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THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE

EVIDENCE

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OTTAWA, Wednesday, November 1, 2017

The Standing Senate Committee on National Finance met this day at 6:45 p.m. to continue its study 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.

[Translation]

Senator Mockler: Honourable senators, I welcome you to this meeting of the Standing Senate Committee on National Finance. This evening is the 13th public meeting on the study 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. Thank you to the witnesses.

[English]

To the witnesses, thank you for accepting our invitation and sharing with senators tonight your comments, views and recommendations. I welcome you to this meeting.

My name is Percy Mockler, senator from New Brunswick and chair of the committee. I wish to welcome all those who are with us in the room and viewers across the country who may be watching on television or online. As a reminder to those watching, the committee hearings are open to the public and also available online on the Senate website at sencanada.ca.

I now would like to ask the senators to introduce themselves, starting on my left, please.

Senator Jaffer: My name is Mobina Jaffer, and I’m from British Columbia. Welcome.

[Translation]

Senator Bellemare: My name is Diane Bellemare, a senator from Quebec.

Senator Pratte: André Pratte from Quebec.

Senator Forest: Good evening. Éric Forest from the Gulf Region of Quebec.

[English]

Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.

[Translation]

Senator Mockler: I would also like to take this opportunity to formally introduce our deputy chair, Senator Cools.

[English]

Senator Cools: My name is Anne Cools, and I’m from Toronto, Ontario.

[Translation]

Senator Mockler: I would also like to present our clerk, Ms. Lemay, and our two analysts, Sylvain Fleury and Alex Smith, who team up to support the work of this committee.

[English]

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

Honourable senators, this evening we have before us organizations from the business sector. We’ve asked them to share their opinions, recommendations. As we continue criss-crossing Canada on the eastern and western trips, please feel at ease if you want to share additional information to write your comments to the clerk.

From the Canadian Chamber of Commerce we have the Honourable Perrin Beatty, P.C., President and Chief Executive Officer; and we also have Hendrik Brakel, Senior Director, Economic, Financial and Tax Policy. From the Coalition for Small Business Tax Fairness, we have Jason Burggraaf, Policy and Government Relations Advisor; and Loren Kroeker, Senior Vice President of Taxation Services. From the Kingston Advocacy for Small Business, we have Jason Skilnick, Member and Spokesperson; and Karen Sands, Member and Spokesperson. Finally, joining us via video conference from Mississauga, Ontario, from the Alliance concerning the 2017 Tax Reform, we have Benedict Leung, Liaison.

To the witnesses, I’ve been informed by the clerk that the first presentation will be from the Chamber of Commerce, to be followed by the Coalition for Small Business Tax Fairness, then the Kingston Advocacy for Small Business and Mr. Leung to finish.

I have also been informed by the clerk that you each have not more than seven minutes.

[Translation]

On that note, the floor is yours, Mr. Beatty.

The Honourable Perrin Beatty, P.C., President and Chief Executive Officer, Canadian Chamber of Commerce: Thank you very much, Senator Mockler and members of the committee. It is a great pleasure to be with you today.

[English]

I’m very pleased to talk about the number one issue that our members are worried about for Budget 2018, which is the Finance Department’s proposed tax changes for small business.

I’ve been the CEO of the Canadian Chamber of Commerce for a little over a decade, and I’ve never seen a reaction like we’ve seen this year from our membership. For months, we’ve had daily phone calls and emails from concerned businesses all across Canada. It’s because the changes under consideration are so broad, so far reaching and with so many unintended consequences.

Senators, there is not a restaurant or a farm in the country that does not have family members working there. Almost every business in Canada has passive income unless it’s on the brink of bankruptcy.

When the government announced changes to its tax proposals during the week of October 16, we were relieved that it had been listening. I want to personally thank the minister for addressing a number of the concerns that we were hearing from our members. When we saw the initial package, it seemed as if the Finance Department had crafted tax measures that would affect the maximum number of businesses in the most complicated manner possible and not collect very much revenue. There is no question that the minister has made a number of important improvements.

However, we’re concerned that there is so little detail in the announcements and that some of the biggest risks have not been addressed. Here’s what we’re worried about: Businesses of all sizes accumulate surpluses of funds that can be used to get them through economic downturns or for capital investment. As one business owner with 80 employees told us, “I keep most of the earnings in the company because we’re trying to grow, and in construction we go through cycles when business dries up.”

If the government hits investment income with a 73 per cent tax, business owners won’t have any incentive to keep surplus assets in the business. Most would be better off taking money out of the business. The minister announced a threshold of $50,000 below which passive income would not be taxed, and this is helpful for the smallest businesses in Canada.

But for medium and larger businesses, a threshold this low means less investment, fewer jobs and less of a cushion to make it through a downturn.

And it means lower productivity. There is a Bank of Canada study called Productivity in Canada: Does Firm Size Matter?, and they say that half the productivity gap between companies in the United States and in Canada results from the fact that businesses in Canada are smaller, and smaller companies invest less in capital and skills. This punitive tax would cause them to invest even less and to cap the size of their savings.

Next, imagine a venture capitalist who specializes in green technologies. She takes equity positions in start-up companies that are trying to commercialize environmental tech. But those investments are passive income according to the definition, so she could be hit with a 60 to 70 per cent tax on those investments.

Finally, imagine trying to explain all this to a foreign investor. The complexity is mind boggling. The apportionment method of taxing passive income requires you to allocate income to three pools, plus a pool for shareholder contributions, in order to calculate varying after-tax rates. All of this, of course, comes at a time when our American neighbours are undertaking the most massive tax and regulatory reform in over a generation with the intention of making the United States a more attractive place to invest.

This tax could be a massive job killer, undermining Canada’s competitiveness and causing less investment, less of a cushion to get us through the economic downturn, whenever it comes, less venture capital and less foreign investment.

On income sprinkling, the government has promised its new rules would be streamlined and clarified. That is good, but we don’t know what this means yet. There are many questions that still need to be answered, and let me give you a couple of examples. First, why shouldn’t spouses be allowed to split income, particularly if their personal assets — the house and car, the family savings — are pledged as collateral if the business fails? And if one spouse is working 12 hours a day, the other spouse has to pick up the slack at home. Do the spouse’s efforts to support the business at home have no value?

Second, if a spouse is paid $70,000 but CRA assesses the value of his or her labour at $40,000, how should a business owner prove the value of the contribution?

Let’s take a step back and look at the broader picture. These are exciting times in tax policy around the world. France has just embarked on major tax reforms with a 2017 budget that reduces or eliminates several business taxes while lowering overall rates. The U.K. government undertook a major tax reform last year but backed away from the most contentious measures in April 2017. As I’ve just mentioned, in the U.S., congressional Republicans are determined to press ahead with the biggest tax reform in 30 years, to slash the general corporate rate from 35 to 20 per cent while eliminating certain tax credits.

What is Canada doing in the midst of our trading partner’s laser-like focus on competitiveness? We have just spent the summer in a ferocious battle over income sprinkling. We’re missing the forest for the trees.

In an interconnected world, technology and capital are increasingly mobile, and this mobility is driving competition for business investment. With combined federal and provincial corporate tax rates in the 27 per cent range in Ontario, Canada is right around the OECD average. Rather than reactively waiting for the Americans to move before we figure out how to respond, let’s proactively get our own house in order and bring down rates to boost Canadian competitiveness.

Canada’s tax system could be designed to support investments in productive assets and business growth. Instead of penalizing passive savings, Canada could offer incentives to invest in the business. A 100 per cent write-off of capital investment in the year in which it’s made would provide a big inducement.

On the human capital side, Canada needs to attract and retain world-class talent, both skilled workers and entrepreneurs. That means that we also need to look at personal income tax to determine if top marginal rates — in the 53.5 per cent range as they are in Ontario — are driving people away. Many of the people affected are not just the maligned high-income earners but also the innovators and creative visionaries who can lead businesses in the 21st century.

Finally, senators, we need to confront the total overall cost of doing business in Canada and the serious cumulative impact of the growing burden posed by fees, taxes and regulations that the private sector is being asked to bear. Our members are deeply worried about their ability to grow their businesses within Canada and to compete for investment and customers from abroad.

That’s why we’re asking the government to first take these proposals off the table for the time being. Second, launch meaningful consultations with the business community to address any shortcomings in tax policy without unfairly targeting businesses. The sober second thought and thorough study of Senate hearings are precisely what’s needed. Finally, establish a royal commission to undertake a comprehensive review of taxing statutes guided by the principles of simplification and modernization as well as with the goal of reducing compliance costs to give Canada a competitive tax regime once again. The Canadian Chamber of Commerce would be very pleased to work with the government to help frame such a review.

Senators, with such a review and with some hard work, Canada could create an internationally competitive system of business taxation that rewards entrepreneurship, encourages businesses to invest in the technologies, skills and capacity they need to grow, and attracts capital, product mandates and highly qualified people from all around the world.

Thank you, senators. I’d be very happy to answer any questions.

Senator Mockler: Thank you. Now we will recognize the Coalition for Small Business Tax Fairness.

Jason Burggraaf, Policy and Government Relations Advisor, Coalition for Small Business Tax Fairness: Thank you for inviting the coalition here today. I’m very pleased to introduce Loren Kroeker, Senior Vice President of Taxation Services with MNP, who has joined me here today to answer your technical questions.

As you likely know, the Coalition for Small Business Tax Fairness came together to present a united voice on the government’s proposed changes to tax planning and business management for private corporations.

Over the past two months, the coalition has expanded to include 79 business associations. Together our organizations represent hundreds of thousands of private businesses, professionals and taxpayers across all sectors of the economy, employing millions of Canadians in every community from coast to coast to coast.

The fact that these diverse groups came together for this cause only affirms the potential negative impact that the government’s proposals had on small and private businesses and the Canadian entrepreneurs that drive their creation and success.

While coalition members were pleased to see the government roll back or modify some of its original proposals, there are still a number of concerns about the measures the government is moving forward with, primarily regarding lack of detail and clarity as well as the need for proper impact assessments.

A proper impact assessment should answer the following four questions: How much revenue will be raised by this measure and when? What is the impact on business resiliency? What’s the impact on the availability of capital for start-ups and business expansion? Finally, what’s the impact on retirement savings?

Given the complexity of these proposals, more analysis and consultation are needed to fully understand the effect on the small business community. While the government has introduced the idea of the $50,000 threshold for passive investment, the coalition still challenges the assumption that the deferral of the personal level of tax on corporate business earnings is bad tax policy. There are a number of reasons why a business owner would choose to retain earnings in a corporation, including financing debt arrangements and having liquid assets ready for the next business opportunity.

The coalition does not believe that any changes to the current rules regarding passive investment are necessary. There certainly hasn’t been enough time or consultation done to consider the impacts on business and subsequently the economy.

One of the coalition’s concerns with the proposal as currently composed is that some of the businesses may face exorbitant tax rates as high as 73 per cent, and this could very well lead to investment capital fleeing the country.

This is important as Canada has had a dearth of medium-sized businesses, and a threshold may inhibit businesses looking to get to that next level. While government may reap a short-term benefit by effectively limiting the ability of business owners to save money inside their businesses, there will be long-term negative consequences as businesses may be left cash-strapped in challenging times.

The government has also indicated that it will expand the definition of meaningful contribution to a business in regards to its proposals around income sprinkling. However, the fact remains that any restrictions will still apply to businesses at all income levels, not just top earners. The proposed changes do not reflect the many formal and informal ways family members participate in the business, especially when it comes to the participation of spouses. To help address this, the coalition recommends at a minimum a full spousal exemption under the income-splitting rules. This will recognize the key role spouses often have in a business, one that cannot always be clearly quantified.

It will also help address concerns about the additional red tape burden, as well as arguments with CRA auditors that will inevitably come with the proposed restrictions on income splitting.

Finally, coalition members look forward to fresh consultations regarding intergenerational transfers in order to find ways to make it easier and less costly to pass the family business on to the next generation.

Overall, the coalition continues to urge the government to take a step back on all of its proposals and launch meaningful consultations with the business community to address any shortcomings in tax policy without unfairly targeting small and private businesses.

New consultations, including impact assessments for any proposals, should also be considered in the context of a comprehensive review of the Canadian tax system with a view towards fairness and simplification for all taxpayers.

Senator Mockler: Thank you. Now we’ll recognize the Kingston Advocacy for Small Business. Mr. Skilnick, please make your presentation.

Jason Skilnick, Member and Spokeperson, Kingston Advocacy for Small Business: Thank you for having Kingston Advocacy for Small Business, or KASB, to appear here as a witness. We are truly grateful to you for forming this committee in respect of this national issue. Karen Sands and I are proud to represent the group.

To understand the values of our views, it’s important that you know who KASB is. KASB is a group of 59 Kingston and area accountants, lawyers and academics that formed in response to the July 18 proposed tax changes. Our group did not exist previously in any form, and we are not political.

The first matter we’d like to discuss is tax uncertainty. We appreciate the statements made by Finance the week of October 16. However, we still have many questions. For example, Finance stated that it will not be moving forward with measures relating to the conversion of income into capital gains. This would seem to be a very positive development. However, Finance has also noted that it will continue to develop proposals while protecting the fairness of the tax system. Such latter statements create continued uncertainty. Family succession plans have been on hold since July 18, and Canadians need this clarified immediately.

Also, Table 8 from the July 18 discussion paper shows that Finance is proposing to eliminate the capital dividend account. KASB and others have been watching closely for clarification from Finance regarding the capital dividend account, but there was noticeably no statement made. KASB believes that the CDA is critical to tax integration and should not be eliminated.

Next we’d like to address passive income. The week of October 16, Finance announced a new framework for passive income earned inside a CCPC. KASB believes this framework for passive income would create a two-tiered tax system in Canada and favours those who hold existing wealth over those who are trying to accumulate wealth, including young entrepreneurs.

I asked about 70 Queen’s business students last week what they thought about this system. It took them about two minutes to realize this type of system is biased against them. There was utter disbelief that this was being proposed given the broad statements from the Department of Finance and the government about creating tax fairness.

We have many questions about how this framework would work and various pools of retained earnings that would have to be tracked under such a system. The framework that Finance has laid out would be very complex and costly for Canadians.

KASB believes that passive income tax policy cannot be designed simply by looking at Canadian trends like an increase in the number of private corporations in Canada and the dollar value of the investments they hold. In today’s global economy, where capital, certain business industries and future businesses are mobile, Canada needs to consider how competitive our tax system is for passive income relative to other tax regimes.

For example, we understand that U.K. companies generally pay a tax on passive income of 19 per cent. Further, in the U.S. it is believed that the federal government will release draft legislation later this week that would see the federal C corporation tax rate reduced to 20 per cent, which would apply to passive investment income. One U.S. CP we spoke with yesterday said it would be disastrous for Canada to increase its passive income tax rate to 50 per cent on a permanent basis while the U.S. is lowering its tax rate.

We believe the flaw is in comparing CCPCs and their shareholders to other Canadian individuals. This thinking results in the CCPCs and their shareholders being disadvantaged compared to public companies and their shareholders, as well as Canadian companies that are owned by non-residents. Our private corporations in Canada are competing in many cases with these companies and should not be disadvantaged. We have performed analysis that shows CCPCs would be at a disadvantage compared with public companies and non-resident-owned Canadian companies under the proposed framework.

KASB believes that the policy results that would arise are inappropriate and should be abandoned. We have already heard that entrepreneurs are planning or are in the process of moving all or part of their operations out of Canada. We have further been told that existing entrepreneurs would not have left their corporate jobs to start their existing businesses in the proposed tax environment.

The final topic we would like to address is tax on split income, or TOSI. KASB does believe some of the policy objectives have merit; however, the draft legislation is simply not workable. The rules are incredibly complex and would be costly for taxpayers to comply with.

While Finance has indicated the intention to simplify the proposals and stated that the proposals will only apply to family members who do not make a meaningful contribution, such language is not conducive to simplicity.

One reason the TOSI rules are not workable is because there is an inherent conflict between corporate law and TOSI, such that succession plans in family-held companies are negatively impacted.

In the interest of time, we refer you to our written submissions for comments on TOSI.

I note that many of our concerns have not yet been addressed by Finance, such as the following: The proposals are retroactive in impact and unwind many years of retirement planning; the proposals penalize lower-income Canadians more than those who are already taxed in the top bracket; TOSI could recharacterize capital gains from a sale of shares as dividend proceeds. In this respect, Finance stated it will not apply TOSI when the lifetime capital gains exemption is claimed; however, no clarification was given in respect of capital gains that do not qualify or where the gain is in excess of this exemption.

Overall, Finance has identified what seems to be the issue of unequal distribution of wealth in Canada. However, KASB respectfully states there are two fundamental flaws in their approach to this matter.

First, Finance is trying to use income tools to deal with wealth. Such a tool is imprecise, which is why practitioners are identifying so many unintended consequences. To be clear, we are not saying a wealth tool should be used, as such a tool would likely be disastrous in the context of the current global tax system.

Secondly, Finance is citing the CCPC as a reason for this inequality of wealth. According to the data provided by Finance, the majority of CCPCs do not have significant wealth, for either much wealth has already moved abroad or is not corporately held. We understand that tax avoidance is 100 times greater for offshore wealth as compared to domestic. Continued focus on offshore tax avoidance by Finance and the CRA is useful for enhancing the integrity of our tax system.

We also encourage focusing CRA resources on existing domestic non-compliance.

In conclusion, KASB is asking for a comprehensive review of the tax system. However, if for whatever reason a comprehensive review is not possible, we have two important asks for the Department of Finance. First, we ask that no new law be effective prior to January 1, 2019. Second, we ask the Department of Finance that before any revised legislation is released, they will correspond with members of the tax community, like the joint committee, so that many unintended consequences can be identified pre-emptively and much of the confusion from this past summer can be avoided.

Thank you for having KASB here before the committee today. We are pleased to answer any questions.

Senator Mockler: Thank you. From Mississauga, Ontario, we now have Mr. Benedict Leung from the Alliance concerning the 2017 Tax Reform.

Benedict Leung, Liaison, Alliance concerning the 2017 Tax Reform: Thank you to the Senate for this meeting. We have been looking forward to talking about these issues for a month since the Minister of Finance closed down the hearing by October 3.

Our group mainly consists of those of Chinese and Asian origin with respect to Asian businesses.

I am Benedict Leung. I have been a chartered accountant since 1990. I have been practising public accounting and taxation for small businesses for over 25 years in the Greater Toronto Area.

Most of the points in my speech have been covered by the three other gentlemen. I don’t want to repeat anything.

As an immigrant and also as an accountant, I know we have a lot of newcomers who would like to come to this country to start their business. Due to language barriers, a lot of Asian immigrants come to Canada to start their own business, and usually it’s hard for them to get a decent job with good pay, so they work hard in bringing connections globally into Canada, especially when today our immigration minister announced that in the next few years our immigration policy will focus mainly on economic immigrants.

Most people, when they try to find a place for their family for a better future, can pick many countries around the world, for example, Australia, the U.S. and the U.K. If our tax system becomes a barrier for a new economic category of immigrants to come to this country, it will be a big loss to our economy.

At the same time, these tax proposal reforms never hit on big corporations or people whose company is foreign-owned. So as those other speakers said, capital is also mobile. Newcomers can set up another way of planning or even try to escape the scale of the Canadian tax year. They make money even in Canada. So if a simpler taxation system exists in Canada, international investors will be more open to putting their money into our system to create employment, develop technology and back up our future as a global economy.

We know that Asia should be the next boom economy in the next 10 years, so we should open up to a more friendly and simpler taxation system that will make it easier to get people to come in.

We talk about fair. Fair does not mean equal. Since the tax system is trying to find a way that is equal, employee and employer face different risks and have different concerns. Bigger companies always have a fat pension plan for their executives, but in the current proposal, no rules or regulations try to make sure these pensions or stock options have to pay the fair share of Canadian tax.

For small and medium-sized businesses, those passive incomes, other than for maintaining a healthy business cycle when there is a need, also should act as a pension for a lot of small business. A lot of small-business owners do not have RRSPs and are not able to fund or pay for expensive tax planning for their pensions or have an individual pension plan. Big corporations also have more resources to lobby the government on change and also to lobby for further government assistance. All that is left alone is small business, and basically they are helpless when they need help.

Luckily the Senate will have this kind of hearing. Usually the Asian community, especially the Chinese community, is silent on most issues. They always think it’s an issue for everybody, so we just follow. But when the Minister of Finance proposed these tax reforms, the entire community overwhelmingly wanted to act. That’s why we could form an alliance with over 20 business associations within days.

Our concern is for the community, and I’m open to questions. Thank you so much.

Senator Mockler: Thank you. We will start with questions.

Senator Marshall: Thank you very much to everybody for being here this evening.

I think almost all the issues you have raised have been raised by numerous witnesses that have appeared before us in the past. But probably the most interesting was the minister appearing before us today, and he also addressed some of the issues you raised.

Before I get to my question, I wanted to mention a few things that came out today that might be of interest to you.

First of all, the minister is determined that the changes are going ahead even though some of the details have yet to be released. He’s certainly determined the changes are going ahead.

In my opinion, he didn’t appear receptive at all to an overall review of the tax system. A number of witnesses have recommended that, but the minister didn’t seem warm to that idea at all.

There’s been no thorough assessment of the impact of these proposed changes on the economy. That’s something we were looking for.

I don’t think we raised the amounts of revenues that the government thinks is going to be raised from these changes, but I’ve seen in articles that they’re expecting $250 million for income sprinkling and multiples of the $250 million for the passive income changes.

One of the interesting things that the minister touched on today — and we’ve had discussions here with witnesses — is that with all the reaction to the proposed changes, it’s always a threat. Whenever the government is going to make changes, the business community makes a threat, but it’s never followed by action. We had this discussion with the Ontario Medical Association. When the doctors are not happy with something, there will be a threat that members will move south of the border, but it never materializes.

Could you speak to that? Why is it always the threat, and it’s never followed by action? Based on what you’re saying now, I expect something will happen. When will we see the repercussions of these changes, and what will they be?

Mr. Beatty: Senator, could I respond to the three key points that you made? The first was the issue of an overall review. The last time a full, comprehensive review of our system took place was a little bit before I was first elected to Parliament. Contrary to public belief, this wasn’t around the time of Confederation. I was elected in 1972. I was Minister of National Revenue from 1984 to 1985. By then, already the cutting and pasting that had been done with the system had created a system of taxation that had become extremely complex, where ordinary people didn’t know where they stood and where it became difficult for people to comply.

That system has become that much more complex ever since. If we’re worried about competitiveness, there’s something wrong if business people are spending their time trying to fit their company in between a comma and a semicolon in the Income Tax Act instead of focusing on how you develop a business plan, attract new customers and develop new products. We need that comprehensive review to ensure that we are competitive.

In terms of the second point, with regard to how much money will be generated, the answer is that we don’t know. That’s why we really do need to have an economic impact analysis done of all these proposals so that we know what the net impact is on our economy. We need to know what the likely effect will be in terms of employment and investment, and what happens in terms of revenues. On the one hand, obviously there’s an immediate impact in terms of increasing tax revenues going to government, but if you discourage investment and growth, what is the net impact for the Canadian economy? We need to take that into consideration. We don’t have that data today.

The third point is the question you put to us, namely, whether this will in fact cause business people to act differently. The answer is that it will. The difficulty in any of these instances is how to track investments that don’t get made, jobs that don’t get created, and people who don’t come here, whether from Asia or elsewhere, as entrepreneurs to open up new businesses.

What worries me more than anything else in dealing with our 200,000 members is that increasingly businesses are saying to me that their greatest competition isn’t external to the company; it’s internal at budget time, as they try to justify even keeping the investment they have today in Canada, let alone attracting new investment to our country. What we need more than anything else, if we’re going to be competitive, is to be able to draw investment to Canada.

I promise you that if we continue to increase the cost of doing business in an already high-cost jurisdiction like Canada, the net impact is that money flows across borders like light through glass, and we will see the investment going elsewhere, at a net loss to Canadians, which will be substantial.

Senator Marshall: I agree with everything you’ve said, but based on my interpretation of what the minister said today, I don’t think the minister is convinced as I’m convinced. I would be interested in hearing from other members of the panel with regard to my question as to what you think is going to happen after these changes are made.

Mr. Burggraaf: I can’t necessarily speak to the threat of moving out of the country, because the coalition covers so many different sectors. Within the sector I work in, there are businesses that are now buying land in the States to solidify that they will have business in the next year. That’s in residential construction.

What I will say about the business reaction to this is that when you’re in this environment, the reaction of businesses is to retrench. When there’s a threat to the amount of capital you have or to your investments going forward, you hoard money for a rainy day. You don’t buy that next piece of land, in the case of residential, or you don’t make that next investment. You hold on to the money because you’re afraid of what income will come in —

Senator Marshall: The uncertainty.

Mr. Burggraaf: Yes, and what kind of net income will come in by the following year. So you don’t hire that extra person that you really could have used. You could have had that extra person and they would have been able to help out, but you’ll make do with the three employees or however many that you have instead. That impact on the economy is very hard to measure, as Mr. Beatty said, but that’s the reaction from businesses.

Mr. Skilnick: If I could add a couple of points from our experience in Kingston. From my accounting firm’s office alone, we’ve already had two doctors move to the U.S., I think partly because of the unfortunate language that was used -- they felt targeted -- and also because of the environment.

Second, we are having conversations, particularly with one business, and it actually happened today. They brought it up. They said, “We might be going to a lower tax rate in the U.S. Should we be moving our intellectual property?” It’s a very robust company, one that’s investing $10 million or $20 million right now. That’s a very real conversation that started today.

Capital is already being invested, based on what I’m told, outside of Canada. It has already started. We don’t have to wait to see the impact. One example was $60 million within a family. They had a choice of where they were going to invest it, and it’s not Canada.

The next point I would make is that as we look towards millennials, it’s not just about having the right tax system; it’s about having buy-in to the tax system. When we look at millennials, there’s already a bit of cynicism about the way the system is stacked up against them. Particularly on passive income, we have to be careful. If they’ve determined that the system is stacked up against them and that the people before them had a better kick at it, our system loses credibility, and we also risk losing our best entrepreneurs.

Senator Mockler: Mr. Leung, any comments?

Mr. Leung: I would like to add my experience. I was told that a lot of business people just threaten and then there's no action. But I can tell you that my family doctor told me he’s working five and a half days now, and he’s going to work four and a half days. A lot of measures will not be seen immediately, and the effect will be gradual. When we realize the effect, it’s too late to make any remedies. I would hope that the Minister of Finance will look ahead not just one or two years but into the next decade in terms of what will happen to the Canadian economy, to the medical profession and to our health care system. It is worth taking a look.

Senator Jaffer: Thank you very much to all of you for your presentations. As Senator Marshall said, a lot of the things you said we have heard, but it doesn’t hurt to hear them again.

One of the things I brought up with the minister, which he did not answer, is the uncertainty and the loss of trust in the system that has been caused in the market since the summer. For business owners, certainty and stability are very important for growth. The reason we have done so well in Canada is because we have always had certainty and stability in our country. This blaming of each other has caused a lot of bad blood, and people are unhappy. Some are leaving. All may not leave, but the idea of investing is gone.

I asked the minister this question today, and I’m going to ask you again. It appears the proposed passive income rules are attempting 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 denied to private corporations? Is there any concern that public corporations will use this tax advantage to swallow private corporations?

My colleagues can correct me if I understood him wrong, but I understood him to say that public corporations pay taxes. Of course they pay taxes. I think he even said they pay a higher per cent. Of course they do. But that wasn’t the issue. The issues were the passive income and the retained earnings. The government is not going after public corporations; it’s going after small business corporations. I’d like your opinion on that.

Mr. Beatty: To start with us, I’d be glad to hand the microphone over to Mr. Brakel, our chief economist.

Hendrik Brakel, Senior Director, Economic, Financial and Tax Policy, The Canadian Chamber of Commerce: The challenge is that private corporations are of all sizes. They can be big mining companies or utilities -- a public corporation — and the only difference between them is that one is listed on the stock exchange. By virtue of being listed on the stock exchange, you’re subject to a much lower tax.

So why would we have this inequity or different systems? We’ve asked that question repeatedly of Finance. They've said, “Because someone in a private corporation might be personally benefiting, and that’s why we need to have this distinction.” I understand there are large businesses that are private corporations, but not all of them are sinister billionaires. Lots of businesses have 100, 200 or 500 employees, and they want to save for a rainy day.

We absolutely agree. Your question is critical. Why would we create this vast inequity in our tax system? We think it’s absolutely a mistake.

Loren Kroeker, Senior Vice President of Taxation Services, Coalition for Small Business Tax Fairness: I might add that all the proposed rules apply to Canadian-controlled private corporations. They don’t apply to public corporations or to private corporations that are not Canadian-controlled. There is another group of corporations that are not impacted.

Mr. Skilnick: I would just add that Kingston Advocacy for Small Business absolutely shares your concern. If you layered onto that the proposed 84.1 and 246.1 succession-planning rules, they would have made it way better for family businesses to sell to third parties. One of our primarily concerns is that all these rules are pushing family-owned companies and small business to that.

Mr. Leung: I’d like to echo one of the comments. Publicly owned company — is also a foreign-owned company. It’s simple for immigrants. They will have family members outside a country. They can set up an arrangement so that a CCPC is paying higher tax than those people. Why do those foreign ownership people create a lower tax? The CCPC owner who works so hard who chooses Canada to be their home and pay more tax — I don’t know why the minister doesn’t consider that.

Senator Jaffer: The other thing that concerns me — I did ask but I don’t remember what you said. Sorry. The $50,000 for passive investment — people I’ve spoken to have said it is so arbitrary. Some of you have already said that. But it could mean that $50,000 for one person’s business, maybe that sounds fine, but say it’s four brothers working in a company. For them, $50,000 in passive investment may not be necessary. Then they will have to form holding companies and complicated structures to take advantage of the $50,000. It will make businesses more complicated.

Obviously we haven’t seen the rules yet. That’s why it’s difficult. In our country, where we think things should be equal, how could you arbitrarily say it will be $50,000? I have not seen this kind of arbitrary number. You are the experts. Have you seen this before?

Mr. Brakel: That’s a great point. Certain industries like plant nurseries where they deal with seasons, they have large passive incomes. But if you look at a company that has 50 or 80 employees, that $1 million in assets generating $50,000 — that’s not a lot of money to sustain them through a downturn. Once you get to that 73 per cent tax rate, companies will pull the money out or will try to arrange to get it outside the company.

You will have medium and large businesses that don’t have the same savings they used to in the past, so we’re concerned that that makes them less stable and less able to get through a downturn.

Mr. Burggraaf: If I can add, the other issue about this is that you don’t necessarily have the same revenue year over year, so there is no clarity or even any indication of intention. Say you get $25,000 one year, $75,000 the next year, how does that all even out? There is no indication of what the expectations are there either.

Karen Sands, Member and Spokesperson, Kingston Advocacy for Small Business: I have exactly the same points as the other speakers, but one other consideration we’ve thought through is that it’s not clear what that $50,000 would include. Would it include capital gains from sales of stocks or real estate? There is some suggestion that current wealth in a corporation would be protected from these rules, but will that wealth be protected when those assets are sold?What’s included in that $50,000 threshold?

Certainly, in our base of clients that KASB is here representing, there is a wide range of the size of the businesses and the amount of capital that’s required by those businesses. To try and apply a one-size-fits-all type of threshold like that seems like it’s going to be very punitive to some.

Senator Mockler: Mr. Leung?

Mr. Leung: Yes, I can say that when we have $50,000 income, but how about accumulated income — not realize it? Will it be part of the $50,000? If you accumulate value but it’s not recognized — not the income — and then we borrow under those jurisdictions to be limited — there are a lot of technical issues we need to clarify. I just don’t understand how our finance minister can just say “$50,000.” Why not $55,000? Why not $60,000? He’s not going to a market to buy something. Offering $50,000 to buy a car. It’s not really responsible. That’s how I see it. Thank you.

[Translation]

Senator Forest: This is the 13th meeting for this study, and the committee will travel west and east, through the Maritimes, for consultations. Four concerns that come up repeatedly in testimony relate to passive income, income fragmentation, intergenerational transfer and capital gains exemptions.

The minister appeared before the committee today, but one question remains. Even after the amendments, the majority of people are wondering how the Canada Revenue Agency (CRA) will apply the new tax rules. Following the appearance of CRA representatives before our committee, we would have liked clarification to better inform Canadian entrepreneurs about application models. Knowing very well that the legislation hasn’t received royal assent and is not definitive, we would have liked to have an added-value on the consultation. We are currently reacting to a major tax reform project. The minister told us not to worry, and he wanted to relax and simplify the tax rules. But when asked how he intended to do it, we did not get an answer.

It is clear that we could discuss all these major issues at length. At one of our meetings, a 30-year-old entrepreneur said, “With the demographic curve, there will be a lot of business transfers. I want to accumulate capital to seize market opportunities.” Of course, there are plenty of reasons to want to accumulate capital. Today, although properties are less material-based, the renewal of specialized equipment and retirement insurance for the business owner are among these many reasons.

The minister announced that the tax reform would not be done by January 2018, but probably before the budget is tabled. Is it unusual to ask organizations like yours to come up with rules that would be appropriate so that Canada is fair and competitive in terms of its tax system? We talked this afternoon about the flight of capital, but there is also the brain drain. The demographic situation in Canada is such that one of the major challenges for our businesses in the coming years will be to ensure succession, among other things, within the organizations themselves. We will have a brief to submit, which should be as objective and relevant as possible. Could organizations such as yours begin to reflect and then, based on your experience and know-how, provide us with effective and equitable rules to encourage entrepreneurship in Canada?

[English]

Mr. Beatty: Senator, we can certainly do some of that. We’ve done some of it already. I guess the plea I would make to the minister is that we should avoid arbitrary deadlines. We want to get it right. Particularly after the experience we had this summer, it’s all that much more important that whatever changes we make are properly considered and well done. That’s why this committee’s hearing is so important; it’s giving Canadians the chance to be heard. Take the time that’s necessary, get the input and then make a decision.

Put all of the facts on the table. What I’m hearing from you and from your colleagues is that you’ve been attempting to get information, as we have, as to exactly what the details are. What does the government have in mind to do here? How will it be implemented? We don’t know at this point. How can you react to something when you don’t know what is being proposed? It’s not a good way to make law.

We have made suggestions related to income sprinkling, for example. I raised the question of how do you value the contributions made by a spouse. I’m a former minister of national revenue, and I can tell you that when the Government of Canada brings all of the resources that it has against somebody who has a small business — owns a convenience store or a family farm — and you have all of the resources the Government of Canada raid against you, this is intimidating and formidable, and your chances of success are very poor. You get in a debate about the difference between the $40,000 that the CRA says your spouse has contributed to the firm and $70,000 that you feel is appropriate. How do you win something like that when you’re dealing with criteria that are vague to begin with?

So we’ve made some suggestions. Mr. Brakel can comment on one of the ways in which we could achieve the minister’s express goal of clarification and simplification of that measure.

Mr. Brakel: Exactly. We have made suggestions around accepting an affidavit, for example, from the business saying these are the duties and having that accepted at face value rather than having a more formal audit around income sprinkling. We would really appreciate the opportunity to work with Finance and to provide suggestions. We have committees of experts that have recommendations.

No one at the Canadian Chamber of Commerce or the Coalition for Small Business Tax Fairness supports loopholes or exemptions for people evading the system. What we want is a fair system that works for business owners and that has that clarity.

Senator Mockler: Are there any other comments?

Mr. Kroeker: I would just add that I understand your question, particularly on passive income. I think it’s very difficult for us to put forward concrete ideas or suggestions for implementation because, quite frankly, I’m not sure I understand what the government’s objective is on passive income. I think until we really understand what the government’s trying to achieve, we can’t be very helpful in helping them to implement ways of getting there.

Mr. Skilnick: I would just add that groups like ours, the joint committee and other people in the tax community are absolutely willing to work with Finance and help craft ways so there aren’t these unintended consequences. We hope that happens before any new legislation is rolled out.

We have thought with our group about what we could propose within the existing framework, and with TOSI we thought, “Well, we don’t believe the existing framework works because it doesn’t allow you to sell the shares of your family business because somebody is probably going to be trapped into TOSI top rate capital gains.” It’s too complex to sell it where you’ve got family members involved, and this is TOSI. It seemed like the biggest culprit was dividends paid to children aged 18 to 24. That seemed to be one of the big issues they were trying to close. With a stroke of the pen, change the age from 18 to 24. There are going to be some times we miss, but on the whole, at least that’s a bright line test that people can understand. There is an existing system in place that practitioners and clients understand. That would be something that’s workable.

The other thing is, if you need to get additional tax revenue and you really want to go after more wealth, the best tool we probably have is our GST/HST. You wouldn’t touch that without a good review of the impact, but do you have to make sure you don’t adversely impact lower-income Canadians and middle-income Canadians. But presumably you can do that by adjusting income tax brackets. If you didn’t want to give wealthier Canadians the benefit of those middle- or lower-income tax brackets, you can have a clawback system. That might be a more effective way to achieve some of the objectives of the Department of Finance and the government.

Senator Mockler: Mr. Leung, do you have any comments?

Mr. Leung: On that, if we are asking how to implement certain policies, what would be the best system to execute, if this policy or system doesn’t have a clear objective, it’s really hard to give our ideas on how to execute it. It would be a huge burden to the CRA people and also test Canada. Everything has been disputable even under the current system we have that CRA already has to do it, and maybe the assessment and reassessment are delayed for months and months. If you have new rules and policies and the top management doesn’t even know how to implement these policies, how can the staff execute and come out and tell the taxpayer what to do? You can't just come out and accuse someone saying that they didn't do the right thing. That’s what we say. Just as the other speaker said, there are huge resources behind CRA, and for the individual small-business owner, how do they defend their rights? If that’s the case, it’s not fair anymore.

[Translation]

Senator Forest: I think you are all ready to work with the Department of Finance to improve tax measures. I consulted 21,000 briefs. We will also submit a brief. We should be able to make concrete recommendations. Otherwise, we will just repeat that all Canadian entrepreneurs are worried. There are problems with passive income and income splitting. That’s what we hear every night. I invited you to give us concrete examples. One witness told us that in the medium term, the government was heading for a decrease in revenues. With the flight of capital, there would be less revenue. The current passive income will eventually be collected by the government because it will be used by the pension plans where the money out will be taxed when they go to use it.

[English]

Mr. Beatty: If I can comment on that, that’s precisely why we need from the government to have their economic impact analysis of each of the measures here. You, as parliamentarians, are being asked to pass judgment on this. You’re not being given the information that you need to understand what the impact is on the Canadian economy as a whole. The government owes that to you. They owe it to Canadians. Each of us can talk about our understanding, much of it anecdotal based on our members, clients or on colleagues we know from within the business community, but it’s the government that should be modelling this and putting together an economic impact analysis of it.

The only other point that I would make is to underscore what Mr. Brakel said earlier. Nobody here on this panel and none of our members will argue for somebody who is a freeloader on the system. What happens is that honest business people are asked to pick up the slack. Our concern is that measures that are intended to deal with a very few people can have a very damaging impact on a very large number of people as a consequence and on the Canadian economy as a whole. That’s in nobody’s interest.

Senator Mockler: Thank you. For your information, to follow on Senator Forest's question, our researcher is confirming that Bill C-63, A Second Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017 and other measures, under its short title, “Budget Implementation Act, 2017, No. 2,” for the record was introduced in the other chamber last Friday, October 27. Although the bill contains 317 pages and several amendments to the Income Tax Act, it does not contain any measures associated with the tax reforms announced on July 18, 2017, or the subsequent October announcements. Therefore, with parliamentary procedures, the only opportunity to have an idea of what can come next will be in Budget 2018. That said, witnesses, if you are following the procedures and you want to add additional information on what we’ve heard tonight, please do it through the clerk.

Senator Andreychuk: You’ve covered a lot of ground that I think is important for our study. You talk about the need for an economic impact assessment. You’ve also said that you need to know what the government’s objective is. I think that’s what we need to struggle with before we can make recommendations and before you can make recommendations. I’m very worried about implementation, but that’s because of history of the Income Tax Act. I won’t tell you how many pages the Income Tax Act was when I started as a lawyer, but I know now it’s impossible. It does take great skills to go through it.

I’m concerned because I’ve heard the minister quite honestly say that he is worried. I think he’s worried about the person who’s employed, as opposed to someone who runs a business, and I think that’s fair. We have to worry about those who are employed. They have a risk in our economy. Then we have the self-employed who we want to encourage, and they have a risk.

What I heard was the minister trying to equate the two, trying to equate their incomes, saying they should have the same benefits, and no one should get any tax breaks. I thought we were off that because of hearing all the consultations, but we still seem to have to rebut that before we can get any further. That’s not a good comparison, in my opinion. Perhaps my colleagues will beg to differ with me.

When I hear the government say they care about changing the tax and making it fair, I can’t dispute those comments. I want it fair. I don’t know whether they are using the correct equation, however.

Second, I hear the government saying they want to grow the economy, and that comes from other ministers. I hear we want to retain entrepreneurs. We want to take all that talent of the millennials, build on it, brand it and become competitive overseas.

Sitting on another committee, I heard millennials come back and other businesses saying that they can get the ideas and they can get going at that first stage and be a small business. But it’s very hard to become a medium business because they don’t know where to get their financing. There are different risks. So the passive income has been one vehicle.

More concerning was that money is being held at the upper, medium-class businesses, but they want to grow internationally, so they’re feeling penalized. Then we did tax the upper 1 per cent. We didn’t get the revenue. So how do we put all of that together?

Also, I have some great fear about farmers and the passing of the income and intergenerational transfer. I think the minister is getting that part of it, I hope.

Then we have the other problem of doctors. We have an aging population. We need skills. We’re talking about our health care needs and the cost for that.

Have any of you talked to the minister or the Prime Minister or someone? How do we put all these pieces together in a cohesive, coherent way? It isn’t just an economic impact from the Department of Finance. It’s an economic impact on the entire system. Plus I haven’t even touched provinces and the dilemma there.

Mr. Beatty: Senator, you have put much more cogently than we have the frustrations that the business community is experiencing.

First, what is the government trying to achieve here? The sense that we have in talking to our members is that we’ve seen a series of cures for which there is no known disease. As a consequence, then, the impact on the economy will be very negative. It’s precisely why we need to have a comprehensive review of the tax system. We need to spell out what we are trying to achieve with our tax system.

One key element is obviously that we must raise revenues for government to pay for services, absolutely. But we also have to have a tax system that encourages growth and incentivizes entrepreneurship. We need something that is seen to be fair and we need to define what constitutes fairness. When talking about the difference between people who are employed, self-employed and entrepreneurial, what is the balance you have there? We have to have a system that at the end of the day is seen to be fair. What I learned when I was Minister of Revenue is that the most important thing about our system is it’s a system of self-assessment based on the belief that ordinary Canadians have that the system is fair. If they work hard, try to get ahead and play by the rules, they succeed. When that breaks down, you drive people into the underground economy, or they leave the country.

We need to be explicit about what our goals are in building the system. That’s why we need a full, comprehensive review, something that is going to lay out our goals and that will involve Canadians in a full, transparent discussion about how we get here.

We talk about entrepreneurship. With the rhetoric that we’ve heard over the course of the summer, which has been punitive in nature, directed at individuals, if you were an entrepreneur looking at trying to build something in Canada, would that be an incentive to invest in this country or to go somewhere else?

The concern I have is that there seems to be more of a worry that some people may get ahead than that people fall behind. Our goal should be to ensure growth in the Canadian economy and opportunity for Canadians instead of measures that are simply punitive in nature and that discourages economic growth and cost jobs. That’s why we need a full, comprehensive view, one that’s transparent and where citizens have a right to be heard.

Mr. Burggraaf: Yes, I would echo that call for a full review. One of the reasons the minister brought up for introducing this tax package was the increase in CCPCs. It’s unsurprising. But what wasn’t brought up was why there are so many more self-employed people. In the previous budget, the minister brought up remarks about precarious employment and how that would only grow, but he didn’t then make that logical jump to that’s why you see so many self-employed. When you’re self-employed, there is an incentive to create a private corporation. That’s a change in the economy and a change in job structures.

Is that necessarily a bad thing? That’s the argument we must have. He referenced the increase in CCPCs as a shift in the tax base. Okay, but let’s look at the tax base and how we’re pulling from them rather than punishing the people who are just trying to do the best they can with the situation they are given.

Mr. Kroeker: I would add that many of these people, when they become self-employed and are looking for contracts, are forced to incorporate. Many people who would engage in a contract with them will not engage with them as an individual. They will insist that they incorporate, for many reasons, including that the payers want to protect themselves from potential payroll taxes if that person is found to be an employee rather than a contractor. Many of these people who are incorporating don’t have the choice. If they want the contract and the revenue, they will have to incorporate.

Mr. Skilnick: I agree with all the other witnesses here today. The only point I would add in the context of fairness is this: Let’s take business owners out of the equation. The example given by Finance in the July 18 discussion paper is that say you have a company that earns $100,000. It splits that income so that each spouse has effectively half that income on each return, regardless of their contribution. It then compares that to a couple that isn’t incorporated, where there’s an employee.

Let’s take the situation where you have two family units: one where the couple earns $100,000 with one spouse, and none with the other, and they have a tax liability that’s higher than the other two-employee family unit where each person earns $50,000. Is that fair? The fairness question goes on and on, and that’s why a comprehensive review of the tax system is required. You can’t just look through the eye of the needle and look at one distortion and say that’s inequity.

Senator Mockler: Mr. Leung, do you have any comments?

Mr. Leung: To have a fair tax system is beautiful, and everybody agrees. If the minister would really like to have a fair system for Canadians, he should conduct a full-scale study on the impact. How can he overhaul the entire tax system in just 75 days? Is 75 days sufficient for a new system to be in place? How can we right now, sitting here, tell him what to do? He should be the one to sit down and think about how Canadians would like a fair tax system. What’s fair? Give time for everybody to have more input in order to get a fair system. Then, based on the result, make a good decision and implementation.

Senator Mockler: Ms. Sands, did you have comments on that question?

Ms. Sands: Yes, please, if I may. KASB’s position throughout is that it seems that many of the flaws that have come through in the proposals are as a result of comparing the employees to the self-employed people. Our tax act clearly distinguishes those two classes of people. That is another reason why, if we’re going to change some of the rules for some of the players, we have to look at the entire act.

I understand that the Minister of Finance has concerns about employees. I’m not sure what those concerns are. But if these proposals have been developed to penalize, for lack of a better word, the small-business owners and Canadian-controlled private corporations in order to help employees, I’m not sure that’s the correct method of going about it.

Again, our tax act clearly distinguishes; there are separate sections in the act that deal with employment income and those that deal with business income. To look at one piece in isolation is I think what’s causing a lot of the confusion here.

Senator Pratte: The Department of Finance estimates that on income sprinkling, approximately 50,000 CCPCs would be affected out of 1.8 million; and on passive income, with the new threshold, only about 3 per cent of CCPCs would be affected, holding more than 80 per cent of the passive income, but still, a small minority of companies.

The minister today, on passive income, repeated that in his mind that means — well, the numbers show that it means a small minority of companies will be affected by the new passive income and income sprinkling rules. The government considers that most small business will be protected and will not be affected by this.

Do you have any comments on that?

Mr. Beatty: Certainly, senator. We’ve heard exactly the same thing from the government. There’s no question that the changes they’ve made are improvements on what we saw in the July package, but we still have significant concerns. Let me turn to Mr. Brakel to comment on that.

Mr. Brakel: We understand the concentration on passive income, because 97 per cent of businesses in Canada are small. You have the 3 per cent that are much larger. Our concern is that affecting the entire swath of private Canadian-controlled corporations that are medium to large can have a big impact on companies in certain sectors. It’s true that it does exclude a certain number of the smallest businesses, and that is helpful; that is an improvement. But this is a huge swath of medium and large companies. This is everything from mines to technology companies, and we don’t know what the impacts are and how businesses will react. Some businesses will move money outside of Canada; some will invest less; some will react in other ways. That’s why we don’t understand the economic impacts of affecting all of these medium and large companies in Canada, and that’s why we keep asking the government for the economic impact of this.

Senator Pratte: I understand that, and I’m certainly sensitive to the comments we’ve heard from tax practitioners and small-business people since we started this work. However, in the case of passive income, we’re talking about 30,000 companies. That’s a lot of companies, but it’s a very small proportion of private companies.

I’m wondering: Can tax changes that will affect “only” 30,000 companies wreak such havoc on the Canadian economy?

Mr. Brakel: We have concerns about the data they’re providing. They say that a certain percentage of companies have no passive income at all. Those same figures show that 80 per cent of Canadian companies have no passive income at all. Every company has passive income if it has money in the account earning some sort of rate of return or a GIC, mutual fund, or anything like that. What they’re saying is that companies have actually declared passive income on their return as a withdrawal out of the company, so that’s a different number than the total number of companies that have passive income.

Again, we have questions about how they’re determining that there are so few companies that could be impacted by this, because there are so many companies that have passive income that is within the business, but it’s not being declared in the way they’re doing it.

Mr. Kroeker: I share your concern or questions around where the numbers are coming from. I don’t have data, other than anecdotal data, on that. The number 50,000 for companies that have a split income sounds like a drastic understatement to me, in my experience.

Mr. Skilnick: A couple of points on passive income. We’re saying that we want to help small companies become bigger, but we’re going to treat them unequally, the public companies or non-resident-owned Canadian companies. It’s not going to help them. It’s going to hurt the objective that we want.

With regard to TOSI 50,000 corporations, KASB has documented that we flatly disagree. Every family-owned company, we have to consider the TOSI rules. At a minimum, they will have increased compliance costs.

It even impacts people who are not incorporated. We went door to door talking with business owners in Kingston. One person was not incorporated. I said, “Tell me about your business. Why are you not incorporated?” They said, “I heard it could be really complex,” and it was family members who were helping out. They’re not wrong.

When we look at family succession, which is an important issue we’ve dealt with under 84.1 and 246.1, I don’t know what will come out in the next round of legislation, but it needs to be dealt with in TOSI. We’re telling you it’s such an important issue for these tax changes.

Senator Pratte: Just a question to Mr. Beatty about this idea of a royal commission or a thorough examination. I’m rather favourable to this idea, but I want to ask you as a former politician — and playing devil’s advocate — isn’t this a way of pushing the problem further down the road? A royal commission would last three or four years. Who knows what would happen with the report? How can we be sure it’s a productive exercise?

Mr. Beatty: There’s no guarantee. It depends on what the government does with it, senator. We had an extensive debate at our AGM precisely on this issue of a royal commission or some other inquiry, and the AGM voted in favour of a royal commission. The reason was the suspicion of what happens if there’s another inquiry that the government can influence in some way, or the report gets lost. The vote in favour of a royal commission was its comprehensiveness and independence.

Yes, it takes time.

Far be it from me to give political advice to the government. I’m not a politician, and I have my papers to prove it. If the government was concerned that anything they did on tax reform was going to be contentious, launching a royal commission now with the expectation that the report would come back early in the life of a new parliament would be a good way to ensure Canadians had a chance to be heard, that there was a process that was transparent and fair, and a new parliament could take a fresh look at this issue and make changes to the system to ensure it was fair and efficient in terms of what it was trying to achieve.

To come back to your earlier question as well, you asked a good question about what this means, 3 or whatever per cent. None of us knows for us. If we learned anything from the experience this summer, it’s that haste in moving forward with these things, the assumption that the government knows everything and there are no problems or substantive changes that might need to be made — that was the wrong way to go. The restrictions on public input and having a restricted discussion in the middle of the summer led to incredible divisions in Canada.

If we want to get it right this time, we need a process that’s transparent, fair and takes the time necessary to get it right. We also need to launch it now for precisely the reason you mentioned: It does take time. Every day we delay on this means that the end result will be that much further off.

We strongly feel that if the government were to launch a full independent review like a royal commission, it would be the best way to ensure that we have a system that’s fair and responsive, and that we wouldn’t repeat what happened this summer. We heard in the summer that there were no unintended consequences. All the changes made last month were made because there were unintended consequences.

I believe the Finance Minister is a decent and honourable man. I believe that he is in Parliament to serve the public. I don’t believe for a minute it was his intent to inflict massive damage on small business in Canada or family farms, yet that would have been the consequence of an ill-considered package that was being put before you.

The lesson from that is to get it right. Let’s take the time to get it right and have a system in place that ensures fairness and transparency.

Senator Oh: Thank you, witnesses, for being here. My apologies for being late. I’m trying to bring business to Canada.

I heard a lot about you being professionals and you are confused, not knowing what way the government is coming in. You must have submitted your concerns or suggestions since July. Have you been called by the minister or the department to come in and discuss the issues of concern?

Mr. Burggraaf: Not at the coalition level, but at my own personal association, yes.

Senator Oh: Are you aware of any association being called? Many submissions have been given to the government since July.

Mr. Beatty: The minister was good enough to come to our AGM to meet with our members. We deeply appreciate him doing that, but following that, our membership voted 98.2 per cent to call upon the government to withdraw these proposals and launch a full independent review, because we came away from the experience more concerned. We had a sense the government didn’t understand the issues of concern to us.

On the 21,000 submissions made — and the minister evidently referred to them today, I gather -- the minister announced the changes two weeks after the close of consultations. They must be speed-readers to have been able to go through all of those submissions, some of which might have run to scores and scores of pages, then assimilate them and then come up with these proposals. It seems like a very rushed process to me.

Senator Oh: This afternoon I asked the minister a question about exit strategies and flight capital, and somehow he thinks Canada is still the best place in the world to live.

Are you worried about outgoing capital — the flight of capital — even people moving businesses away?

Mr. Beatty: Yes, sir. We are very concerned about it.

This particular set of proposals is one element that discourages entrepreneurs from coming to or staying in Canada. The problem is much broader than that. There are many other areas in which Canada is becoming a high-cost jurisdiction in which to do business. As a consequence, business people take a look at it and ask, “Where am I better off investing my capital?”

Second, as you well know, the most talented people in the world are highly sought after everywhere in the world. We want to bring entrepreneurs to Canada. If the measures we bring in are punitive in nature, it will be difficult to attract people to come to this country.

Senator Mockler: Mr. Leung, you had comments?

Mr. Leung: Yes. The immigration minister today proposed to bring entrepreneurs to this country. When entrepreneurs from all over the world see the Canadian system — and Canada is number 17 to do business with in the world, compared to New Zealand, which is number 1, and Hong Kong at number 5 — who will come to this country if our system becomes even more complicated?

We have a lot of reasons to attract foreign investors and entrepreneurs to be here, but if our government can pass something in a rush without thinking of the total consequences and the newcomers fear it, that is very negative for our future economy in Canada.

Senator Marshall: We’ve talked about the tax changes in detail. I wanted to just broaden the discussion a little bit. The tax changes are one area of concern to small business, but there are a lot of other issues too. It looks like there’s going to be a downturn in the economy. The NAFTA negotiations don’t seem to be going well. Interest rates are on the rise. South of the border, it looks like they’re going to reduce their tax rates. Then we have the tax changes themselves here. Then we have the uncertainty with regard to other tax changes.

Could you briefly comment on the whole environment that small business is trying to operate in? The proposed tax changes are just one element. Can you just give us a flavour of what’s happening out there with regard to your members?

Mr. Brakel: That’s a great question. There’s a much bigger picture here. Canada has gone through eight quarters of declining business investment. A lot of it was natural resources, but it was right across the board if you dig into the data. Every economist in the country is predicting a sharp slowdown in the second half of 2017. We’ve had three months of contracting income; two months of zero GDP growth. We have the impacts of the foreign buyers tax in Toronto, rising interest rates. On top of that, we have uncertainty around NAFTA. This is the time to make Canadian business more competitive and dynamic and give entrepreneurs help, not pile something else on the backs of entrepreneurs.

Senator Marshall: Give them more confidence.

Mr. Brakel: Absolutely. I agree with you.

Mr. Beatty: We shouldn’t lose sight of the fact that we’re the most fortunate people in the world to be living in Canada. That is our starting point. Whatever criticisms we have or concerns that we express, there should never be any doubt about our sense of how fortunate we are in Canada. It is important, though, to recognize that the environment in which we’re operating today is intensely competitive. For a small business in any part of the country, there was a time when it was good enough to be the best in their community or province. Today, with your customer, supplier or competitor on the other side of the world but as close as a mouse click, you have to benchmark yourself against the very best in the world.

That means that for Canadian businesses to succeed, they need to have an environment that allows them to do so.

In June or July, in cooperation with all of the provincial and territorial presences of the Canadian chamber network, we wrote to the Prime Minister and premiers about that. It’s no one thing; it’s the aggregation of all of the fees, charges, costs, taxes and regulations added together, which is taking a high-cost jurisdiction and making it so that it becomes uncompetitive.

We have seen in the energy sector this year how many billions of dollars it is. The total is perhaps up to $100 billion dollars in the past year, somewhere in that neighbourhood, of projects not going ahead for a variety of different reasons.

You go to southwestern Ontario and into the Leamington area, where you have greenhouse vegetable growers who look across the water to Michigan where the cost of land, labour and electricity is cheaper, and they are about to have new burdens put on because of cap and trade. I’m not saying we shouldn’t fight climate change. We should. But we have to look at the aggregate impact of all these costs. The change of minimum wage in Ontario and all sorts of other areas, all these things added together are making Canadian businesses uncompetitive and causing people either to pull back and simply not make an investment or hire that new person or, in some cases, to take their money and their skills and go somewhere else.

Pardon me if I sound political here, but with what’s going on in the United States, we have the potential for the biggest brain gain in my lifetime, to attract the best and brightest to come to Canada. People who were previously going to the United States or elsewhere and are made to feel unwelcome are suddenly seeing there’s a society here that will welcome them and where we believe in opportunity. We should say, “How can we attract these people,” not how to put disincentives there that cause them to look somewhere else.

Senator Marshall: Good comments.

Mr. Leung: In the past, it’s been a honeymoon for our government in the last two years. Our economy was pretty good. We’re consuming our assets. So should we give up our country and consume our assets left behind from the past? I believe we should have something to attract new business to come in. The U.S. will have tons of opportunity. When people don’t like the current administration, they can come to Canada. Also in Europe, when the U.K. exits the EU, that’s a good chance to attract people to Canada. But we make our system more complicated and uncertain and have the high cost of running a business, and that will be a hurdle for people to come and a loss of opportunity.

Senator Jaffer: I have a very short question for Mr. Kroeker.Mr. Kroeker, when you were speaking, Mr. Rotenberg, a tax consultant here in Ottawa, sent me a note. You were talking about contractors. He said one of the largest hirers of contractors is the CRA and you must be incorporated to get those contracts.

Mr. Kroeker: I have heard that was the case. I chose not to raise that as an example, though.

Senator Andreychuk: I don’t think I can do as well as Senator Jaffer just did, but I did want to talk about the CRA. They have come before us, and they feel that they can handle all these changes and they’re waiting to get simplified rules, yet they couldn’t explain what the simplified rules would be. They say they will be consulted, will be part of the process.

My concern is that whatever rules come in — and the minister was insistent he’s going to go ahead with the bill in short order — can we conceivably see a system in place by January, which is what the minister is targeting for?

That’s part of the question. The other is the comment that you can put down a comment on a form that you comply. The problem is that a CRA officer can come and say, “We dispute it.” Will it not be worse if we mislead people by a recommendation that would say “just sign”? Because auditors can come in and say, “Where’s your proof,” so you have to anticipate what the other person is going to say even more than you have to today.

While we’re talking about all these other things, if the government is going to go ahead and does not allow for a proper, full review and insists on any form of these, how are we going to, in this very short time, produce the kind of guidelines and protocols needed for CRA?

I think that’s part of Senator Forest’s concern, too. How is this all going to be managed without being more disruptive, more fees? It may be helpful for some accountants and lawyers, but how is that going to be handled? The devil is in the details, as we always say around these tables. Implementation is as important as the law itself.

Mr. Beatty: Could I comment on that, senator? It brings us back to the fundamental question we would leave you with tonight: What’s the rush? Why not take the time to get it right? Why not have a system that’s open, transparent, consultative and where Canadians feel that the process itself has been fair? Do we want to go through what we went through this summer yet again? I don’t think so, and there’s no need to do so if we simply have the sense to do it right and take the time to do it.

Senator Andreychuk: I take it you don’t think January is realistic?

Mr. Beatty: I’m a former revenue minister. Will the department attempt to apply the law? Yes, they will. But will there be problems down the road if we have something that is half-baked and not properly considered? We will have significant problems, great unfairness, and we will create uncertainty, which will discourage investment and will cost jobs as a consequence as well, and ultimately revenue for government.

Senator Mockler: As we conclude, before thanking the witnesses, I will inform the senators and also the witnesses here this evening that we will be completing two trips, one from November 5 to 10 in Western Canada.And Eastern Canada will be from November 19 to 24.

Witnesses, please do not hesitate, if you want to add information over and above what we heard tonight from your organizations, please send it to the clerk.

For your information, on our two trips we will have 62 different groups representing Canadians from coast to coast to coast. The Standing Senate Committee on National Finance will be tabling a report to the Senate on December 15.

On behalf of senators this evening, thank you very much for sharing your thoughts, views and recommendations.

Senators, we will be in Vancouver Monday morning, November 6, starting at nine o’clock. Thank you.

(The committee adjourned.)