THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
ST. JOHN’S, Newfoundland and Labrador, Monday, November 20, 2017
The Standing Senate Committee on National Finance met this day at 1 p.m. to study the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: Honourable senators, I want to take the opportunity to bring to the attention of our witnesses that the Standing Senate Committee on National Finance is here today in St. John’s to continue its special study on the proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved in changes that the Minister of Finance proposed during the summer of 2017.
We have three witnesses: from the Newfoundland and Labrador Federation of Labour, Mr. Kerry Murray, Director of Policy; from the Canadian Home Builders’ Association of Newfoundland and Labrador, Mr. Des Whelan, Chair; and from the LAT49 Architecture Inc., Mr. Jim Case, President.
Mr. Murray, followed by Mr. Whelan and followed by Mr. Case, will make their presentations of approximately five minutes each. We will then move immediately to questions from senators.
Mr. Murray, we know that in the past 72 hours -- I won’t say “last minute” -- you were asked to be present today. It is a pleasure this afternoon to hear your comments and your recommendations. I want to say that we were reminded to come to St. John’s by Senator Marshall.
That said, I will ask you, sir, to make your presentation.
Kerry Murray, Director of Policy, Newfoundland and Labrador Federation of Labour: Thank you very much for accommodating us last minute. Senator Marshall used to be my MHA in the house, so we know each other a bit from dealings when I was on the local school council.
I’m with the Newfoundland and Labrador Federation of Labour. We represent approximately 65,000 working women and men in every sector of the economy in every community in every corner of the province. We advocate for strong public policy and public services that align with our values around social justice and economic equality.
The NLFL and the labour movement across the country welcomes the federal government’s plan to close tax loopholes for high income earners who use Canadian controlled private corporations to avoid paying their fair share of tax. Current tax rules in our country allow the wealthiest to pay less in personal income taxes because of some of these loopholes that have existed for quite a while. Rules that make it possible for someone who makes $300,000 to avoid paying tax that is the equivalent of what an average working person makes in a year are really not fair.
We’re talking about the involving the income sprinkling and passive investing, and I’m not going to go into the different types. I’m sure everyone is aware of what those are. That kind of tax avoidance and those rules probably cost our country $500 million on an annual basis, money that would pay for health care, education, infrastructure, that sort of thing. That’s kind of an intro to our organization and what we think.
When it comes to providing vital public services that we rely on in this country, Canadians expect everyone to pay their fair share. Critically important for maintaining fiscal capacity and the political support needed to pay for these services is a system built on tax fairness; a tax system that recognizes varying levels of ability to pay tax; that aims at reducing inequalities; that doesn’t worsen inequalities by disproportionately rewarding the wealthiest and that isn’t so unnecessarily complex and riddled with loopholes that high earners are able to gain the tax system at the expense of the rest of us. We just don’t think that’s fair.
As the Department of Finance has written -- this has been written and talked about in the media quite a bit -- closing tax loopholes, cracking down on tax evasion, ensuring tax fairness, are essential to preserving the ability of government, our government, to maintain its role in funding health care, housing, child benefits, the Coast Guard, and other essential services and programs on which Canadians rely.
It’s a long standing debate in industrialized countries and those countries that have figured out tax fairness or a progressive tax system that is actually fair are those with the lowest measures of poverty, measures of inequality, and are at or near the top in a broad range of economic and social indicators.
This is not a new debate in our country. I happened to come across, in my brief time to research, a white paper from 1969 by the Liberal government, by the Minister of Finance, called Proposals for Tax Reforms, and two of the areas that he identified were: “important forms of income and benefits escape taxation. The government proposes to bring them into taxable income, in particular, a tax on capital gains is proposed.” The other one around loopholes is, “tax can be avoided under the present law by clever devices and the reform must close loopholes now available to those with the wealth and expert advice to use them.” So, it’s a long-standing debate in our country and it’s about time that we caught up with the rest of the industrialized world.
It was also a campaign promise by the current government in 2015 to cancel tax breaks that benefit the wealthy and make taxes fairer. Since 2000, tax changes in Canada have brought a lot of benefit to corporations, businesses, high earners and the wealthy. The federal corporate tax rate from 2000 to now has basically gone from 29.5 to 15 per cent today. Our corporate rate is the lowest in the G7. And provinces have done the same for small business in lowering both the exemption and the small business tax rate.
The theory that lower tax rates for corporations allow them to retain more earnings that can be reinvested to support growth and job creation and encourage new capital investment has really not materialized. In actual fact, economic growth over the past decade has kind of been stagnant and sluggish and has not brought us to where we would like to be.
In the meantime as well, federal tax revenues, as a share of GDP in our country, have fallen to the lowest level in 50 years. Since 2000, spending on programs and services in our country as a share of the economy has also fallen below historical norms.
We’d like to acknowledge the steps that have been taken by this government and the Department of Finance in moving down the road toward progressive taxation. They’re positive steps, but we think there’s a bit more that has to be done.
We need a more aggressive clamping down on tax loopholes and tax havens. The recent document that was released around how corporations hide and shield taxable income shines a light on probably a glaring hole in our tax system, not only here, but probably in some other jurisdictions.
We need to eliminate regressive and ineffective tax loopholes. We need to tax foreign e-commerce companies to level the playing field for Canadian providers. We need to look at taxes on banks and finance companies that have received windfall profits in this country.
I’ll stop there. We’d like to acknowledge, as I said, what has been done to date. Thank you for the opportunity to express our point of view on this important issue.
The Chair: Mr. Whelan, please.
Des Whelan, Chair, Canadian Home Builders’ Association – Newfoundland and Labrador: Thank you very much for the opportunity to speak to you today. I have with me as well Victoria Belbin, the CEO of our CHBA-NL office.
Mr. Chair, esteemed senators and colleagues, the residential construction industry in Newfoundland and Labrador is responsible for over 11,231 jobs, $725 million in wages and over $1.6 billion in economic activity. I would add that four years ago, these numbers were actually double, meaning that our industry has seen a 50 per cent decline over this timeframe in all of those numbers.
The residential construction and renovation industry is mainly made up of small family-run businesses, over 95 per cent of whom have five or less employees. The residential construction industry is cyclical in nature and vulnerable to regional economic conditions.
Additionally, with the nature of the residential construction and renovation business, the ability of our members to keep equity in their companies that can be easily liquidated to invest in acquisition of property for development purposes cannot be overstated. As well, like many industries, that equity can also be accessed in tougher economic times and that becomes an issue of survival. These factors also mean that the industry is particularly sensitive to changes in the business environment.
The tax code in Canada has not seen significant changes in over 50 years and one could ask after 50 years, why does the Government of Canada seem to be in a rush to make sweeping changes without taking into consideration the possible unintended consequences of these changes. In fact, our members are still unsure how this will impact them because the nature of being a small or even micro-sized business is that they do not have the expertise to determine the effects.
We certainly welcome the spirit of the announcements made in October. However, it cannot be stressed enough that certainty is a must for small business owners, like the members of our association. These announcements could actually be good for our members, but without details required for each business owner to assess their possible outcomes, they represent promises that can only be evaluated when the details are released.
For instance, over the last two years, the Government of Canada has made significant changes to rules for prospective homeowners to qualify for mortgages. These changes were proposed to slow the heated markets in large and urban centres like Toronto and Vancouver. The effects on these large urban markets have been negligible. However, in Newfoundland and Labrador, with an already tough economic situation, our members are seeing 50 per cent of their clients declined in their mortgage applications. This reality has further contributed to year-over-year housing starts decline at a time when we should be promoting home ownership to see additional households increase equity and wealth.
We will see that additional mortgage changes in January 2018 that will further decrease sales in the second and third time homebuyers’ market. These are the sorts of unintended consequences that our membership would warn against.
We hope the new rules on income sprinkling recognize the dynamic contribution of family members to a business and we are encouraged by the government’s references to capital and equity contributions, as well as taking on financial risk in determining meaningful contributions to creating and running a business. However, when you consider the joint investment and financial responsibility of spouses of small business owners, what some consider income sprinkling could also be termed as a return on investment that the spouse holds with equity contributions and liens on their personal property.
Additionally, we hope that government will agree to periodically revise the passive income threshold to ensure that it is targeting only the very top earners and at the same time, limiting impact on the real business requirements for passive investments.
We understand there will be new rounds of discussions and consultation, a process the CHBA looks forward to participating in on how to address what government sees as problem issues related to intergenerational transfers of business ownership.
While the plans to reduce the small business tax are welcome, downside protection is more important to our members. Lower taxation of profits certainly helps when business is good, but it does nothing in the tougher time.
In a similar way, uncertainty is always bad for business and government’s proposals have created a great deal of uncertainty within the industry. That uncertainty is still with us today. It is imperative that government release final and detailed rules and implementation timeframes for the provisions that are moving ahead so that business can make any necessary adjustments. It is also critical that the Department of Finance and Canada Revenue Agency and private industry together work to ensure that interpretation guidance for the legislation is clear so that implementing the new rule changes does not create confusion and a whole new set of problems.
Finally, CHB and CRA have done great work together to address the underground economy in residential construction and renovation. In fact, the Newfoundland CHBA is co-chairing a committee with the provincial Department of Finance right now and we hope to see an impact soon.
But higher taxes and perceived unfairness are known to drive more cash deals. It would be a shame if the result of these tax changes was more people operating in the underground economy and therefore government realizing less tax revenue.
Our goal is to ensure that a fair and balanced tax system, without hurting our members who along with small business people across our great country are responsible for over 70 per cent of employment, representing a very, very important component of our economy. Thank you very much.
The Chair: Mr. Case, please make your presentation.
Jim Case, President, LAT749 Architecture Inc.: Thank you, honourable ladies and gentlemen. My name is Jim Case. I am an architect and the managing director of an architectural firm in downtown St. John’s that employs just over 20 people, the current iteration of which has been in place for about 20 years. A good year generates about $5 million in design fees for salaries, operations and modest profit, all of which invariably finds its way back into the local economy.
On July 18, the federal government proposed changes to the taxation of small business. These sweeping changes launched my business and my future into a sea of uncertainty. My retirement plans and those of my wife of 40 years suddenly demanded revisiting. The tone of the document was untoward and deeply offensive. The implication was that I was a tax cheat; that I somehow was a rogue who refused to cough up my fair share.
Recently, there has been a softening of the original government stance. We do not know to what extent, as these have been more akin to a kind of drippling, as opposed to any concrete revisions. These comments, tweets, rumours, appeasements and defensive suggestions do nothing to ease my worry and in many ways, leave me confused and jaundiced.
What may be withdrawn from the July 18 proposal and what may remain is vague and nebulous, not only to me, but to my accountant. My advisers are left with nothing of substance to advise me on. They cannot tell me how this will affect my business, my life or my retirement plans. They are completely adrift.
My wife abandoned her degree program and went to work to support me in mine. She left various promising careers to accompany me wherever it was I could find work, at first throughout Atlantic Canada, then in Asia and in Europe. When we put all of our savings on the line and mortgaged our future, she was there to counsel and support me. She gave up a career path to do so. She was in lockstep with me for 38 years while I built my career and ultimately my business. When I took risks to establish and grow the firm, she took those risks as well and made the commensurate sacrifices. We didn’t view it as a family business, but now, in light of this proposal, we see it thus, and must defend it thus. Otherwise, this government has reduced her contribution to zero. It considers everything that she has done to be worthless.
Now my adviser tells me that according to this proposal, if I can demonstrate that my wife has made a meaningful contribution to the success of our business, I can pay her a reasonable amount that is in line with her contributions. What then does this government consider meaningful or reasonable? Who will determine her meaningful contribution, her reasonable pay? Me, my business adviser, a disgruntled CRA auditor? And what are the costs incurred as I engage my financial advisers to harvest the documentation required to meet some obtuse definition of meaningful; to glean through my wife my wife’s life to determine if what she has done for me is of any consequence? And what then? Defend that to the CRA, defend it in Tax Court?
And what of the planning that my wife and I paid for, completely compliant with the taxation rules and regulations of the day? We did not hedge tax advantage through loopholes. We simply planned for our retirement through the eventual sale of our business. The sale proceeds as well as the profits we managed to accumulate due to our excess in 2013, 2014 and 2015, three boom years over the course of 35 lean ones, were supposed to fund our retirement.
Now I understand that passive income earned at over $50,000 will be taxed at a punitive rate of 73 per cent. This is based on an assumption of $1 million of savings earning a 5 per cent rate of return for the rest of my life. There is, as yet, no indication that the $1 million of savings is assumed to be shared between my wife, myself, my business partner and his spouse, or do we each have a one million dollar savings potential? As a couple, $50,000 per year is not what we intended or expected to retire on. Furthermore, we definitely cannot retire on $25,000 if we are forced to split the $50,000 threshold with our business partners.
Taxation at a rate of more than 70 per cent is punitive, bordering on pernicious. It is not a fair foundation of taxation. A fair system would not suddenly change the rules. The transition of my business to capable young architects that will succeed me was meant not only to provide financial opportunity for them, but to ensure that my wife and I could avail of the lifetime capital gains exemption that we thought we deserved, as we have no pension.
Instead, it seems we are about to be penalized and subjected to the arbitrary testing of her contribution through the lens of a CRA auditor. My wife’s contribution to our business should not be subject to some arbitrary test. Marital law would not have it so. Yet tax law would show her such contemptible and convenient bias. Does changing the tax rules for this middle class family in this hopelessly depressed province when we are on the verge of retirement sound fair and equitable to you? It is not. It is a poorly conceived prejudicial, condescending, vengeful and gender-biased political mechanism tailored to appease the masses.
Thank you very much, ladies and gentlemen.
The Chair: The first questioner will be Senator Marshall, followed by Senator Andreychuk.
Senator Marshall: My first question is for Mr. Murray. When the government announced its proposal, based on the feedback got it got, it revised its proposals last month, and it also made a commitment to reduce the small business tax. It’ll be reduced to 10 per cent in January and then to 9 per cent. Would you have an opinion on that? Several other witnesses in responding to a similar question have indicated that the dividend tax credit is going to be changed so really the net benefit to the taxpayer will be zero or even punitive. I just wanted to disclose that to you up front. What would your position be on the decrease in the small business tax rate?
Mr. Murray: I don’t think one tax measure alone indicates the progressiveness of the entire system. In our province, small business is part of the economic engine, so our consumers and that sort of thing. You have to look at the entire tax mix to determine progressiveness, not just one tax on a stand-alone basis.
Senator Marshall: You were also talking about the need for a fair taxation system and about how it’s going to fund public services or make the system fairer to the middle class. The government, when it did its fiscal update last month, made reference to that but it’s very general. It says it commits to apply future revenues from the proposed tax measures to provide further measures to support the middle class, but it doesn’t get specific. What would you like to see done with this revenue? From what we’re aware of so far, the minister has indicated that the tax on split income is going to be $250 million and the initial proposal on the passive income, he said was going to be multiples of $250 million, which I would expect to be decreased because the passive income proposal has been revised. Where would you like to see that money go?
Mr. Murray: I have a long shopping list here in my pocket.
Senator Marshall: The top two.
Mr. Murray: Off the top of my head, I would say, a national childcare strategy and those pieces of public infrastructure or public services that can help the economy in a whole range of different ways. Obviously child care would allow more single parents and women to enter the labour market, those sorts of things.
When it comes to public wealth and you distribute it, public services are great equalizers for people of any income source, especially low income people. They depend on public services more. There are many areas to which you could allocate additional tax revenue. We have public infrastructure that needs to be replaced; the child care. There are a lot of places.
Senator Marshall: Mr. Whelan, what are you hearing from the members of your organization with regard to the proposed tax changes?
Mr. Whelan: There’s a challenge around that, as I had said in my comments, in that you’re talking about small, microbusinesses. Incidentally, I spent a considerable amount of time in the last couple of weeks leading up to this meeting talking to our members.
Senator Marshall: And the proposals aren’t finalized yet.
Mr. Whelan: The proposals are not finalized, so they don’t know necessarily how it’s going to affect them. They’re very nervous about having made plans over the last whether it’s 35 years, as has Mr. Case, or even five for some younger business people that I spoke to. They’ve made these plans over these years with a certain case in mind, and then sweeping changes came in that they had no ability to comment upon. Now, they’re going to have to go back and reevaluate and rejig their plans with possibly losing up to half of that income that they were planning to use as retirement income. To us, it’s very similar to going into an organization where they have a retirement plan and saying, “Okay, we’re going to change the rules and we’re cutting your retirement income in half.” That person has invested that money over a period of time. They paid tax on it as they were earning it to invest it, as business people do. They pay tax twice. They pay tax in their corporate taxes and then they pay personal tax as they withdraw income. The bottom line is they don’t totally understand how this is going to affect them.
Our job, as an organization is to try and bring that together for them so they can have some understanding, but we can’t do that without the rules in play.
Senator Marshall: Some witnesses have indicated that their members have either closed shop or they are second guessing and taking action leading up to what they think the government is going to do. Are you seeing evidence of any of that with your members?
Mr. Whelan: I don’t know if I’ve heard anybody closing shop, but there will be changes in decisions. The income that you carry inside your company helps you with opportunities to invest. Our builders have to buy property years in advance of being able to enjoy any income on that. They have to invest this money. They have to build infrastructure. They have to put all this in place and then hope that down the road the factors aren’t going to change too much. It can have an effect on the housing prices. It can have an effect on the person’s ability to hire, to build, to do more and to grow. This sort of upheaval causes everybody to step back and reassess what they’re going to do. It could mean less economic activity, which is bad for everyone.
Senator Marshall: Would your members be mobile? For example, doctors who are incorporated are going to be impacted by these tax changes, and they’re usually mobile. They can go to other provinces or they can go to the U.S. Are your members mobile like that?
Mr. Whelan: That’s a tough question. Some of them are not even mobile from one community to the next because they’re dedicated to building in a specific regional area of Newfoundland and Labrador. First they have to sell their business, which of course becomes a problem given the third level of changes around the capital gains and all that sort of stuff. It complicates any ability to predict the future of your business. They are not very mobile.
Senator Marshall: One of the committee’s objectives is to assess the impact on the economy and on stakeholders? Do you think that the members who aren’t mobile will cope with the changes and make do, or do you think that it will have a more significant impact and cause some businesses to fail?
Mr. Whelan: We’ve seen, as I said, a 50 per cent decrease in housing starts in Newfoundland and Labrador. We haven’t seen a tremendous number of businesses fail to this point. I can only assume that for many companies, having their business opportunities decrease by 50 per cent will put them in jeopardy. These sorts of tax moves which change any planning you’ve done over the 35 to five years, however many years you’ve been in business, will create opportunity for more companies to be in jeopardy.
Senator Marshall: Mr. Case, thank you for your testimony, especially when you were talking about your spouse’s support. My interpretation of the testimony from officials of the Department of Finance is that they weren’t very supportive of spouse’s contributions to their partner’s business, unfortunately. I think I understand what you would like to see come forward when the minister comes down with his budget in 2018. What would you like to see in the passive income proposal? You talked about the impact it would have on your retirement. The proposals aren’t finalized and there are a lot of details yet to come. Of course, as the Senate National Finance Committee, what’s going to happen after we finish these hearings is that in 2018 we’re going to get a budget document and we’ll probably have two weeks to review it. For the passive income proposal, it’ll probably be something very detailed. So what would you like to see? That would help us when going through the legislation that we will get next year.
Mr. Case: Given my current situation, as I say, I had been planning for retirement next year. Therefore, having worked for 38 years, and as I say, three successful ones where we managed to put away this money that we have, I think there has to be some sort of grandfathering clause. I‘ve played by all the rules. I did what I was supposed to do. I wasn’t using loopholes. I mean, these weren’t loopholes. This was the way it was. As I say, I’m not a tax cheat. So I don’t have any time to retool. I want to get out and enjoy my life. I’m 60 years old, I have other plans. Not only are my retirement plans on hold, the plans associated with my retirement plans are completely on hold. In fact, they’ll be toast.
What I’d like to see is in some way to say, “Okay, now you’ve been through that.” We should have a cutoff. Maybe we need to go back to people five years ahead of me or rather behind me, and allow them to carry on in some way, but perhaps make these changes gradually. The whole retroactive thing is really going to cause me extreme difficulty.
I’m not the upper class. I’m barely middle class. I was born and raised on Springdale Street here in St. John’s, which is a working class neighbourhood. We had to claw our way out of that. My wife’s father was a fisherman. We went to school. We had no money in school. She had to quit school. She never finished her degree program because by that time we had moved to Australia to find work. I didn’t even mention that part.
Senator Marshall: You mentioned the passive income and the threshold that the minister is proposing, the $50,000. I think the minister was asked whether that applied per partner in a partnership or whether it had to be shared between all the partners. How many partners do you have, just to get a handle on the $50,000?
Mr. Case: It would be myself and my business partner and our spouses.
Senator Marshall: What would you like to see as a threshold, if there is one? We’re hearing testimony from other witnesses that the threshold is much too low.
Mr. Case: It is too low. If the threshold is going to be based on $1 million, then I think that it should be a million-dollar pot based on all of us. The threshold of $50,000 just represents 5 per cent per annum that you could earn on that $1 million in your portfolio.
Senator Marshall: So you would rather see a per-shareholder or a per-partner allocation rather than a total?
Mr. Case: Absolutely, senator, yes.
The Chair: Senator Andreychuk, to be followed by Senators Oh and Cools.
Senator Andreychuk: Mr. Case, have you ever had any contact with the CRA about your spouse and the sharing of income before, say, questioning what you are doing; in other words, through an audit or some such thing?
Mr. Case: Prior to the tax changes?
Senator Andreychuk: Prior to them.
Mr. Case: Never. I’ve never had any question from CRA
Senator Andreychuk: So you’ve been in this situation with your wife from the day that you started your business?
Mr. Case: Essentially, yes. We didn’t incorporate right away. We incorporated about ten or so years ago. Everything before that was just basic partnership basis.
Senator Andreychuk: What has troubled many witnesses that have come before us, and I think some of our members, is this test of reasonableness.
Mr. Case: Yes, that is very troubling for me.
Senator Andreychuk: And the department officials said that there’s reasonableness already in the Income Tax Act. As far as I understand reasonableness, it would be on things that you could test externally. For example, one may have charged too much hospitality or an exorbitant amount for a limousine ride from here to the airport. There’s some objective way that you can test the reasonableness of it. If it’s $25 to get to the airport and you charge $50, you might have some reason; say, there’s a breakdown on the highway.
In this test, it seems to me the reasonableness goes to the very essence of your marriage, your partnership with your spouse or significant other. Is that part of the troublesomeness?
The reason I say this is that we have spent decades in Canada trying to value a family unit and support the family unit. At the same time, we’ve never said, not in any law that I know of, what the family unit should be. In fact, what we’ve done is enlarge what the family can be. You know, with same sex marriage, et cetera, we’ve moved off a traditional marriage with traditional roles, expanded to give family units all the discretion they need to be a positive unit for the betterment of Canada.
Is that where you were going with your comments? As you were getting very emotional, I was getting emotional with you.
Mr. Case: Forgive me for that, senator.
Senator Andreychuk: No, it troubles me too.
Mr. Case: I think you’ve hit the nail right on the head. I suppose, in terms of a traditional family, you couldn’t get any more traditional than ours. I mean, in so many ways, we’ve been very fortunate. We managed to raise two kids and put one through to a PhD. They’re both here in town. We’re fortunate for that.
We had to do that, as I say, right from the get-go. At one point in time when we first got out of school, my wife worked as a photographer, but then I dragged her off to Australia to find work. We came back after a year because her father died. Then, a short while later, when we were here in the early 1980s, I bounced around from job to job. I mean, there’s not a lot for architecture in Newfoundland. We’re not building that kind of stuff. I bounced around from job to job, around the Maritimes, and then I managed to survive the ‘80s recession, which was bad enough. My wife had two kids. We raised them. She stopped her work; she never went back to the photography thing. Just when we were sort of getting on our feet, we got hit with the ‘90s recession. In the ‘90s recession, I first went to Montreal to work on the Hibernia project and then when we checked out to come back home, there were no jobs; there was nothing.
Chevron then asked me if I would go to work at a shipyard in Korea. So, on 10 days’ notice, we packed up our two kids, our entire family, and we moved to Korea for two and a half years because there was no other way that we would ever get by. Again, she quit her work. That was the sacrifice that we had made because we had learned from the ‘80s recession that there was no hope for us here. Only through the work that I did in Korea did I make enough money to come back and actually pay down all the debt that we had and make a modest $10,000 investment in the company that I worked for at the time. I borrowed another $10,000 from my father and another $10,000 from the bank, and I suppose the rest, as they say, is history.
My wife also had a promising career then as a paralegal which she gave up to go to Korea. When we came back and we finally settled, we said, “You know, what the heck is the point?” So, she never ever went back to work. She never finished her degree. All the while, for those 30 years, while everything was on the line, she was right there on the line with me.
I’m very worried, as you know, and I’m deeply offended by the tone of this sprinkling business, which is a term that I find completely demeaning. I didn’t bring my kids into my corporation because I felt that was morally wrong. I could have, but I didn’t. But I recognized my wife right from the beginning as a 50 per cent contribution to everything that I had done in my career and building my business and my firm, which I’m proud to say is a successful one, one which I would like to leave to the kids who are managing it now. I have five architects on staff. They’re ready to go. I would like to see them have a few good years. That’s kind of where I am, senator. Thank you.
Senator Andreychuk: Mr. Whelan, have you had any discussion with the government on the unintended consequences of the underground economy? I don’t think we’ve had any testimony, or perhaps we did and I might have missed the sessions, about the home builders’ situation. I come from Saskatchewan. We have the same thing. We read the newspapers and it’s Toronto, Vancouver. I haven’t really taken the position that you have; that home builders are affected by virtue of the laws or policies being directed at the two major centres. Do you have any data on that?
Mr. Whelan: I do not. We currently sit on a committee with the provincial government where we’re gathering those sorts of numbers. Most of the data that I would have would be anecdotal. Our members understand that day-to-day operation, they have to compete, especially when it comes to renovations, and this is a whole new area of business for our membership. As you can imagine, with a 50 per cent decline in housing starts, they’ve had to be very creative in how they can keep their businesses, how they can pay their staff, how they can maintain their business in existence.
What we do understand is that there is always competition with people that operate in that underground economy. Customers will say to our membership as they’re bidding on a home renovation project, “What’s your price without tax?” So what our members are forced to do because they do not operate in the underground economy, is they have to take less on their side of the deal. They still have to pay their employees. They still have to pay Workers Compensation. They still have to pay all the insurances that are required in order to operate a business. So, their competitive bid against the guy who’s not paying Workers Comp, who’s paying his employees under the table, essentially brings less profit. Sometimes they lose on these deals, just to keep themselves in survival mode.
No, while I don’t have hard and fast data, we do, across the country, have a lot of anecdotal data to show that these sorts of tax measures which make it harder for a business to operate will drive some people into the underground economy and force people like our members, companies like our members have, to really skin back and lose money in some cases to keep their businesses open.
Senator Andreychuk: Mr. Murray, this is just one thing that the government on July 18 zeroed in on, but you mentioned some other factors in the whole taxing system and fairness system, and providing enough for social benefits, which is what we want. One thing that you didn’t add was the aging population, which seems to be the crisis that everyone else is talking about. Do you factor that in as well as one of the social benefits that we should have?
Would it be fairer to stand back, not hit small and medium-sized businesses, which we’ve heard, right across Canada, are the backbone of our economy and the job creators of our economy, and look at where are the real loopholes, where are the tax evaders, what are the proper initiatives? We have a progressive tax system, but is it working progressively and fairly, one group against another? Were your comments really driving you to the conclusion that we should look at the entire taxing system?
Mr. Murray: I’ll speak to the aging comment. No one is aging as rapidly as we are here. We certainly understand that that’s a huge economic and social challenge for our province and the country.
I’m not a tax accountant or a fiscal economist. The government has knowledge and expertise internally. However, we do recognize the importance of having progressive taxation, and it has to be done in a way that is not punitive toward people who have not taken advantage of the tax rules.
I mean, I think we know where the loopholes are. I haven’t taken advantage of any tax loopholes in my life yet, but I think we know where they are, and I think as I said earlier in my comments, those jurisdictions internationally that have figured out progressive taxation are either at the top or in that upper echelon of countries that have great social programs; great economic health and great medical health; that have a well-distributed public service social net.
That is where we have to look, not at one particular instrument. It’s the whole suite of things. We can always do better. I’d like to see Canada, my country, as the global leader in that. I’d like for other countries to look at us and say “Look what they’ve done.” I think that’s where we need to strive to be.
Senator Andreychuk: Mr. Case, just one more question. You say you’ve been in business and incorporated for 10 years. If the government persists in moving on this reasonableness test for spousal or partner contributions, how will you be able to justify whatever test they come up with in January 2018 its reasonableness within your business? Have you kept records of proof in any way, any logs on your wife’s contribution or has it been, as we have heard from many people, an informal discussion, consultation, but no paper trail like you would have with bills and receipts, for example? I used to do tax law long time ago. How are you going to prove what is reasonable in the eyes of CRA? Do you have a paper trail? Do you have some external proof that you can point to, “Here’s what I’ve done for ten years and therefore it’s reasonable for my business.”
Mr. Case: I have no idea, senator, how I can demonstrate the sacrifices that my wife has been through. I have no idea how I could do it. I’m going to have to roll over.
Senator Andreychuk: Is that the test though that you’re worried about? That someone’s going to come along and say it’s fair or unfair? The onus is on you to prove it.
Mr. Case: Yes, I’m sure I can demonstrate my holdings in companies that go beyond the 20-year company that I currently have, how I built on and how I bought into my current company and eventually bought out my partner, who’s retired, and so on. All of that is fully documented, but how can I say that half of that money was hers? I have no idea.
Senator Oh: This is very emotional for hardworking Canadians, especially on this side of the country.
Some witnesses have told the committee that the proposed threshold of $50,000 for passive income is an acceptable compromise, while others have argued that it is far too low, especially for large private corporations such as the subsidiaries of multinationals. So what do you think of the $50,000 threshold for passive income? Should it be increased or should the threshold be tied to the size and the nature of the business, such as business revenue or capital investment?
Mr. Murray: I’m not really in a position to say what that should be; I’m more concerned about the progressiveness of the tax. I’m not a businessperson, so I’m not 100 per cent sure how that would affect the way Mr. Case has so eloquently related that to the committee. I’ll pass.
Mr. Whelan: To me, it seems that $50,000 is an arbitrary number based on having $1 million in a bank account at 5 per cent interest. If you assume that a business person puts away money, part and parcel by the way to run their company in poor times, but also as an ability to have a retirement fund down the road, any financial adviser will tell you that in order to have a proper retirement at a reasonable amount of income, you need to have between $2 million and $4 million in your retirement savings plan. For a government worker who has worked very hard for their plan, that’s kind of the numbers that you see. For a relative of mine, $3.5 million came out of her retirement plan. She worked with the bank for 40 years. To me, $1 million seems like it’s an arbitrary number when you look at one of the main reasons for having this income in your company is for retirement, and it’s not nearly enough to retire on.
Mr. Case: Senator Oh, I think I could manage the $50,000 threshold if it were applied to both my wife and I. If it’s going to be applied to just myself, I don’t know what I’ll do. I’ll just have to continue working or retire and find something else to do; go to work at Home Depot or something, and that’s a fact.
Senator Oh: Today, many of us in the country are actually paying tax on top of tax. All the time we are paying the tax after tax money; we still pay tax. Would you agree that we should have a comprehensive tax overall since the last one, the Carter commission, 40 years ago? Maybe we should have a complete review, take time and draft a complete proposal that is fair for everyone in Canada
Mr. Case: You are absolutely correct, Senator Oh. There’s no question of that. I mean, if we go through with this proposal, we’re adding on a whole new strata of fine print, a whole new strata of testing and a whole new strata of calculation. Now I have to maintain those extra strata in my retirement. It’s not something that I can manage. Now I have to go out and pay my accountant to manage something that this government has made more complex, especially in my particular case.
Mr. Whelan: I would love to address that. Essentially, as I said in my presentation, it has been 50 years. One of the things that’s always a little disturbing to business owners is to see this uncertainty. We had an announcement on July 18. We have a 75-day period. Everybody must figure out in that 75-day period how this going to affect me, what’s it going to do for me in my retirement, for how I run my business. How am I going to have to make decision on that? I don’t know, does the government need money? Is this the reason it’s rushed? Why not have a proper assessment done of the whole thing. You could call it a royal commission. You could call it what you like, but at the end of the day, properly assess what is a fair taxation system. How does this affect Canadians, both big and small? And at the end of the day, that’s what our members want to see and I think that would be a very fair statement to make. You can’t just bring changes in and assume that everybody is just going to cut cheques and pay bills.
Senator Cools: I would like to welcome you three gentlemen to our committee today. I found the testimony of Mr. Case extremely compelling and, I must say, a little frightening and a lot disturbing.
I’m reminded, Mr. Chair, that we’re on new ground here. I have always understood that there’s a very important principle in law called the legality principle. That principle upholds the fact that there cannot be r retroactivity in law. In other words, the legality principle says, in essence, that no one may be charged or accused of a wrong or any offence unless that wrong or offence at the time of the commission of the offence was in law an offence. In other words, you cannot decide a crime retroactively. Otherwise, you could go and do it for every enemy you had. Mr. Trudeau senior enshrined that principle in our Charter of Rights in 1982.
I think, Mr. Chair, we should ask our law clerk, at least at the Senate, to examine this particular issue and give us a legal opinion on it. My staff here has just given me a copy of the Charter of Rights 1982. Just for the record, so that you know what it is I’m looking at, it’s section 11(g) and it says:
Any person charged with an offence has the right
(g) not to be found guilty on account of any act or omission, unless at the time of the act or omission, it constituted an offence under Canadian or international law or was criminal according to general principles of law recognized by the community of nations.
Now, this doesn’t say the Income Tax Act and it doesn’t have to say so because it is looking at the principle that is called the legality principle. I’m just saying that to you and because you called it to mind. Your testimony was so compelling that it evoked my recollection of this. I think, Chairman, we should ask our law clerk to have a look at as to how that principle would apply in tax law, and I don’t see that it can’t apply in tax law.
Rather than ask you a question, I just thought I may try to present perhaps a possible solution. We don’t know, but let’s take a shot at it and see what comes out.
Mr. Case: Thank you, senator.
Senator Andreychuk: I just want to make sure that our witnesses understand that it’s a principle of retroactivity, not criminal law. I don’t think anyone is saying that what people have been doing under the present Income Tax Act is illegal. There are tax evaders, but building a business plan based on good information of the law is not an offence. It is not irregular. It is not inappropriate. Somehow this term “loophole” has led to a tainting. I don’t think we’ve heard anyone say it is the appropriate word to use. Maybe you want to change the system for a better system for the benefit of all of us, but it should never be taken that citizens who have used the law as is should be moved over into a tax evasion or a tax cheat category. I think we’ve been pretty universal in saying that in a non-partisan way.
Senator Cools: But we take this seriously.
The Chair: On behalf of the Standing Senate Committee on National Finance, thank you very much for sharing your opinions, your recommendations and your ideas with us.
Honourable senators, our next panel is composed of Mr. Jason Sullivan, President, Stone Island Enterprise Inc.; Dr. Paul Johnston, a physician practising in a teaching hospital, Mr. Michael F. Power, the owner of Power & Associates; and Laurie Skinner, Chief Financial Officer, KMK Capital Inc.
I have been informed by the clerk that the first presenter will be Mr. Sullivan, to be followed by Dr. Johnston, Mr. Power and Ms. Skinner. You have five minutes each for your presentation, to be followed by questions from senators. And since we’re in St. John’s, Newfoundland and Labrador, the first questioner will be Senator Marshall from Newfoundland and Labrador.
Mr. Sullivan, please make your presentation.
Jason Sullivan, President, Stone Island Enterprises Inc.: Hello. I’m Jason Sullivan. Feels a bit funny to hear my name, President of Stone Island Enterprises, but what I own is a fishing company. So I’m not as groomed as a lot of people you’ll probably hear throughout the country. I also don’t know all the intricate details of what the government is proposing, but I do know that it negatively affects me and my business and my retirement, so I guess I just want to tell you my story and how it’s going to affect, not just me but thousands of other small businesses in the fishery around the province.
So it was really tough to get in the fishery. We had to buy in now. Years ago, before the moratorium, you could get a license for $30. Now after the moratorium happened, we had IQs and stuff. So then you had property and you had to buy it. So, when I got in the fishery, it’s after costing me over $1 million.
This year alone, because of quota reductions and stuff like that, I see the net worth of my enterprise is reduced about $500,000. That’s fine. That’s one of the risks I took getting into the business and I know it’s a cycle and it’ll come back. I’m young. The thing is no one is going to get into business if there’s not some sort of reward at the end of the day. I’m sticking my neck out on the line every day and it’s hard on the family. It really is. There are always problems. It’s a small business; you got to deal with it yourself. I don’t have the luxury to have a 9:00 to 5:00 job and leave your phone at work when you go home.
This last year, I bought a new boat and we took on more debt, but because of that new boat, it gave me an opportunity to catch more species and have more revenue. We had a good year, and I’ll be honest with you, I made enough to cover my payments for next year. But I can tell you right now, next year, it looks like our quotas are going to be reduced about 30 per cent, so my revenue is going to be down 30 per cent.
Just because I have money in the bank doesn’t mean I have money. I have no pension. I have no nothing. At the end of the day, hopefully I can pass my enterprise on to my children or sell it and retire. If I sold my enterprise now for whatever it might be, $1 million, and I lost a quarter of that, it would be tough.
Like I say, I was only contacted late last week by the board of trade here and there’s better people to talk about all the infinite details. The trouble I’m having with it is you read a lot of stuff in the paper and stuff like that and people with different columns and calling people who have small businesses tax cheats and stuff like that, and you know, it really is a struggle in order to survive when you start a business, and it’s kind of a slap in the face when you read something like that.
I read one recently. Lana Payne wrote that the party is over. I don’t know what sort of party she’s talking about. Here she is making $250,000 with two personal assistants flying all around Atlantic Canada and supposedly representing me because she’s head of the union we’re part of. But then to go and insinuate that I’m bending rules or I’m whining or whatever when she’s got this big pension and we’re struggling.
I listened to the guy from the Federation of Labour which I’m also part of. I mean, every time he opened his mouth it felt like I got a kick in the guts. They’re there supposedly to be helping us and all they care about is the employees. They don’t realize the sacrifices that people who start a business have to make. I listened to Mr. Case there talking about his wife and stuff, and it’s true. Businesses are hard on families and it takes a strong marriage to get through it, from my experience. Luckily mine’s pretty strong so far.
I made a few notes, just so I wouldn’t miss anything. I heard people talking about some companies may close and stuff like that and it’s true. The unique thing about the fishing companies is they are basically injecting most of their money back into rural Newfoundland and in times like this, there’s not much money going into rural Newfoundland, so anything that’s tougher to do or there’s less reward in the end, people aren’t going to do it.
Our average age is around 55 in the fishery now and we need new people. But bringing down rules like this when, at the end of the day, there’s very little incentive when you go to sell or retire or whatever you want to do will make it tougher for us to draw new people in. We’re creating a culture where if you tax people so hard that people aren’t going to want to be doctors. They’re not going to want to go to school for ten years when you can go to school for a year and make a little bit less money and essentially pay less tax. You can’t tax your way out of a hole. If they have a spending problem, they should stop taxing people.
I think for people to say I’m not paying my fair share is lunacy. I mean, jeepers, that’s what this has done. It created a divide in society where people in business are treated like criminals now or assumed to be criminals and everyone else is not getting enough from the few people that have some businesses.
I just hope that before rushing into anything, and it seems like it is a big rush for some reason, that they’ll take a step back and realize what they’re doing. They’re saying they’re trying to strengthen the middle class, but I think I’m the middle class. I don’t know. I can’t stop working today and never pick up another pair of rubber boots or anything like that again. If you’re going to say the middle class, the first thing you should do is identify what is the middle class. I mean, I’ve read articles where it’s anywhere from $30,000 to $100,000. But $30,000 might go a lot farther in rural Newfoundland than it does in downtown Vancouver, I don’t know. The point is if you keep taxing people, people are just going to give up. We need more businesses. We need businesses to grow to create more growth and more jobs and strengthen the economy, but every time you increase HST like we just faced here in the province, every little thing all adds up. It’s just like you’re chipping away at it and just waiting for us to fall.
When I first started in business -- and I’ll just leave you with this before I go -- I couldn’t believe the amount of taxes I had to pay at the end of the year when I met my accountant, and it’s not Mike either; I can’t afford him. Anyway, I said “Geez, Derek, b’y, there must be something we can do. God, this is an awful lot of money. I’m going to be left with nothing at the end of the day.” He said, “Jason, if you’re going to start a company, don’t let the tax tail wag the dog.” So if you’re going to bring anything back to Ottawa, perhaps you should leave them with that quote. Thank you.
The Chair: Now we will hear from Dr. Johnston, please.
Dr. Paul Johnston, physician practicing in a teaching hospital: I am deeply appreciative of the opportunity to speak with all of you today.
As mentioned, I’m Paul Johnston. I’m a cancer surgeon at Memorial University. Unfortunately, I don’t have much positive to say about the tax changes. You’ve already heard from physicians across the country, I assume, and I’m sure they’ve already explained the lifetime financial realities of being a physician, shown you how these tax changes will make physician retirement vastly less comfortable than that of a government employee with a defined benefit pension. I don’t doubt that federal employees contribute greatly to society. Rather, I suggest that physicians should also enjoy comfortable retirements, and these tax changes will make that very difficult.
The effects will be more pronounced in Newfoundland and Labrador than elsewhere in the country. The first thing I should tell you is that generally speaking physicians leave and do not get recruited to Newfoundland and Labrador and thus the problem is retention and not recruitment of physicians.
Typically, young “Newf” doctors pursue some of their residency or fellowship training on the mainland in Canada or the U.S. where upon they discover warm, sunny weather from May to September and something called spring, and more importantly, they get paid way, way better than at home where Newfoundland and Labrador offers the lowest compensation to physicians in most specialties, including family practice, in all of Canada. Based on this, young Newf doctors often decide within the first year of living away to stay away for the rest of their working lives and if the financial realities of Newfoundland physicians’ pay are made even slightly worse, and these changes will do far worse than that, the attrition of new grads will accelerate to a crisis.
Let me give you a personal example. I was offered a job to stay at Indiana University in 2012 during my two-year fellowship there and I can tell you without hesitation, I would never have come home if the proposed tax changes were already in place. Just last month, I was chatting with one of my colleagues from my training days in “Indy” who now works in Michigan. After sharing a couple of pints with him at a conference and telling him of the madness that is these tax changes, he and the administration of St. Joseph’s Health Network in Ann Arbor are eager to fly me down for a site visit and take a look at their facilities, which include four surgical robots and hardwood floors on the patient floors. If the current tax changes go through, the lifetime take-home pay in Michigan is about double what I’m going to earn here. Nonetheless, I’m going to stay. The schools are good. My family and I are happy and that’s more important than money and Newfoundland is, I believe, the best place in the world to raise a family.
However, staying put will not be the story for new grads and here is where I believe the real and serious danger lies. Unlike me, new grads don’t yet have children, are less anchored to home, easily portable and have big six-figure student debts by the time they finish 10 or 15 years of training.
I deliver nine hours of lecture each fall at the medical school and the students are already approaching me about how to go about writing United States medical licensing exams. They’re not stupid. They’re about to spend 80 to 100 hours a week for the best ten years of their life at less than minimum wage and the federal government is about to erase their ability to use a future corporation as a means to save for parental leave, pension, disability pay and a myriad of other benefits currently not offered by this province, or really any province in this country, to physicians. In short, new grads are going to leave if these changes go through.
Finally, the morale of Newfoundland and Labrador’s physicians is deplorably low. Despair is a better word than morale. We have been working without a signed provincial contract since 2013. Our own Prime Minister stood in the House of Commons and said that he doesn’t stand with doctors and that his federal government is pushing through tax changes that eliminate our ability to save appropriately for retirement.
As per usual, and my respect to the mainlanders in the room, a mainlander has proposed sweeping changes that he or she thinks will be good for the mainland with absolutely no regard for or understanding of the devastation it will wreak upon our fine province. People with last names like Trudeau or Morneau who have perfectly legal low tax family trusts in place which alleviate entire generations of family members from the need to work are telling a bunch of overworked doctors who are simply trying to fund their own pensions and pay their own medical school bills that they need to hand over some of their excess wealth to the taxman. The hypocrisy of these proposals is therefore at best breathtaking and at worst, weakens this government’s moral authority to enact legislation.
In closing, I respectfully and somewhat emotionally urge this Senate Committee to recommend that the proposed tax changes be abandoned in full until more thoughtful consideration of their consequences upon rural parts of this country, such as Newfoundland and Labrador, is undertaken. Thank you.
The Chair: Dr. Johnston, you have another minute left.
Dr. Johnston: That went a lot slower when I read it to my wife last night.
I would quickly mention that the effect of the tax changes for the physician goes beyond the bedside. Given that Newfoundland and Labrador does not have a Toronto or Montreal where large national or multi-national corporations prefer to set up offices, a larger percentage of the higher income individuals here in this province are doctors, not just in St. John’s, but particularly in smaller communities. If the physicians leave then what leaves with them is not only the patient care. Some disposable income that would have otherwise been spent on dinner at a local restaurant or to buy clothing at the local boutique or purchasing a newer car at the dealership goes with them. These people aren’t employees of banks or major multi-nationals. It’s also mom and pops who are buying stuff and looking after each other.
I guess I could also mention that physician suicide rates are three times the national average. Stress is really high. Since July 18, I don’t know whether I’ve got a pension or not. It’s November. I got a two-year-old, a four-year-old and a six-year-old. I got my mortgage. I got my wife. I just want to know where I stand.
The Chair: Dr. Johnston, thank you very much for your comments. The committee can share with you that there are a lot of concerned Canadians out there. We intend to table our report by December 15, and it will reflect what we’ve heard.
That said, the hair will now recognize Mr. Power, please.
Michael Power, Owner, Power & Associates: Thank you very much for the opportunity to present my views on tax planning on the private corporations to this committee.
My firm provides professional services, including tax advice, to Canadian private businesses, families and individuals who operate in Newfoundland and Labrador. My comments today stemmed from my consultations with my clients and my associates, as well as my thoughts drawn from my own experience over a 40-year career.
I am pleased that you have allowed me to present my thoughts here today, and I’m hoping that my thoughts can be presented and integrated into the national revenue framework.
To prepare here today, I did a little bit of research on the finances of the Government of Canada over our history. Our country is 150 years old this year. From 1867 to 1917, there was no Income Tax Act. Our country relied upon customs and excise taxes and postal rates for its revenue. In 1917, the Minister of Finance introduced a temporary War Tax Upon Income Bill which called for a tax of 4 per cent on income of single men over $2,000, very low. For others, the exemption was $3,000. For those Canadians with annual incomes of more than $6,000, the tax rate ranged from 2 per cent to 25 per cent.
This original Income Tax Act was ten pages long. Now, here we are 100 years later and the Income Tax Act is over 2,000 pages long and the highest rate of tax is over 53 per cent.
I’d like to give you a quote from Sir Thomas White and what he said as the Finance Minister who brought in the Income Tax Act. To paraphrase him, he said, We are a country inviting immigration and I therefore thought it desirable that we should not be known to the outside world as a country of heavy individual taxation. I think that still applies today.
Sir Thomas also said, “We cannot see very far ahead these days. We don’t know how long this war will last. We don’t know what the attitude of the people of this country will be upon the many questions, social, industrial, financial and fiscal.” This quote is relevant to our current environment with respect to immigration and taxation. We are taxing individuals at such a high rate that it has become a disincentive to earn additional income, as well as to attracting educated, high income earning immigrants.
This temporary Income Tax Act became permanent in 1948. In 1962, the Royal Commission on Taxation known as the Carter commission was started. It took ten years for that commission to present its seven-volume report and then have it implemented. It brought in tax on income plus tax on capital gains. Later, in 1991, the government of the time, to replace the manufacturers’ sales tax revenue, introduced a GST, known today as the GST/HST reform.
I provide this context as evidence that the taxation system requires time and careful consideration to be effective and further, to reiterate the notion that government can tax whatever source it chooses. It is only the details of the system that change over time.
Each successive government has made changes to promote itself politically based upon the prerogative of the current prime minister. The proposed changes involving Canadian controlled private corporations have done the opposite for Prime Minister Trudeau. The campaign promises to tax wealthy Canadians and redistribute to the middle class have backfired. The comments that I’ve heard from taxpayers since July 2017 have been overwhelmingly negative.
Owners of CCPCs are worried about their livelihood and how to navigate the complicated and sweeping changes as they have been proposed. The point is that most Canadians who own a Canadian controlled private corporation do not consider themselves to be wealthy. They consider themselves middle class, hardworking Canadians. I have reviewed some of the submissions that have already been made and they cover many of the costs and efforts associated with earning their incomes and owning a small business. I draw your specific attention to the submission by CPA Canada last month which makes very specific and comprehensive recommendations for changes to the proposals.
The small business owners that I represent do not identify themselves to be wealthy. Here are some specific comments on some various changes being made.
Income sprinkling: In my practice, it is mostly doctors, but there’s a sprinkling of others, some lawyers, a few accountants. For the most part, this sprinkling occurs when a child turns 18 and is going to university. It lasts for four or five years until the child is finished university and then they start earning their own income. It’s a help to the family. Why do people work and earn an income? They do it to support their family. This is just one other way of supporting your family.
Most doctors that I talk to, especially young doctors, their biggest question is: How can I pay off my student debt? I know of some students that have debt of $100,000 to $200,000 and some up to as much as $500,000 of student debt to get to where they are, especially the people who train to be specialists. That’s their biggest concern. They have all the same things that Paul Johnston has. They have a spouse and they have kids and they have a mortgage and they have car loan and they have to pay off this debt as well. Why can’t we change the Income Tax Act to support those people and let them deduct their payments at the high rate? We should be helping these people. We need these doctors. We shouldn’t be making it a negative. We should be making it into a positive for them.
There are changes being made to things like work in progress for professionals. The administration said that other people are not getting those deductions. Employees don’t have work in progress. Work in progress is something that you are working on. It is not finished. You don’t get to bill it until it’s finished and that’s into the next year. Why?
There are also issues like intercorporate dividends. They made changes that are preventing people from paying dividends out and actually paying tax. It’s making tax planning completely uncertain.
There are also two sources of revenue for the federal government. One is income tax and the other is HST. We have a huge number of people who are getting older, call them baby boomers, and they’re spending more and more time outside of the country. I provided a copy of Statistics Canada stats saying how many days and nights that Canadians are spending outside of the country and how much money they’re spending. There are 321 million nights spent by Canadians outside of Canada. When they are outside of Canada, they’re buying their meals outside of Canada. They’re buying their coffee. They’re buying all the things that are subject to GST. Why can we not tax people on that? Wouldn’t that be simpler? If it’s 321 million nights, if you charged them one dollar a day for when they’re outside of Canada that would bring in $321 million.
Mr. Morneau is saying that these tax proposals on small business would bring in $250 million. Why can we not tax people when they’re out of the country? It would be a very simple thing. It could be a one-line on a personal tax return. How many nights were you outside of the country by one dollar and very simple; no administrative costs. It would be very easy to administer. You can find that from people’s passport information; very readily available to the federal government. Would I object to paying one dollar if I’m outside of the country for a night? I don’t think so. But it would bring in the revenue that he’s looking for. It’s a suggestion for a very simple change.
The message that I’d like to bring across is these changes that are being proposed are so complex. I’m in the tax business for 40 years. I find it very difficult to follow what’s going on and I can’t give advice to my clients. That’s not fair to me. It’s not fair to the clients. It’s not fair to small business and it’s not fair to the country.
I would like to see these tax proposals scraped altogether and bring in another royal commission to study how the Government of Canada should proceed with its revenue, either from income tax or from GST.
Thank you very much.
The Chair: Mr. Power, I’ve been informed by our committee analyst that the number of pages in the present Income Tax Act in Canada in 2017 is approximately 3,500 pages.
Mr. Power: I said over 2,000.
The Chair: Ms. Laurie Skinner will now present her comments.
Laurie Skinner, Chief Financial Officer, KMK Capital Inc.: Thank you for the opportunity to speak with you today on the proposed changes relating to the taxation of private corporations. Considering one in three people in Canada own or work in a small business, these proposals will have a significant impact on all private corporations across Canada, even in the context of the revisions introduced in October.
KMK Capital is a vertically integrated group of companies with operations primarily focused in the real estate sector. It employs in excess of 500 people. The operations of these businesses provide substantial direct and indirect benefits to the economy.
Today, I would like to discuss the process of consultation and communication on these proposals, the tax principles of fairness and simplicity and provide specific commentary on the proposals relating to passive investments and tax on split income.
The proposals tabled in July and further amended in October are pervasive and complex. A consultation period of 75 days over the summer was a considerably insufficient period to provide affected parties with time to properly analyze and respond to the proposals. Notwithstanding, Canadians submitted 21,000 proposals to the Department of Finance, a strong indicator of the extent to which these proposals tore at the fabric of the Canadian tax system.
In addition, the tone of the communications from the Department of Finance did not respect the fact that businesses are operating within a tax system that was designed and legislated by successive governments on the advice of the respective Departments of Finance.
It is clear to most observers that the scope of these changes would substantially alter the rules of the game under which Canadian owned businesses have operated for over 40 years. It is also evident and necessary that such broad-based changes should only be implemented after a comprehensive review of the Canadian tax system.
Since 1972, the effective date of the last truly comprehensive tax reform in Canada, it may be said there are two bedrocks of a small corporation tax system designed to ensure fairness in the system and that is the refundable dividend tax on hand and the capital dividend account.
The objective of the passive income proposals is to remove tax deferral when income is not fully distributed and passive investments are required inside a corporation with after tax business earnings. The current proposals aim to eliminate the refundable portion of investment tax and the capital dividend account, the intended result of which is to equalize returns of the corporation to those of a highly paid employee.
If these proposals are implemented, distributed earnings will be taxed in the range of 70 per cent to 73 per cent for investment income and 55 per cent to 59 per cent for capital gains. This enhanced entrepreneurial tax serves to widen the gap between the investment returns for businesses and employees significantly in favour of the employee. If equality was a principle to start, it is clearly not being achieved.
In its proposal, the Department of Finance has not considered the differentiating circumstances under which an employee and an entrepreneur earn investment income. Business owners put personal capital at risk, assume full responsibility for financing their retirement and take financial risks on a daily basis to operate a business. Business owners retain earnings in a company to manage through business cycles, to support its capital structure or for future growth and investment. Is the unintended consequence of these proposals to suppress growth and reinvestment by entrepreneurs?
In the context of a company holding real estate, investment income is currently taxed at the higher rate of 53.67 per cent and on a fully integrated basis under the new proposals could be as high as 73 per cent. The proposals do not reference the role of the real estate development and rental business in the Canadian economy. If the thought process is that business owners retain lower tax corporate earnings to avoid paying the higher rate personal tax, retaining after tax investment income inside a corporation already taxed at the high rate would be counterintuitive. I would suggest there should be some consideration given to this circumstance in any revised proposals.
When the proposal on passive income was introduced, there was no accompanying legislation and so many questions remain unanswered. What is a passive investment? What about an investment that is acquired with debt? How will the grandfathering provisions apply?
In its October update, the Department of Finance introduced a relief provision such that $50,000 of investment income would not be subject to the new rules. Few details accompanied this announcement and many questions still remain.
The new proposals around the tax on split income expands the definition of specified individuals to include a spouse and other related individuals, expands the type of income subject to the high tax rate and will involve a significant amount of compliance, effort and cost for the small business owner and/or their tax adviser.
The rules will require the business owner to track the contributions of all related individuals considering labour, capital contributions and historical remuneration and returns to determine if a payment is reasonable and meets the definition of an excluded amount. This ongoing assessment will require considerable judgment if applied as currently prescribed and the enforcement costs for the Department of Finance will be significant.
Considering the principle of fairness, I would suggest including the spouse in the category of specified individuals subject to the same test as other related adults is unfair. Current tax legislation contemplates and recognizes that while each spouse may assume different roles, the partnership exchange between spouses is essential to support a private business. The new proposals tend to be regressive to this concept.
In specific circumstances, these proposals also have the potential to limit long-term tax planning strategies, including estate freezes and other succession planning.
In the October update, the minister committed to addressing certain issues raised by stakeholders in connection with the proposals for tax on split income. In light of the direction taken with the current proposals and the demonstrated impact they will levy on business, any revised proposals relating to passive income and tax on split income should be subject to a new consultation process before being brought forward in any budget process.
We operate in a global business environment. Capital is transient and Canada’s tax regime must be competitive with other countries. In moving forward with tax reform, we must be careful not to seriously weaken our competitive position.
Tax reform is likely to be neither effective nor efficient if undertaken piecemeal and without the engagement of all of those impacted. The virtually unanimous rejection of the current proposals confirms this. Only a comprehensive review of the tax system can properly address these issues. All options must be on the table. There is no perfect tax system and there will be tradeoffs and compromises.
Moving forward, any revised proposals should be subject to a consultation process in light of the material changes contemplated and the Department of Finance should avoid changes which have the effect of retroactivity, changing the rules of the game. Today’s businesses are operating in a structure that has evolved over 40-plus years and this system should not be changed retroactively. Time must be given to adjust to a new framework.
Small and medium-sized businesses are important to the growth of our communities and our country. During Small Business Week, the Prime Minister noted that small businesses make up 98 per cent of all business operations in Canada, employ over 70 per cent of the total workforce in the private sector and contribute more than 30 per cent to our gross domestic product. Given the demonstrated significance and importance of small and medium-sized businesses to this country, we must ensure our tax system supports them. Thank you.
The Chair: Honourable senators, the first questioner will be Senator Marshall, followed by Senator Andreychuk.
Senator Marshall: I’m going to start with Dr. Johnston because somebody had said he may have to leave early. This is an area I’m really interested in because I worked with the Department of Health.
We’ve had a number of doctors testify across the country and the week before last we were in Saskatchewan and Manitoba. Both provinces have medical schools, one medical school each, like us. I asked them how many doctors they are retaining. They’re retaining 50 per cent, and 50 per cent are foreign-trained. We have a medical school and we’re training physicians, but we’re crying out for physicians. How many do we retain?
Dr. Johnston: I don’t have a good number for you, but I could get one for you through the NLMA.
Senator Marshall: Would you tell us anecdotally?
Dr. Johnston: Anecdotally, that sounds about like it is here. The call to larger cities is too hard to ignore a lot of times and that sounds about right. A lot of times I’ll be on the phone because we cover rural areas that have to send patients in by air ambulance, if it’s from Goose Bay or what have you. A lot of times you’re dealing with a physician who’s doing well, doing good work, but when you get to know them a little better was foreign-trained, like a lot of the time.
I would say overwhelmingly on the Avalon Peninsula, a substantial percentage of the physicians are foreign-trained, which is fine because there are a lot of brilliant foreign-trained doctors out there. But the Canadian standard in terms of training is pretty darn high. In fact, each of the 16 medical schools in the country is ranked in the top 200 in the world. We do very good work and I have more confidence if I know I’m dealing with a Canadian-trained physician on the phone until I get to know the foreign-trained physician, who may or may not be excellent.
Senator Marshall: This would apply to you also, that if you have foreign-trained doctors, it’s an indication that they’re mobile. They could easily pick up and move off if they can find another position.
Dr. Johnston: Yes.
Senator Marshall: So what has it been like for the last number of years? There has always been an issue with regard to adequacy of doctors, especially in rural areas. Is it getting better or is it getting worse, or has it stabilized, say over the last five or six years.
Dr. Johnston: I would say it’s sort of stabilized. It’s not getting any better, which is to say it’s not as good as it needs to be. If the majority of people that I’m on the phone with off the Avalon Peninsula are foreign-trained, then clearly we don’t have Canadian doctors in those locations. Like I was saying, if this goes through, there’s no question it’ll get worse.
Senator Marshall: These are federal taxes. I know that the province will probably benefit a little bit, but if people were to move, they’re not going to move to another province. They’re going to move south of the border.
Dr. Johnston: It’s a federal thing. It affects everyone across the country. Yes, the truth of the matter is the first world countries of the world’s population, you know, the baby boomers are moving into their health care years. It’s a competitive marketplace for what are internationally valuable skills. I’m a text away from three or four guys I trained with, I’m still good friends with; I have a Miller Lite with them when I go on conference. It’s really easy and that’s true throughout the first world. It would be easy to go.
Senator Marshall: Each province has its own medical association. Has there been any information coming from them? The accountants have the CPA, and the national president has submitted a brief. I’m thinking provincially.
Dr. Johnston: The CMA has shouldered the burden of advocating on our behalf with regard to a federal tax change. The provincial medical associations have been largely quiet because it makes more sense if we have one voice. If this stuff goes through, and it reminds me of what happened when Paul Martin balanced the budget in the late 1990s -- I might have the date wrong there -- when he basically downloaded the health care costs onto the provinces. They’ve been reeling from it ever since. This is another example of something that’s going to get downloaded onto the provinces.
In the case of Newfoundland and Labrador, the province is teetering on bankruptcy with a prime of 33.5 per cent. They’re going to have a hard time justifying increases to really pay anyone who is under the government payroll and doctors are going to be furious. If my retirement is gone, then I need more income now to save for later. It’s going to be a mess for Newfoundland. There’s no money in the coffers and our retirements are gone, so who are we going to ask? There’s only one taxpayer. Whether it’s the feds or the province coming after me, there’s only one of me and I need to protect my family, my future and the investment that I made by starting work only at the age of 35.
Senator Marshall: So doctors in Newfoundland are the lowest paid in the country?
Dr. Johnston: Across numerous specialties, certainly mine I know for a fact. I think a family physician in Newfoundland and Labrador in real dollars probably makes a couple hundred thousand less a year than an Ontario family physician in a family health network, a family health organization. Money is an uncomfortable thing for physicians to talk about because I got into this specifically because I’m not very good at money, right. The other folks on this panel are brilliant at that sort of thing. I can look after a person, right. But if you push someone who doesn’t know much about money to the point where they’re worried about their money, then they’re going to start talking about money. All I want is to be able to focus on my patients and not worry about my money. But this has made that difficult. I’ve been up nights.
Senator Marshall: I’m an accountant and I know from 40 years that everything comes back to money.
Mr. Sullivan, thank you for your presentation. We haven’t had any fishers testify. We had a lot of farmers out West. We were also talking about behavioural changes. The government increased taxes on the highest 1 per cent. They raised the tax rate to 33 per cent, and they thought they were going to raise so much in revenue but something happened, they didn’t. They didn’t raise any because there were behavioural changes. What can you do as a fisher? You have a pretty big company. What can you do try to cope with these changes? You have a boat, you have a company. You can’t move. You’re not mobile like the doctors.
Mr. Sullivan: I can sell it before the changes comes in, I suppose. Right now, if I sold, it’s going to cost me maybe $300,000 or $400,000 in extra tax if this comes in right now. So there’s not much I can do, because I’m not getting out. I’m going to stay in no matter what. What I’m worried about is the people coming behind me.
I was lucky because my dad was a fisherman. He had a bigger company and sold it, and because he took advantage of his capital gains and stuff, he helped us get in, me and my brother.
Senator Marshall: So he sold to an outsider? He didn’t sell to a family member?
Mr. Sullivan: Yes, he sold it and he had an offshore license and then he bought an inshore and we all have coastal licenses. But my brother and I collectively spent around $2 million to get in afterwards. So it’s tough. I was lucky because I had Dad, and part of the reason why he could help us get in was because of the capital gains exemptions and stuff.
I can’t talk like those two people there and tell you exactly what I can do about it, but it’s going to be hard for rural Newfoundland and in particular in the fishing industry because it’s hard to get people in. I mean, you have so much debt. It’s a struggle. Like I said, I know right now my revenue is going to be down 30 per cent next year, but I still have to pay every month. I’m still paying $100,000 a year in stuff.
That’s why, like I said, it stings when you hear the Federation of Labour and those people talking because I understand that the government wants, needs more money, but that’s what they should have said. They kind of brought it across as, “We don’t need more money, but there’s people cheating the system and we want to get that money from them.” They should come to the reality and say that we’re in trouble here. We can’t stop spending. We need $300 million or $400 million now and someone got to pay for it. They brought it across as people are not paying and they should be paying, and I don’t know anyone here that’s doing anything wrong.
Senator Marshall: That’s right. It came out as a fairness issue, but then other people say that they’re looking for cash and this is one place where they’re going to get it.
Mr. Sullivan: Well, if they don’t need the cash, why do it? Obviously there’s something going on if it’s not a spending problem. I’d like to know how much it’s going to cost really rich people. I know it’s going to cost me, it’s going to really hurt my retirement, if I ever get an opportunity to sell. I’d like to know how much it’s going to cost those billionaires with billionaire companies like the McCains and people like that. Are they going to care about losing $200,000? Probably not, if you got $100 billion or whatever they have. If they’re going to sweep in with changes like this, I’d like to see how much it’s going to cost Morneau or one of those people.
Senator Marshall: Mr. Power, I wanted to talk about income splitting. You mentioned splitting of income with adult children. Some of our witnesses have suggested that one of the counter proposals could be to eliminate tax splitting with adult children but preserve the spousal aspect. Losing the splitting of income with the spouse is really causing a fuss, more so than income splitting with adult children. What would be your views on that?
Mr. Power: Well, I have no problem with the issue. I certainly support income splitting with a spouse. In most family units, spouses are an equal part of it. Certainly I wouldn’t be able to get along without her and I see no reason why I shouldn’t be able to. However, it’s my children as well. I used the income splitting for my children when they were going to university, and it was a big help. It was a help to my family unit. Now that they are of age; they’re in their 30s, they are now making their own incomes because of that help. So that was a boost for them and now they’re paying tax at the high rates themselves. It was only a temporary measure. So, I don’t have to pay them dividends now. So, they’re now out making a good living. What is wrong with the Government of Canada helping people and lifting them up? That’s what they should be doing.
Senator Marshall: You would prefer to have that preserved?
Mr. Power: It has worked just fine for years and years. It’s a great help to a lot of families.
Senator Marshall: I wanted to ask you about another topic that is not in this legislation, but you did raise it. I noticed that, last year, it came up during the budget process, and that’s the work in progress. When that was first floated, I think it might even be in legislation now, I didn’t hear any reaction to it. Could you speak to that?
Mr. Power: Certainly. When I was a young accountant, I had to build up my practice. When I got to the end of the year, I had a lot of work that I had done that I couldn’t bill because the work wasn’t finished. So, if I had to pay tax on that, as I was growing, I wouldn’t have been able to finance my practice. How could I pay tax on monies that I haven’t received? They’re proposing now to eliminate that. The comment is that it is because other people don’t have it. Who are these other people? Employees don’t have work in progress.
Senator Marshall: How big a financial implication is it? I hadn’t heard and I didn’t get any reaction from anybody on it. It’s a big issue, is it?
Mr. Power: It is a big issue for people who are starting out. You build up slowly over time. The proposals are going to be phased in over five years. I’m pretty close to the end of my career, so I’d probably let it go anyway. But for people who are starting out, if you got to start paying tax on 20 per cent, 40 per cent, 60 per cent over five years, that’s going to hurt them. How is it benefitting anybody? We should be helping these people. Let them have the deduction for that. Why do they have to pay income tax on monies that they can’t even bill?
Senator Cools: That’s right.
Senator Marshall: Is that not in effect already?
Mr. Power: I think it is.
Senator Marshall: Ms. Skinner, this question is probably unfair to ask, but I have to ask you anyway. The company is called KMK Capital. That’s a fairly new company, isn’t it?
Ms. Skinner: Early ‘90s.
Senator Marshall: Early 1990s, so it’s fairly new. It has been fairly successful?
Ms. Skinner: Yes.
Senator Marshall: So if the rules that are being advocated now, these proposed tax proposals, were in effect back in the 1990s, do you think your company would be as successful as it is now?
Ms. Skinner: No, I don’t think it would have. The integration that is in place when you acquire real estate and earn investment income or you actually dispose of the real estate and you have a capital dividend account or significant tax equalizers, I would call them, in the Canadian tax system. When someone like, well, you know Kevin, invests in these businesses, you certainly look at the long game. Taking the long game into consideration, I think that would have changed maybe some of the thinking.
Just to expand a little bit on that, when these proposals came out in July, days after we were all sitting around the boardroom table talking about the impact these changes were going to have on what we were currently in the progress of doing, what we had done, and what we were going to do in the future.
I can give you one example. A real estate company is taxed at 53.67 per cent. You’re already at the high rate. The integration concept allows you to get a refundable dividend tax. When distributions are made, they actually go out and then you have an equalizer. With the new rules and it could be because they’re so convoluted right now and maybe they’re casting, I call it, “a Goliath’s brush over a David problem”. With these new rules, if you have $1 million in retained earnings and you go next year to invest in a brand new office building, which is good reinvestment -- it creates jobs for the economy -- the government is going to assume that you’ve taken your $1 million in retained earnings and you’ve invested it in an asset that’s worth many more millions, and the investment income associated with that asset will be tainted. So, you’re already paying the 53.67. That doesn’t change. You do not get your refundable dividend tax when you actually pay out the distributions.
I don’t think there’s anything wrong with retaining earnings within a company to be able to grow and reinvest. I don’t think these proposals at all consider the impact on the real estate industry with respect to what I just said.
Senator Cools: Or any industry.
Ms. Skinner: Or many industry, yes, absolutely. We have a broad range of companies, mostly in the real estate sector, but there are also some in the service sectors as well. I come at it from a lot of different ways, but these proposals here are certainly hard hitting on the real estate and rental portion.
The Chair: Senator Andreychuk, to be followed by Senator Oh and Senator Cools.
Senator Andreychuk: When we started out on this exercise, the government was saying it was to close loopholes. Later on, it was fairness between employees and incorporated businesses. More recently, we heard from either the Finance Department or the minister, I’m getting all these witnesses confused, but someone said that this passive income retained earnings should not be used for retirement purposes. It should be for growing your business, for crisis intervention, for the ups and downs of the fishing business, et cetera, but should not be a vehicle for retirement because those that are not incorporated would be disadvantaged, and there are a whole host of other people who don’t have guaranteed pensions.
In the presentations today, we’ve heard more about “I need the money for my retirement” as opposed to “I need the money to buy equipment.” We heard in Saskatchewan and Manitoba, you don’t buy a machine for less than $300,000 et cetera, and the prices are going up. You just shocked me and I thought they bought a little boat, a million-dollar little boat. My whole perception has changed. So travelling across the country is a good thing.
Is it a fair rebuttal by some people and some officials to say that this wasn’t created to be a retirement vehicle; that we should look for another way to some sort of incentive tax for retirement purposes for those who are not covered by existing pension plans? That is a debate that we hear in the United States.
Dr. Johnston: I would disagree with that argument for a couple of reasons. One, if you have one account that accomplishes many things, that’s a flexibility that fits with the realities of life. I know for myself, if I cut a finger off my hand, my family’s finances change overnight forever. I’m five years into a career at the age of 39. I’ve back loaded a lot of risk. For me right now, disability is a big thing that I have to fund myself. That’s different from retirement and if you pigeonhole things in different places, for me, it makes it harder for me to cover what life is undoubtedly going to throw at me.
I would also say, if people are arguing that other people don’t have access to this measure for retirement savings, a lot of employees have things like RRSP matching. They have defined benefit pension plans which are quite comfortable. I don’t think the people on this panel have access to anything like that.
The other thing is RRSP contributions. Some are not making enough money to contribute to create RRSP room, which is the case with a lot of small businesses. Certainly in my case, I made less than the minimum wage until I was 35 years old. I haven’t created any RRSP room. So how am I supposed to save and grow for retirement if I can’t even create RRSP room until the age of 35, and most physicians burn out by 55? So, I have 20 years. What is it, $26,000 a year? That’s, 520K over 20 years and that is not enough to retire on if I’m going to retire at 55. Unless I have that heart attack I see in my future, I’m going to live to 85. There’s 30 years at 500K. It’s going to quickly dissipate.
Mr. Sullivan: For me, like he said, just creating a special thing for retirement, I don’t know if I could afford to do that. Last week, I had a bill for $10,000 to get my engine fixed on my boat. I don’t know what’s going to come up. Like I said, I’m comfortable now. I know that I can make my payments for next year if nothing catastrophic happens and the fishery goes into a moratorium for a year. I don’t know. Nobody knows. I’m willing to take that risk. I signed up for that. But, now that the rules are changing and that pot of gold at the end of the rainbow is going. There’s always someone with their hand in that pot and there’s going to be nothing left, maybe a drink of water or something.
I just would like to be able to sell my business at the end of the day or pass it on to my kids without getting hammered on taxes, and be able to build up something right now to have some sort of retirement.
Like I said, I don’t think it affects someone with a billion-dollar company, but for someone who has a million-dollar company, you’re looking at paying $200,000 or $300,000 in taxes. It’s a lot at the end of the day.
Mr. Power: It depends on who you’re comparing it to. If you’re comparing it to a civil servant who has a 25-year or 30-year career and is going to get a pension for 30 years, how much money would I have to have in order to be able to get that pension for 30 years? I see all kinds of people at Tim Hortons sitting down who worked for the government for 25 or 30 years. I was talking to a teacher who retired at 53 and he’s been retired for 23 years, getting a pension. How much money would I need to have? I’m certainly not going to get it through an RRSP contribution. I have to get it through my company. I have to be able to get it from another source. That’s the comparison that I use. How much do the civil servants get and how much do they have to have in a pension in order to be able to make it equal to me or even comparable? Because it’s not comparable using RRSP money.
Senator Andreychuk: Could I just say that you’re also taking the risk because you’re saying you might sell your business.
Mr. Power: I might; I might not. I could be like him and have a heart attack.
Senator Andreychuk: You don’t know what you’re going to sell it at. Even comparing it to a defined benefit pension or any other pension, you’re presuming you have something to sell at the end at a certain price.
Mr. Power: That is very true.
Senator Andreychuk: And you may not.
Mr. Power: That’s a really high possibility.
Senator Andreychuk: That’s increased risk, right?
Mr. Power: It’s a very real possibility. I may not have anything to sell at the end.
Ms. Skinner: Just to echo the theme that you just talked about, a small business generally does not operate linearly. So to think that I buy an asset, I earn my income, I accumulate that income, I put it into retained earnings and then I take it out at the end of the day is really linear thinking. To your point, the risk that’s taken every time, every year you reinvest. So investment is not static. You take whatever you earn and you reinvest it. You have to wait until the very end when you’re ready to retire to see if there’s anything there that’s going to be available to fund your retirement. So while it could potentially be a source, you’re putting that fund at risk every day and at the same time, you’re creating economic spinoff benefits into the economy. You’re employing, in our case, many hundreds of people. I don’t see that there’s anything wrong with that.
Senator Andreychuk: The sale of goodwill always bothered me when I practised. What is goodwill? Ms. Skinner, we’ve travelled and we certainly have heard the same issues raised. I think it’s been very important to hear from every segment of Canada because the message is somewhat different, the area is somewhat different, and I think that enriches our understanding to make better recommendations.
You said something, and perhaps if you could repeat it, because I’m not an accountant, I’m a policy wonk. I want to know why you’re doing things and what the benefits will be.
We had heard that the fairness was supposed to be for an employee making $50,000 and paying tax on it and a company retaining earnings of $50,000, they should be somewhat equal in the taxing. But you made a point that I didn’t quite understand. It’s an employee within the business?
Ms. Skinner: No, it’s a highly paid employee.
Senator Andreychuk: Highly paid employee?
Ms. Skinner: Yes.
Senator Andreychuk: Could you explain that? That’s different. In the public’s mind, because there are some people who want these changes and they’re saying “Well, how come I’m making $50,000 and they can defer their tax.” You gave me a slightly different idea of why or how, maybe how, the Finance Department might have recommended and convinced the minister to do it, because it was equating employees in a different category than your average Joe making $50,000 somewhere else. It was within the business.
Ms. Skinner: The business earns an amount of money and then the individual earns an amount of money and they pay the tax if it is the high rate. The example that’s always been used is $100,000. So, the 51.3 per cent goes there. Then your corporation also has $100,000, and in the case of an investment company, you’re paying 53.67 per cent of tax. Once the distribution is paid out to the shareholder, you get a refundable tax on that, so it equates the tax that was paid by the individual to the tax paid inside the corporation. The changes that have been made removes the refundable portion of that tax, so the tax effective rate for the corporation, once it’s fully distributed out to the individual, is much higher than that to the employee.
Senator Andreychuk: I think that’s where the issue was in the Finance Department because I understand this proposal has been floated before and declined, and I wondered why it passed muster this time. It was using an employee but an employee as you are describing it as opposed to just an employee in some other business or working for the government, which is what the public I think is saying. I think the rationale came from what you’re saying, whether it’s acceptable or not, but that must have been the comparison. How did you come to point that out in your paper to us?
Ms. Skinner: We were looking at the examples that are being brought forward to say that this was an equalizer. It certainly wasn’t an equalizer because the old system provides for an integration mechanism where you do have equalization of a highly paid employee and investment income being earned inside the corporation. The new rules remove the equalizer because of the deferral concept, and when the income is distributed out, the tax rate that’s paid overall is much higher. I’m not sure how that would have convinced them to move forward.
Senator Marshall: I don’t know either. I just saw the example. This is where you got your 70 to 73 per cent.
Ms. Skinner: Yes, that’s exactly right.
Senator Marshall: It’s the refundable tax is no longer refundable.
Ms. Skinner: Right.
Senator Andreychuk: You’re talking about a higher class employee, whereas the public view is for someone like a fireman who make $50,000, et cetera. So, the comparisons are different. It’s more of an academic exercise.
Mr. Power, I don’t know if you have any comment on why they chose to try and equalize these types of employees and then end up with what we have?
Mr. Power: It’s not a fair comparison, compared to an employee making $50,000. That employee doesn’t take any risk, and they have benefits. They can get unemployment insurance. A small business owner --
Senator Cools: Paid vacation, sick leave.
Mr. Power: Paid vacation and all those things are benefits that they get, and they get a pension. We don’t. How can you compare one to the other? It’s just not possible.
The Chair: We have Senator Oh for one question, and we will wrap up with Senator Cools.
Senator Oh: I want to take the question south of the border. With NAFTA coming up, we have a problem. The new administration seems to be talking about lowering taxes. They’re discussing tax reform. They’re going down and we’re going up. What do you think is the cause, brain drain? What does the future look like?
Mr. Power: We have to remain competitive with the United States, our largest trading partner. Even back in 1917 when the income tax was brought in, the minister of the day said we have to remain competitive and not have high personal income tax rates. Our rate is 53 per cent. Many of my clients have already said to me “I’m fed up with this and I’m thinking about moving to the United States or setting up an operation down there.” That’s not easy to do. Whether they will actually do it or not, I don’t know, but the fact is they’re saying it because of what the Government of Canada is doing to them; people are mad. They’re angry. Why is the Government of Canada doing this to all these hardworking small business people? The fact that somebody would actually say that to me is a reflection of what’s happening. That’s my view.
Senator Oh: Doctor?
Senator Cools: It’s not easy. There’s great discomfort, an uneasiness, an uncertainty all across the country.
Dr. Johnston: I have a standing offer on the table in Ann Arbor, Michigan. The next generation to me won’t stay if this goes through. It’s that simple, period.
The Chair: Mr. Sullivan, any comments on that?
Senator Cools: He can’t leave his boat.
Mr. Sullivan: Maybe I’ll steam down there or something.
Senator Oh: You’re going to fish in U.S. waters.
Mr. Sullivan: Yes. There is a moratorium on cod in Boston now, so perhaps we can get some higher value down there.
I’m just back from the U.S. actually. I always enjoy talking to people down there about health care and different things and we always talk about taxes and stuff and it’s amazing how much less they pay. I understand, we get free health care. But at the end of the day, we still have to compete. Most of those guys down there have good jobs and good benefits, so it all works out and they’re still paying less tax. I don’t know. I agree with Mike and Paul, that at the end of the day, if we’re not competitive, you’re going to leave no matter what you’re doing, you know. So, I guess it’s the same thing for everyone to consider.
The Chair: Ms. Skinner, do you want to comment on that question?
Ms. Skinner: KMK Capital is already operating in the U.S. We’re headquartered here and we have most of our operations here and we’re still growing our operations here. But, we do have a presence already in the U.S. So if the tax burden becomes so much more significant, it’s a much easier decision to say that, you know, we’re going to invest capital where we’re going to have a higher return. I think that’s just not a reality for KMK Capital. I think the Canadian government needs to look at it that way as well. You do not want to push your Canadian growing corporations south of the border because of a tax reason that creates an unfair playing field. I think it’s a real possibility. More and more people in this global economy are not looking at Newfoundland or even Canada as a borderless area any more. It’s very transient, as I said. Capital is very transient.
The Chair: We will wrap up with Senator Cools.
Senator Cools: I would like to thank the four of you for coming before us today.
I would like to say to you, Dr. Johnston, that you’re a very important human being in this community, and I want you to feel confident that the decisions you’ve taken to stay here are important decisions. You have invested your life in study to at least 35 years of age.
I spent a lot of my time, when I was a student, in hospitals. I knew all the interns and residents, and I knew of the struggles and trying to make ends meet. You can feel confident and assured that there are large numbers of us who want to see you do well and who want to keep you in Canada. That’s number one.
Number two, this whole matter has been very disturbing for many of us on this committee. Wherever we go and whomever we talk to, we keep encountering this uneasiness, this uncertainty about these proposals before us. It appears to me that the government has lost its way and doesn’t really know how to go forward from here, and that should concern us deeply. I keep pleading with many others not to lose total trust in the government because mistrust is not a healthy ground on which to make decisions. However you cut it, there is a national uneasiness and uncertainty about what is going on with Mr. Morneau’s and the Prime Minister’s proposals, and that has become a part of the national psyche of people and it is disturbing us very greatly.
In any event, we will be working on a good report in which we will touch upon all these issues. We will bring it to the Senate for discussion.
Finally, Mr. Power, you have served for a long time and I encourage you to keep on serving. Don’t give up. If we don’t give up, you shouldn’t give up.
Mr. Power: I would like to make one small comment. We’d like to thank Mr. Morneau for one small thing that he did. When he came up with his announcement, I had a client, a young lady who was notoriously slow in paying her bill and she came in and paid her bill and said, “I’m going to need you”. So I guess I’m going to have to stay on.
Senator Cools: I thank you too, Ms. Skinner. At the end of the day, we must adhere to the fact that the taxing power is a very strong, a very powerful power that governments have. However, there’s a side to that and the side to that is that the taxing power is a sacred trust between citizens and ministries and it’s never to be violated. We will keep that as a principle before us, and we shall say this to the minister the next time he appears before us. Canadians are feeling violated. Enough.
The Chair: To the witnesses, thank you very much. Since we received the mandate from the Senate of Canada in September 26, 2017, the Standing Senate Committee on National Finance has received testimonies from many organizations representing hundreds of thousands of Canadians from coast to coast to coast and tens of thousands of companies. You can rest assured that will be reflected in our report when we table it on December 15. If you wish to provide additional information, please do so through the clerk.
Also, I want to thank Senator Marshall from Newfoundland and Labrador for the great hospitality we’ve received in St. John’s.
(The committee adjourned.)