Good morning, everybody. Welcome to meeting number 150 of the Standing Committee on Industry, Science and Technology. It seems like I'm always trying to remember what committee I'm on.
Today we're continuing a study of the impacts of Canada's regulatory structure on small business.
Today we have with us, via video conference, from Calgary, Alberta, Moodys Gartner Tax Law, Kim G.C. Moody, Director, Canadian Tax Advisory. Also via video conference, we have Paul Medeiros, Managing Director, North America, of NSF International. Furthermore, from the Independent Contractors and Businesses Association of British Columbia, we have with us Tim McEwan, Senior Vice-President, Policy and Stakeholder Engagement. We will have, from Kirkview Farms, Michael MacGillivray, Owner.
Thank you, everybody, for coming today and participating in our study. You will have seven minutes each to present, and after that we will go into a round of questions.
Why don't we start with Moodys Gartner Tax Law?
Good morning. I have some prepared notes, which, I hope, you have in front of you.
Thank you for the opportunity to appear before the committee to discuss this important topic. As I understand the mandate, the committee is to identify areas for legislative and regulatory modernization and improved international co-operation with the goal of identifying areas for improved efficiency to reduce costs to regulated parties, support international alignment and trade, and create flexible pathways for innovative products and processes to come to market while protecting the health and safety of Canadians. That's a pretty ambitious mandate in my view.
For the benefit of the committee, my name is Kim Moody. I'm a CPA and one of the directors of Moodys Gartner Tax Law, a tax law firm that services successful entrepreneurs, with an emphasis on Canada-U.S. tax issues for private businesses. I have a long history of serving in leadership positions for the Canadian tax profession. Our firm has had extensive experience in how regulation or tax law hampers or, at a minimum, increases the burden of doing business in Canada.
From a high level, private business owners or their investors seek the following pillars when deciding how and where to invest their capital—these are well-known principles, so I won't go into a lot of detail—which include, predictability, easy access to capital, good labour markets, low red tape, and a good tax system. I'll say more on a good tax system in a minute.
I will focus the bulk of my comments on what I know best, which is tax, but before I digress into my tax commentary, I will say that regardless of what I know best, I believe it is fair to say that amongst all the pillars that I've mentioned—predictability, easy access to capital, good labour markets, low “red tape”, and a good tax system—the common thread is that private business owners/investors seek fairness, consistency and simplicity amongst all the pillars. I also believe it is fair to say that the current regulatory regime and environment covering such pillars does not wholly meet those objectives. I also believe it is important for regulations to be agile to respond to environments that can quickly change.
I'll digress outside of my expertise for one minute.
Let's consider Alberta's current labour laws. Recent amendments to provincial law have made it much more difficult for small businesses with 19 or more employees to comply. For example, our firm with approximately 40 employees has had to, in order to comply with the new laws, retain expensive labour lawyers and consultants to help us build a new workplace occupational health and safety manual. I just received a draft of it the other day, and reading it makes me almost throw up. There's a rule for most common-sense things. For example, if one of my employees rents a car during the course of their employment duties, there is a paragraph on how they should familiarize themselves with the car before driving away. If they have an accident, there's a paragraph instructing them to call 911. There is another paragraph instructing my employees to ensure that they have a valid driver's licence. All of this stuff is common sense, but given the “nanny state” environment where I live, rules replace common sense.
There are significant punishments to me as the employer if such rules are not written down or if I can't produce such a manual. And to make it worse, such labour laws are not consistent with those in the various other provinces in which we do business and which make no obvious attempt to try to coordinate such laws and regulations. How much has our firm paid so far to comply with these new labour laws? It's well in excess of $25,000 and growing. That's a very significant sum of money for a small firm like ours. Will there be a good return on my investment? Nope. I'm very confident that these new laws, which are applied with a one-size-fits-all approach, will have a negligible impact on improving labour conditions for my employees, but our firm bears the brunt of the cost and the risks. At the very minimum, it would be great if Canada's provinces tried to coordinate labour laws so as to ensure easy compliance by private business employers.
I'll go back to my area, tax. Albert Einstein was correct when he stated that there's nothing more complex than the income tax. Canada's income tax statute, the Income Tax Act, is by far the largest and most complex statute in Canada. And it continues to become even more complex with numerous yearly additions that add to the patchwork quilt that is our act.
Committee members, if any of you have never picked up the act and tried to make sense of even a few pages, I would encourage you to do so. I'm confident you'll find the Income Tax Act almost as incomprehensible as most people find it. And if you find it is incomprehensible, how do you think private business owners find it? Most are intimidated by income tax law and the required compliance. Accordingly, they need to hire expensive advisers like our firm to ensure compliance.
While that might be good for our firm's business, it is not good for our country as a whole. Private business owners should expect their country's income tax laws and related regulations to be understandable and easy to comply with.
You want a recent example? Consider the new income splitting rules as set out in section 120.4 of the act. These new rules were introduced as part of the embarrassing attempt by our current government to reform the taxation of private corporations on July 18, 2017. The first version of the rules was incomprehensible. The second and third versions were just as incomprehensible. Ultimately, the new law is incomprehensible for the average private business owner and their advisers. Unfortunately, private business owners and their accountants will require income tax specialists, such as our firm, to help them apply these new rules, thus increasing compliance costs. Recent other amendments are also incomprehensible and have wide application, such as the taxation of restrictive covenant receipts, the application of the small business deduction, intercorporate cash movements and others.
The joint committee on taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada wrote the following in its March 8, 2018, submission to the Department of Finance about the new income splitting rules that I just referred to:
There is a time and place for complexity. Rules likely to apply primarily to multinational corporations, who can be expected to have access to sophisticated advisors can reasonably be complex and involved where necessary for their purpose. The TOSI [income splitting] rules apply in a context that could not be more different. Every single...resident in Canada who receives or realizes an amount derived from a private corporation, partnership or trust will need to understand these rules in order to comply with the law.
I agree with this quote. I was the co-chair of the joint committee at the time of the March 8 submission and one of the signatories to the submission.
What can be done about this? In closing, I have two simple but rather ambitious suggestions.
One, introduce an office of tax simplification. In the U.K. it was recognized long ago their income tax legislation administration had become very complex. Accordingly, this office gives independent advice to the government on simplifying the U.K. tax system. I would suggest, like many others, it is time for Canada to do the same as the U.K. as long as this office is independent and free of political interference.
Two, undertake comprehensive tax review and reform. The last time Canada had comprehensive review and reform was the Royal Commission on Taxation, which released its landmark six-volume report in 1966—before I was born—after approximately four years of study. Such recommendations were studied and debated for a lengthy period of time following its release and was the impetus of many foundational changes introduced in 1972. While limited studies have since been done, nothing comprehensive like the Carter commission has been undertaken since.
Since I'm running short of time, I'll quickly go ahead. Since 1972 our Income Tax Act has become a patchwork quilt of changes built on 1972 tax reform. However a patchwork quilt can quickly become busy and complex, and it's time to construct a fresh quilt built off a comprehensive study.
I strongly disagree with some academics who suggest a continued patchwork quilt approach, with studies to provide limited tweaks as the way to proceed. I encourage such academics to spend a few days in my office or in the shoes of entrepreneurs who struggle with the current patchwork quilt approach. The last thing we need is a patchwork quilt, which was put through a light laundry cycle that will only make the quilt appear a bit cleaner for a short period of time. It's time to retire our current quilt and construct a new one with no patches.
Thank you for inviting me. I'm happy to take questions.
Thank you very much, Mr. Chair and committee members. It's a pleasure to be here today.
By way of background, the Independent Contractors and Businesses Association of British Columbia has been the leading voice for British Columbia's construction industry for 43 years. We represent more than 2,100 members and clients who collectively employ over 50,000 people.
We advocate for our members in support of a vibrant construction industry, responsible resource development and a growing economy for the benefit of all British Columbians.
For the benefit of the committee, some of my remarks today will be informed by previous roles I had as a senior public servant in British Columbia where, among other things, I had responsibility for red tape reduction, regulatory reform, and small business and major investment delivery.
For the purpose of staying within the time limits that I have been given, my brief will serve as a broader version of the remarks that I give today.
We appreciate the opportunity to provide our suggestions on the critically important topic of Canada's regulatory structure and its impacts on small business. This study is very timely for addressing the silent and underpriced costs that small businesses face with the myriad of laws, regulations, policies and guidelines imposed by all orders of government.
The effects of government regulatory activity are disproportionately felt by smaller businesses of zero to 20 employees, where the majority of Canada's jobs can be found. We hear every day from our members that the cumulative effect of government regulation can be crushing as they work to deliver construction services on time and on budget, as they develop their workforce in a rapidly changing business environment, and as they simply struggle to meet their regular payroll.
When government enacts new regulatory measures, the cost to a small business often manifests as lost or forgone business that would otherwise have generated additional income, created more jobs and provided incremental tax revenue to government. These opportunity costs are often hard to quantify but they are nonetheless very real as small businesses cope to fill out one more form or as they make one more call to determine what government is asking of them in existing or new regulation.
Deployment of information technology in online government is always worthy of consideration in any effort to improve regulatory compliance and service delivery, but it is not a panacea nor is it a substitute for addressing the general architecture of regulation, processes and continuous improvement.
As the standing committee has heard recently from a couple of other witnesses, in 2001 British Columbia embarked on a comprehensive program to reduce the quantum of regulation on its books. Those efforts now span 18 years and are recognized as best practice by many jurisdictions throughout North America.
Initial efforts saw a reduction of 36% in unnecessary regulations between 2001 and 2004, increasing to 49% by 2018. This was accomplished without compromising compliance or health, safety and environmental protection objectives. Between 2015 and 2017, B.C. broadened the scope of its red tape reduction efforts to include service delivery improvements within government.
Both initiatives have built a lasting architecture and have entrenched a cross-government culture and commitment to continuous regulatory review, monitoring, improvement and accountability.
The B.C. experience also offers a number of lessons that could be of benefit to the standing committee to identify pathways to improvement and in the improvement of the overall architecture for regulatory reform. A number of the key elements are listed more comprehensively in the submission you have before you. I'll run through them sequentially, but briefly.
The first is ministry mandate letters. In British Columbia in 2015, ministry mandate letters included red tape reduction as a core corporate goal of government, and that was included within each and every minister's mandate letter. That provided the impetus to drive a culture of regulatory reform into the system. It had quite a bit of effect as government moved beyond the efforts to reduce the quantum of regulation and into the service improvement side of red tape reduction.
As I mentioned earlier, British Columbia has actually measured the quantum of regulation on the books and has had a one-for-one rule—one regulation in and one regulation out—for some time. I understand that that commitment has been extended through to 2021.
Stakeholder engagement, and also public servant engagement, is critically important. On the stakeholder engagement side, it is always important to engage with a variety of sectors on an ongoing basis. Another innovation in British Columbia in the 2015-17 period was harnessing the power of social media to bring in ideas from the public, ideas that we then drove into the system as efforts continued to improve upon our regulatory agenda.
Having a secretariat with a central agency function is also important and linked to the mandate letters in terms of having that tracking function of regulation, but also pushing out to ministries the ideas that come in from the public and from industry sectors and monitoring.
The next thing I'd say is transparently reporting on an annual basis what the quantum of regulation is on the books and where service delivery improvements can and have taken place.
Before I conclude, I want to highlight three items of considerable concern to our members from a red tape perspective and that are currently under consideration or within the realm of federal regulatory policy. One is Bill . Our members are very concerned about the impact of this legislation. It is now before the Senate. We made representations to the House of Commons committee last year, but we're very concerned about the impact this will have on a go-forward basis for major project delivery. Simply put, the approvals process there has a number of additional barriers that will make things much more difficult.
The steel tariffs that have been imposed in response to section 232 in the U.S., while understandable as a response to the measure that President Trump took, are having a detrimental impact on the construction industry in British Columbia via cost escalation. We're keeping a very watchful eye on the supply side because we simply can't source steel at a competitive price from eastern Canada; it has to come from the United States or offshore.
Finally, I want to flag for the committee the question of community benefit agreements, which many of you may have heard about from the Building Trades Unions. We flag this as an issue from the perspective that it can lead to cost escalation in publicly tendered contracts. We want to ensure that for those projects within provincial jurisdiction, for example the SkyTrain extensions that are forthcoming in British Columbia, federal dollars not be given to the province if the precondition is building trades will only do the construction. In British Columbia there is a projected labour agreement framework that is to be put in place by the new government that will freeze out non-union and non-affiliated contractors, or about 85% of the B.C. construction industry.
In closing, I'd like to highlight one key metric. The World Economic Forum has placed Canada's overall competitiveness at twelfth out of 140 countries, but for regulation, we are disconcerting 53rd out of 140 countries. The work you're doing today is critically important in that overall competitiveness context, which serves to underscore the urgency of your committee's work.
Thank you again for the opportunity to present today, and I look forward to the question and answer period.
Thank you, Mr. Chair and committee.
By way of background, NSF International is a not-for-profit organization helping businesses in the agricultural processing, food equipment, restaurant and retail industries. We help them navigate through the food safety and regulatory environments, and have been doing so for over 70 years.
Our extensive suite of food safety and quality services spans every link of the food chain from farm to fork, including certification, product testing, training, consulting, auditing and regulatory compliance. NSF Canada is located in Guelph, Ontario.
I serve as managing director and oversee the consulting and technical services area, as well as our retail audit services teams for North America. From our organization's engagement with industry, my own background in public health and participation in projects and networking activity with both industry, academia and the regulators, I think I have an interesting perspective on the regulatory burden facing small business in Canada.
In 2018 my team consulted in one form or another with around 800 Canadian food facilities. Approximately 560 of these were SMEs. In preparation for my participation today, I solicited feedback from several of my consulting team members. I spoke directly with several of our clients, and I also reflected back on my 25 years of experience in the food industry.
Today I will focus my comments on food safety regulations, in particular the safe foods for Canadians regulations. I'll share with you what we are seeing and hearing as an organization as it relates to the regulatory burden and impact on small business.
I will start, though, by talking about what I think before I talk about what I see and what I hear. In general, I do believe food safety regulations are necessary. I don't think anybody would argue with that, and it does make sense to revamp them as we have been doing.
When you look at food recalls and the outbreaks that have happened—even as recently as last week—the University of Guelph published a study showing that 14% of the sausages they sampled contained meat products that were not on the label. So, clearly, we as an industry have a lot to learn and can do a better job providing safe and wholesome food to consumers.
I had some first-hand experience dealing with manufacturers. I will say for, the most part, that when a food manufacturer approaches us for help, they want to do the right thing. They want to make their product safer. They want to be in compliance. They want to grow the business, and that is the vast majority.
Once in a while we run into clients, food manufacturers, who want to be in compliance but they do not necessarily understand the reasons for doing so. They just want to be in compliance. They want to satisfy their direct customers and perhaps take the quickest route through.
One example is a bakery I worked with. Early on, I saw on their labels them declare that that all of their products were peanut-free. I thought that was interesting because, as I walked through their bakery, I saw peanuts everywhere. I asked the owner how they could declare on their label they were peanut-free, how they could put a spotlight on their product telling people with peanut allergies to eat their product, that it was safe, when they had peanuts basically everywhere. He responded with an answer that did not really give me a sense of comfort. The bottom line, he said, was not to worry, that they had it handled and that it was basically a marketing approach.
Fortunately these sorts of clients are few and far between, but because they do exist, I do think it behooves regulators to make sure that our regulatory framework can provide sufficient standards and enforcement.
I would also say that there is little extra burden from the safe foods for Canadian regulations on any existing food manufacturer out there, large or small, currently providing food products to some of the large retailers, such as Loblaws, Sobeys, Metro, or even some of the large food service companies such as McDonald's. I say this because, for years, these companies have been required to have higher levels of food safety systems in place, and higher from a regulatory perspective as well, so they're used to it.
However, it's estimated that between 20,000 and 40,000 new food companies will require licences to comply with the safe food for Canadians regulations. These companies have never had these systems in place and do not fully understand them. When they're asked to put these in place, I'm telling you that they will not know what hit them, because these requirements are a game-changer. They change how you operate your facility day to day, how you maintain your records, who you hire and how you train. The impact is quite significant. It is my fear, and the fear of many others in the industry, that a lot of those companies will not be prepared.
I will also say that the safe food for Canadians regulations can actually help smaller companies. A smaller manufacturer does not have the bandwidth or the sophistication to police its own ingredients supply chain. The Maple Leaf Foods of the world can do it. The Loblaws can do it. The local candy manufacturer or the local bakery cannot do it. The more the regulators can ensure that the ingredients coming in to that small manufacturer are safe, the better able that small manufacturer is to produce a safe product.
So I see a lot of good, for sure. I also see that the Canadian Food Inspection Agency, the CFIA, is trying to communicate these new standards through their website, through consultations, through communications. They're also making it known that they will take a graduated, soft-enforcement approach. Again, to me the question is this: Is a soft-enforcement approach the best solution versus maybe a cleaner and simpler way of launching a new regulatory regime?
What we see is that the Canadian Food Inspection Agency is not getting the message out enough to the SMEs. What we see is that the communications channel, such as the CFIA's website, is a good attempt. But someone like me, who's been in the industry for 25 years, can navigate it and understand the new rules; someone who really hasn't been working with the terminology for 25 years will have a hard time understanding it. So it's of limited help to those small and medium enterprises, for sure.
The funding that is available to help companies develop their programs will help, for sure, but often that funding is difficult to gain or to understand, and it runs out. Then the small business owners are still burdened with having to maintain their operations day in, day out, especially in the very competitive environment where they're being faced with other cost pressures. Again, it's one additional cost pressure.
We have also heard from many—
Good morning, my apologies for the delay.
My name is Michael MacGillivray. I am a small business owner. I own a farm about 100 kilometres due east of here in a little place called North Glengarry. It's part of the regional municipality of SDG.
I've been asked to come to represent the regional food council, which I'm a member of, to talk a bit about some of the challenges facing small business owners, small ag producers and ag-food processors.
Our family farm has been in our family since the early 1800s. I'm the seventh generation, and hopefully not the last, but there are a lot of challenges facing ag-food businesses today, especially on the regulatory aspect.
To give you an idea, I'll talk about three different members of the committee.
One is a processor, meaning an abattoir. A couple of producers have been trying to get them to look at becoming a federally inspected abattoir, because in eastern Ontario there are no federally inspected abattoirs, so we have to use provincially inspected ones, whereas in Quebec—our neighbours—they can actually come in. They have the federally inspected abattoirs, so they can access our market, but we can't access theirs.
This gives you an idea of some of the challenges that we have in creating a local food system. We don't have access to a market that... In my case, I'm a lot closer to Montreal and I could be selling into the Montreal market, but that's not possible because there are regulations in place. That's a really quick overview of one of the challenges.
We also have the region of Akwesasne within our territory, which is another challenge because that region sits between Quebec, Ontario and New York state. There are, of course, food security issues for first nations, but it makes it very difficult for us as local producers in that region to be able to serve that market because of a lot of the regulations that our local businesses face.
Of the other two, one is a local brewer, which is a start-up. They were hoping to be producing about six months ago, but because of a lot of the regulatory compliance they've had to go through and a lot of the challenges, they are still not producing. That is a challenge.
We also have a local winemaker who has expressed frustration with dealing with a lot of the regulations for starting a winery. He has made a significant investment. He has about 10 acres of grapes growing, but he's been struggling with a lot of the regulatory compliance issues. Again, it goes back to the Ontario and federal aspect. A lot of the federal aspect...he's having trouble understanding why they're involved in the first place.
These are some of the challenges that are facing our businesses in our region and are having a negative impact from an economic development point of view.
Well, there is a lot to add there, and I only have a little bit, but I could literally talk all day on a lot of the problems.
I'll give you two quickies here. You're probably familiar, generally, with the new passive investment rules that were passed as a result of the July 18 private corporate tax proposals and, ultimately, what was landed on.
Ontario, as you probably know, chose not to follow the lead of the federal government with respect to the passive investment proposals. In my view, that's great leadership because those rules are ridiculous. They're ridiculous in terms of their complexity and ridiculous in terms of policy. They ultimately result in a marginal tax rate of about 130%, if you're affected by them, on every dollar that's affected. So Ontario chose not to follow them.
Now what do you have? You have a situation where businesses, if they could, transfer from, say, Alberta—which, by the way, our office operates in, as well as Ontario—across the country. You could literally transfer a business to Ontario from Alberta and pick up a significant tax benefit by doing so, in order to avoid these implications.
Now, who would have thought about that? Nobody, other than somebody who would run the math. That's point number one.
Point number two, just to pick up on your opening comments about whether I fall on the sword of this being bad for my business, by starting from scratch again, I don't say so very lightly. I've been in leadership positions in the tax profession for a good chunk of my career, and I see the damage that a complex code, a complex income tax act, does. My hourly rate is over $1,000 an hour. Am I proud of that? Not really. Do I think the average business owner can afford that? No, they can't, and I think it's crazy that you must have a person like me, of whom there aren't many across the country, deployed to give private business owners proper advice.
There are academics across the country who suggest that all we need to do are little tweaks. That shows, to me, a lack of practical experience. I mean no disrespect to the academic community, but the bottom line is that it shows they just simply don't....
It's good to see our witnesses. Thank you for coming today. I've heard a lot of great stuff.
Mr. Moody, it's good to see that your business is in Alberta. You're probably familiar with some of the story I'm going to tell briefly, about a constituent of mine, a farmer, who's encountered these new small-business tax changes and how the regulatory impact of that has increased his greenhouse gas emissions significantly and his tax burden.
The tax changes meant that he could no longer ship his grain to a terminal owned by James Richardson International and a group of private investors less than five kilometres away from his terminal, where he had to pay a 15% tax. Instead, he had to ship to a terminal owned by a United States company, nearly 40 kilometres away. At the old facility, he would have had to pay a 28% tax rate, versus a 15% tax rate by going to an American-owned company. This was due to these tax changes, which said that if a relation of his had any shared interest in that grain terminal, he would have to pay a higher tax rate.
Are you seeing this impact in your tax practice? What's your comment on that?
Thank you very much, Mr. Chair. Thank you to all our presenters. It's been very informative. We're undertaking a very important study and, obviously, is something that needs to be reviewed continually.
I've been in small business development for many years and this is always a top priority for people when they want to start businesses or scale up, so, again, your thoughts on established regulations, and perhaps new regulations, are important.
I'm going to ask my question of Tim McEwan.
You had indicated a concern with community benefits legislation that's been introduced recently. I think it was a private member's bill from the now , in which the can dictate.... Because we've made investments in infrastructure historically all across the country and a lot of shovels are in the ground, the community can recommend—not dictate—to the minister that local trades be used, apprentices must be onsite, or it could be that green space be developed. There are a number of things.
Tim, could you please describe some of your trepidation with the regulation?