The Standing Senate Committee on
National Finance
Issue No. 42 - Evidence - October 24, 2017 (Morning Meeting)
OTTAWA, Tuesday, October 24, 2017
The Standing Senate Committee on National Finance met this day at 9:33 a.m. to study the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: I welcome you to this meeting of the Standing Senate Committee on National Finance. My name is Percy Mockler, senator from New Brunswick and chair of the committee.
I wish to welcome all those who are with us in the room and viewers across the country who may be watching on television or online. As a reminder to those watching, the committee hearings are open to the public and also available online, on the Senate website, at sencanada.ca.
Now I would like to ask the senators to introduce themselves.
Senator Oh: Victor Oh, Ontario.
[Translation]
Senator Pratte: Senator André Pratte from Quebec.
[English]
Senator Black: Doug Black, Alberta.
[Translation]
Senator Forest: Senator Éric Forest from the Gulf region, in Quebec.
[English]
Senator Andreychuk: Raynell Andreychuk, Saskatchewan.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Eaton: Nicole Eaton, Ontario.
Senator Neufeld: Richard Neufeld, British Columbia.
[Translation]
The Chair: I would also like to introduce the clerk of the committee, Gaëtane Lemay, and our two analysts, Sylvain Fleury and Alex Smith, who team up to support the work of this committee.
This morning, the committee continues its study on the proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved, changes that the Minister of Finance proposed during the summer of 2017.
[English]
Honourable senators, today we have before us representatives from the rural agricultural sector who have been asked to give their opinion, comments and recommendations on the impacts of the proposed changes.
We are pleased to welcome first Mark Brock, Chairman, Grain Farmers of Ontario. Second, we welcome Philippe Etter, a dairy farmer from eastern Ontario. And third we have Mark Wales, Chair of the Business Risk Management Committee, Canadian Horticultural Council. Finally, by video conference from Regina, we welcome Ray Orb, President, Saskatchewan Association of Rural Municipalities.
Mr. Orb, do you hear us?
Ray Orb, President, Saskatchewan Association of Rural Municipalities: Yes, I can hear you just fine. Thank you.
The Chair: Thank you all for accepting our invitation.As a reminder to our witnesses, I would ask each of you to limit your opening remarks to seven minutes. Your presentation will be followed by questions from the senators.
Mr. Brock, you have the floor.
Mark Brock, Chairman, Grain Farmers of Ontario: Mr. Chairman and members of the committee, thank you for the opportunity to provide comments on proposed changes to the Income Tax Act.
I farm with my wife, Sandy, just outside of London, Ontario, where we have a cash crop and livestock operation.
I am here in my capacity as Chairman of the Grain Famers of Ontario, representing 28,000 farmers across Ontario who farm 6 million acres. Our industry has a $9 billion impact to the economy and creates over 40,000 jobs.
Our membership is made up of family-owned farms that produce corn, wheat, soybeans, barley and oats. We produce food that is used in Ontario or exported, and also renewable products that are used in Ontario or exported.
The proposed changes to the Income Tax Act are probably one of the most contentious issues that I have dealt with as Chair of the Grain Famers of Ontario. The unintended consequences impact our family farms in three ways: by decreasing the amount of capital available to expand farm businesses; by increasing the regulatory burden; and by making it more difficult to transfer farms to the next generation.
For these reasons, we have asked the government not to move forward with the proposed changes but instead to work with industry to address any shortcomings in the tax policy affecting private corporations. We still believe that additional time is needed to address the numerous unintended consequences that may arise from such a major change.
Last week, Prime Minister Trudeau and Minister Morneau made further announcements regarding these tax changes. We are pleased to see the direction of these changes; however, we remain concerned about the details behind these announcements and the process for formulating these changes. It is our hope that there will be ample time for industry to provide input and analysis prior to the legislative process. Because of the limited details, it is difficult for us to comment definitively on the revised changes. However, with what we know at this point, I want to share some of our thoughts.
With the capital gains exemption, it is clear from the initial proposal that there was significant impact on intergenerational farm transfers and young farmers in particular. The proposed changes would have increased annual taxes, debt loads and the cost of transferring the business from one generation to the next by millions of dollars.
The announcement that the capital gains proposal has been withdrawn from the package is positive. It means that disallowing the capital gains exemption on gains accrued while a child was under the age of 18 is off the table. The announcement did not appear to address the fact that it is still more cost-effective to sell your corporation to a stranger than it is to your child.
In order for succession plans to work, they must provide certainty to both the parents and the child involved. The tax system needs to recognize the non-labour contributions of family members, allow flexibility in compensating non-farming children and keep capital in the corporation where it can fuel the growth of the business and the overall sector.
The original proposal contained a reasonability test around income sprinkling to determine if dividends and capital gains received from family corporations would be taxed in the current way they are. If the test resulted in failure, the individual would be taxed at the higher personal tax rate.
Last week, the Prime Minister indicated that the revised rules would not apply to someone who made a meaningful contribution to the business. We need clarity on what “meaningful” means. Our original concerns regarding the subjective nature of such a test were as follows: Any test that is subjective would open farm businesses to the interpretation of a CRA auditor, with little recourse to argue against that interpretation. Farm families live where we work, and members contribute to the family business in ways that are often impossible to track and indirect in nature. The consequences of being offside of the test under the proposed rules were highly punitive and unreasonable, and there is no indication of whether those have changed. The test will create uncertainty in farm succession plans and compensation structures and increase compliance costs as farm businesses seek to document or defend themselves against the imposition of a test. Spouses staying at home to take care of children or working off-farm to support the family business will potentially be impacted to the greatest extent.
When looking at passive income, the original changes to the passive income rules would have made it difficult for farm corporations to build reserves for major purchases or innovative changes. Minister Morneau announced last week that there would be a threshold of $50,000 for passive income, which would not be affected by the new rules. He indicated that this would equate to roughly $1 million in passive investments in a corporation. This is a significant improvement over the initial proposal. One concern, however, is that the change does not make any allowances for the scale of businesses. For example, larger farm corporations will have greater need for passive capital than would a smaller one. As land prices have risen, it is certainly not unusual for a single land purchase to be well above the $1 million mark. A farm corporation that is holding passive investments for this purpose may exceed the threshold. It is not clear what the tax rate would be on this passive income greater than $50,000, which is a significant concern since original proposals subjected passive income to tax in excess of 70 per cent.
Intergenerational transfer. Last week, there was an announcement by the government that the government would make it easier to pass along business to the next generation. This sounds like a positive step in the right direction, but we need further information on how this process is determined and how the ease of the transfer will unfold. How industry will be involved in this process is important.
That summarizes our major concerns around the issues, but I would like to leave with you a few thoughts.
The agriculture sector in Ontario and Canada is poised for growth. Late last year, Dominic Barton, Chair of the Prime Minister’s Advisory Council on Economic Growth, recommended that the federal government focus their attention on unlocking the potential of Canada’s agriculture. He stated as the reason for this that it employs lots of people, that there’s a lot of innovative technology and that there is huge demand for agricultural products around the world.
The growth potential for agriculture is real, and we need a business environment so that our farm members can take advantage of this opportunity. Getting tax changes right without adversely affecting family farms is essential for us to remain competitive with U.S. farmers and farmers around the world.
A personal note I want to impart to the committee is how farm families are unique. Our assets can appear to be large, but we need land to produce products, and the cost is continuing to rise. Grain and oilseed farming is not something you can do on 10 or 15 acres. You need a sizeable land mass to make a living. You can say that each generation inherits the land, farms it and passes it along to the next to farm and continue on that process. We don’t even realize the value of the land in our business most of the time.
Family members contribute to the operation of our farms in different ways. My daughter is in high school right now and will be going off to university shortly. She is an important contributor to our farm and will always be. We have peak times at harvest and in the spring for planting. We have weather to contend with within our business decisions. It’s not a nine-to-five job in a factory producing widgets. As a test for reasonableness is considered in income sharing, our uniqueness needs to be incorporated.
Passing on the family business can be challenging. It is our home and our place of business. Not everyone can stay on to run the farm for it to be successful. There needs to be consideration as the rules are developed. It cannot be more attractive for my mom to sell to an institutional investor than it is to pass on the farm to her son or her granddaughter.
We ask the government to commit to a clear process for farm stakeholders to address the unique nature of our business and ensure that no unintended consequences are experienced on the farm. Get us involved, and we can help to craft a solution that will work for our farmers and help the government to stay focused on the 3 per cent of the population they are targeting with these changes. Thank you very much.
The Chair: Mr. Etter, please.
[Translation]
Philippe Etter, Dairy Farmer, as an individual: Good morning, senators and members of the Standing Senate Committee on National Finance. Thank you for the opportunity to share my concerns regarding the various amendments proposed by the Minister of Finance. First of all, I would like to explain my background in agriculture, followed by my reasoning on the effects that some of the changes may have on agricultural entrepreneurs in our country.
I myself am a young dairy farmer from the village of Sarsfield, east of Ottawa, and also Vice-President of the Union des cultivateurs franco-ontariens, which represents more than 2,000 francophone farms in Ontario.
In terms of my personal background, after finishing my studies in finance at the University of Ottawa, I decided to return to the family farm to prepare myself to take over their business. In January 2013, we transferred the company from my parents. We proposed a structure with two separate businesses, knowing that my parents would continue to farm the land. I personally created a private company and I am the sole shareholder for the dairy farm. We chose this approach after consulting with various experts in the field, namely our accountant, our lawyer, our management consultant and tax experts.
It takes months, if not years, of work, meetings, discussions and, above all, planning to come up with a logical and consistent transfer between the two companies. Now that you know that I am a young, next-generation producer, you will understand that for me this new generation of farmers is essential to the future of the Canadian agricultural industry.
Every day, 2 million people work in agriculture and agri-food, or one of every eight jobs. Agriculture is a major economic driver in the country since we are the fifth largest exporter of agricultural products in the world. That said, the average age of farmers in Canada keeps going up, which means that, in theory, there will be a massive transfer of farm businesses from one generation to the next. There are a number of barriers upon entry for young people who want to make a living from agriculture.
Here are some of the problems facing new agricultural entrepreneurs: very large capital investments with, of course, the associated financial risk, a serious labour shortage and an increasingly challenging work-family balance, given the size of today’s businesses. All those are major stressors for those who want to take over farm businesses.
You know that farmers are passionate people and that you have to have that passion to succeed and persevere in the community, but at the end of the day, economic reasoning must prevail. That is why I think the various changes proposed by the Minister of Finance will have a negative impact on the young agricultural entrepreneurs who decide to take over the family business.
We should find ways to encourage them to return to working the land. So I’ll go over a few of the measures that have been listed. First, let’s look at the recent changes to the various rules on the small business deduction. In our specific case, we will be affected, because even though we are two separate companies, since we are connected and there is an exchange of products and services between the two, the portion of the revenue generated by my parents’ business will no longer be eligible for a reduced tax rate.
The other thing I want to talk about is the transfer of a business within a family versus the sale to an individual. Initially, some of the changes and provisions would have had a major impact on the transfer of a business. As a result, it would have been better to sell to an individual than to your own family. Finally, the Minister of Finance retracted to correct the situation, but my concern is with the message being sent. We should encourage the next generation instead of hanging on to the beliefs that transferring businesses within families is a tax avoidance tactic.
The third issue I would like to address is passive investments. In reality, farmers need a lot of capital and investments. In most cases, the vast majority of funds are reinvested in the business. However, I think it is wise for good, seasoned business managers to diversify their sources of revenue, as much as possible, in order to reduce their risk.
That said, the new rules in Budget 2018 will certainly limit or discourage some from diversifying their investments outside agriculture.
Finally, farmers are an engine of the Canadian economy and bring vitality to our rural areas. There are significant growth prospects for those who want to invest in the field, but we must give ourselves the means to encourage them. Imposing tax rules to counter abuses committed by a minority, without really understanding the effects, would have a major impact on the vast majority of agricultural entrepreneurs.
Thank you.
[English]
Mark Wales, Chair of the Business Risk Management Committee, Canadian Horticultural Council: Good morning, Mr. Chair, honourable senators.
As a way of introduction, the Canadian Horticultural Council is an Ottawa-based voluntary not-for-profit national association that represents all fruit and vegetable growers across Canada involved in the production of over 120 different types of crops, with farm cash receipts of $6 billion in 2016.
To understand the importance and scope of the horticultural sector, the economic impact of our industry was analyzed. The GDP footprint associated with the exports of produce, household consumption of produce in Canada and the use of produce by other industries in Canada throughout the value chain was valued at $15.7 billion in 2016, which, in turn, supports 181,600 jobs in the Canadian economy. It all starts on the farm with a grower and his or her family.
As for myself, I’m a vegetable farmer from Aylmer, Ontario, on the north shore of Lake Erie. I grow hot peppers, garlic, corn and soybeans. I’ve been spending most of my harvest season, since July 18, reviewing the original tax changes and working through the language with my son, who has an accounting business with many farm and small-business clients.
Now that Finance Canada has announced revisions to the original tax proposals, I continue to work through my peak period analyzing the changes and learning how farms may or may not be impacted.
A week ago my remarks would have been different than they are today, but a lot of things have changed, and my hope is they’ve changed for the better.
The CHC is pleased that Prime Minister Trudeau and Finance Minister Morneau have taken our concerns into consideration. The changes announced last week are a step in the right direction for all farmers. We are encouraged by the changes, and we will be analyzing the text in more detail in the weeks to come, as well as Budget 2018, where we’ll likely see the new passive investment rules.
CHC is committed to continuing to work with the government to ensure the tax system is fair but does not hit our hard-working farmers, especially our young people who are the next generation of food producers for this country.
This morning, I’ll address some of the changes as we understand them today and how they will impact farmers.
First, the government has made changes to the income sprinkling provision and will be coming out with revised legislation later this fall. As you may be aware, the original proposal said that family members would need to pass a reasonableness test, which opened up many questions and uncertainty for farmers, not knowing how the test would be applied. No one, of course, would want to leave that definition to a CRA auditor who doesn’t understand the farm.
While farm families may not be on the farm all the time, their contribution is extremely valuable, as they’re working when it matters, particularly during the key planting and harvest seasons. In some cases, the younger generation may become the tech expert for the farm and help on the innovation and technology side. Though it may not actually take much time, their contribution is extremely valuable. Much of the equipment we have today, they are the only ones who know how to make it work. Those of us in the older generation just drive it and use it.
Under the revised change, we now have a “meaningful contribution” test. CHC continues to have a concern with the uncertainty this may bring farmers. However, we have let the Prime Minister’s Office and Finance Canada know that we are ready and willing to help with the technical guidance documents to make sure the revised tax change is fair and does not affect those who contribute on the farm, even indirectly. We continue to offer our help to Finance Canada on this proposal and the others to make sure farmers do not end up being unintentionally hit by the tax changes.
Second, the revisions made to the passive investment proposal should not affect the majority of small businesses, including farms. Finance Canada has proposed a threshold of $50,000 of passive investment income per year, which, depending on the return on investment, would mean an average investment of a $1 million getting a 5 per cent per year return.
Farmers who use passive investments as a savings vehicle can continue to do so without worrying about getting hit by more tax. As we continue to look at this proposal, we raise the question of lumped investments, such as large land or real estate or quota sales, and we advise the government to include a carry-over provision on the $50,000 annual threshold.
Lastly, we are encouraged that the government has taken two proposals completely off the table, which would have unintentionally impacted farm businesses. The government has said it will not move forward with the proposed measures to limit access to the lifetime capital gains exemption, nor are they moving forward with measures relating to the conversion of income into capital gains.
Farmers were concerned that the original measures relating to the conversion and to capital gains could result in several unintended consequences, such as in respect of taxation upon death and potential challenges with intergenerational transfers of business.
CHC looks forward to working with Finance Canada as they set out to make it less difficult for farm families to hand their business to the next generation. We will continue the dialogue with government to ensure farmers’ voices are being heard.
Beyond these changes, we are pleased that the government is keeping their campaign promise to lower the small-business tax rate to 9 per cent by 2019. In the government’s last budget, they recognized the agri-food sector as one of the most important — and I would say we are the most important — for Canada’s economy and set a goal to increase agri-food exports to $75 billion by 2025.
With the recent revisions to the proposed tax changes, family farms will continue to grow their businesses, contribute to Canada’s economy and provide for their families without having to worry about passing on the farm and their hard work to the next generation.
CHC is committed to working with the government to ensure the tax system is fair and does not hit our hard-working families.
The Chair: Thank you, Mr. Wales.
Now we will go, by video conference, to Mr. Orb.
Mr. Orb: Good morning. My name is Ray Orb. I am President of the Saskatchewan Association of Rural Municipalities. SARM is the independent association that represents all 296 rural municipalities in Saskatchewan.
We have a long and proud history of advocating on behalf of our membership and the rural communities in which we live, work and invest. As a voice for rural Saskatchewan, I appreciate the opportunity to speak to you today about our concerns with the federal government’s proposed tax planning using private corporations.
SARM has consulted with the chartered professional accountants and business advisers group to further our understanding of the serious negative consequences that the proposed tax changes will have on rural Saskatchewan and the long-term impacts these changes could have on our rural municipalities and the economic landscape of the place we live.
We understand that the government will not be moving forward with measures related to the conversion of income into capital gains. SARM would like to stress the importance of the family farm and the ability for intergenerational transfers of farms and businesses in Saskatchewan. Farmland accounts for 61.6 million acres in Saskatchewan, and the province is home to 34,523 farms. Saskatchewan has the highest proportion of incorporated farms on the Prairies.
Farmers take on significant risk when they invest their time, resources and assets into a business that makes them price takers. SARM appreciates the federal government’s commitment not to pursue the conversion of income into capital gains. However, SARM remains concerned with the other proposed tax changes.
Increased tax rates for related parties earning income from private corporations — to say that business owners are using loopholes to pay a lower tax rate than a comparable employee would pay on a similar income is an unfair comparison and seems to mislead people into the belief that the two income streams are economically identical.
Business owners, whether they be retail stores, manufacturing operations, health professionals or farmers, have a very different situation in dealing with earning taxable income compared to employees.
Most doctors in Canada are also small-business owners who create local jobs, purchase equipment and supplies, rent or buy buildings and pay their taxes. Doctors are essential to thriving communities and provide care to residents in our rural communities.
Removing economic incentives to corporate operations will decrease the number of entrepreneurs, professionals and business startups in the future willing to take on the risks without the potential for increased returns. The proposed tax changes will stagnate or, even worse, erode our knowledge economy by driving away highly skilled professionals who are engines of innovation, research, technological advancements and medical breakthroughs.
The proposed tax changes to private corporations have the potential to discourage entrepreneurship and alter the landscape of rural communities across the province. Business owners take on a significant risk when they invest their time and assets into a venture with no guarantee of success. There is no safety net for the business owners. If the business doesn’t make a profit, then they do not get paid. They do not have access to vacation pay, medical leave, overtime, pensions, severance or health and other benefits that employees are granted and even guaranteed by law.
Small-business owners bear the responsibility for the success of their business, meaning they need to be available to a much greater degree than employees. This creates stress and requires flexibility within the family unit in order to be feasible.
Currently, no consideration is given to other family members, spouses, parents or children that give up the security of a steady wage and endure the fiscal drought of low-profit periods and support the person directly active in business in their family and home life. The proposed change to increase the personal tax bracket on income earned by a related person from a private corporation has the potential to severely economically punish many business owners. The current proposal increases the tax rate on income in excess of reasonable amounts while providing no real guarantee on what is reasonable for the limited contribution factors that are proposed to be included.
It is not unusual for one spouse to hold an employee job to support the couple’s lifestyle while the other spouse starts a hopefully profitable business. It is bad enough that little consideration is given to the employee spouse, who pays tax on the full amount of employment income, but under the proposed rules, they potentially may not be able to reap any benefits when the business is successful because they have not contributed directly to the corporation.
The least defined of the proposed changes — the changes to income tax rates on passive investments held by corporations accumulated through the after-tax profits of active businesses — are potentially the most far-reaching. Business owners make up a significant portion of the Canadian economy, and successful business owners are one of the best sources of investment capital for new business.
The proposed rules will decrease the ability and appetite for successful business owners to assist other business owners to get started. Fewer new businesses would result in less job creation, less innovation and a potentially stagnant and underperforming Canadian economy. Suggested methods to increase corporate or personal tax rates related to income generated on these passive investments will decrease corporate savings, increase business risks and encourage less research on new business ventures.
These items decrease the likelihood of long-term businesses that are successful, again a detriment to the entire Saskatchewan and Canadian economies. The current tax system allowing deferral on taxation on assets retained in a corporation is a significant incentive to make intelligent, long-term investment decisions with excess profits that are not needed to expand the business. Business owners have a better idea of how to create greater wealth for themselves, for their families and for the Canadian economy on an individual basis as opposed to adding extra funds to the government budget.
The proposed changes will — communities and their — corporate operations, we run the risk of decreasing the number of entrepreneurs, professionals and business startups. This will lead — to local jobs created in the economy.
— will cause considerable damage to key areas of the Canadian economy and specifically — over generations in rural Saskatchewan.
Thank you for the opportunity to speak today. I would be pleased to answer your questions.
The Chair: Thank you, Mr. Orb.
Senator Eaton: One of our witnesses last week said that industrial strategy does not match taxation policy. In listening to the four of you, it seems very much the same where you could say that taxation policy is not promoting agricultural policy.
I say that because I used to drive a tractor at 12 on my uncle’s farm when I was needed, so I’m aware of how income sprinkling works. And I understand that passive income is very often used, as you say, to buy an expensive combine, to buy more cows, to buy the land next door, and $1 million in today’s costs doesn’t go very far.
Am I wrong in saying that taxation policy should be directed towards promoting agriculture, especially since we seem to count on you so much in our free trade deals and we count on agricultural produce to benefit this country as a whole? Mr. Wales, you seem positive about the government’s step in the right direction. Do you think that with income sprinkling, a reasonable test is a step in the right direction?
Mr. Wales: As I mentioned in my remarks, that’s probably the area where we have a lot of work to do with them. In my discussions with the PMO and Finance Canada, they say they are willing to work on this with us. That’s the one that gives us the greatest concern because it can be very subjective at the end of day. That’s the one we need to get right.
Senator Eaton: Time sheets? You were up at 6 this morning to milk. Were you making lunch for the crew at 12?
Mr. Wales: Did you attend an auction sale to get a good deal on the next piece of equipment or the next piece of land? With the rural workplace — this is not only about farms — we have a huge amount of support businesses in rural Canada that we depend on, whether it is the farm machinery dealer or the local repair shop. They are generally family businesses that get passed on to the next generation as well. And we depend on them and their success just as much as they depend on us.
Certainly the income sprinkling is one we have to work on. I am relatively satisfied that the rest are under control. The government has realized the damage they could have done through the changes to capital gains and passive investment. On passive investment, if you were a livestock beef farmer on May 19, 2003, the world probably looked pretty good. On May 20, the floor fell out and the border was closed as a result of BSE and through the better part of a decade or longer. You may need to have money set aside to deal with downturns that you could never in your worst nightmare have predicted. We all work at the mercy of Mother Nature. At the end of the day, with all the plans you make before going to bed, she gets the final word and everything changes the next morning. We work under those extreme time constraints, especially with planting and harvest. In the fruit and vegetable industry, we have a lot of crops that have sometimes a 24-hour harvest window, and you need all the help you can get.
As I mentioned, our big concern going forward is the income sprinkling and getting that one right.
Senator Eaton: Mr. Brock, do you have anything to add about passive income?
Mr. Brock: Yes. To your point that having a taxation policy that promotes an industry, it is probably the broader conversation that we have. When I came home from university to farm in 1997, I had three jobs and I farmed as well, trying to make sure I could actually pay the mortgage on our farm. Being subjected to a CRA audit two years ago on my HST and payroll, I am concerned about the argument and the validity around trying to show this passive income or the income sprinkling issue as well, because it’s not very subjective. It’s very black and white and there is a lot of concern about how an auditor would apply the rules, and it is almost personalized to the auditor.
They do a great job. They do a job they have to do, and they have to live within the rules that they’re given to do an audit in. But the subjectivity of a reasonability test and looking at some of this passive income are concerns, and I think we need to make sure we get it right, because what happens when you develop policy in silos is that you do something over here that has a negative impact on our industry. Being highlighted in the federal budget and through Dominic Barton’s Advisory Council on Economic Growth, agriculture is a shining light in the Canadian economy. Let’s have a broader discussion and see, as we talk about tax policy, how it influences the overarching policy around how we want to drive agriculture forward.
Senator Andreychuk: I just want to follow up on this point. We look at agriculture as income when we come to the tax act. Then we look at it, as Senator Eaton has said, about agricultural policy and how to help it out. I’d like to hear either from Mr. Orb or Mr. Brock about the fact that agriculture, in other countries, is looked at as something very valuable to society, not just to the farming. It is tied to health. It is tied to security. It is tied to safe food. It is tied to competitiveness with all of the other agriculture, and it’s tied to trade policy negotiations.
We’ve talked about farms, but it’s rural Canada we’re also talking about because the small businesses are not just the doctors we want to keep there. It is the lumber yard, the little confectionery that can stay open a few hours longer. In my case, often, I see immigrant families who are spending with their family in rural Canada, and we want to have immigration spread out. Can either one of you talk a little more about the fact that it’s not just farms and the passive income that are affected but that it affects the whole community? Mr. Brock?
Mr. Brock: Mr. Orb could probably answer this better from a municipality standpoint. I look at where I live, and I look around me and look at the fantastic rural landscape that I have the luxury to live in. When I look at that, if I were to look at it and say, “Okay, we’re going to remove agriculture from this rural community,” it’s gone because we tend to be the backbone. There are three equipment dealerships in my small town. It gives the opportunity to have immigrant families come in to start small businesses to service the industry that services our industry. It is that ripple effect where, as you spread out, it just encompasses so many other businesses. If you start to pick away at the core business and have a negative impact on one of the core businesses in that area, it just has that ripple effect.
A friend of mine is a building contractor, and he says, “I do well when farmers do well.” That really resonates with me when I talk with other businesses outside of just agriculture. They know when the farm economy is doing well because they are doing well as well.
Senator Andreychuk: Mr. Orb?
Mr. Orb: Yes, I can answer if you can hear me.
The Chair: Yes, we can.
Mr. Orb: Thank you. I wanted to answer Senator Andreychuk’s question with a comment saying that agriculture is the backbone not only of rural Saskatchewan but also of rural Canada. I think it is something that is often overlooked. Agriculture is the sector that pays the bills. The majority of the municipalities in the rural area in Saskatchewan are operated from the funds created from the farms, from farmers paying taxes to the municipalities. It is very important that, if tax policy is changed, it has to allow the farmers to be able to have all of the tax tools at their disposal to be able to operate. Agriculture is more than just a sector creating profit; it’s a way of life. That’s the way it is looked at, I believe, in countries around the world. This is a way of life that has to be maintained. It is creating safe food for people, not only in this country but to be exported out of our country. So I think it’s very important.
We were concerned about the consultation period. That has not been brought up yet. We feel that the consultation period for these proposed changes was not done properly because of the fact that many farmers are busy with their harvest and weren’t able to comment. So we asked for extension. Unfortunately, that didn’t happen.
Senator Black: Gentlemen, thank you all very much for being here and providing to the committee the point of view of your industry. As you have indicated, and I want to underline as a senator from Alberta — and I know my colleague Senator Andreychuk, from Saskatchewan, feels the same — we want you to know that we know you’re the backbone of our economy. Particularly when the energy industry in both Saskatchewan and Alberta is becoming more and more constrained, the opportunities that are available to agriculture are basically unlimited if we follow the advice that Dominic Barton, as someone suggested, gave. We need to ensure that we are not hobbling the horse that might actually get us across the line.
Now that I have disclosed my bias to you in favour of agriculture, I want to ask you this question: Income sprinkling. I am not sure why your industry is not simply saying to the government, “The amended proposals are just unsatisfactory. You are creating, potentially, a set of rules that simply cannot be administered.” So why are you allowing yourself to get into the game of tit-for-tat? Why don’t you simply say, “No, a definition of income sprinkling on the farm is not possible. It’s for us to determine, not for you”?
Mr. Brock: I think you make a very valid point. I think, in all negotiations in good faith, when you draw the line in the sand, you tend to not have an ability to negotiate much further. From our perspective, we are trying to get this tax policy right. I’m personally more in favour of family income, where, as a family, this is our family income, and this is the tax we’ll pay as a family. I think that makes a lot more sense because, to your point, I think that, within our own business structure and our family structure, we are able to use the tax tools to help our business as a family business. So, to your point, I agree; I would prefer a family-tax-based system. Those are my points; I don’t know if I have much more to add.
Mr. Etter: Thank you for your question.
Now, as we all know, my point of view would be that our government is structuring this policy in order to touch a minority of people that use that strategy. For example — and I will not name any professions here — the spouse is working outside, and then they will split that income. The reality is, in our sector, that that is rarely the case.
Either the man or the wife is working. He’s working on the farm or off the farm, and either she helps out or not. It’s really not applicable in that portion.
Mr. Wales: Thank you for the question. It has been an interesting exercise going since July 18. One of the things that we’ve learned is that — and I think most didn’t realize it — there were already rules around giving a wage to a family member. They have been there for a very long time. There had to be a considered contribution. So those rules were already there. Of course, the rules did not apply to dividends from a Canadian-controlled private corporation; so that’s what the government was trying to change. I’ll echo the sentiments of both Mr. Etter and Mr. Brock; income sprinkling was probably very uncommon in the farm situation to start with. In going forward, we certainly offered to help them to get the guidance documents for the CRA auditors right, and we will work with them. We have done this in a lot of other areas of the economy to start with.
I serve on a labour task force in Ontario regarding the Occupational Health and Safety Act. When we brought our industry under the act in 2006, they created a committee I have sat on ever since. We work with WSIB in Ontario, the Ministry of Labour and Agriculture and Agri-Food Canada to monitor the implementation of that act. We meet three or four times a year and look for trends and problems, and fix them.
You can do that going forward to ensure things get implemented properly. That’s the key on this one, because it was not a common practice to start with, but it did occur. We want to make sure the farm workplace gets recognized for its uniqueness, because the contribution of family members is often wide and varied, and it’s different from a normal Monday-to-Friday, nine-to-five type of business.
I’m confident we can do that, and we have opened a dialogue on this subject that we didn’t have before. I’m confident we can come out of this well. If not, we’ll back at this again. We have been at this for the last 930 days, from start to finish. I have commended the government for listening.
I would also like to commend the press for keeping this issue alive and making sure that everybody who would have been impacted had a chance to tell their story. It doesn’t often happen on an issue; you get one-sided reporting sometimes. I think the press did a good job of ensuring every type of small business in this country had the chance to say how much this would have impacted them, and I think that affected the government’s decision.
Mr. Orb: In our experience as far as income sprinkling is concerned, we would like the government to get this right, because we found in the past that if the government decides to bring in legislation, it is harder to change it after than it is before the legislation is put in place. That’s exactly why this consultation is taking place. We’re really pleased that the Senate committee today is allowing us to present, because I believe this will be the last chance we get to voice our opinions on this matter.
We appeared in front of the House of Commons Standing Committee on Finance in Calgary a couple of weeks ago. We gave examples of farmers in Saskatchewan who need to keep the provision of income sprinkling in place, because these corporations, even though they are family farms, are some of the biggest farms in the country. I believe that 27 per cent of the incorporated farms in Saskatchewan are the largest farms in the country. We need to keep the tax tool there.
The problem is that putting some subjective rules in place that may alter how farms operate and run their business — making it subjective for someone else to make a decision outside of what the family farm believes is viable — is a mistake, and we have to make sure the government gets it right. Thank you.
Senator Marshall: Thank you for being here today.
I have a question specifically for Mr. Wales, and then I have general questions for everybody.
Mr. Wales, when I looked at the submission you made to the Department of Finance, you said the Canadian Horticultural Council “has been assured AgriInvest funds and rented farmland will not be affected” by the passive investment rules. Then you say, “However, based on the complexity and vagueness of the proposals, we flag this as an additional concern.”
What did you mean by the first sentence? Who has assured you that there are certain elements that won’t have the passive investment rules apply?
Mr. Wales: We’ve had consultations with the Prime Minister’s Office and the DepartmentFinance — and I will avoid naming a name, but I’m comfortable from repeated discussions that they recognize things. AgriInvest — I’m glad you mentioned it — is a government program that helps farmers set money aside for those unexpected downturns. It was a program set up in 2007 by the previous government. It has high uptake by the farmers — almost 90 per cent will use the program. By definition under the proposed new rules, that would have been considered a passive investment.
What would be the point of using a government program to save money for a downturn and then having to pay possibly 72 per cent tax on the income it might make? It defeats the purpose.
There’s been clear indication from more than one source that AgriInvest accounts clearly weren’t the intended target and won’t be going forward.
I’m trying to recall the other part of the question.
Senator Marshall: You say that with confidence and follow it up with something not so sure: “Based on the complexity and vagueness of the proposals, we flag this as an additional concern.”
Mr. Wales: We are not going to let them forget it — always keep reminding them. That will be part of the discussions around income sprinkling, as well, to make sure they get it right. I don’t want to be fighting this battle again in two, five or 10 years. Let’s get this right now.
Farm businesses have to plan for the long term. We’re trying to attract the next generation to the farm, and good succession plans probably take 10 years from start to finish. It’s five years to figure out. You have to talk about difficult things in doing a transition. People would rather have a tooth pulled than talk about succession planning these days, but we have to get this right so that farm families can plan ahead for the long term.
We can’t plan around things we don’t know about, but we can at least plan knowing that the tax system will treat everyone fairly and not be a hindrance upon the next generation. The last thing you want to do is get them a farm and then there’s a huge tax bill at the start of their farming career. That would be the worst outcome for any of us.
Senator Marshall: In your submission, you also indicated that there was an estimate of additional taxes of $1.5 million on a typical family farm over a 20-year period. Is that based on the revised proposals of the Department of Finance, or is that the original proposal?
Mr. Wales: That would be under the original proposal. As I indicated at the start, my comments a little over a week ago would be different today than what they are now.
Senator Marshall: I would like to hear comments from all the witnesses for my next question. These proposals depend on whether farms are incorporated. I guess your members are incorporated. Are most of your members of each of the organizations that you represent — I know Mr. Etter is here on his own behalf — but are most members incorporated? I’m trying to get a handle on how pervasive these rules will impact the members of your organization. Is it 95 per cent of your members? There are 28,000 grain farmers. Are most of the farmers incorporated? Could you give an idea as to the extent of incorporation?
Mr. Brock: I can’t specify a percentage, but I use the 80-20 rule. If you look at 80 per cent of the farmland operated in Ontario, it’s probably done by 20 per cent of the farmers, and they would be incorporated. I’m incorporated myself through succession planning and through farm advisers. My mom has two farm corporations, because my parents went through a divorce. One was created through the divorce to maintain the assets in the family. The other is my mom dealing with her own siblings from my grandma’s passing.
They are tax tools we’ve used to ensure we can maintain a capital asset base so that future generations can farm. When you get around the passive income investment, that’s where it gets tricky with income sprinkling as well. My brother is a teacher here in Ottawa, and he will probably end up being a shareholder of one of the farms on my mother’s side. Then I would probably pay him a dividend, but he would be taxed high on that dividend because he would not pass a reasonability test.
That puts my capital in jeopardy because he would think, “Why would I leave my capital with you if I’m going to get taxed at some crazy rate?”
There are a lot of corporations, but I don’t know it percentage-wise.
Senator Marshall: You are thinking 20 per cent.
Mr. Brock: I have heard numbers of it being quite significant. It’s more than 20 per cent. It’s a way now to bring the youth into farming, because as a parent looks at it, they can freeze their assets to bring a son or daughter into a corporation and still deal with non-active farms. It’s very complicated. Corporations have eased the complication of it, so it’s becoming more prevalent.
Senator Marshall: If we assume 20 per cent or more, then not all of those have income sprinkling, and not all of them have issues with the new proposed rules on passive income.
Mr. Brock: It’s pretty significant. To answer your question, there are a lot of family farm corporations, and they are impacted by all of these potential changes. It’s a lot more prevalent than it was probably 20 or 30 years ago.
Someone else may have a better number.
Senator Marshall: The government is estimating $250 million in additional revenue from the income sprinkling, and it seems from the information that’s out there that around 29,000 corporations are going to be impacted now by the new rules for passive income. I’m trying to get a handle on how pervasive it is.
Mr. Orb, are most of your members incorporated? Could you give me some idea of the extent of incorporation and the extent that income sprinkling is being used?
Mr. Orb: Most of our farms won’t be incorporated in Saskatchewan. We have the number. We think approximately 27 per cent of the farms in Saskatchewan are incorporated, but you have to keep in mind that these are the largest farms in Saskatchewan. We have incorporated farms which are family farms, which are exceeding 100,000 acres now at this point.
They incorporated for the reason that Mr. Brock indicated. We need to do this because we need to be able to expand our operations to be competitive, to be able to survive.
The incorporated farms in this province, the majority of them, are family operated. They are the largest farms in Saskatchewan and the largest in the country.
Senator Marshall: Would your members also be impacted by this issue that I was speaking to Mr. Wales about, the AgriInvest fund and the rented farmland where the government is saying it will not be affected? Does that affect your members?
Mr. Orb: It does. If we could give some advice to the federal government, they could simply renege on all the proposed changes that they were able to make. They did consult, and the majority of the people who replied, either by showing up in person or by sending letters and emails, are opposed to these changes. We should maintain to the federal government that they should renege on all the proposed tax changes and not just simply on the one to do with the limit on capital gains.
That concerns us because of the fact that the government needs to say, not only by doing press announcements, one every week basically, saying they’ve changed their mind on some of these things — we don’t know the details. We think the government should stand up in the House of Commons and say, “We made a mistake. We’re backing off on all of the proposed changes.”
Senator Marshall: Capital gains, it’s my understanding that that’s not off the table. What the minister said is, “We’re going to take a step back and reconsider that aspect of our tax reform proposals.” I don’t think he’s made a commitment that it’s going to be taken off the table.
If around 27 per cent are incorporated, would income sprinkling apply to most of them?
Mr. Orb: I’m not sure exactly how many it would apply to, but it would probably apply to a fair number.
In our presentation we also made a pitch for family doctors to be looked at as well, because we have a shortage. We have a shortage of rural doctors not only in Saskatchewan but across the country, and if we make it tougher for them to operate, they are simply going to leave Canada. They don’t have to stay here. This is a real risk to the health of Canadians, basically.
Senator Marshall: What about the impact of the $50,000 threshold for passive income? Are you happy with that?
Mr. Orb: No.
Senator Marshall: You’re not happy with that either.
Mr. Orb: We’re not happy with that. We think it should be taken out. We’re simply asking to leave that provision the way it is now.
The Chair: Do you want to comment on that question, Mr. Wales?
Mr. Wales: Yes, on the statistics, on how many farms are incorporated. I believe the Canadian Federation of Agriculture represents 220,000 farm families across Canada, and the estimate is that slightly over 25 per cent of farms are incorporated across the broad range of commodities.
The real cause for concern with the proposed capital gains changes was that, eventually, probably about three quarters of farms would try to transit to the next generation. Even farms that were not incorporated, the normal path to intergenerational transfer would be to incorporate or form a family trust, do an asset freeze and then bring the family members in that way. So even if you weren’t incorporated, you would eventually incorporate, and that would be the vehicle to a proper intergenerational transfer.
For all the rest, the other 75 per cent who weren’t incorporated, sooner or later they would have been dinged by these rules, and it would have made them look and say, “Why bother trying to sell to my children?” If it’s going to cost another 30 or 40 per cent of tax on the sale of farm assets, which are in the millions, to sell to your children and you don’t have that cost if you sell to an unrelated third party, very quickly land ownership would transit out of the hands of young Canadians and into who knows where.
Senator Pratte: It is my understanding that even before the July 18 proposals, there are, today, in the Income Tax Act or the regulations, obstacles to the intergenerational transfer of a farm to the children. I think,Mr. Brock, you alluded to that in your brief, saying that we have to address that.
Would you briefly elaborate on what the current fiscal obstacles are to an intergenerational transfer and what recommendations you would make to this committee that we would make to the government to address that problem?
Mr. Brock: Thank you for the question. I don’t know the specific details of the current tax policy that does create a barrier for intergenerational transfer. From our standpoint, our view is that if you’re going to look at taxation and at tax policy, then that’s one of the key areas that need to be addressed as we move forward.
I think the intent of this process was to say, “How do we reform income tax, get it right and do it properly?” You’ve heard a lot today about how to not do it properly, maybe around some of the policies for agriculture, but when you open that up, you have an opportunity to look at it and say, “How do we make sure, as Canadians, that we can ensure that assets can be transferred from one family generation to the next and not create a barrier?”
The last thing I want to see is a situation created where my mom could sell a farm to me, but it makes more sense to sell it to some institutional investor, whether it’s a pension fund or something, because of tax.
I don’t think that’s the intent of our taxation policy. Having a conversation around tax, let’s talk about how we do it right on some other issues that weren’t maybe brought up. That provision was there before. I think we need to address it, and we need to make it so that it’s not a barrier for intergenerational land transfer.
Senator Pratte: Any other comments on that?
[Translation]
Mr. Etter: Having lived and worked with a lot of young people who are going to transfer the business, I think the resources are there, whether in the private sector or otherwise. Farmers are often overwhelmed. We agree that they are working 365 days a year, seven days a week, so they do not always know where to start. It is important to understand that, with the size of today’s businesses and the specific technical aspects, the first thing to do is to surround yourself with professionals who understand the agricultural sector. Not all tax experts and accountants understand the specifics of the amounts with which we work. I would like to ask a question related to Mr. Brock’s comment: in a business that includes other siblings, who are involved in the business or who work outside, how will we be able to include them in the business? It is impossible to be fair, but we must find a strategy to make the transfer. The last thing we want is to cause a quarrel and for the operation to be sold, as Mr. Brock mentioned, to foreign interests. I think that’s what we are having a little trouble with right now.
[English]
Mr. Wales: Thank you for the question. I have two responses. The first is that I know the Canadian Federation of Agriculture has identified specific parts of the Income Tax Act that could use some work, and off the top of my head, I don’t know; I’ve seen them. I don’t know whether the CFA is making a submission to this committee. I know they’ve made submissions before to the House of Commons Finance Committee, so that information will be on the record.
One of the challenges with doing an intergenerational transfer — and as I mentioned, I know most people would rather have a tooth pulled than talk about the issues around that — is that you have kids who have grown up, are working on the farm and will be the next generation farming. And you have other children who have gone off and gotten careers and who come back and help occasionally. As a parent, when you’re doing that transfer, you want to transfer value to all of them; you want to try and treat your children as equitably as you can without hobbling the ones who will actually be doing the day-to-day farming. You want to treat the non-farming children fairly.
That complicates any type of transfer, share structure and everything else. I wish I could remember the specific clauses, but there are some that the CFA has clearly identified as needing some work going forward. I fully support them in those concerns.
Senator Neufeld: Some of my questions have been asked. Prior to the July 18 release, Mr. Brock, was there consultation of any kind with the Grain Famers of Ontario from the government?
Mr. Brock: Not that I am aware of.
Senator Neufeld: Not that you’re aware of.
Mr. Wales, was there a consultation with your organization prior to July 18? You said afterwards, in the 90 days since then, but prior to?
Mr. Wales: Prior to that, no consultation. In fact, my first awareness of the file was when my son called me on July 19 and said, “Do you know, and is your organization on this file?” I’m not aware that any agricultural organization anywhere in this country had any contact or discussion on these proposed changes.
Senator Neufeld: Mr. Orb, did your organization have any consultation prior to July 18?
Mr. Orb: I can answer that — the sound has been cutting up a bit.
There wasn’t much notice before. We found out about this almost by accident in a media article posted in Ottawa that the federal government was looking at this. Our members are really upset about that because there was basically — to extend that time to give people more of an opportunity and that wasn’t done. We’re still concerned about that.
Senator Neufeld: But obviously all of you will say there has been consultation since July 18. Is that correct?
Mr. Brock: That’s correct.
Mr. Etter: That’s correct.
Mr. Wales: Yes, there’s consultation. But again, with the Income Tax Act, when most of these rules were created almost 40 years ago — I believe it was the Carter commission — they took something like six years or longer to review and come up with the rules we’ve been functioning under for four decades.
So, it’s 72 days of consultation with, I understand, over 21,000 submissions, and change occurred within about two weeks at the end of the deadline. We had some consultation during the 72 days but — I’ll give the government full credit — they listened and they made changes. And we’ll keep on them to make sure they implement changes they said they were going to, to get it right.
Senator Neufeld: What’s interesting to me is no consultation prior to July 18 from a government that says they want to consult all the time. I guess it doesn’t surprise me, to a degree. But it also says to me that some people, a department — and I would assume it’s the Department of Finance — sat down and decided that this is what’s going to take place and damn the torpedoes that could come afterwards.
I worry about that, when they talk about income sprinkling and some of those things, and how CRA will interpret those things when they come to visit your farm for an audit. It is different world that comes from Ottawa to your farm than the farm that you’re on. I worry a whole bunch about that.
The second question I have is about passive income. Mr. Brock, you spoke about this as it applies to a different size corporation or farm. It’s all the same. It’s $50,000 whether you’re a huge operation or whether you’re a small operation. Can you explain that to us a little bit more, the negative effect that would have?
Mr. Brock: It’s one of those situations where it’s pretty easy, in this day and age, to spend $1 million or need millions of dollars to operate a business. We look at different ways to mitigate risk on our farm, and I think we want to ensure that all farms have a tool to do that.
Some smaller farms might use different mechanisms, and a larger one might have a cash reserve. Friends of mine that I know very well in Western Canada, because of weather issues, have a significant amount of working capital on hand. A lot of times it’s two and a half times the expenses. When you look at that, it’s not hard to add up to a couple million dollars — or $3 or $4 million — sitting somewhere in working capital, whether it’s in an investment account or something, because you might have a wipeout.
As our farms have progressed in size and the complication of our business has increased — and I know the expenses in my own operation have gone up significantly relative to my increase in growth — $1 million doesn’t seem like much anymore. When you look at large operations that want to maintain a certain level of working capital, it easily can be well above $1 million. So we’re very concerned about what the impact of that could be for those farms that are actually using it as a tool to mitigate risk in their business.
Senator Neufeld: Exactly; I appreciate that.
The second question is about passive income. Who thinks about a 72 per cent tax in the first place? Who would dream up that we’re going to tax you 72 per cent on anything over and above what you’re allowed to keep? Regardless of the size of the operation, it’s 72 per cent.
Do you know of anywhere else in G7, G8 countries where 72 per cent is a tax that’s applied? Maybe it is. I don’t know where that number came from, how someone dreamed it up, how someone thought 72 per cent would be palatable to anybody, anywhere.
Can you help me a bit, any one of you? Have you ever heard of that kind of thing in the countries that we deal with? Maybe it is. You can correct me if I am wrong. Any one of you?
Mr. Wales: I’m not aware of any other country that does that. You’re already being taxed on passive investment at 50 per cent. I’m not sure a lot of people were aware of that. So if you’re going from 50 to 72 per cent, the proposal was designed to force you to dividend it out, pay tax now.
The original proposal not only would have gone to 72 per cent, it also potentially would have gone back and re-taxed the original capital that generated that investment in the first place. I’ll use an example. If you had $100,000 profit in your corporation, typically the small-business tax would have been around $15,000 and you would have $85,000 left to either reinvest in the business, dividend out or put in a passive investment.
The analysis I’ve seen of the original proposal would have had CRA coming back and grabbing another $35,000 out of that. The remaining $50,000, they would have taxed you 72 per cent on the income from that investment going forward, which would have substantially reduced any possible amount you could have had to save the business down the road.
It was a bad idea from the get go. If anybody really paid attention to the fact that they were already being hit at 50 per cent tax on that investment income, perhaps they’d rethink having it sit there.
From what I’ve seen, having money available there to meet the current or short-term needs of the business would still be okay. It’s not considered a passive investment now. The real challenge was people constantly putting hundreds of thousands of dollars in passive investment and having it just sit there to fundamentally deal with retirement. That was supposed to be what the government was targeting.
However, when you make a rule, instead of using a surgical knife, when you use a sledge hammer to do something, the law of unintended consequences spreads far and wide. That’s what we saw.
We’re going to have to work with them. The passive investment rules won’t come out until Budget 2018. We’ll have time before then for input and time afterwards to make sure it targets exactly whom it ought to target in the manner that it should, not everybody.
Senator Neufeld: Does anybody else want to comment?
Mr. Brock: No, I’ve never heard that. I think at the end of the day I go back to a more philosophical approach to this. How do we stimulate the economy? How do we ensure that I have opportunities, tools and ways to invest within my business in innovation and production to expand, create jobs and do different things?
When you look at being audited or the reasonability test where it defaults to the highest tax rate, those things scare me because it takes away my incentive to do stuff and puts me in a situation where I’m unsure of the tax implications. Then I’m overcautious because the last thing you want to do is be caught up in one of these rules being applied to you and then have a huge tax fine.
I think it makes us overly conservative.
[Translation]
Senator Forest: Thank you very much for your participation. Agriculture is a basic sector, not only in terms of the economy, but also in terms of meeting the needs of Canadians. I think your testimony sheds a lot of light on this.
My understanding is that the changes to the reform are encouraging overall, but you are worried by the fact that the rules of application are unclear, particularly with respect to the Canada Revenue Agency. Usually, in economics, times of uncertainty do not really help to promote economic activity.
[English]
Mr. Brock: Absolutely. The issue there is that there are two approaches right now. One is the policy around taxation and those high-level views, and then there are the rules and the implementation.
Our concern is the disconnect between what the intent of the policy is and how the rules are going to be applied on my farm. I can have a meeting with somebody in Ottawa here who says, “No, you’re not going to be impacted by these,” but it’s also the person that’s not coming out to my farm to do the audit.
That’s where we’re concerned about the disconnect. You can have a lot of great ideas around policy, and it is encouraging to see them shift on where they’re going with this, but they’re still not the ones who are going to apply the audit on my farm. We have to ensure that there is not a disconnect there that causes us to be apprehensive.
[Translation]
Mr. Etter: Mr. Brock mentioned this with respect to uncertainty, and I think it’s a perfect example. When I invest, I do not want to have to make 12 phone calls to make sure I know the impact and perhaps miss an investment because I waited too long, I analyzed too much. Yes, I understand that you have to analyze things properly. However, at the end of the day, if you take more time to analyze the impact it will have on taxes than to invest and manage the business, you are clearly going around in circles. It will not work.
[English]
Mr. Wales: As I mentioned in my remarks, it really comes down to the guidance documents that CRA prepares for their auditors. That’s the area where we really have to be part of that discussion. The industry cannot be left out of that. We have to work with them to make sure that the guidance document puts some parameters around what the auditor should and should not look at, and how they should perform their duties, so that there is that certainty. That’s our biggest area of concern going forward.
As everybody has mentioned, this industry has massive potential. We can’t do it without young people going forward. They’re critical to the operation. Farms will continue to be family farms, I hope, forever. I don’t want to ever see that change. We don’t want to get into the type of corporate farming they have in the United States and all of the issues around food safety and everything else they have to deal with.
Going forward, there are great job opportunities on farms. Our industry will get very technical, but we need to have certainty in those rules. It can work. I’ve worked with the Ontario government on the Occupational Health and Safety Act, so we actually educate their inspectors as to what’s a farm and what’s not because there are some slightly different rules and they need to recognize the farm workplace as different from an industrial workplace.
It can be done. There’s a track record of it, but we need to ensure that this government works with us every step of the way. There should really be some representatives from the broad range of commodities; sit down with them and go over the documents and make sure we all agree that, yes, this is the fairest way to do it.
The Chair: Mr. Orb, do you have any comments?
Mr. Orb: Thank you. Unfortunately, I wasn’t able to hear the interpreter. The message that I got from the other members of the panel is that regarding concerns about the federal government bringing in some of these changes, perhaps they could be done in the budget. But if there’s an omnibus bill that goes with the budget, we won’t have another opportunity to prepare our comments on this because the budget most likely will be passed as a whole. We’ll have to deal with it later. If the CRA is looking at making some changes, perhaps reasonability tests and things like that, it is subjective and it varies from farm to farm. We’re quite concerned about that. We want to have young farmers. On some farms, sons and daughters aren’t even involved with farming right now. They may be attending university and getting training that will help them come back to the farm to help operate the family farm.So there have to be rules left in place to encourage those young farmers.
[Translation]
Senator Forest: We are familiar with the business model of the Canada Revenue Agency. It passes a judgment and we then have to overturn the judgment.
I think one of the key issues is to clarify the application rules for this reform and what will be left of it.
In Quebec, we have a law that protects farmland. As you rightly pointed out earlier, Mr. Etter, there will be, from a demographic point of view, a massive transfer of all Canadian businesses, but particularly in the agricultural sector. I think running a farm is more than just a job, it’s truly a vocation. In a family, not all the children necessarily have that calling.
When a farmer wants to shut down their farm operation today, it is fundamentally unfair because it comes with the disadvantage of transferring the farm to a stranger, not to the family.
In your opinion, if we want to align the tax policy with our policy to encourage intergenerational transfer and development, what would be the main change that should be made to the legislation to ensure intergenerational transfers are fair?
[English]
Mr. Brock: Thank you for the question. We have to ensure there isn’t a disincentive to sell to a family member. Currently, it’s more beneficial to sell to an outside entity. Let’s get that right so that there isn’t a penalty there.
As you go forward into the future, I don’t think — yes, you have to match a tax policy for agriculture that would mirror the growth strategy that you have for it. Overarching, you want this growth strategy. Then you look at the growth strategy for agriculture and for Canada as a nation and ask where the barriers are to the growth strategy. When you look at that from a barrier standpoint, what are the tax implications or tax policies creating those barriers? Let’s either adjust or remove them to stand out of the way and let industry flourish.
It’s this problem of looking at things in isolation. We have to look at it as a broader policy and then figure out what those barriers are in those different pockets of policy.
[Translation]
Mr. Etter: I would like to add to Mr. Brock’s comments.
Let me give you an example. When a couple sits down with their children to transfer the land, but decides to sell it to private entity X, because it is more advantageous than transferring it to their children as a result of the incentives, there is a big problem.
Some have done it, and the profit from that sale may have been distributed within the family, but I do not think that’s really good for Canada’s economy. The change should provide incentives for business transfer and the tax policies should be fair and equitable so that young people like me who want to take over the land can do so. We need these young people.
[English]
Mr. Wales: I wish I could remember those two sections of the Income Tax Act that CFI identified need fixing. One additional thing that needs work is that the lifetime capital exemption for farmers is currently $1 million. In the last five or six years or so, farm land has doubled in value almost anywhere in Canada. That number needs to rise more over time in a measured manner with the rate of inflation or something. That needs to go up. If it doesn’t, when you go to do that intergenerational transfer there becomes a tax bill. The bigger the bill, the more the parents may have to get out of the next generation in order to have retirement income and pay tax bills. We need to make sure it is as fair and smooth as possible. Increasing the lifetime capital gain exemption in a regular, known, predictable manner over time would be a good step in the right direction.
Mr. Orb: I agree with Mr. Wales in perhaps asking the federal government to look at the lifetime capital gains exemption. It isn’t very much.
In future, if the federal government looks at making changes — that small business could be argued agriculture — I believe these are the middle class — federal government set a platform to help — and targeted. It seems like it was overlooked and affected by that. We know that agriculture — industry. We want to make — of our national — that the consultation seems to be in a more equitable manner. The federal government is — I’m not sure if that is exactly the case or not, but we want to make sure the federal government announces soon that they are changing their mind on all of the proposed tax changes.
The Chair: Mr. Orb, we’re having difficulties on the technical side. I’ve been informed it’s on your end, so we will be careful in coming back to you. We did not hear almost half of your comments.
Mr. Orb: I’m sorry.
The Chair: That’s all right. Thank you.
Senator Moncion: One of the comments you made, Mr. Brock, was about the members of your family — with your mother having two incorporated businesses and then your incorporated businesses — that will probably inherent from your mother’s estate. You were talking about the dividends that they are going to receive and that they are going to be paying income tax on them. If they are not working on the farm, don’t you think it’s fair for them to be paying the income tax that should be coming with gaining something that you’re not working on? They would benefit, but they are not working on the farm.
Mr. Brock: This becomes the murky part of family succession planning, where you have the emotion involved with the financial reality of it. Yes, I completely agree that my brother should pay income tax on earnings made through a family corporation. In a way, that is effective in terms of paying some tax but ensuring it doesn’t hinder the use of capital.
We need to have that conversation. We’re going to see this sometimes in succession, family affairs not always equal. We might have siblings that come in that own shares of the corporation through the estate-planning process. They will be involved in the business to a certain degree or not at all, and they are going to receive some income out of it because that’s what is owed to them through the estate of a parent who owns the land or the dairy or whatever.
We are trying to balance that. While ensuring that we pay tax on income there because income tax is due, how do we ensure we don’t penalize, tie up capital or lose capital for the farm family member that is actually trying to run the business?
It’s that complicated issue where, if we have an impactful tax rate on that dividend to my brother, he would say, “I no longer want to be an investor in your company.” But I don’t usually have the means to buy out his capital, so would I have to liquidate my portion of the capital and would no longer have that asset to use on my farm. If we get into those situations too often, we will see an exodus or a shift in ownership of land. I don’t think we would want that as an overarching agricultural policy for Canada. I don’t think it will incentivize to youth to be part of that process.
Senator Moncion: Isn’t this kind of situation way out of what the government is looking at right now?
Mr. Brock: I’m not sure. I’m not completely detailed on all the details of the proposed tax changes or the proposed changes to the proposal.
I think it becomes that implementation part of it as well, where we understand the intent that we are not supposed to be caught up in some of these rules, but I’m not sure how that will be communicated to the CRA in terms of auditing processes. That’s our concern.
Some of these things indicate to us that we are outside the scope of it, but will that apply when it comes to the practicality of it?
Senator Moncion: One of the issues associated with the intergenerational transfer is how the sibling who wants to keep the farm gets the means to be able to buy the farm. That’s usually where the problem lies. That is, you can do the transfer, but there are tax issues and money issues because most of the time younger farmers don’t have the collateral to support the loans that come with the buying out of the parents or the owner.So that’s where I see most of the intergenerational problems at the moment. There are also tax issues.
But just for your information, here is something that was provided earlier. In 2006 they made an evaluation of how many companies, small or medium-sized businesses and farms were going to be transferred over a 15-year period, and we are in the last five years. They said 82 per cent of transfers were going to occur between 2006 and 2021, and by 2015, 60 per cent would have been transferred. Another 22 per cent will be transferred over the next couple of years. These are just comments that I’m making. It’s just information. We’ve known this for a long time.
Mr. Wales, it’s nice to see you again. You were talking about farms and farmers. There are about 220,000 farmers, and only about 25 per cent of them are incorporated. I’m a little bit surprised because of all the tax incentives and the complications that are related to our tax system where you would need expertise from income tax lawyers and experts.
Why would people not incorporate?
Mr. Wales: Again, I was surprised at the number, too, although generally, along your farming career you’re unlikely to incorporate at the beginning. Usually you start out farming when you may be single and you get married along the way, whatever your situation is. I’m a first-generation farmer, and there are four generations living on my partner’s farm: her mother, who is 92, her daughter- and son-in-law and two children who have come home to the farm. We have four generations on the farm trying to figure out a succession plan because she has two other daughters who would like to have some ownership, and she would like to ensure they do.
Generally, as the farm business grows and gets more complicated, that’s typically when you incorporate. Definitely, as I mentioned earlier, the route to intergenerational transfer is usually through a corporation and what they used to call the pipeline provisions. It’s not uncommon in an intergenerational transfer to have three generations. The grandparents might still own some of the land, the parents might own some of the assets, the kids might have some of their own assets, and everybody is part of the farming business going forward, and the grandparents may leave shares of the company in their will to certain children. It gets really complicated.
As I mentioned, it takes on average 10 years to put together a workable succession plan, and they don’t all work for all the reasons that everybody has mentioned.
I do certainly think that those who are earning dividend income should be taxed. If you earn dividends from a Canadian-controlled private corporation, we all pay tax. The problem is if you are hit with a punitive tax, that’s when the system goes wrong. You should be paying whatever tax you should pay on dividends from whatever corporations you receive income from. That’s the fair way to do it, not penalize someone because they don’t happen to be actively involved five days a week, 52 weeks of the year in the ongoing business.
Eventually, most farm businesses do a transfer and do incorporate, but it often tends to occur in that time period when they are trying to move to the next generation.
Senator Moncion: Thank you.
Senator Oh: Thank you, witnesses. After the past one hour and 45 minutes, I think it is clear that farmers have a lot of worry and there is concern about the new tax proposals.
Various witnesses have already noted the impact of the proposals on spouses, especially women, given their involvement with unpaid labour such as child care. However, one of the objectives behind the proposal identified by Minister Morneau is to ensure that any changes to the tax system promote gender equality.
Is it your opinion that the current proposal undermines the contributions made by women to their families and businesses? Will the complexity of the proposal cause the federal government to see unpaid labour as a non-meaningful contribution?
Mr. Brock: Thank you for the question. I can give a perspective from my own family. My wife is more active on the farm than I am. So I think when you look at that situation it would actually be her income that would get sprinkled to me because I’m involved in different things. I’m on the farm all the time, but she is the main contributor on the farm.
We want to make sure there are no barriers to anybody on the farm. When we had our son, way back when, we split the child care duties between the two of us, where I would look after our son during the morning while she was working in the barn, and she would look after him in the afternoon when I would do some of my office work.
We want to ensure there are no barriers to contribution. I look at my daughter on our farm: She helps out all the time and wants to go off to school for agriculture and then come home to the farm. I want to make sure there are no barriers for her to do things like that, and we have to ensure tax policy doesn’t create those barriers.
[Translation]
Mr. Etter: I am going to use a personal example too: my wife works in the public service and the company is in my name. Our plan is that, one day, if she wishes, she can come and work on the farm. However, if she wants to become a partner in the farm, there will be huge implications and we will have to work with a tax specialist. I am completely open to that. But some professionals go so far as to tell us to be very careful if we do that. That should not be the case. Bringing one’s wife or husband into a business, a company, should not have a negative tax impact on that decision.
[English]
Mr. Wales: I would agree with your question. Certainly the original proposals clearly were gender imbalanced. No argument: They were going to make it difficult to be fair to the spouse and the children. Going forward, the proposals around income sprinkling are one the things that, in the whole definition of the contribution test, we’ll have to ensure they get right, or we will have the same situation all over again, and that’s not fair and not what should happen.
The Chair: Mr. Orb, do you hear us? Could you please give us a comment?
Mr. Orb: Yes, I do. We’re still concerned about the government wanting to go down the road. If the government reneges on this, we would like them to stand up and announce in the House of Commons to everyone that they are reneging on the proposed changes that will hurt spouses on the farm.
Senator Cools: I will begin by thanking the witnesses and also expressing my wonder at your skilful handling of these situations about which you know a lot.
I would also like to remind you, because you may not have known, that the Senate for many years has been attentive to agriculture and the needs of agriculturalists. The Senate has a committee on agriculture.
In addition, you might not know, but for years and years the Senate, in the selection of persons who would be senators, the governments always used to select individuals who were in agriculture. Some of the names still stand out very well in my recollection of them. There was a man that Senator Andreychuk would have known as well — Senator Sparrow — and he led the Agriculture Committee on a very important study that they did on soil erosion. This was many, many years ago. There was another senator who was very important, also an agriculturalist and also a meat producer, Senator Bud Olson. One was from Saskatchewan, and one was from Alberta. I wanted to say that a long-serving senator such as I am has served with them and knew them very well. I think that all of us should be on the case to remind future prime ministers that they should also choose senators from among those individuals. I think it would be a useful and wonderful thing.
My question to you is respecting this committee, which is really looking at the financial situation. We will be setting off on a trip, two trips really. Our committee will be travelling, and we will be looking at Western Canada and then Eastern Canada. I think that the whole subject matter of tax reform is ever delicate and ever potentially explosive.
I’m just wondering if, in all of the thought that you have given to your testimony this morning, you have any special recommendations or advice to give to our committee so that we can do the kind of quality job that we intend and want to do. If you have some ideas, we are all ears.
Mr. Brock: I think taking on this file and doing a study on it is a great first step. The opportunity for me and for my colleagues here to come in today to talk about the impact around taxation on our businesses is a great opportunity. I think your intent to go across Canada and have those conversations with people is a great step. I think it’s a very effective tool to engage with Canadians about how they feel about tax policy. I think you’re right that it’s an explosive topic. I think that we have a lot of the privileges that we do in this country because of a taxation policy. I think we just have to make sure that we get it right, and engagement is a way to get it right.
[Translation]
Mr. Etter: First of all, I would like to thank you for your initiative in going out to meet people all across Canada. Now, I would like to take advantage of my meeting with you all to draw your attention to a Canadian reality that is not really reflected in all industries. The men and women who farm in Canada make up an economic vector that is largely rural. It is mostly made up of family businesses that provide a living for many people. In the next few years, the industry will make a major turn: massive transfers will be set in motion, if I can put it that way, and we want them to be successful.
[English]
Mr. Wales: Thank you for the question and the comments. I have been fortunate to appear before the Senate Agriculture Committee before on a couple of issues, so I have really appreciated senators’ interest in agriculture and farming and the things we do.
Some advice, I guess: Hopefully, you will be able to support an increase in the capital gain exemption for farming. That’s going to be a necessary tool going forward. You’ll need to recognize clearly that farming in one province, and one area of one province, is completely different than another. I think the average farm size in Ontario, the last stat I saw, is about 350 acres, and the average farm in the Prairies would probably have another zero or two added on. The size and scale and complexity of farms are varied. People are serving the food market and maybe farming successfully on a small acreage. They may require a large acreage. We are probably going to grow things and find uses for the products that we grow in the future that we haven’t even thought of yet. As I’ve tried to highlight, the opportunities for our industry are wide open. There’s simply no end to the opportunities for the industry and the people in it, but we need to make sure that the rules are as simple as they can be. Our industry is complex enough as it is. Certainly, the Income Tax Act has no end to the complexity there. We have only scratched the surface looking at some of the issues over the last 90 days. I spent a lot of time learning about something I didn’t want to learn about; so it has been an interesting exercise. As I say, my son called me on the nineteenth and said, “Did you know?” Basically, every two days, we’d sit down and run scenarios. What does this mean? What’s the tax bill to someone? What are the implications of this to help to understand? Appearances like this also help you to think a little bit more.
My best advice is to recognize clearly that agriculture is important. It’s varied. It’s different. Anything that can be done to simplify the rules we operate under. I know Senator Andreychuk had a question earlier about what goes on in the rest of the world. Clearly, lots of countries recognize the importance to the environment of agriculture, and they have policies around that, something that Canada is a tad lacking on. We need some assistance there in terms of environmental goods and services. We provide clean air and water and land for people, and we respect the land. That’s the best I can give. If you can find ways to make the Income Tax Act simpler, please do. I wish you luck. That’s a big mountain to climb.
The Chair: Mr. Orb, do you have a comment as we close?
Mr. Orb: Unfortunately, I’m not able to hear very much of what is going on, but I would just like to thank the Standing Senate Committee on National Finance for doing this and to hope that the government realizes that the proposed changes are not in the best interests of Canadian agriculture.
The Chair: Thank you.
Senator Cools: Gentlemen, I would like to say to you that I’m from the British Caribbean, Barbados, in particular. In Barbados, we don’t use the word “farms” or “farmers.” We use the words “planting” and “plantations,” and my mother owned a plantation. So the early years of my life were spent learning a lot about the art of planting. I remain a planter, and I have 72 rose bushes on my property here in Ottawa. I plant tomatoes every single year that my husband loves.
The Chair: That was a comment, no question. We do have a second round, and we have three senators. So you can appreciate the interest the senators have vis-à-vis your concerns.
Senator Marshall, Senator Forest, Senator Eaton, maybe you could ask your questions, and we will ask them to write to the clerk.
Senator Marshall: Mr. Wales provided the brief that was submitted to the Department of Finance, and we had it in our package, but I haven’t seen anything else from the Saskatchewan municipalities or the Grain Farmers. I don’t know if Mr. Etter submitted something, but the Grain Farmers have definitely submitted a brief. So could we get a copy of those briefs? I expect we’ve heard everything, but it would still be interesting to read the briefs.
The Chair: Please follow up, witnesses.
[Translation]
Senator Forest: There has been a lot of talk about the increasing value of agricultural land, which basically is going to represent a major problem when it comes to transfers. The current tax rules often encourage farmers, instead of transferring their farms, to sell the whole lot, the machinery, the buildings, the land, and they are often bought by large corporations. Could those rules not be having an effect on the increasing value of agricultural land?
[English]
The Chair: So you have the question. You can submit in writing, please, to the clerk.
Senator Eaton: As you represent the Grain Farmers of Ontario, the Canadian Horticultural Council and the Saskatchewan Association of Rural Municipalities, have you wondered how our taxation policy that affects agriculture and horticulture would compare to other OECD countries, which might be very good for us to know?
The Chair: If we can do that. With that, honourable senators, just a reminder that we will be meeting in room 160-S, Centre Block, from 2:15 to 4:15, for other witnesses.
To the witnesses, thank you very much for accepting our invitation, and we also appreciate your comments and your recommendations.
(The committee adjourned).