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THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE

EVIDENCE

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HALIFAX, Tuesday, November 21, 2017

The Standing Senate Committee on National Finance met this day at 9:04 a.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: Welcome to this meeting of the Standing Senate Committee on National Finance. My name is Percy Mockler, a senator from New Brunswick and chair of the committee. Honourable senators, at this time I would like to ask the senators to introduce themselves, starting to my left, please.

Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.

Senator Neufeld: Richard Neufeld, British Columbia.

Senator Oh: Victor Oh, Ontario.

Senator Eaton: Nicole Eaton, Ontario.

Senator Cools: Anne Cools, Toronto, Ontario.

Senator Andreychuk: Raynell Andreychuk, Saskatchewan.

The Chair: We also have with us our clerk, Ms. Gaëtane Lemay, and our analyst, Sylvain Fleury.

This morning the committee continues its special study on the proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved, changes that the Minister of Finance proposed during the summer of 2017.

The committee received this mandate from the Senate of Canada on September 26, 2017. The Standing Senate Committee on National Finance was authorized to examine and report on the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved, in particular income sprinkling, holding passive investments inside a private corporation, and also converting income into capital gains. The committee was also asked to take particular note of the impact of the government’s proposed changes on incorporated small businesses and professionals, economic growth and government finances, the fairness of the taxation of different types of income and other related matters.

That said, the committee will submit its final report to the Senate no later than December 15, 2017, and will retain all powers necessary to publicize its findings for 180 days after presenting the final report.

This morning marks our twenty-fourth public meeting dealing with this subject matter. Yesterday we were in St. John’s, Newfoundland and Labrador, for a full day of hearings.

In Ottawa, earlier this fall, we held 13 public meetings where we heard from over 60 witnesses.

Two weeks ago, we were in Western Canada where our hearings generated a lot of interest from the business community, the health, agricultural, and farming industries. More than 30 witnesses testified before us at our meetings in Vancouver, Calgary, Saskatoon, and Winnipeg.

Honourable senators, this morning we have on our first panel the Dairy Farmers of Nova Scotia, Gerrit Damsteegt, Chair. We also have, from the Nova Scotia Federation of Agriculture, Chris van den Heuvel, President.

You will have approximately five minutes to make your presentations and it will be followed by questions from senators.

The chair will recognize Gerrit Damsteegt, to be followed by Mr. van den Heuvel.

Gerrit Damsteegt, Chair, Dairy Farmers of Nova Scotia: Thank you very much for the opportunity to speak to you today.

Just to give you a bit of background of who I am, I farm about 40 minutes north of here with my family on a dairy farm. I am Chairman of Dairy Farmers of Nova Scotia. I am also a director on Dairy Farms of Canada.

In my presentation I want to set the stage a little bit to get an indication of what the industry is like. So, without wasting any of my precious minutes, I would like to present to you the following.

Thank you, Mr. Chair and committee members, for the opportunity to share our perspective on the proposed changes on tax planning to private corporations.

Dairy Farmers of Canada is a national policy, lobbying, and promotional organization representing Canada’s farmers living on approximately 11,000 dairy farms, about 220 in this province. Dairy Farmers of Canada strives to create stable conditions for the Canadian dairy industry today and in the future, and works to maintain policies that foster the viability of the Canadian dairy farmers to promote dairy products and their health benefits.

The Canadian dairy sector is a consistent, positive contributor to the economic stability of the Canadian economy. In 2015, the sector’s economic contribution amounted to $11.9 billion towards Canada’s GDP, and $3.8 billion in tax revenue. In addition, the dairy sector sustains approximately 221,000 jobs in Canada, while providing Canadians with fresh, high-quality, nutritious products without any of the direct government subsidies provided in other jurisdictions.

Now regarding the proposed tax changes, I would like to note that Dairy Farmers of Nova Scotia fully support the Canadian Federation of Agriculture in all of its advocacy on this issue. In general, I would say that, at this point, although we are cautiously optimistic as an industry about the changes announced to date, it is my understanding that there is still a number of details that remain to be sorted out.

In particular, on income sprinkling a simplified reasonableness test was announced with a decision made not to move forward on the more troubling limitations that were proposed for the lifetime capital gains exemption. The primary concern we have now with this proposal is the potential applications of the simplified test to capital gains. This could complicate succession planning.

There is also a concern that any test, even a simplified one based on determining whether any meaningful contributions were made, will create subjectivity and a significant compliance burden for producers.

Now on passive investment income, while the decision to announce a $50,000 threshold that grandfathers existing assets looks like a step in the right direction, further analysis will be required once more details are available to determine its appropriateness. The major concern we have is with the treatment of rented out land and what these rules could mean for producers’ risk management and succession plans. It is my understanding that the Canadian Federation of Agriculture has also recommended that a $50,000 threshold be cumulative and indexed to inflation, which we will support.

On conversation of income and capital gains, like the CFA we are pleased to see that government will no longer move ahead with any of the proposed changes. It is our understanding that CFA will work closely with the Minister of Finance on how to better facilitate genuine intergenerational business transfers.

I would like to point out that, although the government has rightly identified agriculture as an economic driver and an area of growth, some of the policies currently under consideration put all of that at risk. Indeed, if you ask farmers about supply management, they will probably say that it is hard not to feel like we are being targeted in the current climate by these proposed taxation changes, from the removal of dairy products as a category in the Canadian Food Guide to demonizing nutritious dairy products by characterizing them as unhealthy and branding them with warning labels. Although the government and all parties have repeatedly and publicly noted their support for supply management, it is difficult not to feel like we are being slashed by 1,000 cuts.

While we certainly continue to appreciate the government’s ongoing support on challenges like the renegotiation of NAFTA, Canada’s domestic policies are completely within the government’s control. It is incumbent upon the government to listen to the concerns of stakeholders on any proposed policy and to take that input into account and make adjustments as necessary when they are confronted with a solid evidence base. It is my sincere hope that the input of stakeholders will be predominantly featured in the final version of this policy and all others.

With that, I will end my presentation and welcome any questions that you may have. Thank you once again for the time.

The Chair: The chair recognizes Mr. van den Heuvel.

Chris van den Heuvel, President, Nova Scotia Federation of Agriculture: Thank you, Mr. Chairperson, committee members, for the opportunity to speak here before you today on the proposed tax changes that will impact our farms and consequently our industry.

A little bit of background on myself. My name is Chris van den Heuvel. I am a dairy farmer from the western part of Cape Breton Island, and I am President of the Nova Scotia Federation of Agriculture. We represent the 27 different commodity groups, 13 different county federations, and the over 2,400 farm families that are present within Nova Scotia.

I first want to applaud the federal government for listening to farmers’ concerns about the proposed changes this summer. Pulling back on many of the proposed changes shows that they were listening to us and to many of our concerns. There were; however, a couple of alarming points with regard to the changes.

The first obvious alarm was the timing. Proposed changes were announced during the busy season for farmers, and consultations closed during the same busy season. Ultimately, this provided very limited time for farms and farm organizations to study in detail the implications that these complex changes would have on farm businesses.

The tax tools that were being targeted were not the vicious tax adverting loopholes that were being portrayed. They are financial planning tools that provide strategy for farm succession plans across generations and within families. Most farms, even your typical traditional family farm, incorporate for a variety of reasons. The tax cost of transferring a farm within the family is much higher, almost double that if you transfer outside of your family, unless using private corporations. We are talking about farms valued at millions of dollars and the difference of 15 or so percentage points can add up in a hurry.

Another reason farms incorporate is to allow access to capital gains exemption on the sale of a farm. In the sale of a company shares to a non-related corporation, a holding company is generally used, and this allows the purchaser to access the acquired company’s income stream and allows the vendor to access the enhanced capital gain exemption on the sale. However, as mentioned, when dealing with family members the proceeds are treated as a dividend, preventing farm families from being able to access the capital gains exemption.

Section 84.1 of the Income Tax Act must be amended to facilitate access to the capital gains exemption for farm transfers to immediate family members, thus ensuring equal treatment.

I would also like to touch on income sprinkling. Farms are family operations by their nature, with every generation playing their appropriate role in the day-to-day tasks. Income sprinkling is a way that we recognize the value and the work that our children and their children put into their farms and growing our crops each and every year. There are many benefits to children working on the farm: Instilling a strong work ethic and teaching valuable life lessons are just two of these benefits. Appropriate tasks are identified using the National Children’s Centre for Rural and Agricultural Health and Safety, and they have agricultural youth work guidelines that help parents and others in assigning age appropriate tasks for youth who live or work on farms.

Another alarming point was the impact that these proposed changes would have compounded on the industry. The Advisory Council on Economic Growth has identified agriculture as a key priority sector that has great potential in both the domestic and international markets. The challenges presented in the council’s report to increase agricultural exports by 50 per cent over the next 10 years will require on-farm investments, and the amount of funds that would have been available for farms to contribute to these challenges would have been significantly lower if the proposed tax changes to private corporations went through.

In closing, I would like to make a few recommendations. The reasonableness test for income sprinkling must be better defined. The timeframe for consultations on the changes was unacceptable and any future consultations on anything that would impact agriculture and farmers should not take place during our busy cropping seasons.

On the topic of taxes, facilitate the transfer of family farms by levelling the playing field. In a sale of company shares to non-related corporations, as I mentioned, holding companies are generally used allowing the purchaser to access the company’s income stream and the vendor to access the enhanced capital gains exemption. But when dealing with family, the proceeds are treated as a dividend. So, we must change Section 84.1 of the Income Tax Act to facilitate access to that capital gains exemption for farm transfers to immediate family members, thus ensuring equal treatment to all farm families.

Once again, thank you very much for the opportunity to speak before you here today and I will gladly welcome any questions that you may have.

The Chair: The first question will go to Senator Marshall, to be followed by Senators Eaton, Andreychuk and Neufeld.

Senator Marshall: Thank you for being here this morning. I will start off with a detailed question and then I will ask a general question.

Mr. Damsteegt, I am looking at your opening remarks and at the dollar numbers you provided; the $19.9 billion toward Canada’s GDP. You estimate $3.8 billion in tax revenues. I know that when the Minister of Finance spoke about the proposals that are on the table, he mentioned with regard to the tax on split income that they are looking at raising an additional $250 million, and from passive income he indicated multiples of $250 million, although I suspect that has been downgraded with the revisions to the proposals. Do you have any idea what impact those two proposals will have on your $3.8 billion in tax revenue? Has there been any discussion on that? I know the details of the proposals have not been released, but I am curious as to the dollar impact.

Mr. Damsteegt: Thank you for the question. Certainly I think you hit the nail on the head with your last comment. The details have not been released and I think the uncertainty around all of this is the big issue. I cannot give you any revised numbers at this point in time. What I can give you is the reality of the uncertainty of this tax bill hanging above us, not knowing if it is retroactive or what is required in regard to this reasonableness test?

I want to share something with this committee. I have a son at home right now who wants to take over. He hears all these things and he asks me, “Dad, should I really do this?” That is the reality of it.

On supply management, I can speak for the dairy sector; Chris will speak for all the other commodities. It is the stability. This industry is growing. It is growing exponentially in this country. But because of the things that they are hanging above us, there are a lot of people holding off on investments because they want to know where this will go. That is what we need.

Senator Marshall: I realize that there is a lot of uncertainty, and I know that it is not just the tax changes. You mentioned supply management, so NAFTA would be a concern. I would expect rising interest rates would be a concern, and there is some indication of an economic slowdown. All of those things play into the mix.

Could you tell us what exactly your members are saying to you? In your remarks, you gave some general information. But what are your members saying with regard to how this will impact them individually? Could you relate some specific examples to us? I know that these changes will have significant implications for a lot of families. I know, for example, that the split income proposal is really going to impact you because you have a family farm.

We heard from other witnesses that some farmers are actually doing things. They are trying to second guess the federal government. They are taking action now as a pre-emptive strike, not knowing if they are going to hit the nail on the head. So, could you give us just some ideas as to what you are hearing from your members?

Mr. van den Heuvel: Thank you very much for the question. Both of us have touched a little bit on this subject. I think the biggest thing that we are hearing, obviously, is the uncertainty about these proposed changes, and the devil is in the details, as they always say. Some of the biggest concerns that we are hearing from our memberships are especially around the income sprinkling. All of the concerns are very important, but we hear a lot about this reasonableness test and what will be allowed or disallowed insofar as on-farm work, on-farm labour, and on-farm valuation of the contributions that family members make.

They are family farms by nature, as I mentioned in my remarks. My son is a partner with me right now. His daughter, who is just growing up, is already in the barn, and she is not quite two years old. She knows that she has to give one scoop of feed to those cows. I mean, they start learning these things at a very young age and they start learning the value of a great work ethic. We need to be able to show them, and instill those values in them, and provide value for their efforts.

So I think that being lumped in with some of the tax averting methods that some of these other corporations were trying to achieve is unfair to our members, and I think those are some of the biggest things.

Senator Marshall: What are they are saying about the passive income proposal? I am looking for a definition. What is included in passive income? Black and white, what will be in there?

Mr. Damsteegt: I have to admit I am not a specialist in this field. To be a little bit more prepared to speak to you today, I had a meeting yesterday with my accountant, who is with PriceWaterhouseCoopers. They are very well recognized. From talking to them, as you just mentioned earlier, some individuals are taking action, guessing what government might do. They are really discouraging producers from doing this because you can move money around, but you do not know.

With the passive income proposal, certainly that is an issue because as farmers you make certain investments. You have investments in land, certain properties, and so on, and you do that for strategic reasons.

I have four kids, and the youngest one is a 13-year-old daughter. I believe she was born in the barn because she just loves to be there. As soon as she comes home from school, she is in the barn. That is what she wants today. For her to have the opportunity 10 years from now to be part of the farm, I might have to make decisions today with regard to purchasing land, doing things to create opportunity.

Senator Marshall: Looking forward.

Mr. Damsteegt: I might not need it today. Is it not a passive investment? I do not use it directly.

In regard to this reasonableness test, I have to admit to all of you that dairy farmers do not work by the hour. I do not know what I make an hour. My kids do not know what they make an hour. We pay our children a reasonable amount of money to offset the work they do. It is not from 8:00 until 4:00. When I need help at 5 o’clock in the morning, the knock is on the door and they come and help. If it is 9 o’clock at night, so be it. So for that very reason when we talk about reasonable, that is reasonable. For quite a few people it is not reasonable to ask somebody at 9 o’clock to come and help, but that is what we are up against.

Senator Marshall: It is very grey and at some point, I expect they will define it. I do not know if they will be defining it in black and white though.

Senator Eaton: Mr. Damsteegt, I want to come back to something you said in your presentation. It is my understanding that CFA has recommended that the $50,000 threshold be cumulative and indexed to inflation, which we would support. Being a dairy farmer, obviously you have your good years and your bad years. You also have your retirement to consider. As you said, you do not know which of your children, or how many of your children, might want to stay on the land. You have new equipment to buy, milkers and all the various new equipment. I was just at the Royal Winter Fair and watched them, it is quite extraordinary. Do you really think that $50,000 cumulative is enough to expand, renew your equipment, provide for retirement, and for bad years?

Mr. Damsteegt: It is a very good question, and I am actually impressed that you recognize the investments involved in farming and so on.

Senator Eaton: My uncle was a dairy farmer.

Mr. Damsteegt: I have to admit that we have allowed CFA, the Canadian Federation of Agriculture, to take the lead on this because it is not just for dairy farms, but we have accepted the $50,000. Is it enough? Is it not enough? I cannot really speak to the detail of that. That is an amount that we agreed upon. It is certainly something I can take back and ask some questions about. Maybe Chris has more info on that.

Senator Eaton: I would, if I were you. I think it is very interesting. You carry huge risk.

Mr. van den Heuvel, I understand that Nova Scotia has a top combined tax rate of 54 per cent, which is one of the highest in Canada. Regarding income sprinkling, anybody who has worked or lived on a farm knows that you do not keep time sheets for labour. Are you going to start keeping a time sheet for your granddaughter, at two, who may be in the barn, or your wife, or your children? How do you think you could make a better case to explain it? A farm is an all hands on deck kind of operation, as are a lot of small businesses.

Mr. van den Heuvel: Thank you very much for the question. I think the easiest way for us to make a case is to invite you out to the farm, invite some of these folks out to a farm and give them a real sense and appreciation of what we go through on a daily basis. Gerrit mentioned it is not a 9:00 to 5:00 job. It is not even a 5:00 to 9:00 job. It is often times much more than that.

Senator Eaton: Have you studied what that could do to your tax rate if you can no longer give some income to your children or your wife for participating in the running of the farm?

Mr. van den Heuvel: Again, we do not know the details of what will be allowed and disallowed, but ultimately it will have a significant negative impact because we are not going to be able to use those expenses to account against. If we cannot pay our children, our sons and daughters, or our wives or husbands, whatever the case might be, for the work they do; that ultimately will have an effect on raising our income and we are going to be paying more in taxes.

Again, we do not have the details of what they are going to consider to be reasonable amount of labour and a reasonable amount of remuneration for our farmers, so it is pretty hard to come up with a ballpark of what the impact will be, other than it will be negative. There is no doubt about that.

Senator Andreychuk: Mr. van den Heuvel, could you tell me a little more about the other farming ventures in this province beyond the dairy farmers? Have you heard from those who are into horticulture, apples, whatever, so that we have an idea of what agriculture means in this province?

Mr. van den Heuvel: Dairy is the largest contributor to the agricultural GDP in this province. But there are some other very significant industries. The fur industry, blueberries, beef, maple, dairy, the horticultural industry. There is a number of them right across the whole realm.

As I mentioned in my opening remarks, we represent 27 different commodity groups. Farm gate revenues for 2016 were about $580 million. So, it is a significant amount of revenue and I think dairy represented about $130 million of that $580 million, so it is a significant contributor to economic activity.

We are hearing a lot of the same things from all of our members because a lot of these issues are not supply managed specific. All of our farms use on-farm family labour. When our farms are being transferred they have a significantly higher value and they are under the same tax rules for transferring to family members, as they are when selling outside the family. A lot of the implications are the same, and we are hearing the exact same things from everybody right across the entire industry.

Senator Andreychuk: One of the terms is “income sprinkling.” It seems to me it is not sprinkling. It is reward for work done or risk taken. Were you given any indication that these changes were coming? Were you consulted in any way?

I presume that with your business plans you are relying on what you have been doing for the last 30 years and what the laws have been on transfer of property. Did you know this was coming?

Mr. van den Heuvel: Not until the consultation was released. We certainly had no prior indication and I think that is what caught everybody off-guard. I know that in their defence they were portraying this, “Well this is not definite. This is not what we are going to do. These are the consultations, so we are putting these ideas out there to see what feedback we get.”

As I mentioned, the timing of that was very bad from our perspective, as was the lack of consultation ahead of time. I think any time that you are going to impact an industry with changes as significant as these, we would hope for pre-emptive consultations in order to facilitate. Maybe we could have avoided some of this backlash if they had talked to CFA or NSFA or Dairy Farmers of Canada, or whatnot, ahead of time.

Senator Andreychuk: Following up on that, the government is saying now that they are proceeding and CRA will develop the guidelines. Have you been consulted on that basis? In other words, there will be a test of what is reasonable in income allocations within the family unit and the CRA will give you a determination. You will have to then either agree with it, or find some evidence or some way to prove that their test of reasonableness is unreasonable. Have you been consulted at all about what their guidelines for this test of reasonableness will be?

Mr. van den Heuvel: I haven’t heard of anything to date. We just got back from Ottawa a couple of weeks ago from a session on the Hill where we were talking to various MPs at a Canadian Federation of Agriculture meeting. We were pleased around that same time that they announced a couple of key points around these proposed tax changes and were recognizing that agriculture needed to be consulted and needed to be thought about separately because of the importance of the industry. To my knowledge, as of yet, there has not been any detailed conversations around that. I hope that they will happen very soon. Perhaps there is something happening that I am not aware of.

Senator Andreychuk: What type of records do you keep about your family operation? In my province they are saying, “We have lived under this system for 30 years and it has been acceptable to the government.” These rules are going to come in immediately. They are not going to be delayed although some people are asking for delays.

If you were the one that CRA was approaching to justify your spreading of income in a family unit, have you talked to your accountants about what you are going to have to prove that it is legitimate?

Mr. van den Heuvel: Again, this goes right back to the uncertainty of what that reasonableness test will be. One of our policies at the Nova Scotia Federation of Agriculture, the CFA and beyond is undue regulatory burden.

Gerrit mentioned in his presentation that we feel that some of these rules and regulations are going to place an extra layer of recordkeeping, and whatnot, on top of our farms when we are already busy. It is difficult enough as it is.

As was said, you can be called out at 5 o’clock in the morning for half an hour or 45 minutes, and then you are back to bed; or 9 o’clock at night, whatever the case might be. You are doing such a varied number of tasks, and it is not like a traditional business where you are able to clock in at the start of the day and clock out. We are on call 24 hours a day as farm owners. So, any of these types of things are going to create an undue amount of recordkeeping.

What will the definition of reasonableness be? Are we going to have to start recording every single little detail of every activity that we do throughout the day? That will be a difficult task. Are we going to have to tell our children to record when they fed the calves, or when they mucked out the stalls, or did whatever? These are some serious questions that we feel are going to have a fairly significant impact on our ability to move forward and do what we love doing, which is produce food for Canadians.

The Chair: Senator Neufeld, to be followed by Senators Oh and Cools.

Senator Neufeld: Thank you gentlemen for sharing your views today on the government’s changes to the taxation process.

When I got smarter than my dad, when I was a very young man, he told me that if I had the world figured out, I better go out and prove it, and I did. I worked on a dairy farm for $5 a day milking cows by hand. So, I’ve milked a few cows in my life. That is a long time ago, and the world has certainly changed since then.

I am sure you have heard the Minister of Finance and the Prime Minister constantly talking about the middle class. Where would you say you fit in that, in the middle class? Do you have any thought process on whether you are middle class or not middle class?

Mr. Damsteegt: Yes, I believe we are middle class. I know sometimes consumers look at farm operations, and seeing the buildings and all the land, they believe you are a millionaire. You are not because all your money is tied up in the operation. That is what generates my income. For that very reason, yes, we are part of the middle class. This government came out at the beginning and expressed that they were going to fix this tax law because of loopholes, and that is hurtful because you put your work in every day.

I will speak for myself because I am familiar with my own situation. We incorporated as a farm about nine years ago. We did that for a reason. We did it for the reason of taxes because it is more attractive to be incorporated than not. The biggest reason was planning ahead for succession. Planning ahead to give the opportunity to the next generation, because no matter whether I am a farmer, a senator or a carpenter, we all need to eat. If we create an environment in which the next generation says, “I am not interested in doing this anymore, dad,” who will feed us?

Mr. van den Heuvel: Thank you for the question. I couldn’t agree with Gerrit more. I do believe that we are part of the middle class solidly, for all of the same reasons that Gerrit mentioned. Yes, people do look at our infrastructure and whatnot and think that we’re driving a big truck, or whatever the case might be and therefore we are well off.

However, we put in our time. We pay for that in ways that a lot of people cannot or do not imagine the amount of work, time and labour that goes into these types of operations. So, for those reasons I think that we are definitely in that middle class of Canadians.

Senator Neufeld: For a government that constantly talks about helping the middle class, would you say they have done a good job of helping you gentlemen in the middle class with these tax changes? Do you think they have helped you or hindered? Yes or no is good.

Mr. Damsteegt: A lot of uncertainty; no.

Mr. van den Heuvel: No.

Senator Neufeld: Well, that will be a good message to take back to those two gentlemen that talk about the middle class all the time. To be honest, the minister has been asked numerous times to define middle class. You have done a better job. He has yet to be able to define the middle class definitively with anybody. I have been at hearings where he has been present, but he cannot define middle class. I am glad you have.

The second thing is the passive income issue. Would you say that the $50,000 cap is sufficient for every dairy farm across Canada regardless of what size it is, or what they farm?

Mr. Damsteegt: As I mentioned, the Dairy Farmers of Canada have supported the Canadian Federation in regard to this $50,000. I have to admit to you I’m not qualified if that is enough. That is certainly a question that I will take back and certainly we will channel it through the CFA. You are right, there is quite a discrepancy between one operation and another.

Mr. van den Heuvel: I would echo Gerrit’s remarks there that we will take that question back. It has been mentioned a couple of times and it would be in our best interest to do so.

There is a huge variance in size of operation, not just within dairy farms, but within agricultural operations across Canada. To broadly paint a sector with one brush when, as you have mentioned, the devil is in the details, demands that we go through that with a fine-tooth comb.

I have a neighbour who has 12 cows and his 10 kgs. of quota. There are other farms in this province with quotas that are at 250, 300, 350 kgs. There is a very large disparity in operations. The same can be said when you look at farm operations across Canada. There are grain farmers out West that, when they look at our 200, 300 or 400 acres, say, “Well, that is what it takes me to turn my combine around.” They are farming 5,000 acres, 10,000 acres, 15,000 acres of land. So there is a huge disparity in size and that has to be taken into account.

Senator Neufeld: I totally agree with you. In fact, when you look at all businesses, not just dairy farms, or agriculture, it is the same. You can have a small business for which $50,000 may be enough. For others, that $50,000 is just peanuts to their business. I appreciate that answer.

When you fellows work on your farm, do you think about your retirement and what you would get for your investment and the hours that you have worked? Do you plan for retirement using at least some of the money from what you would get out of the farm, whether you sell it to your child, or to another corporation? Do you think of that?

Mr. Damsteegt: Thank you for the question; and, yes, we do and we should.

Having said that, it goes beyond mere retiring. It goes to the very point of allowing an opportunity for the next generation to farm, and also to being fair to those children who are not going into farming, to ensure they get a fair share out of the operation.

As I mentioned earlier it’s the financial aspect, and when you look at this farm you see this capital, but it is tied up. It is part of the operation. In being fair to the rest of your children, you have got to set up a structure beforehand to allow the operation to go on for the ones who go on. But at the same time, you have to be fair to everyone in the family, and that is why I have put a structure in place

Mr. van den Heuvel: Thank you for the question. It is something that is always on a lot of our minds and particularly here in Nova Scotia which has one of the highest average ages of farmers in Canada. I think we are somewhere around, on average, 56 and a half years old as a sector.

Retirement is always something that you are thinking about. As Gerrit mentioned, just being able to provide the ability to move on to that next generation in a fair and equitable way that puts them in a position to be able to succeed. That is the key. It is easy to transfer something, but it is not easy to do it in such a way that you can ensure a quality of life for your children, grandchildren, and so on and so forth.

I think at the end of the day, given the opportunity, we are in the business because we love it. We know we are not going to become millionaires. We know we are not going to be challenging Bill Gates for the top spot on that list any time soon. We do this because we have a passion for the industry and because we love it. And we hope to be able to instill that in our children and give them the opportunity to be able to do something, to live and grow and raise their kids here in Nova Scotia, rather than moving away out West or wherever. It is definitely something that is always on my mind, for sure.

Senator Neufeld: I want to read to you a bit of what the Minister of Finance, this fellow who talks about helping the middle class, and you have identified that you are the middle class, or believe you are in the middle class. The Minister of Finance told the committee that the government recognizes the need to retain funds within a corporation for business purposes. That makes sense. It wants to discourage using private corporations to save for retirement. What he is saying is that all the money you make on a farm you should have to reinvest in the business. But you shouldn’t plan for your retirement.

Now, I think Mr. Morneau and Mr. Trudeau are planning for their retirement. Actually their families ahead of them planned for their retirement, to be perfectly honest, with their income trusts. But what do you think about that statement by the Minister of Finance when he says he is looking after people in the middle class?

Mr. van den Heuvel: I think that is a very easy statement to make when you have a guaranteed pension waiting for you at the end of your retirement. I do not.

My pension is my job. My pension is the work, the calluses on my hands that I put into my labour every single day. So, for somebody to come to me and say that the work that I do and the income that I earn off of that cannot be used for retirement, isn’t right. I would tell them, “Let’s switch jobs. You come and do what I do for a day and you will see how long you last.”

Senator Neufeld: I will take that message back to them.

Mr. Damsteegt: I couldn’t add much more. I think that was very well said, Chris.

Senator Oh: Thank you, gentlemen, two of our hardworking middle class in Nova Scotia. My question to you is: Are children and spouses normally involved in the operation of the farm? If so, is it always in a formal way or informal way? Are farmers nervous to know about whether CRA officers will consider their contributions meaningful enough for them to be compensated?

Mr. van den Heuvel: Thank you very much for the question. To answer that, I think that their contributions are both formal and informal. My family members, my son and three daughters, all have chores, and they all work on the farm. They have formal tasks that they do. But like Gerrit has mentioned, there are times and opportunities for them where we have to call them out and do something different, lend a helping hand or whatever.

As well, my wife is an equal partner in this. I do not consider this my farm, it is our farm. She works just as hard, and if need be she drives a tractor, or grabs a pitchfork and does whatever. Those are the formal tasks on the farm. But her contributions go way beyond that in the form of bookkeeping and in the form of making sure that when we are in the tractor for 12 hours at a time I do not have to go back to the house to get my meal, or to get my drink, or whatever. Those contributions are extremely important and cannot be under looked or understated. It is a concerted family effort that crosses both formal and informal lines.

Senator Oh: Gerrit, would you like to comment?

Mr. Damsteegt: I really appreciate the question. Quite often from the outside it is not recognized that it is a family event. I can share with all of you that I am involved as the Chairman of Dairy Farmers of Nova Scotia, which takes a considerable amount of time. I am involved in Dairy Farmers of Canada. I spend a lot of time in Ottawa, but that wouldn’t happen if it wasn’t for the input of my family.

I could not be doing that if it wasn’t for my wife dealing with the issues when I’m not there, if it wasn’t for her to be able to call on some of the kids, “Listen, dad is not here. You have to be here.” Do I want to be away from the farm? No, to be really honest. I want to be in my boots and my coveralls. That is the passion. That is what I love. I am not a suit guy.

Mr. van den Heuvel: He looks good in it.

Mr. Damsteegt: Sometimes you have to do what you have to do, and you need people to do these other jobs that keep the industry going. It is certainly a family event, no question. That is not always recognized.

With this income sprinkling, that is a thing to remember. I am not just doing a job myself. It is all of us.

Senator Oh: Over the next few years we will need more accountants and lawyers, tax lawyers. How much more do you estimate that farmers will spend on accountants if this tax reform goes through?

Mr. Damsteegt: That is a big question and I could put a number to it, but I would be just picking a number out of the air. However, I am certainly glad that I did meet with my accountant yesterday afternoon. She told me, from the perspective of PriceWaterhouseCoopers, that they do not understand where all of this is going, that there are many questions. You know, are things grandfathered? Is it retroactive? What are the implications?

When we talked about this reasonableness test she said, “Okay. What are the parameters? How are we going to measure this?” Given all the uncertainty around this issue, if government plans to move forward on the proposals it has to allow time -- set timetables so that things can be planned, things can be done and, first of all, understood.

Senator Oh: Last question: Do you have a family trust or an offshore account somewhere on the islands?

Mr. van den Heuvel: The only island I deal with is Cape Breton.

Mr. Damsteegt: I would love to, but I can’t afford it.

Senator Cools: I would like to thank you first of all for appearing before us and sharing with us your very keen perspective. I am very pleased that you have also echoed what we have heard everywhere, which is the terrible uncertainty and uneasiness that is just sitting on top of every person in the country. The terrible uncertainty and uneasiness is because they do not know what to do and they do not know where to go. It is not a good thing when a government measure, proposed by the minister, is in that situation. As a matter of fact, it makes it extremely terrible and frightening, I would say.

You have shared so much about your farming experience, I must tell you my mother owned a plantation. We did not have farms in that part of the world, we had plantations. So I saw a lot about plantation operations in the development of sugar and so on.

As you know, at the completion of this study we are expected to produce a report on our findings and we will present this report to the Senate. Part of this report will include the committee’s recommendations. So, if you were sitting here on this side of the table making these recommendations, what would be the best four recommendations that you would make, or that you want us to make? We have to put forth very healthy and robust recommendations; it is a very serious situation.

Mr. van den Heuvel: I made a few recommendations earlier on and we will reiterate some of those. Of course, we have mentioned a couple of times the income sprinkling and this reasonableness test. What is reasonable? What is not? We need details. We need definitions. We need to understand what we can and cannot do. What are the ramifications on our operations? That would be a key one.

With regard to transfer of farms within families, we need a level playing field. The unfortunate reality is it is easier for me to transfer my farm to you than it is to my son or my daughter, and that is not right. Something needs to be done about that. So, that would be two big ones from my perspective.

Gerrit, you may want to add to that.

Mr. Damsteegt: Certainly, in the broad perspective of it all, it is clarification, around the uncertainty that you talked about. I can deal with situations, but I need to know in advance so I can make right decisions in regard to succession planning. That speaks about the timing as well. The timing on this passive investment and so on. There is just great uncertainty on what is allowed and what is not allowed.

The accountant said yesterday as well that she has clients who are moving money from one place to the other right now. But is it the right thing to do? The ultimate question is what are we doing to the overall infrastructure? By creating that uncertainty are you stagnating economic growth? I think you are. On the one hand, you are trying to get more tax dollars. But the uncertainty, I think, is the big one.

The Chair: On a second round, the chair will recognize Senator Marshall and Senator Andreychuk.

Senator Marshall: One or both of you mentioned that you were on Parliament Hill talking to members of Parliament. Could you just give us some information on that? My understanding is that it was on these tax proposals. What sort of feedback did you get from them? Did you meet with the Minister of Agriculture, whose riding is just next door? Could you just tell us what happened with regard to those meetings?

Mr. van den Heuvel: As Nova Scotia’s representative on the Canadian Federation of Agriculture, I was in Ottawa a couple of weeks ago. We do these meetings on the Hill twice a year. We organize meetings with various MPs, and in some incidences senators. We try to meet with both the sitting government and opposition MPs to get a good cross section.

Obviously the topics change from session to session, but the fall session this time was specifically geared around the two major issues which were the income tax changes and the trade issues around NAFTA and TPP, and so on. Those were the two things that we talked about in general.

We met with 42 different MPs over the course of the day in various groups. By and large, the feedback that we got from them was that “Yes, we did this wrong.” They understood that. I think they were genuine about that. I think they wore that on their sleeves and they understood that they have to do a better job in the future in order to ensure that Canadians are treated fairly.

Senator Marshall: So these were your own MPs, Nova Scotia MPs? You met with them also?

Mr. van den Heuvel: Well, there were some Nova Scotia MPs, but we met with MPs from across the country.

Senator Marshall: But it did include some from your own province?

Mr. van den Heuvel: Yes, that is correct.

Senator Marshall: And were you able to meet with the Minister of Agriculture?

Mr. van den Heuvel: Yes, he is often on the list. I was not part of that meeting. The way we do these is we split them up. There is two or three CFA members that visit each one. Typically, if your local MP is on that list, we try and ensure that you are too. For example, I would go visit Rodger Cuzner, or whatever the case might be. Some of the senior level staff at CFA were part of consultations with Minister MacAulay.

Senator Andreychuk: We have heard that there was probably more activity in incorporating about 10 years ago, although there have been incorporations since they have been allowed and that current scheme has been in place at least 30 years.

We heard from a lot of farmers who are very worried that they are coming to an age where they are thinking of passing on the farming operations to their children, and it is critical in the next five years to know where you are going. Is that the case also in Nova Scotia, this kind of generational shift that will be taking place?

They were not only worried about their own families, but also about what it might do to agriculture. Is that kind of discussion going on in the Canadian Federation across the country? Is that happening across your farming communities?

Mr. Damsteegt: Certainly I can speak for the dairy sector. In the dairy sector in this province we are certainly seeing a very keen interest in the young individuals. I am 54 years old. I was bald when I was 22, so do not use it against me. When I am in a room meeting with producers there is a lot of the younger generation. I wouldn’t say that Nova Scotia is on the lower end. There are a lot of younger producers in the dairy sector. I cannot talk about the other sectors.

Nevertheless, it doesn’t matter if it is me, or a 32-year-old who is taking an interest, because he is into that corporation as well and he will face the same things that I will face when these things are going to be changed; not in the very short term, but in the longer term. There is an interest in getting into the industry, but it is the uncertainty.

In regard to your question in meetings with MPs the Dairy Farms of Canada always meet with them the first week of February. We visit all the MPs on the Hill and we try to meet all the senators as well. Nevertheless, with this tax bill coming out, we have encouraged our membership, “You do not all have to go to Ottawa, but meet your MPs locally, here,” and they have. But you have got to recognize the colour of what we have within Nova Scotia and they hear us, and I think they understand. I think we felt support. It is also somewhat, “You are the government in power today.” The message has been out there, no question.

Senator Andreychuk: One area that concerns me particularly from my background was the idea of an individual from the CRA coming in to assess what is an appropriate, reasonable spreading of income. We have spent decades now trying to legitimize family units and saying, “You know, we are not going to get involved in your marriage and your relationship because every family is unique and different.”

We survive and thrive, as we used to say in the social services, when we give the maximum discretion to a family to develop. Government normally does not intrude until there is a bottom line. We do not set a standard of what is a good family unit. What we say is, “It is at your discretion.” But if you fall below a line, like in abuse cases or something, the government will intervene.

So we are setting up a system now where we are going to have CRA accountants, who I presume will be good, assessing what is acceptable for the sharing of income within a family unit. Does that give you any pause? How are we going to justify, “Here is how you run your operation?”

You mentioned being on the tractor for 12 hours, and somebody has got to prepare a meal and get it to you. I mean, I remember the old farming harvests. Everyone pitched in, and the women all came together to cook, to make sure you could do it on a 24-hour practical basis. So, my concern is from the social policy point. We have put measures in place to recognize family units, to not intrude on those family units as to division of labour, etc., and to value every contribution, whether you are in the kitchen or in the field. How are we going to have CRA accountants determine your family unit and what is fair?

Mr. van den Heuvel: Thank you. I couldn’t agree with you more. That gives us very great pause for concern, about what will happen and who will determine in my operation the value of one skill over another. Agriculture is unique in all aspects. It is not a factory. It is not an office building. It is not a workshop. It is all of the above and more. The government has to recognize that there is a very wide range of skill sets and a very wide range of opportunities for people to become involved in the farming operations. For somebody to come down, whether it is an accountant, a tax lawyer, or whomever, somebody from wherever, from the government, and tell me or my children that, “Hey, sorry, but we do not value the contribution that you are making to this family farm.” No, that is simply not acceptable.

Mr. Damsteegt: Further to that, I think Senator Oh raised the question earlier about what are the implications going to be? How many lawyers are going to be involved? What is the charge going to be from the accountants’ perspective?

When you open this can of worms or kick the hornet’s nest, be prepared for all that can happen, because how do you determine? As Chris said, “This is worth this much and that is worth that much.” I like my cup of coffee and I like my meal on time. When I am on the tractor, my wife will prepare food for all of us. We are not going to the kitchen to have that bite and that cup of coffee. What value do you put on that? How is the CRA going to determine the value of that? They are a lot smarter than us if they can.

Senator Neufeld: Senator Cools asked you about recommendations. We’ve had a lot of recommendations come to us that say, “Government, you have just cherry-picked a few things in the tax system that have huge implications for everyone.”

It may be best for them to actually step aside and not do any of that, but do a whole review of the taxation system in Canada because it hasn’t been done for many years and the world has changed for everyone. Would you agree that maybe that should be a recommendation: “Look government, you didn’t realize what you were doing. Here is what you have done. The best thing you can do now is to do a review of the whole tax structure.” It is not just you people who are unhappy with it; a lot of other people are unhappy with it. Would you agree with that recommendation?

Mr. Damsteegt: I think we would support that, live and learn. We went through this process. There is an explanation, with all due respect to all those individuals who started this. You get this feedback through this committee. Take that information and say, “Okay, maybe we were on the wrong path here,” and for that we need to back up. Just the transfer, the taxation from father to son, or father to children, the tax burden on that in comparison to me selling it off to someone outside of the family, or outside of the corporation needs to be addressed.

Mr. van den Heuvel: Thank you very much for the question. Again, I couldn’t agree with you and Gerrit more. We need to know details and we have to plan these things. We cannot go about this and in three-months’ time, or four-months’ time, implement tax changes that have such wide-ranging ramifications. They are admitting they themselves do not even know what the details are. So, how can we go ahead and roll out tax changes, or tax plans, without knowing ahead of time what those details are and their ramifications on our businesses and the very fabric of rural Canada?

The Chair: As we close, there is no doubt in my mind that the Dairy Farmers of Nova Scotia and the Nova Scotia Federation of Agriculture, through both of you gentlemen, have articulated the views, the comments, and the concerns of your associations. On behalf of the Standing Senate Committee on National Finance, thank you.

Mr. van den Heuvel, do you have a comment?

Mr. van den Heuvel: I would just say thank you very much for the leeway, Mr. Chairman. In closing, thank you folks for the opportunity to come forth and present our views. It is an important feedback loop that has to continue and move forward.

We’ve thrown lots of numbers around here today and there are lots more available. I would just recommend in closing that if you guys have not had a chance to read the Advisory Council on Economic Growth Report put out by Dominic Barton, please do so, because it does name agriculture as the number one growth industry in Canada. We have to grow in the next 40 years the same amount of food as we have in the past 10,000 years combined, safe food. So, that tells us the importance of agriculture.

I will close with one last number, and I have been doing this at all of the talks that I give; 88,695. Anybody have any idea of what that number represents; 88,695? Remember it. If you live to the average age of a Canadian, 81 and a half years, and eat three meals a day, that is the number of times in your lifetime you are going to require the services of a farmer.

The Chair: Thank you.

Senators, we will now hear from our second panel. First, to the witnesses, thank you very much for accepting our invitation. We are anxious to hear your recommendations, your comments and your opinions.

We have with us, from the Halifax Chamber of Commerce, Mr. Patrick Sullivan, President and Chief Executive Officer; from the Atlantic Chamber of Commerce, Mr. Glenn Davis, Vice President, Policy; and from the Cape Breton Barristers’ Society, Ms. Nicole LaFosse, Lawyer, LaFosse MacLeod. Thank you for being here.

I have been informed by the clerk that presentations will commence with Mr. Sullivan, followed by Mr. Davis and Ms. LaFosse. You will have approximately five minutes each.

Patrick Sullivan, President and Chief Executive Officer, Halifax Chamber of Commerce: Good morning, everyone. Thank you very much for joining us in Halifax. We are thrilled to have you here on a very important topic.

My name is Patrick Sullivan. I am the President and CEO of the Halifax Chamber of Commerce. The Halifax Chamber of Commerce is a best practices business advocacy organization that continuously strives to make Halifax an even more attractive city, if that is possible, in which to live, work and play. Together we have over 1,600 members that represent over 65,000 employees who act as a single, powerful voice through the chamber to promote local businesses in the area.

I am very happy to be able to speak to you today about the changes and the updates to the tax policies that we have recently learned of. We hear continuously from our members of the uncertainty and added stress that these changes have created and would like to take the next few minutes to address some of those concerns.

In our letter submitted to the Department of Finance on September 29, 2017, we noted our concern over the reasonableness test that they had presented. The updates from the week of October 16 stated that those making meaningful contributions to the business will not be impacted by the proposed income sharing measures. Our members do not know how this initiative will be interpreted, applied, or enforced. Entrepreneurs will spend more time on administration instead of growing their businesses and creating jobs. We recommend a cost benefit analysis be done on this initiative to reduce the uncertainty surrounding this potential change.

We are pleased with the decision to not move forward with the proposed measures to limit access to the lifetime capital gains exemption. The proposed tax reform would have impacted family succession, farmers, fishers, and many family businesses that would be sold or transferred to a family member. With over 70 per cent of businesses expected to change hands in the next decade, those proposed tax changes would have severely impacted the ability for succession to occur, or the value of those businesses.

We saw those kinds of changes even from the time the original changes were announced in July. Uncertainty drove down the value of businesses of our members. The unintended consequences would have been that many small businesses would close when third party purchasers were not available.

We are very happy to hear the government has fast tracked their promise to reduce tax on business to 9 per cent by 2019, after initially saying in the last budget that it would be delayed. The proposed legislation on investment income will severely impact the ability of a business to save for expansion and to weather an economic downturn. So, obviously, two thoughts.

In addition, many entrepreneurs provide capital to other entrepreneurs with innovative ideas. The level of proposed taxation on these funds will result in significant negative economic impacts on small business sustainability and growth. It is our belief that the Finance Department only believes that organizations hold funds for savings. Our members tell us they hold funds for reasons including unplanned downturns, competitive activity and cash needs for acquisition. Now they will be taxed on these funds at an exorbitant rate. We do not understand why at a time when other jurisdictions are examining how to reduce taxes for businesses, Canada is considering how to increase the cost of capital.

The Halifax Chamber of Commerce and our members still have concerns that are yet to be addressed that are causing undue stress and worry in the business community. As recently as last Friday, I gave a presentation to a group of business executives in the city. The chartered accountant partner, CPA now, who was sitting next to me told me that he was advising his clients, and has been advising his clients since July, to hold on business purchases, on investments because they simply do not understand what the landscape will be in the coming months and years.

Underrating entrepreneurs, the white paper compared taxes paid by an employee with an entrepreneur. This is an apple to oranges comparison. The entrepreneur bears the stress, risk and rewards that come with owning a business. These changes could unintentionally create barriers for those entrepreneurs. Those same entrepreneurs are the backbone of the Canadian economy, accounting for some 1.17 million businesses in 2015, of which 97.9 per cent were small businesses.

Economic uncertainty is another area of concern. In the current climate of global uncertainty, with areas like NAFTA discussions and slow economic growth, we question whether these changes will incur more harm than good for the business environment and competitiveness in Canada.

We still have questions we hope you will take into consideration, such as: Has an economic impact study been conducted on these proposed changes? Has government evaluated the increased burden and costs to small business? Has government evaluated the increased cost and administration for CRA? How will the proposed changes be managed?

Some of the language is vague and subject to interpretation. For example, implementing a reasonableness test. Has the benefit to the Canadian taxpayer been evaluated against the potential job losses and business failures that will result once these measures are implemented? Small businesses are the employers of the middle class. Who will employ the middle class once many of these small businesses no longer exist, or will not be founded? Small business will be required to make the Atlantic Growth Strategy a success, a priority of this government. How will this strategy be executed if entrepreneurs are discouraged by these recent tax changes?

Nova Scotia is currently the highest-taxed province in Canada, and with a large amount of red tape facing current and future businesses the proposed changes to Canada’s tax policy could have a significant impact on the Nova Scotia economy. Adding more barriers in a climate ripe with roadblocks like Nova Scotia, could hinder Nova Scotia’s ability to support not only Halifax-based businesses, but those in rural communities as well.

We will be separately asking the provincial government to ask how they plan to compensate for these changes to ensure small business growth when there are fewer incentives to open, run, or hold cash inside a small business.

The Halifax Chamber is committed to helping businesses succeed and we want to ensure all businesses are treated fairly and equitably, and provided with the right environment to succeed. We hope you take the time to review our comments and questions. We are certain that the proposed changes to the current tax policy for private corporations would have a myriad of existential impacts on Canada’s economy and Canadians’ well-being.

We agree the tax system is not perfect. As mentioned by the Canadian Chamber of Commerce, we believe it might be in the best interest of the government to procure a royal commission for tax reform that clearly defines the problems to be solved and the objective of the change to tax policy to reduce the undue stress and uncertainty in the business community and lessen the impacts to global business competitiveness.

Utilizing accurate language that more precisely describes the legal practices businesses use, instead of demonizing small businesses by using words like, “loophole” and “sprinkling” would also provide more clarity for both business owners and the public.

Thank you very much for giving the Halifax Chamber the platform to voice our members’ concerns and recommendations for a healthy business economy.

Glenn Davis, Vice President, Policy, Atlantic Chamber of Commerce: Good morning senators, and thank you very much for this opportunity to present our members’ concerns regarding the proposed changes to tax planning regulations.

Simply put, our network of 93 Chambers of Commerce and Boards of Trade, representing over 16,000 businesses and professionals across Atlantic Canada are gravely concerned by the government’s proposals and amendments.

If there was ever an issue that warrants the involvement of the Senate as a chamber of sober second thought, this is it. The substance and process of the so-called consultation has created a divisive controversy where one did not previously exist. To say that the approach was flawed would be gracious. The choice made to schedule consultations during summer months has been described as more of a sneak attack on small business and professionals than a genuine consultation.

While welcoming recent announcements by the Minister of Finance that appear to limit the impact of new rules on income splitting, passive income, and the transfer of businesses to family members, there are many aspects of the government’s objectives and methods that remain undefined, appear arbitrary and will assign subjective powers to those who will enforce the tax rules. It appears that the concept of fairness is driving the minister to adopt a “come hell or high water” attitude to moving forward with reform of CCPC regulations.

By now it should be clear to both Houses of Parliament that the original proposals were overkill. It is not necessary to change the rules for all private businesses instead of targeting a small percentage of business owners who enjoy inordinate benefit from the current tax laws. The initial shotgun approach, followed by adoption of arbitrary thresholds, demonstrates the folly of trying to pursue fairness one issue at a time.

We feel the level of concern is potentially greater in Atlantic Canada than the rest of the country. We have the highest percentage of rural population, a full two and a half times the national average. These people are located in small communities whose sustainability depends on small retail businesses and resource industries such as forestry, fishing, and agriculture. A significant portion of these businesses are supported by pledging family assets, are subject to seasonal cash flows, and often passed from generation to generation.

Our economies and urban centres also include a burgeoning ICT sector that is predominantly populated again with small businesses. The proposed regulations will inevitably cause these small businesses to re-evaluate their investment and operational decisions to ensure that their corporate tax environment does not duly restrict their profitability.

Going forward, we urge the members of this committee to recommend withdrawal of these ad hoc measures that are not adequately justified by economic impact analysis. Evidenced by CRA’s recent misstep on interpreting rules regarding employee benefits, and the revelation that a very small number of tax payers are registering in tax havens to save enormous amounts of tax, it is clear that the potential exists for unreasonable interpretation of poorly defined regulations and there are better cost benefit opportunities for government to expand their sights beyond Canadian control of private corporations. If we want to rebuild Canadian’s confidence in the tax system and the Canada Revenue Agency, the only reasonable response is a comprehensive review of the entire tax system, with the objectives of proving fairness and competitiveness.

Even with the minister’s revisions to the original CCPC tax reforms there remains too much uncertainty and lack of objectivity. Is the objective to improve the well-being of the middle class individuals in employment situations; or to cap the maximum benefits available to those who would risk their financial well-being to operate a business; or to reduce tax avoidance in hopes of increasing government tax revenue; or some or all of the above? Answers to these questions would logically influence the manner in which tax reform should be approached.

In direct response to the tax reform proposals as they currently stand, our members have asked that government publicly release comprehensive economic impact assessments of the proposals for review, including projections of the impact on business investment; fully define the determinants of measurable contribution to increase objectivity and reduce potential legal issues; exempt spouses entirely from the measurable contribution requirements in recognition of the risks borne by the family union, not simply direct contribution to the operation of a business; create passive investment limits that are more representative of industry conditions and individual corporate ownership; and do not proceed with changes to regulations regarding the transfer of businesses between family members without adequate public consultation.

Reforming the tax system to be fair is desirable, but by nature the complex regulations is a monumental task. It should not move forward until government and taxpayers have a mutual understanding of the objectives and effective solutions that will satisfy employers and employees alike. The current public dialogue between government and the business community clearly indicates that this understanding does not yet exist. To continue down this road would risk further alienating future investors and limiting the growth potential of the backbone of our economy.

The Atlantic Chamber of Commerce urges the Senate Committee on Finance to exercise their prerogative to recommend that the Government of Canada conduct a royal commission on tax reform that will analyze the deficiencies and fairness and develop solutions based on comprehensive impact analysis and create a balance between the interest of citizens, private and public corporations.

I thank you for your attention and will answer any questions.

Nicole LaFosse, Lawyer, LaFosse MacLeod, Cape Breton Barristers’ Society: Thank you, honourable senators, for this opportunity this morning. I intend to speak today with respect to income sprinkling, passive investment, and access to justice.

Those seeking to make changes to the Income Tax Act have portrayed income sprinkling in a negative light. Income sprinkling acts as so much more than an individual trying to avoid paying their typically highest marginal tax rate on the income that they sprinkle to their family members. When used legitimately, this tool is used to put children through university, to pay expenses for the sick or disabled, or to pay for the care of an elderly relative, thus potentially clearing up some of the long wait lists for assistance in this province. By removing or limiting the ability to income sprinkle, this will have a limiting effect for some individuals to obtain a post-secondary education. My own education was at the benefit of income sprinkling, and while I have no doubt that I would have pursued my education without this aid, it is quite likely that many children will not. By implementing these changes, the government will not improve anyone’s access to education or to better healthcare. In fact, these changes may act as a barrier to some.

Further, the discussion surrounding a reasonableness test for sprinkling will create a great deal of uncertainty and will most certainly lead to an increase in CRA audits, appeals and litigation far outweighing the benefit of the stricter sprinkling regulations. There are certainly mechanisms to cut down on the abuse of sprinkling, but the government should not disregard the many benefits that come from this legitimate usage.

With respect to passive investment, the government was clear that their focus with these changes was to target the wealthy, the 1 per cent. A clear line was drawn in the sand to determine who fell into that category. As opposed to eliminating passive investment for small business, the government has proposed a threshold of $50,000. As such, we are accepting the premise that there is a threshold that will only affect the 1 per cent, that being those who are able to save in excess of $50,000 annually in their small businesses, although no statistical data have been presented to date to support this arbitrary figure. The government has also declined to specify whether this threshold is per household or per person. The lack of clarification would suggest that it is the former. Now if that is the case and the most you are allowed to passively invest is $50,000 as a household, you are suddenly reaching and affecting well past the 1 per cent targeted group.

Both my spouse and I are lawyers in private practice. Under this proposed scheme, we would be limited to passive investments of $25,000 each. Savings of this amount are presumably more attainable for many individuals. Limiting savings to $25,000 a person is well below what the government has established as its 1 per cent in its targeted group.

I understand that some will have little sympathy for small business owners who are able to use these provisions of the Income Tax Act to their advantage. We have heard the comparisons of two neighbours with the same salary, and the small business owner paying less taxes as compared to the employee. My response is one word; risk. There is much more risk and uncertainty in starting your own business versus being an employee. You have to make sacrifices as a small business owner. You have no guaranteed annual income or pension. One year you may earn the same amount as that neighbour, while the next it could be far less.

Small business owners typically do not have the same long-term planning available to them, as opposed to those with steady, stable income streams. A small business owner’s income can be affected by many things outside of their control. Given all the risks associated with starting and operating a small business, we need some mechanism in place to acknowledge the risks taken by small business owners to incentivize them to do more and to grow, and to support them during difficult periods.

Tax is the cost of doing business. Now in order to reduce these costs business owners are going to take steps like terminating employees, raising prices, or in my profession decreasing the amount of pro bono work.

In Cape Breton, the majority of those affected by this justice system are those who are not able to afford representation. As such, many lawyers ensure that a certain percentage of their time is dedicated to pro bono endeavours. If these amendments are passed as proposed, it will be increasingly difficult for lawyers to dedicate time to pro bono projects. Everyone will soon be required to put in more hours to take home the same, or less, than we were taking home before. This leaves less time for those who need our assistance, becoming an access to justice issue. I suspect our profession is not alone and that this will become an access to service issue, transcending many professions.

In closing, we should not structure these changes into a one-size-fits-all approach. We should tailor our tax programs to change only around the specific areas where abuse exists. If there is abuse with sprinkling, figure out where that abuse is and change the law so that it decreases opportunity for that particular abuse. Do not change the law to the detriment of those who are lawfully abiding by the rules.

My fear going forward is that if you take away these tax strategies, how do you grow your business? We want to encourage risk and encourage the entrepreneurial spirit. These proposals impose a punitive tax rate on private corporations and will consequently have harsh impacts on small businesses that are at the heart of our economy. If you discourage people from starting businesses, who is going to start them? All of a sudden it makes more sense to be an employee to get a steady income and a pension. Without risk takers, a community dies.

The Cape Breton Regional Municipality, where I am from, has an aging and declining population and the only way to develop and encourage growth is to encourage and not discourage the development of small businesses. By discouraging new or growing businesses, this policy disproportionately affects those regions like mine that most need the help.

I would strongly urge our government to reconsider its proposed tax changes and to truly study the far-reaching impact that it will have on our economy as a whole. This not only affects those who own small businesses, but their families, their employees, and their communities.

Thank you very much for this opportunity.

The Chair: The first question will go to Senator Marshall, to be followed by Senator Eaton.

Senator Marshall: I have the same question for all of you, but I am just taking a look at the document that was provided by Mr. Sullivan. You asked whether an economic impact study had been conducted. We know now that there was not, because we had asked that question of the minister. Has the government evaluated the increased burden of costs to small business? That has not been done either. I went down through all of your other questions. I do not think they could have addressed them at this point in time because the proposals are not finalized yet. All we have so far is like a framework. We think we know where the government is going, but everybody is sitting and waiting to see what the specifics will be.

Mr. Sullivan, I think you said you were talking to a CPA and the advice was to do nothing right now. Hearing from other witnesses across the country some people are not doing anything. But there are a lot of people who are doing something, and some people are doing some really big things in anticipation. They are trying to second guess the federal government. So I am interested in knowing what your members are telling you with regard to what they are doing now, because I know they are not all just waiting for the federal government to come out with the details. I would just like to get a flavour for what this uncertainty is doing to people in the interim, because even when Budget 2018 comes out and people know the specifics, there will still be a lot of work to be done to find out exactly what the specifics mean. So what are people doing?

Mr. Sullivan: Let me give a couple of specific examples. The majority of the people that I have spoken to are sitting and waiting. The reason they are sitting and waiting is second guessing the federal government is a bit of a fool’s errand because we did see proposed legislation during the summer. That proposed legislation seems to be changing. So I do not know that doing a lot of things in the interim is a wise decision.

I will give you two specific examples of folks that have been impacted. A business was being sold. This is relayed by a CPA who advises people on the sale of their business. It was a small business, five employees. It was being sold to an individual. After the proposed changes were presented that sale was put on hold. The individual who was doing the purchase believed that they would have less opportunity for return, or income; therefore, they would not pay the price that the seller was offering. So, that was a reduction in the value of the business. The seller then pulled back and is considering selling the business to someone outside. It is a travel agency. It can operate in any location. So, they may actually be selling the business to someone outside of Nova Scotia. There is one example.

Another example, it is common to negotiate the purchase price of a business when you begin the purchase if you are buying in. He had bought 40 per cent of the business. The purchase price was already agreed upon. He knew, based on the previous tax legislation, what his income stream would be and he had the option to purchase the other 60 per cent. He did not have an option to renegotiate the price. He is, therefore, not going to purchase the business or purchase the remaining 60 per cent of the business today because he will not have the income stream that he had in the past. So, there is a second example.

I will give you one more brief example. I was, and I still am, a private corporation. Although I am a full-time employee of the Halifax Chamber, I still have a private corporation. I was on my own for a number of months, or years. When I got my loan to start my business, my wife had to sign-off on that loan. Although she didn’t contribute every day, she would say that since we mortgaged the house to start that business she was an equal contributor to the business.

Senator Marshall: The proposed tax changes are not finalized yet so there is uncertainty there. What is happening with your members? Are they looking at other things that are happening? We have been through a great period of growth, but now it looks like we are facing an economic slowdown. Interest rates are going up and that is a concern. Some businesses are concerned about the NAFTA negotiations, like the dairy farmers who were on the panel earlier this morning. How does that factor in? For some people is this like the straw that breaks the camel’s back. Where are these other uncertainties with regard to the uncertainty on the tax changes?

Mr. Sullivan: We have a broad range of members. So, I would say for our doctors, and we have doctors, this is the straw that broke the camel’s back. There is no doubt about it. They are very angry and upset about these changes. I do not want to speak for lawyers.

I would say for many of our members that -- and Atlantic Canada is a little different than the rest of Canada, obviously – while Canada had good GDP growth the last 12 months and is projected to have good growth, Atlantic Canada was not so lucky.

Senator Marshall: I come from Newfoundland and Labrador, so I know.

Mr. Sullivan: There you go; you understand. So, Nova Scotia is not quite as lucky, as is New Brunswick. I would say many of them are putting on hold their business changes or investments and that is really worrying. I mean we expect that we may have a nine-month pause in business, and a nine-month pause in business in an economy that is already slow, will create another nine-month pause at the other end, sadly.

Senator Marshall: We are waiting for the smack.

Mr. Sullivan: We have had the smack, we think.

Senator Marshall: Well you are going to get another one.

Mr. Sullivan: We are going to get another one, yes.

Senator Marshall: Mr. Davis, what are you hearing from your members? Would you share some members?

Mr. Sullivan: We are a member of the Atlantic Chamber. Therefore, all of our members are their members, but they would have a lot more.

Mr. Davis: Essentially our members are Chambers of Commerce and Boards of Trade. So, indeed, each of those Chambers of Commerce is independent and come together in a voluntary association for common issues. You asked the question, “What are people doing?” Certainly, at our level where we work with Chambers of Commerce, there has never been an issue in which the Chambers of Commerce have been more active, more involved, more engaged. One of the examples of how they are working is Chambers of Commerce across the provinces, across the region, have been organizing information sessions to help their businesses better understand what is on the table and how it will impact them. There have been hundreds across this, if not thousands. For example, in a small town like Tracadie, New Brunswick, they rented the local theatre in order to put on a presentation. They were turning people away at the door, which is a demonstration of the level of concern.

Senator Marshall: We have heard from witnesses that people are selling their businesses closing down their businesses. One of the concerns that some witnesses raised is specific to doctors. Doctors are mobile and can move to the States. Some businesses are mobile as well. I find, especially in Ontario and out West, that there seems to be opportunities to move things south of the border. Are you hearing that from businesses in the chamber? I mean, not all businesses can.

Mr. Sullivan: Certainly, from members who are mobile, we are hearing that they are exploring other options, whether that is another province, which would be just as bad for us, or the United States. We certainly have heard that from medical folks who can work anywhere and are clearly exploring other options. We in Nova Scotia already have approximately 100,000 people without a family doctor. So, this is an area of significant concern provincially.

I shouldn’t speak provincially, but for Halifax it is still a worry.

Senator Marshall: Ms. LaFosse, you are here representing the Cape Breton Barristers’ Society. I sort of look at your members a little bit differently than I look at members from the Chamber. You are representing lawyers, but it would be from the perspective of how it impacts them, but also how it impacts their clients.

Ms. LaFosse: Exactly.

Senator Marshall: So, could you give us your perspective on that?

Ms. LaFosse: Certainly, and I think my comments would echo those of these two gentlemen in that everything right now is on pause. I work very closely with several accountants for the purpose of incorporating these companies and these family trusts.

One of the first things that new physicians do as soon as they finish their residency is they incorporate. That is when they come to see me. I think they typically finish in June or July. This year I saw several in late July, right before this happened. We started the process. Then as soon as these proposals came out we went right to the accountant and everybody said, “Stop. Put everything on pause.” Even after the changes in October, the message has been the same, “Just wait. Just hold off.”

My colleague Dr. Stone will be able to speak to that in much greater detail this afternoon and the impact that it will have on physicians. I know Cape Breton is kind of ground zero for physicians leaving. So, it will have a very drastic impact on our area.

Senator Marshall: What about the lawyers, the members of the society? I would think a lot of lawyers have these private corporations. They are probably not so mobile as the doctors.

Ms. LaFosse: We are also a much less sympathetic group versus the doctors. I guess it depends what stage you are at in your career. I know some of the older, more senior lawyers are saying, “I am just going to close. I am done.” While I get the message from others that this year will be a big year for hoarding, for passive investment, because we just do not know what 2018 will bring. There is just too much uncertainty right now.

Senator Marshall: Too much uncertainty. We do not know what passive income is yet.

Ms. LaFosse: Exactly.

The Chair: Senator Eaton, to be followed by Senator Andreychuk.

Senator Eaton: From the previous panel, Nova Scotia is currently the highest-taxed area in Canada. You said, Mr. Sullivan, in one of your speeches that it also has the largest amount of red tape and that Canada’s tax policy may have a significant impact on Nova Scotia’s economy.

Jack Mintz, when he appeared before the committee, and I quote him, “Evaluating taxation only in terms of fairness is inappropriate . . . .”

And this is something we have heard over and over again from the Liberal government. “Oh, it’s only fair.” They do not talk about equal opportunity. They talk about equal outcomes, which is strange. He said, “Evaluating taxation only in terms of fairness is inappropriate since public policy must balance competing objectives. Growth is also important.’

Could you talk about the importance of recognizing the need for economic growth as a part of tax policy and how these measures could work against that?

Mr. Sullivan, I think you have on the back of your card specific areas you would like to see the federal government look at. As you know, e minister lowered the small business tax or he is threatening to. Will that have much of an impact?

Mr. Sullivan: Just to qualify, Nova Scotia does not have the largest amount of red tape, it has red tape. So, I would not say that.

Senator Eaton: That’s good. I am glad.

Mr. Sullivan: We have the largest taxes, but I think we share red tape. It is fair to say that the current tax policies have built what we have today. So, there is enthusiasm among small business owners for the current tax policy. But it has been layered on over years and years. I really do get a little disturbed when I hear words like “loopholes.” The reality is that tax policy has been created to advantage small business at times, large business at times, doctors at times - maybe never lawyers. Certainly, it is there to assist businesses and their growth and it has done that over the years.

A wholesale change is very worrying because it creates the unintended consequences that we are seeing with these kinds of changes: threats to leave; people closing down their businesses; the loss of value in a business; lack of expansion. That is what happens when you try to do things in one fell swoop without, it appears, adequately reviewing the economic impacts of these kinds of changes. I do not know if that answers your question.

Senator Eaton: Well, yes it does. Mr. Davis, do you have anything that you would like to add to that?

Mr. Davis: Just to emphasize that we fully agree with Mr. Mintz on the issue that fairness is not the only, and should never be the only issue when developing tax policy. Competitiveness and economic growth have to be integral parts of the evaluation.

We have talked about the mobility of doctors to be able to leave if they find the tax regime unfair. Capital, investment capital, is equally mobile and probably more so. People are making decisions locally, for instance, on whether to invest in a growth business here, in New Brunswick, or take it across the border where they can access more markets, or new markets, or to Europe. These are the kind of questions that the government needs to include in their assessment of changes to the tax regime.

Senator Eaton: Ms. LaFosse, we heard quite a few panels of doctors before us when we were in Ottawa. One made a very strong case when she said the average doctor, and I equate it to some lawyers too, when leaving school usually has debt which you have to pay off. In your case you set up your firm, I gather, with your husband and with others, which is also a risk.

As you said in your presentation, nobody will pay you maternity leave if you decide to have children. Nobody is setting aside money for your pension. Nobody buys you new office equipment. So, will $50,000 really do it? As you say, you are going to hoard lots this year. You are going to try to put a lot away. But they are going to cap it at a million dollars. If you think of that as your pension, keeping your office going, will that be enough?

Ms. LaFosse: I do not think so. It is hard right now to come up with an exact number. That is why we need the facts and analysis to determine the magic number. Does that magic number exist? I think $50,000 is too low, particularly if it is a per household situation. That is not enough.

In speaking to things like maternity leave, if I choose to do that; one, it would be very nice to be able to have my spouse’s income for that period because we have a cost of living now that is certainly above what I would be receiving from the government during a period of maternity leave. Further, I do not necessarily have the opportunity to even take that leave when I have a small business and I have a practice. It is very difficult to step away from that.

Senator Eaton: Would you be better off if you were a member of a union, if lawyers unionized themselves, like the teachers?

Ms. LaFosse: I do not know if I want to promote unionizing lawyers, but I would be better off as a government lawyer certainly, because then I would have considerably more significant benefits.

Senator Eaton: Your benefits would be assured?

Ms. LaFosse: Yes.

Senator Andreychuk: Thank you for the presentations. I think you have covered a lot of ground and it is good to hear from the legal profession. I think we have presumed that the legal profession was going to gain from this confusion because there would be more cases to look at and more time expended. However, you pointed out the valuable pro bono work that lawyers do, so I appreciated learning of that perspective from lawyers.

I want to put to all of you this issue of reasonableness and the meaningful contribution. Certainly, this is one of the most difficult areas for me to understand, how a CRA official will be able to say that certain income spreading is not meaningful and not reasonable. In fact, it goes against social policy that we have developed over decades to understand the differences within family units, to respect that as part of our societal fabric and certainly to spend a lot of resources sustaining families, having them grow in the direction they want. We have only intervened at a minimum rate. We do not say what a good family is. We are saying all families are good, they are different, they are diverse, they need to be nurtured. It is only when you do not meet the minimum standards that we intrude. So, we are now going to have a CRA accountant who will say, “This is not a reasonable family unit,” or “This is not a meaningful contribution.”

Have any of you taken this issue up directly with the minister, members of the government or finance officials that they will put on people who are skilled and trained as accountants, financial people, the job of assessing what is a meaningful family unit and a meaningful apportionment of work?

Mr. Sullivan: I can take a crack at your question to start. I will not pretend to understand matrimonial law. Maybe Nicole has a better sense of that. My understanding is that many of these things in terms of family contribution have been determined over decades, as you pointed out. I think matrimonial law and property law could go down a long way if they would look at some of the rules and laws that are currently in place, or decisions that are currently in place. That is one thing.

I think you are absolutely right there is a lack of clarity, and lack of clarity will create uncertainty. People will either push the boundaries or not push the boundaries far enough.

We have not responded directly to CRA. We have not asked them questions. They do not have the answers yet, for sure. We have asked our members of Parliament. We have asked the Finance Minister. We have written to the Prime Minister, of course. The responses that we have received to date are underwhelming. There is no clarity yet on what that reasonableness test would be and it is a pretty good bet that CRA will receive many varieties of interpretation of what reasonable is. In Year One they will start to assess those, and in Year Two those will be overturned, and in Year Three those will end up in tax court. So, there will be likely lots of growth on the CRA side for employment. But we do see the uncertainty creating less opportunity for people to run their businesses and much more administrative burden.

Mr. Davis: In terms of our organization’s involvement in this issue, from our members across the region more than 1,200 letters were sent to MPs, the Minister of Finance, the Atlantic Caucus for the Liberal Party, all pushing for a much clearer and more appropriate definition of what is firstly reasonable and now what is measurable, both concepts that do not preclude the potential for extensive litigation or need for clarification.

I fully agree with you that the concept is, in the case of small business, the definition of a family unit and their contribution both directly and indirectly to the success of the business. These are concepts that we have communicated in writing at any opportunity to meet with our local members of Parliament.

Ms. LaFosse: I do not practise family law; however, my understanding of family law is that it is generally a 50/50 split when you are in a divorce situation. So, the law has been clear that a family shares equally. I am unclear as to why the government now wants to step in to retry that fact when we have already determined that we all share as family units. It will be difficult for the government to now set a standard for what they believe is a reasonable family unit.

With respect to your comment earlier about potentially more work for lawyers, it will only be tax lawyers who see a benefit from this. I can say that I have actually seen a decrease in what I do since July. It has cut down professionally on my workload.

Senator Andreychuk: You talked about equality. “Equality” does not mean sameness and that we can value one type of work, whether it is outside of the home, inside of the home, sharing the mortgage, whatever. There are all these intangibles. We have said equality is 50/50 because we leave the rest for the family unit.

One of you pointed out that if there is some income sprinkling or spreading that is inappropriate, let’s go for it. I certainly have not heard of where there has been an abuse of income sprinkling. Are you aware of any of it? It seemed that it was happening. CRA was dealing with it, but not in such a way that it came to the attention of the public or journalists in any way. They were isolated cases, if they were there. They said, “Let’s not go after all of the income spreading, let’s go after the abuse.” I would like to know where the abuse is, because I have not heard about it.

Ms. LaFosse: I can speak to that briefly. I had never known abuse to exist in this system. It was not until I was actually preparing for this presentation that I learned that there were some people taking advantage of the system. In speaking with numerous accountants, there were limited situations in which people were writing cheques to their beneficiaries and perhaps that money flowed back to the individual who had originally earned that income. I have never seen that situation happen, although I understand that that is one example where there has been abuse. As you said, this has not been a widespread issue that we are losing a lot of tax dollars over.

Senator Andreychuk: Your example is tax evasion, as opposed to legitimately using income spreading. Am I correct in that?

Ms. LaFosse: Exactly.

Mr. Davis: In terms of answering your question, one of the things it highlights is that we are talking about a small number of people who potentially are benefiting inordinately from the current tax laws. If you go by the minister’s historical background of how we got to where we are, there is indication that some form of study, some form of consultation with experts was undertaken since their election, and they came up with the original proposals that have currently been proven to be unworkable and punitive.

So, really, when you ask the question of whether there are abuses, it speaks to the fact that the government itself has not been particularly helpful in identifying those abuses, and has done so only in general terms. It almost looks like they looked at a table of incomes, then circled an area and said, “These are the guys we are going after.”

Mr. Sullivan: I would agree with the other two folks. I believe the reality is CRA addressed that a number of years ago when they raised some of the age limits on income sharing. I prefer to call it “sharing,” rather than “sprinkling.” I think sprinkling was an unfortunate term that I had never heard of until July. It is my belief that the CRA dealt with that a long time ago and it is not so much an issue currently.

The Chair: Senator Neufeld, to be followed by Senator Oh.

Senator Neufeld: Thank you to all three of you for taking time out of your busy schedules to come in and speak to us about some of the changes proposed by the government.

I would like each of you to answer my questions, if you would please. In your statement, Mr. Sullivan, I will just read what you said,

With over 70 per cent of businesses expected to change hands in the next decade, those proposed tax changes would have severely impacted the ability for succession to occur or the value of the business.

I had not heard that 70 per cent of small business were expected to change hands in the next decade, although generally there is supposed to be a lot. I am just asking for a broad answer, but do you think that is why the government made these changes, to severely impact people so that they collect some of their taxes that they thought were due? I mean, we have a “tax and spend” government in place in Ottawa. I do not want to get political, but it is certainly a fact that they are looking for money. Do you think this was a move on their part to say, “Hey, we will get a big share of that if we change these certain things in the tax structure?”

Mr. Sullivan: I have to be careful about what I say. I think it would be, perhaps, giving the Finance Department too much credit to say that they had thought this through fully.

Senator Neufeld: Too much credit? That’s a good answer.

Mr. Sullivan: My understanding, based on what has been published, was that the expectation that all of these changes combined would deliver about $250 million. Now that the corporate tax rate has been reduced, that will reduce taxes in the billions. I do not really understand what the government’s original objective was, compared to what they tried to do to soften the blow. I cannot answer the question, really.

Senator Neufeld: Okay.

Mr. Davis: My only observation is that this particular government has adopted an enforcement perspective to tax. They have invested a lot more money in collecting tax from individuals and businesses. To the extent that maybe they have seen an opportunity, as you say, to increase revenue for government, I cannot say, but would not discount what you are proposing.

Ms. LaFosse: I think that this proposal unfairly targets what I would consider to be the middle class. We are not the wealthiest Canadians. I think there could have been other mechanisms to pursue that would have generated much more than the proposed $250 million. I would suggest they could have gone after the offshore funds, things like that. That would have generated significantly more tax revenue for the government.

Senator Neufeld: Part of what the government talks about is they want to bring parity, or “equalness” between the 9:00-to-5:00 worker and business. They say there is too big a spread there. Could you give me your thoughts on why they think that is so? I think there should be a spread for a whole bunch of reasons. I want to hear from you folks on why you think there should be a spread? On top of that, perhaps to quiet people a little bit, they went and made the gap larger by saying they are going to drop the small business tax to 10 per cent and then to 9 per cent. Is it as confusing to you folks as it is to me?

Mr. Sullivan: Yes. I think it is very confusing. I think the reality is that when you look at the government’s original proposal and the examples that were provided, and I alluded to it in my presentation, they talked more about neighbours as opposed to employees. I think that is how they presented it. Neighbours are very different.

The majority of our 1,600 members are small businesses. So, 83 per cent of them are small businesses. As Nicole has said, they are very clearly the middle class. They are not terribly wealthy people. Some of them do well, some of them do okay. Many of them are starting businesses, trying to grow their businesses and hire employees and build their businesses.

The risk for entrepreneurs is the lack of reward. When I speak to some of my female members they talk about their inability to take maternity leave, whether it is a month, 12 months, or 18 months, versus the neighbour they may have who works for government -- to kind of bring up the elephant in the room, I suppose -- and can achieve a 12-month or an 18-month maternity leave with a guaranteed job to come back to, maybe not the same job but a guaranteed job to come back to. That is clearly very different than someone who has now the ability to keep $1 million; granted it sounds like a lot of money, but $1 million for an economic downturn, for a risk, for an acquisition, all of these kinds of things.

So, I think it is very different when you talk about neighbours, when you talk about entrepreneurs, when you talk about employees. Everyone has the opportunity to take the risk and become an entrepreneur if they choose to -- we would encourage them to -- but I don’t know that we should be comparing people as quickly as the government has.

I apologize, I must leave. I am very sorry to have to step out.

The Chair: Thank you.

Mr. Davis: In short, I fully agree with Mr. Sullivan. The concept of parity between an employee and a person who has created a business is a false premise. It is not tenable at all.

To add to that the concept of passive investment as it is currently composed seems to be a number picked out of the air -- $1 million, a round number, and if it goes beyond that level the average person says, “Oh, my gosh. They’re hugely rich.” Taken in the context of businesses that are trying to grow, businesses that are looking to new opportunities that may become available under the European Trade Agreement, it is especially important to our neighbourhood in Atlantic Canada. There are opportunities where an individual company going after a contract can spend millions of dollars just preparing their bids, submitting their proposals. So, again what the government has put on the table under the guise of parity or fairness is just not working for us.

Ms. LaFosse: I will echo Patrick’s comment that everyone has the opportunity to take the risk and become an entrepreneur. As I mentioned in my presentation, as a business owner you do not have the steady stream of income when there are downturns in the economy. Right now, I do not have the same stream of corporate work that I had prior to July. I am not incorporating as many companies. Times are a little bit slower. There is really no such thing for a business owner as a 9:00 to 5:00 job. That doesn’t exist.

Again, with respect to Patrick’s comments on maternity leave, an employee can come back to a guaranteed position; I cannot. I cannot take a year of maternity leave and expect my clients to stay with me. They cannot go a year without their lawyer, and a corporate lawyer. There is no else in my firm who does corporate work. Everyone else does litigation. They would have to go elsewhere and I cannot guarantee that they would be there when I come back.

Senator Oh: Thank you, witnesses, for all the information given. Truly, you are the voice of Nova Scotia.

I want to bring the discussion a little more south to NAFTA. The NAFTA negotiations are not looking too good. What if they do not go well? The U.S. is also looking at tax reform, lowering their corporate taxes and so on. We are raising our taxes, and they are going down. There could be a shift in future investments between Canada and U.S. Can you comment on that, please?

Mr. Davis: I fully agree with what you are proposing. The current global approach to tax reform has been largely to reduce taxes on corporations or small businesses in order to encourage their growth and investment. If indeed we, as a country, decide that while other countries are reducing their tax rates we need to, on a broad scale rather than a targeted approach, reduce the profitability of small businesses, then we are doing a great disservice to our potential growth.

Atlantic Canada as a whole is super reliant on exports. We have a proximity to the major markets in the United States. In New Brunswick, I believe, exports going to the United States are worth over 70 per cent of the entire economy, and I apologize if I have it wrong. So, what is being proposed by the current government and what is developing, especially south of the border, as you indicate, are significant concerns to the businesses in Atlantic Canada.

Ms. LaFosse: If I can just speak briefly on this? I would agree with your comments and I think these changes are going to affect our competitive advantage on a global scale, if they come into effect. I cannot speak specifically to my region and how much we are exporting and the direct impact that would have, but certainly as a country as a whole, I think this will have a negative impact.

Senator Oh: What recommendation would you give to Minister Morneau if he were today? Would you tell him to scrap these changes? If he told you that he does not plan to do that, what recommendation would you give him to fix it?

Mr. Davis: As in our presentation our number one priority, both as a Chamber of Commerce for Atlantic Canada and in partnership with the Canadian Chamber of Commerce, the agreement is that these changes ideally should be withdrawn at this point in favour of a more comprehensive review of the tax system in general. Anything less is tinkering, and as the initial proposals have demonstrated they carry the danger of being regressive rather than progressive in terms of our future prosperity.

If indeed they do go forward, of the three issues it is hard to pick which one is more important. The numbers that Mr. Sullivan mentioned in terms of companies that will be sold over the next 10 years indicates there is a significant crisis, both in terms of changes to the tax laws and also just generally business owners being able to organize a very cogent succession plan. It is both an opportunity and a danger, especially in our region with a large number of small businesses that we have.

Ms. LaFosse: I would agree with Glenn with respect to his comment about withdrawing the proposals altogether. However, to make some recommendations, first of all slow it down. Get the details. Do a comprehensive study of the impact that these changes are going to have. If we have to do something with sprinkling, really expand on that definition of reasonableness, exempt spouses in recognition of their contribution to a family business.

Again, with passive investment get the information. Get the statistics. Do not pick an arbitrary number. Please make it so it is not per household, but rather per person. Just simply make small businesses feel valued. That is the way to grow the economy.

Senator Oh: We will convey your message and your concern. Thank you.

The Chair: For the second round, the chair will recognize Senator Marshall, to be followed by Senator Andreychuk.

Senator Marshall: We have talked a good bit about income sharing, the definition of reasonableness and the family unit. But what about passive income? That will have a big impact too.

Ms. LaFosse, I got the impression from what you said that you are thinking that $50,000 is per company. An MP asked the minister was it per company or was it per shareholder, and he didn’t answer the question. Passive income is not really nailed down either, any more than the reasonableness thing on income sharing.

Do you think there is a good understanding of what has to go into the passive income pot? The tax experts are saying to us that there now has to be maintained different pots of income. One of the pots will be passive income. Do you think there is a good understanding as to what type of income has to go into that passive income?

Ms. LaFosse: There are so many questions with this. I spoke with my accountant yesterday. He is a tax specialist. In speaking with him, I just asked the questions, “So, what happens over that $50,000 mark? What happens to that money? What percentage is that going to be taxed at?” And he said, “To be perfectly honest, I do not know.” He said, “In looking at it, it can be taxed at anywhere between 63 per cent to 73 per cent. We just do not know. The details are not out there.” How do you plan going forward when you do not even know the details?

Senator Marshall: Was there any indication as to what will go into the passive income pot? I thought I understood it but then I went to the Department of Finance website, and after going through everything I thought, “I am not so sure anymore.” Has there been any discussion on that? We keep talking about the reasonableness and that is pretty grey. What about passive income? Do we have the same problem there?

Mr. Davis: I think we absolutely do. As Ms. LaFosse mentioned, there is on the table the potential that different pools of capital will have to be treated differently within a corporation -- number one, adding complexity; number two, as you mentioned, creating variable tax rates depending on where the income is. Number one, the Finance Minister says this will apply to a small number of companies. Number two, it is too complex for the average small business to track those kinds of pools of capital, to differentiate them all for the goal of addressing some benefits that a small number of companies are accessing.

I fully agree with you. We do not have enough information on the passive income issue. It is not clearly defined and the current proposal seems entirely arbitrary when you consider that individual businesses have different needs and requirements.

Senator Marshall: Do you think the reduction in the proposed tax rate to 10 per cent and 9 per cent compensates for what is happening with regard to the passive income and the income sharing?

Mr. Davis: I think I am quoting the government’s own stats in stating that the maximum benefit for a company earning up to $500,000, would max out at $7,500.

Senator Marshall: The reason I asked the question is that some of the tax experts who appeared before the committee have told us that they are going to change the dividend tax credit and, in effect, the proposed tax increase will not make any difference. In fact, I think somebody said it would be punitive. That is why I was asking the question.

Mr. Davis: When you look at the changes in the dividend tax rate, which I was not aware of, and the types of tax rates that Ms. LaFosse was quoting, and I have heard them myself, up to 73 per cent, again, a small change in the small business tax rate of $7,500 annually does not seem, on the face of it, that it will compensate adequately.

Senator Andreychuk: I want to cover two points.

The intergenerational transfer issue was taken off the table. Some people say that they believe that means they have abandoned it. Others are saying it is off the table, which means they have put it in abeyance, but it will likely come back. What is your take on where the minister is going with this?

Mr. Davis: Again, the communication coming from the government sometimes is without clarity and subject to interpretation. My understanding of reading it and dialoguing with other people is that the initial proposal is off the table. However, some believe that new regulations regarding the transfer of businesses are under consideration. This is one of those areas where there is so little information. There is only a principle that they will provide us with workable, equitable or fair regulations regarding the intergenerational transfer of businesses.

Like I say, you have to take the government at its word that that is what they will do. Again, it opens up the need for a better and more complete assessment and consultation with business before the proposals that are forthcoming go to law.

Ms. LaFosse: I will echo Mr. Davis’s comments. I do not know as much about the intergenerational transfer, but I think again it is a matter of better communication and studying the far-reaching impacts that this would have.

Senator Andreychuk: With the government putting in this interim measure, or this amendment, shall we say, of the $50,000, they say it will only hit the top, the real earners. Sitting on another committee I found that, particularly with women entrepreneurs, when you are a small business you want to grow your business. The government wants you to grow your business. However, you do not have the resources to do. We are looking at subsidies and other ways to help businesses grow their business.

What we have heard by putting this cap of $50,000, or moving it up to $100,000, discourages moving into medium-sized and, therefore, becoming competitive internationally. We say small businesses and medium-sized businesses are the backbone of Canada. They produce the jobs. This is where innovation comes from and this where our future lies. Yet, if they are going to attack even the small 3 per cent, they say, the mindset of some of the witnesses we have heard is that they will stay small. They will not move forward. In other words, they see it as a disincentive.

I haven’t heard from you about innovation, the new kinds of young entrepreneurs that start small but want to grow big. I am thinking of women in my area who started a jewellery business in their kitchen, moved into a provincial thing, nationally, internationally. They have the savvy to do it, but they also need the means and the support of the government to do it. Is any cap helpful in growing business or is it a disincentive if you grow beyond $50,000 -- in other words, $1 million – because then you will be penalized really.

Ms. LaFosse: The cap certainly is not an incentive for anyone. The way I see it in my rural community is that it will discourage, first of all, even small businesses from starting. Your comments are very accurate in that it is certainly going to decrease the opportunities to grow from the small to a medium-sized business to a large-sized business. We do not have many of those in Cape Breton, and we never will if this goes forward.

Mr. Davis: Thank you. We fully agree with your assessment. Given the nature of the Atlantic economy there is a heavy emphasis on the whole concept of assisting start-up companies, whether it be incubators, mentors, so on and so forth. The limits on passive investment do have a significant demotivation for growth.

Two concepts come to mind. Number one, is devolving your company into two small businesses in order to access an extremely preferential small business rate. The other is simply relocation. Mr. Sullivan has mentioned that tax rates are quite high in Nova Scotia and other provinces of Atlantic Canada.

I can say from talking to some of our board members who are business owners, that they are certainly in the investigation stage of setting up subsidiaries outside of the Atlantic Region just for that reason. Others are considering it.

The Chair: To the witnesses, I noticed that as you made various comments, members of the audience were signalling their support. Your testimony has been very informative. Thank you very much.

(The committee adjourned.)