I call the meeting to order.
Welcome to meeting number 26 of the House of Commons Standing Committee on Finance.
Pursuant to the order of reference of March 8, 2021, the committee is meeting to study Bill , an act to implement certain provisions of the economic statement tabled in Parliament on November 30, 2020, and other measures, for the first two hours. For the third hour, pursuant to the order of reference of February 3, 2021, the committee is meeting to study Bill , an act to amend the Income Tax Act regarding the transfer of a small business or family farm or fishing corporation.
Today's meeting is taking place in a hybrid format pursuant to the House order of January 25, 2021. Therefore, members are attending in person in the room and remotely using the Zoom application. The proceedings will be made available via the House of Commons website. So that you are aware, the website will always show the person speaking rather than the entirety of the committee. I would remind folks that they're not supposed to take photos or screenshots of the proceedings.
I will leave out a lot of the rest of the preliminaries, but I will remind you that members and witnesses should be addressed through the chair.
I'd now like to welcome our witnesses.
I will not at this time go through the departmental witnesses, but will welcome and officials from the Department of Finance and others. They as well will be here for the presentation with Minister Freeland
Before you start, Minister, we are going to be interrupted by votes. Your ears might have been burning before you sat in your chair, because we were having a discussion about how we could ensure that you're here for an hour. I just don't know how this is going to complicate things, but maybe you could respond to that and then go to your remarks.
Thank you, Mr. Chair and members of the committee, for the invitation to be with you virtually today. Accompanying me virtually from the Department of Finance are Maude Lavoie, Dave Beaulne, Trevor McGowan, Lesley Taylor and Nicolas Moreau.
I'd like to begin by acknowledging that today is a sombre anniversary. It is one year since COVID-19 was declared a global pandemic by the WHO.
On this national day of observance, I know that all of us honour the memories of all those who have lost their lives to this disease, and we have the deepest compassion, I know, all of us in this committee, for their families and their loved ones.
To the extraordinary Canadians who have been serving on the front lines in our country's fight against COVID-19, to personal support workers in long-term care facilities, to all of our health care workers and to the essential workers keeping food on our shelves, from cashiers to truck drivers, let me just say thank you.
I'm happy to be with you, parliamentary colleagues, to talk about Bill , which would implement several important and necessary measures from the fall economic statement, which I tabled last November 30.
For over a year now, Canadians have been coping with an unprecedented crisis that is still in progress. But spring is coming and there will be better days ahead.
Until we've got COVID-19 under control, our government will do everything it can for as long as it's needed to help Canadians get through the crisis. From the beginning of the pandemic, the Government of Canada has done everything in its power to get the virus under control and limit its economic impacts. So far, $8 out of every $10 spent in Canada to combat COVID-19 and help Canadians came from the federal government.
In the 2020 fall economic statement, we set out a detailed plan to protect Canadians, jobs and companies in Canada during the pandemic's second wave. We took rapid action to meet these commitments.
By supporting Canadian businesses, jobs and families, not only were we helping our communities get through a difficult winter, but also preventing economic after-effects. This support will allow for a full and robust economic recovery once the virus is totally under control.
Bill is an important component of our government's economic plan. It makes it possible to move forward with the emergency measures outlined in the economic statement designed to provide immediate assistance to families with young children, students and businesses, in addition to measures to protect the health and safety of Canadians.
When we debate Bill , here is what is concretely hanging in the balance.
The fall economic statement announced a new $1 billion safe long-term care fund to help provinces and territories protect seniors. Of this, Bill would provide $505.7 million immediately, while our need is most urgent, to support long-term care facilities over the coming months to help prevent the spread of COVID-19 and to help prevent outbreaks and deaths in supportive care facilities.
In addition, we have proposed, through this bill, to provide up to $395.6 million to support a range of health initiatives to help Canadians cope during the pandemic and to continue our fight against the virus with vaccine funding and development, testing and treatment.
The challenges brought on by this pandemic have caused great hardship for Canadian families with young children and brought unanticipated costs. Bill proposes to provide immediate relief for low- and middle-income families with young children who are entitled to the Canada child benefit by providing up to $1,200 in 2021 for each child under the age of six. Families that have a net income at or below $120,000 would receive four tax-free payments of $300. Families entitled to the CCB who have a net income above $120,000 would receive four tax-free payments of $150, for a total benefit of $600.
This temporary assistance would directly benefit more than 1.5 million families and more than two million children at a time when many are still grappling with the financial impacts of the pandemic.
If I can speak personally for one moment, I am hearing so clearly from my neighbours and constituents who have young children just how hard COVID is for them. I know we would all love to give them this extra support. As you all know, we can't get it to them until Bill receives royal assent.
Our government is also working to protect the future of students who had to leave school or who were unable to obtain summer internships or jobs.
Through Bill we will eliminate interest on repayment of the federal portion of Canada student loans and Canada apprentice loans for 2021-2022. This important measure will provide $329.4 million to 1.4 million Canadians who are looking for work or who are in the early stages of their career.
The bill also formalizes an amendment to the Income Tax Act that will allow the Canada emergency rent subsidy to recognize rent payable as an eligible expense, provided certain conditions are met.
As members of this committee will recall, the Canada Revenue Agency is currently administering the rent subsidy with rent payable as an eligible expense. This is because the businesses relying on this subsidy told us that it was what they needed, and all of us listened. Not all small businesses have the cash flow to pay their rent on the first of the month with the reimbursement to come later. This bill ensures that those small businesses can get the support they need. Again, I'm sure we've all heard from small businesses in our ridings who really need that support.
Additionally, Bill authorizes payments to Canada's six regional development agencies for the regional relief and recovery fund. The government announced the $962-million fund on April 17, and then expanded it to $1.5 billion on October 2. As a next step, Bill C-14 proposes a further top-up, to $2 billion, for this fund. It helps support businesses that for one reason or another are unable to access other federal pandemic support programs.
The point I'm making here is really simple: The measures in Bill are essential. Canadian families and Canadian businesses need this support to get through the crisis.
Colleagues, today let's set aside partisan sparring and work together to support the people all of us serve. I welcome vigorous debate, care and study. Indeed, debate has been central to Canada's response to COVID-19 so far. Our government has received constructive input from all parties, very much including all the members of this committee. I recognize the critical role parliamentary committees play in scrutinizing government legislation. I understand that the opposition's formal role is to oppose, and that delay forms part of the opposition tool kit in the Westminster parliamentary system. I get that. When I was first elected, I sat in the opposition benches. I asked questions in committee of the member for , who now sits in this committee with us all, when he served as trade minister.
That said, it is now time for us to move forward. Canadians need the concrete support this bill offers, and they need it urgently. At second reading, some of our colleagues on the opposition benches set partisan politics aside to do what is best for Canadians and supported the bill. I was frankly surprised that the Conservatives chose to do the opposite. I was surprised they did that even as they put forward an opposition day motion urging the government to support small business.
I say to my Conservative colleagues, on this committee and in the House, that—
It's great to see you, Minister. Thank you for being here.
I want to ask you a question about pandemic preparedness. It's great to see that Bill takes this seriously. As we know and as we saw with COVID-19, pandemics can strike at any time and I think we have to be on guard and on watch for future pandemics.
I'm reading directly from the fall economic statement where it says that $1.5 billion is proposed to procure PPE and provide warehousing and logistics support so that PPE can be delivered quickly, when needed, along with medical supplies to provinces and territories and indigenous communities, as well as to ensure the readiness of the national emergency stockpile.
Could you speak to the importance of that? I can't tell you the number of constituents who, over the past year, have asked what the government is doing to prepare for, heaven forbid, the next pandemic. What can we do to further ensure that Canadians are safe in that regard?
Thank you very much, Ms. Dzerowicz. It's great to see you.
That is such an important question, and in my opening remarks I spoke about the additional support that Bill would give to families with young children. I added a personal plea—not in my written remarks—because I have to say, my youngest child is now 11 and it is challenging having children, even in elementary school, in a pandemic. Virtual school is hard for kids, but my heart just goes out to all the young families in Canada with a child under six. It is so hard. I have had people, constituents, neighbours, just crying when they talk about how difficult it is.
As you know, one terrible consequence we've seen is women quitting their jobs, dropping out of the labour force because they just can't keep it all going. Bill will give those families with the youngest children in our country a bit of extra help. As we said in the fall economic statement, we really believe now is the moment for us as a country, after 50 years of talking about it, to finally put our shoulder to the wheel and to build universal early learning and child care across Canada.
Here, I do think all of us have to offer a chapeau, figuratively, to our colleagues from Quebec who have shown the way. They have shown that affordable, high-quality universal child care has a huge economic impact. Quebec has a much higher participation of women in the labour force than the rest of Canada, about 4% higher. There is a great economic benefit, not to mention that it makes life so much easier for families with young children.
Good afternoon, Madam Minister. I am delighted to see you here with our committee.
I'd like to begin with a few comments. I am very pleased that Bill is under study in committee today. Unless I'm mistaken, it's the first economic bill to be debated by the Standing Committee on Finance since the last election. We understand that it's urgent to act in a pandemic, but we've also found that it's beneficial to everyone for bills to be studied in committee, and that doing so enables Parliament, as the legislator, to perform its role effectively.
Bill implements a number of measures that were announced in the 2020 fall economic statement, which created great expectations for the next budget. Among other things, you mentioned a recovery plan of between $70 billion and $100 billion.
Madam Minister, I was really expecting this budget to be tabled in the final week of March during which we will be sitting. According to the media, this isn't going to happen.
Can you confirm that your budget will not be tabled in March?
Thank you for your question, Mr. Ste-Marie.
With respect to support for families, individuals and businesses, the federal government has been there for Quebecers and all Canadians. We were happy for Canada to be in a financial position that made it possible to do so.
I would also like to point out that in the summer, we gave an additional $19 billion directly to the provinces and territories under the Safe Restart Agreement and an additional $2 billion for reopening schools. The safe restart funding was in large measure for health spending by the provinces and territories to combat COVID-19.
As I mentioned in my opening address, Bill will provide more funding to the provinces. There will also be measures to help support residential and long-term care centres, or CHSLDs, because we understand just how important they are.
Last Friday, I had a discussion with the provincial and territorial ministers of finance, including Mr. Girard, Quebec's minister of finance. I was very happy, moreover, to be able to thank him publicly for his sincere and frank collaboration. He's an excellent colleague. We discussed what else the federal government might be able to do to help the provinces and territories, particularly with respect to combatting COVID-19. I told the ministers of finance…
Thanks, Minister Freeland, for being here today. We hope that you and your family continue to be safe and healthy during this pandemic.
I want to say at the outset that I think it is absolutely inappropriate that we have gone two years without a budget. In Canadian history, we have had massive crises and we've never had a two-year period without a budget. It's a question of accountability.
Despite the fact that we're talking about the fall economic update and Bill today, the reality is that C-14 has areas where it doesn't respond at all to the needs of Canadians at this critical time during the pandemic.
I'll start with an issue that I have raised with you, which is the issue of subsidies that have been given that permit abuses. We raised this with your predecessor last spring. If we're going to give wage subsidies and supports for businesses, we need to put in place...as other countries did, to avoid abuses—like dividend payments, executive bonuses and stock buybacks—of government funds.
We have seen a whole range of abuses taking place with government funds. There's Bell Canada, which received $122 million and laid off hundreds of workers and are still paying dividends. Suncor laid off a couple of thousand people.
Here is a critical issue. You referenced it in your opening remarks when you talked about $505 million for long-term care. Extendicare, Chartwell and Sienna Living paid out, collectively, over $172 million in shareholder dividends, despite the fact that they were receiving massive and significant government subsidies. During this time and up until now, over 760 residents and workers have died in their facilities.
I think it is obvious to anyone that instead of being paid out in dividends, that money should have gone to resident care and to support the safety of their workers.
My question is very simple. Do you agree that there was a major mistake made in not ensuring that abuses like this couldn't take place? Why wasn't this loophole closed in Bill ?
Thank you, Mr. Julian, for raising all of those important issues.
I'll start with the wage subsidy. If I have time, I'll say a couple of things about long-term care.
On the wage subsidy, I hear your concerns. It is important for companies to understand that, legally, the wage subsidy can only be used to pay employees. It can't be used for any other purposes. Any allegations of misuse should be reported to the CRA. There are penalties for misuse of the wage subsidy. It is an additional 25% penalty and potentially imprisonment, in cases of fraud.
It was and is important for us to have that support out there, but we do take abuses seriously.
The other thing I would say about the wage subsidy is that my priority, at the end of the day, is to keep as many Canadians working as possible. Our supports—and I would say the ingenuity and resilience of Canadians—mean that we are getting through this unprecedented global pandemic.
However, at the end of the day, there are still 636,000 Canadians who don't have a job today who had one before the virus hit. For that reason, our objective has been and continues to be to have in place the most comprehensive set of supports we can to keep people working. The wage subsidy is a really important program in that regard because it keeps people connected to their jobs.
As you know very well, Mr. Julian, that is so important for a person's sense of self-worth and dignity. Also, if one becomes long-term unemployed, it is much harder to get back into the workforce. That's the rationale there.
I could say more about long-term care, but I see you wanting to talk and maybe I've run out of time.
Thank you, Mr. Chair, and thank you to the minister for appearing in front of us and having an open discussion on so many things over the last while.
I represent the Northwest Territories. A year ago we were very nervous. We didn't know what the outlook was. The pandemic was declared, and we spent a very difficult year trying to make sure everybody was looked after. We're now starting to see light at the end of the tunnel. Vaccines are being rolled out, and here in the north it looks like we'll have everybody vaccinated by at least April.
The combined work of the Government of the Northwest Territories and the Government of Canada can only be described as a success in keeping the cases down and the death numbers low. The low numbers in the north have allowed us to do more than what our southern neighbours were able to do. For us in the north, we were able to keep all our schools open. We allowed businesses to stay open. I think for that we should all give ourselves a collective pat on the back.
The Government of the Northwest Territories just announced fairly recently that of the $156 million that was spent in the Northwest Territories to address COVID, $123 million of that was covered by the Government of Canada. That's the reason we were successful. The assistance that the territories received from the federal government is the major reason we were able to operate the way we have.
Our economy varies by degree. We have some people who did well all through the pandemic and others who have struggled, and then there are some who are really in trouble.
Back in June, the Government of Canada increased the borrowing limit for all three territorial governments to ensure that they could continue to have the fiscal flexibility to manage the economic pressures caused by COVID. I'd like to ask if the minister could explain how Bill similarly seeks to make sure the Government of Canada has the fiscal flexibility it will require.
Thank you, Mr. McLeod—Michael, as I call you in less formal settings. It's great to see you.
You prefaced your remarks by explaining to us a little bit about how things are going in the Northwest Territories and how people have handled COVID. You suggested a collective pat on the back, and let me just say, speaking from the south, to you, Mr. McLeod, and to all the people of the Northwest Territories, I think all of us in the south should be patting all of you on the back.
The way that the Northwest Territories has handled this global pandemic is really admirable and a real example for the rest of the country. The approach you took required a lot of sacrifice from individual people in the Northwest Territories. It required an acceptance of some real restrictions on travel outside of the territories, and you guys are quite rightly reaping the benefits of that disciplined approach. I collectively pat you all on the back. Bravo.
You're also quite right—
An hon. member: But—
Hon. Chrystia Freeland: Did you want to respond, Mr. McLeod?
Page 126 of the fall economic statement, annex 1, forecasts significant cuts in program expenses, starting the next fiscal year on April 1. Other countries have looked to address the issue of pandemic spending by putting wealth taxes in place or by increasing the corporate tax. We've seen those announcements, yet in the fall economic statement, no measure puts in place a wealth tax or addresses the endemic pandemic profiteering that we are seeing. However, we know that Canadians are going through misery in so many cases and need investments that will continue through the next fiscal year.
I'm perplexed by this approach. We have other countries putting in place wealth taxes, excess profit taxes, looking to address overseas tax havens and raising the corporate tax rate. In the fall economic statement, in Bill , there's no reference to that in any meaningful way.
Are you looking to change direction in the budget so that those investments can be put into place and in doing so, will you heed the call for tax fairness that so many people have raised across the country, ensuring that the immense profiteering we've seen during this pandemic is addressed with the billionaires and the banks that have received so much in profit and so much increase in wealth having to pay their fair share?
I'm going to offer two responses.
When it comes to our thinking about the budget, our overarching priority is jobs and growth. More than 600,000 Canadians who had a job before the pandemic don't have one today. That's a tragedy for each person and for their families. I wake up in the morning and I think about how we can get those jobs back. The answer in my view is economic growth.
When it comes to taxation, I would disagree with you in characterizing the measures announced in the fall economic statement as being not weighty. We will levy a tax on the international digital giants, and there is real momentum at the OECD to get this done. The Biden administration has created an opportunity to get this done at the multilateral level. That is huge. That is transformative for the international tax framework, and our government is very involved in this.
Finally, because I see our chair moving around in his seat a little, when it comes to overseas tax havens and tax avoidance, I very much agree with you. At a time when so many Canadians have suffered, we have to have zero tolerance for tax avoidance and tax evasion, and our government is committed to that and to strengthening those rules.
The officials are here. I'll quickly go through the list so we know who's here. We have an hour with officials.
We have, from the Department of Employment and Social Development, Atiq Rahman, assistant deputy minister; and Steven Coté, executive director.
You could raise your hands, so they know who you are.
From the Department of Finance, we have Maude Lavoie, director general; Dave Beaulne, director general, legislation; Trevor McGowan, senior director; Lesley Taylor, senior director; and Nicolas Moreau, director general.
With the Department of Health, we have Edward de Sousa, acting chief financial officer; Jocelyne Voisin, associate assistant deputy minister; Monique Frison, acting assistant deputy minister; and Greg Loyst, director general, policy and regulatory strategies.
From the Department of Western Economic Diversification, we have Barbara Motzney, assistant deputy minister.
Those are the officials.
Thank you, Mr. Chair. I can take this one.
Basically, when you look at the chart that was presented by our minister earlier, this represents the borrowing needs of the Government of Canada but also the Crown corporations. To that number we add, basically, the $100 billion that you referred to for the stimulus package. We also add a 5% buffer, just to take into consideration the fact that there's a lot of uncertainty surrounding fiscal projections.
To your question specifically on how this money will be deployed, I think I need to refer you to the budget. In the budget, basically, we present the expected spending and revenue for the next three years. That has been used in order to build that figure.
In terms of details, I think the best reference will be the budget text, but also, basically, the corporate plans that have been in place by the different Crown corporations in Canada.
Thank you very much, Mr. Chair.
I'd like to add my voice to my colleagues' to thank all the witnesses for the work they have done during this pandemic. We hope that they and their families remain safe and sound during the pandemic.
I have a few questions, Mr. Chair, and it might take more or less time. It will all depend on the answers. So I hope you'll cut me a little slack over the next few minutes.
I want to start by following up on the minister's comments around the emergency wage subsidy program and that the improper use of it, such as dividend payments, stock buybacks and executive bonuses, is something that is not tolerated.
I would like to know a couple of things on that. First off, do we have an indication from the ministry of finance what the rate of non-compliance is? How are those cases of non-compliance generated? Is it complaint-based or is it something that is investigated, for example, when there are articles in the Financial Post, where dozens of companies were cited that had paid out dividends and received massive amounts of subsidies at the same time?
Then, what is the process, whether the complaint is from the outside or is flagged internally? Do you contact the company? Do you issue a notice? Are you investigating or is there an attempt at prosecution?
This is my global question. What are you doing in response to these widespread complaints about improper use of wage subsidy and other government programs by very profitable Canadian corporations?
I want to thank all the officials for being here today. Thanks so much for your dedication and your hard work through this unprecedented time, which we all hope will be over sometime soon.
I have two sets of questions. The first is around the Canada emergency rent subsidy. The businesses in my riding of Davenport, and I'm sure right across this country, were super happy when they could apply for the rent subsidy directly to the government.
With regard to the two questions I have, one is that, if I understand correctly, if Bill is to pass, the rent subsidy would become an eligible expense. Does that mean that a business can apply for the rent money in advance of actually having to pay the rent? That's question one.
My second part is that I believe that under CECRA, the first version of the rent subsidy, there were 140,000 small businesses that received the first version of the subsidy. Can you give me an idea of how many small businesses actually receive this rent subsidy now?
I have just a handful of observations. I know the committee has heard from a number of witnesses and is pretty familiar with the content, the purpose and the policy underlying Bill , but to level-set, it's obviously intended to facilitate intergenerational transfers of a business that are otherwise caught by a surplus-stripping rule under the existing tax system.
What is surplus stripping? That is an important context-setting question.
Surplus stripping occurs when an individual shareholder reaches into a corporation to access its surplus in a manner that produces a capital gain at the personal level rather than a dividend. The normative expectation is that a corporation would earn income that forms part of surplus and be distributed to the individual shareholder as a dividend. When steps are taken to achieve that kind of result not in the context of a sale of those shares to an arm's-length person, then this section 84.1 rule, which you're all becoming quite familiar with, steps in to characterize that capital gain as a dividend.
That's the starting contextual point, the foundational principle.
Building on that just a little, the rule applies to corporate surplus that is accessed by a parent through a corporation owned by a child. The reason that's the result is that the parent and the child are related for purposes of the tax rules and, for purposes of this surplus-stripping rule, are essentially treated as the same economic unit. There has been no disposition of shares to an arm's-length person in that context. Corporate surplus has merely been accessed by the individual shareholders. The tax system doesn't care who they are if they're related or not dealing at arm's-length.
That's important context as well, the parent and the child, because this is the point we're taken to where surplus stripping bumps up against an intergenerational transfer, which is the point underlying Bill . We know and accept that, in some cases, it could be more attractive to sell the shares of a business corporation to an arm's-length person than to a child, in the expectation that the sale of those shares to an arm's-length person would produce a capital gain whereas there are circumstances in which the sale to a child would produce a dividend.
Trevor will get into the differentials in a little more detail, but again, the context is that those dividends are likely going to be taxed in the mid to high 40% range, and a capital gain in the mid to high 20% range. There is delta of around 20 percentage points as it relates to realizing corporate surplus in the form of a capital gain in the hands of an individual rather than a dividend. That's a fairly significant benefit, and needless to say, one that is sought after in the context of ordinary-course tax planning.
The key point we want to bring to the committee's attention as it relates to your deliberations around Bill is that, if there is a decision to except from the surplus-stripping rule a genuine intergenerational transfer, say, on neutrality grounds—neutrality in terms of producing the same result as the sale to an arm's-length person—I'm not going to comment on that policy point at the moment, but if that decision were taken, one needs to be mindful of the boundaries that are established between what constitutes surplus stripping and what constitutes a real intergenerational transfer of a business.
In other words, we wouldn't want to make an amendment to the act that would open the system up to vulnerability in the form of a parent being able to access corporate surplus through a corporation owned by a child if that was not in the context of a real or genuine intergenerational transfer of a business. In the hallmarks for assessing whether there has been a real, genuine intergenerational transfer of a business, one would look to the terms and conditions that would be reached between arm's-length parties in the context of the sale of a business and to what extent those terms and conditions exist as between any transaction that might be undertaken between a parent and a corporation owned by a child.
The legislative challenge is in how to delineate in legislative language those boundaries so that the real intergenerational transfer situation could be protected, but at the same time, the system isn't opened up such that it becomes vulnerable to relatively more aggressive or abusive forms of tax planning.
The final point that I would make, before I turn it over to Trevor, is just to remind the committee that this issue only arises when the shares of a small business corporation or a business corporation generally are sold by a parent to a corporation owned by a child. There are no impediments under the tax system to an intergenerational transfer of a business carried on in unincorporated form, whether a sole proprietorship or a partnership. Indeed, there are no impediments under the tax rules to the sale of shares of a business corporation to a child in circumstances where the child does not seek to use the corporate surplus of the acquired company to finance the acquisition itself. That's where the rub occurs.
It's the accessing of the corporate surplus to finance the acquisition by the child that arises at this awkward intersection point between surplus stripping and a transaction that looks like a genuine intergenerational transfer of a business.
With that, I know we'll have ample opportunity for questions.
I would turn it over to you now, Trevor, for a slightly more detailed walk-through with some illustrations and some examples to help highlight that critical point around establishing the boundary.
I'd like to build upon what my colleague Shawn has already said about the context of the anti-surplus-stripping rules in section 84.1 and the intended purpose of the proposed amendment in Bill , and then discuss how it would apply, looking at the specific legislative proposal.
I'll skip ahead to clause 2. I will mention clause 1 a little bit later, but clause 2 is the one that really deals with intergenerational transfers. It applies where a parent transfers shares of a corporation to a corporation controlled by their child or grandchild. There's a fairly simple trigger for that relief to be provided when it applies. That is the deeming of the purchaser corporation to not be dealing at arm's-length, which effectively turns off the anti-avoidance rule in section 84.1.
The difficulty or some of the challenge with the measure in the bill is how precisely targeted it is to get at what you'd think of as a real intergenerational transfer of a business. Of course, it deals, as I said, with the transfer of shares of a corporation owned by a parent to a corporation controlled by the child. It does not intrinsically deal with the real transfer of the business that is being carried on.
That level of abstraction from the actual business—where a parent wants to hand it over to their child or to their grandchild, so they can carry it on, keep it going, continue building it and continue running the business—is not directly provided in the bill due to this abstraction, just looking at transfers of shares going from one to another. It's that lack of precise targeting that I think we want to highlight as being a concern with the measure.
I could provide a few more details on that. In particular, the rule doesn't require the child, after the transfer, to be involved in the business in any way. It doesn't require the parent to cease to be involved in the business after the transfer of the shares. In fact, the parent could simply wind up the business right after the transfer.
There is a requirement that the purchaser corporation that gets the transfer shares be legally controlled by the child at the time of transfer. “Legally controlled” is generally defined for tax purposes to mean that the child could elect a majority of the board of directors. However, it does not prevent the purchaser corporation from being factually controlled by the parent. Likewise, it doesn't provide that the child will necessarily have any economic exposure to the shares being transferred. In fact, it does not require the child to retain ownership of the purchaser corporation after the transfer.
The requirement that shares be transferred to a purchaser corporation controlled, at the time of transfer, by the parent, is somewhat abstract, but I think it's worth noting the points of departure between that and what you'd normally consider to be a real transfer of a business to a child.
Why do these matter? They matter because while it is generally described as facilitating an intergenerational transfer in certain cases that Shawn set out—basically a transfer of shares to a corporation owned or controlled by the child—it would also open the door to facilitate tax planning, generally for high-net-worth individuals.
Shawn was mentioning the tax rate differential between capital gains and dividends in this anti-surplus-stripping rule. That's at the heart of it. In particular, as Shawn said, for a top-marginal-rate individual in Ontario, that might be the difference between around a 47% tax rate on dividends going down to a tax rate of 26% or so on capital gains.
Likewise, if the parent is able to access the lifetime capital gains exemption, as they would with some fairly simple planning, it could drive their tax rate down to zero. They would effectively be able to extract retained earnings from the corporation they control and continue controlling the corporation, continue running the business. The child need not necessarily have any involvement in the business after the transfer. To the extent their lifetime capital gains exemption is available, their tax would go from, again, for a top-rate Ontario resident—just to use as an example—47% down to nil.
Even in circumstances where a lifetime capital gains exemption is not available, say either because it's already been used up or because the corporation that carries on the business has more than $15 million in taxable capital—as I understand, a component of the rules would provide a grind to prevent a lifetime capital gains exemption from being accessed for larger companies—you would still have a rate delta, as Shawn said, of around 20 percentage points.
That is obviously going to be the most valuable for high-net-worth individuals who are subject to the top marginal tax rates and for individuals who want to extract a sizable amount of money from their corporation, such that the tax savings would be enough to more than offset the transaction fees of putting these kinds of complex arrangements into place.
I'd be happy to walk the committee through exactly how these transactions can be structured. The gist of it is that the parent has shares of a corporation, transfers them to a child or a company owned by the child in exchange for a promissory note. The parent's company pays the child's company an intercorporate dividend, which of course is tax free, and that dividend is then used to repay the promissory note that was used to purchase the shares. In that way, the money gets out of the corporation; you have a capital gain if the anti-avoidance rules of section 84.1 don't apply; and the individual is able to, instead of paying dividend rates, pay the much lower capital gains rates or nil if the lifetime capital gains exemption is applied.
That, hopefully, gives a bit of a flavour about the slight disconnect in the rules. When we look at the legal form of a transfer of shares by a parent to a company owned by their child, there's that bit of a factual disconnect between that and the real bricks-and-mortar transfer of an actual business to their child that the child continues to carry on.
I had mentioned earlier that I wanted to touch on clause 1, as it is different from clause 2. Clause 2 relates to intergenerational transfers and provides an exception for the anti-surplus-stripping rule in section 84.1. Clause 1 doesn't really relate to intergenerational transfers of a business. Rather, it relates to a different anti-avoidance rule, but it relates to siblings.
Just like for an individual moving from a dividend rate down to a capital gains rate means a tax savings, for corporations, transfers between corporations, if they can essentially transmogrify or change a capital gain into a dividend, intercorporate dividends are generally not subject to tax and so they're able to avoid tax in that way. That's what's called capital gains stripping generally. Section 55 is an anti-avoidance rule intended to prevent that.
There are a couple of important exceptions. One of them is that if you have a corporate reorganization between related parties, then you can move amounts around among your corporations. As long as it's all in the same group, there won't be any negative tax consequences.
This measure would allow siblings to escape the application of the anti-avoidance rule in section 55. As a result, one sibling would essentially be allowed to transfer their stake in the business to the other sibling without triggering this anti-avoidance rule that could result in capital gains treatment. It would provide a tax deferral on that sort of transfer between siblings. Again, it's not intergenerational and is dramatically different, which is why I did it in that order. I hope that provides a bit more of a flavour of what clause 1 does.
That, I think, provides a bit of an overview of the bill and some of the observations that we at the department have made about its technical operation. Shawn and I would be happy to answer any questions you might have.
Thank you for that question, Mr. Chair.
I, of course, can't speak to the government's intentions about what fixes it might wish to do or anything like that. I can point to the fact that addressing this sort of intergenerational transfer is in the 's mandate letter. It is something that we, as department officials, are looking at.
In terms of whatever fixes would be needed, I would just go back to my earlier comments and say that the fundamental issue we have identified is this disconnect that I was trying to describe from a real transfer of a business as people would ordinarily understand it, where a parent carries on a business and for one reason or another they want to transfer it to their children or their grandchildren, and the next generation starts to carry on that business.
It's that fundamental disconnect between that factual situation on the one hand and, on the other hand, the approach of this measure looking solely to a transfer of shares from one individual to a corporation owned by their child, without really connecting the legal form with the real underlying story behind it. It is certainly something that we believe can be addressed.
In terms of the bill, hopefully, I've gone through and provided enough of an overview of the fundamental issues with it. I don't know if Shawn had anything to add to that. I think that's about as much as I could think to share.
Thank you for that question. It's a good one. It's a good illustration of a point that Shawn was making earlier, that these are hard lines to draw and have to be done with careful thought, being mindful of real business transactions and what really happens when a business is transferred. It's finding the right balance.
As Mr. Wark said in his comments, it would be a somewhat extreme rule that said that when you have a transfer, you have to shutter the doors and the parent is not allowed in the building anymore, as of the date of transfer. That, of course, goes pretty far.
At the same time, you have at the other end of the extreme some provisions, such as the ones we've been discussing today, that have no requirement that the parent cease or restrict in any way their involvement in the business and, in fact, have no requirement that the child have any involvement in the business or that there be any sort of transfer between the two.
Part of the hard work that we're thinking about, consistent with the 's mandate letter, is the balancing of these kinds of practical considerations, so that you can have a real intergenerational transfer that reflects what actually goes on.
It is a fair point that in many cases it's not a hard break, such that at the date of transfer the keys are given, as when you buy a house, and the parent is no longer involved at all and the child completely takes over. It makes sense for there to be some overlap, and that is something that I think a set of rules would need to think about.
On the other extreme, however, it seems that when you have an intergenerational transfer of a business, some diminution in the role of the parent, coupled with the child's actually taking over the business, is an integral part of it. That really is a lot of the difficulty in coming up with a nuanced and complete set of rules to deal with it.
The bill before us is very important. Since being elected, I have met quite a few owners of family businesses, farming and non-farming, who were having a horrible time of things. It's a serious matter and they were in deep trouble. We've heard from a group of witnesses, and they all told us that we needed to forge ahead and that the situation made no sense. I know that it's a complex matter from the legislative and other standpoints. We certainly need to take the points that you've made into consideration. I wouldn't want to just hear that it's all very complicated and then find that nothing is being done. It's an urgent problem and the bill should be adopted.
From my point of view, as it's written, Bill would deal with the situation. After that we could examine the Hansard transcriptions, the debates in the House and the committee evidence to understand the intent of the bill. It's been said many times that we wouldn't want this bill to provide an opportunity for people who are cheating to avoid paying taxes. Its purpose is to facilitate intergenerational business transfers. Government regulations could spell out the details, and if there are problems, we could deal with those afterwards. But it's really essential to forge ahead.
The Quebec finance minister, Mr. Eric Girard, came to the Grand Joliette chamber of commerce before the pandemic, and said he couldn't understand why it hadn't been dealt with in Ottawa yet, when it had in Quebec.
Gentlemen, you've been working on that and you've been able to look at the model used in Quebec, which has guidelines.
What's the problem with what Quebec is doing? Why are you so afraid that we're going to go ahead and adopt a similar bill?
Thank you for the question.
I think certainly the intergenerational transfer rules in Quebec as well as precedence in the United States and elsewhere have informed our thinking on the matter. It is, as I said, an important topic, sufficiently important, of course, to have made it into the 's mandate letter.
You'd asked about the specific concerns and had raised tax planning, and whether or not it could be dealt with later. I would simply note that the amendment, as provided in the bill, would facilitate more often high-net-worth individuals to extract or to pay out retained earnings from the corporation, possibly using the lifetime capital gains exemption to avoid or reduce taxes. Those could go from, to choose the Ontario rates we talked about earlier, 47% down to 26%, roughly, or down to zero where the lifetime capital gains exemption applies.
This kind of surplus stripping is very widespread, I would say, within the tax planning community. It's fairly common to try to convert dividends into lower taxed capital gains. It would seem reasonable to expect that to not only continue but to be accelerated and emboldened with the kind of planning that could be utilized through some of the measures in this bill.
You'd asked about what kinds of concerns there were on the tax avoidance side of things, and I think that's about it. I don't want to get into too many technical details. I alluded to them earlier. By using some tweaks on existing techniques, it is very possible, through a few transactions, to eventually....
Say, you're going to extract $100,000 from your business. You wanted that money out. You'd normally pay around $47,000 or $48,000 of tax on it. To have your child set up a corporation, transfer through—
I'm going to let Trevor deal with that one.
While I defer that to him, the one thing, Mr. Julian, that I would point out around modelling—because we have been looking at it, as you say, for a while, for the reasons that Trevor has given—is that this delineation question is at the heart of it. There's a significant risk of revenue erosion if this exception to the surplus-stripping rule is too wide. We've had some conversations about it.
You've heard from Mr. Wark. He's just touching on the design features, the notion of how long a parent could remain involved in a business transferred to a child. There's that element. There's the element of whether they can own shares and the nature of those shares, and the extent to which the children need to be involved in the business.
Delineating what looks like a real intergenerational transfer is very difficult. If that isn't done properly, then, yes, we are saying that there is a significant risk of revenue erosion, which runs to your question about modelling.
Trevor, I don't know if you want to add anything to that.
With that, we will go to clause-by-clause.
Thank you very much to the witnesses for providing the information.
If this doesn't carry, we'll deal with that. If it does carry, I would suggest that someone needs to look at it to make sure that there are amendments made that protect genuine transfers and don't open up tax planning in a way that creates some problems. There's always that opportunity, as was suggested earlier, either by a ways-and-means motion from a minister or a royal recommendation when we report it to the House. There are always options.
(Clauses 1 and 2 agreed to on division)
The Chair: Shall the title carry?
Some hon. members: Agreed.
An hon. member: On division.
The Chair: Shall the bill carry?
Some hon. members: Agreed.
An hon. member: On division.
The Chair: Shall the chair report the bill to the House?
Some hon. members: Agreed.