Proceedings of the Standing Senate Committee on
National Finance
Issue No. 11 - Evidence - June 7, 2016 (9:30a.m. Meeting)
OTTAWA, Tuesday, June 7, 2016
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to examine the subject matter of all of Bill C-15, An Act to implement certain provisions of the budget tabled in Parliament on March 22, 2016, and other measures.
Senator Larry W. Smith (Chair) in the chair.
[English]
The Chair: Welcome to the Standing Senate Committee on National Finance. Colleagues and members of the viewing public, the mandate of this committee is to examine matters relating to federal estimates generally as well as government finance.
My name is Larry Smith, a senator from Quebec, and I chair the committee. Let me introduce the other members of our panel.
To my left, from Alberta, Senator Mitchell; to my extreme left from Galiano Island, deputy chair of the committee and former Mayor of Vancouver, Larry Campbell.
To my right, from the Yukon, is Senator Lang.
From Toronto, Ontario, Senator Eaton. I met people at the D-Day conference in Hudson, Quebec, who spoke very highly of you.
Senator Eaton: My relatives?
The Chair: Well, some of them were close to being in another world.
To my extreme right is Senator Beth Marshall from Newfoundland.
Today we resume our consideration of the subject matter of Bill C-15, An Act to implement certain provisions of the budget tabled in Parliament on March 22, 2016 and other measures. We sometimes call this bill the "BIA,'' for budget implementation bill.
[Translation]
This morning, we are continuing our study on the subject matter of Bill C-15. We are pleased to welcome Alexandre Laurin, the director of research for the C.D. Howe Institute, and Douglas Cumming, a professor at the Schulich School of Business at York University.
[English]
We'll spend the first 45 minutes meeting with our two panelists. The Premier of Yukon, the Honourable Darrell Pasloski, will join us by video conference for a short appearance between 10:20 and 10:40.
From the Canadian Federation of Independent Business we will hear from Monique Moreau, Director, National Affairs.
Mr. Laurin, we will start with your opening remarks.
Alexandre Laurin, Director of Research, C.D. Howe Institute: Thank you, Mr. Chair, and members of the committee. It is a pleasure to be here this morning. The clerk highlighted five or six budget measures that you would like me to address today. I don't think I have time in five minutes to talk on each of these measures, but I'll start one by one, and stop me when my five minutes is up and we can have a discussion afterwards.
Let's start with the age of eligibility going from 67 to 65. In my view, this is a broad response to a targeted problem. What is the targeted problem? The decision was made to cancel the increase in the retirement age to protect a minority of low-income seniors from poverty while they have had to wait an additional two years before being eligible for the Old Age Security.
The decision, however, fails to recognize a broader reality of longer life expectancy and the current trend toward later retirement. By 2030, about 40 per cent of 65-year-old seniors will likely be working and collecting the OAS pension.
The normal age of retirement plays an important symbolic role. It sends a signal to workers planning their retirement. What is considered normal is naturally subjective, I recognize that, but the eligibility age for OAS contributes to entrench our cultural belief over normal retirement length, influencing our current retirement planning.
The beneficial economic and fiscal impacts of working longer are clear. By reducing the stress of demography on the labour market and on the pension system, a higher retirement age could play a major role in our future ability to bear the fiscal and social cost of an aging population.
Let me move to what can be good news, increasing the maximum GIS top-up for single pensioners by $947 annually. This will be good financial help to single seniors who, unlike couples, do not benefit from scaled economies of living together. The incidence of poverty among single seniors is higher than among couples.
A single senior with no other source of income would currently receive about $16,000 in OAS and GIS combined. Add in provincial GIS top-ups, because the provincial governments also top up these amounts, and other fiscal benefits, and a senior couple in Nova Scotia with no other sources of income would receive about $17,000, up to about $20,000 in Saskatchewan and Alberta.
With the proposed GIS top-up increase, a single senior would receive an additional $947. This amounts to about a 5 per cent increase in his or her disposable income. It's a sizeable increase.
The flip side of the coin, however, is that the top-up amount will be clawed back at a rate of 25 cents per dollar of other taxable income, which includes CPP, pensions, work income, whatever. This clawback is on top of the 50 cents withdrawn on regular GIS benefits; so the total clawback rate will be 75 per cent, going from taxable income of $2,000 up to $8,500.
This means that a single senior receiving the average amount of CPP benefits, about $6,500 currently, would lose two thirds of this income in withdrawn benefits in provinces east of Ontario, and more than 80 per cent in Ontario, Alberta and Saskatchewan because these provinces have seniors programs.
To make the story short, the system will be excellent at combatting senior poverty, which is the objective, but at the expense of greater disincentives to save on a tax-deferred basis for average income earners, including savings in the proposed ORPP in Ontario and a potential CPP expansion.
Next is maintaining the small business tax rate at 10.5 per cent. The economic motivation for a lower tax rate on small business is to help young and small businesses to invest and grow. However, there is evidence that the small business rate may have some unintended consequences, rendering it uneconomical. I would recommend a better regime.
The larger the gap between the general corporate tax rate and the small business rate, the more incentivized are firms to stay small, undermining the original intent of the tax preference.
A large gap may also encourage self-employed individuals to incorporate, to gain access to the lower tax rate purely for tax-planning reasons, a concern that the recent rise in the personal income tax rate to 33 per cent just reinforced.
This makes the small business tax preference more costly, which has to be financed through a higher tax rate on other corporations which may be more productive, so it has a negative impact on the economy.
It would be better to have a regime that would distinguish between young, growth-oriented enterprises and the small businesses whose owners have limited or no growth ambitions, the lifestyle businesses.
I will now talk about replacing the Canada Child Tax Benefit, the Universal Child Care Benefit and the Family Tax Cut with a new Canada Child Benefit.
This new program would be very good news for low- and modest-income families with children because it would increase the value of their benefits substantially. It's a substantial increase.
Another advantage is that it would reduce the benefit clawback rates at the lower end of family income, which are currently very high. For low-income families, a typical family of four — two parents and two children — the effective tax rate, which is an implicit tax rate — I can go into detail later on if you want more details on this — the effective tax rate for the secondary earner of that family can currently be easily up to 70 per cent in specific income ranges. It goes up to 80 per cent in Quebec, in some income ranges; and in some other provinces it goes up to 65 per cent. It can be very high at low income levels.
This new Canada Child Benefit will reduce these effective rates on families, making it more advantageous for the secondary earner of a family to integrate into the workforce and work. So there is a beneficial economic impact as well. There is a cost associated with that policy, but there is also a beneficial economic impact.
The Chair: Why don't we stop there and we'll ask more questions as we move forward.
Mr. Cumming, do you have a statement you would like to open with?
Douglas Cumming, Professor, Schulich School of Business, York University, as an individual: Thank you as well for the opportunity to be here today. I will start on different items. Alexandre and I didn't coordinate, but it's useful that he went first so that I can focus on some things that he hasn't had the opportunity to speak about yet.
I'm going to begin by saying that those who know me, know me as an empirical-based person, and I very much believe in empirical-based policy-making. I'm going to talk about a few of these programs in reference to data written by people that don't have a vested interest in the outcome of the policy change.
The first place to start is with the Labour-Sponsored Venture Capital Corporations Tax Credit. Everything that's been written about this program, not just by myself but by other academics, without exception, indicates that it's an extremely inefficient program that is very expensive. The direct tax cost in foregone revenue, depending on a particular year involved, is typically in the range of half a billion dollars, and in some years it has been more than that.
This tax program subsidizes managers who are running venture capital funds that have inefficient investment structures with inappropriate covenants set out by statute. It gives rise to funds that make a large number of investments without incentives to do proper due diligence, producing a massive adverse selection problem in respect of which investments get made.
These funds have amongst the largest MERs, management expense ratios, in the world, not just in Canada, charging over 5 per cent, where a normal mutual fund would be well under half of that for an actively managed fund. These funds generate rates of return, on average, since their inception, that work out to be roughly around zero. So there's no economic benefit, on average, and there's no outlier fund as well that makes these structures worthwhile.
The other problem here is that these investment structures crowd out otherwise private venture capital investment by bidding up prices, lowering rates of return, and nevertheless still attract massive amounts of capital each year through the tax subsidy. So investors simply allocate money to these funds without thinking of the economic rates of return, which exacerbates the economic inefficiencies. This is a very expensive program, which the data indicates has not merely not generated economic returns but has damaged the economic rate of return and efficiency of the Canadian venture capital industry. In fact, it makes our venture capital industry a laughingstock relative to what exists in other countries. Quite literally, when I say "laughing,'' in talking about this program with policy-makers in other countries, it tends to generate laughter.
The second one I want to talk about is the Mineral Exploration Tax Credit. There's a great paper by Vijay Jog at Carleton University, published by the University of Calgary's policy institute, which talks about very similar economic inefficiencies with these flow-through share tax credits. On average, these programs generate rates of return that cost investors about 50 per cent, so it loses about half its money.
The reason for this is extremely similar to the labour-sponsored venture capital programs in that there's an adverse selection problem with these generous tax subsidies that gives rise to inefficient investments that get made in a completely improper allocation of capital. It is likewise a very expensive scheme, also costing taxpayers roughly half a billion dollars per year.
So these are very expensive programs, generating, as the data would indicate, very little and quite arguably negative economic returns to Canadians. We're not just foregoing tax money; we're actually causing harm as a result of these tax policies.
Because it's related in principle, I'm going to echo some things that Alexandre said with respect to the small business tax rate.
A recent paper from the International Monetary Fund, put out this year, looks at these small business tax rates. It's extremely critical of countries, which includes Canada but not just Canada. Canada is one of a few outliers that have a differential tax rate based on size. The tax system is just like any other economic system where you're allocating incentives to different people, and it's bizarre to allocate an incentive to someone to stay small. In fact, the data indicate that there is a clustering of firms lying just below the threshold.
Why would you encourage someone to stay small? It's baffling to people that, in 2016, tax policy hasn't yet figured that out. To have a proposal to reduce this small business tax rate from 11 per cent down to 10.5 — and there's talk of reducing it to 9 per cent if they can afford this — is a shocker.
Normally, we would want to encourage the things that are driving economic wealth and growth, like entrepreneurship, and encourage people to grow and not stay small. There are much better ways of doing that than having a tax policy that's based on size. It could be based on, for example, age or investment in R&D through some of the other things that are done in Canada and other places around the world.
We mentioned the labour fund program and the flow-through share program costing investors in direct foregone tax revenues about half a billion a year. Add that up to about a billion a year, not counting the inefficiencies of the capital allocation, which probably doubles the amount of the economic harm caused there.
If you go to the small business tax cost, it's estimated to cost taxpayers about $3.5 billion in foregone revenues per year. So they are very expensive programs that we have to take a sober look at and ask ourselves, "What are we doing?'' It just makes no sense whatever. It's not rocket science to figure this out; it's very obvious that these things shouldn't be done.
I could keep going on, but I see my time is up.
The Chair: I would like to welcome Senator Andreychuk, from Saskatchewan, to our meeting today. Thank you very much for participating. Also with us, Senator Percy Mockler from New Brunswick, from our steering committee. We have everybody represented. We had people flinching as you people went through some of the areas that were most affected with some of the negative elements of what comes out in the budget.
You both raised two parallel issues in terms of the business tax for small businesses, and the mineral tax. Could you suggest any improvements to be made to those two particular subjects? We criticized them for their strengths and weaknesses. The cost you mentioned of half a billion for each of them a year, so there's a billion dollars a year. You mentioned $3 billion. Is there anything that can be done to improve these two instruments?
Mr. Cumming: A few years ago, the federal labour sponsored tax credit was announced as being phased out. The Province of Ontario was the first to do this phase-out of their provincial program, and they effectively did that and got rid of it in 2011. The announcement of the phase-out started in 2005.
They replaced that program with a few other programs, one of which is an Ontario venture capital fund where the government effectively acted as a limited partner in a limited partnership structure where they invest in other privately managed funds that operate in the same way private venture capital does.
Those types of program structures have been very successful in other countries around the world. Some examples include Israel and Australia, and they work in a much better way, in the way that venture capital markets should work.
I would applaud Ontario for that change of taking a stance and getting rid of that program. I was very excited when I saw that the federal government was going to do the same phase-out as Ontario had done, and I was completely shocked when they announced they are bringing back this tax credit. I was just baffled.
Again, I'm speaking from the data. I'm not offering any opinions. This is based on empirical evidence from people who have absolutely no financial stake in the outcome of where this ends up, other than wanting to see good public policy. This is not just one or two people writing about this; many people are writing about this. These are well- accepted principles. This program should not be brought back in. It has caused immeasurable economic harm to Canadians since it was first introduced in the early eighties in Quebec, late eighties and early nineties in the other provinces. Alberta and Newfoundland are the only two provinces who haven't brought this in.
The Chair: Do you have anything you want to add to what Mr. Cumming has stated?
Mr. Laurin: I also favour eliminating the LSVCC tax credit. Right now they are mostly found in Quebec, Fonds de solidarité FTQ and Fondaction CSN, two very big labour sponsor funds. However, this is for venture capital, and venture capital should be to promote innovation, promote technological change, and high growth small businesses.
But that's not the mandate of Fonds de solidarité. The mandate is to create and keep jobs. That's a worthy mandate from a political perspective, but that's not what venture capital should be primarily used for.
Secondly, if you look at these two funds, about half of the investment is in publicly tradable investments, not the equity of private firms. Only 30 per cent is in private firms. They do that because there are redemptions. There are people reaching the threshold where they can take their money out. It's a retail product, so you have to keep some liquidity in it to ensure that you can meet those obligations. It's an operational constraint, but that money is not going to venture capital.
Thirdly, we've published, at the C.D. Howe Institute, Mr. Cumming's study on labour-sponsored venture capital funds. We published another study on venture capital, asking which fund is the best at promoting innovation with respect to patents. When innovation is measured in terms of patent creation, LSVCCs come last. They have no effect on patent creation, whereas venture capital in general has a lot of effect especially on private funds and institutional funds. Venture capital is very effective, but not the LSVCCs. This is probably for the reasons I have stated. For that reason, we supported it when Ontario eliminated the credit. We also supported it when the federal government gradually eliminated the credit. I understand why we're bringing it back now, but it's not really for venture capital and promoting the innovation and growth of high-risk technological firms. It's a job program.
Senator Eaton: You're distressed by some things. I remember last year sitting in the Senate Finance Committee discussing the move for pensions from age 65 to 67. The Dominion Institute told us that when pensions first came into being, the average Canadian lived to 66, so he stopped work, collected his pension and died, very conveniently.
Now the average age is well into their seventies, close to eighties. They were saying that it shouldn't be moved to 67 but should probably go to 74.
When you look at other OAC countries such as Germany, Australia, the United States and France all moving to 67, isn't that a terrible mistake that we're moving back to 65?
Mr. Laurin: I think it's a mistake. It's a mistake because when you think about the OAS, it's what people consider normal retirement age. If the OAS is at 65, then we will all plan our retirement to retire at 65 because it's a signal.
The office of the chief actuary said in its report that $8 billion a year would be saved by moving the retirement age to 67. So there are cost savings, obviously. But there is something even more important here. Retirement is expensive. If everyone plans to retire at 65 instead of 67, retirement becomes much more expensive to fund for everyone.
That's not the reality. What we're seeing now is that it's already starting. The average retirement age of Canadians has moved up tremendously. It's now about four years older than it was in the 1990s, and it's going to keep moving up, so we need to adjust the pension system to that reality.
If there is a problem with senior poverty, it could be addressed in a more targeted way.
Senator Eaton: Can you give us an example of a targeted way?
Mr. Laurin: It may be easier access to the welfare system or something different on the welfare system side. I don't know. Policymakers are really brilliant when it comes to finding solutions to targeted problems.
Senator Eaton: I agree. I was going off on a tangent.
May I ask you a question on income splitting? You made the remark that if there are two family workers in a lower income bracket, the secondary worker gets taxed at a very high rate. Was it a mistake to kill the income-splitting tax or the possibility that people had?
Mr. Laurin: That's a politically charged question.
Senator Eaton: Just give me the facts.
Mr. Laurin: I'll give you the facts.
I published a study with Professor Kesselman in 2011 on income splitting. It was on the original proposal in the election platform of the Conservatives in 2011.
Senator Eaton: So you're telling us you have a conflict of interest?
Mr. Laurin: It was about pure income splitting, and we came out against it for a number of reasons. One reason was that it was a disincentive for the secondary earner to join the workforce. Another reason was the concentration of benefits to very wealthy families because of the structure of the credit.
To make a long story short, the new proposal was very different. The Family Tax Cut is not pure income splitting. That's because it is now a tax credit and not a deduction and it's limited to $2,000. This addressed most of the criticisms we had in our original proposal. The disincentive to work for the secondary earner pretty much disappeared because the secondary earner could earn up to $25,000 before being affected. The high concentration at the highest level of income was much less of a problem because it was now limited to $2,000.
It's much harder to criticize the new Family Tax Cut on the same basis that we criticized the original proposal, but there are still problems associated with it. It's a complex tax expenditure. We may not agree with the purpose, which is to equalize the tax burden among different types of families. Some people believe there's a horizontal inequality. Others believe there isn't. This is more subjective.
So in a way, what's left is a very subjective purpose, the horizontal equity of the ability to pay, and people disagree. The fact that it's been eliminated is mostly because it was very costly and the government needed money to implement the Canada Child Benefit.
Senator Lang: I would just like to follow up on Senator Eaton's question, going back to moving the retirement age from 65 to 67. I think I heard you correctly when you said that the demographics are changing dramatically and that the retirement age of Canadians has gone up by four years. Are you saying that most Canadians are retiring at 69 as opposed to 65? Is that what you said?
Mr. Laurin: No, because the average retirement age was closer to the 61 or 62 mark, and now it's closer to 65. But the projections have it going up.
Senator Lang: That's what I thought.
I would now ike to go to the area of equalization and transfer payments to the provinces and territories. We talk about the child credit and the various other tax incentives that have been put in place. Have you ever done a study in respect to how these affect the equalization payments for the territories and the provinces? My understanding is that when you make these adjustments, in some cases it affects the various formulas with the provinces. Sometimes they'll be affected due to an unintended consequence because the money is going somewhere else as opposed to the provinces. Perhaps you could comment on that.
Mr. Laurin: If I understand your question, you are asking about transfers to persons?
Senator Lang: What I'm asking is when you take the dollars and direct them to individuals, that has an indirect unintended consequence on the equalization formulas for the provinces and the territories and a shortfall that occurs because of that. Is that correct?
Mr. Laurin: No, I wasn't aware of that. The equalization formula is based on the differences in the tax base of each province. It's just equalizing to the average of the tax base. Those transfers are not taxable income anyway. I wasn't aware of that.
The Chair: It may be because of the fact that Senator Lang is related to the northern territories, which received a reduction. The reduction came through StatsCan and how they addressed the formula for the equalization payments. I think that's the issue. The government has made some adjustment, but the issue is specifically what caused the problem. What did StatsCan change in terms of the formula to change the amount of money that went to the territories?
Mr. Laurin: I'm not an expert on the territorial transfers. I couldn't really answer your question.
Senator Lang: Just to clarify, we're going to have the Premier of Yukon here on a video conference call later. I have been made aware that the Child Tax Benefit has affected, for whatever reason — I don't fully understand these formulas. I really don't know who does. At any rate, there's going to be a substantial financial shortfall of some kind in the transfers, and same with the northern resident deduction. There's an unintended consequence to the transfers to the territories as well.
Then the transfer payments were affected, and in a five-year period there's going to be a $100 million shortfall to the territories if it stays in effect. I was wondering how that affected the provinces, because there's only so much money in the coffers. When you take money from here, there's got to be an effect over there somewhere, and it may be referred to as unintended consequences. This might be an area that you will want to look at.
The Chair: Moving ahead, Senator Mitchell.
Senator Mitchell: I'd like to ask a variety of questions, actually. I'm interested in your comments on venture capital markets, and I get the issue of the labour funds. You both focused on R&D. It seems to me it should be the emphasis in promoting business. Why is that it? Not all businesses are in the business of developing technology, certainly not in my province of Alberta where we develop certain kinds of technology for sure, but not all small businesses do that.
Second, don't small businesses have problems that big businesses don't have? I get that you want to make them bigger, but they have capital and market access problems, and capacity problems to attract the kind of quality people they need to develop to a bigger scale, marketing problems, all kinds of things.
Mr. Cumming: Yes, I agree that those are issues faced by small businesses, but the fix for those is certainly not through these investment schemes that misallocate capital and don't help. When you look at any of the economic metrics in terms of what happens to a small business when it receives venture capital or what happens to one of these exploration schemes that's through a tax flow-through benefit, the results are drastically worse on average relative to not being in those schemes.
So if you take specifically the context of venture capital, the investors are supposed to be value-added active investors that are providing not merely their due diligence before investment but providing financial, strategic and human resource advice, putting in company stock option plans and doing things that are going to help them go from being small to large. Often that's in the case of technology industries, but venture capital and private equity funds sometimes invest in other industries as well.
If you have a labour sponsor setup, the typical fund manager has a huge portfolio per person, so they simply don't have the time to allocate the attention needed to grow the business that they invest in from small to large. So portfolio sizes, depending on the particular fund you look at, could be anywhere from double, triple, sometimes ten times the size of a regular venture capital fund, which means the allocation of intention is totally distorted, and that's a direct effect of the tax scheme. There's no proper time allocation.
The results are extremely inefficient and low. The results, not just in terms of patent creation, but other things that investors care about, like generating companies that are eventually going to be acquired or go public on a stock exchange, they are much less likely to happen through one of these tax schemes. It's unfortunate that we would spend money on that.
Alberta did a good thing by not bringing in this scheme in the first place, one of two provinces — Newfoundland is the other one — and it's unfortunate that bringing it back federally is being contemplated.
Senator Mitchell: Alberta and Newfoundland now have pretty serious economic trouble, extraneous to this.
What would you do? You're not saying that you would give tax credits to bigger businesses to encourage people to get big. Are you saying there should be no tax scheme or lower taxes generally? Should everyone have lower taxes? I get your argument that the labour-sponsored funds don't work.
Mr. Cumming: If you're going to set up other investment schemes, you could do it in the way that Ontario did, for example, through a limited partnership scheme, which has been shown to work in other countries.
If you want to do it through the tax system, having tax incentives to stay small isn't the right way to go. We know this from the IMF study done recently, amongst others, but you could set up other programs for being young, for instance, or starting up.
More generally, we know that start-up rates are much lower when tax rates generally are higher, but there are other ways to incentivize people to grow through the tax system and not encourage them to stay small through the tax system.
It's odd that the flow-through share issue and the LSVCC is on our list, because the one not on the list that hasn't been talked about, perhaps because it's such a politically charged one, is the higher marginal tax rates at the top level.
Without saying anything other than this, it is strictly from the studies done by academics that have no vested interest in this. For example, a recent paper published in the American Economic Review by some professors at Harvard estimate that when you increase the top marginal tax rates, the subsequent reduction in real GDP is commensurate. So a 1 per cent increase in tax rates at the top marginal level gives rise to conservatively a 1 per cent reduction in real GDP in future years. That multiplier, depending on what you look at, could even be higher at 2 to 3 per cent.
There is a Brookings Institution paper on this as well. Why is that? Well, these things directly affect savings, investment and the labour supply. If you couple that policy with these other directed policies through labour funds and flow-through shares, that's harm on top of harm; so you're paying for those expensive policies with another policy that isn't necessarily efficient.
Oddly enough, that also ties into other things to do with financing retirement and the old age benefit up to 65. These things are quite closely related to one another.
Senator Marshall: I wanted to talk about the small business tax rate. Over the past number of years, people say small businesses are the engine of the economy, and it seems like the big businesses got a bad name.
I was very interested in what you had to say about tax rates. It sounds like by not further decreasing the tax rate for small businesses that the government is doing something right. Is that the right conclusion?
Mr. Cumming: The trouble with these small business tax rates is if you look at the differential, simply a 4 per cent differential for $500,000 in income, that's $20,000. The benefit to any single firm isn't that large, and as Alexandre pointed out, it may be directed to people that don't necessarily need that type of benefit, such as a professional corporation that's intended to stay small.
It's an expensive program that's perhaps over-inclusive in its scope as to who you're trying to help and has a built-in disincentive to grow large, so you have an artificial incentive to stay below that barrier.
If you want to encourage things like R&D or people starting businesses, you can do that through other tax programs. Some of these are highlighted in this recent International Monetary Fund paper where they look at these programs around the world and which ones are good and bad. The one that comes out highlighting Canada in this study is that the small business tax credit makes absolutely no sense.
It's not that we don't want to help small businesses; we want to help them with a program that's going to be less expensive to taxpayers and will generate the economic result that we're trying to get at.
Senator Marshall: Is it true that small businesses are the engine of the economy? What's the data showing?
Mr. Cumming: Certainly every large business was at one time small. Google or Apple, all these famous companies, started out small. What we're hoping is these companies that were small are going to become large and successful. We don't want any impediments along the way that might discourage that, and one such impediment here is built into the tax system. Instead, we want to encourage these businesses to become large and successful.
There's a lot of innovation and "intrapreneurship'' amongst large organizations. Again, the basic idea is that the tax system should be encouraging growth and not encouraging folks to stay small.
Senator Andreychuk: I sit on another committee where we're looking at encouraging small- or medium-sized businesses to go more than national. They never bring up the tax rate either as a positive or negative. What they're saying is there are too many impediments to growth. It's different if you're manufacturing a widget and all of a sudden it takes off in the world. That's growth.
They particularly made a comment about lifestyle small businesses aren't really growing. Well, that's where women are, and they do grow. There are jewelry and yoga businesses, things that are unique and innovative, and they're telling us they can't grow because they've got too many impediments, such as regulations. They cannot take their small business and spend the time because they don't have the resources. They have to find other resources to grow.
Everyone talks innovation, and they're saying, "You're not helping us innovate.'' They're not saying much about the tax rate.
Mr. Laurin: The small business tax rate is an extremely broad measure. It's not targeted at all. It's targeted to all businesses that are small. We know that some businesses are small and they don't have growth ambitions; we know that. Some people even use a small business tax rate as a tax planning device; we also know that.
It's a very expensive tax credit. We also know that large businesses are more productive. To the extent that this large, expensive program leads to higher tax rates on other corporations that are more productive, our recent studies have shown that it's actually an economically inefficient program because there is more damage created by having a higher tax rate on other businesses to pay for that tax preference because the preference is overly broad. So it should be more targeted to those businesses that really want to grow.
The Chair: Thank you. I hate to cut this short, because there are lots of questions that we want to continue to ask you, but we thank you, gentlemen, for your participation today. It's very kind of you, and we look forward to seeing you again.
I'd like to welcome the Premier of the Yukon, the Honourable Darrell Pasloski.
Good morning, sir. How are you?
Hon. Darrell Pasloski, Premier of Yukon: Good morning, senator. It's a pleasure to be listening to you. I don't have you on the screen, but I've got the audio very clearly.
The Chair: We've had an interesting morning so far, and we have spent the last few weeks looking at various elements of the budget. It was brought to our attention, not only through the media but by Senator Dan Lang, some of the challenges that you've faced.
Would you like to start with an opening comment? How much time, sir, can you give us?
Mr. Pasloski: About 20 minutes.
The Chair: Is that okay? Perfect. If you would like to start, please go ahead.
Mr. Pasloski: Good morning, everyone. Thank you, Senator Smith, for the introduction and for the opportunity, senators, to speak with you today. It certainly is a great pleasure to be with you all this morning, and a delight to be in front of the Senate Finance Committee.
As you are all aware, Yukon and each of the Northern territories are in a unique position amongst our provincial neighbours, especially economically.
As premier and as finance minister, I am proud of how our government has invested in our citizens and our territory despite our challenges. Today Yukoners enjoy truly an incredible quality of life. Obviously, the hard work of Yukoners is the biggest factor when it comes to this, but our government also has a role to play.
In April, I had the pleasure of presenting our budget. I'd like to quickly note a few big-picture achievements, and then I'm happy to speak to any of them in detail during the Q&A that will follow.
Our government has been supporting Yukoners by investing in the sectors that need it the most, to the benefit of our economy as a whole. Our budget showed a commitment to the personal well-being of each and every Yukoner through investments in health care, education and infrastructure, while supporting local businesses. We've invested in the environment and clean energy. We've reduced Yukon's environmental footprint while also supporting job creation through investments such as major energy efficiency retrofits.
We're proud to not only present a surplus in 2016-17 but also maintain absolutely no net debt. Perhaps most importantly, we did this while we continue to hold taxes low for Yukoners.
The theme that runs through each of these accomplishments is fiscal accountability. With fiscal accountability we have fiscal stability, which allows us as a government to make better policy decisions and financial investments.
One of the reasons we can point to these accomplishments and enjoy economic stability year after year is because of the ongoing partnership we have with the federal government. The Northern residents deduction and Yukon's Territorial Formula Financing transfer, or the TFF, are some of the arrangements that have helped us better serve Yukoners.
We rely on the stability and cooperation between the federal and territorial governments to make informed and principled decisions. This stability allows our government to plan and to make informed budgeting decisions for the benefit of Yukoners, and this is where I'd like to focus the remainder of my time.
I'd like to start with the Northern residents deduction. The federal budget raised the Northern resident deduction amount quite significantly, from $8.25 to $11 per day. That number jumps even higher, from $16.50 to $22 a day, when no other member of the household claims the deduction.
We are, of course, very supportive of these changes, as it puts money back into the pockets of hard-working Yukoners, and it shows that the federal government recognizes the unique challenges that we face in the North. This adjustment is estimated to save Yukoners in the neighbourhood of $6.3 million annually. However, it's easy to overlook the fine print, which is that it becomes a change to what is referred to as the common tax base.
The federal changes to the common tax base, specifically to what may be considered taxable income, directly impact every province and territory.
In our case, of the $6.3 million to be saved by Yukoners through the Northern residents deduction, nearly $2 million will come out of the Yukon treasury. Because of the direct impact on Yukon's bottom line, federal consultation and dialogue with their territorial partner would not only have been welcomed but I believe would have been the appropriate thing to do. Dialogue is the cornerstone of cooperation, and cooperation is how we get results for citizens, and good results obviously contribute to the high quality of life for the people that we serve.
We find the same issue with the Territorial Formula Financing changes. Our government makes a principled effort to ensure there is stability and services provided to our citizens year after year. Federal transfers play a role in helping us provide that stability.
As you're aware, changes to the Territorial Formula Financing calculations occurred this year. It was disappointing that after our concerns about the scale of the changes had been raised with Minister Morneau, only partial concessions were made to soften the blow. While it was an abrupt break from the usual cooperation that we experience with the federal government, we understand that this is a reality, and we adapted to accommodate it.
Because our government has worked hard to be in a position of financial strength, we were able to absorb these unilateral changes and still manage our finances in a way to be in a surplus. But it's fair to say that this approach is certainly less than ideal. With that in mind, a big reason our government has been able to make stable economic decisions is because of the commitment to cooperation with our federal partner, and of course we certainly remain committed to that.
We believe that the dialogue we're having right now with the federal government regarding potential infrastructure investments is a chance to collaborate even better and to get important results for Yukoners.
I know we share a belief with the federal government that infrastructure can have a positive impact on the environment, the economy and the daily lives of real people. I'm confident that we will learn from these past experiences and work together to make solid infrastructure investments. It's to the benefit not only of our citizens but Canadians from coast to coast to coast.
With that, I'd like to turn it over to the honourable members, if you have any questions.
The Chair: Thank you, Mr. Premier.
Senator Lang: Thank you. I should welcome you here. I know you are travelling and you are making the time to be here.
A number of weeks ago witnesses appeared before this committee in respect to questions on the transfer of payments to the territories. I want to quote a Mr. McGirr who said, "Essentially the feedback we've been getting has been positive,'' even though there was a very significant cuts in the transfer payments. He continued:
. . . the Premier of Yukon seemed to be a little upset the day of the announcement, but since that time we have not heard any sort of grumblings or complaints. I'm taking that to mean that the territories have been positive to the change.
I'd like you to comment in respect to that particular statement, Mr. Premier. Also, how much of a shortfall will Yukon experience this year with the changes that have been made? Would you like to comment on the other two territories as well? If this change stays in effect, how much of a shortfall will we see in the next five years?
Mr. Pasloski: Thank you, senator. I'd have to say that the statement made by the official a few weeks ago was incorrect. Certainly as soon as we found out about this change to the TFF, we began dialogue with the federal government, specifically with the federal minister. It was through those conversations we saw the amount of the reduction go from $23 million annually down to a shortfall of $6.5 million.
Am I satisfied with that? No. I do believe in the principles of the TFF. Two of those principles are stability and predictability. I know that when we've had technical changes to the TFF in the past, historically what the federal government has done is ensure that they made us whole with those changes.
I believe that while there was a $6.5 million shortfall, because of the financial strength that we've had, we've been able to continue to run with the surplus. However, we feel that that statement was incorrect. In fact, I continue today to advocate for the reinstatement of the full amount as per agreement on the TFF.
What we're looking at potentially on a go-forward basis over the next five years is between a $30 million and $35 million impact to the territorial government, and that is a significant amount of money for a small territory.
I can't really comment on the other two territories. I know that they, too, didn't have full restoration of their TFF. I have heard some of the conversations occurring right now in the Northwest Territories. I believe that they currently have a wage freeze in place with their government and have looked at some reduction in programming as well in their situation, but I can't really comment any further on that.
Senator Lang: There are some other aspects that are affecting the transfer payments. Perhaps you could comment on the question of the new child care deductions and how that is going to affect the transfers to the Government of Yukon. Also please comment on the amount of money with the Northern resident tax deduction. Thirdly, would you be supportive of an observation coming out of this committee to request the government to go back to negotiations and to reinstate the shortfall that the Government of Yukon and other Northern territories are experiencing?
The Chair: Mr. Premier, you look like you played contact sports because you wanted to write those questions down. Were you hit in the head a lot when you were young? We caught you.
Mr. Pasloski: I would have loved the opportunity to play more football. Physically, I probably had the right body shape to play; I just never had the opportunity. It would have been a lot of fun to do that.
To your last question, yes, I would support a recommendation to have the federal government re-engage with the territories. We had a five-year arrangement. We are now into year three of the five-year arrangement. I had suggested previously to the minister that the time to look at changes would have been when those discussions on a new five-year arrangement were going to begin.
As I mentioned, historically when there have been changes as a result of technical modifications to the TFF, the federal government in the past has always made us whole.
When it comes to the Canada Child Benefit, there is an impact because if we are now providing more money that is not taxable to individuals, we'll lower their net income. In the case of people who are receiving social services or on the edge of it, it will have an impact in terms of what those costs could be potentially to the territorial government.
At this point we are working closely with federal officials and working towards fully understanding the entire impact of the Canada Child Benefit. The federal government has provided us with some time to engage with the officials on that. We look forward to having those discussions with them.
Senator Eaton: Thank you very much.
Do you feel the loss of the TFF has been made up by more money being given to Northern residents, and the fact you have gone from $11 to $16, $16 to $20? In other words, do you think putting more money directly into peoples' pockets has offset your loss to your territorial government?
Mr. Pasloski: I would disagree.
Senator Eaton: I'm just asking you the question. I don't agree or disagree.
Mr. Pasloski: I would point to examples such as health care. Providing money directly to the pockets of Yukoners, which we do support, doesn't do anything to help us advance our priorities or Yukoners' priorities around health care and around education as well.
As a government we have not raised taxes, but giving the money directly to Yukoners is an acknowledgment of the higher costs and challenges that exist in the North. However, we do have an agreement which has been in place for a number of years, the TFF, that has a formula which articulates predictability and stability. Being shorted on that results in increased challenges for the government to provide the programs and services Yukoners expect and should be able to receive.
Senator Eaton: I understand that. Our books say that it is the result of a revision to the public sector data within Statistics Canada microeconomic accounts. Would that have anything to do with your demographics? Is there a change in demographics? Has the population fallen somewhat in the North?
Mr. Pasloski: No, we've had population growth for a number of years. My understanding is this methodological change in data is a result of data that occurred nationally and is impacting the territories. I would reiterate that when these technical changes have occurred to TFF in the past, the government has always ensured that they made the territories whole and that there wasn't a financial penalty for that.
Senator Eaton: Thank you, Mr. Premier.
Senator Lang: They've taken $6 million out of the transfer payments and perhaps made adjustments for the Northern tax credit of $6 million. It wasn't the understanding of the negotiations with the Government of Yukon that they were going to take money out of the transfer payments to pay for another federal program. I don't think that is a fair assessment to make. Maybe the Premier wants to further comment on that.
Mr. Pasloski: I would agree with that, senator. As I mentioned in my opening comments, part of the challenge with this was the notification. When it came to changes in the TFF, we were notified in the early part of December that there was going to be a change coming forward effective April 1 of the 2016-17 fiscal year, that we would in fact receive $23 million less than what was anticipated through the TFF.
I think that speaks to the financial management of our government. I appreciate the work that was done by Minister Morneau when it came to reducing that decrease from a $23 million reduction in anticipated revenues down to only a $6.5 million reduction.
As I've also said, I am encouraged about some of the programs that are going forward that both the Yukon government and the federal government know are important to Canada but specifically to the North, and those are infrastructure investments. I'm very supportive of the infrastructure investments. They will create jobs in the short term, which I'm very supportive of, but we're also going to create the necessary infrastructure that we need over the long-term horizon to help us, in terms of my vision, see this territory become a net contributor to this country one day.
The Chair: Do you have time for one more question, sir?
Mr. Pasloski: One question.
The Chair: After the answer, could you give us a 30-second summary: What message do you want to leave us with today? That will be after Senator Marshall asks you a question.
Senator Marshall: What's the budget of the Yukon? Did you say that you're projecting a surplus this year?
Mr. Pasloski: Our total budget is between $1.3 billion and $1.4 billion for the current fiscal year. We have tabled a budget with an approximately $9.5 million surplus.
Each of our budgets during this current mandate has been tabled with a modest surplus, and we have ended each year with a surplus. We're also in the very fortunate position at this time to have net financial resources. In fact, we have a small amount of money in the bank.
Senator Marshall: So I would say that the cuts related to your fiscal position probably compare to other provinces and territories. That's what it sounds like to me.
Mr. Pasloski: I think $6.5 million to a province may not be as significant as it is to a territory with a much smaller budget. You're correct there. Because of our financial position, I think we were able to absorb that and still come forward with a modest surplus. However, it did require us to make some tough decisions to be able to get to a position of surplus for the current fiscal year.
Senator Marshall: But $6.5 million is still a lot of money, regardless of what your budget is.
Mr. Pasloski: Agreed.
Senator Marshall: Thank you.
The Chair: Could you give us a 30-second summary of the message you want to leave us with today?
Mr. Pasloski: First off, senator, thank you for the opportunity to have a conversation with the committee.
As a wrap-up, I would say that collaboration and coordination between our governments is very important. There are many areas where our governments have the same focus; as I've mentioned, infrastructure is certainly one of those opportunities.
However, my message would be that we have an agreement that has been in place with the federal government for a number of years, and that is the TFF. I would encourage the committee to urge the government to return to the table to ensure that when we do make changes to the TFF, they don't result in impacting the amount of money we should get based on the formula. Two of the fundamental principles of the Territorial Formula Financing agreement are stability and predictability. Certainly, without them it becomes very difficult for a government of our size to be able to react to unpredictability and still be able to provide those programs and services that are very important to the citizens of Yukon.
The Chair: Thank you very much, Mr. Premier, for your time. Most appreciated. Have a great day.
Mr. Pasloski: It's been a pleasure. Thank you very much.
The Chair: Colleagues, I'd like to welcome our third witness today, from the Canadian Federation of Independent Business, Monique Moreau, Director, National Affairs.
Do you have an opening statement to make?
Monique Moreau, Director, National Affairs, Canadian Federation of Independent Business: I do. Thank you, senator.
Thank you for the opportunity to be here today to share CFIBs perspective on the budget implementation act, Bill C-15. You should have a slide presentation in front of you that I would like to walk you through in the next few minutes. It should be a full-page colour presentation. If you have the one with the words, it might not be the most up to date, so we'll make that note with the chair.
CFIB is a not-for-profit, non-partisan organization representing more than 109,000 small- and medium-sized businesses across Canada that collectively employ more than 1.25 million Canadians and account for $75 billion, or nearly half, of Canada's GDP. Our members represent all sectors of the economy and are found in every region of the country.
Collectively, Canada's SMEs employ 70 per cent of Canadians working in the private sector and are responsible for the bulk of new job creation. Addressing issues of importance to them can have widespread impact on job creation and the economy.
We are a survey research-based organization, and one of these surveys is the "Business Barometer,'' which you should also have in the package provided. Our latest barometer shows that small business confidence remained cool in May, sitting at 58.2 or dropping one point from our previous barometer in April. Ideally we want to see this index somewhere between 65 and 70 when the economy is growing at its full potential. Measures that can help boost small business confidence are critical right now to help kick-start the economy.
One thing I'd like to address right off the top on slide 4 is there seems to be a myth circulating that small business owners are quite rich and are stuffing money under their mattresses. Anyone with a small business background will tell you how hard it is, especially in the early years, to survive as a small business.
To unpack this notion, you have data from the latest household census which shows how much money employees make compared to the incorporated businesses or their employers. You'll see that I have drawn a line around the $80,000 to $99,000 mark. If you look left of that line, you'll see that the vast majority of employees make more money than their employers. We're using this chart to remind policymakers that small business owners themselves are also part of the middle class.
If the government wants to kick-start the economy, it needs to help inspire business confidence. How do you build that confidence? You address the issues of highest importance to small business. As you can see on slide 5, the top issues of concern are the total tax burden, followed by government debt and deficit. The cost of employment insurance is also a concern for nearly half of our members.
We also ask our members how government can best help them grow their business. On slide 6 you will see that the vast majority, or 83 per cent of our members, have identified reducing the small business corporate income tax rate as helping their business performance the most, followed by a reduction in EI rates and CPP rates, which I will address in a few moments. We believe there are good reasons to have a lower small business tax rate, as it helps to offset some of the increased costs borne by smaller companies.
Given that the total tax burden was a concern for over three quarters of our members, and 82 per cent identified a reduction in the small business tax rate as helping their business, it should come as no surprise to senators that the small business community was very disappointed when the reduction of the small business rate was deferred in Budget 2016.
Our number one ask today is that you ensure that the scheduled reduction of the small business tax rate remains intact. This was an election promise made by the Prime Minister and, in fact, all party leaders prior to the election.
One of the criticisms of decreasing the small business tax rate is that the $500,000 threshold acts as a barrier to growth. If you look at the chart on slide 8, which contains data from the Department of Finance, you'll see that there are very few businesses that hover around that mark, and in fact some do jump over it.
Another announcement in Budget 2016 that came as a surprise to our members was the conclusion of the passive versus active review as you see on slide 9. This is an issue for our small business members who operate campgrounds and self-storage facilities. The legislation is designed to capture someone who works full time, maybe rents a few apartments on the side, and to ensure that that rental or passive income is properly taxed.
However, there are legitimate businesses getting caught in this outdated legislation simply because they have five or fewer employees; a family-run business where the spouse and their partner are working together, for example. As a result they are getting audited occasionally to the tune of tens of thousands of dollars, and as a result these businesses have to close.
Earlier I mentioned that our members identified taxes as a priority issue. On slide 10 we asked them to break this total tax burden down, and you'll see that payroll taxes are the most burdensome for 74 per cent, or nearly three quarters of our members. I am going to focus on employment insurance.
I'd like to turn your attention to slide 11. You will see a chart showing the rates employers have paid for last year and this year. If you look at the column for 2016, employees are paying $1.88 per $100 of EI assessable payroll; big businesses are paying $2.63, or essentially 1.4 times that amount; and smaller businesses are paying $2.24, or approximately 1.2 times the amount. This is because the Small Business Job Credit is still in effect, which our business owner members were very supportive of.
We know Budget 2016 reduced the employee rate substantially by 27 cents, as you see in the 2017 column. The rate big businesses pay is also going to come down by 38 cents. But because there was no announcement regarding the renewal of or perhaps the introduction of a similar rate for small businesses, their rate actually going up.
Another element that employers are counting on was the youth hires credit. It was a 12-month break on employment premiums for employers who hire a youth between the ages of 18 to 24. This EI holiday was also cancelled in Budget 2016.
In addition to EI rates increasing next year, our members are concerned with the potential risk for an increase in CPP premiums. We know that the finance minister is personally committed, as you see on slide 13, where we've excerpted a segment of his budget speech. This is the largest payroll tax that business owners pay, so we ask them what the impact of a CPP premium increase would be on their business.
The answer is on the next slide. If you look on slide 14, 67 per cent of our members indicated that a CPP increase would put pressure on them to freeze or cut salaries, while nearly half said they would have to reduce investments in their business. Over a third said they'd have to decrease their number of employees.
Lastly, an issue I'd like to raise that we are spending a lot of time on as an organization is succession. As you see on slide 15, two thirds of small business owners are planning to exit their business in the next 10 years. This is an area where government can help, by allowing small business owners to pass the business on to their children. The sale of a business not only helps small business owners with financing their own retirement, but it has become an important tool to help finance the next generation of entrepreneurs.
Succession planning is even harder for those looking to pass their business to their children. Right now it is more expensive in Canada to sell a business to your children than it is to a third party. This is why we support Bill C-274, which hopes to address this issue.
This concludes my remarks, and I look forward to answering your questions.
The Chair: Thank you very much.
Senator Mitchell: My first question addresses your last comment. Why is it more expensive to pass a business to the next generation than to sell to a stranger?
Ms. Moreau: It's the way the legislation is designed. In the 1980s, there was this option for farmers, fishers and small business owners, but there were some issues around fraud at that time so they closed that off.
There has been a lot of excellent research done by the Canadian association of life underwriters and others in this area who closed those loopholes, and we think there are some good suggestions that can be given to the Department of Finance to try and address that issue.
Senator Mitchell: Do you have a document where could we find those suggestions?
Ms. Moreau: I can certainly forward that to the chair after my presentation.
Senator Mitchell: That would be great.
Earlier today we heard from two economist-type business professors from the C.D. Howe Institute and from the Schulich School of Business. You know the argument. I'm giving you the chance to answer it because I'm sympathetic to your predicament. They would argue that a lower small business tax rate encourages small rather than large. How do you answer that?
Ms. Moreau: That's why I included the slide with the long tail. I'll point members to it now, on chart 8. If that premise were true, presumably with this chart you would see the reverse of what's happening. You would see tons of businesses hovering at that $450,000 to $480,000 mark, not encouraging themselves to grow because that $500,000 barrier is there.
This is Department of Finance information. It's clearly not true. There is a good chunk of businesses worth $200,000 and less in Canada. That decreases. There is a blip around the $500,000 mark, but that's about 10,000 businesses in Canada. That's not a reason to make a big policy change.
The second piece is there are important reasons for having a lower rate for smaller businesses. That is because running a small business is just more labour intensive. Business owners don't have access to the same financing options, tax credits. They don't have the expertise or person power in their office to do that. They're often looking at their books at the end of the night, and that's not the time when they're going to start applying for tax credits, grants and programs that may apply to them.
Senator Lang: I don't know if you're comfortable commenting on this, and if you're not, that's fine. In a general sense, looking at the country and the ramifications of what's taken place over the last year, the devastating fire in Fort McMurray, obviously, is of significant concern to those that live there and Albertans, but it's a very significant concern to the country as a whole. I don't know the numbers, but we're going to be affected from the government revenue point of view both to the Government of Canada, obviously, and to the Government of Alberta, along with those 80,000 people who are out of work, which is really a substantial hit to the economy.
I was looking at your business barometer, and you are fairly optimistic in respect to looking ahead. Do you have any idea how much revenue we are foregoing because of the Fort McMurray situation and what the ramifications are to the Government of Canada and small business across the country?
Ms. Moreau: You're asking about the lost income as a result of that?
Senator Lang: Yes.
Ms. Moreau: As an Albertan born and raised, my heart breaks for the individuals there. It was a difficult thing to watch and will be. I don't have the figure for that, but I can tell you that if you look at the Alberta optimism in the small business barometer, amazingly their optimism went up after the fires. We think that's in part due to the rebuilding that's going to happen. There will be opportunities there. In terms of the timing and how quickly that will occur and when the revenue generating will happen, I can't speak to that, but I know that's a big chunk of industry that has been affected, and I think that they're going to be extremely motivated to get back on their feet as quickly as they can.
Senator Marshall: Thank you for being here.
What kind of information do you have on small businesses? Is the number of small businesses in Canada increasing? Is the number of employees employed by small businesses increasing? Is the income tax increasing? What kind of data would you have that would indicate the health of the small business sector?
Ms. Moreau: The "Business Barometer'' included with your package will give you that feedback. We do that every month, so that's the most recent data for this month, but I can certainly give you the last year or so.
Senator Marshall: Could you give us an overview?
Ms. Moreau: Certainly, yes.
The first chart on the barometer, the same chart in the slide deck, the blue line is us. We ask our members, "How do you feel your business is going to do in the next 12 months: better, worse or stay the same? They may not be able to predict how the economy as a whole will do, but they sure know their own business.
Senator Marshall: That's the future.
Ms. Moreau: That's right.
Senator Marshall: How about the past?
Ms. Moreau: In the past we know that the barometer was at its lowest point last June. We've crept up a bit and come down a bit, as you see, in the first part of 2016. So if you look at the last three or four bars, those are the years on the barometer. You have a sense of where we've been at.
We tend to track to GDP overall. We think that there have been businesses growing. There's always a bit of churn. Of course you lose a few every year, but overall employer optimism has increased.
Senator Marshall: Okay.
Ms. Moreau: Except for the last month.
Senator Marshall: What about the hard data? Is the actual number of businesses increasing? That's the business barometer, but does that indicate the number of small businesses in Canada? Is that the actual number of small businesses in Canada?
Ms. Moreau: No, those are the answers from our membership in response to that question.
We know that we capture about 10 per cent of the small business community in Canada. Depending on whose figures you use — Statistics Canada or Industry Canada — there are anywhere between 2 million or 3 million businesses in Canada.
Senator Marshall: Would that be growing? I'm trying to get a handle on the health of the small business community because we had two panellists here this morning saying that the lower tax rate for small businesses is probably not a good idea.
Is the number of small businesses in Canada growing? If that's true, then it would seem that the tax rate and other factors are pretty good and would allow the number of businesses to grow. Then if the number of individuals employed is growing, that would also indicate that it's a healthy sector.
Ms. Moreau: Yes, I understand your question.
I don't have the hard numbers in terms of whether more businesses have been created, but we know things like the job credit with EI have actually been in place for five years and very heavily used by our members. That might give you some sense that they get those credits when they had an increase in EI payroll for the first three years, and the last two years it was automatic for small businesses.
Those kinds of credits, we think, are a good sign that employers are hiring. We do have job hiring information right now, and it's down for the third quarter, which is right now. I know it doesn't answer your last question, but I can certainly get you information for the last two quarters in terms of job availability.
Senator Marshall: Would you know whether the amount of federal taxes paid has increased in relation to small business? Has that increased over the last number of years?
Ms. Moreau: I'm not sure. I'm sure the Department of Finance would have that information in terms of the revenues the small business community is contributing overall to that. I don't have the answer to that one. We could do some digging on our end, but the minister might be able to answer.
Senator Marshall: In your presentation you were talking about the Canada Revenue Agency aggressively auditing two sectors, campgrounds and self-storage. I heard about the issue of campgrounds somewhere else. What's the detail surrounding that issue?
Ms. Moreau: Thanks for the question. I'm happy to expand a bit on that.
When the legislation was designed to capture passive income — for example, someone working who rents out a couple of apartments — it's to ensure that that income wasn't taxed at the lower small business rate, essentially, as if it were a business.
When that legislation was created, campgrounds and self-storage facilities, in particular, didn't exist, so they fell into the passive rental income that the legislation was trying to get at. But they have a bunch of tests that don't necessarily help a small family-run business, for example. If you have fewer than five employees, and many campground owners and motels were exempted from that, but self-storage facilities do, then you are captured by that. As a result, you don't get access to the small business tax rate because you're deemed to be a passive business, and then all of your income is taxed at the personal rate and you don't get any of the benefits that you would as a business owner.
Senator Marshall: In Newfoundland a number of years ago a lot of the provincial campgrounds were privatized. I would think that some would probably fall into that category. I think I heard about it in relation to that.
Senator Eaton: Ms. Moreau, I noticed on your slide of serious concerns that the availability of financing falls to the bottom. It's not difficult to grow a small business or to innovate or to get market share? That's not of concern?
Ms. Moreau: Oh, I think it very much is. I think that particular question is relative to the others, firstly. Those are the options given to the member in this survey in particular, so they have to rank amongst those.
We have heard from our members that it is difficult to get financing occasionally. Largely this is a knowledge thing. They don't know about other programs like the BDC or EDC that might be able to assist with that. Even though those organizations are there and available, members just don't know. They're just too small. They're not getting that advertising or information generated to them.
We do have some banking research coming out in the next month or two that I can send to you once it's published that gets at whether our members are getting access to small business loans, for example.
Senator Eaton: Do EDC and BDC not approach them or market to them specifically?
Ms. Moreau: I think they try, but there's a disconnect because very few of our members know that those options are available to them.
Senator Eaton: I remember sitting with Senator Mockler on the Agriculture Committee and hearing about how many small businesses and food processing or innovative initiatives could never get financing.
Ms. Moreau: It's a two-part problem. Part of it is if you're brand new, you don't have a track record to show to the banks, in particular, that you're going to be successful. The other half of it is that there are grants, but business owners don't know about them or they don't qualify for whatever small reasons. That's where the issue is.
Our members have told us they prefer tax credits over grants and subsidies. In fact, we have coined a term at CFIB for "grantrepreneurs,'' people who master the application of the grant but they're not necessarily able to stand on their own two feet without it. That's not something available to all small businesses, so we could encourage tax credits like the Small Business Job Credit, for example, over something like SR&ED, which is a very difficult credit to get for innovation.
Senator Eaton: Do you have data showing how many small businesses graduate to being large businesses on a yearly basis? What's the cut-off?
Ms. Moreau: Slide 8 will give you an idea. That's not the number of businesses necessarily. That's from 2013, so I could get you the ones probably from a bit more recently.
Senator Eaton: It's if you make a net profit of $500,000.
Ms. Moreau: Correct.
Let's draw the line at $150,000. Most Canadian businesses are valued under that. The premise from the witnesses you heard this morning is that the $500,000 cap keeps businesses small. If that were true, we would see a big spike around $450,000 to $480,000 in this chart, and we don't. There is a small one around 500, right there, but that, as I mentioned, is 10,000 businesses compared to 115 or so at the first bar.
Does that answer your question?
Senator Eaton: Yes.
The Chair: In terms of the definition of "small business'' versus the definition of "medium-sized business,'' could you walk us through that? I think there's a misconception that small business owners have $250,000 worth of income, but what about all the equipment and assets that are part of that? How does that fall into the valuation of a small business? What is the cut-off line between a small and a medium-sized business so we can get a perspective?
Ms. Moreau: That's a question that government and all kinds of departments have been trying to answer and put definitions around. In order to be a member of CFIB, you just need to be Canadian owned and operated. We don't distinguish between number of employees or size of revenue. The Industry Canada definition differs from the StatsCan definition. I don't have that information at my fingertips, but I'm sure we could get it to you. I can't tell you specifically when the crossover from small to medium occurs.
If we take someone like a plumber, for example, a sole proprietor, once they've paid for their tools and maybe they have no employees, it's very likely they could be making $250,000 if they have been working very hard that year. You may have a small convenience store which hits that approximate amount too if they're very successful in a downtown urban centre with four or five employees. A small family farm will have assets valued in the millions for their equipment.
What is the value of a business? This is part of the reason it's so hard to sell a business to another party. Everything must be evaluated at fair market value at that point in time. Assets and their depreciation at that point must also be taken into account. That's why you have to hire accountants and lawyers. So it's a tricky question to answer.
We at CFIB don't discriminate. We have a handful of members at that 500 employee level. The vast majority are small. They have 11 employees or fewer.
The Chair: You have 109,000 members; is that correct?
Ms. Moreau: Correct.
The Chair: How would you classify the number of folks who qualify differently than being a small business?
Ms. Moreau: I would say less than 2 per cent, probably. Of the small to medium businesses, the vast majority of our members have 11 or fewer employees. They would be the beginning of this tail I've been referring to on chart 8.
The Chair: Okay.
I'm just thinking about how things are looked at. How does that differentiate between a consulting business with two or three employees and they're grossing maybe $600,000 of revenue, but their actual net is after they paying themselves?
One of the things that came out during the campaign, of course, is that small business owners make all sorts of money. I can tell you that being a partner in a small business for the last 13 years, I have not received one dividend cheque. Our business is doing okay, but how do you qualify small- and medium-sized businesses, the true definition, so that Canadians can really understand the nuances and differences?
It's tough owning a small business. When the bank calls, you have to sign a guarantee. When your personal money is on the line, that's a different concept. I'm trying to understand whether the information you provided will totally answer the questions in terms of differences and nuances. This seems to be more of a general overview of your members, which is good, but how deep are you digging to analyze your members?
Ms. Moreau: We have an enormous database. I didn't walk you through profile in detail given the constraints of today's presentation, but I can certainly provide more detailed profile information to the committee if that's of interest.
The vast majority of members are in small businesses. I can certainly prepare something by employee size or by annual revenue. We can tell you where every voting member of CFIB lives, how many years they've been in business, how many employees they have. We have a lot of that data at our fingertips. If that granular level is of interest, I can provide it.
The Chair: If you could give us an overview cross-section that would help with our understanding. Some of this information may seem infinitesimal or immaterial, but you have so many different types of people and organizations within that 109,000, it could give us an education.
Senator Marshall, did you have a question?
Senator Marshall: I was looking at the handouts. Why is there a little blip at the $500,000 mark?
Ms. Moreau: I think it's a material question. I'm not sure, to be honest with you. Maybe you would argue that there are businesses sitting there.
Senator Marshall: Pushing it down?
Ms. Moreau: That could be.
If we call the blip 10,000 businesses, then the one right after it to the right is 5,000, and then there are further ones. There are obviously businesses that decided to keep going past that $500,000 threshold.
Any business owner who says they are going to turn down an extra $100,000 because the advantages are so great, it's a pretty tough sell. No one's really going to want to do that, and that's been our argument, and this data shows that.
Senator Marshall: But it looks suspicious.
The Chair: It does.
We're trying to dig deeper with various groups. We're not being critical, but we want to ensure that we learn the actual reality of what people are faced with. When we share information, we want to have qualified information to demonstrate that we have done research to position ourselves to be authentic in terms of feedback.
Senator Eaton: On your "Business Barometer'' sheet, is there something which makes one province more attractive to small business than another? For instance, British Columbia seems to be very high. I can understand Prince Edward Island being a very small population, that that would be easier. Alberta is at 34 per cent, British Columbia at 67 per cent and Ontario at 65 per cent. Are there factors that make those provinces more attractive for small businesses than others?
Ms. Moreau: I'll pick on P.E.I. to start because it's only very recently that they have been leading the pack. Our director of provincial affairs in P.E.I. spent years being at the bottom of the pack, but tourism season and the low U.S. dollar has actually helped P.E.I. Their proximity to the U.S. states and tourism has brought an influx of optimism and money into the province.
If you look at Alberta where there have been constant layoffs for the last year or 18 months or so, and including the devastation of the fires, it makes sense that they would be in a place where they're not optimistic right now.
Senator Eaton: Yes, but that doesn't reflect the numbers of small businesses. Is that a percentage of optimism?
Ms. Moreau: Correct. It's each business saying, "How optimistic am I that I'm going to do well in the next 12 months?'' So in P.E.I., 75 per cent of business owners are saying the next year is going to be a good one, whereas in Alberta 30 per cent or so of members are saying the next year is probably going to be bad.
Senator Eaton: So they feel reasonably optimistic in Ontario and Quebec, and that has more to do with the provincial economy, not taxes or incentives or anything else.
Ms. Moreau: It's the global everything. It's their total tax burden. It's their optimism for hiring.
We have this information. The barometer total is by province as well. If you flip over to the other side of that page, other indicators may be of interest. For example chart 4 at the top left, that's their hiring plans for the next three months for full-time employees. I believe that 21 per cent of members have plans to hire in the next three months and 12 per cent plan layoffs. I have that data per province as well. So in Alberta those numbers are crossed right now of course because people aren't hiring.
Senator Eaton: Ontario is in a huge deficit hole.
Ms. Moreau: Yes.
Senator Eaton: If Premier Wynne called you in and asked how to grow more small businesses in Ontario, would you have specific suggestions for her?
Ms. Moreau: I absolutely would. The first would be to not implement the Ontario Registered Pension Plan. That's a huge payroll tax that's coming, along with CPP increases. I don't think anyone anticipated we would be here. Ontarians are looking at a situation where there may be an increase in CPP and an increase to their payroll tax base with the introduction of the ORPP. EI rates may be going up, and in 2017 there may be a carbon tax. How is that going to filter down? So 2017 is looking like a tough year for most Canadian businesses, but particularly in Ontario.
Senator Eaton: Have you been consulted?
Ms. Moreau: In Ontario?
Senator Eaton: Yes.
Ms. Moreau: Yes, and we've been loudly and clearly opposing — 92 per cent of our members oppose the ORPP.
Senator Mitchell: I met with a group of dentists recently who said that they're quite keen on keeping the small business tax relevant to their businesses. Do you have a position on that?
Ms. Moreau: In terms of access to professionals?
Senator Mitchell: Yes.
Ms. Moreau: Yes, absolutely. We think the small business rate should be available to all entrepreneurs. This gets into the business of the government picking winners. Why should a plumber who's making way more money than a rural dentist get access to it? That's where the complication is.
This is what we pressed government on after these statements started coming out in the last six months or so. What is the particular policy problem they are trying to solve?
If there are Canadians who are not paying their taxes and they should be, that's a totally different story. We believe, of course, they should be assessed properly and pay any taxes owing. But to pick or choose one industry over the other or one sector over the other based on how successful they were as an entrepreneur when they may have taken enormous risk to get to that profitable place, we think that is wanting at this point.
Senator Mitchell: The two economists who here previously mentioned that really what should be focused upon with respect to promoting small business is research and development of technology. It seemed to me that was a little narrow, particularly for my province of Alberta. Although it's a very advanced and technologically savvy province, it also has different kinds of businesses. What's your position on that? Again, you're probably agnostic; let's not pick winners and losers?
Ms. Moreau: Well, to a degree, we are encouraging government to think of innovation more broadly than maybe has been done in the past. We have this sense that innovation is only invention and that small business owners aren't innovative, but that's not true. In fact, we're doing research right now; our survey has already come out and we will be publishing a report hopefully this summer that gets at this piece.
What are business owners doing that is innovative and outside of that white lab coat, R&D definition of innovation? That's where we think we can bring more specific, granular information about what small businesses are doing and have been doing that's innovative and what they're bringing to their community as a result.
Focusing on R&D and in terms of that white lab coat, scientific approach is a portion of Canadian businesses, but it's not all of them. Many of them are still doing really innovative work, and that's what this report will bring forward.
If I leave you with one piece on innovation, it's to expand the definition and to think beyond grants and subsidies as the only way to encourage or spur that innovation. As I mentioned, applying for the SR&ED, for example — the Scientific Research and Experimental Development tax credit — is a very valuable credit, and a very valuable cottage industry has gone along with it to help individuals apply for the credit.
That should tell you, if it's so complicated that you need to hire someone to spend tens of thousands of dollars to apply for it, it's probably a problem.
Senator Lang: Just looking at your "Business Barometer'' and the breakdown by province, I notice you don't have the territories there — Yukon, Northwest Territories and Nunavut. I know that Yukon provides a lot of the information you have on this particular chart. Is there a reason why you don't represent your membership from the Yukon in this particular document?
Ms. Moreau: If only because they are so small that it's hard to draw trends from our members only. We do have the data, but for a year instead of on a monthly basis.
I can certainly provide the committee with information for the territories. We have it for Yukon and the Northwest Territories. We don't as of yet have any members in Nunavut; we're working on that.
I can certainly bring the data for a year, which is a more representative sample. Our research team would be very distressed if we drew any conclusions that weren't credible, and we work very hard at that.
Senator Lang: Okay.
I'm looking at your presentation, and I notice that in it you haven't mentioned the long-term consequences of the deficit and the implications to Canadians and to small business. It would seem to me there was a promise in the past election that there was going to be a $10 billion deficit. Now we're somewhere between $20 billion and $30 billion, depending on who you talk to. Is that not a concern? Is there a reason it wasn't highlighted in here? At the end of the day, somebody's going to have to pay for this.
Ms. Moreau: There's a saying we often use at CFIB, which is that today's debts are tomorrow's taxes. I just had to pick and choose within the constraints of the five-minute presentation what issues I would illustrate on behalf of our membership.
They, themselves, have to be fiscal hawks, so they struggle when they see significant spending without a plan to return to balance. I think our members have told us that they're willing to be cautious this year to see where the spending lands. They are supportive of some infrastructure spending, but if this continues, then that support will come back.
On my first chart of the priorities, government debt and deficit was actually third last quarter and it went up to second place. That's all levels of government and all kinds of taxes. It's not necessarily just that the federal budget triggered that; other provinces aren't doing so well either, so that might have influenced it, but it's certainly part of the answer.
Senator Lang: If I can make a recommendation, I believe this particular issue is something that should be highlighted on an ongoing basis, primarily because if we don't bring it into the public conversation, we won't talk about it. If the membership in such organizations as yours are not made aware and continue to be made aware — I agree when you listen to Senator Eaton and the situation with the province of Ontario. Combined with the Government of Canada, what does that do in respect of the long-term implications to interest rates and to how it's going to affect Canadians? So I would make that recommendation.
[Translation]
Senator Mockler: My question is directly related to employment insurance.
[English]
EI is part of who we are, regardless of what some people say. Because our people receive EI doesn't mean they are lazy or the work is just not there; it's because we have seasonal employees and a seasonal economy. We don't plant trees in January, nor do we open our beaches in October.
When you talk about making the EI system fairer for employers, could you expand on that and how we could help CFIB to address the image that we have a problem with EI?
Ms. Moreau: Thank you for the question.
The reason we talk about fairness in the EI system is in part because employers pay more into EI than employees. Decades ago, employees paid 40 per cent, employers paid 40 per cent and the government paid 20 per cent. The government got out of that and dumped that 20 per cent onto employers. So that's one part of it. It's not fifty-fifty like other payroll taxes, such as CPP.
The second piece is that many of our members have used seasonal workers and appreciate the role the EI system plays. We have just as many members who have difficulty in hiring and have been told the reason they don't want to work is because EI is coming in. So a balance needs to be found in terms of both employers' and employees' usage of the system.
There have been some good programs that have gotten people through times of reduced business activity, like Working While on Claim, and our members are very supportive of that. EI covers a portion of the salary and the business pays the rest during times of distress, and then when things go well again, they are able to keep their employee and not have to retrain and rehire and find somebody else.
We have had other members tell us that they struggle to find employees, and the EI system has a role to play in that.
[Translation]
Senator Mockler: There is a percentage of people who think like that or who have these difficulties. Could you explain what we could put in place at the provincial and federal level to help people who think this way and who are forced to acknowledge a certain reality with the CFIB?
Ms. Moreau: For the employers or the employees?
Senator Mockler: The employees.
Ms. Moreau: We have created a situation in Canada where post-secondary education is encouraged. Many young people are highly qualified when they leave post-secondary institutions, and they do not want work in a restaurant or a pub mopping the floor. They are looking for internships and co-operative education programs. We have created a labour shortage by overinvesting in our young people. This is why the Temporary Foreign Workers Program exists. We are currently reviewing the immigration system to determine whether there would be other ways to obtain people who come to work in Canada. We would like to suggest to these people that they pursue opportunities in their own communities, even if they are initially paid less than what they earned in their former job, or even if it is far from home. It is important to start in the community where we live and use our experience to contribute to our community by finding worthwhile jobs related to our path.
Senator Mockler: And that is the universal challenge.
Ms. Moreau: Yes, especially in a large country like ours.
[English]
Senator Mitchell: You alluded to the problems of small business, capital markets, grants and how they can supplement and also impede access to capital markets to some extent for small business.
Are you aware of the non-profit business in Calgary called TECTERRA that is given provincial and federal money and allocates that in an arm's-length way with business people in their operation and with experts in the area that they focus on, which happens to be geomatics? I am wondering if you are and if you see that as a model for facilitating this interface between government and small business in an effective, non-partisan, non-political, arm's length way.
Ms. Moreau: I'm not familiar with TECTERRA, but I will look them up after the committee adjourns.
Generally, we would be more interested in exploring that model if there was little red tape and if the difficulty in applying or receiving the grant money was limited. There is the receiving of the money and then there are the reporting requirements that can be burdensome for small businesses.
If you're a small operation and you rent out, so to speak, your accounting and legal requirements, you're not going to necessarily have someone to do that paperwork for you as you go on. It then becomes a question of whether or not it's worth it for the CEO or VP to undertake that work.
If the grant is substantive, as it sometimes is — and that's why SR&ED exists — some members will use it and appreciate it. It comes down to the government picking winners as opposed to letting the free market decide and see when successful businesses get to take advantage of a credit, based on the fact that they've earned more income that year, as opposed to having to properly tick off boxes and fill out paperwork.
The Chair: Would you like to have a wrap-up statement for some of the viewers that could be entrepreneurs and small business people? Is there a message you would like to pass on to them? They could also be members of your association.
Ms. Moreau: To sum up, I appreciate the opportunity to be here today and to share with you the CFIB's perspective. Our members have told us that the small business tax rate deferral was a big shock to them and that they were counting on that. It was an election promise, so that's something that we would encourage you to look at closely and likewise the increases to payroll taxes.
We know that Canadian entrepreneurs work hard and long hours. They do a lot of training in this country, giving young Canadians their first jobs and integrating them and spurring them on to the job market. It's a great time to be entrepreneur in Canada, but we want to make it better for them. That's what we would encourage this committee to do as we examine this budget bill in particular.
The Chair: Thank you very much, Ms. Moreau. It was a pleasure to have you with us.
(The committee adjourned.)