THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
OTTAWA, Wednesday, May 2, 2018
The Standing Senate Committee on National Finance met this day at 6:45 p.m. to study the subject matter of all of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: Honourable senators, I welcome you to this meeting of the Standing Senate Committee on National Finance.
[Translation]
I wish to welcome all those who are with us in the room and viewers across the country who may be watching on television or online.
I am Senator Percy Mockler, from New Brunswick, chair of the committee.
[English]
Now I would like to ask senators to introduce themselves, starting on my left.
Senator Mitchell: Grant Mitchell, Alberta.
Senator Marwah: Sabi Marwah, Ontario.
[Translation]
Senator Pratte: André Pratte, from Quebec.
[English]
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Eaton: Nicky Eaton, Ontario.
The Chair: I also recognize the clerk of the committee, Gaëtane Lemay, and our two analysts, Sylvain Fleury and Alex Smith, who team up to support the work of this committee.
This evening, honourable senators, we continue our consideration of the subject matter of Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018, and other measures.
Today, we welcome seasoned tax practitioners from renowned firms across Canada. We invited them to give to the committee their views on certain aspects of the said bill.
We would like to discuss the changes proposed to the taxation of private corporations, a topic that honourable senators examined extensively during our special study last fall.
This evening we welcome from MNP Jennifer Kim Drever, Partner, Tax. Thank you for accepting our invitation, Ms. Drever.
Peter Weissman, Partner in Cadesky Tax. Thank you, Mr. Weissman, for accepting our invitation.
From BDO Canada, Rachel Gervais, Partner, GTA Group Tax Services Line Leader. Thank you for accepting our invitation.
Welcome to all of you, and thank you for accepting to share with us your opinions and your professionalism.
I would now ask the witnesses to give their opening remarks, starting with Ms. Drever, to be followed by Mr. Weissman, and to be concluded by Ms. Gervais. Honourable senators will be asking questions following the last presenter.
Ms. Drever, the floor is yours.
Jennifer Kim Drever, Partner, Tax, MNP LLP: Thank you for the opportunity to present to you again today.
MNP strongly believes that we need comprehensive tax reform. Without it, we will have an increasingly complex and costly tax system. We need simplification and modernization of the current system.
MNP represents over 150,000 private businesses in Canada, including 16,000 farms. We are the country’s tax experts on small business. No one in Canada works with more small businesses day in and day out than MNP.
I commend the government for listening to the concerns raised by the community relating to the private company tax proposals. The draft legislation released on December 13, 2017, relating to tax on split income or TOSI, as we call it, and the passive income proposals in Budget 2018 have addressed many of the concerns we previously had. However, we believe that further work still needs to be done.
Given the amount of time we have today, I will focus most of my time on TOSI. It unfairly targets service companies. This accounts for 78 per cent of the Canadian small business.
There’s also the new 20-hour test for working in the business on average 20 hours a week. Most family-run businesses, including family farms, do not have any history of keeping track of hours worked for their business owners. We question how we will be able to satisfy the CRA when we do have audits. We will have no evidence at all other than personal testimony.
This legislation could be retroactive in its nature because of that. We will be penalized for not having kept records that we were not obligated to keep at the time the work was done.
The final test is reasonability. These TOSI rules introduce several new factors where reasonability would be considered. Labour is just one factor. For that one we do see reasonability elsewhere in the Income Tax Act, but this new reasonability test blurs the line between a return on your investment and the labour component. This is new ground.
With respect to that, we are asking for the CRA and Finance to work together to provide a balanced approach on how they would interpret or determine reasonability. This would allow both Canadians and the CRA to apply the framework consistently.
Without a framework for reasonability, and given the significant number of businesses that will be relying on this test with respect to not having TOSI apply, we foresee the courts will be where we end up. It will take years and years before we have a concept of how these different reasonability tests will work.
I would like to introduce you to a sample client situation. Bob and Karen have a company called BK Transport. This is a typical client you would see throughout Canada. Over the last 30 years, they have grown from a small trucking company to one with significant capital, many employees and operations in three different provinces.
Karen is ill. She has reduced her hours in the business and rarely comes into the office at all any more. Like many entrepreneurs, Bob and Karen declared dividends instead of paying themselves salaries in the past. No one used time sheets. No one had to use them. No one did.
Due to the TOSI changes, one of the things we now have to do is determine the relative value of Bob’s role in the business versus Karen’s role in the business. We’ll have to look at that in terms of sharing the profit from the business they built together.
First, we need to look at is whether TOSI will apply. Because they’re both shareholders in the business, TOSI will apply unless I can find a way out. You’re in unless you’re out.
For Bob, we need to start tracking his hours. He will have more administrative burden, but that’s something we can do. Karen will not meet this test because she rarely comes to the office at all any more.
BK Transport is a service company because it is in trucking. They will not meet the carve-out. When we explain this to Bob and Karen, they don’t understand why a retail business, a construction business or some other type of business with the same level of capital and the same number of employees wouldn’t have TOSI apply on their dividends but they do simply because they’re trucking.
Under the draft legislation the final way out is reasonability. This is a very subjective test. Do we think the dividend should be reasonable that we pay to them? Yes, we do. Do we have certainty the CRA will agree? No, we don’t.
They would benefit from more administrative guidance on what would be considered reasonable and the providing of clarity on the intended businesses to be caught. We believe catching businesses like BK Transport is an unintended consequence of the drafting.
As far as passive income is concerned, the draft legislation we saw in the budget is greatly improved from what we had last July. We recognize the government’s commitment to finding an acceptable balance on this issue.
In the written submission, I have three comments on these proposals for your consideration.
In closing, Bill C-74 is a considerable improvement from July. That said, we still need more simplification of the TOSI rules. We need to have something that small businesses across Canada and their owners will be able to understand.
Please consider our three recommendations. Number one is comprehensive tax reform. We do very much need this in Canada. It’s for all taxes as well, not just income taxes.
The new TOSI rules unfairly target service companies. Whether it was intentional or unintentional, we believe the service companies should be specifically excluded from the carve-out in the definition of excluded share. We don’t think it’s fair that service companies will have TOSI when other active businesses will not.
We encourage continued collaboration with all stakeholders and all experts as we move forward to ensure we have tax fairness that works for all Canadians, much like what we ended up with, with the passive income proposals.
I look forward to the committee’s questions about TOSI, passive income and the RDTOH regime.
Peter Weissman, Partner, Cadesky Tax, as an individual: I’ll be a bit unorthodox in my approach tonight. I do have some speaking notes, but I’ll stray from them from time to time.
I was scooting over here, finally without a winter coat on, and it was actually smelling like spring. The lyrics of a song came to mind, and I thought it has been a long winter. Suddenly that led to the song “A Long December” by Counting Crows:
A long December and there's reason to believe
Maybe this year will be better than the last
I thought what perfect words because, quite honestly, December 13, 2017, was a day of opposites. It was the day that this committee made excellent recommendations and asked the government to scrap its private company taxation proposals and undertake a more comprehensive review of Canada’s tax system.
Thank you for being bold enough to say that to the government. I think it did make some sort of difference, although not surprisingly the government silently ignored or silently responded to your recommendations.
In addition, you made comments about extending the implementation date of the TOSI rules to January 1, 2019. Again, thank you for that welcome advice. Tax practitioners and business owners really appreciated it.
I’ll talk about the various rules. I think December 13 was a day of opposites because we had your report, which was the voice of reason, and later that day we had Minister Morneau come out of the house after it recessed for the holidays and give us the TOSI legislation.
On December 13 there was new legislation that I will tell you is not easy. It became effective on January 1 while the house was in recess. They are not tweaks; I’ll get into that a bit. I am a tax guy. My math may be off, but it gave practitioners and businesses, 18 days to figure out these unwieldy rules.
The rules we had before were not examples that we could work with. The new rules went from 27 pages to 11 pages on income splitting. When we already have a kiddie tax and income tax splitting regime, 11 pages are outrageous. I am going to call a spade a spade.
I would like to talk about the three components of the tax proposals that are in Bill C-74. I’ll be very brief, and I am very happy to answer any comments or questions you have. I have my own thoughts about Ms. Drever’s observation about service businesses. I’d be happy to share them with you.
On lowering the small business tax rate, my idea here is to let you know of things that you and the public haven’t been told. When that announcement was made, it was marketed by the government as this great saviour to businesses. By lowering the tax rate from 11.5 per cent to 9 per cent by 2019, that means on $500,000 of income a company will save $7,500 of tax. This was marketed by the government as a great boon for business.
The reality, if you look in the footnotes of the backgrounder released on October 16, I think it was, there’s a little footnote that says there will be an increase in dividend tax rates. We have a 1.5 per cent decrease in small business tax rates from 2019 on, and we essentially have a 1.5 per cent increase in dividend rates from that date on.
Dividend rates in Ontario are currently at about 45.3 per cent. In my 29 years of tax I don’t think they’ve ever been higher. They will go to 47 per cent because of this gift to small businesses.
Let’s say a company earns $100,000. They will save $1,500 of tax with this gift from the government, but all of the earnings they’ve accumulated up to that point and haven’t taken out already will be taxed at an additional 1.5 per cent.
If I have a company that has been operating for 10 years at $100,000 and paying its small business tax, that shareholder will pay $13,500 more tax because of the small business reduction but only save $1,500. This is not a metric that the government has announced to anyone, and it’s critical.
The small business tax rate, I will tell you, is not accepted or wilfully accepted. The government thinks they’ve hit a home run. Taxpayers are the crowd and they want to throw the ball back onto the field.
With respect to income sprinkling, from the outset on July 18 we said income splitting is a fair target, but the complexity and subjectivity in the Income Tax Act are recipes for tax litigation, high professional fees, uncertainty of planning, difficulty dealing with a CRA that has the ability to say you’re guilty until you prove yourself innocent, and clogging an already underfunded tax court system. It’s totally unnecessary.
We already have income sprinkling rules. We call them the kiddie tax. A simple way of generating some additional revenue and curtailing income splitting where a lot of income splitting occurs would be just to extend the kiddie tax to age 25. It is simple, with a few sentences in the act and not 11 pages of complicated, subjective rules.
Look at those 11 pages. Some people have drawn up decision trees. I wanted to show one tonight, but I would call them decision bushes. They’re not decision trees. These rules are extremely complicated and totally unnecessary.
If we want to fix or address the issue, go for the age test. It is easy and subjective. It doesn’t address spouses and people like that, but it’s definitely a better solution than the income sprinkling proposals.
There are so complicated that even the Parliamentary Budget Office can’t understand the rules. I don’t know if many of you read the March 8 report, but the PBO could not figure out who these rules apply to. Neither can we. They do apply to people now that we don’t know about because they have a January 1, 2018, application date.
The PBO ran some numbers and the government told us that these measures would raise maybe $250 million, which made no sense to us because the administrative cost on the government side of these rules will be a lot more than $250 million.
The PBO came out and said, “We think you might raise $660 million.” When you add the provincial effect, that’s over $1 billion of tax costs to small businesses from these unwieldy income splitting rules. That’s not what the government said they were to do. I don’t think they realize what they’ve done. I will not pull any punches here. They will not admit it.
The government has retracted from a lot of what it announced in July. I think it’s largely due to the work of this committee and a lot of tax practitioners. The income splitting rules in this bill should be pulled from the bill. I do not think we can let these come into legislation.
Finally, on passive income, I have something nice to say. Tax practitioners will say, “What was proposed on passive income was absolutely horrendous.” What we have now seems to indicate that the government listened to us, and they’ve come back with something I think we can all accept. We may not all agree that it’s necessary, but I think we can all accept it. I say thank you to anyone who was involved in making that decision.
I want to point out two aspects to the passive income proposals. The proposals grind down access to the low tax rate based on how much investment income a company earns. There’s no indexing to those thresholds. I’ll give you a perfect example.
The grind starts at $50,000 of investment income. That was based on the government’s arbitrary decision that $1 million of capital earning 5 per cent is all a business needed to run. I don’t know how this decision about $1 million was decided, but I think some of the people involved have never run a private business or been involved in a private business. They really shouldn’t be making those kinds of decisions. Anyhow, they did.
Now it has been extended from $50,000 to $150,000. At a 5 per cent return, that’s starting with $1 million of capital. I don’t know if any of you noticed, but interest rates are going up. The TD just raised their lending rate 45 basis points to 5.59 per cent. If we take that 5 per cent and move it to 7 per cent, that $50,000 number is hit at about $700,000 of capital.
These rules are counterintuitive given the environment we’re in. There’s no indexing. There are no adjustments to these thresholds, and there has to be. We’ve suddenly gone from a $1 million benchmark to almost $700,000 overnight. That’s at a time when interest rates go up and businesses need capital more than ever. This is a big problem I see in the proposed passive income rules.
Finally, in transitioning a business it’s often the case that the parents freeze the value because they finally have developed the capital they need to retire on, and they give the growth of the company to the kids. The kids have to run the business and build up their own capital. The parents’ capital, using these passive income proposals, will eliminate the children’s ability to access that small business tax rate that the government has identified as being very important to start-ups.
A family business that has been frozen and handed over to the kids is not really much different from a start-up. The capital that has been accumulated isn’t there for the kids to run the business. It is there to look after the parents in retirement. That’s not factored into these proposals as well.
I thank you for the opportunity to vent, and I look forward to answering questions you might have.
Rachel Gervais, Partner, GTA Group Tax Service Line Leader, BDO Canada LLP: I am a tax partner with BDO. I am the tax service line leader for the Greater Toronto Area, and I sit on our tax leadership team for the firm.
I last had the pleasure of presenting to this committee on October 24, 2017, regarding our firm’s views on the July and October private company tax proposals and announcements made by the Department of Finance. This time around I’ve had the pleasure of going last, and I can tell you there’s definite consistency in the tax practitioner’s perspective on where we’re at today.
As mentioned when we last presented, BDO Canada is a leading professional services firm in the Canadian market. We serve thousands of hard-working Canadian business owners, families and individuals who are true entrepreneurs and drivers of the Canadian economy.
We have unique insight into this important segment of the Canadian economy, the challenges that entrepreneurs face, and the type of tax policies that we as a country need to be able to support Canadian businesses and their owners.
You have requested our views with respect to certain measures in Bill C-74, specifically income sprinkling arrangements, restricting access to the small business rate when there is passive income, and lowering the small business tax rate.
Before sharing our views on each of these specific measures, we would like to begin with some general comments regarding Canada’s tax competitiveness. The budget bill does not address the issue of Canada’s tax competitiveness globally, and notably with the United States, particularly as it relates to entrepreneurs and personal tax rates.
For example, the U.S. has recently reduced its top personal tax rates. They apply those top tax rates to much larger taxable income thresholds compared to Canada. Additionally, the U.S. has recently provided for immediate deduction of certain capital expenditures. When compared to Canada, we have much smaller, slower tax depreciation rates.
Also as mentioned when we last met, it is our recommendation that there be a comprehensive review of the Canadian tax system to ensure Canada has a competitive system that supports business investment and encourages individuals with the skills businesses need to work and live in Canada. Canadian businesses and their owners need clarity, and we need a tax system that is fair, simple and less complex.
The income sprinkling draft legislation contained in Bill C-74 attempts to simplify the original July 2017 expansion of the tax on split income rules or TOSI rules. Many practitioners believed that the original July proposals were far too broad and too complex to be workable. These concerns were put forward loud and clear during the consultation period.
The Department of Finance listened to the concerns, making announcements in October and releasing a revamped second version of draft legislation on income sprinkling in December 2017.
A more streamlined approach with exclusions is used and bright-line rules have been introduced to better help determine when an individual is subject to the rules.
However, the draft legislation still includes broad concepts and compliance requirements that will make the interpretation and application of these rules very difficult for taxpayers, in particular small businesses and their advisers.
The additional complication is that the rules, if they’re passed in their current form, are already in effect, as both have mentioned, leaving us with an unfortunate situation that we may not be able to properly plan our affairs.
The most significant concerns we have with the tax on split income changes are the broad concepts and ambiguous wording used in the draft legislation. We feel there is a lack of clear guidance from both Finance and the CRA for applying these rules. The rules will result in additional compliance requirements and costs to prove that the exclusion under the tax on split income rules applies.
Finally, with the timing of implementation, as we mentioned, the rules are in effect on January 1, 2018, but we only saw the draft legislation on December 13. There are many uncertainties on how to apply the rules. Taxpayers and their advisers will be faced with the risk of not being able to properly plan their remuneration strategies for 2018. We don’t think this is fair for taxpayers. There should be more certainty in our tax system so that taxpayers can properly plan their business affairs.
We strongly support a one-year delay in the implementation of the rules, with the expectation that we can obtain a better understanding from the government on how the rules are to apply.
With respect to the passive income changes and the clawback of the small business deduction, the proposed changes in this year’s federal budget do evidence that the government listened to the concerns about their initial ideas proposed in July and then again in October.
From a policy perspective, we feel there is a logic to the new proposals: If a corporation is being used primarily as a savings vehicle, there will be a tax cost in the loss of the small business deduction.
The $50,000 threshold of passive income allowed means that temporary savings for business investment won’t be punitively taxed at that level. We also note that the measures are a lot simpler to apply than are the original proposals.
However, the rate of small business deduction clawback appears to be very severe with $5 of small business deduction for every $1 in passive income over $50,000. Perhaps a smaller clawback would be more appropriate.
Finally, with respect to the small business tax rate reduction, for the small business community it is a positive development as it can allow the business owner to leave money behind in the corporation for investment back in the business. We note, however, that from an integration perspective these measures will basically maintain the integration costs at approximately 1 per cent.
In closing, while the latest versions of draft legislation and proposals are welcome improvements from the July and October 2017 versions, we believe further modifications can and should be made.
Our firm strongly believes that our tax system needs to be fair, simple and clear. We have been and we continue to be very willing to work with the Canadian government, Canadian businesses, and all relevant stakeholders in making such modifications and participating in a comprehensive tax review.
I thank you for hearing our views, and I look forward to answering your questions.
The Chair: I would like to ask each of the three senators who just came into the room to introduce themselves.
[Translation]
Senator Moncion: Lucie Moncion, from Ontario.
[English]
Senator Andreychuk: Raynell Andreychuk from Saskatchewan. I apologize. Another committee precluded my coming at the start and hearing your testimony fully.
Senator Cools: Anne Cools from Toronto. She kept me late at her meeting.
Senator Marshall: My question is on the passive investment income. In its budget the government indicates how much revenue it expects to receive from these tax changes. For the business limit on the passive investment income, it’s $1.2 billion over five years. This is the clawback, Ms. Drever, that you were referencing. I do understand that one.
Yesterday, when we had the Finance people here, I was asking questions on the refundability of taxes on investment income.
The question I asked was: Will this refundable tax ever be refunded to the taxpayers? They were saying yes, it was just a matter of deferral and it would happen some time in the future. It shows that over the next five years that the government will be bringing in over $ billion on the refundability of taxes on investment income.
Perhaps I could start with you, Ms. Gervais. Perhaps you could speak about that. Is that a timing issue? Will the government bring in these revenues and then refund the taxes way out into the future?
Ms. Gervais: It’s timing.
Senator Marshall: It is time, is it?
Ms. Gervais: That would be my take on it because they are to limit the ability to refund taxes out of the corporation if you have different pools of income, eligible dividends and ineligible dividends.
Right now in the Tax Act there is a bit of a nuance where you can pay out an eligible dividend to the taxpayer, the shareholder, but still get the refundable taxes back inside the corporation. They are to put limits on that ability.
When I read “revenue taken,” I don’t look at it as a permanent revenue taken. I look at it as in the next number of years that will happen with the way they have the legislation drafted. At some point in time refundable taxes can be refunded into the corporation on the payment of the dividends.
Senator Marshall: Some time later on. Mr. Weissman, do you have any comments on that?
Mr. Weissman: Yes, thank you. These proposals are all about deferral. They’re not about new revenue generation.
There are actually two components to the deferral. I haven’t seen the numbers you’re looking at, but the refundable taxes are one and the refundable taxes already exist. The elimination of the small business deduction is probably included in the numbers you’re referring to because that increases corporate tax.
The reality, though, as I explained earlier with the small business deduction, is that you may not pay it at the corporate level. That just means you’re prepaying tax you would have paid on dividends when you took the money out later.
I don’t think we’re really talking about any new revenue generation. We’re just talking about getting some of it earlier.
Senator Marshall: You were also talking about the dividends, the gross up of the dividends, and the dividend tax credit that will be changed to compensate for the reduction in this small business tax rate. Could you explain that again?
Mr. Weissman: Yes. Our tax system is somewhat unique. It’s based on the theory of integration that someone should be indifferent between earning business or passive income personally or through a corporation and that, really, by the time the corporate and the personal taxes are paid, the total tax bill should be the same as if someone earned that individually.
The theory of integration means that if there is a corporate tax reduction, the only way to equalize the corporate and personal taxes is to increase personal tax rates. That’s what’s happening.
Senator Marshall: Is that revenue neutral to the government or do they bring in additional revenues?
Mr. Weissman: I think they’re bringing in additional revenues. In the example I gave, they’ll lose $1,500 of corporate tax and gain $13,500. They’re giving a break on future business income, and they’re applying the higher dividend tax rate through all the accumulated earnings that have been accumulated at the old rate. To me, this is revenue positive. It is not revenue negative.
Senator Marshall: For my next question I will start with Ms. Drever. Perhaps one of you or maybe all of you mentioned that this would impact service organizations.
When we had the hearings before Christmas, the physicians made a lot of representations. Do they fall into the service organization group you’re talking about?
Ms. Drever: They do not fall into what I am talking about. The physicians have professional corporations, and professional corporations have also been specifically excluded from that definition.
All professional corporations will have taxable split income applied unless they’ve met the 20-hour test or unless the dividend is reasonable in the circumstances.
We have left the professional corporation alone, but they’ve also talked about a service company. We’re very perplexed about why the service company has been specifically excluded from the definition that gets you out.
A lot of Canadian businesses are service companies. The service businesses are hotels and trucking companies, and we question why they are being excluded.
We actually think they’re using service as a proxy for capital. We question whether that is what they are doing. They’re trying to say capital intensive businesses shouldn’t have TOSI, but non-capital intensive businesses should. If that’s what they’re intending, that’s not what they’ve drafted.
Senator Marshall: That seems to be a shift because the impression that was left when we had the hearings before Christmas was that maybe the physicians were of interest to the government and maybe that was the group they were targeting.
From what you’re saying now, that’s not the case.
Ms. Drever: They’re targeting any professional corporation. The physicians, dentists, accountants and lawyers are all being targeted but so are the service companies.
Senator Marshall: All of you will be interested in this question.
What are you advising your clients on the tax on split income? You talked about the 20-hour rule, and you talked about just being given 18 days’ notice before it came into effect.
What sort of advice are you giving your clients? You are not just giving them advice for the future. You are trying to advise them on what they should have done in the past and how they can fix it, if that’s possible.
Could you talk a bit about that?
Ms. Drever: Because the rules came out in December, we had a few days to help some of the people we thought would be most greatly damaged by them in terms of maybe accelerating dividends or things like that to the spouses or the family members who we thought we wouldn’t be able to pay a dividend in the future.
We did a bit of planning with some clients that brought forward taxes into 2017. We’re really trying to look with clients and plan in terms of whether we think they will be able to get out of TOSI on a go-forward basis.
We are looking at each individual client’s fact pattern. If we don’t find a way out, then it comes down to how we will start documenting reasonability. It’s very difficult for us to look at what is reasonable when we don’t know what’s reasonable.
Senator Marshall: You don’t know how the Canada Revenue Agency will apply the rules.
Ms. Drever: We don’t know how they will apply the rules. On December 13, the same day your report was released and the draft legislation was released, they also released some questions and answers. They didn’t really address the issue of what is reasonable.
The reasonability will be the most difficult part of these TOSI rules. We see reasonability elsewhere in the act. We’re not saying reasonability shouldn’t be there. We believe it should be there.
It’s there because you can’t possibly legislate every single one out of these rules. It is there to give taxpayers and Canadians a bit of comfort, but the CRA could have a very different view than we do as advisers.
We’re advising clients that there’s risk, a lot of risk. We may be taking out dividends, but we don’t know the tax rate. We might be thinking we have a certain tax rate that later gets reassessed and we’re paying 45 per cent tax on it.
Mr. Weissman: It’s an excellent question. The first thing we did was tell our clients that we could get hold of and who were not on holiday to make sure they maximize their dividends in 2017 and take advantage of as much as they can.
You will see an increase in revenues in 2017, purely because you’re going to get less revenues in the future. People maximized in 2017.
We then looked at the rules. Something that happens when tax rates go up. Eliminating income splitting is a tax increase. We have 53.5 per cent regular tax rates in Ontario, and income splitting has now been removed. When rates go up, I think revenues go down because people get more aggressive and some people go underground. That’s the reality.
At some point people ask why they work so hard and give the government 53.5 per cent of what they earn. Plus, they’ll have to give them more. A lot of clients are asking about aggressive strategies. Quite frankly, our job is to stop them from being too aggressive and to ensure they operate within the law.
We’re the front lines for CRA, to be quite honest, because we see more taxpayers than CRA does. I don’t think anybody sitting at this end of the table, or people in our profession, will want to lose their licence or reputation by being involved in something overly aggressive. We have to coach clients who are trying to become too aggressive.
The third approach is that there are other strategies for extracting income from a company and looking at whether there are other legal alternatives that will get them a better rate.
Ms. Gervais: I completely echo the comments. It was about educating our clients as quickly as we could by holding a webinar within a day or two of when the December legislation came out, by trying to help our clients that met one of the bright-line tests, one of the exclusions or off-ramps they referred to. We were trying to help the clients to understand that they will probably be okay with one of the off-ramps.
For all the ones where there is such uncertainty about a reasonable return and the business test, we’ve basically said, “Let’s sit tight and see what kind of guidance we can get from Finance and the CRA in 2018 to try to get this back on track.”
It has basically put us into the second half of the year trying to solve the problem.
Senator Marshall: There was a lot of activity in the latter part of December.
Ms. Gervais: A lot of activity, absolutely.
Senator Pratte: I have two lines of questioning to follow up. When we had officials from the Department of Finance before us, the whole idea of keeping reasonableness tests was presented to us as giving a possibility of flexibility for businesses that could not meet the bright-line tests.
Does that make sense? Have you had any indications that the government, CRA or Finance would give you more guidelines in the next few months, so that you have more information to advise your clients?
Ms. Drever: I would agree that they provide flexibility. That’s why we, as a firm, are saying that we want the reasonability tests to stay. We just want more guidance.
We have not received anything from the CRA that I can recall where they are to provide any more guidance. We would really like them to work with Finance.
Finance drafted the legislation. We would like to see what their thoughts are on what is reasonable and work with the CRA because the CRA will be administering it.
We haven’t seen anything yet, and we would love to see something on that. We want to keep the reasonability test. It’s there to help when we don’t meet one of the off-ramps or one of the bright-line tests.
Senator Pratte: You all advocate an exercise of major tax reform, not only income tax reform. From its experience with income tax reform in the last few months, the government has found it so difficult that they will not try anything ever again as far as tax reform is concerned.
Anyway, if you had one thing that you would like to change as far as tax reform is concerned, what would it be?
Ms. Gervais: I will take this one first as I am very passionate about this one.
I completely agree with the reaction that things haven’t gone very smoothly, but I think it’s the approach. They’re releasing draft legislation and then asking for consultation and comment from the taxpayers and the stakeholders who are impacted.
If you want to approach tax reform and new legislation in a better fashion, you bring all stakeholders to the table at the time the legislation is first being drafted. You include government officials, taxpayers and tax practitioners, as well as policy, government and education, and you put them altogether in a room to come up with the right solutions, rather than launch very complicated legislation, wait for the reaction by tax practitioners and taxpayers, and then have to make changes down the road.
Mr. Weissman: I can give you my comments quite easily and quite quickly. They echo Ms. Gervais’.
In October, I wrote an article for The Globe and Mail. My main message to the government was to collaborate with us. We’re not the enemy. We actually know what goes on in the trenches. We can actually help the government achieve its objectives. My main message was: “Slow down and get this right.” That’s an exact quote.
I have heard from the minister and other people that they are trying to get this right. Maybe they adopted part of my message, but they didn’t adopt the slow down part, and that’s what I would suggest.
Ms. Drever: I would echo the comments that have already been made. We need certainty, predictability and fairness in the tax system. That will lead to confidence, to a growing Canada and to a growing economy. It’s imperative for a strong Canada, especially when we see what has happened globally.
I would echo that it came top-down instead of collaboratively. If we do something very collaboratively and look at all tax and all systems, we would discover what would give us the best results and then build from that. We need to know what it is we’re trying to accomplish before we can get a very good tax system that works in Canada.
Senator Eaton: I think at night about the pipeline fiasco right now which is on the horizon, Trump’s controversial tax cuts, and our passive income which has been changed. It worries me a bit in that people can’t save for a decent old age, can’t expand their businesses, and all kinds of things.
We seem to be losing our sense of competitiveness. Certainly the minister has talked about thinking very carefully about what being tax competitive could be with the United States.
I am more concerned with small business, which has always been a big employer and a good backbone of the Canadian economy. Lowering the threshold for how much a small business can make or put aside for either pensions, expansion or renewal is sad.
Could all of you comment on that? I think it’s very dangerous. We don’t talk about competitiveness in this country right now or encouraging people to be more productive and take more risks. These tax proposals don’t seem to be doing that.
Ms. Gervais: I completely agree. On the passive income tax proposals in particular, in July and October when they were talking about what they didn’t like it didn’t seem to be that they would be going after small businesses in particular.
When the legislation came through in the budget, it ended up being a sort of different path that the government took on how they were to attack passive income. They ended up hitting small businesses in particular.
They don’t hit businesses that are paying the general corporate tax rate. They’re unimpacted by these passive income proposals. They’re basically in the same position as they were before the budget came out.
I completely agree it’s small businesses in particular that are definitely impacted by those changes. I would say on the TOSI side of things, that large multinational and large Canadian-controlled private Corporations have the ability to hire significant advisers to help them through understanding very complex legislation.
I don’t find it reasonable to say that the very small business owners and the general advisers they may have will be able to look through the TOSI proposals. The flow charts that Mr. Weissman mentioned are giant, full pages of yes or no answers that you have to work through. There are nine basic questions and definitions. They’re all interconnected. You have to walk through them to even figure out if these rules apply to you or not.
From a small business community perspective, there’s definitely a significant impact on them.
Mr. Weissman: We are dealing with two different tax systems now. None of the proposals that we are talking about apply to public companies, large foreign corporations or foreign corporations, for that matter.
For those companies, Canada is a great place to do business. We have a 26.5 per cent corporate rate. It’s not as low as the U.S., but we have a great labour market.
We are incentivizing the kinds of businesses we need in Canada, but they’re not the backbone of our economy. We’re incentivizing and in fact giving a competitive advantage to multinationals and public corporations. We are attacking small businesses with these complicated rules that they cannot understand.
We are making small businesses less competitive. Some of them are closing up because it’s not worth working any more. I know of many companies that are not deploying capital in Canada any more. It’s easy to deploy capital in the U.S. It’s not hard to do. The multinational companies in Canada will pick up private companies for a bargain.
What we have going on is just terrible for our economy. I am not an economist. This is off the top of my head. It will take us decades to recover from the fallout from these changes when they come in, even as they’re proposed now.
Ms. Drever: I would agree with the comments that have been made. The competitiveness issue is another reason why we need the comprehensive tax reform to look at how to make Canada a competitive environment for our private businesses and other businesses coming into our country.
Senator Eaton: The government often talks about putting money into innovation and encouraging start-ups, but I wouldn’t think these would do that.
Ms. Drever: Right now, as lots of the small business corporations start to create capital to be able to do something like that, it’s taking away their small business deduction. It was in a very interesting way that Finance dealt with the issue of passive income.
We question whether $50,000 is enough as the lower level. If it’s $1 million, much like Mr. Weissman was saying earlier, a lot of businesses need more capital available than that to survive economic storms, to expand and to do all kinds of things that are good for the Canadian economy for them to do.
Senator Eaton: The owner of a small radiology company in Gatineau in testifying before us said that if he had to replace his machines it would cost more than $50,000. He would have to put aside more than $50,000.
Ms. Drever: Yes, and we would see that. In the last economic downturn we saw that the businesses with strong balance sheets survived. Businesses that did not have strong balance sheets or were heavily capitalized with debt versus having liquid assets struggled very much. Some of them went under, and some people were laid off.
These new proposals don’t really help that situation.
Mr. Weissman: How does that radiology company survive? It becomes acquired by a company that’s not subject to these rules. It becomes acquired by a consolidator. That person sort of cashes out and the company is run by a consolidator.
Regarding innovation spending, as a result of these proposals I became part of a very small informal think tank of very successful tax people, someone who is on “Dragons’ Den” and number of people from all different areas. The last thing the tech people want is handouts from the government.
We’re seeing money being thrown at companies. They’re handing money to companies that don’t necessarily even have a plan to spend it.
I have been intimately involved with the R&D tax credit expenses for a long time. They are potentially very good, but they’re administered in the Income Tax Act. The Income Tax Act is a revenue collector, not a money giver.
There have been talks about maybe moving the R&D incentives to another area like Innovation Canada or somewhere else. That would be more helpful because it incentivizes companies that are actually spending the money. Writing big cheques to certain companies that are able to lobby to get those funds and don’t even have the money to spend will not develop our tax incentive.
Senator Marwah: I have two questions for Mr. Weissman, but all of you can jump in. It’s hard to disagree with the policy intent of the income sprinkling rules. I think you said you were supportive of that. Though I agree with you completely, the way they have the new rules written is unnecessarily complex.
Between the exclusion, the bright-line tests, the greater than 65 years, the greater than 18 years and the greater than 25 years, it is complex. It increases uncertainty. It increases disputes with the CRA, compliance costs and so on.
I also agree with you that if they made the one-line change to change the kiddie age from 18 to 25, you would not pick up all the revenue but a vast majority of it. If they did that one change as opposed to the whole range, how much of the tax would be picked up? Would it be 70 per cent, 80 per cent, 90 per cent or 10 per cent?
Mr. Weissman: Obviously I haven’t crunched the numbers, but I would guess 60 per cent to 70 per cent, in that range.
Senator Marwah: With the increasing complexity, about 30 per cent to 40 per cent, basically.
Mr. Weissman: Yes, and it’s increasing costs to companies to fight this stuff. It’s increasing the burden on the administration.
Ms. Gervais: A lot of practitioners have said the same thing even when the July proposals were first released. By simply changing the kiddie tax to expand it to anyone 25 and under is a simpler solution.
Senator Marwah: We all agree with that. How much of the tax would be picked up and how much would still be left on the table?
Ms. Gervais: I don’t have any numbers in front of me and I haven’t crunched those, but I agree with Mr. Weissman. I think it would be close to the 50 per cent, 60 per cent or 70 per cent of what they suggested is being collected.
Senator Marwah: I have another question for you. You mentioned that the small business reduction is a positive, but you seem to dismiss that reduction because you say the dividend tax rate is going up, which offsets that. The dividend tax rate going up is applicable to all Canadians, so why is that unfair?
Mr. Weissman: In fact, that explains why perhaps it’s even more unfair because it’s going up for all Canadians on dividends from Canadian corporations.
Senator Marwah: Everybody is affected. They’re affected but they’re at least getting something in return. They’re getting a reduction in the small business rate, so I think they should be better off.
Mr. Weissman: They’re not because the amount of reduction in the small business rate and the benefit they’re getting from that is very small compared to the immediate tax increase that’s imposed.
Let’s say we have a 1.5 per cent decrease in the corporate rate, which translates because of integration to about 1.5 per cent increase in the dividend rate. The 1.5 percentage decrease in the corporate rate is only from the income I earned from January 19 on. The 1.5 per cent increase on the dividends that I take out applies to all my accumulated earnings, even what I’ve earned over the last 20 years. When I take money out of my company I have tax on a really big amount, and I am only saving tax on a relatively small amount on a go-forward basis.
Senator Marwah: You can’t compare the 1.5 and the 1.5. The 1.5 per cent is really a 10 per cent to 15 per cent decrease, whereas 1.5 per cent increase in your dividend rate is on 30 per cent. It’s 2 per cent, so it’s totally incomparable. They’re far better off getting the small business rate. You’re comparing 1.5 to 1.5 on a totally different basis.
Mr. Weissman: No, I understand what you’re saying, and in particular I did not do that. Let me reiterate the numbers I gave you. I gave you an example of a company that earned $100,000 a year over the last 10 years and paid the 15.5 per cent small business rate. They had 84.5 per cent to pay out as a dividend, and they now earn $100,000 under the new low rate. They save $1,500 on their new income, but on that $854,000 that they take out, they will pay 1.5 per cent, which is $13,500, to get the money out.
Senator Marwah: When they take it out that increase in the dividend rate is applicable to every Canadian that receives a dividend tax.
Ms. Drever: It doesn’t impact all people receiving dividends. It only impacts people receiving dividends that the company has a small business deduction rate on. If you own portfolio dividends, let’s say, or you have shares in companies that are paying dividends that are not getting the small business deduction rate, your dividend is not going up. It’s staying the same.
It’s only from the company that got the small business deduction. Those are the ones that the dividend is changing.
Senator Marwah: Because that’s a much bigger base.
Mr. Weissman: The shareholder of Loblaws, for example, is not going to pay a higher dividend rate.
Ms. Drever: Anyone receiving a public company dividend.
Ms. Gervais: It doesn’t treat all taxpayers the same.
Senator Marwah: I have a question for you, Ms. Drever. You mentioned that service businesses should be excluded.
Could you elaborate why? Is it only because the definition of the reasonability is unclear? If you got a better definition and clarification of how you would do the reasonableness test, would that do it? Why would they be exempted or excluded?
Ms. Drever: Right now, they’re specifically saying that if you have more than 90 per cent revenue from service or if you’re a professional corporation you will not meet the condition of an excluded share, which is one of the outs.
We questioned why the service company. What is wrong with a service company, the trucking business or the hotel? These are very capital intensive businesses. It’s not PC-like. The owners have real risk in the business. It’s different. It’s not like an amount of capital that’s low or there’s a very low barrier to entry. There are service businesses like that with maybe low barriers to entry, but there is also are very capital intensive businesses.
I come from Alberta. There’s a strong amount of oil and gas businesses out there. Most of them provide services. Most of them are doing a service for the oil company. All of those businesses will not meet the condition of an excluded share. A trucking company will not meet the condition. If instead of a trucking company, they manufactured or sold widgets, they would be fine.
Senator Marwah: Not being allowed the exclusion because they’re not deemed to be capital intensive, is that the policy? I am trying to understand the policy intent of not excluding them. What’s the policy intent of the government in your judgment?
Ms. Drever: I don’t really know what their policy intent is because they didn’t share that, but we believe they’re trying to use service as a way of saying not a lot of capital is involved in building that business.
Mr. Weissman: All we can do is think because these thoughts have not been shared with us. Initially these proposals were really aimed at professional corporations, people like myself who can incorporate. One day I am a self-employed paying 53 per cent tax and I incorporate myself and start paying 26.5 per cent. I understand that. I think that’s initially where this started.
That then expanded to: We will attack professional corporations because we are caught automatically under these rules, but we will extend it to other service companies because it’s not just professionals; it’s computer consultants. At some point it became a broader base that they started wanting to apply this to, but by doing that they created a lot of uncertainty.
A mechanic, is that a service business? Probably. Is it capital intensive? Very. A hotel has rooms and banquet facilities. What part of that is service and what part of that is not service? To take an extreme example, if I have a hairdresser client, I now carve out the shampoos and everything they sell and put them in a separate business because that’s not service. Hairdressing is.
They’ve created an unnecessary and difficult game to play.
Ms. Gervais: If the government wants to target professional corporations and other specific services businesses, they could do so by defining a specific group of service businesses they want to catch rather than saying service business because it’s a catch-all and everything is in that net. It would be easier for the government to specifically target the particular service businesses that they’re after.
Mr. Weissman: Even professionals like myself, we actually do have capital invested in our companies. For me to incorporate just for me to get the benefit, I understand that. If I have a professional corporation that has 100 employees, which is quite possible and is how many companies operate, and if I have payroll to meet, rent to pay, computers to buy, and conferences to send people to, I have a real professional corporation. It’s not there just to get the 26.5 per cent rate. That professional corporation is caught by these rules, and I don’t think that’s appropriate.
Senator Mitchell: Thanks very much for your very interesting analysis. I have a number of questions. I think what I am gathering from all of you, as sort of a baseline, is that you don’t think anybody who isn’t actually doing work for a company should be paid a salary. You don’t think that anybody who hasn’t invested money or sweat equity in the company to build the company should be paid dividends. Is that right? You wouldn’t argue with that.
If my son is in Harvard and I am paying him $35,000 a year to do the accounting, which he clearly isn’t doing, he shouldn’t be getting paid. Are we disagreeing about that?
Ms. Drever: Just so I understand your question, if the individuals are doing nothing in the business they shouldn’t receive any remuneration from the business.
Senator Mitchell: No. If they’re doing nothing in the business, they shouldn’t receive a salary. If they invest in the business but are doing nothing, or if they did sweat equity for 10 years and built the business and are doing nothing, they should be paid, absolutely. I am saying if they didn’t do those two things and they’re not working, they shouldn’t be paid a salary and they shouldn’t be paid dividends. It shouldn’t be sprinkled if they haven’t earned it.
Ms. Drever: It depends. I would agree with you in part, but I think there are people involved in a business that maybe don’t work in the trenches day to day, but the risk or the capital has been contributed. Maybe they’re not in that business every day, but they should get a return on their investment.
Senator Mitchell: Sure, but if they contributed capital there’s a problem. They will get a return on investment. We’re not arguing that. These features don’t argue that, if they made a real investment. The problem is if they didn’t make a real investment.
If they’re 18 years old, at Harvard, never had the money to invest and are not working, why should they be paid?
Ms. Drever: This is a bit of semantics, but one of the tests in there is a definition of what the capital can be if you are under 24. You can’t even go to the bank and get a loan to invest in a company and receive a dividend.
Senator Mitchell: Between 18 and 24.
Mr. Weissman: I’ll give you a very honest answer. I agree with you. I’ve said that from the beginning. If my child is in university and is not involved in my business, no. Should I be able to pay them tax saved money? I agree. I am hurting myself, but I agree.
Senator Mitchell: If you leave money in your CPC for real investment back into your business to expand your business, it is very good for the economy, for your business and for creating jobs. That would therefore be a pretty significant, acceptable and understandable public policy objective for the Government of Canada, and you will get a reasonable taxation rate. In fact, it will be 9 per cent if you leave it in and reinvest it.
I am interested in your argument about complexity. I get that. Setting that aside for one brief moment, these rules say that when you take it out you should be taxed like every other Canadian either as a dividend or as a salary. It has the public policy end of saying leave it in there, invest and expand. It’s good for your company. It is also good for jobs and for the Canadian economy. What’s wrong with that? Then it says we will tax you like everybody else if you take it out. What’s wrong with that?
Mr. Weissman: It says something in between as well. It says if you accumulate too much, and we will arbitrarily tell you what that is, you’ll pay tax differently. Capital that’s not invested right away earns passive income.
Expanding the business is one thing in terms of creating jobs and helping the economy. Saving the business is also quite important, as is saving money for downturns. I agree that paying tax at the corporate level and paying tax when you take it out is what our system is based on and no one is complaining about that.
Ms. Gervais: I wanted to echo Mr. Weissman’s comments as well. The issue we see with our actual clients is, yes, they’re saving money for capital improvement, but it might be a five or six year sort of trend where they have to save away because they’re working hard. They are not making a whole lot yet, and they have to put everything they have left into that corporation. They are not drawing a salary. They are not paying themselves. They are leaving it in the business. It’s growing over a number of years. It’s what will happen over the whole time period that’s at issue.
Senator Mitchell: My question is for Ms. Drever on the Karen and Bob example. I am being a little aggressive here, but it is really good stuff to hear. I am enjoying this quite a bit, and I admire what you said.
On Karen and Bob, did Karen work for a number of years and build the equity in that trucking firm? If so, she would have no problem. She can receive a dividend even if she never sets another foot in that business.
Ms. Drever: Our issue is more the fact that now I have to support the 20 hours a week on average.
Senator Mitchell: That’s not how I read it.
Ms. Drever: I have no evidence to support that.
Mr. Weissman: You have two tests. There is the 20 hours a week bright-line and, if you don’t meet that, then you go to reasonability. That’s where the problem is.
Senator Mitchell: If she has been paying taxes for the last 20 years as a partner in that firm, it would seem to me to be pretty easy to establish reasonability. She should be getting paid now because she has clearly been active in building that firm.
Ms. Drever: In my example, she was receiving dividends all those years, so she wasn’t a T4 employee. You’ll see that quite commonly where business owners don’t take salaries often because of cash-flow issues. They don’t want to have this burden of every month a certain amount of money has to come out because they may need to leave it in this month or they don’t pay themselves this month.
A lot of business owners pay themselves by way of a dividend versus a salary. For them now, just because she worked in the business in the past and received dividends doesn’t necessarily mean she had laboured.
Senator Mitchell: She did pay less tax on the dividends than she would have on salary, too. That is one of the other reasons they do it. There’s nothing wrong with that.
Ms. Drever: You are correct that she personally does, but when you look at her and the business they pay exactly the same amount. When you are a family business and you’re looking at your remuneration strategy, you look at the tax you pay at the corporate level and at the tax you pay at the personal level.
The Canadian system is set up where integration works. You will pay the same amount. If I take out a salary, I will have a reduction in my corporate taxes because I get a deduction for the salary. I have less income, and I will pay more personally. If I take a dividend, I will have higher corporation taxes and a bit lower personal ones, but they come to the same number.
Ms. Gervais: I echo the comments that have been made.
The Chair: If, after you go back home and you look at the transcript of our committee and would like to add additional information, please do not hesitate to do so through the clerk.
On the second round, do you have a question, Senator Marshall?
Senator Marshall: No, all my questions have been answered.
The Chair: Are there any other questions, senators?
Senator Andreychuk: One of my questions has been answered.
Forgive me if this was covered before I arrived. After the second round, the government said that they listened. I am not talking about July; I am talking about October. One of the reporters said to me, “You have a year before you have to file your income tax, so what’s your problem? Why are you bringing this up all the time when in fact you have a whole year that you can contemplate before you have to file?” My rebuttal to the reporter was, “But I don’t know what I have to gather. It’s more work,” et cetera.
When you’re saying that you have to document the 20-hour reasonableness, is one of the problems that you really don’t know what you have to get and then you’re put in a position, maybe a year from now, there will be case precedents, et cetera, and you will make it up?
Ms. Drever: One of the issues is that we don’t want to be making anything up. We want to make sure that our clients have the evidence they need to support what the rules are, absolutely.
One of our issues with the bright-line test of 20 hours is that it’s for any prior five years. Those prior five years might have been 1979, 1984 or 1991. Whatever years I go and pick. I have no evidence at all for that. Very few private businesses would have time sheets for their business owners. That means the 20-hour test for the five-year history can help us five years from now when I had been able to collect evidence, but it doesn’t help me now. Essentially, in effect, it is retroactive because we are being asked to have evidence for things that we never had to have at the time we would have been collecting evidence.
Mr. Weissman: The comment by the reporter is an understandable inaccuracy. The fact that the tax is to be paid next April 2019 when you file your 2018 tax return is not the issue. The fact that we’re now subject to the rules without even knowing what the rules are is the issue.
It’s not the matter of the timing of when the taxes are to be paid. It’s the timing of when the rules are actually to take effect. There is nothing you can do now. We don’t understand the rules. We just don’t understand them.
Ms. Gervais: I could add that taxpayers and the owners of these businesses want some certainty in remunerating themselves or their family members during 2018, not don’t worry about that, Mr. X; we’ll figure out what tax you will pay in April 2019.
Senator Andreychuk: On another area, I sit on a committee that I hope will produce a report on gender-based analysis and how it should be applied. We also did another report in the Senate about trying to encourage women into business, and small business is how they often start.
Before these rules, they were already saying how complex it was trying to manage a family and grow a business. With all of the red tape, bureaucracy and the justifications it was too overwhelming. Women were somewhat more adversely affected by every change the government makes.
Have you heard anything from women entrepreneurs about this being another hurdle they don’t need? Do you know whether a gender lens was put on it?
Ms. Drever: I do know that the paper released with the legislation mentioned that 68 per cent of the people in receipt of the split income dividends were women. not all the dividends but the split income dividends. To me, this causes some concern, and it causes concern for a lot of women that they would be the ones having to defend the reasonability a lot more.
Ms. Gervais: We’ve heard the same comments from our clients on the reasonability test and the defence that female business owners and/or spouses of business owners will have to apply.
Senator Mitchell: You make a very strong case for clarification and the problems of uncertainty that come with this. It seems to me that any time you change the tax system you want to make a comprehensive change. On one hand, you are saying there is too much uncertainty. On the other hand, it seems to me any time you change the tax system there will be uncertainty and questions will need to be asked for clarification. There are ways the government can do that, and they have probably done that in the past.
The fact of the matter is that it’s not unreasonable to encounter some uncertainty, some of these kinds of questions and the requirement for guidance when you’re changing the tax system as this does. It would be inevitable with any change, wouldn’t it?
Mr. Weissman: I’ve seen a lot of tax changes in almost 30 years. I don’t want to go to 30 yet. I don’t complain about most of them. This series of changes is the first time I’ve been as passionate and vocal about changes. The reason is the uncertainty that’s being imposed and the targeting of private companies.
First of all, there is no need for the uncertainty. I can tell you that unnecessary uncertainty should not be built into the Income Tax Act. Nothing good can come from it; just litigation. I can make a lot of fees defending my clients and taking them to the CRA. That’s not what I want to do and that’s not what should happen.
Yes, there is uncertainty with tax changes. Not all tax changes people like. We have had a capital gains exemption that used to apply to all property taken away and only applied to small businesses. We had kiddie tax. It only came around in year 2000. I was around before that. I started wanting to use kiddie tax, and then suddenly, boom, I lost it.
That happens. That’s life in tax, and that’s fine. The reason the uncertainty is unnecessary is that there has been no collaboration.
Senator Moncion: Why like this and why now?
Mr. Weissman: I am not going to pull any punches. This is a reaction to irresponsible and ill-conceived policies that were developed, quite honestly, by people who have never been in business and by academics without consultation with people who are in business and represent the people in business.
The approach that has been taken has villainized small businesses and tax advisers when in fact we’re really part of the team. If I help a client save tax, that means I have to pay more. We’re all in the same boat. We want Canada to be successful. We want our clients to be successful. We want to be successful.
Why now? It’s because of the approach that the government has taken.
Senator Moncion: This is not a new measure. This measure was on the drawing board for a number of years and this government brought it in. It has been there. It is not new.
Mr. Weissman: Which measure?
Senator Moncion: Income splitting.
Mr. Weissman: Income splitting has been in the act, targeted income splitting. With the government we have now, slowly over the past couple of years they’ve taken away small business deductions for professional corporations. They’ve been tightening it up. They’ve taken away the work in process reserve which I spoke to this committee about on Bill C-63.
Things have been taken away, and you didn’t hear us complaining. It’s the extent, the magnitude and the irresponsible manner in which these provisions have been drafted that has us angry and has us saying, “Let’s get it right.”
You as a committee have done an excellent job of reigning in the government, to be quite honest. It’s a majority government. You’ve made headway and we’ve made headway. It’s because people are passionate and this is just not totally right. It is not totally wrong. It’s just not being done right.
Ms. Gervais: I don’t think any of us here think it’s totally wrong. We all have issues with the very broad pool it impacts and the complexity of the drafted legislation.
There is uncertainty and it’s gigantic legislation where there is too much complexity for small businesses. That’s probably why you have so many practitioners standing up for small businesses to say small businesses can’t deal with these rules. They don’t possibly have the capacity to be able to understand all of this.
Mr. Weissman: I decided to come here in person as opposed to by video conference because this is so important. I would do the same if the government had a bit of humility and said, “Do you know what? We have good objectives, but I think we’ve gone about them in the wrong way. Come and help us figure it out.” I’d be on a flight the next day. We’re not getting that.
We’re getting: “You guys are crazy. You guys are just complaining. You just represent the rich.”
Senator Moncion: No, I think we’ve heard that.
Mr. Weissman: We haven’t heard those exact words. You’re right.
Ms. Drever: I would like to add that what we have today is a significant improvement from what we had last July. That’s why we didn’t hear anyone on budget day being disappointed with what was in there with respect to passive income. Most people were pleasantly surprised with what we got compared to what was floated prior to that.
We’re not saying that this is all wrong. We’re just saying there are little tweaks we still think should be made to it.
Ms. Gervais: There is room for improvements in these rules. That’s what we’re looking for.
The Chair: The uncertainty has prompted me to ask questions of the professionals. Yes, there is uncertainty. We’ve been told this. With what we’re witnessing tonight in the way you’re saying it, I think there is cause to be concerned. However, we have a report to make to the Senate of Canada, and we will.
With your experience on the ground and working jointly with CRA, do you believe the measures we’re faced with now could increase the use of tax avoidance by businesses or even move on to look at including tax havens?
Ms. Gervais: I can speak to the reactions of clients I’ve heard from in the last number of months: “Rachel, they’ve gone too far with all of these proposals and all of this complexity. I want you to talk to me about strategies that exist for taking my business out of Canada or taking my business offshore.”
With all of the latest changes, I would suggest to you that taxpayers are definitely more interested in hearing about more aggressive strategies than they were interested in hearing about a number of years ago.
Mr. Weissman: I don’t hear clients and I won’t listen to clients talk about tax evasion. I won’t listen to them talk about using tax havens for the wrong reasons. I do have clients who are willing to become more aggressive in how they do their planning. I definitely have clients who want to leave. When they leave Canada, there is a tax to leave but the tax savings afterward more than make up for it. I have clients who are deciding to expand their businesses outside of Canada instead of in Canada.
Ms. Drever: I would concur with that. We have had more requests from people looking at how to leave the country than we had prior to these rules. Tax changes behaviour. When tax rates get to a level where people feel overly burdened, it changes their behaviour.
I would concur with Mr. Weissman. I am not interested in any tax evasion strategies, but people are looking for them.
The Chair: To the three witnesses, thank you for your professionalism and your comments.
(The committee adjourned.)