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Results: 1 - 15 of 35
View Pierre Paul-Hus Profile
CPC (QC)
Thank you, Mr. Chair.
Gentlemen, thank you for being here.
The purpose of our study is not to analyze fraud. We aren't as interested in the financial aspect so much as in the impact on the cybersecurity of transactions.
We understand quite well that FINTRAC is a hub that receives information from the list of agencies that were mentioned. Large accounting firms, for instance, must send you information on their clients, correct?
View Greg Fergus Profile
Lib. (QC)
Has the agency encouraged professional associations, auditors in particular, to develop codes of conduct to promote certain practices rather than test the limits? Aggressive tax planning comes to mind here. I'd like to know whether those professional associations have codes of conduct or want to establish them in order to provide their clients with good advice.
Ted Gallivan
View Ted Gallivan Profile
Ted Gallivan
2018-12-11 10:00
The association that represents professional accountants in Canada has a code of ethics. That document has just been updated. The code is included in the basic training given to accountants. It's a focal point in continuing training.
We also have the option of imposing administrative penalties on third parties. Last year, we levied fines totalling $48 million on professionals who had been involved in aggressive or negligent tax planning.
As for efforts that have been made, the accountants association offers this training, but we also have a method designed to encourage appropriate behaviour via penalties assessed on third parties.
Trevor McGowan
View Trevor McGowan Profile
Trevor McGowan
2017-11-02 15:32
Thank you, Mr. Chair.
I'm going to provide a brief overview of the items in part 1 of the bill, each of which relates to proposed income tax amendments.
Part 1 includes a number of amendments that were announced as part of the 2017 federal budget. These include removing the classification as Canadian exploration expenses of costs incurred in respect of a drilling well. They would instead, unless they're proven to be unsuccessful, be classified as Canadian development expenses. If unsuccessful, they would continue to be Canadian exploration expenses.
They would eliminate, for qualifying small oil and gas companies, the ability to re-characterize up to $1 million of expenses, which would otherwise qualify as Canadian development expenses, as Canadian exploration expenses. The difference being that Canadian development expenses are deductible at a rate of 30% per year, whereas Canadian exploration expenses are fully deductible in the year incurred.
They would revise the anti-avoidance rules for registered education savings plans and registered disability savings plans, aligning them with the current rules that apply in respect of registered retirement savings plans, registered retirement income funds, and tax-free savings accounts.
They would eliminate the ability of designated professionals to use the billed-basis accounting system. They would instead be required to use the general rules applicable to other taxpayers in the Income Tax Act for their tax accounting purposes.
They provide enhanced tax treatment in respect of eligible geothermal energy equipment. The enhanced treatment consists of accelerated capital cost allowance rates at 50% in class 43.2, as well as the ability to classify certain expenses in respect of qualifying geothermal projects as Canadian renewable conservation expenses, which can be deducted in the year incurred, or transferred to investors in flow-through shares.
It would extend the currently existing base for erosion rules that apply to foreign affiliates of Canadian taxpayers, and prevent them from inappropriately shifting income in respect of the insurance of Canadian risks offshore to a foreign affiliate. It would extend those rules to foreign branches of Canadian life insurers, which, for many purposes of the tax system, are treated in a manner similar to foreign affiliates of a Canadian corporation, including their, in very general terms, exemption from Canadian tax on their active business income.
It would clarify who has factual or de facto control of a corporation for Canadian tax purposes. This is intended to return the state of the law to what it was before a recent court decision, and requires that all relevant factors are to be taken into consideration in determining whether a person has factual control of the corporation.
It introduces an election that would allow taxpayers who hold eligible derivatives as income properties to be able to treat them as market-to-market properties, which would allow changes in the value of the derivatives to be realized for tax purposes on an annual basis. Otherwise, the default rule would be taxation on the realization basis.
It would introduce a specific anti-avoidance rule in respect of so-called straddle transactions. These are transactions that use somewhat complex derivative instruments, offsetting derivative instruments to achieve an inappropriate deferral of taxation from one year to the next.
It would allow mutual fund corporations, that are organized as switch corporations, but would now be more appropriately called multi-class mutual fund corporations, where each class of share of a corporation is a separate investment fund. It would allow them to effectively, on a tax-deferred basis, merge or split up into a number of mutual fund trusts. Each of those mutual fund trusts would constitute its own investment fund.
It would also improve the tax treatment of segregated funds. These are insurance products that in many ways, including through their tax treatment, are intended to be similar to ordinary investment funds. There are some minor differences. This bill would extend the ability for segregated funds to merge on a tax-deferred basis and as such achieve economies of scale. It also would allow the carry-forward of non-capital losses from one year to the next. Both of those can currently be achieved by an ordinary mutual fund operating through a trust. That would be extended to segregated funds of insurance companies.
On the measures announced in the budget, finally, there are enhancements to the protections afforded to gifts of ecologically sensitive land. It also implements a number of other income tax measures in part 1 by closing loopholes surrounding capital gains exemptions on the sale of a principal residence. These were released for public consultation in October 2016, and were mentioned as previously announced measures in the budget text in “Tax Measures: Supplementary Information”.
It extends a measure, announced as part of budget 2017, to provide additional authority for nurse practitioners—for many Canadians, they are the primary point of contact in the medical system—so that nurse practitioners can certify things for a number of purposes beyond the disability tax credit, which was announced in budget 2016.
It would also, following on a measure from budget 2016, provide that sales by farmers and fishers of their farming products and fishing catches to qualifying co-operatives would be exempted from the measures announced as part of budget 2016 that would prohibit the multiplication of the small business deduction, allowing each such farmer or fisher to have full access to the small business deduction.
It would also introduce a number of proposed technical amendments that were released for public consultation in September of 2016 and were also mentioned in “Tax Measures: Supplementary Information”, which accompanied the budget. These include measures that would extend the types of reverse takeover transactions to which the corporate acquisition of control rules apply and make a number of tweaks and improvements to the scientific research and experimental development rules. It would provide rules for the allocation of income for federal credit unions between provinces and territories that completely mirror the rules that currently apply to banks. It would make a number of changes to improve the operation of Canada's international tax rules.
Finally, it contains a number of measures that are technical in nature to improve the accuracy and consistency of the income tax legislation and regulations. These are technical amendments that are announced for consultation and included in bills from time to time to ensure the proper ongoing operation of the income tax system.
That's a summary of the measures in part 1 of the bill.
Charles Lammam
View Charles Lammam Profile
Charles Lammam
2017-09-28 10:27
Thank you, Mr. Chairman and committee members, for the opportunity to offer my thoughts on the federal government's proposed tax changes affecting private corporations. I hope you find my comments helpful and informative as you deliberate on this important public policy issue.
I'm the director of fiscal studies at the Fraser Institute, an independent, non-partisan economic policy think tank. The institute's mission is to measure the impact of government policies and to broadly communicate to Canadians how those policies affect their lives and the lives of future generations. My comments today reflect my own opinions and observations. They do not, necessarily, reflect the views of other staff, affiliated researchers, or our board of directors.
Since the committee has already heard much about the technical aspects of the government's proposed changes, I will focus my remarks on points that I think have not received sufficient attention in the public debate.
First, I want to commend the government for undertaking a review of the tax code. Canada's personal income tax system has become increasingly complex and uncompetitive over the years, so the goal of reform is a positive one. In fact, the Fraser Institute has published studies on both the growth in tax complexity and the opportunity for the federal government to dramatically simplify the tax system while fostering economic growth. This was largely a response to the previous government's tax changes, which tended to increase the system's complexity with no material improvement in efficiency. As part of the current review, the government has correctly identified problems with our tax system, including a proliferation of so-called boutique tax credits, which are economically ineffective tax breaks for certain groups and individuals. In addition, it has identified tax planning through the use of private corporations as another problem area.
However, the policies implemented to date by the current federal government, including the elimination of several tax credits, along with the proposed changes to the taxation of private corporations, are best described as a piecemeal approach that falls well short of the type of comprehensive tax reform that Canada now needs. This is a lost opportunity.
A major shortcoming of the government's approach to these tax changes is how it plans to use the expected revenues from eliminating preferential tax measures. The standard approach to tax reform, as was the case with Canada's major personal income tax reform in 1987, is to use the revenues from eliminating preferential tax measures to reduce marginal tax rates broadly. In doing so, the government would eliminate special preferences for certain groups while reducing tax rates for everyone, thus improving the economic environment for workers, business owners, entrepreneurs, and investors. Instead, the federal government plans to retain all the new revenues. This is actually a trend with the current government, as it has eliminated a number of tax credits and other special privileges embedded in the tax system without using the resulting revenues to cut rates broadly by an equivalent value.
When it comes to the proposed tax changes to private corporations, it's important to understand why anybody pursues tax planning through such vehicles in the first place, since doing so comes at a significant cost. Business owners, including professionals, must spend significant amounts of money on accountants and lawyers in order to use these options in the tax code. The reason these expenses make sense is that the costs are less than the benefits they gain by lowering their effective tax rates critically. The tax savings are a result of large gaps between different levels and types of income.
For instance, a professional can shift income to a spouse with lower earnings or perhaps a dependent child with no income. If the professional can do so, the gains from the lower tax rates can be significant. Let's assume a doctor being taxed at the top federal rate of 33% can shift income to a spouse who only works part time and pays income taxes at the lowest federal rate of 15%. That's an over 50% reduction in the marginal tax rate by shifting income from one spouse to another. The gain is even larger if the income is shifted to a dependent child with no income.
These tax differences are the reason why people pursue the strategies in question. If the government reduced the gaps between tax rates, it would reduce the incentives, i.e., the benefits, of such tax planning in the first place. Instead, the current government has made this gap larger by increasing the top federal tax rate from 29% to 33%.
By making the tax gap larger, the federal government, along with several provinces, inadvertently increased the incentive for eligible professionals and business owners to use these strategies. Introducing new rules alone to eliminate or mitigate the use of these strategies, as the federal government now proposes to do, will not solve the underlying problem. They will simply incentivize accountants and lawyers to figure out new ways to get around the new rules for their clients. The solution is to concurrently eliminate, or at least meaningfully reduce, the tax rate differentials that exist in the system. Doing so will reduce the incentive for tax planning in the first place.
I have just two final points.
A risk inherent in the government's proposal is the potential to make the tax system more complicated without solving the fundamental problem. There will remain an incentive for Canadians to incur the cost of hiring accountants to help them tax plan, but the administrative and compliance costs will increase as the Canada Revenue Agency plays a greater role in enforcing the proposed new rules.
Finally, my last point relates to the negative signals the government is sending entrepreneurs and investors in its public communications regarding the proposed changes to small business taxation. For instance, on a nationally televised interview, the finance minister used the phrase “going after” to describe his government's approach to extracting more taxes from incorporated professionals and wealthy people. This language signals to the world that Canada is an unfriendly place to do business, which undermines our country's ability to attract investment, which is a key ingredient for economic growth and innovation. Fortunately, we've seen positive tax reform from past federal Liberal governments, whether that's forging a technical committee on business taxation and implementing many of the committee's recommendations, or expanding RRSP contribution room, or lowering the inclusion rate for capital gains taxation. Indeed, pro-growth tax reform is a non-partisan issue.
Thank you, and that concludes my initial remarks.
View Michael McLeod Profile
Lib. (NT)
Thank you, Mr. Chair, and thank you all for the presentations. It's a very interesting discussion today.
The Income Tax Act for sure is very complicated and complex. I'm not a tax expert, and God help you if I try to advise you on how to save money, because I'm not good at that either.
I want to point out, however, that the consultation process is on now, and we want to hear what the public and the experts have to say. We have no legislation on the table yet, but that gives more opportunity for input.
As I'm listening, I'm wondering, because the corporations have to incorporate that set-up and there are a lot of rules around the tax system. I want to ask if someone could tell me what it takes for these corporations to do their taxes at the end of the year. If the system is so complicated, as many have indicated, that you need lawyers, accountants probably. Could somebody tell me what an average corporation pays for an accountant to do taxes?
Jennifer Kim Drever
View Jennifer Kim Drever Profile
Jennifer Kim Drever
2017-09-28 11:20
That's actually a very complex question. It depends on the complexity and what is going on in that company. It also depends on what level of financial statements the bank would require.
Jennifer Kim Drever
View Jennifer Kim Drever Profile
Jennifer Kim Drever
2017-09-28 11:20
For a small business that has “notice to reader” financial statements, I would expect the average to be somewhere between $1,500 to $2,500.
Jennifer Kim Drever
View Jennifer Kim Drever Profile
Jennifer Kim Drever
2017-09-28 11:20
Every corporation has to file a tax return. That doesn't necessarily mean they have an accountant who does it for them.
Allan Lanthier
View Allan Lanthier Profile
Allan Lanthier
2017-09-26 10:41
Thank you, Mr. Chair.
I'd like to thank you and the other committee members for inviting me to appear today to address this important issue.
I'll restrict my opening statement to certain aspects of the passive income proposal. The proposal is contentious and would result in significant harm to our Canadian economy, and therefore to the middle class, which depends on that economy.
A Canadian-controlled private corporation, or CCPC, is, as you know, taxed at preferential rates on business income. The government is concerned that a CCPC that acquires portfolio investments therefore has a deferral advantage that is not available to individuals.
The government’s concern has merit. Investment income of private corporations increased from $9 billion in 2002 to $27 billion in 2015. The government’s proposal would tax the investment income of a CCPC at a non-refundable rate of 50%, equal to the assumed highest personal tax rate for individuals, the so-called one-percenters. Then there would be a second tax when the corporation pays dividends to its owner. The result would be a combined tax on investment income of more than 70% for business owners in the highest rate bracket.
The impact on middle-class business owners would be even worse. While middle-class owners are not the real target, by using a non-refundable corporate rate of 50%, the proposal would severely overtax every business owner in this country who is in a rate bracket below the top rate. For example, a middle-class owner who is in the 30% bracket would suffer a combined rate of 59%, not 30%. That's a 75% increase over existing law. Canada already imposes an immediate tax of 50% on the type of income we're talking about here. That is more than enough. There are about 200 countries in world. There is only one country in the world that has a corporate tax rate above 50%.
Still, the amount of investment income of private corporations is increasing. Why is that? Outside of the professional sector, there is no reason to believe that businesses are incorporating for tax advantages. A business incorporates for a number of non-tax reasons, and none of these have changed in the last 50 years.
Professional income is quite different. Many high-rate doctors, lawyers, and accountants, including many partners of large national legal and accounting firms, are incorporating solely for tax benefits. This is certainly the major cause of the recent increase in the amount of investment income earned by private corporations.
I therefore suggest a different approach: the introduction of a special refundable tax for professional income of a CCPC for most medical doctors, lawyers, and accountants. This tax would be similar to the tax that was enacted in 1979 and repealed in 1984 for mechanical reasons, not tax policy reasons. The tax would not apply to any other industry sectors, so it would address the government’s concern but avoid most of the economic damage that applies under the current proposal. It would be simple and understandable, and the revenue from the tax could be easily and accurately tracked. All additional tax revenue from incorporated medical doctors should be earmarked for health care funding, and the balance for debt reduction.
Mr. Chair, I am a retired accountant. I have no clients. I hold no interests in private corporations or in any trusts. I have no dog in this fight. I simply want to see tax changes that address tax policy concerns, but that do so in a sensible and thoughtful manner, and that strike an appropriate balance between tax revenue for the government and the inevitable damage to our economy that any additional taxes cause. As part of this process, we also need a comprehensive review and reform of the taxation of private corporations.
Thank you, Mr. Chair.
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