Thank you, Mr. Easter, and thank you to the committee for the invitation to speak today on Bill .
Overall, I believe that this was a positive budget, and this implementation bill of that budget reflects items that the Canadian Centre for Policy Alternatives has been advocating for through its alternative federal budget for several years.
The gender analysis in particular was a strong and important addition to the budget process, but in my limited time here today, I'd like to focus on two items: the new Canada workers benefit, and the closure of tax loopholes used by a small number of private corporations.
With respect to the working income tax benefit and its transformation into the Canada workers benefit, I commend the budget for the decrease in those living in poverty by about 70,000 due to this measure. I believe this builds on other measures, including the Canada child benefit and the guaranteed income supplement, which, when fully implemented, will lift roughly 500,000 Canadians out of poverty, although three million to five million Canadians live in poverty, depending on the year and the measure, so there is plenty of work to be done.
Eliminating poverty in Canada remains an important and worthy goal. Tracking how measures impact it should be part of budget reporting, as it was in the case with the Canada workers benefit, but it's not always the case.
I believe the automatic enrolment feature of the Canada workers benefit is a crucial if underrated change in this program. It's a seemingly small change, but a very important principle, and far from universal in federal benefits. I hope the committee agrees that automatic enrolment should be extended across all federal transfer programs, not just in the Canada workers benefit.
Transfers should not have to be applied for, given that for many the only requirement is inadequate income, which is often already known by the CRA. I encourage the committee to conduct an investigation of any federal transfers or benefits where take-up rates are not 100% and determine how we could get there. One place to start is the Canada child benefit, which is not universally received by low-income families in first nation communities due to low filing rates on reserves.
With respect to the Canada workers benefit, the one item I am concerned with is the potentially dangerous distinction between “deserving” versus “undeserving” poor. At present, support for low-income families is not universal. Only those families who work, or who have children, or who are seniors “deserve” support. If you can't work, federal support is almost non-existent. The only support that a family would receive through the tax system is the GST credit, which is worth at most just under $300 a person.
One of the particular groups that falls between the cracks is that of those aged 50 to 65 who no longer have children and live alone, either in a couple or not. They don't receive the Canada child benefit, as the children have moved out, and they don't yet receive seniors' supports because they're not old enough. Poverty in this group is driven by high disability rates that skyrocket in this age group, either because those folks have worked hard, have been injured, and can no longer work, or because they are caring for spouses who can no longer work. Often, these families see big improvements as they turn 65 and gain access to important programs, such as old age security and the guaranteed income supplement, but in the interim, those Canadians often end up on social assistance, and in most provinces, at rates that are often inadequate.
In our alternative federal budget, we have examined the possibility of extending the GST credit and creating a top-up to the GST credit to support the lowest-income Canadians and also to capture this key group that currently falls through the cracks. This top-up would be worth up to $1,800 a person, but would be reduced more quickly than the GST credit to focus the benefit on the lowest-income families. I encourage members to read a more detailed analysis in our alternative federal budget.
In terms of the closure of the income sprinkling and passive income tax loopholes for private corporations this year, I would express my support, as I have in the past. I think there are clear equity implications, in that wealthy individuals who are paid in particular ways could reduce their tax bill while regular wage earners could not, and those regular wage earners would end up picking up the tab through taxation for the government services that we all enjoy.
It is clear that these abuses were restricted to a small group of private corporations, with a few small businesses actually affected, although I see little economic reason for lowering the small business tax rate as some form of compensation. The small business tax rate is built for one reason—to encourage the reinvestment of profits into the business instead of them being withdrawn by owners.
Neither income sprinkling nor the use of private corporations as a store of passive income have anything to do with reinvestment in the business and are merely ways of reducing personal taxes. As such, their closure would have little impact on business decisions to reinvest profits. If anything, the now larger disparity between the small business tax rate and the general corporate rate will likely further encourage other forms of aggressive tax planning, such as the ones that were just closed.
More broadly, I hope that this committee will focus on tax loopholes, not just with respect to private corporations but in a more wholesome examination of tax expenditures. I hope the committee will continue its examination of who benefits from tax expenditures, and continue to evaluate tax expenditures as if they were program expenditures that should undergo the same type of analysis. Not only that, but also examine the distribution analysis of tax expenditures with the goal of closing those tax expenditures and raising more money for other programs and other public services.
I thank the members for their time and I look forward to your questions.
Thank you, Mr. Chair, and members of the committee. It's a pleasure to be before you this afternoon.
I am grateful for the invitation to come before this standing committee to present the views of the Investment Industry Association of Canada, the IIAC, on Bill .
I will focus my remarks on part 1 of the bill and, more particularly, on the sections that pertain to passive investment income, the refundability of taxes on investment income, and income sprinkling.
The principle focus of our remarks is on the impact of the private corporation tax proposals on the capital formation process for new and emerging small businesses. Recent budget changes to the tax proposals have given small businesses qualifying for the small business deduction greater flexibility and scope in managing financial investments.
On the other hand, private corporations are still discouraged from building financial assets and engaging in small company financing and merchant banking activities.
Under the first feature of the tax proposals, the availability of the small business tax deduction—namely, the eligibility for a preferred corporate tax rate of 10% on the first $500,000 of qualifying active income—will be phased out for CCPCs and their associated corporations that exceed the $50,000 threshold for passive investment income in the taxation year. This will be achieved by a sliding scale that will reduce the small business deduction by $1 for every $5 in active income.
This phase-out mechanism limits the availability of the small business tax rate completely once the passive income threshold reaches $150,000 a year. While this is a simpler approach than previously, the inability for many companies to qualify for the preferred corporate tax rate, unless the passive income is below the $50,000 level, unfairly penalizes small business owners by limiting holdings of passive investments to meet unforeseen contingencies, to purchase corporate assets or property, and to expand business operations.
The second feature limits the refundable taxes that private corporations receive on the amount of certain dividends. Under the current policy, private corporations qualifying for the preferred corporate tax rate, or businesses taxed at the general corporate tax rate, are entitled to a refund of taxes paid on dividends from passive investment income. However, the budget provisions effectively limit the tax refund to non-eligible dividends from passive income. While the new proposals are an improvement, this approach will increase the administrative burden for small firms that will now be required to establish separate accounts for eligible and non-eligible dividends.
We urge the government not to proceed with the passive investment income tax proposals. The government estimates that the proposals will affect less than 3% of private corporations, or about 50,000 companies. However, we have little idea of how important these companies are to the Canadian economy. They may be among the largest and more dynamic in the country. In our view, if the government does proceed, the passive income holdings should be grandfathered in determining eligibility for the small business deduction, and the sliding scale should be indexed to inflation.
Our third feature relates to the income-splitting rules. We believe, here, that the government should consider further amendments to the rules, or at a minimum delay the implementation to give greater clarity on the rules and give time for small businesses to comply with the rules.
There are some complicated aspects of these particular income-splitting rules.
The substantive adjustments to the tax proposals for private corporations illustrate the new rules were introduced too quickly and with insufficient analysis. If the government proceeds with its modified new tax rules, we recommend it closely monitor the impact on expansion of existing, growing private corporations, and migration of these businesses to the United States. Canada can ill-afford the loss of available capital for small and mid-sized businesses.
Thank you very much for your attention.
Thank you very much, Chair.
Thank you for giving me the opportunity to testify today.
The focus of my testimony will be part 2 of the bill, clauses 47 to 67, implementing a $1-per-carton increase in tobacco taxes and modifying the inflation indexing for tobacco taxes from every five years to every year. We applaud these measures and urge all committee members to support these provisions. Tobacco products remain the leading cause of preventable disease and death in Canada, killing 45,000 Canadians annually and causing about 30% of all cancer deaths.
We also strongly support the federal budget provisions that provide increased investment in the federal tobacco control strategy. This is essential as part of the efforts to meet the objective of reducing tobacco use to under 5% by 2035. There are still more than five million Canadians who smoke. There are teenagers starting to smoke every month. We have made considerable progress, but enormous work remains.
The budget measures regarding tobacco taxes and funding of the strategy are complemented by Bill , adopted at third reading by the House of Commons last week, and by pending regulations for plain and standardized packaging. Plain packaging, a key measure to protect youth and curb the package as a means of promotion, has already been adopted by eight countries.
Increasing tobacco taxes is the most effective strategy to reduce tobacco use, especially among youth who have less disposable income. They're more price sensitive. That tobacco taxes decrease consumption is recognized by the World Bank, the World Health Organization, a vast number of studies in Canada and worldwide, provincial and territorial governments across Canada, and successive federal governments. Tobacco tax increases are a win-win, benefiting both public health and public revenue. The budget projects increased revenue of $375 million in this fiscal year alone as a result of the tobacco tax changes.
Inflation indexing of the tobacco tax was initiated in the 2014 federal budget, with indexing to occur every five years. The first inflation adjustment was to have occurred in 2019. Indexation ensures that tobacco tax rates are in effect kept the same on an after-inflation basis. In its pre-budget submission, Imperial Tobacco Canada recommended annual indexation instead of every five years as part of its recommendations to this committee.
Federal tobacco taxes are better than provincial tobacco taxes from a contraband perspective, because they apply on reserves. There's no difference between on-reserve and off-reserve tax rates. The level of contraband on which federal tobacco taxes are not paid is far lower than the contraband level on which provincial tobacco taxes are not paid.
I would invite committee members to turn to the background material that was circulated to you. The first graph shows comparative provincial and territorial tobacco tax rates. We see that Ontario and Quebec have the lowest tax rates in Canada but the highest contraband. That's counterintuitive to what we hear from the tobacco industry. They say higher tobacco taxes increase contraband. We see that in western Canada they have far higher rates of tobacco taxes but much lower levels of contraband.
Why is contraband higher in Ontario and Quebec? It's proximity to the illegal factories and sources of supply, but we can see that higher tobacco taxes have been sustained in the west and the Atlantic.
The next graph shows the trend in federal and provincial tobacco tax revenue. We see that even with reduced smoking rates, tobacco tax revenue continues to increase despite the lower smoking prevalence. In fiscal year 2017, the amount of $8.4 billion was collected, with even more of an increase if GST, HST, and PST on tobacco products were factored in.
The next graph shows the long-term trend in smoking prevalence in Canada. In 1965 it was 50% for Canadians aged 15 plus. In 2016 that was down to 17%. Over recent years we've seen a continuing decline. That's very positive, but it's also relevant when we see that tobacco tax revenue continues to increase. So tobacco taxes do benefit public revenue.
The next graph shows trends among teenagers, the 15- to 19-year-olds. We see a continuing decline in smoking prevalence among youth. That's very good. Tobacco taxes and other measures have contributed to that, but we want to keep driving this down further. The recently announced measures will help do that.
We thank the federal government for the new tobacco control measures that have been brought forward, and we appreciate the support from all parties. We look forward to continuing progress.
Good afternoon, and thank you very much.
I want to thank you on behalf of the Canadian Child Care Federation and Canada's child care and early learning sector for the opportunity to present today to all of you on part 1 of Bill , specific to the measures noted with regard to the Canada child benefit.
Bill , among its many items, calls specifically for new measures to be taken by the Government of Canada to index the Canada child benefit, or CCB, as of July 2018 to ensure it keeps up with the rising cost of living. This income supplement initiative, much like the CCB itself, is a progressive policy to lighten the financial burden on Canadian families, especially middle-class and low-income families, helping to support the costs of raising children. Like other federal income programs, such as the Canada pension plan, indexing CCB payments makes good sense and would be welcomed by eligible families.
Additionally, we support measures that ensure that appropriate taxpayers are eligible for the CCB and that information related to it can be shared with provinces and territories for certain purposes. As with indexing the CCB, this makes good sense and will help to ensure that those who are eligible will receive their benefit and any others that they may be provided by provinces, municipalities, or territories.
As an income supplement, the CCB is a welcome and important support for eligible families. The other integral federal support for Canada's families, which the CCB is not, is the federal government's multilateral framework agreement on early learning and child care, along with the companion bilateral agreements with the provinces and territories. Related to this, we are still waiting for the multilateral agreement on early learning and child care with indigenous communities to be formally signed, which will add another historic agreement, this one directly supporting Canada's indigenous children and families.
These agreements and frameworks are critically important, as they directly support the other part of Canadian family life, that being the need for high-quality, affordable, inclusive, and accessible child care, and just as importantly, start to address the national child care crisis in Canada. The Government of Canada has committed $7.5 billion over 10 years, starting in the last fiscal year, to fund these agreements, but significantly more investment is needed to bring Canada to the OECD benchmark of 1% of GDP annually.
Quality child care is the key element for economic security for the vast majority of Canadian families and for Canada's economy as a whole. While the CCB directly and financially supports families, it does not replace the need for progressive and significant investment in policy in child care systems and does not directly address child care affordability and accessibility.
A recent report by the Canadian Centre for Policy Alternatives on the rising cost of child care across Canada found that the typical family with young children spends about a third of its income on fees. To put this into perspective, child care fees can cost up to $15,000 a year in Ontario and even more in the GTA, more than triple the average tuition cost to put another child through university for one year, a system that is more significantly supply-side funded.
Supply-side funding, therefore, is how Canada—its provinces, territories, and indigenous communities—should be approaching child care affordability, policy, and funding, and exactly how we are seeing the provinces of Ontario and B.C. moving forward with their significant and historic child care announcements made this year, addressing head-on the crippling cost of child care in their respective provinces. They will join Quebec and P.E.I. in moving past tinkering on the edges of policy into a holistic and comprehensive solution for children and families.
In his ministerial e-newsletter sent out on April 24, 2018, the , the Hon. Jean-Yves Duclos, stated:
||For many parents, accessing quality child care is a major challenge. In fact, only one in four Canadian children has access to a regulated child care space. The development of Canada's early learning and child care systems is one of the best investments our government can make to help strengthen Canada's society and economy, and give children the best possible start in life.
We agree with the minister, and it is through direct funding from the federal government, along with policy, leadership, and partnership with provinces, territories, and indigenous communities, that Canada's child care crisis will be addressed. These things taken together with income support initiatives like the CCB will mean that Canada can join other OECD nations as a leader rather than a laggard with regard to investing in children and families.
I thank you for your time.
Good afternoon Chair, Vice-Chair, and committee members. Thank you for inviting me to speak today as part of the study of Bill .
As requested, I will focus my remarks on part 1 of Bill , more particularly on the section pertaining to the small business tax rate and dividend tax credit, as well as the small business deduction based on passive income and on preventing income sprinkling.
While discussing the specific tax measures included in the budget, I would like to touch on some commonly cited concepts used when evaluating tax policy. These include the principles of fairness, efficiency, and administrability.
According to Kevin Page, former Parliamentary Budget Officer and president of the Institute of Fiscal Studies and Democracy at the University of Ottawa, in a recent article in Policy entitled “Cutting Taxes is Easy, Tax Reform is Hard”:
||Tax theorists typically talk about two fairness concepts. One is vertical equity, usually taken to mean the more you earn, the more you pay. Two is horizontal equity, meaning those in similar circumstances pay a similar amount. The Liberals were effectively making the case that potential base-broadening reforms to small business taxation were 'two birds with one stone'.
Indeed, the proposed small business tax changes, while unpopular among those who will see their tax bills rise, increase the fairness of the tax system from a tax theory perspective. The efficiency of a tax system speaks to the ability to generate tax revenue in a manner that is least distortive to incentives and behaviours, thereby having the least impact on economic activity.
Looking to the small business tax regime specifically, a 2015 study from the C.D. Howe Institute by Benjamin Dachis and John Lester, entitled “Small Business Preferences as a Barrier to Growth: Not so Tall After All”, looked at two federal programs intended to provide special support to small business: the small business deduction, and the scientific research and experimental development investment tax credit. To quote the authors:
||The purpose of these programs is to improve overall economic performance by mitigating inefficiencies in the market. However, since receiving benefits is conditional on staying small, these programs could act as a barrier to growth.
Further, the authors found that neither of these programs have a meaningful impact on boosting investment. Meanwhile:
||...supports for small business have a social cost. The largest cost arises from the fact that the government must recoup forgone tax revenue by cutting spending or imposing higher taxes elsewhere. ...A more effective way of spurring economic growth is to reduce corporate income tax rates for all firms rather than providing preferential tax rates for small businesses.
The inefficiency of the tax system created by the small business tax regime goes further. Specifically, the rules governing private corporations as they currently exist allow for income to be moved between personal and business income, thereby creating an opportunity for tax avoidance. Indeed, the current rules incent taxpayers to structure their businesses to report income in a manner that is advantageous to them, but isn't the intent of the tax policy per se, with lower tax revenue being collected as a result.
This brings us to the ability of the federal government to administer its tax system in the spirit in which the tax legislation is written. This is difficult at times, as the letter and spirit of tax legislation are not always one and the same. Closing this gap requires, at times, changes to tax law.
In the context of changes to small business tax rules, these changes were first telegraphed by the federal Liberal Party in its 2015 election platform. Then, in July 2017, the began his consultations on tax planning using private corporations. While the federal government should be commended for engaging in public consultations, I'm sure no one in this room has any illusions about how this rolled out. It didn't go well.
Just because people get mad about the fact that tax preferences will no longer be available to them doesn't mean the baby should be thrown out with the bathwater. While there were definitely areas for improvement in the proposed changes to small business tax rules, there was also a great deal of misinformation. In the end, from the fall economic statement 2017 through to budget 2018, the federal government rolled out the tax changes with adjustments having been made to address some of the concerns raised in the consultation process. While some stakeholders remain unhappy, tax practitioners I've spoken with seem to be of the opinion that a lot of the most glaring concerns have been addressed.
In closing, the tax rules governing private corporations were known to have been unfair and inefficient, as defined by economists, while making administration challenging. The changes that have been implemented are intended to correct this. Only time will tell if this was actually the case and if business investment is impacted as a result. That said, a better approach would have been to include these changes as part of a broader tax reform package, which could have broadened the tax base while, at the same time, lowering the average tax bill for Canadian households and businesses.
Chair and members of the committee, I would like to thank you for inviting us to speak with you today.
MNP believes that we need comprehensive tax reform. Without it, we will have an increasingly complex and costly tax system. We need simplification and modernization of the current system.
At MNP, we represent over 150,000 private businesses in Canada, including 16,000 farms. We are the country's tax experts on small business. No one in Canada works with more small businesses day in and day out than MNP.
First, I would like to commend the government for listening to the concerns raised by the community relating to the private company tax proposals. The draft legislation released on December 13 relating to the tax on split income—or, as we call it, TOSI—and the passive income proposals in the budget of 2018 have addressed many of the concerns that we had last summer and fall. However, we believe that there still needs to be further clarity.
Given the amount of time we have today, I would like to focus on TOSI.
First, it unfairly targets service businesses. They account for 78% of Canadian small businesses, and they are being specifically excluded from some of the rules.
There is a new 20-hour test, which would exclude people from having TOSI apply to them. Most family-run businesses have never kept time sheets. They have never really kept track of the hours that are being put in by the owners of the business. We question how CRA will ever be able to have the evidence they need for these audits. It will all be personal testimony. This legislation could be retroactive in nature, because Canadians will be penalized for not keeping records that they did not have to keep at the time the work was being performed.
Next is the test of reasonability. These TOSI rules introduce several new factors to the reasonability tests. Labour is one of the factors that we see elsewhere in the Income Tax Act with a reasonability concept, but this new reasonability test blurs the line between investment, the return on investment, and the labour. This is new ground. We are asking for a balanced approach whereby the Department of Finance and the CRA provide a comprehensive framework to help determine what is reasonable and what is not. This will allow Canadians and the CRA to apply the framework consistently.
I would like to introduce you to a sample client.
Bob and Karen have a company: BK Transport. This is a very typical client that you would see across Canada. Over the last 30 years, they have grown from a small trucking business to one with significant capital. They have over 250 employees and operate in three different provinces. Karen is ill. She has reduced her regular duties in the business and is rarely able to come into work. Like many entrepreneurs, Bob and Karen declared dividends instead of paying themselves wages throughout the last 30 years. No one needed time sheets; no one prepared time sheets. Now, due to the TOSI changes, when we are paying out dividends, we will need to determine the relative value of Bob's work in the business to Karen's work in the business.
The first thing we need to look at is whether TOSI even applies. Because they are both involved in the business and both are shareholders in the business, TOSI will apply unless we meet one of the specific exclusions. For Bob, he'll have to start tracking his hours. He's going to need to meet that test of 20 hours a week on average. He'll have to start tracking it and keeping time sheets. Karen won't meet this test, and the other thing is that Karen has never had time sheets in the past.
Next, BK Transport is a service business. It is in trucking, which is a service. This will not meet the specific carve-outs. When we explain this to Bob and Karen, they can't understand why their trucking business is impacted, but a business that is in retail or in construction, with the same number of employees and the same amount of capital, is fine. Their service business is not.
Under this draft legislation, the final way out is that of meeting the reasonability test. This is very subjective. Do we think her dividends would be reasonable? We would think so. Do we have certainty that the CRA would agree? There is no certainty here.
What they would benefit from would be more administrative guidance on what would be considered reasonable as well as clarity on the intended businesses to be caught. We believe catching businesses like BK Transport is an unintended consequence in the drafting of the legislation.
As far as passive income is concerned, the draft legislation is greatly improved from what was in the July paper. We recognize the government's commitment to finding an acceptable balance on this issue. In our written submission, we have three comments on these proposals for your consideration.
In closing, Bill is a considerable improvement over what we saw in July. That said, we still need more simplification of TOSI so that it's something that business owners can understand and actually comply with.
Please consider our three recommendations. First, we believe strongly in comprehensive tax reform. This should be for all taxes, not just income taxes. Second, because the new TOSI rules unfairly target service businesses, we think we should look at this again and see whether service businesses should be excluded. Last, we are very encouraged by the continued collaboration with all stakeholders and also the experts.
As we move forward to ensure that we have a fair tax system for all Canadians, we will have to keep doing this. I look forward to the committee's questions on the tax on split income, on the passive income proposals, and on the new RDTOH regime.
Welcome, everyone. It's nice to see some familiar faces again. I wish to start with Mr. Bartlett from the Institute of Fiscal Studies and Democracy. You made a comment regarding taxes and a preference to have lower taxes, if that is correct. I think you mentioned that in your comments. I want to put on the record that when we came in we cut taxes for the middle class. If you look over a five-year horizon, it's over $20 billion in tax relief to nine million Canadians. We did institute that.
We also increased taxes on those who can afford it, the wealthiest, the 1%, and this has been applauded in a lot of quarters. Then we also cut business taxes for small businesses. If you look at that over a four-year period, it's $3 billion that will be saved by small businesses, which we know are the backbone of our economy. In the city that I have the privilege of representing, as one of three MPs, there are over 13,000 private businesses and it'll be approximately a $3-billion tax cut, which I think will be beneficial to those folks. I did want to put that on the record, and I'm not going to ask you a question directly.
I want to go to Jennifer Drever at MNP. I read your brief and I wish to say thank you for your comment when you say you “applaud the progress that the Government has made to date which clearly demonstrates that when the Government and stakeholders work together, we can achieve results that benefit everyone.”
I'm not going to go into TOSI, because the tax on splitting income will be a very interesting subject to talk about in a minute or two, and it's difficult. I do want to talk about passive investments and I would like to hear your comments on that, because I think we've landed at a place on passive investments that is equitable, that is fair, and that takes into account people's ability to save. If you want to go on maternity leave, you can save for that. If you're a doctor and you want to set aside up to $3 million or the equivalent in passive investments, $150,000 in income, all that's going to happen is that you're going to be bumped up from a 12% small business tax rate to the corporate tax rate of around 25% or 26%, which is not that bad on passive income, as opposed to active income.
Generally, the largest corporations don't pay the small business tax rate; that's to say, the wealthiest people don't pay the small business tax rate, because they're already in the higher corporate tax rate. So those entrepreneurs out there are going to keep doing what they're doing. I'm not asking for verification, but in your judgment, is that a fair assessment?
I think the Canada child benefit, as I've said before, will be important. Once we get the full dataset, which will probably be released some time next year, we'll see a fairly substantial decrease, particularly in child poverty, as well as in the poverty rates for the parents of those children. Of course, we often focus exclusively on child poverty, but poverty is a family concept, so if the children are lifted out of poverty, so are are the parents.
From a poverty reduction standpoint, the Canada child benefit is an important part of the overall basic income project that in essence the federal government has embarked on. Although, I would certainly encourage this panel to examine supports for, as I said in my presentation, families who don't have children and are not yet seniors but are still in low-income categories.
I think the Canada child benefit is unlikely to affect the cost of child care, which I would say is the largest impediment in Canada at this point in most of the provinces for female labour force participation. That is something the Governor of the Bank of Canada has highlighted, and others like have highlighted.
As Don mentioned earlier, the multilateral framework does provide some funding. It's the first time that the federal government has been involved in child care funding for a decade and a bit. It's positive, although most of that will be targeted to lower-income families.
I think that if we're interested in higher female labour force participation, what we need is a country-wide program that sets fees across the country, not just in Quebec, Prince Edward Island, and Manitoba where there are presently set fees. Those lower fees I think will help with female labour force participation.
Mr. Sorbara, I have just two very brief comments. I think you made some very good points.
You made the case that the passive income threshold of $50,000 translates to financial assets of about $3 million a year, and whether that was adequate or not adequate. I think we can debate that a bit, but it's certainly in the right direction.
There are two elements, though, that I think the committee should consider. One of them is indexation. It may be that $3 million dollars is appropriate in terms of a retirement portfolio for a professional, but I think there should be some protection for inflation, so that it keeps them at that lower rate.
The other is the retroactivity point, which the government in fact committed to before the proposals. The reason I think it might be important that retroactivity be taken into account, in other words that these proposals not be retroactive, is that professionals.... I'm thinking of some of the debate in the newspapers where doctors were encouraged to move into an incorporation strategy as some kind of compensation for salary, and the financial contracts that the medical profession negotiated.
It's those two elements, and I think my colleague from MNP made a good point about the complexities, which is another issue. I just wanted to make those two points.
To some of you, welcome back to the committee. Ms. Drever, you were here last time.
I think it was almost a year ago now when the small business tax debacle started. In fact, an eloquent Liberal MP called it “God awful” in his communication. He's an MP I like to quote quite often. He's not listening, but that's okay.
Ms. Drever, you said that these proposals are far better than what you originally.... You said you were pleasantly surprised. I guess the impression in the accounting community more broadly was that the government was fully intent on going through with every single part of it.
I want to start with TOSI rules. The example you gave was a complexity involved in trying to prove that a spouse in a relationship is actually involved, or perhaps was involved in the past, in a business, but isn't involved today because of health reasons or they have moved on to other things. I heard the same thing when I was in Vaughan from a medical company. They are going to be changing the structure of their company and creating a new one in order to avoid some of the problems with these rules.
Are you hearing that from some of your clients, that they are going to be creating new companies in order to try to manage their tax burden?
Mr. Bartlett, you mentioned that from an economic point of view—not political or anything else but economic—the best thing to do is to have a very broad base of taxation, and I'm paraphrasing here, with as few exceptions as possible to make it broad, easy to manage, and easy to apply so that there are no distortions in the system.
But we have a situation in which for the past almost 20 years, physicians especially—because I have a hospital in my riding and I have a lot of general practitioners and also a lot of clinics surrounding it—have been encouraged by their provincial body to professionally incorporate, and that's not unique to Alberta but is in many places. They are service businesses. There are very few people looking to buy into a practice like that, so they were encouraged by governments—provincial governments—to do so to take advantage of the tax structure. So what do we do for them?
What do you say to those who took advantage of a tax structure, because the provincial governments were telling them to do so and the federal government wasn't opposed to it, to doctors, to GPs, who are now finding themselves facing, in some cases, pretty high new taxes?
I'm going to move on to another topic, corporate tax, as a number of witnesses have talked about it.
Just yesterday, a witness from Canadians for Tax Fairness said that in terms of passive income, $50,000 was too high a threshold. Today, we're hearing that this threshold may be too low. So I was wondering if some of you could comment on a $50,000 passive income. How much should the investment be to generate $50,000? Do you think that's an appropriate threshold?
I would like to hear from any of you having an opinion on that.
Just before I turn to Mr. McLeod, I have a question on the comprehensive tax reform review that I think Ms. Drever mentioned. It's been mentioned before.
How would you see that taking place? Would it be with a royal commission, a group of experts, or what? This committee, in fact in our previous pre-budget consultations, recommended comprehensive tax reform, so I don't think you'll find much disagreement on this committee.
How would you put that together, if I can put it that way? How would you first start it? Eventually it'll get to a parliamentary committee, but what's the start?
That's for Ian or Kim, or both.
I guess I would start with the fact that it should be driven by the mandate. Then you would consider who would be involved. I think the mandate, to echo what Kim said, should be comprehensive and broadly based. It should deal with income. It should deal with expenditures. We're looking at the expenditure tax and at income taxes.
As was said, we have a patchwork quilt here that's 40 or 50 years old. I think the mandate should be broadly based. It should be objective in the sense that it could be a royal commission, but I don't think it necessarily has to be run by Parliament. In fact, I think it would be better if it weren't, but Parliament would feed into that process. It would seem to me that it would be critical, in order to execute the mandate, to have a cross-section of expertise from all aspects of the economy and the public.
I guess if you're looking at something to model it on, you could be looking at how reform took place in the U.S. recently. You could also look for ideas from the Carter commission back in 1972 and the Porter royal commission, which was on the financial structure in Canada as opposed to tax. I think there are some interesting models there.
I do commend the committee for going down that road, because I think ultimately that's what's needed in the country.
Thank you, Mr. Chair, and thank you to all the presenters here today.
I'm especially happy to see the Canadian Cancer Society here, talking about some of the concerns we have around smoking. In our country, we still have large populations in different regions where there are a lot of smokers. Wherever there are a lot of smokers, there are high rates of lung cancer. In the Northwest Territories, Nunavut, Yukon, and all areas of the north, we still have a high number of smokers. I've raised the concern on the floor of the House of Commons about this issue and asked what can we do about it. We really have to get it under control. I've sat through presentations in my riding with people from health, with the charts on the wall. Smoking and lung cancer is double or triple what everything else is that is a cause of cancer.
It was interesting to hear that you are looking at the issue of raising the cost of cigarettes as a detriment to smoking. I'm not sure if I totally agree with that, so maybe you could explain it to me, because, as I said, I'm from the Northwest Territories where a carton of cigarettes is $161.20 today. I don't see anyone quitting smoking because of that. Maybe you could just tell me what information you have, what research shows that this works.
The Canada child benefit is certainly, as I said, very progressive, and it's certainly helping a very targeted population of Canadian families in supporting their day-to-day expenses, without a doubt.
The other piece of that, of course, is around the affordability of child care, and we have to be really careful not to confuse the two. The two are separate issues. Absolutely, the Canada child benefit helps to pay for, again, those day-to-day expenses, which, for the majority of Canadian families, include child care, but that does not solve the holistic and systemic issues of child care.
We are in a historic time where we have the federal government back at the table providing policy and financial leadership on the funding of child care specifically. We just need to do more of that.
Thank you, Mr. Chair. I'm just going to split maybe two minutes of my time with Mr. Albas.
I want to go back to Ms. Drever on the TOSI rules. The rules use the term “business”, and the definition of “business” in the act is quite broad. It's very inclusive as a terminology, which means that you'll have to go back to the common law definition. If you get caught by these rules, these new rules, it's a very expensive tax bill.
In your view, your professional opinion, will you advise your clients to err on the side of caution, especially if they're a service company, as much as possible? It seems to me that one of the things the government should have done, especially in proposed subsection 248(1), is to provide a very clear definition of “business” that would clarify what business is for TOSI rules versus what is not business for TOSI rules.
Thank you very much, Mr. Chair.
I'd like to thank all the witnesses for coming here today.
I have a question I would like to pose to Ms. Drever and Mr. Macdonald, and hopefully I'll have enough time, Mr. Cunningham, to come back to you on a particular question.
The first question for Mr. Macdonald and Ms. Drever is in regard to what both of you feel. You raised a question in terms of how the government came up with the $50,000 passive income figure: What was it based on? I guess I'm just trying to get my head around perhaps the opposite, or if I could turn that question around a little bit, what would be the public good of a higher limit? Is it only of benefit to individuals? Does it promote economic growth? Does it promote savings among vulnerable people who would not otherwise save? I'm just trying to get my head around that.
Perhaps, Mr. Macdonald, you might want to start.
There's a clear challenge, in that CRA and maybe the people who are using private corporations as a means of savings don't know in advance what they're going to do with that money. Maybe they will use the money to invest in their business and grow the Canadian economy, or maybe they'll use that money as a deferred RSP, which is not how it was intended.
The philosophical question is how you separate out the groups of people. People might be using that money for some productive purpose, or abusing the corporate structure as a means of retirement savings, for instance, or income sprinkling, or income sprinkling combined with passive income for their children's university education, for example.
I think one of the ways you can do that is that this distribution of passive income with this relatively high threshold of $50,000, or say roughly a million dollars in actual holdings in the corporation, eliminates the vast majority of private corporations, so there's a very small number of people who have this amount of money. Moreover, it's not that if you have a million and one dollars it's taken away by the government. You just pay a slightly higher tax rate. If you're saving for a couple of years for a new piece of equipment, or for a construction project, for instance, it's possible you might pay a higher savings rate, but again it's difficult to determine, nor is there any specific...whether it's $55,000 or $45,000.
I think the goal, hopefully, is to eliminate folks who are using private corporations as a means of retirement savings. I think that this obvious red line does that reasonably well but does not unduly punish people who are saving for a couple of extra years for actual investment.
It should be higher. As the previous questioner talked about in terms of whether it should be higher or lower, it seems that the $50,000 translates to about $1 million at a return of 5%. For a lot of people, if they're relying on that for retirement, $1 million is still a small number.
First of all, if the corporation is set up for an individual, the $50,000 per year would strike me as being on the low side. For a small business, even a business that qualifies for the small business tax deduction, we talked about oil and gas, but you could talk about agriculture. If you're buying capital equipment, it's quite expensive. In fact, $1 million in equipment is not an unusual number and it could be quite higher for a small business.
My point is that they should be looking at a higher number, and I'd like to know how they actually arrived at the number they ended up with.
Yes, I would say we haven't talked about the larger private businesses. To your point, though, I think the tax we end up with, on savings, as you put it, or passive investment, for taking that money out is quite punitive. It is a 75% rate. The argument is the tax deferral argument. I'm not sure that really balances, but what it does do is create a disincentive, and it's a disincentive for those companies affected.
Now Finance talks about the fact that there are only, I think, 2.7% of private companies affected by the rules. However, if you look at those companies—and the Parliamentary Budget Officer did look at those companies—there are a lot within that group. A third of them have capital over $15 million. We know there's about $250 billion in passive money out there, and 88% of that money, or virtually all of it, is going to be among those companies that are caught with the new rules. I think it then turns on the question of the role played by these companies, which are, in effect, carrying large amounts of passive income. If you look at the Parliamentary Budget Officer's analysis, he says that more than half of the companies in that category are either finance and insurance companies or companies managing other businesses, so they're holdcos or real estate.
Those companies that are caught in these rules are playing a very integral role in the small- and medium-sized business sector in Canada by providing financing, merchant banking, taking ownership positions in companies, and it seems to me, they're playing a very critical role in the capital formation process and helping small businesses. Again, we're talking a lot of capital, over $200 billion in capital, so what's going to happen as a consequence of this significant change in the effective tax rate on the dividends? Will these companies reduce that activity and do something else or will they migrate to the U.S. marketplace?
I think those are very legitimate questions to be asking, and I don't believe the analysis has really been carried out.
Thank you all for being here.
Mr. Macdonald, you started off talking about the budget and the GBA+ analysis that was done for the first time, and I know you spoke to other things. It's been suggested, even by, for example, the Conservative critic for innovation, science and economic development, that this is really just pandering to gender and intersectionality.
Can you elaborate on why it's so important from an economic—not just moral—standpoint to do this type of analysis in budgeting?
Given that it affects half the population, as you know, this is an important part of what governments do, and it's certainly not anything new that the federal government does gender analysis. I think what's new is that it has moved from the departmental level up into the public budget documents, which I think is a positive analysis, and it can highlight for us important ways that we can increase economic growth, potentially at relatively low cost.
As we were saying to an earlier question, the corollary to reduced child care fees, which is increased labour force participation, was one of the original reasons that Quebec reduced fees in that province. It began that process in the 1990s, and went from having one of the lowest female labour force participation rates to having one of the highest, above the Canadian average, In large part that's due to the fact that there are more spaces and those spaces are more affordable, and that allows women to work.
If that same approach were taken across the country, and not just in Quebec, Prince Edward Island, and Manitoba, where fees are set, there would be potentially substantial economic gains by helping families, and in particular, giving women who want to work the means to work, to raise their family incomes and spend that money back into the economy.
That's one example, but there are various other examples. EI is a good one, with the normalization of paternity leave. Through the “use it or lose it” paternal component, I think it will in the long run likely reduce the disparity between women and men who take time off for children—hopefully. It's a limited circumstance at this point, but I think it's an important step forward.
It's an interesting age group in the sense that federal and provincial supports are relatively strong for seniors, in particular. We have established basic incomes across the country of over $16,000 to $19,000, depending on the province, which is relatively high. The same is somewhat true for families with children, using the Canada child benefit as well as provincial top-ups.
But there exists one group of people—those who don't have children, who are not seniors, and who are not working and therefore cannot access the Canada workers benefit. Again, if you've worked hard all of your life and you've become injured, or your spouse has become injured and you can't work because you're caring for them, or you just can't work, there are essentially no supports, outside of social assistance.
There are a couple of approaches that we could take to try to better create transfers for that group. One is some sort of more universal top-up, which is something we've examined in our alternative budget, that would sit on top of the GST and be worth about $1,800, which would decrease fairly rapidly with income.
Another approach would be to decrease the age of eligibility for important programs such as the guaranteed income supplement and old age security, which currently start at age 65. For the bottom 20% of the population, they actually see their incomes rise substantially as they reach the age of 65, because they can access those programs. If those programs were available earlier, we would lower poverty rates, particularly for folks who can't work and have no other means of support outside of social assistance.
That will depend on the province that each business is in, but they start to lose the small business deduction at $50,000 of passive income. It's lost completely by the time they get to $150,000. They are losing it on a $5 for every $1 of passive income ratio.
The difference from a federal perspective is that we're talking about 6%, which is the loss of the small business deduction. That is what it's worth for small and medium-sized enterprises. Add on to that the provincial taxes and it might be about 16% for each dollar of income. If it's $5 of income that's being lost, we're looking at something like $60,000, potentially. That would be the value of the small business deduction that could be lost for these businesses.
Bear in mind that the small business deduction is a deferral, and when we have a small business deduction, the ultimate dividends come out as ineligible dividends and are taxed at a higher rate. If we pay a higher corporate tax rate and we don't have a small business deduction, the dividends come out as eligible dividends, and they're at a much lower rate. On a year-over-year, they end up being very similar. Effectively, if you were to withdraw all the money in the same year, it would end up being at very similar tax rates.