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NFFN - Standing Committee

National Finance


Proceedings of the Standing Senate Committee on
National Finance

Issue No. 22- Evidence - December 7, 2016

OTTAWA, Wednesday, December 7, 2016

The Standing Senate Committee on National Finance met this day at 6:48 p.m. to give consideration to the subject matter of all of Bill C-29, A second Act to implement certain provisions of the budget tabled in Parliament on March 22, 2016 and other measures.

Senator Larry W. Smith (Chair) in the chair.

The Chair: Welcome to the Standing Senate Committee on National Finance, colleagues and members of the viewing public. The mandate of this committee is to examine matters relating to federal estimates generally, as well as government finance.

My name is Larry Smith, senator from Quebec, and I chair the committee. Let me briefly introduce the other members of the committee.

To my left, Senator Grant Mitchell from Alberta; and to his left, from Montreal, Senator André Pratte. To my right, from northern B.C., Senator Richard Neufeld; from Saskatchewan, Senator Raynell Andreychuk; and to her right — we call her "The Hammer'' — the former Auditor General of the "The Rock,'' the Province of Newfoundland, Senator Beth Marshall.

Today we continue our consideration of the subject matter of Bill C-29, A second Act to implement certain provisions of the budget tabled in Parliament on March 22, 2016 and other measures.


This evening, as part of our study of Bill C-29, we have brought together representatives from the medical world.


During the first hour of our meeting, we have a panel of medical organizations.


Joining us from the Canadian Medical Association is Dr. Laurent Marcoux, President-elect.


We also have John Feely, Vice President, Member Relevance. John, welcome.

From the Ontario Association of Radiologists, two representatives, Dr. Mark Prieditis, President; and Ray Foley, Executive Director. Welcome.

From the University Health Network, we welcome Dr. Barry Rubin, Medical Director, Peter Munk Cardiac Centre, a heartwarming place to work.

Finally, from the University of Ottawa Heart Institute, we have Dr. Richard Davies, Professor, Division of Cardiology. Welcome, doctor.

We thank you all for being here with us. Each organization has five minutes. We would ask you to make sure you contain your comments to five minutes to give us a chance to ask you questions after.

Are we going to start left to right?


Dr. Marcoux, would you like to start?

Dr. Laurent Marcoux, President-elect, Canadian Medical Association: If you don't mind, I will give my presentation in French.

I'm Dr. Laurent Marcoux, the Canadian Medical Association's President-elect and a family physician based in Quebec.

I'm joined today by John Feeley, as you so well introduced him, the CMA's Vice President of Member Relevance. John will deliver part of our opening statement.

Let me first thank the members of the committee for inviting the CMA to appear before you as part of your study of Bill C-29.

The 2016 federal budget included a tax change described as a "tax integrity measure'' that inadvertently caught physicians practicing in partnership models. We are alarmed that the federal government appears to be disregarding the concerns being advanced by physicians. As such, we're appearing before this committee today with the hope that responsible action will be taken.

The Department of Finance Canada is vastly underestimating the impacts to group medical structures and in doing so they are underestimating the risks to health care. We're here today to clarify that the risks are real. If this proposal applies to group medical structures, there will be a negative impact to medical research, physician training and the delivery of specialty care.

These group structures exist to deliver important elements of our health care system that are otherwise unfunded or underfunded such as medical research and physician training. This is done by allowing physicians to pool and reallocate their revenue in a manner supporting their colleagues who deliver services that are funded by the federal government, or not.

This team-based care is essential for educating and training medical students and residents in teaching hospitals, and for conducting medical research.

I will now turn to Mr. Feely who will provide more technical information for your consideration.


John Feely, Vice President, Member Relevance, Canadian Medical Association: Unlike other professions, group medical structures have not been formed for taxation or commercial purposes. They have been formed to provide a public good. Also unlike other professions, physician compensation is set up by negotiations with provinces and is based on the existing tax framework.

Maintaining the current framework for the small business deduction is critical to the continued viability of these structures, as this was the premise under which they were established. Changing the eligibility to the small business deduction will have a significantly larger implication than simply the 4.5 per cent difference in the small business versus general rate at the federal level, as argued by the department.

Physicians in the structures will face a combined tax rate increase that could be as high as 17.5 per cent, depending on the province. As a result, the federal tax change would establish a strong disincentive to practise within these arrangements.

To better understand the impacts, the CMA worked closely with MD Financial Management to develop real financial scenarios based on real financial information from two incorporated physicians and group medical structures. MD Financial Management is a subsidiary of the CMA, providing financial management services to Canada's physicians.

These real financial calculations revealed annual net reductions of funds in the tens of thousands of dollars. This analysis was confirmed by an independent assessment by Deloitte.

Since the release of the budget, the CMA has received an unprecedented level of correspondence from physicians expressing their grave concerns with this federal proposal. To date, we've been copied on more than 2,000 submissions to Finance Canada, the finance minister and MPs. In comparison, when we informed our members of the increase to the top personal taxation rate, we did not receive one message — not one message.

While some are arguing that this tax proposal will cause physicians to flee to the U.S., our research suggests that it is far more likely that they will simply leave the group structures. As a result, provinces and territories will be left scrambling to figure out a new model for training medical residents, funding medical research and delivering specialized care. It will be patients that will suffer.

I strongly encourage the committee to adopt CMA's recommendation to exempt group medical structures as the only means of avoiding these negative and unintended consequences.

Dr. Marcoux and I will be pleased to address any questions you may have.

The Chair: Thank you very much, Mr. Feely.

Doctor, go ahead.

Dr. Mark Prieditis, President, Ontario Association of Radiologists: Thank you, Mr. Chairman, and good evening, senators. My name is Dr. Mark Prieditis. I am the President of the Ontario Association of Radiologists. With me today is Mr. Ray Foley, our Executive Director. In the public seating in the committee room is Dr. Fabiano Taucer, who presented to your colleagues at the House of Commons Finance Committee.

Thank you for asking us to appear before your committee to address our concerns on the issue of the small business tax deduction as it impacts Canadian physicians. We believe you have the ability to positively influence a piece of legislation that will have unintended consequences.

I represent over 1,000 radiologists in Ontario and, by extension, reflect concerns also expressed by the Canadian Association of Radiologists on behalf of the 2,800 diagnostic radiologists providing patient care services across Canada in teaching hospitals, community hospitals and community-based clinics.

Radiologists are specialist physicians who use state-of-the-art technology, things such as CTs, ultrasounds and MRIs, to diagnose in patients virtually every disease known to man. We also use those tools to perform minimally invasive surgery that has revolutionized medicine.

Doctors do run small businesses. We get our revenues from government. We call them billings. Those go to pay all of our expenses, including the cost of our equipment and staff, et cetera. That's true whether you work as a solo practitioner, which does not really occur very much anymore, or whether you work in a group practice. It's the same situation.

We believe that decisions arising from Bill C-29 will have the unintended health care consequences of unwinding many of these group practices. Specifically, it will reverse more than 30 years of expert health policy.

The two questions that face this committee for its consideration are: Do the budget measures before you have the ability to hurt the delivery of health care; and is it reasonable to recommend an exemption to preserve patient care? We believe the answer to both should be "yes.''

Irrespective of what stand you take today, one thing remains constant and common for all of us in this room and beyond: We will all need the skills of radiologists, family doctors, cardiologists, anaesthesiologists, radiologists and many other doctors who work in groups. That's why we urge your action to recommend the reversal of this Bill C-29 provision today.

The Liberal government would have you believe there will be no impact. The question then is who do you believe; the front-line health care provider experts or the cursory view of the senior ministry of finance officials who told us that the patient care impact was not considered in developing this budget proposal, nor was it a policy concern to them?

We know the removal of the small business tax deduction will lead to the dissolution of some of these group practices because it removes one of the most important incentives used by provincial health authorities to encourage group practice, and they've been actively doing that for many years. It is already beginning to occur partly because of the lack of clarity that is out there. The recent vote at the House of Commons committee declaring what the true agenda is will only accelerate these group dissolutions, which will impact patient care negatively.

Multi-specialty group practice offers many benefits to both physicians and patients. It creates a critical mass that permits teaching tomorrow's doctors, conducting research into cures and new and safer procedures. It provides clinical leadership, creates new health care system efficiencies through the involvement of multiple administrative roles. It allows us to pursue quality assurance and quality control improvements in medical equipment selection and so on.

A breakdown in this group model interrupts the abilities of doctors to carry out these largely voluntary functions that go mostly unnoticed outside the world of medicine. Many of these are unpaid. Group practice encourages physicians to share best practices and create standardized guidelines that improve medical quality. In its aggregated form, group practice contributes significantly to coordinated, collaborative and comprehensive patient care.

In closing, I would like to leave the following comments with you. We were told repeatedly by the Liberal government members that this legislation had no impact on doctors. Last week we found out differently. Many feel that the true intent was held back to prevent more opposition to this tax initiative, irrespective of the patient care fallout. Many of us felt misled.

Some have portrayed the small business deduction as a loophole. This is inaccurate, as the CRA has provided tax rulings to many physician groups across the country for well over a decade, declaring this to be a legitimate structure. Physician practices operating in good faith have invested countless hours of effort to build a physician group practice model that is now in danger of being fractured.

Every physician has a billing number unique to them. That billing number and the services connected to it are done by a specific physician and constitute what is a small business in the medical context. They include overhead and the same features of any other small business. For reasons of a more integrated delivery of required services, these small businesses have worked in groups to provide the spectrum of their medical services and to pool income to ensure that less-remunerated work has an equal weighting and to avoid patient care gaps.

Unrelated to what happens here in Ottawa, there's a serious degree of discord and distrust between physicians and provincial health authorities across Canada. We faced unilateral changes on doctors' services, political attacks aimed at physicians, major reductions to medical funding, and ignoring years of increasing medical overheads. This negative direction is producing turbulent change within the ranks of physicians who are questioning their futures in medicine. I know this because I hear it every day as a front-line doctor. The Bill C-29 provisions and other tax increases are needlessly aggravating the situation.

This is not a tax avoidance or tax savings strategy. It is a well-recognized tax deferral that has become more essential and important to doctors to offset their high overheads while in practice, the lack of safety net protections like pensions and other benefits, and other demands related to meeting higher professional training standards throughout their careers.

David Dodge, the former Governor of the Bank of Canada, was quoted last week about the emerging probability of significantly reduced tax competitiveness between Canada and the United States, and that would be another factor in causing professionals to consider moving. Independent of that, we issued a warning that this could also apply to doctors, as it has happened in the past when similar conditions occurred. Mr. Easter says he was convinced by Finance Canada and Health Canada bureaucrats this would not happen. With due respect, doctors do not consult government officials when they make their major career decisions. The same assurance provides no guarantee to low- and middle- income Canadians depending on a stable medical system that many believe is now under attack.

A significant amount of time has transpired since the budget speech was handed down. If this legislation is to proceed, despite our advice to the contrary, there should be a delayed implementation to provide restructuring that can happen in an orderly and organized way to mitigate rash decisions that will impact patient care.

Ladies and gentlemen, this is not about doctors seeking a special privilege in taxation. The current model exists to serve the patients and they will be the ones to be impacted. The people of Canada have entrusted their doctors to be a force for good, and we will reward that trust by working every day in the best interests of every patient in Canada.

Thank you.


Dr. Barry Rubin, Medical Director, Peter Munk Cardiac Centre, University Health Network: Thank you for the opportunity to address you this evening.


I'm a vascular surgeon at Toronto General Hospital; I'm the Medical Director of the Peter Munk Cardiac Centre, and I have run a molecular biology research lab for the last 18 years. I'm also the lead of the governance organizations that represent the 6,000 teaching doctors in Ontario's 16 teaching hospitals and address you today in that capacity.

Canada is a world leader in medical education, innovation and research. Problem-based learning, the most effective method for teaching students, and competency-based assessment, a process for evaluating medical training, were largely developed in Canada and are now practised around the world.

Canadian researchers are among the most quoted in scientific publications, and innovation developed by Canadian doctors ensures the ongoing evolution of our health care system. For example, Canadian doctors were the first to develop the pacemaker, the first to do a single lung transplantation and currently lead development of no-incision heart valve replacement. We're also working on innovative approaches to use stem cells to treat arthritis and diabetes and cure these diseases, and to develop drugs that minimize brain damage after stroke.

It's important to appreciate that the vast majority of medical teaching and research in Canada is done in teaching hospitals. It is also a fact that teaching and research activities are compensated far more poorly than the provision of clinical care, which involves seeing patients, doing operations and many other things.

So the question arises: How does our health care system actually pay doctors to teach and do research, the subject of this evening's discussion?

The answer is by forming practice plans, where groups of doctors in teaching hospitals come together and pool their income. Practice plans typically include 20 to 100 and in my centre 360 doctors that work together, and these have been in place in Canada for the last 30 to 40 years.

Through these practice plans, doctors who make relatively more money providing clinical care actually transfer some of that income to the doctors that make less money doing teaching and research, and they have to do so because teaching and research just does not pay well. That is the academic mission of the practice plans.

This social enterprise is not designed to enrich the partners in the practice plan. It is designed to appropriately compensate doctors for clinical work, as well as the medical education and research that they provide.

In Canada, very surprisingly, two thirds of the support for research that is carried out by doctors in teaching hospitals is generated by redistributing the clinical income earned by those doctors. The remaining one third comes from the provincial and federal governments.

In addition, two thirds of the 30,000 doctors that practise in Ontario were trained at a teaching hospital in Ontario, and this pattern holds true across Canada.

Under the 2016 federal budget, if practice plans continue to redistribute funds to support innovation, teaching and research, incorporated members of those practice plans will have to share the small business deduction. So in addition to giving up clinical earnings to support teaching and research, those doctors will also face a second financial penalty of incurring loss of access to the small business deduction.

Because of this, doctors in teaching hospitals recognize that alternate structures for their practice plans, such as cost- sharing associations, will have to be considered, because remaining in the partnership would financially penalize doctors that already transfer some of their clinical income to support teaching research done by their colleagues.

The core issue with forming a new structure such as a cost-sharing association, which was an option proposed by Minister Morneau, is that practice plans will no longer have a viable mechanism to redistribute the pooled income required to support innovation, teaching and research. That is what led 1,600 doctors, when I wrote this — now 2,000 doctors — from across Canada to write to the Minister of Finance and express concern about the 2016 federal budget.

Currently, I am aware that 50 practice plans in teaching hospitals in Ontario are in the process of considering changing their structures from partnerships to some other structure, in direct response to the changes contemplated in Bill C-29.

If practice plans are not able to pay doctors to teach, who will train the doctors that we need for tomorrow? Who will do the research and lead the innovation needed to develop the new treatments and prevention strategies that are required to care for Canada's growing and aging population?

Limiting the ability of groups of doctors to access the small business deduction has the potential to inadvertently destroy the fundamental mechanism that practice plans in teaching hospitals across Canada have used for decades to support medical innovation, teaching and research — the redistribution of income earned providing clinical care.

This has the potential to destabilize the foundation of the health care system that Canada is so widely known and respected for, and will impact our ability to lead in medical innovation. It would be very difficult for all of those examples I cited to happen: using stem cells, first use of a pacemaker, single-lung transplants. These were all supported by practice plans that transferred funds to support teaching and research.

However, in the final analysis, impairing the ability of doctors and teaching hospitals to innovate, educate and do research will have a lasting, negative impact on the residents and citizens of Canada who we care for.

Thank you very much.

Dr. Richard Davies, Professor, Division of Cardiology, University of Ottawa Heart Institute: Thank you for giving us the opportunity to present. I'm a cardiologist here in Ottawa. I'm also the managing partner of the group of 34 cardiologists who work at the University of Ottawa Heart Institute.

I also speak on behalf of many of my counterparts across the country, with whom we have discussed this and all of whom essentially say the remarks that I am making reflect exactly the situation they are facing in their own centres.

Academic physicians across the country have participated for many years in partnerships, not to make money but to support a mission of excellence in education, innovative research and state-of-the-art care. Using this mechanism, my own partnership supports 100 per cent of the time our physicians spend educating young doctors. Academic centres across the country do the same.

This has allowed Canadian academic centres like ours to develop and maintain teaching programs that are considered among the absolute best anywhere. They also attract the best and brightest young doctors to work with them from both within Canada and from across the world.

Partnerships like ours also support research. My own group supports one of the best cardiac research programs in Canada and maintains an ongoing healthy competition and collaboration with other programs, such as that in Dr. Rubin's centre. This has made possible many Canadian innovations and advances in patient care. Using my own centre as an example, we were one of the first centres in the world to establish a regional program for treating heart attack victims. This is now the standard of care across Canada and worldwide.

When I began my career, the mortality of a heart attack was over 13 per cent. As a result of this program, it is now 3.5 per cent. This level of care is accomplished by attracting the best of the best physicians into academic medicine and then allowing each to focus on a particular area so they can develop exceptional levels of skill in that area and then make that skill available to the patients.

Partnerships like ours also support excellence in areas that are clinically important but poorly remunerated. A good example of this is advanced heart failure patients, including those who would require heart transplantation and mechanical support devices. Physicians in better-paid sub-specialities who have joined these partnerships allow their clinical income to be redistributed so that, as a group, we can provide the best possible care to all of our patients. This kind of success has been achieved in all areas of medicine in centres across the country. The ability to form academic partnerships without penalty has played a major role in making this possible.

As the managing partner of a group such as ours, it's my job to take money off the table so my group can succeed in its mission of excellence. In doing so, I have to deal with an almost fourfold difference in earning capacity among doctors with similar levels of skill but in different areas, no hard funding for physician teachers and most physician researchers.

Academic partnerships are a powerful and time-tested tool that I and my counterparts across the country use to accomplish this. We now need your help to maintain the infrastructure upon which much of our success is built.

As it stands, the legislation in question we believe inadvertently will selectively penalize physicians who wish to join academic partnerships for the altruistic reasons that I've outlined. We are simply asking that you amend this legislation so that these physicians are treated the same as those in solo community practice. Doing so will send a strong message of recognition and support for the work that they're doing.

That concludes my remarks, but in closing I'd also like to read you some comments from Dr. Juan Carlos Monge, who is my counterpart in charge of the practice plan at St. Michael's Hospital in Toronto.

He says that it's beyond comprehension that academic physicians who have taken the initiative for the last several decades to pool our earnings to fund what government doesn't fund are now being penalized by a measure that, although clearly not directed at academic medical groups, nevertheless threatens our very existence and our ability to support research, advance medical education and super-specialized clinical care.

This unintended consequence defies all logic, and we believe that any fair-minded person can easily see that it calls for legislative action to provide an acceptable solution to academic medical groups.

The solution proposed by the finance ministry — a cost-sharing arrangement — is not adequate for our needs as we need to pool and redistribute resources to support our academic mission. This is not the purpose of a cost-sharing arrangement, which merely allows the distribution of the costs of doing business among members of a group — something that falls very short of what we need to do and have been doing in some cases for almost 50 years.

With that, I conclude my remarks.

The Chair: Thank you very much.

We have a very solid list of senators who are interested, because I think you piqued our interest; many of us are at the stage of life where we may need to spend time with you.

First of all, I'd like to have Senator André Pratte from Montreal pose his questions.

Senator Pratte: I have many questions.

It's been mentioned here and elsewhere that provincial governments have for years been encouraging doctors to form partnerships. Could you elaborate on that? How have provinces been encouraging you to form partnerships?

Dr. Prieditis: Sure. It's well known that moving towards a group model in general is the way that medicine should be progressing. It was pioneered at the Mayo and Cleveland clinics and others. Some specialities are farther ahead than others, like radiology and cardiology, but it has come to the point where about six or seven years ago — maybe a little longer than that — as part of a negotiation with the government between the Ontario Medical Association and the provincial government in lieu of a fee increase, the physicians were given the ability to incorporate. They were encouraged to incorporate for that reason.

I'm sure we will hear more about this, but in addition, the AFPs were all encouraged to form shortly around that time, or after that, and they were all encouraged to use these sorts of structures to do that.

The Chair: Are there any other comments?

Dr. Rubin: If you work in a teaching hospital, you have to have an academic appointment, and an academic appointment is from a university-affiliated medical school. In order to have that affiliation, the universities all mandate that you work in a group structure. These are called practice plans, and they have been around for 30 to 40 years. There are variations between the different medical schools, but they all embody the same principle: that you will have the ability to elect and remove officers; that you will have transparent finances; that you will have a dispute resolution mechanism. So we are mandated to work in groups.

This was further entrenched when the provincial alternate funding plan came about — and I'm speaking only about Ontario; this was in 2003 — where to receive supplemental support for teaching and research, which, as I mentioned, covers about one third of the cost of teaching and research, you had to participate in a practice plan.

This is very different than if you work in a community hospital where physicians function as solo practitioners and have no need to participate in groups. This creates an unlevel playing field because the doctors in the teaching hospitals must participate in group arrangements, whereas the doctors in the community do not have to.

If you're graduating from a training program and you're deciding where to work — in a teaching hospital or in a community hospital — under the current legislation, the tax implications may be such that over time doctors will not want to work in teaching hospitals; they'll work in community hospitals.

Over time, that raises questions: Who's going to train the future doctors? Who's going to do the research? And, importantly, who's going to provide the type of specialty care that can only be provided in teaching hospitals, like transplantation, most forms of brain surgery, advanced heart surgery and the like? So there are far-reaching implications.

Senator Pratte: This is a brief question to the Canadian Medical Association. In the table on page 4 where you have the different provinces, there are three columns with a first rate, which I understand is the small business tax rate. What's the second column?

Mr. Feely: The second column is the general corporate rate, and then the third column represents the difference between the two.

Senator Pratte: So if you were deprived of the small business rate, then do you get taxed at the general corporate rate?

Mr. Feely: Yes, that's correct.

Senator Mitchell: I'd like to drill down a bit on the numbers. The example that's given in this submission — December 7, the Canadian Medical Association — of $32,000 net reduction of funds because of the 4.5 per cent difference, if I do the calculation on that, that would mean whoever is losing $32,000 would actually be earning about $750,000, give or take. Is that right? You have to be earning $750,000 for 4.5 per cent to reduce your taxes by $32,000?

Mr. Feely: I'm happy to provide you the greater detail on that one, but it's looking at more than just the total income of the practice. It's looking at the different factors, but they are based on actual figures from physicians who are working in groups that have provided this evidence. I can't recall what the top figure was. I'm happy to provide it.

Senator Mitchell: I mean, $32,000 is not an insignificant reduction. I get that, but it is certainly less significant if you're earning $750,000 than it is if you're earning $175,000. I would just like to see how that fits.

Mr. Feely: I'm happy to provide you more detail.

It's important to keep in mind as well that, as the other panellists have mentioned, the physicians are also funding their other colleagues. So in addition to that contribution, which would be the tax differential of $32,000, they are contributing to pool their income to help those members who are earning less. It's a different kind of a structure in that they are helping their colleagues that I would say are more poorly remunerated to even out the income so that they could provide a full comprehensive suite of specialized services.

Senator Mitchell: Let's say in one of these plans or partnerships there are 30 doctors, and you're saying some of them are subsidizing others. Does that mean 15 are just doing operations and 15 are doing operations and teaching? How does that work? Why would they be partners?

Aren't teachers also paid for by the hospital, by the universities? I have friends who are paid that way.

Dr. Prieditis: It's more complicated than that. There are a lot of things that doctors do other than teaching and research. There's also administrative work that we do, being chiefs of departments, section heads. There are all kinds of quality control work that people do. There are very different sub-specialities and different practices.

I'm in a group of 18 radiologists. I do a lot of MRIs and CTs. Other people do something called interventional radiology. Some radiologists do breast imaging. We've got one radiologist who does mostly administration; one person does a lot of quality control and develops computer programs for peer review, and they would bill much, much less than someone else in the group. In order to incent them, in order to get them to do that really important work and for us to be able to provide 24-7 coverage for everything that walks through the door at the hospital, we have to have some way of redistributing that income. If we don't do that or if there's a real penalty for doing that by working together, then we're going to see some gaps develop, and it will be very hard to get people to do some of those other really important and innovative things.

Senator Mitchell: I would like to pursue this a little further. So the implication is that people would start to split up and break up. Aren't there extra costs to that? All of a sudden I'm not sharing office space or I have to hire someone to administer anyway. That would be my first question.

My second question is: Don't you end up paying these taxes anyway? It's just a question of deferring them for a while. Although I know you're backing off on the "moving to the U.S.'' argument, the fact is that there isn't deferral in the U.S. in this way in any event. This is unique to Canada, isn't it, that, one, you can defer, and, two, "deferral'' just means you're going to pay the taxes anyway eventually.

Dr. Prieditis: The deferral is one part of it, and I think that is important to doctors because a lot of us train until we're in our mid-thirties, sometimes even later than that before we start. It's a very short career, so being able to defer that income helps us in terms of having a reasonable retirement. We don't have any kind of pension plans or anything. So that is one factor.

But the redistribution is really important. Don't forget there might be some physician who earns, as we heard before, one quarter of what another physician is billing. In order to get that person to do that, we have to somehow have a way of redistributing those funds, and I think that is the fundamental issue that's lost.

There is a cost, as you mentioned, to unravelling some of these things, but I think you're creating a real disincentive to actually forming groups and forming that patient care. We are already seeing this happening. We're already seeing groups look into trying to unwind their practices. We're finding new physicians coming in saying, "I don't want to join a group. I'd rather just stay as a solo practitioner.'' It makes it very hard to build a team.

The Chair: Could I ask a simple question? I'm not sure if we have it in our documentation because we just received it tonight. Could you give us a simple example of 20 practitioners and mix in a group? Walk us through how it works so that we can understand exactly the implications. If you could give us some numbers, and you don't have to divulge your own practices, but it would really be helpful if we could, as people listening to what you're saying, understand the implications. We understand how you say your group works, but give us examples of the actual logistics of the money flow and how it works.

It doesn't have to be tied to personal situations, but you have enough experience to give us an example of a group of 20, the breakdown between teachers and practitioners, their roles, and how money is distributed amongst the group. That could be very helpful for us to understand exactly what you're talking about in terms of the implication.

Tell us also about the impact of the legislation. What's the bottom line for you?

Dr. Davies: I may be in the best position. I'll speak on a group of 34 rather than 20, because that's the size of our group.

We don't have many people who are billing — and that's not taking home, that's billing — at the level of $750,000. It's usually much less than that. Within our group, out of our total billings of the group, first we have to realize that within our institute we cover a lot of the overhead. We hire the staff that man our clinic.

The Chair: That's over and above the 34 practitioners?

Dr. Davies: Yes, over and above our 34 practitioners. Within our group we actually maintain a staff of over 60. We hire them; they work within the institute, but they are paid for by us. Basically, first of all, the incomes are gross.

The second is that it's important to realize that within centres like us, what we do is when we bring somebody in, we encourage them to specialize and become really good at a smaller area. This is how we maintain our expertise. I'll give the example of a heart failure because it's a very good one.

We recruited somebody who was described to us as the best cardiologist in Australia, and this person really is very good. This person works very hard. Their earning capacity is very low because essentially someone who sees patients and takes care of these very ill patients is paid at the same level as a general internist. We have other people who are also highly skilled who do technical things, who can earn much better than this person, and all of us realize as a group that we need the whole range of activity. We certainly want to be able to keep somebody like this, but unless we function as a group and redistribute income to this person, we will not be able to have a person like that in Canada. You won't have people training to that level in that area simply because, without redistribution, we can't do this.

So how it works within our group is that we pool our income. For the person who is seeing patients like this, we pay their entire overhead. I attach a 1.5 multiplier to all of their clinical earnings, and we put a formula together that also takes into account academic productivity, research and teaching. We redistribute income according to that formula in order to make sure that this person is valued for what they are doing.

In this particular case, the province has gotten it wrong, but it works very well, and probably the reason nobody has paid attention to it is that it has worked very well for 40 or 50 years.

The Chair: The variance between your top earners and the lower earners going through the development process and your staff, if you had 34 practitioners and 60 staff, can you give us a round number of how much it costs for you to support your staff?

Dr. Davies: Yes, I can. On average, our overhead rate is 28 per cent.

The Chair: Twenty-eight per cent of what?

Dr. Davies: Twenty-eight per cent of our total earnings goes to support our total staff.

The Chair: The 34 practitioners, basically they're funding the 28 per cent. Of the 34 practitioners, how many practitioners are actually learning and getting paid a lesser salary than the top performers, just so we understand the variance?

Dr. Davies: Sorry, say your question again, because I didn't understand.

The Chair: You have 34 practitioners, if I understand correctly. Some of them are in a development phase, and they're being subsidized or paid by the top performers or the people who are —

Dr. Davies: Sorry. With pride, I have to say that everybody in my group is a top performer and those people are being paid by the top earners, which is different.

The Chair: Sorry. All of you are top performers. The top earners are paying the group. So out of the 34, how many would be top earners and how many would be in the development phase?

Dr. Davies: Essentially, it's about a third, a third, a third. What happens is a third is clearly making more than they bring home. A third is billing more than they take home, so a third is clearly making less. And a third is probably in the middle; they're about average. So what happens is their mix of activities happens to match.

The Chair: Could you give me an idea of the middle and bottom third and what type of earnings they would have?

Dr. Davies: The bottom third gross income would be in the mid-200s. The top third median income would probably be three times that.

Dr. Prieditis: I have a quick comment with regard to expenses, because it varies depending on the area of medicine you're in. The average for doctors across the country is somewhere in the neighbourhood of around 40 per cent. Radiology can be as high as 70 per cent because of the very expensive nature of the equipment depending on the setting we're practising in. I think you need to be careful with those sorts of numbers. Again, I want to emphasize that billings are not income.

Dr. Davies: Thank you for saying that. I have to qualify my remarks. Many billings have technical and professional fees. The incomes that I included excluded the technical fees that are still attributed to those doctors. What happens is our overheads would go way up if I included those.

Radiologists are in a situation where it looks like they have a lot of money, but basically they have to fund very expensive equipment. I'd agree completely with your comment. You have to look at the situation.

Senator Marshall: Of the 34 practitioners in your group of 60, each would take the small business deduction; is that right?

Dr. Davies: Yes.

Senator Marshall: It's much more complex than I thought, but I understand what you're saying.

What precipitated the change? Do you know? I had the impression from one of our witnesses that this has been in effect since 2000 or before the year 2000. This has been in effect for quite a while, has it not?

Dr. Davies: What has been in effect?

Senator Marshall: That everybody can claim the full small business deduction.

Dr. Davies: Yes. As far as I understand, that has been in place in Ontario since we were given the ability to form medical professional corporations, and actually many groups got advanced tax rulings to say exactly that.

Senator Marshall: How long has that been? Fifty years?

Dr. Davies: I think 2004.

Senator Marshall: Do you have any idea why this is coming to the surface now, why this change is happening now? What precipitated it?

Dr. Davies: Yes. The reason it's coming to the surface now is the inequitable treatment that physicians joining academic groups are getting relative to their colleagues who are simply practising in the community. Physicians practising in the community can all claim the small business deduction completely. By joining an academic group, for the reasons that I outlined, what happens is they've inadvertently treated differently.

Dr. Prieditis: Can I make one comment with regard to that because I don't think it's completely true?

Physicians that practice in groups are being treated differently than solo practitioners, and that applies to community practice in other settings as well. There are large groups of radiologists and other specialists practising in community hospitals. There are large groups of family doctors now in Ontario, especially where they've created these family health teams, encouraged by the government. You might have 20, 30, 40, even more family doctors so they can provide 24-7 care. It really is that group model, and I think the academics have specific concerns about this. But it's any physician that is practising in a group model.

Senator Marshall: What you're telling us this evening is much more complex than I thought.

Have there been any discussions with finance officials or the minister to explain how the system works and the implications of dismantling the system if this proceeds, as indicated in the legislation?

Dr. Davies: Yes.

Dr. Rubin: When we became aware of this new proposed tax treatment, I wrote a letter to all 6,000 academic physicians in Ontario and encouraged them to write to the Ministry of Finance. We met with provincial-level officials, the Ontario Medical Association, who communicated all of these facts directly to the Ministry of Finance.

I'm not sure why it hasn't resonated. It may be that the construct we have here where high earners transfer money to low earners is different than in most other businesses in society. Usually the situation is that the lower earners — for example, I'll pick a law firm — would generate billings and transfer money to the higher earners. That's a for-profit enterprise. That's not what we do. We take the higher earners and money flows to the lower earners. When incorporation came about, then there was relatively more money available to support teaching and research.

This is a backward step. It's not that there will be less money; it's that the practice plans will have to change their structure to a form where they will not be able to transfer money between partners without additional financial penalty. It's not just losing the money that you're saying, "Okay, I agree to do this.'' It's further being penalized because you have to do that in a group environment.

Senator Marshall: Has the Ontario Minister of Health taken a position on this, or are they not involved in this at all? Because it will affect them. I'm sure the provincial Minister of Health knows that you're going to start dismantling these structures and the implication of it. What kind of reaction are you getting from them?

Dr. Rubin: With respect, I'm not in a position to respond on behalf of the Government of Ontario. We have informed them.

The Chair: Mr. Feely?

Mr. Feely: We did meet with federal financial officials, the Ontario Medical Association and explained the situation. We did ask them if they consulted with health at the provincial level, and they said no and they had no intent to do so.

The Chair: Mr. Foley, do you have a comment?

Ray Foley, Executive Director, Ontario Association of Radiologists: A couple of things. One is that when the budget speech was made, we were told clearly and repeatedly that physicians were not impacted by this announcement. That evolved to they may be involved to they are involved. That evolved further to that was not the intent and the plan is to take physicians out of the legislation or to have some sort of amendment to fix this problem because it was recognized, as every one of the speakers has mentioned, that it had lots of problems and — you've heard the expression — "inadvertent consequences.''

Senator Marshall: I would think that provincial health ministers would be very concerned to hear that. From what you're saying here this evening, a good part of our health care system is going to be dismantled or could be dismantled as a result of this amendment going through. So it's quite concerning.

If you decide to change the structure of your practice, what happens? Say the bill goes through next week, then what happens? Will physicians start to dismantle?

Dr. Rubin: What we anticipate will happen is there will be a migration to cost-sharing arrangements in which there's no provision to transfer money between partners, so that the people who are doing teaching and research, which gets paid significantly less at an hourly rate — in response to your previous comment, senator, you make a lot more money doing clinical care than teaching and research. There is funding for it, but it's not nearly as good. So if you're not able to transfer those funds within the cost-sharing arrangement from the high earners to the low earners, then the activity that's poorly remunerated is going to stop or it will be attenuated.

Senator Marshall: When the Minister of Finance appeared yesterday on this bill, we asked him how much this change was going to raise. We're always interested when there's a change in the tax act to know if this is going to be money to the good of the government or a drain on the treasury. I think the number was $70 million, which I thought was kind of low.

So that brings up a couple of things: Does that number sound reasonable and realistic to you? Somebody in their opening remarks was talking about work that had been done by Deloitte. I think that $70 million figure includes not just doctors; it would include other professionals. To put the health care system in a tailspin for $70 million doesn't seem to be worth it. Does the $70 million sound reasonable to you?

Dr. Rubin: That's for all professionals, not just doctors.

Senator Marshall: That's right. That's what I mean.

Dr. Rubin: What will actually happen here is if doctors move from partnerships to cost-sharing arrangements so they can continue to have access to the small business deduction, there will be no net new revenue in terms of tax from the groups of doctors because —

Senator Marshall: Everybody will still be getting their deduction.

Dr. Rubin: They will be getting the deduction, but what will have happened is you will have lost the ability to support teaching and research: so no gain in taxes and destruction of the mechanism we've used for four or five decades to support teaching and research.

Mr. Foley: We met the Department of Finance officials who wrote the language for the budget in this specific area, and we asked them the question: What impact analysis have you done to assess what this means for the roughly 100,000 doctors in this country? They said they didn't do any. They said that was not their concern; that was not their primary responsibility. Their responsibility was developing tax policy. Our concern was this is about patient care policy. It does have an impact, along with who is doing it.

I would say the $70 million is a very dubious number. There's no math and no evidence behind it. If there is, it's not being revealed.

Senator Marshall: It's not reliable, anyway.

Mr. Foley: We spoke at the House of Commons committee and talked about the impacts on physicians, and those impacts are multiple. The one that got picked up was physicians leaving for the United States. That is a real concern. We have seen that before in Canada in the 1980s, 1990s and the early 2000s.

But it's more than that. It's physicians who change their practice style, as Dr. Rubin has mentioned. It's physicians retiring and changing their scope of practice. It's a whole number of things that they do that Dr. Prieditis mentioned earlier: things that are invisible to people outside of medicine. The quality element of what happens is what makes the difference in quality care. Those things slip away, and they slip away below the radar.

The Chair: We need to move forward. You've done a great job so far.

Hot off the wire, the Premier of Quebec has asked the Senate to help Quebec with this particular request from the federal government, so obviously it's gaining some momentum.

Senator Ataullahjan: I apologize for being late. There's a party going on outside and traffic is a bit slow.

Senator Marshall asked some of my questions. I heard some of the answers, but I would still like to ask you a question.

Yesterday I explained to the finance minister that in any small businesses you tax, they pass on part of the expense to their clients, but physicians cannot do that because they're government-paid. But if you tax dentists or lawyers, they can always increase their fees.

Physicians are given two choices: first, either absorb the higher taxes; or — and this is my big concern — move, like doctors did in the 1980s, as you said. We already have shortages. It's so difficult in the big cities to get family doctors and to get to a specialist. I believe that the small business deduction change in Bill C-29 has the potential to further increase these shortages.

The minister was, should I say, unable to respond to my question about the negative impacts of this change on physicians and what the cost of the change will be.

Besides talking about doctors thinking of moving, what about having a meeting with the minister? Have you all met with the finance minister? Have you asked for a meeting? Has there been any response?

Dr. Prieditis: We've met with his chief of staff, some of the bureaucrats and many of the members of the Finance Committee, and this is what's a little bit disconcerting to us: We felt, based on those meetings over the last eight months or so, that this was not intended to affect physicians or patient care and that it was sort of collateral damage or unintended consequences. We've tried to emphasize, as you mentioned, physicians leaving, which is a possibility. But what I think is really concerning is that tax policy has a powerful behaviour modification aspect to it, and it's unknown what the impact will be. We think these things will happen. We've already seen some of these things, which we believe are going to negatively affect patient care. We know they will.

The existing policy has had a very positive impact on patient care because it's encouraged these groups and these big academic practices to be formed and it has encouraged family doctors and all of us in the community to work together. It's been very effective and we've moved medicine forward. Now we're going to stop doing that and we don't know what the implication is, and it seems it will be a small amount of money. We're not even sure about that cost estimate. I think, really, it requires sober second thought.

Senator Ataullahjan: I did ask the minister specifically about how much money they were hoping to get, not from the other businesses, but specifically from doctors, and I got the $70 million figure again.

The Chair: I must admit that I got myself a little excited here. This deals with the Quebec premier talking about another element, referring to Senator Pratte and our Banking Committee. I didn't get this on a napkin. This is on real paper.

Let's move forward with Senator Neufeld.

Senator Neufeld: Thank you, doctors, for being here. I have been in the hospital, because of my heart, in Ottawa, and I do use a pacemaker, so I don't want you guys to leave.

Many good questions have been asked. We had the minister here yesterday, and when it came to the consumer protection issue that the chair just talked about — that's another issue in this bill — the minister, to me, just seemed to say, "Look, I don't care what it does; this is what we're doing.''

I would say you folks have told me the same thing: He doesn't care; this is what's happening. That's really unfortunate. In fact, it's pretty thoughtless, to be perfectly honest. I don't usually get too political in these meetings, but it is pretty thoughtless.

But would you say, then, that if in fact these things happen — if it carries on and they don't make any changes — and a lot of doctors go back to a solo practice, that it will transfer a huge cost to the province, whichever province it is, to do those things that you do now?

Have you got a number around what would happen if, let's say, you didn't do the training anymore or you did but the province had to kick in the money to actually do it? Would you have to up the fees so you could actually pay for that? Is there a number that you can give us for Ontario, at least, that could help us?

The Chair: Mr. Feely, do you want to answer that question?

Mr. Feely: I would like to and I'm sure other panellists have information that they would like to put in.

From the research we've received, I can tell you a couple of things: 61 per cent of physicians said their group practice would dissolve; 75 per cent said they would lose partners.

You could look at it from a financial perspective, but the real impact will actually be on patient care. It will be a lack of access to some highly valued and needed specialized services that these group medical structures provide to Canadians.

Senator Neufeld: I understand the patient care stuff very well. I understand what you're saying.

Apparently, the minister doesn't care about patient care, but maybe he'll care about some numbers. The Minister of Health in Ontario, I can't imagine why he's not involved.

I'm going to phone my Minister of Health in British Columbia tomorrow and ask him what they're doing about it, because it would transfer a huge amount of costs back onto the provinces. Having been a member of the legislature in British Columbia for years, I know how difficult it is to fund health care.

Mr. Feely: One of the shocking numbers I heard tonight was when Dr. Rubin talked about two thirds of medical research and teaching being paid for today out of physicians' pockets. That's something that the government is not paying for.

Senator Neufeld: Exactly. How much is that two thirds? Do you have some kind of a number?

The Chair: Do you folks have numbers? It would be very helpful.

Senator Neufeld: If you don't have it, I'd rather you not grab something. I'd rather have you provide that to the clerk for us, if you would, please.

Dr. Rubin: I would be comfortable in responding that that two-thirds number comes from talking to my colleagues that lead the 16 teaching hospitals in Ontario and asking, "How much does it cost each one of your practice plans?'' That's a cumulative average.

We've never tried to attach a dollar amount, so I'm not going to make up a figure. Thank you for not asking us to. Whatever that number is, it's a huge amount, and it's being borne by doctors. Going forward, exactly as the chair suggested, this will have to be borne by the provinces or the activities will decrease.

Senator Andreychuk: I'm glad that Senator Marshall went ahead of me. She has set the stage very well.

I'm trying to understand. You're here on academic teaching practices. What about the practices that doctors come together for cost sharing? You're not representing them; is that correct? There are some that aren't doing any teaching; there's no academic component. But doctors are being encouraged in my province to have community clinics so they can stay open 24 hours. Are you representing any of those groups, or are they accepting that it's going to be a different model for them?

Dr. Davies: Doctors who are purely in a cost-sharing arrangement like you have described are not affected. We wouldn't be representing them because they don't need representing.

Senator Andreychuk: Your main concern is teaching and supporting those who are bringing innovation and expertise?

Dr. Davies: Doctors practising in partnerships and actually redistributing income among the partners are those that are affected. Doctors who have purely cost-sharing arrangements are not affected.

Dr. Prieditis: In answer to your question, I think it's important to emphasize that it's not just teaching centres. It's very acute in the teaching centres because of the way they do things, but this applies to any physician group in the country that is working together as a group. Once you form that group and pool your earnings and distribute it, any group will have other roles that physicians will have to take.

Senator Andreychuk: But it's pooling income that's the key here, where cost sharing is not. Cost sharing gets you into what law practices are doing, et cetera. If there is any element in a community practice where there is some pooling, that's really the nub of your issue. That's accelerated, of course, in the academic component.

Dr. Prieditis: That seems to be the issue. Again, I want to emphasize that a lot of things that doctors do, they don't get paid for, but they're good things. Teaching is one example, and research, but there's also administration, quality control and supervision of other professionals, of technologists. All of these things require some element of non- remunerative work. That's not applied proportionally. In any of these groups, you will have people assigned with different tasks, and some people will be able to work clinically all the time, and other people will have to do more of those other things. We're trying to find a way to make it fairer, to encourage people to do all of those activities.

Senator Andreychuk: I know of doctors who are together, and I believe they're cost sharing. A lot of doctors do a lot of added service to the community. Lawyers and accountants do that, responsible professionals.

What I'm trying to get at is this: Is the pooling of resources the key to your problem, and does it go beyond academic and teaching institutions into these other forms of clinics?

Mr. Feely: Yes. So it is the pooling of revenue that's brought into the practice in academic centres, but also in community group practices where they are pooling revenue to provide a comprehensive range of specialized care services.

Dr. Rubin: I would emphasize that all groups in academic health science centres or teaching hospital pool income, 100 per cent, whereas in the community there may be some of this activity, but the vast majority do not. They function as solo practitioners or work in cost-sharing arrangements. That's why we're discussing this relative difference of the impact of this tax treatment in teaching centres versus in the community.

Senator Andreychuk: Did you suggest to the officials that there's a reverse onus sometimes in the income tax? You have to prove that you didn't set it up to evade taxes or to maximize, that you set up your system for a health benefit. Did they buy into that argument? In other words, rather than exempting you totally, one option would be to say that you can prove your case and that you should continue under the basic structure now, or was it simply that you're making your case as it is to maintain your position?

Dr. Rubin: It's hard to speculate why they don't understand. I would say the structure, the concept of having this redistribution of income within the group is so different than so many other elements in society that maybe — I'm purely speculating — this just didn't resonate. The fact is that if this goes through, there will be less teaching and research in Canada, and our health care system and patients will suffer.

Dr. Davies: I think it's important to realize that this probably just snuck up on them, because the concept of pooling incomes in order to support these things predates the Canadian health care system, where you have a central payer. It's also not unique to Canada. Mayo Clinic is well known. Basically, they have clinicians and researchers, and they each respect each other and practice in tandem together. The clinician knows the researcher is important, the researcher knows the clinician is important, and they respect each other.

This is something where doctors adapted the changing system in order to keep doing something which is really, if you like, a tradition. What has happened in Canada is we've made it work very well. Teaching and education has never been on the table because we've always managed to adapt the system in order to be able to make it work. Basically, it's not a problem that people have discussed because it's never been a problem.

The unique thing that's happening now is that, inadvertently, there's a change in the tax rulings that all of a sudden strikes right at the heart of this. That's never happened to us before.

Dr. Rubin: I might add that not only has it not happened, we're actually over-performing. We are world leaders in educational models that are used elsewhere. Pick your area of disease and I will tell you about a Canadian who is leading in that field. There has been no attention brought to this because we're doing so well.

There's a reason why the best treatments come out of the Mayo and Cleveland clinics. It's because they participate in these group models where you have different practitioners working together for the common good, recognizing that the way health care is set up, you get paid more for doing a thing to a patient — an angioplasty, a stent, whatever it is — than you do by sitting like this and talking to the person.

Senator Andreychuk: I know your clinic very well. The interrelationship between the doctors is the success story of the Mayo. You can go to one general practitioner and you get referred to one specialist. We need doctors who talk to each other and work together. That's the essence of excellence, to me, in medicine.

Dr. Davies: We're doing a good job, and what we're asking you is to let us keep doing it.

Mr. Foley: We did speak to Department of Finance officials about the question you asked earlier, and their view was very clear. They saw that physicians work in partnerships, in the legal sense of the term "partnership.'' They could not really conceive of this notion of cost-sharing, along with the fact that they did not really delve into understanding what the consequences were.

One other point is that community practice or group practice, as we know it, has evolved such that, certainly in provinces like Ontario, Alberta and B.C., the more urban provinces, community groups are as large as academic groups. Perhaps the University of Toronto group is an exception, at least in the context of radiology. But it's not uncommon that radiologists work in groups of 30, 40, in some places 50 radiologists who are providing highly specialized programs that are a tertiary level of care, involved in providing teaching as part of the outreach of medical programs.

When we talk about groups, just so you have a clear number in your mind, it can be anywhere from 10 radiologists in radiology, similarly in some other areas, to 50. The group in Edmonton, for example, is about 110 radiologists.

The Chair: We need to move on. Do you have one last quick question?

Senator Andreychuk: There was a news story out saying that the finance ministry, I guess, is looking to tax medical and dental benefits in private plans, which got me thinking about why there is this attention on taxing "medical'' when our system is so fragile? We're going into negotiations with the provinces. We want to keep the kind of medical care that at least we have now and improve on it.

It seems the finance ministry is looking at ways to chip away. I wonder, why isn't the Minister of Health looking at all of this first to see what kind of plan and then cost it out and see where the inequities are and the justifications for taxing? I take it that it has all been the finance department? Is that correct?

Mr. Foley: From our point of view, yes.

The Chair: How many doctors do we have in our country? How many doctors would work within the framework that you are alluding to, just so we have a perspective?

Mr. Feely: There are approximately 82,000 practising physicians. About 15,000 would be practising in the group structures.

The Chair: So 15,000 to 16,000?

Mr. Feely: Correct.

Senator Mockler: Doctors, thank you very much. I want to congratulate you on what you do for the health care system in Canada. You have very good reputations, but I can share with you that as a parliamentarian and a senator, in the last 48 hours this has been quite an issue in Atlantic Canada. I know the premiers are in town tomorrow meeting with the Prime Minister, and I guess a certain government has a funny way of doing things.

In Atlantic Canada, a lot of service we get is because we have smaller clinics to an extent. Then when it comes to more professional services, some of our people go to the Mayo Clinic. Some will go to Halifax or Saint John. Where I come from, northwestern New Brunswick, they go to Quebec. That said, can you give me an idea of how many medical clinics would be impacted?


Dr. Marcoux, what is the situation in the provinces of Prince Edward Island, New Brunswick, Nova Scotia, and Newfoundland and Labrador?

Dr. Marcoux: I cannot give you a sector-by-sector answer for those provinces, but there are group practice organizations for specialty medicine in all the hospitals.


The Chair: We know, senator, that 16,000 doctors participate in these groups.

Senator Mockler: Do you have it broken down for Atlantic Canada?

Mr. Feely: We don't have it broken down by province, but it would be roughly anywhere between 20 to 30 per cent.

Senator Mockler: If I look at a figure, I could say 20 to 30 per cent and that would be very reasonable.

Mr. Feely: I think I would be more comfortable with 20.

The Chair: That's for the Maritime provinces.

Dr. Prieditis: If I can comment on that, in terms of radiology, it's about 95 per cent plus. Almost every radiologist in the country practices in a group model.

Senator Mitchell: Dr. Rubin, I'm interested in your comparison with the Mayo Clinic, where you say there's a really strong model that works extremely effectively. No question about it, I'm sure, but they don't have these tax shelters, so how is it that that model works there? Isn't there some way that it wouldn't work here?

Dr. Davies: I'm sorry; I don't think we were speaking to the Mayo Clinic's tax model or economic model. What we were speaking to is that the model of people who are doing research and one level of activity and then sharing resources and respecting and joining together with people doing predominantly clinical activity, which is also what pays in the Mayo Clinic, is a proven model for producing excellence.

Senator Mitchell: What I'm saying is that they do it without this small business tax shelter because they don't have a deferral.

Dr. Rubin: I'm happy to respond. Knowing many doctors who work at Mayo, we actually collaborate with them. We are doing the biggest trial in the world right now with them on precision molecular medicine. They're able to do it because of the fees they generate for the services they provide and the incredible philanthropic support of the Mayo Clinic. People who go there tend to provide over and above the fees that they pay. They share in the vision and they support the hospital.

Now, this happens in Canadian hospitals as well, but not to the extent that they have. It's a combination of those two that renders the requirement to have this type of tax structure. It's just not essential to make it happen, and the proof is that it works great.

The Chair: And it's fairly expensive to be operated on in the States if you don't have tremendous insurance.


Senator Mockler: My last question is for Dr. Marcoux. You may be familiar with New Brunswick's "Vivre sa santé en français'' initiative. What impact would the measure we are discussing today have on a young organization such as the Société Santé en français?

Dr. Marcoux: Any attack on group practice will have an impact, especially in specialized medicine, where specialist physicians come together to practise in their specialized fields. They are supported by their colleagues, who use their expertise and bring in more money. They ultimately share the income, thereby striking a balance.

In New Brunswick as elsewhere, those practices exist. Instruction and research also take place in all settings, at all levels. So we will lose a lot of expertise. There is no doubt that the very large, state-of-the-art centres in Canada that recruit people from outside will lose more expertise; what doctor would come here to practise in a model where those with a low volume and low income will not be supported by their colleagues? Those doctors will stay where they are or go elsewhere.

If I may, Senator Smith, I would like to add that we would not be discussing the current model if it were not a public health model. In a public health care system, as physicians, we cannot transfer the costs, which are increasing, to our patients, because the care is free for them. If we do not transfer those costs to the patients, they will have to be transferred to the government or elsewhere, probably to the provinces, which will have to cover them. Otherwise, as has been well demonstrated here, these services will be reduced, destroyed, and that is tragic for Canada, which is a leader in research. We have recently had some very eloquent examples of this.

In Canada, the quality of our physicians is connected to the education they receive. The education is generous and is given at the postgraduate level, in particular. When you leave university, you are a doctor, but the learning takes place particularly in hospitals. Doctors acquire cutting-edge expertise because they are supported by groups of physicians who generously volunteer their time to train them.

So as far as research, teaching and advanced medicine are concerned, how can we, even in a very large centre, support a doctor who practises an advanced specialty where there are few cases? Often those cases are recognized less than the more common ones. This is a real issue with our public health system. If the system were not public, the patient would be billed. This is why medicine is not comparable to accounting or law. Of course, the measure will hurt them a little and they will not like it, but the difference will appear on the bill, and someone will absorb it.

The Chair: Thank you, Dr. Marcoux.


Who is going to wrap up?

Dr. Rubin: May I suggest that Mr. Feely wrap up for us?

The Chair: Mr. Feely, will you say a few words to close this off?

Mr. Feely: Thank you very much.

I think the key is we need to exempt group medical practices from this piece of legislation so that they can continue to provide a wide range of specialty care, support medical research and teaching in Canada.

The Chair: Dr. Prieditis, you have 15 to 30 seconds, because I know that you wanted to say something.

Dr. Prieditis: We have heard lots of arguments about why we believe this law should be changed or physicians should be exempted. I think the biggest issue is the uncertainty around the impact on patient care. We believe it will be very significant for very little revenue. We strongly encourage the Senate to carefully think this through.

The Chair: Gentlemen, we thank you on behalf of the Standing Senate Committee on National Finance. It was most interesting. We could have kept you here longer, but we have another witness who is waiting.

Colleagues, for the second part of our meeting this evening we have a single witness to give us his views on the subject matter of Bill C-29. We welcome Kim Moody, Director, Canadian Tax Advisory, Moodys Gartner Tax Law LLP. I should point out that Mr. Moody is also Co-chair of the Joint Committee on Taxation of the CBA and CPA Canada.

Welcome, Mr. Moody. We apologize for keeping you waiting.

Kim G C Moody, Director, Canadian Tax Advisory, Moodys Gartner Tax Law LLP, as an individual: Thank you very much. It took everything in me to bite my tongue, but I'm glad to be here.

Thank you, Mr. Chair, and to all the committee members for the kind invitation to appear before you as you study Bill C-29. My name is Kim Moody. I'm a chartered professional accountant from Calgary. I work in the tax law firm of Moodys Gartner Tax Law LLP where I'm a Director of Canadian Tax Advisory, as you already stated.

As you can tell from my bio and from my size and my height, my dream has always been to play professional football. Along the way, however, I got intrigued by tax and therefore put aside my football dreams in favour of the study and practise of tax and have since held senior positions within the tax community for the past 20 years. Given such, I am pleased to offer my observations and answer your questions regarding Bill C-29.

Bill C-29 contains significant amendments. As you know, some of the amendments are quite controversial within the tax and business community. The small business deduction amendments, back-to-back rules, subsection 152(9) amendments, eligible capital property amendments, the OECD common reporting standard implementation, country- by-country reporting, and a host of other technical amendments are included in this complex bill.

While I'm happy to address questions on all the material, the bill contains amendments that tax the brain of even the most senior tax practitioners, like me, and I'm certainly no exception. Accordingly, I may or may not be able to adequately address your specific questions depending on the area you wish to focus on, but I will certainly do my best.

In my remaining speaking time, however, I would like to focus on an area that I know particularly well, and that's the amendments to the small business deduction rules. When I last appeared before the committee, I waxed on about Adam Smith's four basic tenets of a good taxation system. Many commentators have analyzed Smith's tenets differently over the years. The following resonates with me as good principles.

One, every taxpayer should contribute to the state income equally, but of course we can debate what "equally'' means. Two, every taxpayer should have certainty regarding how much taxes he or she will have to pay. Three, every tax should be collected and paid in a convenient but timely basis. And, four, the tax collected should return a similar value to society.

As a starting point, I do not intend to debate here the policy intent of why the small business deduction exists. Such a debate is for another time.

With respect to the small business deduction amendments, I appreciate the underlying policy intent of trying to restrict access to the small business deduction to situations where its usage was not originally intended and insist on the principle of one business, one small business deduction. That makes perfect sense. I have been a strong vocal and written critic of so-called planning that inappropriately multiplies access to the small business deduction.

However, the proposals released by the Department of Finance and currently in Bill C-29 go far beyond simple targeting. The proposals are very far-reaching and apply to many routine situations where, in my opinion, they should not. As you know, I'm currently one of the co-chairs for the joint committee, and I was one of the authors of the submission that the joint committee made to the Department of Finance. I'm very proud of that submission, in which we outlined a host of technical issues and examples where the rules reached too far and likely have unintended consequences.

Unfortunately, with the exception of a few minor edits made after our submission, the material in Bill C-29 does not adequately address the concerns that the tax and business community have with the small business deduction amendments. Accordingly, many Canadian-controlled private corporations, or CCPCs, will be left in a situation where they thought they had access to the small business deduction but will unfortunately, because of the breadth and depth of the new legislation, realize later that they may not qualify. Adam Smith's certainty principle will be strained significantly.

Overall, the existing small business deduction rules are complex. However, the amendments make such rules horrifically complex. As a tax practitioner, I expect complexity, and frankly I relish it. I like complexity, but I also need to reconcile this complexity with practical realities. As mentioned, I've been studying for over 20 years. This new proposed legislation is without a doubt within the top five in terms of complexity.

When you consider the fact that the vast majority of Canada's tax preparers are not tax specialists but ultimately are responsible for helping private business owners comply with their tax filing obligations, I worry about how compliant the average business owner will be after these new rules become law. There is no doubt in my mind that the average business owner will not be able to even attempt to determine their eligibility for the small business deduction without very specialized tax advice.

While tax return forms can mask a large amount of complexity, I believe that the new forms that will eventually be released by the CRA will either fail to mask these new rules' complexities or will download the application of the difficult aspects of these rules back to the taxpayer. The result: non-compliance and non-adherence to Adam Smith's certainty principle again.

So, given my comments, what do I recommend? Well, I'm glad you asked. Here's a short list.

One, ideally the new small business deduction rules would be given a complete rethink. There are a number of different ways that the new rules could be redrafted in order to effectuate the purpose of the legislation. The joint committee submission provided numerous suggestions that I won't repeat here. Practically, however, the breadth of the new provisions requires a small private business owner to have a detailed knowledge of the financial holdings of every shareholder of the corporation and every person related to them and thus makes compliance with the new proposals virtually impossible.

Number two, if a rethink is not in order, I believe some of the unintended consequences should be targeted and excluded from their application. I recognize that better targeted legislation might create more exceptions, with one of those exceptions being the sectors and structures hit with those restrictions inappropriately. However, if I had to pick my poison on this issue, I'd prefer the path of targeting the small business deduction to those who are consistent with its policy intents, denying the small business deduction where it is not, and minimizing the crossfire collateral damage to other small businesses that might be caught unintentionally. This approach, unlike my previous friends, in my view should also not accommodate certain groups who believe they are special or who have the loudest voice.

Frankly, all small businesses have their uniqueness and special challenges. The new rules should apply uniformly to all different types of businesses. Thus, Adam Smith's equality principle will have been adhered to as well.

Number three, the rules should be significantly simplified to make them understandable by the average business person and tax preparer who is not a tax specialist. While I recognize that such a statement is easier said than done, I truly believe another attempt at simplifying these new rules should occur. The simplification of such rules is even more important when we are dealing with legislation that targets small business and its owners. It is in my opinion more acceptable to adopt complex legislation where the target taxpayer is a multinational or large corporation where resources and access to tax experts is more readily available and affordable. This would go a long way to ensuring compliance with the new rules.

Here are my summary comments and recommendations.

One, I agree that inappropriate small business deduction multiplication should be curtailed. I've been an advocate of that for years. The principle of one business, one small business deduction is a good one.

Number two, the current proposals are far too broad and imperfect.

Number three, ideally there would be a rethink.

Number four, failing a rethink, the new rules should be targeted much better with minimal crossfire collateral damage as a key objective.

Number five, targeting should be broad-based and not exclude certain groups, sectors or businesses.

Finally, number six, any rethink or targeting should include simplicity as a key objective.

Adam Smith would hopefully be proud of my recommendations. If none of my recommendations are met and we're left with the mess that will inevitably occur, then consideration should be given to scrapping the small business deduction and replacing it with a different measure that better targets its intended policy objective without this horrific complexity. That debate, of course, is for another day. However, as I mentioned publicly at the recent Canadian Tax Foundation national conference in Calgary where I was a plenary speaker, the new small business deduction proposals are simply unworkable, mark my words.

Thank you for your attention. I'm happy to address any questions.

Senator Marshall: I'm just trying to digest what you said. In listening to your remarks, I was also thinking about the testimony we have had over the last couple of days. So you looked at the amendments.

Mr. Moody: Oh, I'm an expert in the amendments.

Senator Marshall: When we had Finance officials here and we were going through each of the individual amendments, every time we asked the question whether the government was going to get more in taxes or they were going to lose taxes as a result of the amendment, in all cases they were going to raise revenues. They didn't give us one example whereby they wouldn't raise revenues.

Mr. Moody: Without a doubt this will raise revenue. How much, I'm not an economist, but without a doubt.

Senator Marshall: That struck me as unusual because I would have thought that you're going through and making amendments to the Income Tax Act, trying to clean it up or make things fairer, then in some cases you would raise revenues but in other cases you would forego revenues.

Mr. Moody: I'm not sure I agree with that, but maybe I don't understand your question. Sorry.

Senator Marshall: We discussed some of the amendments last Friday with Finance officials, for example, amendments to ensure that any accrued foreign exchange gains on a foreign currency debt will be realized when the debt becomes a parked obligation. The impression I got when we discussed the individual amendments with the Finance officials is that a lot of our questions couldn't be answered. We didn't get good responses to them. For example, for that one, foreign currency debt will be realized when the debt becomes a parked obligation, when there is an exchange loss. One of the questions I asked was what will happen if there's a loss? They couldn't answer it.

Should that information not be available?

Mr. Moody: Ideally, I think that information would be available.

Senator Marshall: Those are the only questions I had, Mr. Chair.

Senator Andreychuk: With regard to the small business deduction, were you able to ascertain why they were targeting that? What was the difficulty they were trying to overcome with their amendments? We talk about encouraging small businesses — the backbone of Canada. It seems that, as you said, it has gone broad and wide.

Did you get any explanation why they didn't accept some of your recommendations for simplicity and seemed to have caused more problems than they are fixing? And what was the problem they were trying to fix?

Mr. Moody: I'll answer your first question.

From a practitioner perspective, I believe what they're trying to attack is the principle of multiple small business deductions that were available to truly just one business. Here's a classic example. Let's say dad owns a company — a Canadian-controlled private corporation — and it's very successful. An accountant will say, "Hey, let's have mom set up Momco and let's charge fees from Momco to Dadco.'' That way you have an income shift from Dadco to Momco.

Currently, the rules under section 256 of the act don't deal with that because those corporations are not associated. If they were associated, they would only have one small business deduction. But in that egregious example, you have one business where the income shift is pretty artificial. That kind of stuff has been going on ever since I've been in practice. The current legislation does not explicitly deal with that, with the exception of some anti-avoidance rules that are pretty broad. I believe the CRA has had a hard time applying those rules. That's my sense.

But I do think the current legislative tools deal with that egregious example, which I think is at the heart of what they're trying to get at. Clearly, with the amendments that are before us, it will kill that without any anti-avoidance rule. That's done.

Does that answer your question? I hope it does.

Senator Andreychuk: It does somewhat.

I know of businesses that have spinoffs, and that's encouraging women to be their own entrepreneurs. They may have started from "dad's business'' or "husband's business,'' and there's a valid reason for moving it over. It encourages some innovation and encourages utilizing the skills of family units in a different way. What's wrong with that?

Mr. Moody: Absolutely nothing. If it's a legitimate business and not artificial, as in the example I illustrated, I think the current rules encourage that.

Senator Andreychuk: If we left them as they are, it would be better than what we're seeing?

Mr. Moody: In my view, yes.

Senator Andreychuk: Why did they not accept your advice? Did you get an answer? Do they not like Adam Smith?

Mr. Moody: Adam is one of my favourites. But as to why, I can't answer that.

Senator Andreychuk: Did they give you an answer why your propositions weren't feasible?

Mr. Moody: The joint committees, you mean? No, they did not. We had one conversation, to their credit. They're hard-working people, and I get that. They're dedicated people in the Department of Finance. I get that. But unfortunately, no, we didn't get any direct feedback on some of our concerns. I'll try that again: on most of our concerns.

Senator Neufeld: Number 4, talking about failing a full rethink, you said that the new rules should target much better with minimal crossfire collateral damages as a key objective. What would be the most egregious thing that's taking place, without my reading this from one end to the other? You understand it; I don't. What would be the most egregious thing that you think they've done that they shouldn't have done? Can you give me an example?

Mr. Moody: Here's a quick example and one of the things I've written about quite a lot. Take the examples where a sister owns a bookkeeping company. Actually, I stole this example from a practitioner, so I'll give that practitioner credit here. Sister owns a bookkeeping company. Brother owns a manufacturing company. One of the key clients of that bookkeeping company is the manufacturing company. Let's say the bookkeeping company has $500,000 of profits, $300,000 of which is from the brother's manufacturing company. In that situation, it's pretty clear that the other 70 per cent of the income from sister's bookkeeping company is from arm's-length sources. You would think that the bookkeeping company would be eligible for a full small business deduction, but unfortunately because of the way the rules are drafted, because she's providing services to a related person, that $300,000 of income she's making off that bookkeeping company from the manufacturing company is ground down, so she's only eligible for $200,000.

Policy-wise, that's pretty ridiculous and it's just not right. We have put that forward to the Department of Finance. Unfortunately, it's fallen on deaf ears.

Senator Pratte: I want to make sure I understand. You totally disagree with the idea of excluding certain groups, even after what you've heard.

Mr. Moody: Totally disagree, yes. Totally.

Senator Pratte: Would you explain why? From the testimony we had just before you, from the doctors, there did seem to be something quite special in their situation compared to other small businesses. You say all small businesses are special.

Mr. Moody: Absolutely. I'm a direct and indirect owner of a practice. I employ 50 people, which, in turn, provides for a pretty decent living for a lot of people, including myself. We happen to operate a law firm and a sidecar accounting practice. So why are doctors more special, other than the fact they're saving lives? I get that. I don't understand the tax policy objective of why they should be entitled to a small business deduction. I operate in a group function as well and I employ people.

I totally disagree with the fact that law firms are for-profit models where the profits of the juniors are subsidizing the profits of the seniors. If you've worked in a law firm or accounting firm model, a lot of times it's quite the reverse. You're subsidizing the juniors so that ultimately they can get more senior. That's where you can make more money.

It just doesn't resonate with me at all. Quite frankly, and I don't speak for my profession, but I would suggest that a good chunk of my profession and the legal profession would probably agree with me. There's just no room in my view for carve-outs, notwithstanding the fact they're to go great work. They will eventually save my life, probably, and I'll commend them for that. But should they pay less tax than me or pay less tax than my peers? It doesn't resonate.

Senator Pratte: We're legislators, and we have to decide what we will do with the bill and with different parts of that bill. With that particular part of the bill, if I understand you correctly, you're asking us is to take that part of the bill out for further study.

Mr. Moody: I think that would be fantastic if we could do that. Like I said, there are good policy reasons to restrict the small business deduction and prevent its multiplication. Kudos to the Department of Finance for doing that, but I think a rethink should happen.

Senator Pratte: Rather than trying to amend it, for instance?

Mr. Moody: Rather than trying to deal with this mess that we're going to deal with.

Senator Pratte: Thank you.

Senator Mitchell: What we're hearing is that this amendment will solve the problem you're concerned about, that a certain group of people are getting a special benefit that you're not getting; and at the same time you're saying you don't like the amendment, so we should reconsider it.

Mr. Moody: Absolutely. For example, I make a decent living. Let's say that I want to shift income and have my brother set up a company and I'll shift fees to him. Do you think that's right? That's highly artificial.

I would suggest that a good chunk of the spirit and the policy reason for these amendments is to kill that kind of stuff, which was not so easy to kill with the existing legislation because of the non-application of the anti-avoidance rule that was there. I agree with that, but what I don't agree with is the complexity. It taxes the brain significantly. I don't mind complexity, but there's a lot of crossfire and collateral damage in these rules.

Senator Mitchell: It seems to me there are two things that are complex. What exists now, quite apart from this change, is complex.

Mr. Moody: Yes, but it's livable.

Senator Mitchell: But all of a sudden this particular amendment tips it over to be too complex, not livable. What is it about this particular thing that makes this huge mass of complex tax that you're concerned about, but livable, all of a sudden just at some threshold it tips over, when it partly resolves your problem?

Mr. Moody: Great question. I could wax on forever about that, but I know it's getting late. I could talk tax all night if you guys want to.

Senator Mitchell: Please do. I like this guy. He's great.

Mr. Moody: I'll attempt a short answer to your question.

Right now the rules I'll just say are workable. The amendments require you to dive into the sources of income of each company to see whether or not those sources of income on each different type of — for example, the bookkeeping example — you have to look at who your customers are. Are you related to those customers? Whereas right now the rules look at the source of income, yes, but the real test is, is it a business? That's number one. And is that active business income earned in Canada? That's about as complex as it gets.

Now, the same test, but you've got to look at have you earned that money from a related party source, a non-arm's- length source? That's a tough thing to track and dive into, especially when you don't have a controlling interest in the firm.

Senator Mitchell: This is a philosophical question. The doctors make a compelling argument that the tax structure that exists, which would be changed, allows higher-earning doctors to subsidize teaching doctors, for example. In a sense, if you talk about Adam Smith and the public good and how taxation should or should not support it, really we're asking a certain class of doctors to subsidize the education function of another class of doctors, when that education function is a broad public good. We go to them and say that we really want this public good, teaching doctors, we're just going to single them out to pay for it. Why would that be?

Mr. Moody: Again, it doesn't resonate with me because the group function exists with most professions. I mean, look at lawyers. It's been the same way. Accountants. They practise together. Why do they practice together? Because to practise as a single person is so tough, and you're going to teach the youngsters so ultimately there is longevity for the benefit of the society as a whole.

Now the benefit with doctors is they're saving lives and doing research, but so are accountants and lawyers.

Senator Mitchell: You're not getting the same benefit as doctors.

Mr. Moody: Why carve out? That makes no sense to me from a policy perspective.

Senator Andreychuk: I didn't get the doctors saying that they don't contribute to the public good, just as I believe lawyers do, being one.

Mr. Moody: I didn't hear them say that either, by the way.

Senator Mitchell: I didn't say it either.

Senator Andreychuk: I know you didn't. I said the doctors. You were saying that everyone contributes to the public good, doctors, lawyers, et cetera. But the compelling case by the doctors was that they were encouraged by government to take on that role. That's how we are fostering research and development.

Mr. Moody: So are accountants and lawyers encouraged, by the way.

Senator Andreychuk: They are in a medicare scheme where their income is topped. It's what public policy has done to them to limit their options. If we didn't have that system, then they might have looked at other ways to continue research, and they're saying we might have had a different subsidy, research, innovation strategy. But this was something that the provincial governments went to them and said, "Set up this way,'' encouraged the teaching.

Mr. Moody: I understand that.

Senator Andreychuk: That's the difference from other professions. You don't get that? It's not just that they save lives.

Mr. Moody: I agree wholly with the proposition, but so have accountants and lawyers been pushed into group functions. With respect, in Ontario, professional corporation legislation has only been around since 2004. In Alberta, it has been around since 1982. Prior to 1982, doctors practised in groups. To suggest it was the tax policy that encouraged them to practice in groups, I'm not buying that.

Senator Andreychuk: No, a medical practice policy, not a tax policy.

Mr. Moody: I can tell you, as an accountant, my professional body in Alberta encouraged me, and still does, to practise in groups.

I think we're on the same page. I think practising in groups has been encouraged by all bodies, for obvious reasons.

Senator Mitchell: But you don't get the tax advantage.

Mr. Moody: I get the tax advantage today, but will I get the tax advantage after this legislation? No, just like doctors won't.

Senator Marshall: I want to summarize this. You responded to Senator Pratte's question, "Gee, this is great,'' and then Senator Mitchell got in and talked about a lot of other different issues. I want to go back to what you were saying to Senator Pratte.

If you were advising the minister on that section of the act, you would say don't bother with that amendment? Forget that amendment and go back to square one and study the problem before you come up with —

Mr. Moody: My recommendation is a rethink. I certainly appreciate what they're trying to do, and I think that's admirable.

Senator Marshall: But it's not making it better.

Mr. Moody: I think the old cliché "let's kill a mouse with an elephant gun'' resonates with me. I do think there is room for significant improvement in this area; no question about it. But, boy, the crossfire collateral damage that's being done here is quite significant.

The Chair: Mr. Moody, you were succinct, very clear and definite in your thought process. You had a variety of questions. We certainly appreciate your being here, and we appreciate the fact you waited and heard another group before you were able to talk with us. Thank you very much for your participation.

Mr. Moody: Thank you very much.

(The committee adjourned.)

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