THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
OTTAWA, Thursday, December 7, 2017
The Standing Senate Committee on National Finance, to which was referred Bill C-63, A second Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017 and other measures, met this day at 2:15 p.m. to give consideration to the bill.
Senator André Pratte (Deputy Chair) in the chair.
[English]
The Deputy Chair (Senator Pratte): Good afternoon. We are here to continue our study of Bill C-63, A second Act to implement certain provisions of the budget tabled in Parliament on March 22, 2017 and other measures.
To begin, I’d like to ask honourable senators to introduce themselves.
Senator Marwah: Sabi Marwah, Ontario.
[Translation]
Senator Forest: Éric Forest from the Gulf region of Quebec.
Senator Maltais: Ghislain Maltais from Quebec.
[English]
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Eaton: Nicky Eaton, Ontario.
Senator Andreychuk: Raynell Andreychuk, Saskatchewan.
The Deputy Chair (Senator Pratte): Our witnesses, to begin with, are all on video conference. We have Jack Mintz, President’s Fellow, The School of Public Policy, University of Calgary. He is very well known and used to appear in front of this committee. We also have Hugh Neilson, Director, Kingston Ross Pasnak LLP; and Peter Weissman, Partner, Cadesky and Associates.
I believe each witness has a prepared statement for five to seven minutes, after which senators will ask questions, beginning with Mr. Mintz, please.
Jack Mintz, President’s Fellow, The School of Public Policy, University of Calgary, as an individual: Thank you very much, Mr. Chair. It’s a pleasure to be before this committee once again. I want to be brief in my remarks on the budget that is being covered in this session. I thought it would probably be appropriate to say a few words about one particular item. In my view, the budget items do not have a major impact in terms of revenues when considering the provisions in detail. I want to talk about some broader issues that I think are quite appropriate, leaving time for questions during the session.
One particular thing I wanted to talk about is with respect to oil and gas. There are some changes with respect to the treatment of exploration and development. In my view, the changes are appropriate. I don’t have a disagreement with the principle of amortizing successful exploration expenditures. I think that’s quite appropriate for oil and gas and mining, I should add. It is another change that would have an impact on the effective tax rate on capital.
My colleague and I have published a piece on this, in terms of updating 2017 changes, and the impact is relatively small. It’s only about 0.3 percentage points increase in the marginal effective tax rate on investment in oil and gas, so I wouldn’t say that’s a big impact. It’s just another one on top of other types of changes occurring with respect to the system.
So in my view, it’s an appropriate change that will not be too much harm in itself, but I think that we need to sit back and ask why are we increasing the effective tax rate on one particular type of industry -- the mining, oil and gas resource sectors. At a time when we are seeing major tax reforms being taken in the United States, it’s going to create a very significant problem for Canada in the sense that we will lose our business tax advantage with the U.S. tax reform going through. It isn’t certain yet, but I think it’s becoming more of a certainty than we would have said maybe a month ago.
This raises a broad question about what we’re trying to do with the tax system. Not only do we have to worry about a competitiveness issue, but we have to start talking about tax reform and broader ideals and objectives, the typical ones being that compliance, and administrative costs should be kept as low as possible and we should minimize the economic impact and costs of taxation, particularly causing distortions in the economy, including its impact on growth.
The third is around a tax system that’s fair, but not fair just in terms of what’s called vertical equity to make sure that people who maybe have more resources are able to pay more tax relative to people who have less, but also horizontal equity to make sure people with similar resources are taxed at the same level.
We need to get back to these objectives when we talk about taxes and tax reform, and we’re not doing that enough right now.
I would suggest that in the long run we need in this country another type of commission or panel that reviews the tax system. There have been a number of changes lately that have been leading to greater unfairness and economic cost to the system. It’s going to now be forced upon us with U.S. tax reform that is putting Canada at a particularly uncompetitive disadvantage for the future.
I’ll stop there. Those are my comments.
The Deputy Chair (Senator Pratte): Thank you, Professor Mintz.
Mr. Neilson, please go ahead with your presentation.
Hugh Neilson, Director, Kingston Ross Pasnak LLP, as an individual: Good afternoon, Mr. Chair and honourable senators. Thank you for this opportunity to address the committee.
By way of background, I have worked in the accounting profession for 30 years, focused on taxation for small businesses and their owners. I’m also heavily involved in our profession’s continuing education process. I’m a member of the board of editors at Video Tax News, which provides updates on tax matters for accountants and tax preparers across Canada. In that regard, I’m teleconferencing in today from a three-day tax update course. I thank your staff for making that not only possible but very easy and painless.
Bill C-63 implements a wide array of income tax measures, both from the 2017 budget and other previous announcements, and includes a number of non-income tax measures.
My comments are limited to only three of the income tax measures.
I find the diversity of issues in this bill really highlights the rapid pace of change and the ever-increasing complexity of our tax system. That supports the views of many individuals and organizes who, like me and Mr. Mintz a minute ago, believe we need a comprehensive review of our income tax system. One example in this bill is the changes to the rules exempting gains on a principal residence from taxation. The more focused changes here have received limited scrutiny and will likely have unexpected results in the future for some Canadians who were never intended to be targeted.
More broadly, these proposals were announced October 3, 2016, effective for the 2016 tax year. This forced rapid change to long-standing CRA interpretations and administrative practices. One change that was intended to avoid significant increases to the administrative burden unfortunately included a technical flaw. CRA had to make significant efforts to address the concerns, which were made more challenging by the timelines. It seems like these proposals that change practices that date back four decades could possibly have been made effective one year later to afford CRA with some reasonable time to consider the administrative changes, as the changes themselves have taken that long to move through the legislative process.
Many of the measures in Bill C-63 are focused anti-avoidance provisions, and they reflect the need to respond to quickly emerging issues. But these rapid changes often have unanticipated collateral effects. Therefore, the second issue I wish to note is on specified cooperative income, a provision designed to provide some relief from the complex, onerous small-business deduction changes introduced in Budget 2016. The excessive complexity and the overreaching application of these provisions were discussed by the committee a year ago.
While any relief is welcome, these proposals do not address the many unintended collateral effects. They affect only the agricultural and fishing sectors. Even within that narrow scope, they’re extremely limited. As one example, the Canadian Wheat Board does not meet the definitions required to provide relief to those farmers who sell their crops to that organization. Rather than addressing the complexity of these rules, they increase them. We need a much broader review to relieve the inordinate reach and excessive complexity of these provisions. This is desperately and urgently needed by small business and those who advise them.
Many other changes made in recent years have similar issues, and I have no doubt that many changes made outside my ambit of small business taxation have similar issues.
The final item, one that has received a lot more focus, is billed-basis accounting, or the deferral of professional work in progress, which we often acronym as WIP. Our current law allows six professions to ignore the value of WIP, valued at nil for year-end tax purposes. These amendments will require WIP to be valued at lower cost and fair market value, much like inventory of physical assets.
I was a participant in the submission of these proposals on the Joint Committee on Taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada. I note that with the exception of dealing with a phase-in period, which has been extended from two to five years, the significant concerns expressed in that submission did not appear to have been addressed.
Our existing law provides that the value of WIP is the amount we reasonably expected to become receivable at some future date. That includes a profit margin, so it’s not likely to be the approach selected by many taxpayers. The legislation provides no guidance on the determination of the cost of WIP. In my experience, most financial reporting for those professions affected either reflect WIP at an estimated future billing amount or at nil, so there have been no common accepted principles determining the cost for WIP, which have emerged from our profession.
The guidance on cost published by the CRA, the most recent document, dates back to 1999. Even that was very broad, general and does not bind taxpayers or the CRA. It also predates the advent of professional corporations in most provinces, so it does not address issues created by those nannies. We had suggested legislated guidelines to provide desirable certainty and reduce the extent of future dispute resolutions and the attendant costs, including litigation before the already-backlogged tax courts.
Concerns regarding contingency fee arrangements have been raised. This primarily impacts the legal profession. CRA tried to address this with a frequently asked questions document, which indicates that WIP would have no value. That does not seem consistent with the legislation, and no technical basis for the conclusion is being provided. My opinion is that if this is the desired result, it should be in the legislation. If it’s not the desired result, that should be clarified and the implications properly reviewed so that we don’t have unintended consequences going forward. The Bar Association has raised a number of concerns in that regard.
Finally, practically, WIP is most often an issue for accountants and lawyers, not the other four affected professions. A realistic de minimis expectation could reduce the administrative burden for those organizations with only minor WIP levels. One example is medical doctors who regularly invoice provincial health care authorities, so they have very limited WIP, while still capturing organizations with significant WIP deferrals, which appears to be an issue the Department of Finance is dead set on addressing.
With those issues in mind, I look forward to your questions, senators.
The Deputy Chair (Senator Pratte): Thank you, Mr. Neilson. Mr. Weissman will please proceed.
Peter Weissman, Partner, Cadesky and Associates, as an individual: Thank you, Mr. Chair and honourable senators, for inviting me to speak today. I’m a CPA and a tax practitioner. I’ve been in tax for 29 years. I deal a lot with CRA, I do a lot of planning for clients and a lot with small businesses. Since July 18, the world has certainly changed and become a much busier and anxiety-provoking place for businesses, government officials and professionals.
I’m going to try to avoid reverting to a lot of discussions I know you’ve already had and already had other people share with you. Some of the comments I’m going to make just have to be framed in the context of the tax environment we’re living in right now, which is the most aggressive and subjective; it’s a system that villainizes what I think of as being the backbone of Canadian society.
We’re in a very strange era of taxation and our relationships with governments. I’m going to talk today just about the work-in-progress, or WIP, proposals that Mr. Neilson just talked about and make one comment on the principal residence exemption proposals.
What we’re dealing with now is a government that seems to think there is a lot of money to be had by squeezing taxation on private businesses and the work-in-progress is just another one of those tools.
It did predate the July 18 proposals, and leading up to that date there were a number of proposals that made changes in clamping down on the small business deduction and changes proposed to the work-in-process area. They were all manageable by themselves. In taxation, things change. We don’t necessarily always like the changes but it’s government’s right to raise revenues in a fair and even-handed manner.
So these WIP proposals, on their own, are fair, though I don’t necessarily agree with them. This issue was investigated back in 1981. The issue with the WIP is not a matter of raising revenue; it’s a matter of timing. It’s all deferral. It’s not a matter of increasing income to the government, it’s just accelerating it. But it is an issue of cash flow to professionals and the people affected by these proposals.
Briefly, if you don’t mind — I’m watching the time, here — in case you’re not aware, what happens with WIP is that when we bill our clients we do so by the hour, it goes into the work-in-progress and we can’t necessarily bill that amount. When we with finish with a client on an interim basis, we look at the time we have spent, we figure out what to bill, arrange it with the clients and send out an invoice.
At the end of the year, we have a lot of dollars sitting in work-in-progress that doesn’t necessarily reflect the actual revenue we’re going to receive. Because of that, the WIP rules allow us to not include that WIP in income. That’s in the existing rules.
The proposed rules say we’re going to do away with that and you have to bring your WIP into income. Initially, the proposals had a two-year transition period, but a five-year period was a recommendation made in the joint committee submission that Mr. Neilson was part of. We appreciate that that accommodation was made.
But the reality is that we are introducing more subjectivity into our act with these rules. I’ve been a big critic of the reasonability test in the July 18 proposals, mainly because of subjectivity. Subjectivity in our Income Tax Act has to be minimized. As Mr. Mintz mentioned, a complete overhaul and look at our entire income tax system may be worthwhile, but that’s not what we’re dealing with today and I know that’s not a short-term possibility.
We’re putting Band-Aids on top of Band-Aids at this point. The act is just comprised of fixes to various problems and this WIP adjustment is not even a fix, in my opinion; it’s just adding a Band-Aid on top of a Band-Aid that was there. The WIP proposals have subjectivity because I have to now value my WIP at cost. I’m an accountant, so if you put five accountants in a room and ask how you come up with the cost of WIP, you’re going to walk out with 11 different answers.
It’s very difficult and it’s subjective. In the tax world, as you know, the taxpayer is guilty until proven innocent. Notwithstanding whatever good faith calculations a taxpayer has made, CRA can assert something and you are now left with disputes. The world of tax is creating more and more opportunity — I don’t like to use that term — for disputes and more litigation. We’ve got a tax court system that has no money in it.
It’s slowing down, so I think adding rules that increase the use of subjectivity is a really big mistake and I don’t see what the rush to implement is, especially in these measures, since they’re not a revenue generator.
My last point has to do with one comment on the principal residence exemption proposals. Those eliminate the ability for a beneficiary of an inter vivos trust, in most cases, or a testamentary trust, in many cases, to claim a principal residence exemption if they inhabit a house owned by the trust.
There may be some good reasons for that. There was an amendment made to the proposals to create an exemption in the case of a testamentary trust. If someone dies and leaves a house to a child eligible for the Disability Tax Credit, that special trust will be exempt from these principal residence exemption denial rules, so that’s a good thing.
What’s missing from the adjustments is the fact that in most special needs scenarios, those trusts are created during the person’s lifetime, not when the parent — as an example — passes away. As a parent, I would create a trust if I had a child who can’t manage property on their own and buy the house through a trust while my child is alive.
I know they’ve got someone managing their house and a place to live, but that trust, because it was created while I was alive, would not get the same treatment as one I would create in my will. It doesn’t make sense.
It is something I’m going to write to the Department of Finance about and maybe they’ll make a change. I’m not sure. These days, it’s very hard to predict what the Department of Finance is thinking.
On that note, again, I thank you for the opportunity to speak with you and I’d be happy to answer questions if I can.
The Deputy Chair (Senator Pratte): Thank you, Mr. Weissman.
Senator Eaton: Thank you. Mr. Mintz, it’s nice to see you again.
Perhaps you don’t know, but this committee went out west and down east to listen to Minister Morneau’s tax proposal loopholes. We’ve had a lot of hearings about this budget and one of the things that has struck me since July 28 — and you brought this up — is that we keep hearing Finance officials talk about tax fairness, but nobody seems to talk about our tax competitiveness in the G7 and in the OECD.
After listening to 12 or 16 hours of hearings on this budget, it seems to be there are bits of taxes here and there. It’s all little tiny bits and it’s kind of creeping.
What do you think all these tiny bits are going to do, long-term, to our tax competitiveness in the world?
Mr. Mintz: Thank you for your question. I hope you can hear me all right. Apparently there were some problems.
I want to start by picking up on a comment I made early on in my presentation, and that is you can never do tax reform and tax changes based on one single objective. That is, let’s say, vertical equity fairness or just trying to adjust taxes so that higher-income people pay more than other people. I think it is a big mistake to follow tax reform in terms of fairness; there are other goals that are important.
For example, in the small business areas of tax, there was an issue raised in that professionals might earn self-employed income, and they would pay tax right away on that and put it in a private corporation. They can get an advantage to incorporate so they initially get a low corporate income tax rate and later on they do pay full tax. Actually, passive income tax rates are quite high on assets in the corporation, but there is some advantage, especially if you hold assets long enough.
So that was supposedly being addressed as a fairness issue. But on the other hand, now we’re going to be looking at passive income rules that are mainly on high-income people who are now looking at moving their assets out of Canada. I can say that’s being done across the country by a lot of people still looking at these rules and the impact of them.
It’s all well and good. The federal government in the end is probably not going to get that much revenue out of the passive income rules, and at the same time it’s going to create harm to the Canadian economy as people will take their money and put it in other parts of the world instead.
That is not really what I would call smart tax reform, because we’re not looking at all objectives. We have to look at competitiveness as part of the question.
We’ve been doing analysis in constantly evaluating the effect of the U.S. changes on large and small businesses, and I can tell you now that Canada is not competitive on the small business side for taxing entrepreneurs. In fact, the only country worse than us is France. If you look at the changes they’re going to begin on what is called business income earned through companies or entities, their effective taxes will be much lower on capital invested by entrepreneurs than what we will have in Canada.
So if I were a venture capitalist, the U.S. would look like a more attractive, from a tax point of view, to invest in. That’s for small businesses.
For large businesses, the U.S. reforms will lead to a lower effective tax rate on new investments in Canada — both the house and Senate bills are similar. We will have lost our business tax advantage that we had in attracting investment in this country.
That is why we have to worry about this, and we will need to engage in tax reform that is going to come out from these U.S. changes. The Department of Finance is quite concerned about the competitiveness of the Canadian economy.
Senator Eaton: Why do governments shy away from lowering everyone’s income tax and raising the VAT? Would that not be a fairer and easier way to collect revenue?
Mr. Mintz: From the point of view of reducing distortions in the tax system and also reducing some compliance costs — I’m not sure how much — you might actually have some economic benefits from switching to the GST from income taxation.In terms of fairness, actually, it’s a little less clear. As we know, value-added taxes, like any sales tax, tend to be borne more by lower income groups as opposed to upper income groups. Lower income groups tend to spend more of their income on consumption relative to upper income groups.
While for economic reasons, it’s a good justification to switch from income taxes to more GST, we’d have to do some other adjustments if one wants to make sure the lower income Canadians will not be too adversely affected. One way of doing that is to bump the low-income tax credit or do some other compensation. For example, I am on record in Alberta, and I have not lost my head yet due to decapitation. I have argued for an HST in Alberta and using that money to cut personal and corporate taxes. In fact, we worked out a proposal that was distribution-neutral by making the switch, and I would argue that would be a helpful change to the Alberta economy.
Senator Marshall: Thank you very much. My question is specifically on Bill C-63. When we got Bill C-63, I was expecting that it would contain some tax relief and some increases in taxation. As we’re going through each of the section and we’re meeting with government officials, I’ve been asking if this will raise revenues for the federal government or will it decrease revenues. Sometimes the government officials don’t always give a straight answer, but we’ve learned the marijuana taxes will give more revenues to the federal government. Some of you spoke about “work-in-progress” — the dollar value won’t increase but the government will get its money earlier.
When we had the government officials here talking at oil and gas, I know Mr. Mintz mentioned this, they referenced that some expenses that could have been written off 100 per cent were now going to be written off at the rate of 30 per cent a year. That’s going to have a positive impact on the government’s coffers.
This morning we had government officials come in, and they talked about excise taxes on beer concentrate. They’re concerned about beer concentrate being doubly taxed, so I figured that was going to be something that would have a detrimental effect on the government revenues, but they told us, “no,” it would not have any impact on the government revenues.
Each of you have looked at Bill C-63 in its entirety. Everything I’ve seen is increasing taxes. Have any of you seen anything in that bill that is going to have a negative impact on revenues to the government, or is it all increased revenues for the government?
Mr. Weissman: I appreciate the question. I’ll focus on the work-in-progress provisions. Those will be — I’m not sure if this is the right term — but I would say “revenue-negative.” They don’t increase revenue; they accelerate the collection of revenue. They will also increase compliance costs, not just for the taxpayers but for the government. They’ll also increase the cost of litigation for the government.
I haven’t run the numbers. I have a feeling the government hasn’t run the numbers either, but I have a feeling this change will actually be costly as opposed to revenue-generating.
Senator Marshall: Have you seen anything else that will result in a reduction of revenues to the government?
Mr. Weissman: I’ve looked at the principal residence exemption, registered education savings plan provision and work-in-progress provision. My review is limited to those areas, so no, I haven’t seen anything else.
Senator Marshall: Mr. Mintz?
Mr. Mintz: I quickly looked at all the various provisions, and there are quite a few of them. Most of them, I would say, are revenue-increasing. There may be some that are revenue-decreasing, but I’d have to understand the numbers better. One example is the one on credit unions using an allocation method similar to the banks. I don’t know if that raises or loses revenues. It might have very little impact.
A lot of them seem have a relatively small impact. I didn’t see anything that would be billions upon billions of dollars.
I think you raise a good point, senator. We’re seeing either changes to the law to increase revenues in general or new auditing practices that will lead to new increased revenues. This is certainly a large part of the changes taking place.
Mr. Neilson: I would agree with the other comments. I don’t see anything in the legislation designed to give money back to taxpayers and reduce the federal government’s take.
I wholeheartedly agree with Mr. Weissman that the government — more revenue and more responses, and possibly lose on the overall results. That won’t be beneficial to taxpayers. It will be beneficial to tax litigators.
Mr. Mintz referred to the credit union rules. I’m not well versed in those, but my understanding is they — allocation for provincial tax purposes, so they should have no impact on the federal government and redistribute revenues among provinces.
That highlights perhaps a key issue over the past several months and years: We keep hearing “tax fairness,” but we never hear, “Let’s reduce the amount of tax-taking because we're overtaxed.” We hear, “It’s not fair, so let’s bring it up to the highest possible number.” Unfortunately, this imposes the most possible compliance costs and the most costs from the CRA.
Peter and I can sit here and say, “This is great for us. We advise taxpayers how to deal with these rules.” I would suggest that when we, our colleagues and our colleague in tax litigation are coming to these sessions and publishing our articles, crying out for reduced complexity, we’re biting the hand that feeds us. Perhaps that should be paid a little closer attention. If we think the system is too complicated and provides way too much money to us, what does the rest of the business community think?
The Deputy Chair (Senator Pratte): Mr. Neilson, you talked quite a lot about bill-based taxing. I want to make sure I understand the point you were making. Are you arguing that you agree with the fact that billed-based taxing is being abandoned but you disagree with the way it’s being done, or you disagree with the idea that it’s being abandoned, disagree with the change totally? Or is it simply the modality that you disagree with?
Mr. Neilson: I would say I don’t agree or disagree with the removal of the deferral. I think it’s consistent with a lot of other deferrals being removed. Prima facie, it has an appeal. No other inventory gets to be paid for and deducted, I think, outside of the agriculture sector.
What I question is: Is there enough tax benefit to the profession to justify the complexity that this will create? Like Mr. Weissman, I acknowledge that our government has the right and the responsibility to change the rules. This was looked at in 1972 tax reforms, it was looked at again in 1981, and, on both occasions, the conclusion was that the complexities of taxing WIP and deferral vastly outweighed any benefit, so I’m wondering what’s changed in the intervening decades that now makes the complexities manageable and this revenue worthwhile.
I think the other question I would have is: I was at the budget lockup; they were quite candid that they didn’t know how WIP would be costed. Yet they know how much tax they will raise by eliminating this deferral? How can you know the tax without knowing the affected income?
My answer would be that I’m pro the removal of the exemption, but I think the complexities it creates make it far more costly than it’s worth to raise those revenues. If we do wish to proceed, I would rather see bright-line WIP determinations, adjudicated that this is how WIP is costed, or even to say that, if you cost it, there will be no challenge. A lot of taxpayers would take that with an “I know what I pay, and I’m honest with you approach,” even if maybe they’re paying a little more than they have to. I hope that answers the question.
The Deputy Chair (Senator Pratte): Unfortunately, the sound isn’t very good. If I remember, we asked, yesterday or the day before that, the Finance officials how much revenue they would get from this. Was it $350 million?
Senator Marshall: My recollection was that the bottom line was that there would be no overall impact on government revenues. The money would be received earlier by the government, so the benefit was the time value of the money.
The Deputy Chair (Senator Pratte): Okay, that’s it. So, in the long-term, there would be no additional revenue. There would be a bump in the first two or three years because deferral would be eliminated, but there would be no advantage revenue-wise.
Senator Andreychuk: I thank all three of you for being here and dealing with the specifics.
I have one question to Mr. Neilson. You were in the lockup. What are the reasons for this WIP change, getting rid of the deferral? Did they give you a reason? You’re saying they get the money faster for a few years, and then there will be no impact. What was the Finance department telling you on why they are doing this? Why are they disturbing something that really is not going to be a cost benefit to them, except in the short run?
Mr. Neilson: There was no reason provided by the lockup, and, normally, we wouldn’t hear any reasons in the lockup. If I had to speculate, I would say that I think the budget included a number of minor tax changes that were simply resulting from a review of the tax expenditures, those items that vary from the normal rules, and I think the WIP reduction fell into that category in Finance’s eyes. As I said, physical inventory, we do cost, and we don’t allow those expenses to be deducted until the related revenues are received, and I think that’s the reason for the removal. I think the problem is that, as Mr. Weissman had alluded to and I’ve commented on, it’s a lot harder to cost a file in progress, a legal action in progress or a medical procedure in process than it is to figure out the cost of a widget that’s half-manufactured. So we don’t get a lot of rationale from Finance, and I would suggest that that’s a weakness in the system. It’s one thing if I don’t know why we’re making this change. It’s quite another if our MPs and our senators, who have to make decisions on these proposals, don’t know the basis under which they are being proposed.
Senator Andreychuk: Mr. Weissman, you talked about, in the same area, the test of reasonableness. How will they value work in progress? Having practised law, I know that many lawyers, as you say, bill and log their hours now. We didn’t do that before, but we are certainly doing that now. But you stand back at the end and determine what’s fair to your client, for perhaps self-serving reasons like you want to keep the client or the group of clients, or simply because you think that, when you stand back, you, as a professional, determine what your worth is and your work. So it may be less than the billable hours, or it may be a different way of calculating the final bill.
Is the reasonableness test going to drive you into a discussion with the CRA, saying that unfair to do? Is that what they were saying about the work in progress? You’re saying that, by removing the work in progress, they would be applying a reasonableness test. Did I understand you to say that?
Mr. Weissman: I think I may have confused people with my comment about reasonableness. My reference to reasonableness was a passing or fleeting reference to the income-splitting proposals where there is a reasonableness test and it’s subjective and is going to cause a lot of litigation for very little help. The comment about reasonableness was an overriding comment about the increased amount of subjectivity that is being built into the income tax rules with various proposals.
We have the same issue of subjectivity in the work in progress rules. You’re absolutely right. I look at the end of an engagement; I look at my WIP. It is only a proxy for how I judge what my work was worth to the client, and, in many cases, I may not be able to collect any of the WIP if a transaction doesn’t close, rules get changed along the way, for whatever reasons. These rules require us to look at the lower cost for fair market value of WIP. Assessing our fair market value is a very subjective test because we look at what’s going on in that file. It is a thousand hours that have been booked. What do I think I’m going to be able to do? It’s all guessing until I actually go and initiate the final bill with my client. It’s the lesser of that in cost. Cost, like I said and you had mentioned, when you produce a tangible asset is much easier to calculate than it is when you have an intangible.
Our resource, our capital, is our people, and we pay wages, but not every hour of our employees’ time is billable. That doesn’t mean that that time is not productive, so I’m now in a situation where I have to look at what is the cost of that hour of WIP that is sitting there? Is it a person’s wages? Is it all of their wages, part of their wages or the proportion of hours that were billable compared to their overall hours of the year? What do I do about overhead? Is an administrative assistant part of that WIP and, if so, what portion? There is no way to accurately calculate costs. It’s all going to be a function of assumptions, trying to make reasonable policies or take reasonable approaches. It’s not objective, and it’s not verifiable. That continues on the problems of subjectivity.
Senator Andreychuk: Thank you. That helps.
Senator Marwah: I’ll address this to all of you, actually. To answer Senator Andreychuk’s question, the department officials told us yesterday that the reason why some professions were given an exemption from billed-based accounting going back to 1981 was because, at that time, lawyers, doctors and these professions did not have the ability to incorporate and could not access the small business deduction. Today, that is no longer the case. Hence, all these professions no longer have that disadvantage and hence should go on the same basis of every other profession. Other professions, such as engineers and architects, et cetera, have been doing this for the last 25 years. Tell me why you should continue to get the benefit and why you shouldn’t be put on the same basis as everyone else. Why should you continue to get an advantage that nobody else gets?
Mr. Mintz: I’d be happy to answer that at the beginning, and maybe my colleagues would like to add some more.
There are always trade-offs in tax policy. Yes, certainly if people are able to organize their affairs — whether it’s incorporated or unincorporated doesn’t matter. If we’re going to be on an accrual basis for taxation, then everything should be on an accrual basis. It doesn’t matter if it’s in a corporation or not. In my view, that’s irrelevant.
It is an issue that when you sometimes get to certain types of businesses or smaller businesses particularly, then you might take a different view because of the complexity, especially when you’re dealing with non-market values for transactions, where you don’t have an observed value and you may have to deal with the complexity associated with that.
Interestingly enough, with the house and Senate bills under the U.S. tax reform, they are actually going to move to cash accounting for any small businesses with less than $20 million or so. I don’t remember the details. The main point is that that’s because they decided they wanted to have simplification for those businesses because of the complexity involved. In Canada, we’ve had cash accounting for farmers and fishers now for a long time, and that hasn’t changed. So it’s a matter of choice depending on how much complexity you want to push onto businesses because accrual accounting methods can be complex to follow.
Senator Marwah: Another response I heard is, as you know, the WIP is the law of cost or market or work in progress. It’s a law of cost. I would argue that many of your professions, accountants and lawyers, have a better handle of costs than any other profession I’m aware of. You manage your costs down to 10 or 15 minutes versus an engineer or an architect. Engineers and architects have these similar problems, yet they have been doing it happily for 25 years, and you tell me you can’t measure your costs? I find that very hard to believe.
Mr. Weissman: Maybe I can address that question. You’re right that we can calculate costs. That’s part of what we do as accountants. But I can assure you, like I said in my statement, if you put five accountants in a room and ask what the cost of a WIP is, you come out with 11 answers. That’s the problem. We’re trying to cost an intangible. The conceptual or the academic idea of taxing everyone the same way so why shouldn’t the WIP rules be changed so they’re in line with the way every other business is taxed is a wonderful idea, but it’s not practical because what we are valuing is something that is not really something that can be costed. It can be costed, but not with any certainty.
In the matter of collecting revenue and paying income tax, certainty is very important because if you’re off, someone is going to be out and it’s going to be made up at another date. You take away predictability from the revenue stream where you’re the one paying the tax from the actual cost. Tax is really a cost of doing business.
I think that in an ideal world, everyone would be taxed the same way. I know that we would come up with very different costs if you asked five different accountants to figure out what is the cost of the work they’ve done to date, and I don’t see a benefit at all to the tax revenues to put people through that exercise. I only see detriment to taxpayers. I see extra costs in the administrative system.
Mr. Neilson: Mr. Weissman referred earlier to the differences in costs. As a simple example of that, we might have an employee in our practice who is expected to work 2,000 hours a year. We expect 1,200 of those hours to be billable to clients, and really, they’re going to put in some overtime, so they’re going to work 2,200 hours in a year. So when they put one hour onto a file, is the cost 1/2,200? Is it divided by the number of hours they’re going to work in total? Is it 1/2,000, a base work period? Or is it 1/1,200 because all of those extra hours contributed to their ability to do billable work? Those are significant differences in the WIP balance. Frankly, I’m not as concerned on which choice we were to make as that we have certainty and that we’re not going to be spending a lot of legal dollars and a lot of dispute resolution to argue over what that is.
Then we add the further problem that Mr. Weissman or I become partners of our firms, proprietors of our firms. What’s the cost of our time? Is it nothing because our time goes to profit by general accounting principles? What if we’re incorporated? Do we now have to deal with the salary costs that we unilaterally decide to pay ourselves from our professional corporations and now allocate that? We can manipulate how much our work in progress is going to be because we can choose our salaries.
I don’t believe that the underlying objection is quite so much we don’t think we should be taxed on the same accrual basis as other businesses as it is how do we do that effectively, efficiently and without having to tie up resources in bookkeeping and additional administration. I can tell you that I’ve been with a number of accounting firms over the years, and they can’t agree whether they made a profit or suffered a loss on certain files because they do argue over what the cost was.
If we had certainty, then we’re not tying up tax court resources, CRA audit resources, CRA litigation management resources and Department of Justice resources to fight over what is ultimately a question of are we going to tax this now or are we going to tax it later? I think that’s the bigger concern with the WIP proposals.
Senator Marwah: How have other professions been doing it? Architects are a people business very similar to a lawyer or a doctor. They have been happily dealing with the same problems you have had. I haven’t heard any cases about excessive litigation and compliance costs coming from them. This has been operating for 25 years. Lots of practical and empirical experience is out there in the industry. How have these other professions survived for 25 years? I haven’t heard any complaints about excessive compliance costs. How have they done it? Surely there is a lot of evidence that other professions have done it. Why would there be an exemption for these professions? I don’t understand how the architects have done it for the last 25 years.
Mr. Neilson: I think they’re a lot like construction. I think their files, their projects, are a lot easier to determine at the outset how much time they’re going to require. Whereas for myself, for a lawyer, what do we have to deal with? We open a file and don’t know at the outset whether we're going to get a quick settlement with the other side. Are we going to have really good bookkeeping, really good financial statements or a tax file with no arguments with the Canada Revenue Agency? Or are we going to have a lot more issues that develop along the way?
Determining the actual billing at the outset, I think engineers and architects are very often able to determine this is going to be my fee, absolute dollars up front, because I can tell when I’m 20 per cent done, 40 per cent done or 60 per cent done. A lawyer doesn’t know whether this project will take him two hours to discuss with the other side and settle or 200 hours in preparation for court costs, and that certainly makes it more challenging for us.
I also believe that if a lot of those particularly smaller architecture, engineering, contractors, painters, which was one of the earlier examples given to me, I very much doubt that they are in fact accrual WIP, and I don’t think the CRA is paying a lot of attention to any of those organizations where it’s not simple to determine WIP. If we’re relying on a system that says CRA is going to look the other way, I think we have a real problem.
Mr. Weissman: In the submission made by the Joint Committee on Taxation of the Canadian Bar Association and the Chartered Professional Accountants of Canada, there was a request or a suggestion to implement a de minimis test with these provisions if the government was going to go ahead with the implementation of them. The reason is that larger firms do more detailed accounting. I can tell you I don’t know the cost of an hour of work in my office. Larger firms have metrics and they work with them. The suggestion was made to have a de minimis test. I don’t know what the amount would be, but under a certain amount, these new rules would not apply. That suggestion was not taken up, so what we’re dealing with is that this rule is being applied to everyone in these professions no matter what size, and the subjectivity and cost will bear differently on different sized firms.
Senator Marwah: Thank you.
The Deputy Chair (Senator Pratte): Thank you very much. No other questions, senators?
I want to thank the witnesses for appearing today. That was very useful for us.
Senator Percy Mockler (Chair) in the chair.
The Chair: Honourable senators, we now have, from the Canadian Labour Congress, Hassan Yussuff, President. He will be coming in shortly. We also have Vicky Smallman, National Director, Women’s and Human Rights. From the Canadian Alliance of Student Associations, we have Michael McDonald, Executive Director. Thank you to Mr. McDonald and the Canadian Labour Congress for accepting our invitation to speak on Bill C-63.
I have been informed that Mr. McDonald will give his presentation, to be followed by the CLC.
Michael McDonald, Executive Director, Canadian Alliance of Student Associations: Good afternoon, Mr. Chair, esteemed senators, fellow witnesses and members of the gallery.
The Canada Alliance of Student Associations is a non-partisan organization representing 22 student governments from Canadian undergraduate, graduate and polytechnic associations from across the country. We advocate to the federal government in a non-partisan way for an accessible, affordable, innovative and high-quality post-secondary education system.
I want to thank you for the invitation to speak on Bill C-63 today, and broadly speaking, CASA was very pleased with a lot of what was incorporated into the bill. We were especially encouraged to see new supports for First Nations and Inuit learners, expanded access to grants for students with dependents and part-time students and new rules around unpaid internships.
For the remainder of my time I will focus on the proposal to limit unpaid internships, which is part of this bill. This move fits with the broader efforts to make Canadian workplaces more modern, inclusive and effective.
We applaud, for example, the framework announced just last month to fight harassment and sexual violence in public service and federally regulated fields. Tens of thousands of students work in federal government jobs and federally regulated sectors each year. Alongside their colleagues, they deserve the same respect and safe workplaces that allow them to thrive.
For the same reason, we support Bill C-63’s proposed changes to ban uncompensated internships. CASA firmly believes that all students should have the opportunity to obtain quality work experiences and research links participation in co-op programs with higher pay and better jobs after graduation. Surveyed students who did co-ops as part of their studies give their overall post-secondary education experience higher grades. Employers also speak highly of those graduates who have been able to participate in co-op opportunities.
While we know that quality work experience pays off for students and employers, we know that uncompensated work does not. An American study found that far more graduates who did paid internships landed a job at graduation than those who did unpaid internships. Indeed, an unpaid experience did virtually nothing to improve the job prospects of that student. A recent study by the Canadian internships association found the exact same results. The likely explanation is simple. When the employer is invested in the experience, they give the student more attention, more responsibilities and more opportunities.
Ultimately we would like all internships and co-ops to be paid for. However, we do feel that compensation through the form of academic credit is something that is better than nothing and is something that we can accept being a component of this bill.
Bill C-63 proposes to end unpaid internships for the federally regulated sectors except for those that are tied to an educational program. We support this move as an important measure to promote high-quality work experiences and to protect young workers.
We recognize that like paid internships, quality is generally also higher for work experiences that are built into formal post-secondary education programs. We also support Budget 2017’s promise to ensure that all interns, including those working for credit in formal academic programs, receive labour standard protections.
While important steps, we remain concerned that unpaid internships still are exceedingly prevalent in fields outside of federally regulated sectors, and we do feel it is particularly troubling that these are often very gendered work environments with women more often than not being expected to take those unpaid work experiences. Another important consideration is for students from lower income backgrounds who have less flexibility to accept these kinds of opportunities and are therefore excluded from certain pathways that demand unpaid internships.
While we are pleased with the steps taken in Budget 2017 to protect interns, we will continue to be advocating for federal investments in more paid work opportunities. This is why we’re big supporters of the 10,000 new paid work placements from Budget 2016 and the programs focused on paid opportunities for under-represented groups. Including women in STEM, indigenous students and people with disabilities and newcomers are especially welcome. We think this is a strong model for how to move forward with the student-to-workforce transition, which we think is an incredibly key area of focus for the government.
We are also advocating currently that the Canada summer jobs program be expanded to provide year-round in-field work opportunities during studies in a part-time opportunity during the study sessions.
I would also be remiss not to mention that we were pleased to see the expanded funding for Mitacs, and we do think this is another opportunity that gives current graduate and Ph.D. students work opportunities in private sector fields. We do feel this would be particularly successful expanded to opportunities for college students.
We will continue to support, as always, high-quality compensated student work experiences, and therefore we are in support of the changes seen in Bill C-63.
Thank you all. I’m very happy to take your questions.
The Chair: Thank you, Mr. McDonald.
Ms. Smallman, how do you want us to proceed?
Vicky Smallman, National Director, Women’s and Human Rights, Canadian Labour Congress: I could proceed in Mr. Yussuff’s absence. He should be here in a moment, but I’m not sure where he is in terms of the security situation. I’m happy to make the remarks, and he will be here for questions, for sure. I apologize. He was inadvertently delayed.
The Chair: Please make your presentation and we’ll move forward with questions.
Ms. Smallman: Good afternoon, Mr. Chair and committee members. I’m very pleased to be here on behalf of the Canadian Labour Congress. As you know, we’re the national voice for Canadian workers representing our affiliated unions, federations of labour, labour councils, workers in every sector of the economy from coast to coast to coast.
We’re pleased to be here to appear on this bill. We’re really going to focus our comments today on the CLC’s position on two key areas. One is family violence leave, and the second are changes to Part 3 of the Canada Labour Code.
For years, the CLC and the labour movement have insisted that domestic violence must be recognized as a workplace issue. The CLC has been a strong advocate for workplace protections and support for victims of domestic violence.
Bill C-63 creates a new unpaid leave to allow people experiencing domestic violence time off to deal with the effects of the violence and to take steps to address it. Unfortunately, it falls short of providing the support and job protection that people experiencing domestic violence need.
Designated paid leave is a vital component of helping survivors keep their jobs and their economic security. Employment is a key pathway to leaving a violent relationship. Dedicated paid leave gives a worker the job-protected time to do the things they need to do, things to keep themselves and their children and family members safe. Whether that is obtaining counselling, getting a new bank account, meeting with lawyers or police, these are things you need time to do during the standard work day. It also gives them the financial security they need to take steps to leave a violent situation and find safety and security. This can be a very expensive undertaking.
Paid leave is also important because of the dynamics of power and control in abusive relationships. Research shows that in over 90 per cent of domestic violence cases, the abuser’s financial control over the survivor is an issue. If accessing unpaid leave results in a lower paycheque than the abuser is expecting, there may be serious consequences for the victim. The unintended result of not providing a paid leave is that it might increase the risk for workers and may create more barriers for victims.
We also want to flag a concern about the exception clause. We understand that the goal is to ensure that the leave is reserved for victims of domestic violence and not abusers. However, the exception clause may pose a barrier for victims who end up being accused and charged themselves. This can happen in situations where they retaliate and stand up to their abuser or in a situation where police lay dual charges, and this happens quite a bit. In our opinion, the language of being a victim should suffice to limit the perpetrator’s right to the leave.
No one should have to choose between abuse and a paycheque. We urge the committee to ensure that the 10 days of family violence leave are paid days. We urge senators to give careful attention to the potential barriers created by the details of this provision.
Now, regarding changes to Part 3 of the Canada Labour Code, Bill C-63 contains several other important changes to federal labour standards. It creates a maximum of three days of family responsibility leave.
Over a decade ago, the Arthurs report recommended 10 unpaid days of family responsibility leave per year. At the time, the CLC argued for 10 paid days. Most workers would see a maximum of three days to deal with family responsibilities as inadequate and, in any case, the regulations should define family as broadly as possible and no less broadly as the definition of family for the purposes of compassionate care benefits.
Bill C-63 also reverses the previous government’s efforts to enshrine unpaid internships outside of approved educational programs, and we welcome these changes.
The bill also provides a limited right to refuse overtime in order to fulfil a family responsibility. Both of these changes to overtime provisions are consistent with what the CLC and affiliated unions supported in 2009 in response to the Arthurs recommendations. We do recommend removing the limitation on the right to refuse overtime when it threatens to interfere with the ordinary working of the employer’s business.
Finally, I want to say something about process. In the spring of this year, the labour program began consulting broadly on the recommendation of the Arthurs report and its proposals for strengthening compliance and enforcement of Part 3 rights. However, at the same time, the government made important and far-reaching changes without broad consultation, including creating a new complaint mechanism for employer reprisals and changing the enforcement provisions of Parts 2 and 3 of the code. Labour was also not notified or consulted about Bill C-63’s changes to overtime provisions. Our preference continues to be that we have an integrated and comprehensive discussion about strengthening federal labour standards and constructing an effective compliance and enforcement regime under the code.
Thank you, and I welcome any questions you may have.
Senator Marshall: Thank you very much. Mr. McDonald, I must say I personally am not a fan of unpaid internships, so I do support your comments. In your opening marks, you made a reference, I believe, to a study that was carried out, and I believe it was an American study. Has there been any Canadian study?
Mr. McDonald: Yes. That original study was from the National Association of Colleges and Employers in the United States. That methodology was followed up by the Canadian Intern Association, which found very similar results in the Canadian context. Now, the Canadian study was not as large and they were not able to grab as significant a sample size, but it did show similar results.
Senator Marshall: Would you have any idea as to what the proportion is for compensated and what’s uncompensated? Is it equal amounts?
Mr. McDonald: In the Canadian context, we don’t have those numbers right now. I can look into them after. We don’t have a strict breakdown as to the number versus the number that are also compensated positions.
Senator Marshall: Did you say that women are mostly represented in the uncompensated internship?
Mr. McDonald: The Canadian internship association found that approximately 77 per cent of unpaid internship positions were being fulfilled by women, with the other 23 per cent being fulfilled by men.
Senator Marshall: Is there a reason for that? I may be wrong, but I thought in some universities the area of social work is usually dominated by females, and in some cases there is a requirement for unpaid internships. Could you just speak to that? Is that sort of tipping the statistics?
Mr. McDonald: In the unpaid factor, yes. One of the major considerations is that fields that for a long time have been dominated by women, areas such as nutrition, social work and nursing, often expect unpaid participation in the workforce prior to being able to complete their programs, whereas many male-dominated fields such as engineering generally do not provide unpaid internships.
Senator Marshall: That is right. Is there a move afoot to change that?
Mr. McDonald: This is an area we think is incredibly important and deserves additional focus. We are strongly in favour of paid compensation for all work opportunities, especially through government opportunities. Work integrated learning programs, which were announced this August, are a good start to that program. However, this is still a pressing problem that needs to be fixed.
Senator Marshall: The objective is that all internships would be compensated.
Mr. McDonald: That would be our ideal.
Senator Marshall: That would be my ideal as well.
I have a question on the family violence leave. Could you give us your views of what the impediments are for an individual taking advantage of a family violence leave? There are issues such as privacy, and we know victims of family violence often feel some embarrassment or shame with regard to their personal situations. Could you just speak to the impediments?
Ms. Smallman: We have been engaged in this campaign for paid domestic violence leave for some time, and we modelled our approach on the work that unions have been doing in Australia. They’ve actually been negotiating paid domestic violence leave and other workplace supports for a number of years now.
We started our initiative by doing research. We have a survey that we did of Canadian workers, which will be the largest survey of any issue relating to violence against women since 1993, and we found a real prevalence. But the reason we’re focusing on paid domestic violence leave is people need this time off.
Where these paid days exist, they’re usually accompanied by workplace policies that balance privacy and safety and that sort of give workers an idea of how to proceed if they want to have access to these days. People only know if it’s a need-to-know basis. For example, if there is safety planning that the worker is engaged in as well as taking paid days, only the people who really need to know that she is experiencing this would know. The employers that are administering these clauses report they have had no major issues with confidentiality or privacy as a result. There was a study done of Australian employers who administered these clauses, and that was one of the questions that they asked, in addition to how often they were using it, what it was costing them and so on. It was whether there have been any problems with confidentiality, and it has been fine.
To accompany this work, we have also been training our shop stewards and health and safety reps on how to recognize and respond to domestic violence and to support workers dealing with their employers. In Ontario, where employers already are responsible for having workplace policies and keeping workers safe, they have clear policies in health and safety language around these issues.
Senator Marshall: In addition to the leave being available, there is almost a program there to help people to identify situations where there may be domestic violence?
Ms. Smallman: That is right, and our recommendation would be that worker representatives, supervisors and managers receive training so they can better respond to the issue of domestic violence at work, and training is available in a number of ways already in Ontario but elsewhere as well.
Senator Marshall: In providing this family violence leave, what’s the end objective? Is it to stabilize the family, or is it for the abused person to leave the situation, or do you get into that?
Ms. Smallman: Ideally, it’s really up to the individual person who is experiencing domestic violence to decide what’s best for them. As we know, it can take some victims over seven times to leave a violent relationship, and they know that leaving is actually the riskiest time. They have to drive it, so accessing this leave should never be contingent on things like leaving or getting a restraining order, other things that may put you at further risk.
The objective is to allow a person who is experiencing domestic violence to have some time during the work day to do the things they need to do. It’s not necessarily long periods of time off. It’s a half day here to go meet with a lawyer, another half day or day to deal with banking or find a new place to live or get new child care, stuff they need to do but can’t do when they may be monitored by their abuser. It provides that extra cushion of safety without their feeling like they have to sneak away from work. We already know that absenteeism is a real problem for victims of domestic violence, and it puts their jobs at risk. These are some of the other things we learned when we did our research. We want to make sure we’re providing them with a tool to do the things they need to do, whatever they decide to do.
The Chair: Honourable senators, we have a vote, so I will entertain only one more question before we have to adjourn. Your presentations are on record so we know exactly what you have presented to us. We thank you very much, but that’s democracy. We have to go vote. If we give you the chance, do you have any closing remarks?
Ms. Smallman: I might have one if you give me a moment.
The Chair: Mr. McDonald, do you have closing remarks?
Mr. McDonald: Very quickly, yes.
When we’re establishing the value of work to the new entrants, it’s particularly critical for them to understand that that is a monetary compensation. Setting forward for new entrants that their labour does not necessarily have a value is particularly damaging. From a long-term labour negotiation, it causes them more difficulty that any kind of work they were doing in the environment would be worth nothing.
We also think it has a negative impact on employers because this obviously in many instances is a mechanism by which to facilitate the on-boarding process. In many firms, it has become difficult to hire new people, and if they are pursuing this avenue, unfortunately they are using this to not innovate in their onboarding practice, and that’s problematic.
Ms. Smallman: The only thing I would add is that this would not be the first jurisdiction in Canada to have paid domestic violence leave. In fact, Manitoba was the first jurisdiction in 2016, and they have five paid days there, and Ontario just a couple of weeks ago provided for five paid days and additional unpaid after that, so we really think the federal government should be catching up to other jurisdictions and leading the way.
The Chair: Honourable senators, our next meeting on the subject matter is tomorrow morning at 9 in 160-S, Centre Block.
Thank you, witnesses.
(The committee adjourned.)