same economic circumstances as a similarly compensated employed person. Second, the proposed changes will harm family businesses in particular. Third, these changes will harm the most productive job-producing sectors of our economy.
Dealing with the first point that income splitting is fair, the Department of Finance proposal provides an example of an income-splitting individual named Jonah, who has a company, and an employed person by the name of Susan, who has a job. A nice chart shows their economic circumstances, but leaves out taxable and untaxable benefits that Susan is provided by law. The payroll burden or the employer contributions to those benefits amounts to 15% to 18% of the value of her income, which she receives on top of her taxable income in the way of medical, dental, disability, vacation, and pension.
These numbers are conspicuously absent from the Department of Finance chart. I provided you a brief that adds them back in. As compared to the 15% tax avoidance that our Jonah might achieve, Susan's 15% to 18% in benefits is substantial and puts them, at the end of the day, in the same position in terms of disposable income, which I think is a true measure of fairness that ought to be applied.
This is to be contrasted to the circumstances of an employee who is compensated by way of stock options. For amusement's sake, let's call that employee Bill. Bill would pay lower taxes on employment income than either Susan or Jonah, currently in the nature of approximately 26%, so the current system treats Susan and Jonah fairly. If you alter it so that Jonah cannot income split, Jonah's real, after-tax disposable income will drop 15% to 18% and put him substantially behind Susan. Of course, our fictional Bill will be far ahead of both of them at the same income level because we treat stock options as a capital gain.
If you really wish to seek fairness in the tax system, you need to leave income splitting or, and this is the political thing nobody will touch, you need to look at taxing tax-free benefits, which I don't think will go over well. You would also need to deal with the fact that people compensated by stock options receive a substantial benefit, which I have read is in the order of $840 million a year from the treasury.
The second point I would like to make is that with respect to family business. The mechanism by which income splitting is being ended is by amending the definition of the tax on split income, or TOSI. This is being done in a way that punishes related parties. They will be taxed at 52%. This ignores the reality that when small businesses start, their primary capital investors are friends and family. When you go to a friend or a family member and ask them to invest in your business, they anticipate they have a fifty-fifty risk—50% of small businesses will fold in the first year. The upside for them is that if the business succeeds and they have a share in it, despite the fact that they're not working in the business, they will be able to receive substantial compensation.
The proposed rules, if the person is related to you and does not work in the business, will cap what they can gain and will punitively tax them at 52%. When you go to a family member, you will be saying to them you would like them to invest in a new business you're starting. There's a fifty-fifty chance they'll lose everything and they may not get anything in the way of compensation.
If you drill down on the rules on loans, what CRA looks at as a reasonable return on investment is 1%. The proposition for a family member to invest in your new business would be, you have a fifty-fifty chance of losing everything, and you can get a 1% per annum return on that investment.
What's going to happen ultimately is that families will not make rational choices to invest in the business. They will make the rational choice to invest with other people, and many small businesses will simply never come into existence. If you look at the most successful businesses in the Canadian economy, half of them are family businesses. The Irvings, the Reitmans, and the McCains were businesses that were all started by families with shareholders that are family members, and they drive our economy forward at the highest end.
That brings me to my third point. The most productive job-producing portion of our economy is small business. According to StatsCan's 2015 numbers, 70% of private sector jobs are small businesses with between one and 99 employees. They are the drivers of the economy. The intent of these changes is to go to the top third, the $73,000 and above bracket in small businesses. That is what is driving your private jobs, to the tune of 70%.
The people affected, as I understand it, are approximately 90% of those 70% of jobs. If you impact these people—as one person put it, collateral damage—the collateral damage will be across 60% to 70% of the job-producing economy. When you make things difficult for small business, you make things difficult for Canada.
The way to end income sprinkling amongst a select few is through the definition of TOSI. Changing the definition of TOSI in this fashion has enormous consequences, from the intended recipients of the $500,000 professional right down to the family farm. In the way of productive suggestions, you need to stop looking at the change of the definition of TOSI as a way to do this. If you're targeting at a very narrow, small, and specific demographic of the CCPC, you need to specify them by income band, and if need be by profession. You will need to be very specific and you will need detailed regulations.
Frankly, the consequences of this approach, whatever its intended target is, will be massive and devastating to the small business community and the Canadian economy will suffer.
Thank you very much for giving me this opportunity to speak to the proposed changes that are being considered by the government in relation to the small business corporations sector.
I'd like to approach this issue from a slightly different perspective, which is to stand back and say that the changes being considered have become necessary, or some response has become necessary, because Canada has for decades maintained what is called the Canadian corporate income tax integration system, a very unique approach that is not used in quite the same way in many other countries. The goal of this is to receive a steady stream of revenue from corporations, but at the same time to integrate those corporate earnings as if the corporation were not really a separate legal person, by giving dividend tax credits when there are distributions out of the corporations.
This was devised by the Carter commission when it was sitting. It was hammered out into its original form through a great deal of careful, technical development that had, as its goal, ensuring that at the end of the process—regardless of whether there was corporate integration or not—capital gains, employment income, unincorporated business income, and dividends would all be taxed more or less equally so that the goal of equity would be promoted as the dominant goal of the Canadian income tax system.
Unfortunately, because tax is such a politicized area of policy-making, the technicalities required to construct that system in the first place formed easy targets over the decades. Most particularly, with the global, and I dare say Canadian-led move to cut all tax rates, high personal income tax rates and corporate income tax rates gained momentum. This put this integration system under a great deal of stress. The small business corporation rules, which were a unique deviation from the corporate income tax integration system, became particularly vulnerable.
Now, the small business rules have a different policy objective than the integration rules. They were carved out of the integration rules for the specific purpose of showing that governments supported small business corporations and gave them lower tax rates at the corporate level so that they could accumulate after-tax profits more quickly, and therefore, have a supply of after-tax retained earnings that they could invest in research, development, innovation, capital investment, and expansion, and hopefully graduate out of the small business category.
The problem is that as the small business corporate tax rates themselves began to fall, suddenly the financial planning and financial advising community realized that it had become tax inefficient for small business corporations to continue paying people in the family salaries that were held against the standard of reasonableness under the Income Tax Act. They began encouraging people to stop paying themselves salaries, which meant that they stopped accumulating employment insurance, Canada pension plan, registered pension plan, registered retirement savings plan benefits, and other kinds of benefits that corporations can provide. They began to move toward receiving dividend income as a predominant source of income, which was not taxable, which did not produce employment insurance coverage, which did not produce CPP and RRSP coverage.
This sector has become vulnerable as the result of the combined effect of the government focus for over 25 years on cutting all tax rates, creating inequalities between the personal tax rates and the corporate income tax rates, which are at really very low levels not just in Canada but Canada is in the forefront, and creating a class of entrepreneurs who are now, in a sense, being held hostage to the tax planning that they invested in. That is, if they can't continue to receive tax-exempt dividends and split them, they will not be able to then recoup the lost income security benefits that they would have otherwise been accumulating over the past several decades.
I would classify this as a crisis.
It is a crisis in particular for the many family members who have participated in this whole process. I'm talking about women, because it has been women who have been used as conduits for dividends in order to get the family income flow up to the level at which it could sustain the cost of living for the family. All of which meant that the purpose of small business corporations had become to maintain a low-tax lifestyle for that sector and no longer focused on gaining after-tax income in order to begin accumulating, growing, and innovating.
The impact on women, I think, is measurable and significant. In 2007, 20% of all small business owners were women. By 2014, that number had fallen to 15%. That's a significant shift, and this was during a period of time in which the government of the day had put a high priority on trying to get women to become more engaged in entrepreneurial activities and to accept the fact that public sector employment, and employment generally, was not going to be as readily available to women as it had been in the past.
Women are particularly affected. It has been statistically difficult to tease out exactly what that profile looks like. If you take single women as the example, only 20% of all dividends in the country go to single women, but married women are almost fifty-fifty. It's not just the people at the very highest income levels. I think there is a pervasive impact here that is creating an incentive for women to withdraw from what could be income-secure employment insurance, Canada pension plan, retirement, etc., security systems, including maternity leave and so on, and to be induced into putting their efforts into family-managed businesses that have a very different ability to provide income security as compared with the state systems that are much more efficient at that.
First, I want to thank all of the witnesses for being here.
As the chair said, I have a five minutes in total to ask questions and hear replies, and so I ask you to be very brief if possible.
I am going to put the same question to the six witnesses who are here, and it is relatively simple. Then I will have a second question.
Do you think that the current tax system provides the owners of privately-held Canadian corporations with tax advantages that are not available to unincorporated businesses or wage-earners?
Ms. Lahey, what is your opinion on this matter?
I thank our witnesses for being with us this morning for these important discussions and our work on this.
I think we can agree that the principles of fairness and justice must be the cornerstone of our taxation system. Clearly, according to the current measures, the advantages are not the same for a wage earner as for a person who incorporates, or a small business. The latter have tax reduction opportunities that salaried people do not have access to.
In addition, all of these small entrepreneurs, whether farmers or doctors, tell us that they have depended on these measures for years. In the case of farmers or small local businesses, the children may indeed have contributed to the business's success. It is also possible that physicians may have been to some degree encouraged to incorporate because we did not have the necessary funds to increase their salaries. It is also possible that some small entrepreneurs do not have access to a pension plan, and passive investments are for them one way of preparing for the future.
Mr. Goulet, as parliamentarians, as legislators, how should we find a balance between these two poles, in your opinion?
That objective is indeed difficult to reach. In reality, the reason for lower corporate tax rates is to allow and facilitate reinvestment. According to what I understand, the government now wants to prevent people from putting money aside in order to fund various plans, as you quite rightly said, rather than reinvesting it.
What can be done in those circumstances? I don't know. However, as someone said, rather than applying the measures to everyone, we could probably target certain activities, perhaps those of professionals who do not generate any economic activity, given, for instance, the number of people they employ. We could start with that, rather than targeting everyone. I must say that this is quite broad for the moment.
I might also mention that among the three categories of tax measures, this is the only one where nothing has been proposed. According to what I understand, there is a consultation going on. However, measures are being proposed regarding income splitting and the conversion of dividends into capital gains. The table has been set, so to speak, in those categories. In the case of this other category, it would probably be advisable to fine-tune things a bit and proceed step by step.
I agree that the goal of the small business tax rate is to do one thing, and one thing only. It's to incentivize reinvestment of profits in the business, if profits are made. It was never designed to be a retirement savings plan, although that's how it's been used. That use has been allowed, so people are planning towards that, which obviously creates a problem.
We already have very generous systems of retirement outside of the small business envelope. They're called RRSPs. They're called TFSAs. They have a separate set of rules. They have particular limits that need to be abided by. When people retire, there are conversion rules around the conversion to RRIFs, for instance. All other Canadians have to abide by those rules, which are more restrictive than the rules that exist for small businesses.
Also, for small business use you are allowed much more flexibility in terms of how much money you can put in. You don't have to abide by the RRIF rules. You don't have to abide by contribution limits on RRSPs and TFSAs, which at present are a maximum of $31,000 a year. That is a lot of retirement savings.
Only 12% of private sector employees have a pension, so I'm glad small businesses are concerned about pensions, but it's not just an issue for small businesses. It's an issue for all Canadians.
Let me leave it there.
We will have been having this discussion for almost 75 days when it comes to an end on October 2, and it has brought forward a lot of good ideas. As well, tax fairness is something that was in our platform, something we ran on, and something that needs to happen. We want to avoid any unintended consequences. We want to ensure we do it right. That's why we are consulting, and we encourage everyone to submit their briefs in due time.
When I think of it, there are a lot of good things happening in our economy at this time. We have a very low unemployment rate, we've had a lot of good job creation, and we're going to lead the OECD this year, so we're on a very strong footing. Tax reform, or tax fairness, is something we need to do.
I have a question, and I'll start with Mr. Goulet.
Mr. Goulet, thank you for your discussion. How do we ensure that private businesses and private corporations that are generating capital—and we have very low tax rates, so they are generating a lot of cash—are investing that money back into the economy and, for example, not just putting it in passive investments? We can quibble about the definition of passive investments, but are they investing that money back into the Canadian economy?
Thank you for the question, Mr. Sorbara.
What you are proposing, that is to say not taxing income, is one way of doing things. The same tax rate would apply, and there would only be additional tax, which would not be returned, when the money is taken out of the corporation. That is when you see tax rates of 72% or 73%. That is one way of doing it.
Here's another way: let's say the low income tax rate would only apply if you reinvested those funds, otherwise you would be subject to the general tax rate. All of this complicates the Income Tax Act, because it is more difficult for SMEs to comply. There is always a cost to pay. You have to chose between simplicity and fairness.
You could also set a threshold. If you want to target the richer group, you could set the first tranche at $500,000 of invested capital in passive income, and it would not be affected by the rules. The $500,000 is equivalent to the maximum amount of business generated that allows a corporation to benefit from the lower tax rate. That figure could be a guide.
Mr. Merrigan, the TOSI rules already apply—kiddie tax, if you want to call it that—to income, so this would be extending the TOSI rules to dividends. If your child—son or daughter to use better terminology—is working on the family farm, as the gentleman from New Brunswick so eloquently put it.... We love those farmers and we want them producing food for Canada and becoming an agricultural leader in the world, which we basically are. But if your child is still working on the family farm or the family business, a restaurant maybe, we can quibble about what reasonableness is and how else you're able to interpret that, but let's assume that we can overcome that hurdle and we avoid those unintended consequences, effectively what we are doing is only extending the rules onto dividends where there are no rules on dividends right now, and basically where there is a preferential tax treatment. Some may call it an advantage, but I'm not going to use rhetoric this morning. I'm just going to say that there is preferential tax treatment on dividends for that 18 to 24 cohort versus where it is on income.
Is that not correct, and is that not something we can actually fix and is the right thing to fix, without getting into any untended consequences of having some CRA officer come into the family farm and say what is continuous, what is reasonable, and all that, putting that aside?
Mr. Merrigan and Mr. Macdonald. Ms. Lahey, you can jump in too. I think you were nodding.
First, I want to thank Mr. Macdonald for his study. I referred to it yesterday in some testimony, so thank you. I may not have time to ask you a question, but I wanted to say how much I appreciated having some data to back up and get away from some of the rhetoric and personal stories of “I know a woman in business”. That's some of the testimony we've heard, so I really appreciate this.
Professor Lahey, I really appreciate your testimony. It was almost like a history lesson in terms of where the proposals came from and how they were intended. You've laid out a really interesting approach, but I think there are some misperceptions, or maybe we are hearing what we want to hear. What I am hearing is you saying that the system was being used in a way that really encouraged women to stay home and receive dividends, in terms of part of the family business. I think I wrote down, “Encourage women to leave the more efficient state system and earn income in their own way, in a specific way, with maternity leave, etc.”
Then, I hear comments from Mr. Merrigan saying that women should have the home contributions while the man earns the income, not to encourage breaking up the family unit. I don't think you meant that to be offensive, but I take it as a very offensive kind of approach to women in the workforce.
Professor Lahey, if I understand you correctly, you are saying that the way the system has been, it has actually encouraged the gender gap in income levels, and we shouldn't continue encouraging that gender gap. We shouldn't continue to have men earn the income and women stay home and be sprinkled income. What we should do is acknowledge the fact that the system has been established and there are people who will be affected by it—hence why we are not being retroactive, and that's what the minister has stated—but moving forward, we should not encourage a system where women earn 28% less than men.
Did I clarify the inequality in the current system and why we should not continue to have that, moving forward?
Yes, that's true. I think that is a good summary. The fundamental problem that women in Canada face is that they have not been able to close one of the biggest income gaps in the OECD. The biggest barrier really is this insistence that everyone should raise their own children personally and privately and for many years, which always detracts from women's long-term income-earning capacities overall.
When you add into the mix a system that is designed to think of family businesses as replicating and depending upon historical traditional male-female roles in the family, regardless of the gender and sexual orientation of the individuals involved, it incentivizes withdrawal from the support systems that exist.
To give an example, if the retirement income is dividends coming out of the corporation, then the women involved have no entitlement to GIS if there is a low income or to OAS, because their qualification space will be used up by the dividend income, which may not in some situations even be their income. That's the other problem.
The divorce and separation situation is quite different because from an equitable perspective any spouse does accumulate equitable rights in property that is produced in the matrimonial estate. That sits somewhat uncomfortably with what we're talking about here because there are some more traditional sectors of the economy than others. One of them is agriculture; another could be fishing. I think it is important to get the kind of data that is needed to scrutinize this. The data on where women are located in the economy has suffered badly over the last 20 years. It is not what it used to be. It needs to be ramped up and more information on women's economic situation needs to be brought into this discussion.
This can go forward, but it needs to be with a great deal of focus on how people are differently situated. I'm also talking about people who may not be in the highly paid professional careers, who may be more engaged in business because they can't get paid work in the employment sector, and who therefore are de facto running businesses, and may have been talked into forming a corporation because they're thinking they'll do better, but they have to withdraw all they earn because they can't live on their profits.
Thank you all for being here.
Mr. Lovell, I deeply respect the work you do. You'd probably rather be out managing your business than being in front of the Standing Committee on Finance and having to talk to all of us here.
We've heard the government repeatedly say that these changes are not retroactive, and then we've had experts from the Canadian Tax Foundation say the opposite. Their own proposal is retroactive. It's retroactive on estates and on those who are trying to transfer the family farm, especially from one generation to the next.
When you're operating your business, when you're planning for the future, obviously you talk to other farmers in your area, people in the same line of business, families who have been in this business for generations. What are they saying? People in New Brunswick who are in this type of business, planning for the future with their children, with their families, what do they think of these changes?
They are upset. They are scared. There is one farm close to me that is seventh generation. The original land grants were made in 1784. Why would it be cheaper, or why would the government want less taxes on a transfer if he sells it to me, as a non-family member, as compared with his own children taking it over?
When we look at farm transfers, farming is a lifestyle. It's a lifestyle choice. I am an anomaly. I didn't grow up in a farming household. My dad worked at Sears. He's now losing his pension. For me, it's that tie to the land that is so important, because you're not going to get the typical person who didn't grow up farming to come and jump into a farming operation. That's not going to happen. When we start looking at farm operators, the average age of the Canadian farmer is 52 or 55 or something like that, and if we see a slowdown in farm succession, where are we going to be in 10 years when those farmers want to retire and all of a sudden that guy has to pay double the tax? We're either going to see an outside corporation buy it—we've already seen many international farms buying farms on the Prairies—or we're just going to see farmland abandoned.
Just for interest, there are 167 million acres of farmland in Canada and, according to the last census, every one of those acres generated $646 per year. If the average farm size is 728 acres, that means every one of those farms is generating $470,000 of GDP every year. What happens if we start losing them? What is the plan?
In New Brunswick there are 117,000 acres of vacant farmland. When we apply those numbers to it, that means New Brunswick's GDP is short $75.5 million a year because, somewhere in history, those farms have not gone through succession and that land is now sitting there vacant. How is this good for Canadians? How is this good for our society?
I don't understand.
Thank you for your question.
As I explained, we hear less about the third category of measures because their purpose is to block aggressive tax planning. There is a proposal to amend section 84.1 of the Income Tax Act and to create section 246.1, which is an anti-surplus stripping rule. This will cover aggressive tax planning, regarding which we lost before the courts. When I say “we“, I am talking about the government. I apologize, I still have reflexes that go back to my work at the CRA. However, the scope of these amendments is somewhat broad.
The amendment to section 84.1 is going to eliminate one type of planning that was used, which we called the pipeline type, and which allowed people to avoid double taxation when an entrepreneur died. When a person dies, they are deemed to have disposed of their assets. The deceased shareholder thus has made capital gains on his or her shares, and the shares are passed on to the estate. If you decide to wind up a corporation, you then have a dividend. So there are two potential taxes. There would be ways of correcting that, of refining the act in order to block undesirable transactions, while bringing in measures to avoid the dual taxation of the estate of the deceased.
With regard to proposed section 246.1, this is a very broad rule that would apply as of July 18, 2017, on paid-out dividends. It may be that transactions done before July 18 by a corporation that generated capital gains were a part of tax planning and were done in good faith. However, people are now getting caught for having breached that rule. It might be a good idea to adopt an interim rule to cover those situations.
Thank you, Mr. Chair. Thank you to the witnesses for attending today, and we thank you so much for your testimony.
I just want to make it very clear that our government recognizes that farms are unique businesses and hold a very special place and all families who farm. As a son of a farmer, whose grandfather was also a farmer back in Punjab, I understand the hard work that it takes to operate a farm. We really will be focusing, and we're taking a lot of feedback from people testifying on farms, to make sure that there are no unintended consequences of the tax proposals. So thank you for your testimony. We really appreciate the feedback.
My questions are to James.
Thank you so much for your testimony today. You focused a lot on income sprinkling and unfairness. I think there are a lot of misconceptions, and I want to highlight the fact that it's a proposal. The purpose of developing good policy is to talk to Canadians and experts, to get their feedback, and then to go back to the table and draft something that achieves the balance of a more level playing field in the Income Tax Act.
Would you not agree that, like Mr. Macdonald said, you'll still be able to sprinkle your income among your family members, as long as you can prove that they contribute to the corporation?
That's a rather unique perspective on a share. I have mutual funds. I have shares in Coca-Cola. I've never set foot on the floor and I'm entitled to a dividend by means of ownership. Where that really meets the ground is when families invest in families' companies.
I have clients who are brothers. These brothers both invested in a company. One of them was very interested in running it, the other not so much. About 10 or 15 years ago one of them ceased to be active in the company. He owns half of it. He draws down the dividends.
Two things are going to happen to them under these TOSI rules, and they're quite concerned about them. The inactive brother has been receiving dividends for the last 10 or 12 years, equivalent to the active brother because they're fifty-fifty shareholders. That history will now be used, under the reasonableness rules, to say he has been unreasonably compensated historically because that's one of the three prongs in the reasonableness test. Second, he's not contributed any labour. Third, the initial capital for both of them was quite modest, so he didn't contribute a lot of capital—certainly no more than the other. He's owned half of this business for a long period of time, and under these new rules he will be taxed as if he were making $220,000 a year on any dividends he takes out, yet nothing will have changed in the business.
If he were an arm's-length shareholder, that would be completely unaffected by these rules. The reality is that families start businesses and they occupy different roles, and they set it up the same way as people at arm's-length. Now, under the proposed TOSI rules, those types of family companies will be treated in a very different fashion. Going forward, families will be discouraged from investing in family businesses by these rules.
We'll do a pretty hard stop at about 11:25, if we could, because the minister will be on at 11:30.
Just for the record, pursuant to Standing Order 108(2), the committee is doing a study of tax planning using private corporations, and what is presented before this committee during this panel will be forwarded as part of the consultations by the Department of Finance on the tax planning issue.
Welcome to the witnesses, and thank you for coming, many of you on short notice. We'll start with the Canadian Federation of Independent Grocers, Mr. Sands, senior vice-president.
Go ahead, Gary, and welcome.
Good morning. I want to thank the committee for the invitation to appear today and participate in the discussion as part of the consultation on the government's current review of tax planning using private corporations.
While I am the senior vice-president of the Canadian Federation of Independent Grocers, I am speaking today in my capacity as chair of the Small Business Matters coalition, a group of trade associations covering a wide variety of sectors. The cumulative number of businesses we represent is about 180,000. In terms of a coalition size, we are now the largest in Canada.
Over the last few weeks, there's been a lot of sound and fury coming forth from various quarters on the proposal about the issue we are discussing today and how the current system may not be working for the purposes intended.
Our coalition was aware that, in the last federal election, the Liberal Party had declared in its policy platform that, if elected, they would move to reduce the current small business tax rate to 9% but wanted to “ensure that Canadian-Controlled Private Corporation (CCPC) status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses.”
During the course of the last election campaign, our coalition supported that plank. I believe that was reiterated in the 's mandate letter that was publicly released.
I went through the media clippings before I came here today, and I can't recall seeing any outrage or anything like the sound and fury that we're seeing today. But as we said to the minister, we reiterated our support for the principle behind that review, a review aimed, as we understand, at exploring ways to ensure there was fairness and more transparency in the current system, and that it is being utilized by genuine small businesses for the purposes intended.
We also said to this minister, to this committee, and to previous ministers, as did others in the business community, that we need more fairness and transparency in the payment system in this country that is currently allowing small businesses to be put at a competitive disadvantage by unacceptably high credit card interchange fees amounting in the billions of dollars. The concept that you could push forward support for these principles in one area but not in another leaves me personally perplexed.
I'm not saying, and our coalition is not saying, that some changes cannot be made to proposals that were outlined in the consultation document. I expect changes will be made by the government based on the input they've received. The government has made clear to us that they are listening during the consultation period, and we have yet to see any legislation on the most contentious piece, passive income, nor any definitive statements of finality by the government as to how they intend to proceed.
When this occurs, we will make our views known, but in the context of this review, let's apply that principle of fairness and transparency to income sprinkling as an example. This is an extremely important measure that exists to compensate family members making a reasonable contribution to the business, and we look forward to working with the government on defining that term. But income sprinkling should not be used as a means by which self-employed, high-income professionals avoid tax by sprinkling income among family members with no reasonable connection to the business.
I know people who take advantage of this tax planning strategy, but with all respect, as I have said to them, the money that is going to them, our coalition believes, should instead be used to help further reduce the small business tax rate. Notwithstanding that Canada has the lowest small business tax rate in the G7, our small businesses have unique cost challenges. While investing in the bricks and mortar of their businesses, hiring local, buying local, and being the backbone of communities across this country, our members cope with skyrocketing energy costs, higher credit card fees for small businesses as opposed to large corporate chains, the growth of online shopping, and in some provinces, whopping minimum wage increases and a myriad of various and increasing fees, charges, and premiums.
All of these costs and more have a disproportionately deeper impact on small business. All too often this context is forgotten when governments examine the small business tax rate. All three levels of government must do more to be cognizant of the cumulative impact of these costs, no matter what level of government is responsible.
At the same time, the business community must be consistent when it pushes government for more fairness and transparency in other areas. We must ensure that the tax system is one that continues to support small businesses' ability to invest, hire more people, source Canadian products, and to expand. If the review that has been undertaken allows Canada to build on that, this is something, again, our coalition supports.
If there is one message I would leave with this committee today, it is to convey to them that, no, the entire small business community is not lighting their hair on fire over this consultation. Our members understand the principles that are being discussed in this review. We feel we are being listened to, and thanks to the openness that we have personally encountered with and and others, and how they've dealt with us—and that's all I can speak to—we're confident that the government will take action to ensure there are no unintended consequences to these proposals.
And yes, I want to repeat that we want to see a further reduction in the small business tax rate.
Just for committee's information, on the witness list is the Dairy Farmers of Canada. The individual representing them, Mr. Dykstra, was to be on a flight out of Toronto that got cancelled. We do have their brief and it will be translated and presented to committee members.
The representative, Mr. Lammam, from the Fraser Institute, who's in Vancouver, was supposed to be on video conference but that didn't work, so he is listening and will present by teleconference.
We'll turn to Mr. Roberts with the Canadian Labour Congress.
The floor is yours, Mr. Roberts.
Good morning, committee members. Thank you very much for the opportunity to appear before you today. I'm here on behalf of the Canadian Labour Congress.
The CLC is Canada's largest labour central. It's the voice on national issues for 3.3 million working people in Canada and brings together national and international unions, provincial and territorial federations of labour, and more than 100 district labour councils from coast to coast to coast.
I am the director of the social and economic policy department of the CLC, but I'm not a tax expert. I'm here this morning to convey the CLC's support for the government's steps to address tax planning through Canadian-controlled private corporations.
The CLC welcomes the federal government's plan to close tax loopholes for very high income earners. In our view, this tax proposal is an important first step towards bringing greater fairness to Canada's tax system. Current tax rules surrounding CCPCs make it possible for someone earning $300,000 to save more on their taxes than the average Canadian worker makes in a year, and that is fundamentally unfair. There is strong evidence that the benefits of preferential tax treatment for CCPCs accrue disproportionately to a select group of high-income families.
According to the Department of Finance, two-thirds of the top 0.01% of income earners own a CCPC. Published research by Professor Michael Wolfson found that more than 70% of those in the top 0.01% with incomes over $2.3 million owned a CCPC, and nearly half of individuals in the top 1% did. These numbers compare with fewer than 5% of tax filers in the bottom 50% of the income ladder owning a private company of this sort. Those are 2011 figures. Among the bottom 90% of income earners, fewer than 10% had a CCPC. Moreover, a portion of these individuals who owned shares in a CCPC would be low-earning spouses of high-income earners and therefore be from high income-earning families.
I want to stress that these tax planning opportunities are generally not available to working people. To incorporate is a complex undertaking entailing not insignificant costs, particularly when multiple CCPCs are formed by a single individual. The ability to benefit disproportionately from the tax advantages of incorporation increases at higher income levels.
The number of CCPCs has increased by 600,000 in the last decade and a half, a 50% jump. This kind of tax planning is costing the federal government approximately $500 million a year or more.
Taxes pay for the vital services that we all rely on, from physical security and food safety to health care and education and disaster relief. Canadians expect everyone to pay their fair share. Our tax system currently generously rewards those who take on business risk. Canada has the lowest small business tax rate in the G7 and is described by KPMG as being the most tax-competitive country for business globally. Preferential tax treatment for CCPCs allows individuals to reinvest in their businesses at a reduced rate of taxation, and business owners are able to claim tax deductions on their business expenses.
We therefore support the government's steps to address tax planning through private corporations, but in our view reforms can't end here. After a decade and a half of aggressive corporate income tax cuts at the federal and provincial levels and increasingly favourable terms for small businesses, we need to ensure that top owners and corporations pay their fair share too, which means a more aggressive clampdown on tax havens and corporate tax dodging.
This would include eliminating regressive and ineffective tax loopholes by cancelling the stock option deduction; cancelling the flow-through shares deduction; fully including capital gains in taxable income; taxing foreign e-commerce companies to level the playing field for Canadian providers; increasing taxes on banks and financial institutions, which have received windfall profits from corporate income tax cuts over the last decade and a half; and introducing wealth taxes and making income taxes more progressive.
In closing, we hope that the 2018 budget and the government's legislative proposals coming out of this consultation will take on some of the most regressive, wasteful tax breaks as well as tax planning opportunities through private corporations, tax favours whose benefits go disproportionately to a small group of high-income earners and are beyond the reach of the vast majority of wage and salary earners in this country.
Thank you very much.
Thank you, Mr. Chairman.
The CMA and our 85,000 members are proud to empower and engage with our patients, and to provide the highest quality of health care for Canadians.
Like many other organizations representing small businesses in Canada, the CMA remains seriously concerned about the magnitude of the proposed amendments and the time frame for a detailed evaluation of the impact of the proposals. We believe that 75 days for consultation is not enough, given the scope of the proposed changes to a structure that has existed for 45 years.
I would like to address three major issues that set out the unexpected consequences of the tax proposal as presented.
First of all, what happened to promoting the health of the economy?
You heard from the Coalition for Small Business Tax Fairness that small and medium businesses are the economic drivers of Canada. This description also applies to doctors' offices because they generate significant economic activities, while providing essential medical care to the communities that make up our great country.
It is becoming imperative to maintain the conditions needed to support the continued success of doctors' offices when the growth of the economy and the delivery of essential services are taken into account.
Here are some facts about it. In 2016, for instance, the gross domestic product generated directly by doctors' offices in Canada reached $22.3 billion. Medical professionals paid $6.2 billion in salaries and employed 137,000 people. Doctors' offices have generated $643 million in tax revenue for government coffers.
The tax proposals under review require doctors whose practices are incorporated, like any entrepreneur, to adjust their business models. These adjustments will have unexpected consequences by bringing about a decrease in the economic footprint of doctors' offices and by potentially limiting services to Canadians.
Second, why is incorporation logical for so many doctors in Canada?
The majority of doctors, or 66%, for a total of 54,000 doctors, own and operate a private company that is the structure that supports the viability of their practice by providing access to working capital. Doctors rely on working capital to invest in their practice, which includes the purchase of equipment, modernization of examination rooms, implementation of electronic medical records, and many other clinical investments. Working capital is also essential when physicians seek to provide more services to meet the growing health care needs of the community.
The structure may also make funds available to compensate for maternity leaves, sick leaves, parental leaves and employee turnover, as well as to save for retirement.
As a legitimate business organization for doctors that has been endorsed and encouraged by successive governments, incorporation has well-established risks and benefits.
Lastly, why is it necessary to make the right decision at this point? That's the last and most important question.
Doctors' offices play an essential role by giving Canadians access to medical care across our vast country. Any change to the current tax system may have unexpected consequences by forcing owners of doctors' offices to decrease their activities and by stifling the expansion of the most needed medical services.
We have an opportunity to get this right, and Canadians want us to. The proposals announced in July have far-reaching implications and unintended consequences. As a result, we strongly urge the government to undertake a comprehensive review of the tax system, with fairness as the principle driver of change. A fair tax system accommodates taxpayers who assume different levels of risk, and is flexible enough to allow small business owners, including physicians who operate medical practices, to manage in various circumstances.
Finally, fairness also dictates that if self-funded safety net provisions are eliminated or significantly adjusted in the new tax regime, other vehicles must cover planned and unplanned events. In our submission to the government, the CMA will ask that the proposal be suspended to allow for a complete review of a tax system that engages all Canadians and considers the unique aspects of all sectors.
I would be happy to answer any questions you may have.
Thank you, Mr. Chairman and committee members, for the opportunity to offer my thoughts on the federal government's proposed tax changes affecting private corporations. I hope you find my comments helpful and informative as you deliberate on this important public policy issue.
I'm the director of fiscal studies at the Fraser Institute, an independent, non-partisan economic policy think tank. The institute's mission is to measure the impact of government policies and to broadly communicate to Canadians how those policies affect their lives and the lives of future generations. My comments today reflect my own opinions and observations. They do not, necessarily, reflect the views of other staff, affiliated researchers, or our board of directors.
Since the committee has already heard much about the technical aspects of the government's proposed changes, I will focus my remarks on points that I think have not received sufficient attention in the public debate.
First, I want to commend the government for undertaking a review of the tax code. Canada's personal income tax system has become increasingly complex and uncompetitive over the years, so the goal of reform is a positive one. In fact, the Fraser Institute has published studies on both the growth in tax complexity and the opportunity for the federal government to dramatically simplify the tax system while fostering economic growth. This was largely a response to the previous government's tax changes, which tended to increase the system's complexity with no material improvement in efficiency. As part of the current review, the government has correctly identified problems with our tax system, including a proliferation of so-called boutique tax credits, which are economically ineffective tax breaks for certain groups and individuals. In addition, it has identified tax planning through the use of private corporations as another problem area.
However, the policies implemented to date by the current federal government, including the elimination of several tax credits, along with the proposed changes to the taxation of private corporations, are best described as a piecemeal approach that falls well short of the type of comprehensive tax reform that Canada now needs. This is a lost opportunity.
A major shortcoming of the government's approach to these tax changes is how it plans to use the expected revenues from eliminating preferential tax measures. The standard approach to tax reform, as was the case with Canada's major personal income tax reform in 1987, is to use the revenues from eliminating preferential tax measures to reduce marginal tax rates broadly. In doing so, the government would eliminate special preferences for certain groups while reducing tax rates for everyone, thus improving the economic environment for workers, business owners, entrepreneurs, and investors. Instead, the federal government plans to retain all the new revenues. This is actually a trend with the current government, as it has eliminated a number of tax credits and other special privileges embedded in the tax system without using the resulting revenues to cut rates broadly by an equivalent value.
When it comes to the proposed tax changes to private corporations, it's important to understand why anybody pursues tax planning through such vehicles in the first place, since doing so comes at a significant cost. Business owners, including professionals, must spend significant amounts of money on accountants and lawyers in order to use these options in the tax code. The reason these expenses make sense is that the costs are less than the benefits they gain by lowering their effective tax rates critically. The tax savings are a result of large gaps between different levels and types of income.
For instance, a professional can shift income to a spouse with lower earnings or perhaps a dependent child with no income. If the professional can do so, the gains from the lower tax rates can be significant. Let's assume a doctor being taxed at the top federal rate of 33% can shift income to a spouse who only works part time and pays income taxes at the lowest federal rate of 15%. That's an over 50% reduction in the marginal tax rate by shifting income from one spouse to another. The gain is even larger if the income is shifted to a dependent child with no income.
These tax differences are the reason why people pursue the strategies in question. If the government reduced the gaps between tax rates, it would reduce the incentives, i.e., the benefits, of such tax planning in the first place. Instead, the current government has made this gap larger by increasing the top federal tax rate from 29% to 33%.
By making the tax gap larger, the federal government, along with several provinces, inadvertently increased the incentive for eligible professionals and business owners to use these strategies. Introducing new rules alone to eliminate or mitigate the use of these strategies, as the federal government now proposes to do, will not solve the underlying problem. They will simply incentivize accountants and lawyers to figure out new ways to get around the new rules for their clients. The solution is to concurrently eliminate, or at least meaningfully reduce, the tax rate differentials that exist in the system. Doing so will reduce the incentive for tax planning in the first place.
I have just two final points.
A risk inherent in the government's proposal is the potential to make the tax system more complicated without solving the fundamental problem. There will remain an incentive for Canadians to incur the cost of hiring accountants to help them tax plan, but the administrative and compliance costs will increase as the Canada Revenue Agency plays a greater role in enforcing the proposed new rules.
Finally, my last point relates to the negative signals the government is sending entrepreneurs and investors in its public communications regarding the proposed changes to small business taxation. For instance, on a nationally televised interview, the finance minister used the phrase “going after” to describe his government's approach to extracting more taxes from incorporated professionals and wealthy people. This language signals to the world that Canada is an unfriendly place to do business, which undermines our country's ability to attract investment, which is a key ingredient for economic growth and innovation. Fortunately, we've seen positive tax reform from past federal Liberal governments, whether that's forging a technical committee on business taxation and implementing many of the committee's recommendations, or expanding RRSP contribution room, or lowering the inclusion rate for capital gains taxation. Indeed, pro-growth tax reform is a non-partisan issue.
Thank you, and that concludes my initial remarks.
Thank you very much, Mr. Chairman, committee members. Thank you very much for having us here this morning to provide evidence on the rules proposed on July 18 relating to the taxation of private corporations.
Kim and I are partners at MNP. MNP is the pre-eminent accounting, tax, and consulting firm to family businesses in Canada. We represent 150,000 private enterprises and family businesses, and 16,000 farmers. We're the primary service adviser to over 350 Hutterite colonies in Canada. We've heard from them.
They've clearly said they all agree that a tax reform is required, and fairness in a tax system is an honourable goal. We're not all convinced, though, that the proposed rules of July 18 achieve those objectives. They all concur that tax fairness with the simplicity of a system that can be administered is paramount in tax reform, and that tax reform takes time. Again, the July 18 rules probably don't achieve those two objectives.
Meet my other client, Marie. Marie recently transferred her farm business to her family after 30 years. She is now retired and receiving $40,000 on the redemption of her shares to fund her retirement obligations, taxes being one of those, around $1,000. Under the proposed tax on split income rules, the fact that Marie is no longer active in the business and has limited capital since the redemption means that tax will now become $16,000, a 16-fold increase. Marie doesn't think the July 18 rules are fair. She is not alone.
Our colleagues in Alberta look at the passive income rules as problematic. Our colleagues in Alberta had built up a liquidity chest to help fund the economic downturn they're currently facing. I was recently discussing with Kim, a client in our Calgary office, how, if it wasn't for that holding company, they would not be able to sustain their business operations today and continue to employ Canadians, given the downturn they're facing in Calgary. This is problematic.
The transfer of family businesses is also problematic. Family businesses today will face a bias. They would prefer to sell their businesses to an arm's-length third party because the effective tax rate is 25%. Selling intergenerationally to their family members may cost them twice as much. Tax should not be driving the decision as to who they want to sell their businesses to. If families want to continue their businesses, they should not be penalized by having to pay twice as much.
We all know death and taxes are inevitable. The earnings-stripping rules under sections 84.1 and 246.1 are problematic. You've heard from others, and you'll hear from us as well, that on death, private corporations should not be expected to pay twice as much. This affects all small businesses in Canada, not a niche or a small minority. All businesses, when their owners die owning those shares, will have a significant tax implications that need to be addressed.
We see the July 18 rules as a fundamental change to the taxation of private corporations. We don't disagree that tax reform is required. However, the rules proposed on July 18 are vague, uncertain, and lack predictability. Statutory interpretation requires that legislation be clear, fair, and predictable, so all Canadian taxpayers can plan their affairs accordingly. The proposed legislation is far from that.
We have ample evidence of where the vagueness in the language will cause uncertainty. Today, private corporations and their owners are pausing to understand what it means and how they can go forward. What do we recommend, you may ask?
Number one is, if we're going to undertake tax reform, we need a collaborative consultation period to involve all reasonable stakeholders. Open-minded stakeholders will all agree that tax reform is required in order to impose fairness, simplicity, and a certain level of equity for all Canadian taxpayers alike. The current rules lack those initiatives that we need to seek in the new rules.
I'd ask today that the consultation period be extended to incorporate more of these issues with the existing rules so that we can avoid these unintended consequences for all private corporations in Canada today.
Thank you. We look forward to your questions.
I'd like to thank the committee for the opportunity to comment on the Department of Finance proposals, and also thank the staff for their last-minute translation of the three tables and charts I'd like to use.
I would like to focus my remarks on two questions. Briefly, is income sprinkling unfair and how can we know? Do we have the evidence that Parliament and the people of Canada need?
You've already heard a lot about unfairness from most of your witnesses. Indeed, I'm impressed that there seems to be almost unanimous agreement that there is an issue of fairness. To reinforce this point, the first table in the handout shows some calculations that were produced by a private sector tax consultancy. These figures compare the income taxes of an individual who receives their income simply as a salary, with an individual who receives exactly the same income but via a private company, and in the same year, pays it out as dividends to a spouse, or in one of the rows shown, to a spouse and two children, none of whom have any other income.
I'm guessing that the first row, at $73,000, was put there because of the claims made by Dan Kelly and the CFIB, and the group with which he's associated, that two-thirds of small businesses have incomes below $73,000. While not stated explicitly, the implication is that this group is going to be hit hard by the proposals.
If we focus on the income sprinkling part of the minister's proposals, a very large portion of these small businesses don't even have CCPCs, so they would be totally unaffected. Even if the small business were incorporated and did income sprinkling, their tax savings would likely be less than the cost of the tax planner's fees.
I'll skip over describing the other numbers. A few minutes ago, Chris Roberts described the figures, the statistics that are shown in the graph, where 90% of individuals, for example, had less than $68,800, and well under 10% were owners. Let me emphasize a point that he made, that some of these middle- and lower-income CCPC owners were likely the spouses and children of the main CCPC owner, so that in terms of their family income, they lived in families with much higher incomes.
In my last set of graphs I've shown the number of CCPCs from 2001 to 2011 in four provinces, for each of three industrial classifications: restaurants, lawyers, and doctors' offices. The number of restaurant CCPCs has been fairly stable, drifting up a bit, while lawyer CCPCs have increased quite steadily over this decade in all four of the provinces shown.
More dramatic though are the number of doctors' office CCPCs in Ontario. In 2005 the Ontario government, as part of its fee negotiations with the Ontario Medical Association, made an obscure change in their corporate law—page 159 of the budget—to enable family members of doctors and dentists to own shares in their private companies. This change may have been well-hidden from the general public, but it must have been of real benefit to doctors and their families' tax positions since the number of their CCPCs increased 10-fold in the following years.
The change in Ontario's corporate law enabled high-income doctors who set up CCPCs to save tens of thousands in income taxes, and likely had virtually no benefit in terms of real economic growth. In the context of what the Canadian Medical Association said, “Ideally, we wouldn't get sick”, so the expenditure or the contribution to GDP is considered by some economists of medical expenses as regrettable. You'd rather not have to clean up pollution. You'd rather not have to fix people who get sick.
Using CCPCs for income sprinkling is unfair, both horizontally between individuals with the same income but able or unable to run this income through a company, and vertically by eroding the progressivity of Canada's income tax system. Rising income inequality has come to prominence over the past few years, with a focus on the income shares of the top 1%. Our analysis suggests that this degree of inequality is worse than the statistics indicate because these statistics fail to account for income received but retained within private companies.
When we pierced the corporate veil and added these hidden incomes to the share of the top 1% in 2011, it increased by one-third and by half for the top one-tenth of 1%.
Let me now turn briefly to my second and last point. The two graphs that I have just shown stop in 2011. When we started our research in 2013, this was the most recent data available. It took us over two years to assemble the data underlying these results. I'm very proud of the fact that our research has allowed us to shine a light, for the first time ever, into this dark corner of Canadian tax policy.
Unfortunately, such new light in the dark corners of the tax system is rare. As the Auditor General concluded in his spring 2015 report, tax-based expenditures “were not systematically evaluated and the information reported did not adequately support parliamentary oversight.”
While Parliament is able to scrutinize every dollar of what I'll call “front-door spending” by the government every year in the main estimates, various backdoor expenditures via tax preferences—or tax-based expenditures, as the AG calls them—are barely scrutinized once, when they are introduced in a budget.
Further—and let me conclude on this point—the analytical capacity of the federal government has been seriously eroded in the past decade. The previous government was notorious for knowing what it wanted to do, regardless of any evidence or analysis, especially when it was contrary. As a result, policy analysis groups within government departments have generally withered. It takes less than a year to destroy one of these groups, but up to a decade to recruit and rebuild. I worry that part of this government's initial communications problems with these finance proposals may be a reflection that, even the Department of Finance, for decades a powerhouse of unrivalled analytical expertise, has experienced some of this erosion as well.
Thank you, Mr. Chair, and thank you to the witnesses for coming today.
I want to start off with Mr. Sands. We've heard a lot of feedback on the tax proposals, whether in the riding or here in Ottawa in the finance committee. It's actually great to see so many people come out and share their thoughts. I've mentioned this before and I'll mention it again. This is a great way to engage Canadians in developing better policy.
Some things that I think everybody can probably agree on is that the Income Tax Act needs to be more simple, more clear, and more predictable, so that we don't need lawyers or accountants to be hired anymore. If you are living in Canada, you should be able to understand the Income Tax Act. That's a really good take-away.
One thing I really appreciated from your testimony was that you gave a pretty good proposal on income sprinkling. You said that, if there is no reasonable contribution to the corporation, you shouldn't be able to sprinkle the income. I think a lot of Canadians would agree with that statement. You also emphasized that, just because we're changing that rule, it shouldn't mean we shouldn't help small businesses in another way, which is to reduce the small business tax rate. Can you comment further on why you think that's really sound policy?
I want to reiterate, too, that the comments I am making today are based on the direct input we're getting from our various coalition members, notwithstanding what you're hearing in the media. I don't come here and stick my neck out that far. We're representing what we hear from our members, which are genuine small businesses in a variety of sectors.
The reason we favoured this from the outset, when the party that's now the government enunciated or outlined it in its election platform, is that we represent genuine small businesses and we want to see more fairness and transparency. We have advocated for that in a number of areas, and I'm not coming back to this committee in a few months to talk about credit card fees, for example, and look you in the eye and say we want more fairness and transparency and have you say, “A few months ago you said....” I struggle with that.
I am trying to reiterate that the comments I am making are based on actual feedback from genuine small business members, and the context is a continuing frustration for us, whether we're talking about the minimum wage in Ontario.... Maybe I could use that to emphasize my point. We don't want to get into a debate about the pros and cons of a 32% increase in the minimum wage in Ontario. What we always try to do is to look at the context that small business is facing right now.
We deal with a myriad of bylaws, confusing and contradictory holiday shopping, yet we have to compete with the e-commerce online, taxes—
I would like to thank all the witnesses who are here this morning for discussing this crucial matter for many people and many businesses.
Please allow me to raise two points briefly before I get to my questions.
We've heard a lot about family farms and the challenges of intergenerational transfer. My NDP colleague Guy Caron had tabled a proposal to improve this, but it was rejected by Parliament, unfortunately. We already had this concern prior to the proposed changes that we are currently considering.
We agree with those of you who are proposing an extension of the consultation period. They began on July 18, but for many small businesses and farmers, the date was problematic. We hope to hold consultations until December 16.
As long as we're talking about tax fairness, as Mr. Roberts of the CLC said, we should discuss tax loopholes for CEOs, rules on tax evasion and international agreements we have with tax havens, who are not at all affected at this time.
Dr. Marcoux, I would just like to verify something. The doctors who are members of your association are able to buy RRSPs or put money in a tax-free savings account, right?
Mr. Marcoux, I'm really interested in your testimony in particular, because you talked about the health of the economy. Yesterday we heard testimony that mental health issues, for example, cost our economy $51 billion, and the ask was relatively small in comparison to that.
It has been stated over and over again that, if the money in these corporations is actually used for the business, nothing changes with these proposals. Yet you said this is going to stifle growth and services. The changes to these policies apply only to situations where money is removed for personal income tax reasons. I'm very curious to know how you think this is going to stifle growth and services, when the only change and the only impact is on personal income taxes. If the money is actually used and invested in the business, then there is no actual change.
My real question to you is this. We've been hearing more and more from doctors who disagree with the CMA's position. I'm wondering if you might be out of touch with your members. Do you actually think your members like the idea that tax policy—this is similar to Mr. Boulerice's question—should replace fair compensation, and are you actually now advocating for greater inequality among your membership? If you look at the chart that Mr. Wolfson provided, you see that in Ontario doctors are provided a greater benefit than maybe in other provinces. We've seen certain doctors who are on hospital lists that have no risk for collection, they don't employ anyone, but if they're a private corporation they can divert and pay less income tax. Even general practitioners don't have that same option because they would have to pay out in different ways.
Are you worried that you might be contributing to greater inequalities among medical professionals? You're advocating for a system that, even amongst your own members, even among doctors, doesn't have the same access for all to this type of diversion of taxes.
As I said in response to Mr. Poilievre's question, I don't know what the pros and cons are.
The situation whereby one can have more than one million-dollar capital gains rollover—three, four, five of them—is one concern the finance proposals are addressing. If one had only one million-dollar rollover, that would have an effect, presumably, on heritabililty without more tax liability for a family farm.
As to your question, 90%—I was surprised when I looked at the numbers this past weekend—of farm businesses are incorporated. There are, then, already corporations.
The legal structures involved in farms are very complex. There may be one company that owns the machinery, another company or organization that deals with leased land. Unfortunately, we don't have the data to understand that. Whether one legal structure or another or a mix of legal structures is the most efficient way to organize this or that kind of farm, I simply don't know. I think it's an open question, one that merits some careful analysis.
Thank you, Mr. Chair, and thank you all for the presentations. It's a very interesting discussion today.
The Income Tax Act for sure is very complicated and complex. I'm not a tax expert, and God help you if I try to advise you on how to save money, because I'm not good at that either.
I want to point out, however, that the consultation process is on now, and we want to hear what the public and the experts have to say. We have no legislation on the table yet, but that gives more opportunity for input.
As I'm listening, I'm wondering, because the corporations have to incorporate that set-up and there are a lot of rules around the tax system. I want to ask if someone could tell me what it takes for these corporations to do their taxes at the end of the year. If the system is so complicated, as many have indicated, that you need lawyers, accountants probably. Could somebody tell me what an average corporation pays for an accountant to do taxes?
I do have some thoughts. For the members' benefit, I spent 1983 on the research staff of the special Parliamentary committee on pension reform, and that was the committee, among other things, that recommended comprehensive limits for tax assistance for retirement savings.
It was flowing from that, I think, that the Department of Finance increased the RRSP limits to what you see now to bring them in line with the limits on defined benefit pension plans in order to equalize the access to tax assistance for the self-employed or people who didn't have a workplace pension plan.
In one of our discussions, one of the members of that committee said that a fair maximum for tax assistance is about the income of a high school principal. In fact, the access to tax-assisted retirement saving is somewhat higher than that, but in the ball park.
I was really surprised by a witness before the break who said they needed to be able to retain earnings in their private company, not only to capitalize the company but for retirement savings and to pay for their children's education. There are other ways to pay for children's education.
I get love letters because of some of the articles I publish. One person emailed me and said, after a bit of discussion, that he had graduated with $150,000 of student debt. He was a doctor, and he was able to pay it off. It took him three years to pay it off. My God, what kind of income was this person walking into?
Back to the retirement savings, I don't know the details. I was just looking at section 8515 the other day for these individual pension plans. We used to have an issue many years ago when I worked in finance about what we called “top hat” plans, and it seems to have been tightened up considerably, but I assume it's still the case that you can buy retroactive plan enrichments. If you pay yourself a $20,000-a-year salary, which is relatively minimal, in order to set the foundation, and then you come along toward the end of your career and start paying yourself $100,000 or $200,000 a year for the last five years in a final average plan, you could buy back past service based on the multi-$100,000 salary. I think there are things that one might want to look at.
I call the meeting to order again. I believe the cameras know they have to leave. Thank you.
Welcome, Minister Morneau. As you know, the committee has had four panels this week related to tax planning using private corporations. We just finished two panels prior to your coming in. We appreciate hearing from you as well on this issue.
I just want to say to members that in Charlottetown's The Guardian, which covers the Island like the dew, there was a really good article by John Risley this morning, which applies to us today. At the end of the article, he says that this issue “shouldn’t be about political partisanship; it should be about good public policy.” I would hope that when we are discussing this issue today, we can keep that in mind.
Mr. Morneau, I don't know whether you have an opening statement, but the floor is yours.
Thank you, Mr. Chair. I do have an opening statement.
First of all, to the honourable members, it's a pleasure to be here. Thank you for the invitation to speak to you today about our consultation on tax planning using private corporations. I also want to thank you for taking the time to hear witnesses on our tax fairness plan.
For me, it's important to be here and to have the opportunity to listen to your views. This is a consultation, after all, and it is important to get your opinions, ideas, and insights that will help us to get this right. I'm looking forward to taking questions in a few minutes, but first I want to give you a bit of context for what it is we're trying to achieve.
The fact is that when you talk to people across the country, there is a lot of anxiety that the next generation—your kids or your grandkids—may just not be as well off as the generation of today. That's what motivates me, and that's what motivates our government. We want to make sure we create the conditions for all Canadians to succeed in what we know is a changing economy. To get there, I am committed to ensuring a healthy, thriving business environment and to protecting Canadian businesses' ability to invest, to grow, and to create jobs.
I think it's worth starting by taking a look at where we are right now. When we came into office a couple of years ago, we made a commitment to invest in Canada's middle class. We lowered taxes on middle-class Canadians and increased child benefits for those most in need. We invested for the long term in our infrastructure, because we saw this as critically important to the future of our country and to the future of our economy.
Right now we're the fastest-growing country in the G7 countries, and by a wide margin. Our economy over the last quarter grew at an impressively strong 4.5%, faster than it's grown since the beginning of 2006. In the two years since we've come to office, 400,000 new jobs have been created. Thanks in part to strong economic growth and the smart investments we've made in Canadians and for Canadians, we find ourselves with a fiscal position that's much stronger than we anticipated even only as recently as March. For the fiscal year that ended March 31, our budget deficit is $11.6 billion less than what we had projected only a relatively short while ago in budget 2016.
That's all good news, but we need to face facts. Growing the economy is not good enough. We have to work to make sure that the fruits of that economic growth go to all Canadians.
We need an economy where all Canadians, and not just a very small group of the wealthiest, should benefit from the advantages and opportunities that go along with this economic success.
There's still work to do to ensure fairness for middle-class Canadians. That's what we're talking about when we talk about our tax system—ensuring that everyone benefits from our economic growth, not just the wealthy few. From the very beginning, we said that we want an economy that benefits the middle class and all those people who are working hard to improve their situations. At the heart of that goal is a very simple premise: every Canadian needs to pay his or her fair share of taxes. That's why one of my very first acts as was to raise taxes on the top 1% so that we could cut them for nine million Canadians across our country.
One of my principal responsibilities as is to ensure that our tax system is fair, efficient, and supports growth, and that it is also equitable and treats all Canadians fairly. I want you to know that I take these objectives very seriously. In each of our first two budgets, we put tax fairness front and centre, backed by significant new investments in our economy. We increased resources for the Canada Revenue Agency to improve the enforcement of tax laws that are already in place. We also continue to participate in efforts with our global partners to combat international tax evasion and avoidance.
But we're not done yet.
Honourable members, setting up a private corporation offers hard-working, middle-class business owners the ability to sell shares, raise capital, and limit liability. It gives them access to the lowest small business tax rate in G7 countries, but we know that, for the wealthy, incorporation offers something different. In some cases, it offers something quite different. What that means is that a high-income, incorporated professional can be taxed at a lower rate—for example, in the case of a doctor taxed at a lower rate than a salaried nurse practitioner working in the same office.
As the economy grows, Canadians need and deserve to know that their tax system is fair. Right now, we're just pointing out that it's not. These are big changes, and we know we need to get them right. We know we need your help and your feedback on what we're trying to achieve. That's why , my new parliamentary secretary , and I are visiting small business owners, professionals, farmers, and fishers across the country and listening to ideas and answering questions.
Yesterday I spoke with Canadians across our country during a Facebook Live event and with a teleconference town hall. Tomorrow, I will be meeting with what I expect will be hundreds more in Oakville. We know it's important that we listen to people's concerns and that we listen to their ideas. It's also important for us to clearly state that hard-working Canadians, hard-working small business owners, and middle-class Canadians are clearly not the focus of our proposals.
To hard-working family farmers, we want you to know that we support you.
We know, for example, that 80% of the passive income in this country is earned by 2% of the CCPCs that are out there. The measures we're proposing will only affect a very small number of private proportions and a very, very small number of Canadians. Small businesses will continue to benefit from the lowest small business tax rate among G7 countries. The changes to the tax system being proposed will not impair a business's ability to invest, to compete, or to grow. The proposed approaches in addressing passive investment income are not about money that's being invested in a business. They're about money that's being taken out of the business, ensuring it's being taxed fairly, ensuring that the small business tax rate and the corporate tax rate actually help to support economic growth and do what we want them to do, which is to create jobs for Canadians across the country.
We're always open to better ways to fix the problems that we've identified in our consultations. But I want to be clear. We're going to fix them, because our government was elected to help to grow the middle class.
Mr. Chair, I would be pleased to take questions from the honourable members.
Maybe I can just start by saying thank you, because I know that you've heard from many of your constituents, many people, whether they're professionals or small business owners in your riding, and you've come to me with the comments and come to me with the ideas that people are bringing forward. It's really only with this that we can get these proposals right. That is in fact what we're trying to do.
I will say that we have really important objectives in dealing with a tax system that's created, over the last half a generation, an increasing ability for people to use tax planning so that they get themselves into a lower tax rate than other Canadians. Going along with that, as people do that tax planning, as more money doesn't go into the active business but instead is invested in passive investments that are essentially intended to stay there for the long term and not actually advance the business, that's money that doesn't go into our economy.
We decided, as a country—and I think that decision was a good one, and it was by successive governments—to have low corporate tax rates that encourage investment, and low small-business tax rates that encourage people to start and grow a small business. But when those encouragements leave money not actually doing what we were hoping it would do, growing the business, we are not doing what we hoped. We are trying to encourage people to invest in their active business with a low tax rate, and at the same time make sure that they reinvest in that business by creating the incentive for them to do so, and if not, for them to take the money out of the business, as they will, for the management of their family affairs.
We think that these incentives will help to create a tax system that's fairer and also improve our economic activity.
Mr. Minister, thank you very much for being with us today.
Obviously, as progressives, the New Democrats welcome any initiative that enhances fairness in the tax system. Some of the directions proposed in the documents presented move in that direction, and we recognize that, although we have some concerns about the impact this may have, particularly on farmers and some small businesses.
However, we believe the issue of fairness should be directed primarily at the wealthiest people, not those who have a family farm or a small convenience store around the corner. That's why we consider these consultations to be partial, incomplete. We have already asked that the whole tax system be assessed, including tax evasion, use of tax havens and certain loopholes.
In that regard, during the last election campaign, your party promised to “undertake a wide-ranging review of the over $100 billion in increasingly complex tax expenditures that now exist”. However, the proposed consultation today totally ignores the tax loophole for CEO stock options, which are often set up on Bay Street. But, collectively, it costs us $750 million a year. You made that promise, but you aren't following through. You have excluded it from the current consultations.
Why wouldn't we study this tax loophole, which is really very costly for us?
Thank you very much for your question.
It is very important for us to consider how to have a fairer tax system. It's a very important goal.
As you said, our primary objective was to test the feasibility of that, which is very important.
More than two years ago, we explained that it was important to consider private companies because they offer the opportunity for the richest people to use tax planning that allows them to pay less tax.
Having considered this for one year, with the assistance of an expert panel, we concluded that it was very important to include these measures in our consultation paper. That is our goal right now. We want to find a way to improve our tax system in the most important areas that provide benefits to the richest.
It is important to listen to the comments, which is what I am doing. It is very clear that there are ideas to ensure that farmers and small- and medium-sized enterprises understand that our goal is not to try to change their situation, but to allow them to have a better situation in the future.
I have another question, Mr. Minister. I'll come back to my image, which many have shared: I have the impression that you are a funny fisherman who keeps the small fish and throws the big ones back in the lake.
As for the use of tax evasion and tax havens, your party voted in favour of the NDP motion to address tax avoidance issues in tax havens, which Statistics Canada states costs us about $8 billion a year in taxes and in unpaid taxes in Canada, which is considerable.
However, we don't understand why you signed a new agreement, for example, with the Cook Islands, which have a 0% corporate tax rate. So things are moving in the same direction as in previous years.
A lot of people are telling us that a change could simply be made to subsection 95(1) of the Income Tax Act and section 5907 of the Income Tax Regulations to ensure that income that returns to Canada following a deposit or transfer to a tax haven can be taxed and to collectively return money to pay for our social programs or infrastructure, among other things.
Why are you refusing to go in that direction?
That's why we decided to allocate $1 billion more to the Canada Revenue Agency to root out tax evasion. This is very important and is under way.
That's why we've signed an agreement with our international partners to find a way to consider the erosion of the tax base and the transfer of profits, in other words, how companies can find a place where tax rates are lower, at a level that is not appropriate for companies. It is important.
That's why we have an agreement with our international partners on the common reporting standard. That way, we can consult accounts around the world to see how we can ensure that people pay their fair share.
So we're doing several things at once. It's very important to find the most important things, which is exactly what we're doing. The current measures are the most important, making it possible to see how the wealthiest manage their affairs in order to pay tax at a lower level than the rest of the country's citizens. We will continue along this path. We'll listen to the observations to ensure that we are taking the right approach.
It's very important.
Minister, we've heard some interesting testimony on the tax proposals. I want to point out that the Canadian Centre for Policy Alternatives presented and also provided a paper. I am going to quickly read a point from it, “Nearly all of the families who benefit most from income sprinkling are headed by male income earners, which undercuts claims that the current loophole is positive for gender equality, and almost half of all benefits flow to the richest 5% of families”.
We also heard testimony this morning that I found very interesting. It was somewhat of a different take on gender inequality. This might not be verbatim, but one of the things said was that women were used to keeping a low-tax lifestyle, and that continuing these types of tax strategies would actually increase women's inequality and the 28% gender gap, in terms of encouraging income sprinkling, predominantly to women—if the majority of these corporations are headed by men and if their spouses are women—and that going forward with this would actually encourage that sprinkling to create that low-tax lifestyle, and wouldn't close the inequality and the gender gap.
Again, this is based on testimony I've heard, so I'm curious. Based on the information you and the department have received, can you address some of the claims that closing these loopholes would actually hurt women?
Let me just start with a statement of the values of our government. We want to absolutely make sure that our time in office is one that is very progressive in terms of the ability of women to be successful getting into the workforce, to be successful in the workforce, and to have the ability to manage their lives in a way that enables them to do what they want to do in their careers at the same time as whatever other things they might want to do with their lives. This is a really important issue for us. We will not do anything that will, in any way, impede those overall goals.
For that reason, I am very much in listening mode to the kind of testimony you've heard this morning, but also to other testimony, because we want to make sure we get this right.
We started down this path knowing that the advantages that are available in these incorporated vehicles are ones that are benefiting, for the most part, wealthy Canadians, and benefiting them even more the wealthier and wealthier they get. We took a look at the impact on women, and we were of the view that these measures were not going to have a disproportionate impact on women, but we need to be sure of that, so we are listening.
The kinds of ideas that you heard this morning.... There are some issues. We are going to keep listening. We don't have all of the submissions in yet. We are going to make sure we've heard them all, and we are going to deal with this issue in a way that assures Canadians that our overall goals are met while we also have a tax system that's fairer.
Minister Morneau, thank you for coming to this committee meeting, and thank you for your patience, I might say. You've demonstrated great patience today.
One of the things that I love about being a member of Parliament, and certainly what I love about being a member of the finance committee, is that it affords me an opportunity to learn about things that I would not have otherwise learned. Being a salaryman most of my life, I never had occasion to understand the different aspects of our tax system. My father, who was the sole breadwinner in our family, was in the same situation, so I just didn't have exposure to this.
I have two questions.
First, I'll ask you the same question I've asked other witnesses. Does the tax system we currently have offer advantages to those who are incorporated, as opposed to those who are not incorporated or who are salaried?
The second question is this, and please take the time to explain to me and perhaps to other members of the committee who might be interested in hearing this. What's the difference between the amount of money accumulated in a public corporation and that accumulated in a private corporation? Feel free to get into the weeds.
Considering those two issues, in the first issue around the differences in the tax situation of people with incorporated vehicles versus others, there are some important differences that are there because we are trying to encourage people to start small businesses. The idea that we have the lowest tax rate among G7 countries for small businesses—on average, 14.4% in this country—is an important incentive for people to start a business and take those profits and reinvest them in their business.
The fact that we have a lifetime capital gains exemption for small businesses—a lifetime capital gains exemption that's grown significantly to $835,000—is an important incentive for people to invest in their businesses. There are differences between people who are getting a salary—or people who are unincorporated—and people who are in business. Some of those advantages make really good economic sense. We're trying to encourage behaviour that we know will grow the economy.
But there are some advantages that don't actually, necessarily, encourage the kind of opportunity we want. We don't see as a benefit the idea that people can sprinkle income to adult family members who are not involved in the business just to lower their tax rate. We think other Canadians who don't have that advantage would not see that as one that is actually adding value to our economy. Going forward we're looking at whether that should be continued.
We see that the ability for people not only to have a low tax rate to actively invest in their business but also to create a retirement account inside their business means there's an advantage that isn't really about growing the business. It's about growing a retirement account. Now, I understand that for small businesses that vehicle sometimes makes sense, because sometimes people need the access to those funds on a fairly short time period. We understand that. That's something we've heard from small business and something we're listening to closely.
But for people who are building up a big retirement account just for that exclusive purpose.... We know that, up to about 150,000 dollars' worth of income, it really isn't an advantage for those people, because they can instead use the RRSP and the tax-free savings account vehicles. It's only an advantage for the people who have significantly more income. That's critically important for us to understand.
With respect to the differences between private and publicly traded companies, my experience being in both a private and a publicly traded corporation as a CEO is that what most businesses do when they earn profits is they reinvest them in their business to grow their business, and that's what we want.
When most businesses finish with their reinvesting in the business, they dividend that money out or give it out in salaries. If they are a small business, they pass it out. If they are a bigger business, they dividend it out. Sometimes businesses will decide to leave some money on their balance sheet for reinvestment in the business that isn't the next year. In that case—of course—they're not really doing it for the investment income. They're doing it to invest in their business. The goal they have, then, is to keep that money in their business so that they have a future opportunity.
We're trying to make sure those objectives continue to be possible—invest in your business at a low tax rate, keep money in the business for what's necessary—and also find a way for people to invest in their retirement that creates some sort of inherent fairness in that retirement system, whether they be in a small business, a medium-sized business, or a large business.
We believe all these objectives can be met. We know we'll need to listen to people—we are listening to people—to make sure we get it right. I'm encouraged that so many people are coming forward with ideas on how we can do exactly that.
We'll have much more to say as we finish the consultations and consider the input and how best to get to our objective: a fair tax system that encourages investment.
Thank you, committee members.
I think you're right. There will probably be much more to say on your last words there. Just so you know where this committee is at, we will be forwarding you the testimony that has been put to this committee this week, plus other submissions that will come in on the finance committee's submission button for this issue.
I would say that I think all that testimony was heartfelt. It's easy to recognize that there are a number of concerns out there. There is a lot of support for fair taxation, and I think the bottom line is that people want the government to get it right when they've finished at the end of the day.
That will be forwarded to your office sometime on Monday. With that, we really appreciate your appearance here today.