Proceedings of the Standing Senate Committee on
National Finance
Issue No. 45 - Evidence - November 6, 2017 (afternoon meeting)
VANCOUVER, Monday, November 6, 2017
The Standing Senate Committee on National Finance met this day at 1:02 p.m. to study the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved.
[English]
Senator Mockler: Honourable Senators, welcome to this meeting of the Standing Senate Committee on National Finance. I see we have a quorum and I declare the meeting in session.
My name is Percy Mockler, a senator from New Brunswick. At this time I would ask senators to introduce themselves, starting on my left, please.
Senator Pratte: André Pratte, Quebec.
Senator Andreychuk: Raynell Andreychuk, Saskatchewan.
Senator Oh: Senator Oh, Ontario.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Mockler: We will have other senators joining us shortly. Today, I will recognize our two witnesses here in Vancouver.
Our committee continues the special study on the proposed changes to the Income Tax Act. We were mandated by the Senate of Canada, the Standing Senate Committee on National Finance, to be authorized to examine and report on the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved, in particular, income sprinkling, holding passive investment inside a private corporation, and converting income into capital gains; that the committee take particular note in the order of reference of the impact of the government’s proposed changes on incorporated small businesses and on professionals, income growth and government finances, the fairness of the taxation and different types of income, and other related matters; and that the committee will present and table its report in around December 15, at the least.
Before I officially introduce the witnesses, I see that three other senators have just joined us. Senators, would you please introduce yourselves?
Senator Jaffer: Mobina Jaffer from B.C.
Senator Neufeld: Senator Neufeld, British Columbia.
Senator Cools: Senator Anne Cools, Toronto, Ontario.
Senator Mockler: Honourable senators, we have from the Fraser Institute, Mr. Charles Lammam, Director, Études Fiscales. We also have with us Professor Kevin Milligan, Department of Economics, University of British Columbia.
I have been informed by the clerk that Mr. Lammam will make the first presentation, to be followed by Professor Milligan. You have approximately five minutes each, and then we will move into questions.
Charles Lammam, Director, Fiscal Studies, Fraser Institute: Thank you for the opportunity to present some remarks on the federal government’s proposed changes to the taxation of private corporations. I hope you find my comments helpful and informative as you deliberate these important public policy issues.
As noted, I am the Director of Fiscal Studies at the Fraser Institute, which is an independent, non-partisan, economic policy think tank. The institute’s mission is to measure the impact of government policies and to broadly communicate to Canadians how those policies affect their lives and the lives of future generations.
My comments today reflect my own opinions and observations. They do not necessarily reflect the views of other staff, affiliated researchers, or the board of directors.
Since the committee has likely heard about the technical aspects of the government’s proposed changes, I will focus my remarks on points that I think have not received sufficient attention, but first I commend the government for undertaking a review of the tax code announced in budget 2016.
Canada’s personal income tax system has become increasingly complex and uncompetitive over the years, so the goal of reform is a positive one. One of the drivers of growing complexity is the proliferation of so-called boutique tax credits, which are economically ineffective tax breaks for certain groups and individuals. In fact, my Fraser Institute colleagues and I have published a study containing a detailed plan for how the federal government can dramatically simplify the tax system while fostering economic growth.
While I am supportive of tax reform, the government’s proposed changes are a piecemeal approach that falls well short of the type of comprehensive tax reform that Canada now needs. When it comes to the proposed tax changes to private corporations, they do not address the underlying problem of why people pursue tax planning through such vehicles in the first place.
Tax planning comes at a significant cost. Business owners, including professionals, must spend significant amounts of money on accountants and lawyers in order to pursue these options.
These expenditures make sense because the costs are less than the benefits gained by lowering their effective tax rates. Critically, the tax savings are a result of large gaps in tax rates between different levels and types of income.
For instance, a professional can shift income from themselves to a spouse with lower earnings or perhaps a child with no income. If they can do so, the gains from lower tax rates can be significant.
Assume a doctor being taxed at the top federal rate of 33 per cent shifting income to a spouse who only works part time and pays income taxes at the lowest federal rate of 15 per cent. That’s a significant reduction in the marginal tax rate from shifting income from one spouse to another. The gain is even larger if the income is shifted to an adult child with no income.
These tax differences are the reason people pursue the strategies in question. If the government reduced the gaps between tax rates it would reduce the incentives, that is, the benefits of such tax planning in the first place. Instead, the current government has made this gap larger by increasing the top federal rate from 29 per cent to 33 per cent.
By making the tax gap larger the federal government, along with several provincial governments, has inadvertently increased the incentives for eligible professionals and owners to use these strategies.
Introducing new rules to mitigate the use of these strategies as the federal government proposes to do alone will likely not solve the underlying problem. They will simply incentivize accountants and lawyers to figure out new ways to get around the new rules for their clients. Indeed, a risk inherent in the government’s proposal is the potential to make the system more complicated without solving the fundamental problem.
A more effective solution is to concurrently eliminate, or at least meaningfully reduce, the tax rate differentials that exist in the system. Doing so would reduce the incentive for tax planning in the first place.
However, the government has further worsened the problem, particularly regarding the taxation of passive investment, with its planned reduction to the small business tax rate from 10.5 per cent to 9 per cent. Reducing the small business tax rate will also exacerbate an existing problem: the disincentive for small firms to grow.
The cut in the small business tax rate means that the tax disincentives small firms face as they grow and expand have increased. Research studies have noted that the enormous jump in taxes for businesses as they move from small to general is a disincentive for growth. After the change to the small business rate is fully implemented, there will be more than a 60 per cent increase in the tax rate when a firm moves from a small business to a general corporation. This is exacerbated by similar tax preferences imposed by the provinces.
More broadly, the proposed changes to the taxation of private corporations is just the latest example of how the government’s approach to tax policy has sent negative signals to the country’s skilled workers, entrepreneurs and investors.
Over the past two years, several ideas about how to change Canada’s tax system have been publicly debated. Some have been implemented while others have been modified, abandoned or deferred. A common theme of these changes is targeting successful Canadians because of a misperception that upper earners aren’t paying their fair share of taxes. We can talk more about this in the Q and A.
This approach, combined with the rhetoric from the government in its public communications, unintentionally signals to Canadians and the world that Canada is an unfriendly place to work and do business. This undermines our country’s ability to attract skilled workers, entrepreneurs and investment. This is especially poignant given possible pro-growth tax reform south of the border. Thank you.
Senator Mockler: Thank you.
Professor Milligan, please.
Kevin Milligan, Professor, Department of Economics, University of British Columbia, as an individual: Thank you for the invitation to appear. The private corporation tax proposals released in July certainly met with some controversy, but I think the revisions to them announced in October go some way to improving the package.
On the issue of income sprinkling, I see no good reason why we should allow people who have private corporations to split income with their family members when we don’t allow other Canadians to do that. I support the extension of the tax on split income rules to other family members as in the proposals.
On the issue of passive income, back in the 1960s the Royal Commission on Taxation, the Carter commission, recommended that the tax system should neither encourage nor discourage the retention of savings inside a corporation. In my view the proposed changes go some way to make some progress toward that goal by making it so that there’s a balance in the taxation of savings inside and outside the corporation.
Importantly, by pinching down on these two channels of tax avoidance, the full package refocuses our business tax system on what it is supposed to do as laid out in the 1971 budget speech by Finance Minister Edgar Benson. Mr. Benson argued at the time when he introduced this tax measure that we had to make sure the goal of our small business tax system was to provide incentives for active investment in the business, not for a place to park your savings. It was a place to encourage investment in the economy and investment in a business.
In that context, I would like to address one part of the revised proposals, which is the lowering of the tax rate from 10.5 per cent down to 9 per cent for small businesses. It’s important to understand exactly what this would do.
If income sprinkling is restricted and if passive investment is now taxed the same inside and outside a corporation, the only place for retained earnings to go where there is actually a tax incentive now is back inside the firm, back into active business operations of the firm through investment.
From my point of view that’s a good outcome. That’s the goal, as set out initially by the finance minister in 1971. This reform, by pinching off those other routes to get dollars out of the firm, provides an incentive to channel those funds where we want them to go, which is into active operations of the firm.
On the last point, we have just heard some argue the idea of a tax wall because there is this gap between the taxation of small businesses and large businesses. I have two responses to that. First, when you look at the data there are actually very few firms that operate near the $500,000 limit where you move from being a small to a large corporation. It doesn’t actually affect that many firms.
Second, when you look at this gap between small and large corporations, in the 1980s it was over 20 percentage points. In the 1990s it was 16 percentage points. As of 2019 it would be 6 percentage points. Today it’s 4.5 percentage points, and it would go up from 6 percentage points. Historically speaking, this is not much of a wall, compared to where it has been in the past.
To conclude, I agree that it would be nice to have a full review of the tax system, a full review of the business tax system. That would be a good thing. I don’t have any opposition to such an idea. I also think we have to deal with the system we have now, the small business deduction, to try to make the most of it. I see in this proposal a way to take the small business deduction we have right now and restore it back to its original purpose of providing an incentive for Canadians to invest in the active operations of their companies. Thank you.
Senator Mockler: Thank you very much.
Senator Jaffer: Thank you to both of you for your presentations.
I would like you to address one question. The government has not conducted an economic impact assessment of the proposed changes to the Income Tax Act, including its lowering of the small business income tax rate.
What would you believe would be the economic impact of the proposed changes in B.C.?
Mr. Lammam: I agree with you that it hasn’t been done. We have just recently learned what the estimated revenue impacts will be, given the fiscal update released a few weeks ago.
My sense is that one of the things sorely missing in this debate is the effect on incentives from these tax changes. When we’re talking about raising tax rates on people, we know from economic research that people will change their behaviour. You have reduced the rewards from working more, from investing, and from taking on risk. You are likely to engage in less of that behaviour.
We have not addressed, at all in the public debate, the fact that these changes will result in behavioural changes which will reduce economic activity.
This notion that a doctor will not continue to work the same number of hours at the current level of taxation afterward is not supported by any evidence. The notion that professionals will maintain their hours, not adjust their fees, and pass the additional tax that they pay to their customers is not something that is supported by the evidence.
There will be behavioural effects in addition to the passive investment changes that affect higher income earners. That will reduce the amount of investment or dollars available and will have economic effects.
I agree with you it is something that has been sorely missing, but it needs to be much broader than simply looking at what the effect of the small business tax rate reduction will be. My own view is obviously different from that of Professor Milligan. I have seen the evidence first presented at the Mintz tax committee in 1997 which showed that small businesses were less mobile. When you followed them year after year, they weren’t growing past the small business threshold.
My expectation is that you will see fewer small businesses growing and becoming world champions. You will see more tax planning to take advantage of the small business rate and other features of our tax system geared toward small businesses.
If you are taking all of the recently proposed changes together, plus the previous changes enacted by the government including the higher marginal tax rate, there will be a net negative effect on Canada’s growth prospects.
Mr. Milligan: Thanks for the question. I will take it in two steps. One step is thinking of what happens inside the firm when the firm earns profit. Currently right now there is an incentive to keep the money in the passive part of the firm where it is taxed more lightly relative to if it were pulled out of the firm because of the way the passive savings are taxed in a firm.
There is also right now an incentive to flow the money through to your kids or your spouse who might not be working because of the way the income sprinkling tax system treats adult kids and spouses.
Actually, by closing those two things off with this reform is to say, “Okay, we have some profit inside the firm. When are we to do with it?” The biggest incentive is now to put it back inside the firm. In thinking about the economic analysis of the principles, it would seem to me that you will have more investment by small businesses in the active part of the firm, which I think is a good thing.
The second part of the question is about the broader return to entrepreneurship and to investment. We want more of those things in Canada. That’s why it’s important to also consider the cut in the small business tax rate in that context. The overall burden on small businesses will go up in some areas and down in others. In that way, it’s kind of back and forth. Hopefully it will even out.
I echo Mr. Lammam’s first point that it would be great to have more analysis at both the macro and micro level from the government so that we could actually dig into the numbers more easily.
Senator Jaffer: Many witnesses have suggested to us that we need a royal commission to look at the whole tax structure because it’s difficult and not as simple anymore, and there was mention of having lawyers and accountants. Since the Carter commission we have not had another commission, and I want to know what both of you think about doing a complete tax overhaul.
Mr. Lammam: I’m in 100 per cent violent agreement. My issue with the proposed changes is not that in isolation some of them are bad ideas. It’s that they are not being dealt with in a holistic way. If you are to crack down on tax planning in one area but maintain the incentives in the tax system to tax plan, I feel it’s very unlikely the proposed changes will actually do the job of mitigating tax planning because the reason why people do it is still there. You still have big tax rate differentials which encourage people to engage in that behaviour in the first place.
If we take a longer view beyond simply the proposed changes to small incorporated businesses and look at the way the government has removed some boutique tax credits in the tax system, it was an opportunity for the government to do away with ineffective tax breaks. In part, these boutique tax credits or tax expenditures are why we have a complicated tax system. They’ve proliferated over the last 20 years.
Instead of doing away with those and using the opportunity to concurrently reduce marginal tax rates by an equivalent amount and some pretty positive things for our tax system, in large part the government reduced one rate but then increased another. It’s not engaged in the kind of wholesale tax reform that we saw back in 1987 when we had a similar situation. A lot of these special carve-outs were removed from the personal income tax system but, in exchange, the government used the resulting revenue to reduce marginal tax rates significantly.
I view this entire exercise, which involves a lot of political capital, as a bit of a lost opportunity. It takes a lot for a government to touch certain features of the tax system that people have become accustomed to, but in the process it has missed the opportunity to do some really positive things. I would say that’s my main criticism of the tax change we’re discussing today and the longer view of what the government has done in the last two years.
Mr. Milligan: I certainly think it would be useful to have a big review of the tax system. I believe the Royal Commission on Taxation took about five years to do its work in the 1960s. There has been a recent review in 2010-11 in the United Kingdom. They took a couple of years to do its work as well. It was really fine work. These things have been done before and could be done again.
That is a medium run kind of thing. It would take a number of years. It’s possible to do both. There are some items in the tax system that require immediate attention, this being one of them. I would be happy to explain why. I think we could do that at the same time as thinking about a broader reform of the tax system.
I have a final point on the question of what you would get at the end of an exercise of a big royal commission. Hopefully it would a simpler tax system. I think we would all agree that would be a good thing, but I’m not as sure we would end up with one that would have lower gaps between personal and corporate rates. The reason is that over the past 20 years every country in the world, with the exception of the United States, has increased the gaps between corporate and personal tax rates. The reason why they have done that is because they want to maintain a progressive personal income tax system.
The way to shrink that gap is to give up on a progressive personal income tax system. I don’t think that’s where we ought to go, and I’m not sure what we would find if we had a big tax reform.
Senator Mockler: Mr. Lammam, do you have additional information or comment?
Mr. Lammam: Yes, I have a couple of things. One is that Canada already has a very progressive tax system. The notion that we don’t is being fed by the government’s misperception that upper earners are getting away with paying little tax. This is factually incorrect. It’s 100 per cent factually incorrect. Right now we have the top 1 per cent of individual earners paying 21 per cent of all federal and provincial income tax, while earning 10 per cent of the country’s income. That’s a doubling of the tax load relative to their share of income.
Though the government has talked a lot about tax fairness, it hasn’t defined its metric for tax fairness. When you have a targeted group that is paying double its share personal income tax relative to share of income, you have to ask the question, “How much is progressive?” Canada is among the most progressive in terms of having small groups of taxpayers shoulder a larger share of the personal income tax.
I just want to clarify. It’s important for us to talk about the reality of our personal income tax system because a lot of misperception is being fed into the public about top earners not paying enough.
I want to hone in on one point and why we need to talk broadly about tax reform. If you look at things like the unit of taxation, in Canada it’s the individual, but we have transfer programs that look at the family level as the proper unit. There’s a gap, and increasingly so, particularly as government transfers are now increasing between the different units, which is, again, very different from other countries.
One of the reasons why we see people use income sprinkling, as it has been termed, is that they’re splitting income. It’s dealing with a horizontal inequity in that some households have similar levels of income but are getting taxed at different rates because they have, say, one earner that earns a higher amount of income, versus another family that has two earners earning the same total income but less individually and paying less tax. This is one of the reasons why we have the kind of issues coming to the forefront.
Now is as good a time as ever to have tough discussions on what is the proper unit of taxation in Canada. There are certainly pros and cons each way, but there is a broader discussion to be had when we’re raising all these issues.
Senator Marshall: My question is for Professor Milligan. I must admit I was very interested in having you appear before the committee because I was aware you had been an adviser to the Economic Advisory Council of the Liberal Party and that you were in the Department of Finance last fall. I was thinking you may give us some information that we couldn’t get from officials of the Department of Finance.
I was kind of surprised after studying the initial proposals that you were saying in your opening remarks that the revisions improved the package. What did you mean by that?
Mr. Milligan: Thank you for the question. Just to clarify, I was part of a review committee that looked at tax expenditures in the personal income tax system and the corporate tax system in 2016.
Senator Marshall: Oh, you didn’t work on this proposal.
Mr. Milligan: This is not my handiwork here. As part of that committee’s work, we did provide advice on all matters of the tax system, but it was the Department of Finance that made this.
Senator Marshall: I thought maybe you could give us some inside information on these, but carry on.
Mr. Milligan: I was as surprised as everyone else in July when this came out.
To your question, why I thought this is an improvement for a couple of reasons. With the passive income measures the proposal now is to have an exemption of $50,000. I have two things about that. First, even with that exemption, 88 per cent of passive income would still be captured. In other words, even with that $50,000 exemption, 88 per cent of passive income would still be taxed under the new system. It goes to tell you that this is really heavily concentrated among the highest earners you see there.
Second, the $50,000 exemption covers a lot of people and a lot of the concerns raised in July, August and September. Doctors who were saving for maternity leave or other business owners who were saving inside their corporation to make further investments, would have to save an awful lot in order to have income on those savings exceed $50,000. That’s why I thought it was good. I thought having that kind of exemption was a good move.
Senator Marshall: Do you think that threshold is too low?
Mr. Milligan: I actually think they’ve hit a nice spot there. As you move it higher, you would then end up exempting more and more of the passive income. It gets to a point where it might not be worth doing at all. As it goes too low, you start to affect more small businesses that are perhaps using retained earnings to ride the seas of their business up and down.
I thought of $50,000 a year of income as representing a 5 per cent return, which would mean about a million dollars of savings. I thought it was about the right amount to balance off those two concerns.
Senator Marshall: What about the reduction in the tax rate for small businesses? Do you support that, or do you think the gap between the small business income tax rate and the personal tax rate is now too large?
Mr. Milligan: With the passive income measures and income splitting measures in place, it kind of tightens up the system such that concerns about using small business as a tax shelter rather than as a legitimate tool for small business have diminished because those tax planning opportunities are now less.
I think concerns about the small business rate have diminished relative to what they would have been in the absence of this reform. Whether moving the small business rate lower is a good move or not, I would say that many of the concerns are exaggerated. I think there are other measures one could take to replace the entire small business deduction system with other measures that might be better for growth and for investment.
In the context of having the small business deduction system that we have, having the rate at 9 per cent or 10.5 per cent doesn’t seem to me to be a large difference.
Senator Marshall: Mr. Lammam, when the minister appeared before the committee last week, I asked him about his reference to the term dead money when he did an interview for The Globe and Mail last fall. He referred to all this dead money in private corporations.
Can you comment on the reference to dead money which I take it he used in terms of retained earnings?
Mr. Lammam: I don’t have any particular comments on the minister’s view of what’s happening with small businesses, but I want to comment on the issue of the small business rate reduction, coupled with the exemption.
All things equal, if the small business rate falls, you now inadvertently create an incentive for people who qualify for below the exemption, the people with a million or less, to use the vehicles for tax planning.
Let’s be clear. That is not solving the underlying problem. That is making it worse. I have very strong views about this in that I think we should have a single rate. I don’t think we should have a tax system that dictates whether it’s advantageous to be a small or large firm.
In this regard I believe this was a bad move. It was bad policy when it was proposed by the previous government, and I think it is bad policy now that it’s going ahead. We have to remember that there are provincial small business preferential rates. For example, in Manitoba it is zero.
Senator Marshall: That’s right.
Mr. Lammam: When you add them up, we’re talking about a significant disincentive, coupled with other features of the tax system for small businesses to grow. Sometimes you don’t really see it because businesses are broken up into smaller and smaller units so that you don’t actually see the behaviour immediately in the data.
Senator Marshall: I have one final question for Mr. Milligan. My office has exchanged emails with you with regard to the additional revenues the government will collect as a result. For the tax on split income the estimate was $250 million. I know the minister in one interview, said that for passive income it would be multiples of $250 million. Now, with the revisions he released lately, it will be smaller than that.
Could you give us some idea or some comment with regard to the additional revenues that are to be collected by the government?
Mr. Milligan: Sure. The first and basic answer is that they have not been clear about this yet. I’m not sure if it was during the update or in an interview after, but I did hear the minister say in the week of thee fall fiscal update that there would be more information on that in the regular budget cycle in February or March when it happens.
Senator Marshall: In 2018.
Mr. Milligan: I don’t think we have all the information now, but I can say that in the July document there was an intention expressed that existing savings would be grandfathered in, meaning that there would be no change to the treatment of savings already in a firm. It would only be on a going forward basis.
There are many ways one could interpret exactly how they are to implement it. That has not yet been made clear. I’m hoping, as maybe many are, to have that clarity happen in the budget when it comes through in February or March. Until that point it’s only speculation.
Because of that, though, what I can say is that however they do the going forward or the grandfathering, the revenue change will phase in through time. It’s only as new savings accumulate that would be affected by the new rules. The extra revenue would then appear because the existing stock of savings would not be subject to the new rules.
Senator Marshall: For passive income it is probably not that high starting off, but it should grow.
Mr. Milligan: Wherever it starts off, it will certainly grow because of the grandfathering aspect to it. Again, that will need to be clarified as we go forward.
Senator Marshall: Mr. Lammam, do you have any comment on that?
Mr. Lammam: For fear of sounding like a broken record, I wonder about the exemption. I wonder about how the legislation will ultimately look with regard to the restrictions on income sprinkling. When you add all this up, the amount of complexity embedded in the personal income tax system over and above what we have today, plus the administrative costs for the Canada Revenue Agency to enforce the new legislation, is quite concerning to me. I think we all agree here, or maybe we don’t, there is widespread consensus among Canadians that our personal tax system is overly complex. These changes make our system more complex.
Then the question you have to ask then is for what. Are we addressing the underlying problem? I don’t believe that we are.
The underlying problem is that we have differential tax rates that are incentivizing people to tax plan. In some cases, when you are in the province of Ontario you face a top marginal tax rate of 53.5 per cent. People are pursuing these mechanisms in order to reduce their tax burden because we have very high marginal tax rates.
In fact, we have the top marginal tax rate in the English-speaking world right now. Until recently we had the sixth highest among 35 industrialized countries.
Let’s deal with the reason why we’re seeing tax planning before making the system much more complicated than it already is. That is my fundamental concern with these proposals.
Senator Marshall: Thank you.
Senator Pratte: I have a couple of questions. The first, Professor Milligan, is on income sprinkling. I guess it would be quite simple if we said very simply that adult children and spouses had no right at all to receive dividends. The moment you get into the contribution and what is a reasonable contribution, it gets more complicated. Then we get to the complexity aspect that Mr. Lammam mentioned.
When we had the CRA people as witnesses last week they themselves called it challenging, which I don’t find very reassuring. Are you at all concerned about this aspect of things, how complex it will be to administer the reasonableness test of the contribution by spouses and adult children?
Mr. Milligan: Thanks for the question. To start, as an economist I think the principle of allowing equal treatment of people with and without corporations is important. That’s why I support the movement toward expanding the tax on the split-income rule to family members.
Now, thinking about the administration of that, I do have concerns about how it will be implemented. We heard in October from the minister that they plan to make it simpler. We have not seen those details. These are good questions to ask.
At the same time, I do think we can have the technology. We can figure out a way to do it. I don’t rule it out as something that is beyond our ability to do, but I do think it is important to ask questions about how they will do it, and we haven’t seen sufficient detail at this point.
Senator Pratte: What kinds of contributions would be reasonable in your mind? For instance, the spouse of a small business owner who does not work per se for the company but raises the kids has been raised before us. The spouse raises the kids but in a way shares in the risks of the business, without directly working for the firm. The spouse raises the kids and without that work the business could not exist. Would that be a reasonable contribution?
Mr. Milligan: I don’t have much sympathy with that particular example because everyone else who has a job might have support at home as well which facilitates their work and their job. We have decided in Canada to have the individual as the unit of taxation. That means that we have to recognize one’s own effort and not think of the family unit as the unit for taxation.
In general, thinking about how we would measure the contributions, whether that would be generating ideas, whether that would be contributing capital, or whether that would be contributing labour, it will come into exactly where the government plans to lay down the rules about how to administer that test.
Mr. Lammam: Let me make a conjecture here at this table and we’ll revisit it once this goes through.
Whatever the test will be, you will likely see spouses and adult children fulfilling whatever that is. If it’s filing more you will probably see an increased amount of people working toward what the rules are.
Again, the problem is that tax rate differentials exist. They are incentivizing people to take advantage of tax planning strategies. The way you fix that is by reducing those tax rate differentials, not by increasing them, by the way, which is what we have been doing over the last two years federally and over the last seven years when you include the provinces.
Senator Pratte: I have one short final question on the data that we’re using to measure how many of the CCPCs are affected by these changes and what the government has told us.
I think, Mr. Milligan, you have used data yourself today, for instance, on the income sprinkling being used by CCPCs which would therefore be affected. Less than 3 per cent of the CCPCs are over the $50,000 threshold and therefore would be affected.
We have asked many of the witnesses representing chambers of commerce and so on whether they believe these data are correct. They have consistently said no. They think that many more of their members are affected than what those data show.
Do you have any comments on this?
Mr. Lammam: My comment on this is that we have basically created a two-tier system. It’s okay to have passive investment with assets up to a million dollars but it’s not okay afterward. To me, what this speaks to is the broader strategy that’s being pursued, which is signaling to Canadians and people outside of Canada that the more successful you are, is just not acceptable here. There will higher tax rates and even higher tax rates.
Let me just digress for a moment. With speeding tickets we want to have the fine increase as you spend over the limit. That’s not the kind of behaviour we want. We don’t want people speeding all over the roads. Earning income is a kind of productive endeavor with people taking risks, people being entrepreneurial and people being successful, you don’t want to have the same strategy in that you are penalizing people at 53.5 per cent marginal tax rates. That’s going to result basically in a signal to people who are not there yet that once you become successful you will essentially be penalized through the tax system.
Similarly, with the passive investment exemption, I worry that by creating another tier with the general corporate income tax rate and exacerbating the existing gap between the two we are sending the wrong signals at a time when there are significant economic headwinds. In Canada, business investment after inflation is down nearly 20 per cent since 2014. There is dramatically low business investment. We have reductions in confidence among small and large business leaders in the country.
There is the likelihood of NAFTA renegotiations. There’s a lot of headwinds against Canada and potentially pro-growth tax reform south of the border.
Rather than moving in a direction that makes our country more hospitable to investment and more hospitable to skilled workers, we’re going the other way. That is my concern with these additional tiers and the kind of language being used. The finance minister said in an interview, and I quote, “We’re going to go after and target the wealthy.” This type of language and rhetoric is unhelpful at a time now when we do face significant headwinds.
Mr. Milligan: To the question, I have a lot of confidence in the data. Let me tell you why. It’s because I have seen similar answers from different researchers both inside and outside government, using different data sources and different approaches to get to around the same place.
For example, on the split income or dividend sprinkling, I’m referring to a paper by David Macdonald from the Canadian Centre for Policy Alternatives. We can compare that to the estimates from Professor Michael Wolfson from Ottawa and to estimates from the government itself inside. Those are three different sources of answers around the same. That’s where I find the confidence. I always like to see different researchers with different approaches getting the same answer. That really increases my level of confidence. I don’t share the concerns of others about the data.
Senator Andreychuk: I want to pick up on growing the economy in Canada. I sit on the Standing Senate Committee on Foreign Affairs and International Trade. We spend a lot of time responding to a government that said that we need to grow our economy and that the growth would be in small and medium size businesses, the backbone of Canada. Our Minister of Trade now is in Asia looking for opportunities for small and medium size businesses.
Against that background, you’re saying that it is okay. We know that the devil is in the detail, but we are worrying about the top 3 per cent that will be trapped. I wonder what it will do to risk. The overall conclusion from all the fine people like you coming to testify at the other committees has been: “We really are a risk-averse country. What we have to do is create, take the best minds we have and give them a chance.”
You start out in your basement, or wherever you are, with all of the new technologies. How do we give them more incentives to be creative and to be competitive internationally? The concern is that the growth will not just be in Canada. We won’t survive if we can’t do it internationally.
How do we signal them that they’re really the hub and the importance? We don’t want them to stay small. It’s one thing when you talk about a mom and pop shop. They just want to get their kids through school, and that’s it. The creativity of the service industries, the technology industries and the cyber industries often come from one creative mind taking a risk. Wouldn’t we be sending signals to get bigger and be smarter? How do we do that with these issues?
You say the devil is in the detail. What detail would you put in there to create it? I’ll start with Mr. Lammam and then Mr. Milligan.
Mr. Lammam: I think that’s an excellent question. You can surmise my position. There’s a broader set of policy initiatives that happen, but with regard to taxation what is being done at the margin is moving in the wrong direction. Raising taxes on the most skilled and educated workers is not the kind of policy that will attract and retain the most skilled workers.
When we’re talking about the changes with regard to small businesses, discouraging growth is not the kind of change that will foster business development. It’s will not foster world leaders. We want the next Google in Canada. We want the next Microsoft in Canada.
You have to create the economic conditions through policy. Governments can’t control which industry will prop up, but what they can do is set the right framework policies in order to encourage that.
I can’t remember now if it was earlier this year or the year before that there was a proposal to increase the inclusion rate on capital gains taxes. That type of tax policy that is highly damaging to innovation and to entrepreneurship. We don’t need to get into all of the negative economic consequences of the simple idea of putting that on the table and then pulling it back. The finance minister has still not clearly said whether or not increasing the inclusion rate for capital gains is on the table.
Innovative firms rely on changing the way stock options are taxed because they don’t have income in the early stages of their ventures when they’re engaged in unproven methods, unproven products and unproven technologies. They rely on that type of compensation, and the government was talking against increasing taxes on stock options. It still hasn’t said if it’s off the table or not. There’s an assortment of tax policies working at cross purposes to what I think you want, what I want and what all Canadians want, which is a robust economy with firms that are growing and proving their productivities and creating the jobs that Canadians want and the incomes that Canadians want.
You don’t get that if you have policy that’s working against those ends. Unfortunately, that’s what we have had over the last several years in the country.
Mr. Milligan: I share your goals. I think they are the right ones. We want creative people to start businesses in Canada. We want to provide incentives for them to grow. We want to provide the broad social and economic environment where they want to be here and grow.
Let me make a couple of points about that. Imagine you had to design a tax system to encourage those things. I think the last thing you would do would be to allow people to sprinkle income around families.
Why is it I think that would be the last thing you would do? It is because that takes $250 million and hands it out essentially to random families. It doesn’t matter whether you have good ideas. It doesn’t matter if you are investing in your company. It just matters that you happen to have kids of a certain age and you happen to be married with a spouse at home versus not married.
These are not things we want to provide or send out incentives for. We want to send out incentives for people who have good ideas and make investments.
Also we don’t want to have a system that says we want you to park your income in the passive side of the firm. We want incentives for you to invest in your firm. By pinching down on the income splitting and by pinching down on the passive investment, it provides incentives to invest in the firm and to grow the firm.
On my final point, I am thinking about how we get the next Google or the next Microsoft in Canada. I wasn’t sitting in Seattle in the 1980s with Bill Gates, but if I were and it they were sitting there in some garage thinking of their company, I don’t think they were asking each other what if the capital gains tax rate is 45 per cent versus 50 per cent. No, they wanted to change the world. They wanted to find employees that would allow them to help change the world.
Thinking of building a society where people want to arrive, want to feel like they’re part of society, and want to feel like they can grow their businesses and attract new employees from around the world, those are things that help build that environment.
Taxes do matter. I’m an economist. I will not tell that you they don’t, but we have to think of it in the broader package. What I see in the overall structure here is that the tax system, through this reform, will focus incentives on investment. It will also focus on the attention of potential entrepreneurs that Canada is a fair place that has a good society where they can bring their families and grow their business.
Mr. Lammam: Yes, I was happy to hear Professor Milligan concede that taxes do matter, as an economist. Certainly that’s borne out in the evidence, but everything is at the margin. If you have a higher tax rate, it is not about people leaving. It’s about marginal effects. That’s how economists study these things. At the margin you want to be moving in a direction that is helping your case, not hurting it. That’s the point.
Taxes are certainly important in people’s decision making. They’re not the only thing, but it’s about building a framework of policies and at the next margin what the next policy does to help either create conditions for the right company to flourish or not. Unfortunately, again, I don’t think we’re doing the right things.
Senator Andreychuk: Just following up, a lot of the smaller businesses growing to medium, particularly in agriculture, said they that there were other issues than tax. I won’t go through the intergenerational one, but they couldn’t get capital anywhere. They had to incorporate to be able to get certain kinds of credit. They had to incorporate to get certain kinds of insurance.
I hear it’s passive income, but what they were saying was that they were working and looking at the tools to get ahead. They don’t look at it as passive investment. They look at it as their own capability to build a wealth fund, if you want to call it that, to expand for the rainy day or whatever it is.
Right now there have been fires on some crops. It will take three to seven years to regain them. They say they can’t get it elsewhere. Unless we build other structures for them, they’re putting it away for a rainy day. It’s not passive. It’s really a crisis mode, much more so because they can’t get the levers that large business can.
Is that a fair comment they’re making or are they not seeing the full picture?
Mr. Milligan: I think it is a fair comment and that’s why I support the exemption of up to $50,000 of income, which is approximately equal to about a million dollars of assets. Let me make it clear. In that top tier of firms that are over the $50,000 threshold that will be affected. The average amount of passive income, not assets, is $500,000 per year. This is talking about people who have an awful lot of assets. The kinds of farmers and agricultural businesses you are talking about will be exempt under this exemption measure.
What we see is that the remaining firms that will be captured by it are ones with extraordinarily high income to start with. The measures that have been revised in October should go some way to alleviating those concerns.
Senator Andreychuk: Except, if you look at today’s agriculture, try buying a combine. You’re way into the millions of dollars to operate a fairly moderate farm these days. That’s why we’re losing farmers. Is the threshold there?
Senator Mockler: Mr. Lammam, you wanted to make a comment and then we will move to Senator Neufeld.
Mr. Lammam: Yes. I wanted to talk a bit about the exemption. There’s really no economic rationale for the $50,000 exemption. I think Professor Milligan would agree. There is nothing that’s couched in other than an arbitrary number of a million dollars in assets assuming a 5 per cent annual return.
For me, I think you are raising an important point. Is this single exemption appropriate, given different, different circumstances? You will never find an exemption level that is acceptable to everyone because everyone will have a different view. This is the problem when you start creating particular carve-outs in the tax system geared toward an individual or based on someone’s perception. Those are the kinds of things we need to avoid.
Again, we have to take a step back to look at why farmers are using these vehicles. It is because there’s a tax advantage for them to save in these vehicles. That’s why they’re doing it. They’re doing it because it’s advantageous relative to the alternative of putting that money in a personal account and drawing down on it, outside of a tax free savings account. There are reasons why people are pursuing this and we have to understand why they’re doing that.
In terms of the exemption, I think you’re opening up a big can of worms by talking about whether it’s acceptable to one group or another. You will never have agreement.
Senator Neufeld: Thank you very much, gentlemen, for being here. You are very interesting. Professor Milligan, if I heard you right, I think you said that you agree there should be a review of the whole tax system from top to bottom. We have heard that pretty consistently from just about everybody. You are not different from most people that we have talked to, but you did say that there were some things that had to be dealt with right away.
I will use some of the things that have been changed. Was taking away the lifetime capital gains exemption from farmers necessary to carry on in the world? I don’t think so. I appreciate they did change that, but someone made that change to start with by saying they would do this. Wow, I wouldn’t think much thought went into those kinds of things.
Another part that I wonder about is the $250 million sprinkling which will be less now. What was so significant in the $300 billion budget that you had to go in first and change that before you would have a look at the whole tax system? Maybe help me a bit here.
Mr. Milligan: Sure. What I saw as the biggest motivation for this package of reforms was a chart in the July presentation and in the October release from the Department of Finance. It showed the proportion of our economy that was represented by income in Canadian-controlled, private corporations. As a share of the economy, the income that went through this particular corporate structure went I think from 3 per cent in 2002, up to 7 per cent in 2015. Over the past 15 years it more than doubled.
I see that as something that was not resulting from an increase on entrepreneurial spirit in Canada. I wish that were the case. I see that as resulting from decisions made because of the existing structure of the small business tax system to rearrange one’s affairs and incorporate for the purposes of lowering one’s own tax bill.
That’s what people will do. When you look at who is doing, though, you see that this was mostly concentrated among the highest earners in Canada. I see is an increasing share of our economy more than doubling over the space of 15 years and pushing its way into a parallel tax system that was only accessible to those with a lot of money, to start with. I saw that as a fundamental unfairness in the tax system that we ought to address.
On the particular measure the senator mentioned of the capital gains on farmers, that was clearly an overreach by the Department of Finance. I was glad to see that they pulled that one back. As a priority of why this is something that was being pushed forward, the proportion of the economy being pushed through this particular corporate structure was, to me, a big motivation.
Senator Neufeld: I have looked at some of the other proposals that were put through. We haven’t heard everything in testimony, but we always hear those kinds of things after meetings. These ideas have been around for quite a while, as you would know in your previous experience working for Finance as an adviser. They have been broached with different finance ministers. I’m not saying particularly one party or another. Both parties have had advice from the staff to move ahead with these kinds of changes.
Do you agree with me that they have kind of been rolling round within the Ministry of Finance for quite a while? I guess I could say they finally caught a person who actually said, “Yes, we’re going to try it out,” and there has been tremendous blowback? Would you just help me a bit there, or would you tell me that?
Mr. Milligan: I don’t have a lot of information about exactly what has been offered to this finance minister or others by the staff. I can say that the narrative you tell would not surprise me, were it to be true.
Senator Neufeld: I’ll go back to my own experience. I was an entrepreneur when I was 20 years old, doing whatever. I did at one point get into a business that I kept for about 15 years. You could say I was kind of a franchisee for a large company headquartered in Calgary. I was in the little community of Fort Nelson, British Columbia, which is a long ways away from Calgary. Most of the people in the Calgary office wouldn’t understand what I did there.
Being an entrepreneur I went out and gathered business, and I got business. Do you know what happened? They came along and said that they were going to cut the revenue I was going to get. They would pay me so many cents a litre for every litre I sold of gasoline, diesel or whatever.
I view this as kind of the same. What is wrong with being successful in today’s world? What is wrong with it? Don’t we want successful people here? I don’t class some people as high earners and, golly, let’s just go tax them. They got to be high earners for some reason. It was because they wanted to get there. That’s what to me creates business. That’s what creates investment.
In my making more money in the business I had, I would invest it when I saw fit, not when government comes in and says, “We don’t like the kind of money you are putting away in that account there for a rainy day. We’re going to tax you so heavily, if you don’t listen to what we say, that you are forced to invest it.”
Is that how it is really supposed to work? I don’t think so. I kind of think the other way. Tell me what you think. I think people should be rewarded if they work hard and get ahead. Everybody has that opportunity in this great country of ours. We should not curtail that, but I feel some of these things are beginning to curtail that. What do you think?
Mr. Milligan: Sure, I could sign on to almost everything you said — I have no objection to that. The way I look at it is that I think about the returns to someone who gets up in the morning, who works hard and does all those things that we want an entrepreneur to do. I don’t think a return to that should depend on whether you are married or single. That’s why I think that income splitting is the wrong way to channel our business incentives. We should take that money and turn it around into something that benefits all entrepreneurs with good ideas, all entrepreneurs that work hard.
That’s where I’m coming from on this. I don’t want to punish entrepreneurs. I don’t want to punish those who are successful. I am saying we want to make sure we structure our business tax system so that all of those who are successful will pay the same taxes and all of those who work hard will face the same incentives.
Mr. Lammam: I agree as well. That is the kind of system I think we all want in Canada, one that’s a driver of why we have such high degrees of social mobility. The issue, though, is not that we had tax rules in place that were the right rules. The issue is that we have to ask ourselves why people were using these rules. Again, if you do not address the reason why people are using the rules and you change the rules, you will not solve the problem. Those are my thoughts on that issue.
I do want to talk a bit about the famous chart. I’m not an expert on this particular data but I believe one of the reasons the growth or proliferation of incorporated small businesses coincided with a period in which the Ontario government struck a deal with doctors was to encourage them to use these vehicles as compensation for an inability to increase salary or fees paid to doctors. That needs to be noted. It doesn’t mean that it’s the right thing to do, but certainly that is one of the drivers of why that growth in the economy happened over the 2005 to 2015 period.
Senator Neufeld: I watched on TV last night when the Prime Minister stood many times and said, “Tax the wealthy. They’re not paying their fair share.” Yet, I watched a program called Paradise Papers and thought to myself about all the entrepreneurs, the ones the government says it will tax hard if they save over a million dollars because they want them to invest it. They watch and see what we saw. I can only imagine there will be more.
Who are the wealthy in the government’s mind? Is it just the person that can actually put away a million dollars for a rainy day in a business, or is it those that get to actually take their money to the Caribbean? It is not just a million dollars. We’re talking about multiples, multiples, multiples. Anyhow, with all of those people being in the same group, don’t you think we should think about taxing that wealthy cohort?
Mr. Milligan: Thank you for the comment. I have also noted the Paradise Papers story in the news over the past couple of days and have a couple of things to point out on it. When you are looking at international portfolio movements and tax avoidance techniques, two things are important.
One is making sure that the CRA has the tools available to push back against the more aggressive of these techniques. In Budget 2016 there was an investment of $400 million specifically for that reason, to fund the CRA to continue its efforts on international tax avoidance.
Second, because it involves shifting money between countries, it’s really necessary to have an international view on those things. That has been facilitated by the OECD. There’s a process there called BEPS, base erosion and profit shifting, that has tried to coordinate countries in how they deal with international portfolio movements and in corporate profits moving across borders. It’s important for our government to support those international efforts.
I agree with your concerns on that. I share them as well. I would direct my efforts to making sure the CRA has the tools available and that Canada is an active participant in international fora where these things are settled and discussed.
Mr. Lammam: Unfortunately situations where Canadians avoid paying taxes are not good, but fortunately they are often few and far between, particularly as you go up the income ladder. It turns out that the largest share of Canadians who do not pay personal income tax is concentrated among the lower income groups, not surprisingly. There is a $12,000 federal income tax exemption and a suite of other tax credits that allow people at the lower end of the income scale to not pay any income tax.
I don’t have the numbers off the top of my head, but you are talking about 30 per cent or 40 per cent of Canadians, depending on what the income level is. When you go up the income ladder, the percentage of Canadians who do not pay any personal income tax on $100,000 or more is very low.
The types of stories we hear about, or the one-offs about how some Canadians engaged in tax planning activities that allow them to reduce their tax burden, is creating a false impression that for the most part top income earners in the country are getting away with paying little or no tax, which is absolutely not true. The top 20 per cent is paying a significant share of the total tax burden, which is what you get when you have a progressive tax system.
I gave you numbers on the top 1 per cent. The top 1 per cent earns 10 per cent of the national income, pays 20 per cent of all personal income taxes.
I do worry about these one-off situations, but I think they need to be put in the broader context for taxpayers as a collective in those top earning groups. They’re certainly paying what I would consider their fair share. The way I consider it is not just by my opinion. If you define fairness as proportionality, if you earn some percentage of national income and you pay that same percentage in taxes, it can be considered an objectively fair system.
The government and many advocates of higher taxes on upper earners in these proposals don’t define a “fair share.” Of course, there will be one-offs here and there that are fulfilling their Canadian duty. Again, as a group, that is simply not happening. We need to have that understanding because the misperception is fueling, not just these changes but an assortment of changes. The higher marginal tax rates and the higher tax rates on capital gains, et cetera, are motivated in part by an undefined and factually incorrect notion that upper earners are not paying their fair share.
Senator Neufeld: I don’t want you to misconstrue what I was saying. I don’t disagree with what you are saying.
Mr. Lammam: Yes.
Senator Neufeld: The one-offs are the ones that make it tough for everybody below those to actually accept that they’re being told they’re not paying their fair share. If it’s only one-offs, it shouldn’t be too difficult for CRA to actually chase those one-offs, I would say.
Senator Oh: Dr. Milligan, I have a question for you. It is important that we add for the record that you have been a long-time supporter of the Liberal Party of Canada. You have worked with the current government on taxation matters, as mentioned by Senator Marshall and clarified by you earlier.
My first question for you is this: When working on policy suggestions for the government, do researchers consult with people on the ground impacted by those policies?
Mr. Milligan: I am happy to answer any and all questions about my background. I would like to make it clear that I always have a policy of answering phone calls from members or senators from any party. I have spoken with many MPs from the Conservative side, from the NDP side and from the Liberal side. As an employee of a public university that’s my policy. I could provide you with the names of those people, if you would like, senator. It is true what you said. I have provided advice both to the Liberal Party before the election and to the government after it. Thank you for pointing that out.
As a policy researcher and as an economist, my greatest strength is to look at the data, to look at the theory, and to start from there. I have also learned through experience that it’s important to ground my findings in what is true out there in the real world as well. I try to make a point of participating in conferences with practitioners in the tax area and of talking to people in my neighborhood. I balance those off with what I find in the data, in the classroom, and in the textbooks.
Senator Oh: My second question is: Would you happen to know who has been responsible for the gender impact analysis? Was this individual independent of government or under contract such as you?
Mr. Milligan: What impact analysis?
Senator Oh: Yes, the gender impact analysis.
Mr. Milligan: When I was helping the Department of Finance in 2016 with the tax expenditure review, we reviewed something like 150 different tax measures with a big, thick binder of data and an analysis on every one of them. One of the pages in each of those was a gender-based analysis of each tax measure. For the tax measures we reviewed then, I know that was part of the process the Department of Finance follows.
In this particular tax measure, I don’t believe there was a separate gender analysis in the July document, but I believe when the revisions were put forward in October there was more gender-based analysis.
Actually, when I was helping out the Department of Finance in 2016 I found it very useful. I learned things that weren’t maybe obvious sometimes when looking at the gender-based analysis. I certainly support that as part of a package of analysis, and as part of the analysis of this tax reform I hope gender-based analysis will be there as well.
Senator Jaffer: My first question is for the professor. I am also a Liberal. My questions are probably as a thrown-out Liberal at the moment from the Liberal Caucus. I’ve also worked many years with the Liberal Party, so I’m daring to ask you a question which may lead to some challenges.
We have heard a lot about income sprinkling and why that was put in place. We have also heard about the loopholes and how people have reacted. You know all the debate so I’m not going to repeat it. We have heard that people in small businesses take risks. They do not get benefits. They pay EI for their employees. They work long hours. They don’t have pensions. The family does not get outside assets. We had someone here today who didn’t even have a home because he was investing everything in his business.
To compare from what we have heard a salaried employee with small business, we have heard that it is like comparing apples and oranges. They are two different ways. We have a tax system that has been set up to look at how to compensate. Compensate might be a stronger word, but it was to find a way to encourage small business people to open new businesses.
I may not be saying it quite correctly, but you started off your presentation by saying that you didn’t see it as fair. For you they’re both apples, but what we have heard is they’re apples and oranges.
I would like you to comment on that.
Mr. Milligan: Thanks for the question. To clarify, I’m a member of no political party.
Senator Jaffer: I am.
Mr. Milligan: That’s great for you. We’re talking about apples and oranges and all kinds of fruit. I am thinking about the kind of comparison I make that I think is important. If we’re to have entrepreneurial incentives, even within incorporated businesses, it shouldn’t depend on whether you are married or not. It shouldn’t depend if you happen to have kids who are aged 21 or not. The entrepreneurial incentives should reflect the strength of your ideas, your investment, the employees you hire, and the business circumstances. That’s my issue with thinking that income sprinkling as a business incentive, that this is something that we use to reward business. It rewards only a small sliver of businesses.
Senator Jaffer: I’m not talking about rewards. It’s a way of setting up your tax situation.
Mr. Milligan: The other basis of comparison I like to make, beyond thinking of different family types within the corporate structure, is the fact that more businesses are unincorporated in Canada than are incorporated. These are people operating as sole proprietors. This is often a stepping stone where people start their business before they get big enough where it makes business sense for them to become incorporated.
This is important. If we load all of these tax incentives on only those who are incorporated, it actually creates a barrier to start a business because you feel like you have to pay a bunch of money to an accountant or a lawyer to set up a firm just to compete with all those out there who have all of these incentives.
We wanted to make sure there’s a balance between the incorporated and unincorporated business sector because unincorporated businesses are important. It’s a stepping stone forward for a lot of people who are starting businesses. We want to make sure that they don’t start behind the starting line relative to those who are incorporated. That’s why we want to make sure that the incorporation incentives are fair relative to those who are unincorporated businesses.
Senator Jaffer: Yes, but that’s a completely different discussion. That’s not even in front of us. Unincorporated businesses are not even the reform that the minister is looking at.
Mr. Milligan: That’s exactly it. It is to make sure that we don’t have a bunch of extra incentives to be incorporated versus non-incorporated business. The idea is that we’ve loaded a bunch of tax incentives: the ability to income sprinkle and the ability to use business as a savings vehicle. Those are things that you get if you’re incorporated but not if you are unincorporated. Levelling the playing field between different types of businesses is something I see as a motivation for the reform.
Senator Jaffer: I don’t want to get into an argument with you, but that’s not what the minister said. He talked about loopholes. I would like Mr. Lammam to reflect on that, and then I will have a question for you.
Senator Mockler: Mr. Lammam, before you answer, I know that you advised us that you had to leave.
Mr. Lammam: Yes.
Senator Mockler: Hopefully you can take the question from Senator Jaffer after your comment.
Mr. Lammam: Sure, yes. First of all, I want to thank the committee for having me. We had talked earlier because of the time changing that I had a prior commitment. I will be leaving after I briefly touch on your question. I apologize for that.
If I understand what you are saying correctly, people have set up their economic life around the rules that we observe today. By changing the rules we’re affecting their economic life. I think that’s a fair statement, but it doesn’t mean that the rules necessarily were right to begin with.
That is where Professor Milligan and I may find agreement. I’m not supporting the rules that we had in place, but people do use those rules for a reason. If there’s only one thing that you take away from everything I have said today, it is that people are using these vehicles for a reason. Oftentimes it is because they have tax advantages from using them. We can solve a lot of these problems by making the tax treatment of different types of income and different levels of income more similar. That’s really what it will take to have fundamental tax reform to deal with the problem.
I worry now, with the added complexity, that we don’t know the details yet. They will be unveiled in the next months about income sprinkling in particular. My worry is that we will have more complexity and a system that will not address why people are organizing their affairs this way.
It’s not a new answer, but I really believe that unless we deal with the fundamental reasons for why tax planning exists, we will not make real progress in working toward a solution that actually withstands the test of time, is not just adding more complexity, and is having accountants and lawyers giving advice in a way that reorganizes people’s affairs in response to the new rules that are being proposed.
Thank you very much.
Senator Mockler: Thank you, Mr. Lammam, for the information you shared with us.
Senator Pratte: Professor Milligan, I agree with you there is a problem that should be solved on passive income. I follow what the government is trying to do. I wonder, though, whether the solution that has been chosen takes all flexibility away from the business person.
Passive income should be used to be invested immediately in a company. If the business person wants money for retirement, he should take the money out of the company to invest in an RRSP or whatever. If not, the money will be taxed at a very high rate.
From what we have heard from small and medium business owners, one of the things they want is some kind of flexibility. They want money there because they don’t know what’s coming. They may need it to invest in the future. They may eventually need it for pensions but they’re not sure. They may need it if they have a good buying opportunity in the future.
The proposals seem to decide what is good for the company and take out any kind of flexibility. I wonder if that isn’t a problem. Wouldn’t there be a way to address the problem while giving small business owners the flexibility they require while managing their business?
Mr. Milligan: The first important point to make here is that there’s no law or regulation against saving beyond the million dollar limit inside the firm. The new tax regime would mean that when you follow the path of a dollar from pre-tax corporate profit to savings and to the owner’s pocket, done through the corporation or outside the corporation, those things would be approximately in balance. It just means there’s no extra incentive or no additional advantage to saving inside the corporation versus outside the corporation. That’s what the goal is, and I think they have achieved it with the way they have set it up.
Are there reasons why you’d want to save inside the firm? Yes, there are good business reasons to save inside the firm: as you mentioned, for a rainy day, for buying a combine or for doing whatever. There’s no rule against doing so. The question is whether you should advantage those savings relative to savings outside the firm.
With the exemption, as it’s put, it exempts up to around a million dollars of savings. Is that exemption high enough to capture every kind of combine or other thing you might purchase? I don’t know. We have to think about what would happen if we pushed that a bit higher or pushed it a bit lower. Those are good questions to ask.
Again, if you look at the magnitudes of the table that were provided by Finance, many of the firms who will be captured by this will over top of the $50,000 limit. The average passive income is in the hundreds of thousands of dollars. This isn’t some kind of mom and pop shop. This is someone who has tens of millions of dollars saved inside a corporation. I don’t think this is mom and pop doing it for a rainy day.
Senator Pratte: Maybe I’m beyond my mental capacity here, but the problem as I understand it is if you keep money in the firm, not having decided what you will do with it. It may be for a rainy day. It may be for an investment. Part of it may be eventually for a pension.
If eventually you take part of that for a pension then it will be highly taxed. That’s the problem. The problem is that if you want to take part of it out eventually it will be highly taxed. You lack flexibility in that proposal.
Mr. Milligan: Again, you could choose to do your savings inside or outside the firm. The goal of the proposal is to make sure those are the same and that you’re not advantaged or disadvantaged either way. There will certainly be more flexibility, as you mention, up to that $50,000 of income level.
Above that, I think you’re right that there would be less flexibility if you save outside the firm in terms of being able to reinvest inside the firm. This is a question of where to make that cutoff and whether it’s appropriate flexibility for the kind of contingencies that you have in mind.
Senator Andreychuk: Perhaps some of what I was going to ask is covered by Senator Pratte’s point.
The government made a strong point about wanting a fair tax system, but of course fairness is in the eye of the beholder. Somehow or other, being employed is one factor, as are being in a company that is not incorporated in structure and being incorporated. These are sort of three ways of doing things. How do you get at fairness when it seems to me we are equating fairness meaning the same?
I recall the old human rights debate about the Charter and finding we had to get the judgments that said equality did not mean sameness. I look at this tax thing and say that fairness is not the same as being an employee, et cetera.
Employees have a risk. We know it with Sears. Shouldn’t we attack the risk and try to minimize it if it’s to be a social cost for us? The one who hasn’t incorporated has some risks and some liabilities. Then you have the incorporated. They seem to have taken one and tried to say that it will equalize them.
I have been sounding like a broken record, but I continue to harp on the point that a lot of people incorporate not for the tax break. If you want to franchise, you have to be incorporated. Senator Jaffer made a compelling comment about if you want to contract with CRA, you have to be incorporated. The reasons for incorporating are not driven by the person doing the business. It’s driven in the kinds of businesses they’re in. It troubles me that we’re saying it’s all about tax fairness when I don’t have a choice.
I go back to the 3 per cent you are talking about that is holding so much money. Couldn’t we compare it to public companies and the advantages there of movement of money, capability of holding it, and minimizing taxes? Wouldn’t it be better to take that 3 per cent and look at what has been happening in the public sector?
Mr. Milligan: One of the points you made was about the fact that people incorporate for many reasons, not just taxes. That’s exactly right. We want a system where people make their incorporation decision based on the business merits of the case, and where a contracting situation requires that your lawyer tells you that it’s right given the risks of your circumstance. We don’t want people incorporating or not incorporating for tax reasons.
That’s the tax system pushing you one way or the other. That’s the government telling you to incorporate or not. We want, instead, for you to incorporate or not based on the business merits. There are lots of good reasons to incorporate. Let those drive your decision and not stack up the tax deck in favour of one option versus the other. That’s how I approach that.
On the question of fairness, the way I look at this comes from thinking about how different people would view the tax system. It’s not that we want everyone to have the same income, or even necessarily to face the same tax rate, depending on their occupation or whatever. It’s simply a question that I think all Canadians expect everyone is playing by the same set of rules. What I worry about is that some people who are not able to do it will talk to their neighbours and find out that because they happen to be able to incorporate in their profession they’re able to split income with their kids, their spouses, or whatever. What it appears to a lot of people, then, is that someone has been able to buy into a separate tax system that has advantages a regular person doesn’t have access to.
That’s where I come from when I talk about fairness with respect to this. It is the idea that we’re all subject to the same set of tax rules, and you can’t buy into a separate tax system that confers some special advantages on you relative to other people.
As the senator mentioned, people have different notions of fairness. I want to respect everyone who thinks of fairness in a different way, but that’s just how I approach this question. It is the idea that we’re all subject to the same tax rules.
Was there a third question?
Senator Andreychuk: You are saying a lot of people think it’s unfair that you can income sprinkle, et cetera. Do we have any data on that, any opinion polls or anything? We certainly have it from the other side saying that they need them, et cetera. We do have income splitting in other ways too.
You have made an assumption. I presume as a professor you have done it on some information. Perhaps we could get the information on this statistic or who is saying that it’s unfair on the incorporation. Quite frankly, I don’t think we heard that until the government announced these measures.
Mr. Milligan: I don’t have access to specific polling data on that and I would defer to someone who has it.
I expressed my concern that people feel that having access to a separate system is not fair. That’s my personal view of where fairness comes into play here. As I said, people have different views about fairness and I want to respect all Canadians in their views on that.
Senator Cools: I thank you very much for your testimony before us and for your taking the time to join us.
I must make a confession that I’m a little baffled, a little bewildered and bothered. Do you remember that old song of many years ago? I wonder, professor, if it is possible at all that this enormous project of tax reform on which the government has embarked can be achieved in the current atmosphere of public disappointment, public anxiety and doubt in the government’s initiatives?
Mr. Milligan: On whether or not they can achieve it, I don’t care to speculate too much. I could say that they have some work to do still, in terms of providing some of the information we have talked about, enacting the passive income measures and putting out the regulations to determine who has contributed to a firm for the income sprinkling measures. They have some work to do, both on drafting the legislation and on building support through their communications efforts.
I look forward to seeing, as everyone is, how they will do that over the next few months.
Senator Cools: I too look forward to their turning this around. It would be nice. I think it would be fantastic for Canadians because I have never seen such massive reforms get dragged down as these have been in people’s minds. I have never seen such mistrust in government in my years in politics. Thanks.
Senator Mockler: Before we close, I have a question, if you would permit me, Professor Milligan.
We talked about toolboxes, and we have a lot of Canadians with their toolboxes morning and night. You have touched a bit on answering Senator Marshall and Senator Neufeld.
What would we need to make a recommendation to the CRA? You said that you weren’t a card carrying person, politically speaking. What tools could we give, with your experience? We need to make a recommendation to the government of the day about tools to look at offshore companies. What would you recommend?
Mr. Milligan: I don’t have specific recommendations to offer you. I don’t know a lot about the international tax issues that I can comment as an expert. First, I would ask how the expansion in the 2016 budget, the extra 400 and some million dollars, was allocated.
Second, I would ask the government how actively they’re participating in international forums where these are debated, as I mentioned the OECD and other international areas where countries coordinate their efforts to try to pinch down on these kinds of international tax avoidance schemes.
Senator Mockler: My last question would be based on your experience. As minister of finance responsible for modernization or reform of the taxation system of Canada, would you have rolled it out differently?
Senator Cools: That’s a hard question.
Mr. Milligan: As we’ve just discussed, a lot of things come into play. There are the economics of it, the legislation and then the communications. I’m not an expert on the communications. I’m not an expert on the legislation, but I can speak about the economics.
I think about there being as I said a big picture reform with some patches and some fixes that you do in the interim. I view this as a patch on the existing system.
If I were to have some decision-making power on this, I would like to see some movement toward a bigger reform of the tax system that would start to think about complexity and about the goals we have for the tax system.
I’m sorry Mr. Lammam isn’t here anymore to hear me criticize him a bit. Beyond the legitimate goal of thinking about a growing economy for our tax system, it is important to think about making sure that everyone is benefiting from it and that everyone is contributing to society as befits their needs.
Thinking about the role of a progressive tax system within the context of our modern economy is an important thing that we need to maintain our focus on. I would pursue thinking about the twin things of maintaining progressivity and encouraging growth in the economy and having a longer term vision of how we do that with the tax system.
Senator Mockler: Professor Milligan, thank you very much. I thanked Mr. Lammam earlier. You have been very informative. If you want to add any additional information, feel free to send it through the clerk.
Honourable senators, we will suspend for a moment to bring forward the next witnesses.
The committee is resumed. To the witnesses I say thank you very much for accepting our invitation. No doubt we are awaiting your comments, your recommendations and your opinions.
We now have before us David Christian, Partner of Thorsteinssons, LLP, and Hugh C. Woolley, Income Tax Consultant, as an individual.
I have been informed by the clerk that Mr. Christian and Mr. Woolley will make presentations of approximately five minutes each, and then we will proceed to questions.
David Christian, Partner, Thorsteinssons LLP: Thank you to the committee for inviting me to speak before you. I’m a lawyer at Thorsteinssons in Vancouver. I have practised exclusively in the area of income tax law for 25 years now, which is a bit amazing to me that I got there. I’m one of those lawyers and accountants the prior witnesses were talking about that are recommending people plan their affairs in order to get into incorporations.
I am open to address all points of the government’s July 18 consultation paper and proposals. The brief that I submitted to the committee was directed particularly at the income splitting proposals. I used the old-fashion language of income splitting, not sprinkling, which is the traditional language.
My opening remarks will focus more on the income splitting proposals than on anything else, but in response to any other questions I’m happy to address any of the other parts of the government’s consultation paper.
At the beginning of these remarks I would make one point in respect of the so-called passive investment issue that was raised with some of the prior witnesses about dead money. That has been raised as a concern by the minister and there have been other comments to that effect.
I was called into a meeting last Friday afternoon with one of my clients who runs a series of mutual funds focused primarily on producing income. The purpose of the meeting was to discuss the government’s proposals and what it might mean for their business. Their mutual funds are sold in large part to private corporations which have collected income over the course of the years. Because they produce income which is attractive to the particular investors, they’re anticipating a large withdrawal of funds out of their industry over time when these rules come in. Their funds are going. They’re anticipating that there will be a massive withdrawal. They’re trying to figure out how to handle it in terms of their own business, how they will be able to provide the liquidity in order to return funds to their investors. More specifically, what will it mean for their business which started about 20 years ago with about 10 of them? Now it’s about 150 and they manage $2 billion in income producing assets.
That’s what dead money is. Dead money is going out into the community to provide financing for other projects and to provide an income stream for the investors and the entrepreneurs that have saved those funds and set them aside. That’s what dead money is.
Before I shift back to the income splitting, which I seem to be avoiding, one question has come up with respect to the so-called passive income proposals: What exactly will the $50,000 limit mean? Will that mean a $50,000 income limit per enterprise or per shareholder? How will it actually be applied when the legislation comes? That is among the most important and significant questions for when the legislation actually makes its way out.
In terms of the income splitting I made an overall point in the brief I submitted to the committee which I will make again here. The revenue goals as identified by the government are relatively modest. In my view, they are completely disproportionate to the amount of difficulty they will impose upon those who have to comply with the rules, both those who carry on business and those who provide their advice and do their income tax compliance.
As was pointed out by I believe Senator Neufeld earlier on, the amount of revenue is a pittance when compared to the size of the federal budget, not to disparage the $250 million. I wish I had it. In terms of the amount of complexity and difficulty that it will impose on those who have to comply with the rules, it is really quite disproportionate to the amount of revenue that’s being raised.
Other comments were made by prior witnesses who were speaking a lot about fairness. It’s not fair that one person next door is able to split income, whereas their neighbour can’t split income. That’s easy: Repeal section 120.4 on the income splitting tax and remove the prohibition on splitting income through a personal services business. Then everybody is the same.
Why is it always considered that the way to eliminate the disparities between the two is to eliminate the opportunity for one rather than extend the opportunity to others? Of course the answer to this is: That would be an extremely expensive and disruptive approach to government revenues. There are other alternatives, which is the only point I would wish to make.
In addition, the structure of the proposed income splitting taxes is in and of itself flawed. The model for the tax on split income is to impose the top marginal rate of tax on all split income or the split portion of split income. That departure was invented with the so-called kiddie tax that was brought in, in 2000.
Prior to that, the model for dealing with income splitting was primarily the attribution of income. The legislation would say, “A person has transferred income to another person, so we’re going to put it back where it should have been.” It will be taxed at the marginal rate of the particular individual, not at the top marginal rate but at whatever marginal rate might have been there, so that whatever tax “should have been paid” is the tax that ultimately ends up being paid.
By applying the tax on the split income model under these proposals there is, in my view, a significant risk that extra tax would be paid that would not otherwise have been paid under an attribution model.
I think the final point I would make is the most significant one. I left to the last the lack of appropriate grandfathering in the income splitting provisions.
The minister has said over and over again, “Don’t worry. We’re going to make sure that whatever provisions you have in place now won’t be touched.” With the utmost respect that’s not accurate. In respect of the income splitting proposals, the minister appears to be of the view that because those rules will only apply to distributions paid after 2017 it means they don’t apply to anything that happened before 2017, and that is not correct.
There are tens of thousands if not hundreds of thousands of corporations across the country where what is normally referred to as an estate freeze has taken place over the course of the last 30 or 40 years. There is value built into shares and property owned by spouses, children or relatives. It is not the complexity but the variations. Circumstances vary in the way that all families vary from one part of the country to the other. That value is locked in and counted on. It was relied on in good faith by those who carried out organizing their affairs over the course of the last 40 years. There could be $1 million of $2 million locked up in this value and now be subject to a top rate of tax that wasn’t anticipated. I think is an extremely important issue. It appears to me the minister will proceed with the income splitting proposals. An effective form of grandfathering, in my view and in my submission, is absolutely critical in order to prevent a measure of hardship that is not otherwise appropriate. Thank you.
Hugh C. Woolley, Income Tax Consultant, as an individual: Good afternoon. Thank you for the opportunity to address an issue that I am passionate about.
As my resume indicates, I am a tax consultant to accounting firms and have firsthand knowledge of how these proposals will impact small practitioners. Formerly, I wrote butterfly rulings at Revenue Canada’s head office in Ottawa. Also I have taught income tax for the past 25 years and have published 10 major papers for the Canadian Tax Foundation and STEP Canada.
I have distributed my thoughts on the July 18 proposals in an eight-page handout and will dedicate my allotted five minutes to three key things: namely, fairness, complexity and meaningful tax reform.
The first is fairness. If fairness was the objective then I think these proposals missed the mark. Defined benefit pension plans create enormous acrimony for small business owners who are told that they enjoy an unfair tax advantage by accumulating passive assets in private corporations. Many private company owners view their corporations as an unregistered pension plan that will smooth their income in retirement. I don’t believe this fiscal prudence should be punished with tax rates in excess of 70 per cent as the proposed regime contemplates.
If the Department of Finance wishes to address the deferral opportunity, it would be wise to also consider the advantages provided by pension plans. There are many simple ways the Department of Finance could deal with this issue, including significantly increasing RRSP contribution limits or re-establishing forward averaging to recognize that the income of business owners is often volatile.
I concur that it is appropriate to question whether private corporations should enjoy a tax deferral over individuals. However, I believe it is equally appropriate to question whether public corporations should now enjoy an advantage over both individuals and private corporations. This new rule will clearly tilt the balance in favour of public companies and make it advantageous for public companies to swallow private corporations, especially as a tax efficient exit strategy.
Second is complexity. In my opinion the vast majority of accounts will be unable to digest these new rules that only serve to make an overly complicated tax system even more incomprehensible. The Department of Finance is never satisfied with simple, practical solutions. They always strive for theoretical nirvana.
For example, a very simple solution to the income splitting rules would have been to extend the existing kiddie tax to age 24, considering that the vast majority of income splitting that I witness involves university aged children.
I strongly believe the only workable solution to the passive income issue is an advance corporation tax as proposed by the Carter commission. I have not met a single tax expert who believes the Department of Finance will be able to write workable legislation to grandfather existing retained earnings. Some have suggested that isolating passive assets into a new company would be a potential solution. However, tax rules prevent partial butterfly transactions. Even if such corporate reorganizations were possible, the professional fees would be prohibitive to most private corporations.
Also I don’t believe the recently proposed $50,000 annual exemption will have any real value. Although a private corporation earning $30,000 of annual rental income would be within the ambit of the exemption, if the ultimate disposition of the rental property generates a taxable capital gain of $150,000 then $100,000 of this taxable gain will be subject to double taxation. This alone would discourage the owner from acquiring the rental property in the company and render the $50,000 exemption meaningless.
It now appears that the Department of Finance has withdrawn its proposals with respect to the conversion of income to capital gains. I assure you this is not the end of the story. Over the years, this cat and mouse game of surplus stripping has raised its head whenever capital gains are taxed at a rate lower than dividends, as was the case in 1969 when the Supreme Court of Canada dealt with this issue in the Conn Smythe case.
I don’t disagree that a legislative fix is needed, particularly where self-cancelling transactions are involved. However, I believe any new rule must allow for both intergenerational transfers of businesses and reasonable post-mortem tax planning, including pipeline transactions. I have never met a client that died intentionally to obtain a tax benefit.
The third is lack of meaningful reform. The Department of Finance announced cuts to the small business tax rate. In my opinion these tax cuts are nothing more than a gimmick and are not part of meaningful tax reform. It must be remembered that about 25 years ago the small business tax rate in British Columbia was 26 per cent. It’s projected to be about 10 per cent in three years. I believe that a melding of tax rates where all corporations pay about 22 per cent on business income would be more internationally competitive, greatly simplify the tax system and encourage businesses to expand without fear of losing their favourable tax rates. Also it would serve to eliminate a significant portion of the deferral opportunity currently available to private corporations.
Ironically, I believe that the recently announced tax cuts are in reality a huge tax increase. As corporate tax rates decrease, the tax rate on corporate distributions must increase to preserve integration. Soon the top marginal tax rate in B.C. for a non-eligible dividend will be over 45 per cent compared to below 32 per cent in 2007. This increase in over 13 per cent points means the distribution of small business earnings will have become 40 per cent more expensive. Considering the amount of retained earnings in private corporations, this increase more than punishes those that have left small business earnings in their companies.
The new prohibition on income splitting with spouses frustrates years of prudent tax planning undertaken by thousands of small business owners. Forgoing salary to accumulate funds within their corporations with the intention of equal participation in retirement dividends meant that many small business owners did not make RRSP contributions that would have permitted pension splitting in retirement. It is now too late to alter this planning, and these small business owners will be treated in a far worse fashion throughout their retirement years than those that have contributed to RRSPs. In my opinion this is effectively retroactive legislation and is unconscionable.
To conclude, this entire process has been depressing to witness, especially the polarizing rhetoric. The comment, that retained earnings in private corporations was dead money, was unfortunate and misleading. These funds were invested in assets like rental apartment buildings that house Canadians and share the public corporations that employ Canadians.
I strongly recommend that the government strike a royal commission to look into meaningful tax reform for all Canadians. Thank you for this opportunity.
Senator Cools: Very good.
Senator Marshall: I have a lot of questions. First of all, Mr. Christian, thank you very much for raising the issue about the grandfathering problem with regard to estate freeze. I had never thought about that, but I had read it in one of your papers.
In your opening remarks you talked about mutual funds and the large withdrawal that’s happening or will happen. Where is the money going? One of the questions I have been asking is: What will be the impact on the economy? What will we see when these tax changes go ahead? I guess they are. People are doing something. From the large withdrawal of funds from mutual funds where is the money going?
Mr. Christian: This is something that my clients are anticipating will happen. The mutual funds they operate provide funds primarily in the mortgage industry. They provide short-term funds mainly in development financing and that sort of thing. Because of the nature of that they spin off a lot of income.
They’re anticipating that once these changes come in many of their investors will switch their investments from mutual fund units that produce income, to equity-style investments where the income only comes when a gain is actually realized. Money will go into an equity that will sit there. The value may compound over the course of time, but unless there’s a disposition or some other taxable event there will be no investment income. In a way it’s kicking the can down the road because ultimately there will be a problem, but a problem tomorrow isn’t one today.
Senator Marshall: It stays within Canada, does it? Are you thinking it stays within Canada, or does that make a difference?
Mr. Christian: There’s no requirement that it stays within Canada. There’s no guarantee that it will. It will chase wherever the best equity opportunities are, if you are looking for equity opportunities.
I mean I’m the guy who thought interest rates were going up in the early nineties and locked in my mortgage at 11.5 per cent for five years. You kind of don’t want to look to me for investment advice, but if you want something that will not produce income but has the potential to have a large gain, you would look to a tech stock and you would look to the Americans, so the money would move down south.
Senator Marshall: I want clarification on a couple of other issues that you addressed so that I can fully understand what’s happening.
When we’re talking about the $50,000 income threshold and how it will be applied, you gave the impression that there would be several ways you could apply it. Can you just explain that to us? I mean the $50,000 will be in the 2018 budget bill. My concern is that we will the budget bill and have two weeks to study it. There will be something in there. Two weeks will not be sufficient. I am trying to get a handle on what the options are so that I’m aware of what the options and will understand whatever is in the budget document.
What are the options with regard to the $50,000 income threshold?
Mr. Christian: Your concern mirrors mine because what came out in October was a series of press releases over the course of days. The one benefit of the July 18 proposals was that there was at least detailed legislation in respect of income splitting.
Senator Marshall: It was complex.
Mr. Christian: In terms of passive income proposals, there was at least a relatively well laid out analysis. We had some idea of what was going on.
What happened in October was a bunch of press releases saying that they were to do some stuff and will you what it is next spring. Now we’re left to guess what is to happen next spring.
In terms of the passive income proposal and the $50,000 all we know is that there will be a $50,000 limit. The basis of the computation was $1 million at 5 per cent. In and of itself that makes some sense, if looked at quite narrowly.
What does $50,000 mean? Does it mean per entity, if you have all the money in one particular corporation? Is it an associated group of entities? One would assume, based on how the Income Tax Act and the tax system are structured, that it must be shared among an associated group of companies. Does it also apply if you have multiple shareholders?
Senator Marshall: Right.
Mr. Christian: If you have two shareholders, is it a hundred? Is it four? These are the different ways that it could be structured.
Senator Marshall: My last question for you is: Is it difficult to track passive income so that the passive income proposal can be implemented? Some witnesses have said, “No, it’s not difficult.” Will it be difficult? I mean you will have different pots of income, so it sounds to me like it might be a bit difficult but some people are saying, “No, it’s not.” Could I have your views on that?
Mr. Christian: All I can say is, thank God I’m not an accountant. I think it will be tremendously difficult. In all fairness, however, it’s not as difficult as it would have been in 1972. In the early 1970s, right after the initial tax reform, the proposal to track what is in effect the deferral was abandoned because of technical complexity. I think a lot of that, even though I wasn’t around at that time, may also have been the limitations of technology and the ability of the accounting industry simply to keep up with it. Computers have got pretty good.
Senator Marshall: Yes.
Mr. Christian: I have a thing sitting in my pocket that has more computing power than Stanford University had in the 1960s. That will make it easier than it might have been otherwise. The level of complexity and compliance is quite daunting, particularly given that the clients of many of the closely held corporations are not the best bookkeepers.
Senator Marshall: No.
Mr. Christian: They’re not the best record keepers, which puts an immense burden upon the accounting industry to be able to come up with comprehensible numbers that the CRA relies on.
Senator Marshall: That’s right, and the CRA will have to agree with those numbers.
Mr. Christian: Correct.
Senator Marshall: Mr. Woolley, I have a question for you. It’s one that I asked this morning and I didn’t really get an answer that I was happy with.
As the small business rate goes down, as it will go down, the tax on the dividends will go up. That’s our understanding. I think that’s what you said in your opening remarks?
Mr. Woolley: That’s always, I said, yes, and that’s always historically what has occurred.
Senator Marshall: That’s historic. The federal government said that the small business rate will go down. Nobody in the government is talking about the tax on dividends going up. What I’m hearing is that as it goes down they will compensate for the revenues they will lose by increasing the tax on the dividends. Can you just explain that to us?
Mr. Woolley: I’ll try my best. I think this is separate and apart from the new proposals. This would have been the same had they not introduced these proposals.
Senator Marshall: Right, yes.
Mr. Woolley: They cut the corporate tax rate. This would be either the small business rate or the general rate. Just looking at the general rate, when the general rate was first reduced in 2006 we had eligible dividends in British Columbia taxed at 18 per cent. Now they’re taxed at about 33 per cent. You can see the huge growth in dividend tax rates that are occurring. I also alluded to what’s happening.
Yes, they did not make this announcement at the time. What happens is that they will alter the dividend tax credit mechanism to preserve integration.
Senator Marshall: The integration.
Mr. Woolley: They want the total tax burden between the corporation and the individual to essentially equal 50 per cent, assuming a top rate taxpayer. If the corporate tax rate goes down, the tax rate the individual pays to get the money out of the company must increase to preserve integration. That’s historically what has always occurred.
Senator Marshall: The overall revenue raised by the government should be exactly the same.
Mr. Woolley: Yes. Obviously some of it will be deferred if the corporate tax rate is lower. Yes, the total burden is, but that assumes individuals always had the same tax bracket when they took the money out of the corporation. Sometimes people are in different brackets when they earn the income and when they take it out. A lot of people, as I mentioned, view corporations as unregistered pension plans. They don’t have defined benefit pension plans. They save their money in their corporations. They draw it out in retirement so they can smooth their income. For the vast majority of small business owners, that’s what I see occurring.
Senator Marshall: We’re counting on the government to increase the tax on dividends to compensate for their loss in tax revenues with regard to the decrease in the small business.
Mr. Woolley: Generally that’s the way it works, yes.
Senator Marshall: That’s what we’re depending on, but there is a possibility they may increase it more than that.
Mr. Woolley: It becomes a huge tax grab.
Senator Marshall: That’s what I’m looking at.
Mr. Woolley: Let’s say my tax rate of my corporation was 26 per cent when I earned this income 25 years ago. I was assuming that when I took it out my dividend rate would compensate for that, but there is no tracking.
Now, as the dividend rates go up and up and up, my total tax burden could be well over 60 per cent because I have accumulated this income. That’s the point I was trying to stress when I say it punishes the people. As you are keeping this rate, every pool of retained earnings within this corporation will now be subject to higher and higher distribution taxes as the money comes out of the corporation. They’re assuming every dollar in the company is being taxed at 10 per cent. That’s simply not the case.
A lot of the money is being taxed at 14 per cent, 20 per cent or 26 per cent, but they will get it out as if it had been taxed at the lowest dollar.
Senator Marshall: That’s the point I was trying to get at this morning and I couldn’t get an answer.
Mr. Woolley: There is no tracking. There are no pools that said, “Okay, this was earned at this level; therefore, it comes out at this level.”
Senator Marshall: No, I got you. That’s right. It’s not equal.
Senator Jaffer: Thank you to both of you for being here.
I want to start with passive income. I have three or four different areas and I’ll try and do this fast. In the passive income, first of all, I don’t know where they have the 50. I haven’t been able to get a response from anybody I have asked as to why the 50.
From your expertise is it $50,000 per shareholder or is it $50,000 per company? If it was one shareholder or one man owning a company maybe that is fine. It depends. If it’s four brothers, is it $50,000 among the four brothers, or would they then have to form separate companies so that they can take advantage of the $50,000?
What’s really a stone in my shoe about the $50,000 is that small corporations are big and small. You can’t give the same to all. There are many questions around passive to ask, but I had better stop here so you can give an answer.
Mr. Christian: The answer is: Where did the $50,000 number come from? I have no idea. It appears to have been something drawn out arbitrarily. While a million bucks is a lot of money and 5 per cent is a reasonable return, that’s $50,000 and that’s the number. That’s as far as I can tell.
In terms of how it will actually be applied among different shareholders or different associated groups, again we have no information and no way to guess. Based on the press release and the inferences that I can draw from the press release, my guess is that it will be $50,000 per corporation or associated group of corporations, regardless of number of shareholders or business circumstances.
That’s just my guess at this point. We all get to wait for the budget day to find out.
Senator Jaffer: Mr. Woolley, I have a question for you. I asked this question of a professor earlier on I’m not happy with the answer, not because he did not answer the way I wanted but because I think an individual is very different from a small corporation or a public corporation.
Why just go after the small corporation? Why not go after the public corporations as well? I asked the minister that question. My colleagues can correct me if I got it wrong, but my understanding is that he says, “Well, public corporations pay taxes too.” That’s not my question. It’s that they’re just going after small corporations.
I’ll come to the public corporation question in a minute. As I said earlier, to compare an individual to a corporation is apples and oranges. Am I right? Am I wrong? Can you help us?
Mr. Woolley: I think there’s a lot of truth to what you say. I mean it’s not always completely black or white, but I think small business owners take a tremendous amount of risk. I don’t think that having some compensation in the tax system for the huge amount of risk that is being taken is necessarily a bad thing. I think it encourages risk taking, and that is one thing we should be encouraging. That’s just a personal belief. We should be encouraging entrepreneurial spirit to create businesses, to create jobs, and to reward that with a favourable tax rate is a good thing. I don’t think the small business rate should only be, as some suggest, to grow the business. It should also be to reward the risk. I don’t think that has necessarily come out in some of the comparisons.
Senator Jaffer: Do you want to add anything?
Mr. Christian: I would like to make a comment to add onto that. A lot of the debate has been hijacked by commentary over risk and reward. The way I look at it, something that has been lost in the debate is simplicity versus complexity. There are always differences at the margins.
I know the minister and the professor, earlier on, were saying that only 3 per cent would actually be affected by these proposals. Are we really going to make our system much more complex and more difficult to administer over 3 per cent? Where is the sense of perspective and proportion?
The best system is one that is simple to operate and easy to understand. I love complexity and I love complex rules. I’m a lawyer and I like picture puzzles when I do them in my spare time. I think that’s neat, but for people, the system, and the CRA itself to be able to administer a system, we should have a system of rules that apply to everybody without making minute distinctions over whether or not we consider one particular person worthy of having access to the particular rule. It’s not a question of reward. It’s just that’s what you do. Here are the rules. They apply to everybody the same.
Senator Jaffer: In what you have said one thing that is really concerning me is the issue of the reasonableness test. It is one-sided. CRA can say, “This is it” and “That’s the law.” I can say that my spouse has worked so much in my business, et cetera, but CRA can say, “No, I don’t agree with you.” They have the final say. It’s one-sided.
I want both of you to comment on what you think of the reasonableness test.
Mr. Christian: The reasonableness test will be a significant problem. The reason for that is that the minister has said that the reasonableness test has been around for decades. He is correct, and it has been really, really hard to apply for decades. It’s very difficult because each trier of fact, or any particular person who is looking at it, will come to a different conclusion because it’s factual. Different people have different reactions to different facts and different circumstances. There’s no way that you can turn it into something that is easily applicable and will make the meaningful distinctions the government wants it to make.
I have two concerns over what will happen with the reasonableness test. First, the government’s computers and data mining abilities are getting really, really good. They have put a lot of money into their computers and their operations over the course of the last 15 or 17 years, and they’re impressive. I have a concern that they will put together a program that will match those who receive dividend income from a closely held corporation. They will match it with the scheduled 50 to someone who is related in a control position over that corporation. That will generate either an audit lead or, even worse, just generate out an assessment to the individual that says, “Here it is. We think that you have earned split income. Prove us wrong.”
In income tax litigation you are guilty until you prove yourself innocent. Once an assessment is made you have to overturn the government’s assumptions. If those assumptions are generated by a machine it becomes very, very difficult to overturn those.
Second, even if that science fiction fantasy doesn’t come true or doesn’t come true immediately, the CFA officers have a very difficult time administering even the provisions they have, including the reasonableness test.
In 1986 the last big iteration of changes to income splitting was the introduction of the corporate attribution rule. The corporate attribution rule is a relatively straightforward test with bright lines and a couple of little computations in it. As I said at the start, I have done this for a quarter-century. I have worried about the corporate attribution rule every day of that quarter-century because it’s right in the middle of what I do constantly. I’m continually warning people about it. I have yet to see it raised once by the CRA in that quarter-century.
The reason why I think it hasn’t been raised is that it’s too hard for them. It’s too hard to administer and it’s too hard to apply.
A reasonableness test will be in much the same way. I fear a checklist will be developed somewhere internally that will get applied to all circumstances. As Senator Jaffer pointed out, instead of responding to the individual circumstances and the multiplicity of circumstances that can be applied in any particular business, there will be a series of boxes with a series of checklists. If you get six out of ten, you win; if you get four out of ten, you lose. It will be reduced to something that arbitrary.
Mr. Woolley: My thoughts on the matter are this: Whenever you get into questions of fact rather than matters of law, you need some sort of adjudication. One of the problems with the current system is that Revenue Canada gets to be judge, jury and executioner.
Senator Cools: That’s right.
Mr. Woolley: The individual does have recourse to the law. I have often heard, after dealing with the Revenue Canada appeals officer, that you could always exercise your legal right to go to court. For the vast majority of simple cases, the legal fees are anywhere from $20,000 to $50,000. This is simply not an option for most people.
Most people will have to either accept what Revenue Canada says or try to negotiate from a position of weakness. Therefore, whenever you put in tests that have this much grey area, it will always be problematic, particularly for smaller taxpayers. The bigger taxpayers will have the resources to fight but the smaller guys won’t, and they will be bulldozed by the CRA.
Senator Pratte: The July 18 document begins by describing what the government perceives as different kinds of problems and then proposes solutions. You obviously disagree with the solutions, but with some of the issues that the government sees do you agree that there are some problems or some issues that they describe? Are there things there where you think solutions should be brought to the table, or are there no problems at all with what they describe?
Mr. Woolley: If I could look for anything in there, I personally would not have a problem with restricting the capital gain exemption to those over the age of majority. I don’t think that 836,000 exemptions should be available to an infant. I would not have had a major problem with that. It’s one of the things that actually has been repealed, probably most likely because it’s a small dollar amount in the overall scheme of things.
Second, as I mentioned in the paper, I would not have a real problem in expanding kiddie tax to around age 24. Other than that, I think everything needs a major rethinking and I would go as far as saying a royal commission on the whole system.
Mr. Christian: In the government’s concerns that were expressed in the July 18 paper I think that they misidentified their problem. What they identified as a structural problem within the architecture of the Income Tax Act is really a tax rate problem. Both Professor Milligan and Mr. Lammam were talking about that this morning. The disparity between the corporate tax rate, particularly the small business rate, and the top personal tax rate is simply too broad. It’s too wide and it encourages distortions in the system.
I have wondered for some years now whether the small business deduction has run its course. The small business deduction when I first started practising was around 22 or 23 per cent. The general corporate tax rate was 46 per cent and worked out to be double tax. That all got fixed about 10 or 11 years ago with the introduction of the general rate income pool and the full integration of the corporate and personal taxation system. With the reductions in the corporate tax rate over the course of the last decade, or maybe decade and a half now, the general corporate tax rate is now pretty much where the small business rate was in the 1980s and 1990s, and everybody thought it was perfectly fine back then.
I wonder whether there is any particular need structurally for a small business tax rate. If you remove the small business tax rate, you remove many of the incentives and the concerns of the government.
Mr. Lammam spoke about the second tax rate problem of the government that the personal tax rate is simply too high. I can speak from experience. In British Columbia in the 1990s the top personal tax rate was just under 55 per cent. It kicked in at about $60,000 worth of income. At that kind of tax rate people will do anything to avoid it. They will just do absolutely anything.
As income tax rates came down, people would come into my office and say, “I’m about to realize this big income. I’m going to realize a gain. I’m going to do this. What can I do?” I would say they could do this, this and this. Then they would say, “That sounds like a lot of work. It sounds expensive and hard. I will just pay the tax.” That was carrying on in the early part of the aughts. Now as the income tax rates go back up again I fear there will be people who will once again be willing to do anything to avoid paying the top rate of tax.
I guess the final point is that even though the government did identify an appropriate issue in the disparity between the small business tax rate, the personal tax rate and the planning that goes into obtaining the tax rate, while correctly identifying the issue they kind of exacerbated the problem that they themselves identified by reducing the small business tax rate now.
Senator Pratte: The government seemed to be aiming at a kind of CCPC, mostly professionals, probably, that used the CCPC structure strictly for tax purposes and for personal saving purposes. That’s the kind of examples they gave in their media appearances. They were not really aiming at entrepreneurs but, perhaps unwittingly or whatever, they took measures that affected a wide array of companies.
Would there be a way in a tax measure to target precisely the kind of company that they were aiming at? First of all, would it be a good thing? Second of all, would there be a way of targeting those kinds of companies?
Mr. Woolley: Where there’s a will, there’s a way. I believe the Province of Quebec said a few years ago that corporations which did not have a certain number of employees would not qualify for the small business tax rates. That’s one way.
A second way would just be to target professional corporations. There have been proposals, sort of qualified professional income or something.
Mr. Christian: Non-qualified income.
Mr. Woolley: Yes, non-qualified income. They went after those types of corporations. Although it is really is difficult to say that an accounting business is somehow more or less worthy than a dry cleaning business or something along those lines. I don’t know who gets to sort of pick the winners and losers. A lot of these businesses have a lot of aspects to them.
Is someone who is a trustee in bankruptcy an accountant or not an accountant? These are very grey areas and it becomes very complicated.
Mr. Christian: I don’t really have much to add to that other than it strikes me it comes very close to becoming a prescription list.
Senator Oh: Thank you for the wonderful information.
When I first came to this country they told me two things: first, you need a good lawyer and, second, you need a good accountant. That’s what I learned.
I have a simple question. Why can the government or the CRA not come out with a good tax revenue group policy that encourages business, employment and investment to grow? Now we’re paying many taxes in Canada, tax on taxed money like the GST. There are many taxes we pay today that are actually on after-tax money. I think that’s very unfair. You should generate growth to increase the revenue for CRA.
Mr. Christian: I wish I had a good answer for the “very simple” question about how to reshape the entire tax system. Lots of ideas go around about tax reform. Some are good; some are not so good. I’m always up for a good round of tax reform and a long discussion about tax.
I’m sure you have heard from many other witnesses as well that it probably is time in Canada for a good, comprehensive look at tax reform.
Senator Oh: Yes.
Mr. Christian: The last time that happened was 30 years ago, which is really more than a generation. I was an undergraduate when all that happened and I’m not anymore. Before that I was a school child in the 1960s and 1970s. Your point is a very good one. I think it is time for a comprehensive review of the Canadian tax system, but not something slapdash, thrown out in the middle of the summer with a 75-day consultation period.
Senator Oh: Yes. Do you have any comment, Mr. Woolley?
Mr. Woolley: Thank you for the question. I’m not sure if I was talking out of turn within the context of what the July 18 proposals were talking about, but I have a lot of personal ideas.
First, I have been an advocate for the working poor for a long time. I don’t know what the poverty rate in Canada is but let’s say around $24,000. I don’t believe anybody who earns income under $24,000 should pay a penny in income tax. The personal exemption should be $30,000. That’s just my personal feeling. I think it would encourage people and give them motivation and incentive to work. I’m a strong believer in encouraging the working poor.
Second, I am personally in favour of moving toward more consumption taxes to tax the economic activity which occurs within Canada. One problem I have with a lot of my business owners right now is that they are paying 50 per cent plus in income tax. They don’t mind paying their fair share and contributing to our great country, but they are competing in the housing market in Vancouver with people who are bringing money into the system and are paying no income tax. It’s not like they’re cheating. I think there’s a belief that a lot of the people coming from offshore are cheating. In my experience that is not the case. They are just taking advantage of the system that exists.
A lot of the people here are what I call remittance men, where the money is being remitted from offshore and is not being taxed within our system. Generally the only way to do that is to introduce other types of taxes like consumption taxes. When you purchase vehicles and things like that you pay additional taxes.
You talked about the Paradise Papers. If you look at countries like the Caribbean where there is no income tax. Go and buy a car and there’s a consumption tax of $70,000 to buy a car or things like that.
There are other ways of collecting tax. I will stop my rant, but I would personally do a lot of things to change our system personally.
Senator Andreychuk: Rather than talk about what might be, the minister says it’s going in and that CRA will have these regulations put in place. Everyone we have talked to first of all said they weren’t consulted in the way they would like to be consulted. You can tick off consult, but was it meaningful consultation? That was it.
The government says they’re willing to hear from people, but we are really talking about two months over Christmas, not a barbecue but Christmas now. The complexity worries me because we will end up with putting in another system that will not be workable if it isn’t really run through all of you who work it day and night.
How do we convince the government, if they’re so hidebound to do it? I’m going to play devil’s advocate. You lawyers know what that means, right? You’re going to do it. We’re not going to have any more amendments or changes. Now it is the regulations. The uncertainty is as much about what will it mean to me, until I see those regulations.
The minister particularly and the finance department said they would work this out. It’s doable. CRA says that it’s complicated but they will be able to do it. As a side thing, the Phoenix system was doable on paper, and then the problems started. We haven’t even got to the paper yet to see if it’s doable.
We have all these embedded reasonableness tests. Before you were born, since you keep saying 30 or 40 years, I started practising. Actually it was 45 years ago. The Workmen’s Compensation was that kind of problem. How do you value the loss of a limb, et cetera? We ended up with charts and judgment upon judgments. We’re almost at the point now where you just go to a chart to see what every part of your body is worth, but there is discretion now being built back into the system.
How do we convince the government? How do we get some of your input linked up with CRA; not with finance, not with the minister, not with Parliament, but with those who will have to administer it day by day? I believe the CRA people are not really out to get us. They’re doing the best they can with what they have. They get boxed into being arbitrary because they have to justify. It’s not an objective test. It’s not subjective. I don’t even know that part of it.
The dilemma for me is implementation. How do we reduce the anxiety level and all start living with the system if we have to? How do we get that across to CRA?
I will give you some time to think about the answer. There has been a lot of talk about tax havens offshore. How do we get the money back? The U.S. will discount and say, “Come on back,” which I think will probably work in many cases. On the other hand, I think we estimated $9 billion offshore that they know of. Therefore, they have added a component of CRA, a very costly component of additional people.
We have to do the same I think in CRA to manage this. There’s another cost there and another complication for all of your clients. How do we get across that it’s not as simple as, “Don’t worry; it will be fair”?
Mr. Christian: The administration by the CRA, based on my experience on how these things will get administered, will start off with very careful and discerning minds in the centre. They will think very, very hard about it, but the problem that they face in the administration and the application of these rules is how to create and structure a system that produces at least somewhat consistent results.
In order to do that in any particular system, what you have to do is eliminate outliers and you have to reduce the circumstances down to a series of stereotypes. This is the wrong word but it’s the only one I can think of. You have to say there are some categories and there are some boxes. If you fall into the particular boxes, you have to say what the results are.
It starts out with very careful and sophisticated thought. Then it gets generalized down into a simpler set of rules that can actually be administered and applied by lesser trained and lesser sophisticated auditors out in the field, once again all with the objective of producing consistent results. It won’t manage to produce consistent results because there’s no system in the world that can do that, unless you are making cheese or something. In terms of applying circumstances to the messy reality of human relations, it will never be perfectly consistent, but they’re going to try.
The result, as Mr. Woolley mentioned earlier, is that they are either not going to be able to fight the government because economically it isn’t worth it; or they’re just going to give up and not try. This flips it back. That’s the end of the application part.
This goes back to the start part. The point I made in my brief to the committee earlier on was that with the kiddie tax rule was brought in, in 2000, and with the earlier attribution rules, these were bright-line rules that were easily applicable. You could look at it and say you were here or there. With a reasonableness test you are never going to know. If it’s going to be what I call a “don’t do it rule,” which is really what the kiddie tax rule was, then make it a “don’t do it rule.” If you say can’t income split at all, that’s it and it’s done. Don’t try to pick winners or losers and leave it up to incapable humans to be able to administer that in a hopefully consistent way. You just say you can’t do it and carry on.
Mr. Woolley: I’ll look at it from the other side. Let’s look at it from the side of the small practitioner. There are the big accounting firms and the big law firms that cater to the big companies. I work in an area which is really the small practitioner, the small business area. I can assure you that these rules will be incomprehensible.
I work with these guys on a daily basis. They struggle. They’re trying to learn the accounting rules, the auditing rules, the taxation rules, and implement computer systems for their clients. The tax is going right over their heads. They really don’t have the ability to keep up. They really do their best. They want to do their best for their clients. They consult with people like Mr. Christian and me. These are expensive processes. Sometimes they just have to guess or do it. That’s not the foundation for a good system. I just don’t see why they want to make the system more and more and more complex.
This $50,000 exemption is will require a lot of tracking of amounts. If they try to grandfather amounts, there will be all these huge pools. What they are brining here is an unmitigated disaster. As I said, if they just want to introduce what the Carter commission said, which is an advanced corporation tax, it would be a workable solution. I’m not saying they should do that, but at least it would be a potential solution.
Senator Mockler: The last question will go to the senator from B.C., Senator Jaffer, and then we will conclude.
Senator Jaffer: I asked the minister this question and I’ll repeat it. It appears that the proposed passive income rules attempt to compare private corporations to individuals in the name of tax fairness.
Is it fair for public corporations to continue to enjoy the tax benefits that are now being denied to private corporations? Is there any concern that public corporations will use this tax advantage to swallow private corporations?
He didn’t answer the question. He didn’t answer many questions but, more importantly, the answer I think I got from him was that public corporations pay taxes. That was not my question.
The concern is this: Why just go after private corporations? I don’t expect you to speculate on what his thinking is. That’s not fair to you. Do you both have concerns about what would happen to private corporations?
Mr. Christian: I have significant concerns. I think you have hit precisely on one of the big issues, which is that public corporations will look and will pick off the more successful private corporations. If the owners of those corporations are getting older, maybe they will consider it a happy windfall. They will be able to take their money and buy a Maserati or something. Others of them won’t.
Looking at it, and again inferring from the minister’s point of view, perhaps that doesn’t matter and is just part of the give and take in a robust economy. It will also stop those whom I believe Senator Pratte identified. It really appears to be the model behind the concerns, the professional corporations: the doctors, lawyers and accountants.
Mr. Woolley: I believe that there are concerns with public companies swallowing private corporations. If private corporations are to be looking at tax rates in excess of 70 per cent to get money out of the company, why not just sell your shares to a public company, file a section 85 election to pay no tax, hold your public company shares as a retirement vehicle, earn dividends, ultimately sell them, and then have a capital gain without fear of 70 per cent tax rates. I think you will see this become a huge issue. For particularly intergenerational transfers of businesses that would otherwise go between families, this is not a good thing. It should be something that’s addressed and I think it’s a fair question to ask, absolutely.
Senator Mockler: Before we conclude, I have a question for Mr. Christian. You mentioned that you expect the $50,000 threshold will apply to individual corporations, regardless of the number of shareholders.
Do you have a recommendation to make? If you had a recommendation to make to the Government of Canada today, what would be your recommendation?
Mr. Christian: I suppose, if I could recommend more broadly on the proposals, it would be abandon them all until there would be greater thought on how properly to reform the system in a way that won’t cause hardships to those who have relied on the existing system for 40 years. If it was a recommendation specifically in respect of the $50,000 amount I have to say I haven’t really thought it through very carefully.
If you think in terms of the government’s objective, which is that if you are saving for something you should be able to save a million dollars, it should be multiplied by the number of shareholders. That’s a difficult objective to reach. Does every closely held corporation then issue one share to every one of their cousins, friends, uncles, the paper boy, and whoever else might happen to be coming by?
Senator Mockler: If you want to add, Mr. Christian, would you please send your comments through the clerk?
Before we do conclude, to the witnesses I say thank you very, very much. You have been very informative and even enlightening.
To senators and to the British Columbians that are here, I would say that is our first meeting of the western trip. I would be remiss not to recognize the outstanding support and B.C. hospitality of two of your senators, Senator Jaffer and Senator Neufeld, for hosting the Senate committee.
Honourable senators, we will meet tomorrow morning in Calgary, starting at eight o’clock. We are flying in this evening.
Thank you very much, British Columbia.
(The committee adjourned.)