The Standing Senate Committee on
National Finance
Issue No. 42 - Evidence - October 25, 2017 (Afternoon Meeting)
OTTAWA, Wednesday, October 25, 2017
The Standing Senate Committee on National Finance met this day at 2:15 p.m. to continue its study on the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved.
Senator Percy Mockler (Chair) in the chair.
[Translation]
The Chair: Honourable senators, welcome to this meeting of the Standing Senate Committee on National Finance.
[English]
My name is Percy Mockler, senator from New Brunswick and chair of the committee.
I wish to welcome all of those who are with us in the room and viewers across the country who may be watching on television or online. As a reminder to those watching, the committee hearings are open to the public and available online on the Senate website at sencanada.ca.
I would like to ask senators to introduce themselves, starting on my left.
Senator Black: Doug Black, Alberta.
[Translation]
Senator Pratte: André Pratte from Quebec.
Senator Forest: Éric Forest from the Gulf region of Quebec.
Senator Moncion: Good afternoon. Lucie Moncion from Ontario.
[English]
Senator Andreychuk: Raynell Andreychuk, Saskatchewan.
Senator Neufeld: Richard Neufeld, British Columbia.
Senator Eaton: Nicky Eaton, Ontario.
Senator Marshall: Beth Marshall, Newfoundland and Labrador.
The Chair: Now I would like to recognize the clerk of the committee, Gaëtane Lemay, and our analysts, Sylvain Fluery and Alex Smith, who team up to support the work of the committee.
Today, our committee continues its special study on the proposed changes to the Income Tax Act respecting taxation of private corporations and the tax planning strategies involved, changes that the Minister of Finance proposed during summer 2017.
[Translation]
This afternoon, we will be hearing from business people and owners of small and medium enterprises and professional corporations. We have divided them into two consecutive groups.
Our time is limited and I would ask all the witnesses to limit their comments to a maximum of five minutes.
[English]
To our panel of witnesses, thank you very much for accepting our invitation to be here and share with us your comments, opinions and suggestions.
On the first panel we have Mr. Alan Acton,Vice-President and Portfolio Manager of Polaris Financial Inc.; Mr. Robert Kepes, President and Chief Executive Officer of Tensor Machinery Ltd.; Mr. Robert A. Dyke, President of Dyke & Murphy, a corporation of Chartered Professional Corporation; and Mr. Valentin Erikson, Real Estate Tax Lawyer, Erikson Law Firm Professional Corporation.
I would now invite the witnesses to make their presentation. I would ask you to limit your opening remarks to five minutes maximum, which will be followed by questions from the senators.
Robert G. Kepes, President and Chief Executive Officer, Tensor Machinery Ltd., as an individual: Thank you for the opportunity to address the committee. I have two documents that you may have in front of you. One is longer than the other. The one dated October 22 is a more formal submission and then there may be another one dated October 25, which is my speaking notes for today.
I’m the CEO and owner of Tensor Machinery Ltd., a manufacturing company located in Lachine, Quebec. It was started by my father, George, in 1984 and I inherited the company when he passed away in January 2016. At the same time, I have been a tax lawyer for over 30 years in Toronto. I am the co-founder and partner of Morris Kepes Winters LLP, a tax boutique law firm.
I will speak briefly about Tensor, the passive investment rules and the tax on split income.
Tensor is a global leader in the design and manufacture of equipment for the fiber optic cable and highly specialized copper wire industries. We don’t make the cable. We make the machines that make the cable. The machines are designed, manufactured and assembled at its plant in Lachine. Just to give you an idea, the machines sell for anywhere between U.S. $600,000 and $1.4 million each.
Tensor exports 100 per cent of its products almost exclusively to customers in the U.S. As an exporter, Tensor relies on NAFTA, but the uncertainty over NAFTA and President Trump’s protectionist America First policy leads me to conclude that the tax proposals can’t come at a worse time for Canadian exporters like Tensor. The resulting tax changes and burden of compliance will only make Tensor less competitive.
My first thought is that the government should postpone the implementation of these tax proposals at least until after the NAFTA negotiations are finalized.
While I’m on the topic of Tensor, let me address the proposals regarding passive income earned by private corporations.
Last week Minister Morneau announced that all past investments and income earned from those investments will be grandfathered. There will be a $50,000 threshold on passive income in a year, which is about $1 million in savings based on a nominal 5 per cent rate of return, and the small business tax rate is lowered to 9 per cent effective 2019.
There are many questions about that $50,000 annual threshold. Is it fair that a corporation with multiple shareholders is limited to the same $50,000 thresholdas a corporation with one shareholder? Shouldn’t each shareholder have the benefit of that $50,000 threshold?
The proposals in July put forward two approaches for taxing passive income now above $50,000.
Under the first approach, called the apportionment approach, there would be three pools of investment capital that companies have to keep track of. Now, presumably, there will be a fourth pool that will track the annual $50,000 exemption and how that money was put to use.
Needless to say, this approach requires a significant amount of recordkeeping. We’re told that this proposal will only affect the top 3 per cent of private corporations, but the other 97 per cent of us, like Tensor, have to file the same tax returns as the 3 per cent. We all have the same burden of tracking the various pools of income.
The proposals assume that all investment income above $50,000 is passive because any cash balance above $1 million is “excess.” The problem with that one size fits all assumption is that companies like Tensor need working capital and usually more than $1 million, in its business. Every dollar that Tensor can earn from passive investments is a dollar that helps maintain its working capital and its cash flow.
Furthermore, the passive investments serve our business in multiple ways.
Tensor doesn’t have to rely on bank debt. The bank pays interest of about 1.5 per cent if Tensor’s bank balance is at least $2 million. It pays no interest if the balance is less, which is why Tensor would choose to invest in bank stocks like the Royal Bank that pay 3 per cent.
A healthy balance sheet helps maintain access to our line of credit and, as the bank has pointed out, it shows confidence in my business. The passive investments provide a cushion for working capital, cash flow and in the event of a downturn.
Finally, customers run credit checks with our bank because they need to know that our net worth not only exceeds the customer’s deposit but sometimes the entire value of the contract. The customers need to know that Tensor has the financial capacity to complete the work.
One of my particular concerns is the tax treatment of capital gains under the new proposed regime. The consultation paper of July 2017 is very clear that the government wants to eliminate the capital dividend account for capital gains from passive assets, but no mention is made about capital gains from assets used in the business, i.e., real estate.
Tensor’s land and building was purchased about 20 years ago and is used by Tensor exclusively for its business. The property, of course, has gone up in value and there will be a capital gain if it’s ever sold. As a capital asset used in the business, it should get the same benefit of the capital dividend account and capital dividend treatment as under the existing rules. There should be no difference if the building were owned outside Tensor or by me personally.
My recommendations with respect to the rules on passive income, first of all, is that I think they should be shelved altogether. I think the current refundable tax and capital dividend account system works well.
If the government is to proceed with these complex and cumbersome rules, then exporters like Tensor should be exempt. If exporters can’t be exempted, then the rules shouldn’t apply to corporations that have, say, three or more employees.
If the government’s concern is with the high income professional, then they should at least be exempt if they create three or more jobs. If that’s not palatable, then the passive income rules should only apply to professional corporations because that seems to be the government’s focus.
No matter what, real estate used in the business should be exempt from the passive investment rules.
Let me turn to the tax on split income. Let me say upfront that I’m not affected by because my wife is very active in Tensor. These are comments more from a tax lawyer’s perspective.
The 1999 federal budget eliminated the tax benefits of income splitting with minor children. It introduced the tax on split income as a flat tax on split income earned by individuals under the age of 18. Spouses and adult children were not subject to the tax. This made perfect sense because the minor child is viewed as a surrogate for the parent who runs and earns income from the company. It’s reasonable to consider that dividends paid to a minor really is income that the parent would have received otherwise themselves.
It is not reasonable to view all spouses as surrogates for the higher income spouse as proposed in the current proposals. They look to extend the tax on split income to spouses and adult children starting in 2018. They will be asked to demonstrate their contribution to the business based on four basic principles, whether they have made a contribution through any combination of labour, capital or risk. Past contributions in respect of labour, capital or risk will also count. This factor is new as of the press release of October 16.
Labour contribution is self-explanatory. It really asks what services and how much did the spouse or adult child work in the business. The only measure the proposed law looks at is what an arm’s-length person would have paid that spouse or child. In other words, if that amount is, let’s say, $40,000 a year, but the spouse, say the wife in my example, received a dividend of more than that, say $60,000, then the excess of $20,000 is automatically taxed at the top tax rate, regardless of the tax rate of the other spouse who is working in the business.
However, an arm’s-length person will not pay the spouse more just because they contributed assets or lent money to or subscribed for shares or co-signed a loan or agreed to post the matrimonial home as security. In other words, the arm’s-length test is really a flaw in the proposals because it’s not really an arm’s-length test. It’s a “what will the CRA accept test” or, better, “what will a judge accept?”
The burden of proof in CRA audits and tax appeals is always on the taxpayer. The spouse will have to prove two things. First, their contribution to the business and, second, what an arm’s-length party would have paid them. It’s difficult to imagine the level of evidentiary proof required to satisfy a CRA field auditor of what an arm’s-length party would have agreed to pay for the contributions of the spouse or adult children.
If the auditor is not satisfied, then the only avenue is a lengthy and expensive appeal process. These rules are designed to foster tax appeals and litigation.
Make no mistake. The proposals will trigger tax audits. Minister Morneau has said that tax returns will have a box to be checked whether the dividend recipient was active in the business. A letter from CRA is sure to follow asking the person to set out in detail their contributions to the business and proving what is the arm’s-length amount. It would have been far simpler, in my view, to extend the tax on split income to people under age 25 and to continue to exempt spouses from the tax altogether.
If spouses are not to be exempt from the TOSI, or tax on split income, then the arm’s-length test should be eliminated. In other words, they should only have to prove that they made a contribution to the company. They should not have to show what an arm’s-length person would have paid.
In conclusion, the passive income and income sprinkling proposals were proposed without regard to the practical realities of starting and running a business other than perhaps a professional corporation. I’ve tried to point out the practical problems with the tax proposals and would be pleased to come back after the draft legislation is released.
The Chair: Thank you, Mr. Kepes. We appreciate that you’ve provided us with your document. I will now ask Mr. Alan Acton to make his presentation. Permit me to ask again to limit ourselves to five minutes, please.
Alan Acton, Vice-President and Portfolio Manager, Polaris Financial Inc., as an individual: My submission has been distributed. It’s called “The Unintended Consequences of the July 18th, 2017 Tax Proposals on Canadian Health Care.”
Thank you for the opportunity to be here today to outline the consequences of the proposed tax changes.
Approximately 60 per cent of Canadian physicians use legal Canadian-controlled private corporations, or CCPCs for short, as a business structure to manage their cash flow and plan for their retirement. This legislation, if passed, could result in a reduction of the number of practising physicians in Canada to decline, thus furthering wait times and limiting access of Canadians to a dedicated family physician.
There are two main areas that are of concern to Canadian physicians. The first is income sprinkling, or TOSI, a tax on split income paid to spouses from CCPCs. The second is the increased taxation on passive investment income.
If physicians lose the ability to use these fully legal means of paying family members, which, by the way, has been affirmed by the Supreme Court of Canada, and saving for short-term and long-term goals, it may result in a decline in the stock of Canadian physicians. Older physicians might retire. Established physicians may decide to move to lower tax jurisdictions. Some Canadian medical residents, upon graduation, may also decide to move to lower tax jurisdictions.
Let me illustrate why this is with an example. Take a hypothetical physician. I’ve named her Dr. Cheryl of Ottawa, who spends the better part of a decade training and educating herself to serve Canada and become a family doctor. Once graduated, she has a six-figure debt, which is very common, and is faced with the prospect of owning a business. Family physicians are businesses. Dr. Cheryl has no pension plan, no group benefits, no life insurance, no disability insurance, no paid sick leave, bereavement, vacation pay, and no maternity leave.
It has been widely publicized in the media that family physicians earn $275,000 per year. This is a number that is quoted quite a bit. What you have to understand is this number is gross. This is a gross average billing. There are business expenses to be paid, salaries, malpractice insurance, and office expenses. When you whittle the number down to get to the net after-tax/after-expense number, you’re left with less than $8,000 per month.
Dr. Cheryl also manages to save some money in her CCPC corporation for a rainy day. A few years later, Dr. Cheryl decides to have two children. She goes to her CCPC savings and withdraws that money over the next five years for maternity leave as she has her children. This would not have been possible without the savings in the CCPC structure.
After a few years, she has had her children and it’s time to look to other goals. She’s in her forties. Now she has to look at retirement. She goes to her financial adviser and says, “I would like to retire. I would like to have a $70,000 income at retirement. Can I do this with an RRSP?” The financial adviser says it is not possible. Given reasonable rates of return and reasonable assumptions, the RRSP room is capped at $26,000 per year. Dr. Cheryl would have to save $37,000 per year to be able to afford even a modest retirement.
Dr. Cheryl looks back at her career and says, “What if, instead of becoming a family physician, I had gone to work as a public servant of the federal government in health policy in Health Canada? I would have had two years paid maternity leave for two children. I would have had benefits fully covered, and I would have had a fully indexed pension.”
As you can see, she would have been better off economically to work for the government. I could rewrite this example without too much variation for other specialties. A common occurrence is the utilization of the CCPC to split income with a spouse and to save for retirement.
We would all like it. Thank you very much. I would now be pleased to answer questions.
The Chair: Thank you, Mr. Acton.
Now the chair will recognize Mr. Dyke.
Robert A. Dyke, President, Dyke & Murphy Professional Corporation, as an individual: Thank you very kindly for having me here. The promoted tax plans put forth by Mr. Morneau will certainly impact every one of my small business clients in some way. It will provide real incentive for these people to build businesses and invest capital outside of Canada. With the U.S. set to significantly reduce their tax rates, Canada will be offside.
These proposals have been presented in a way that encourages class warfare and paints entrepreneurs as tax cheats who don’t pay their fair share. As a CPA who prepares the tax returns for those entrepreneurs, I can promise you they pay more than their fair share.
Hearing some of the examples that Mr. Trudeau has shared publicly comparing salaried employees to incorporated businesses simply do not add up to this tax accountant. They are misleading and they appeal to the uneducated, as do the continuing references to closing loopholes.
A tax loophole is an unintended consequence of the tax law. The current tax laws have been in place for the last 45 years and the benefits of incorporation are there to encourage economic growth and provide incentives for entrepreneurs to invest capital and create jobs, none of which are unintended or a loophole.
The government has now backed away from some of the provisions in what appears to be a knee-jerk reaction. The vast uncertainty this has created is impacting day-to-day business decisions and lifelong succession plans.
Colleagues and clients of mine are in limbo right now, with plans partially in place but literally afraid to move ahead. Do we need to file elections before the new year? If so, do we need any purifications before December 31? I quite simply don’t ever recall this much uncertainty surrounding business succession planning.
As a CPA, I am most concerned about the Band-Aid solution to the taxation of passive income in a corporation. Passive income under $50,000 is taxed under the old rules; passive income over $50,000 is taxed at 72 per cent. In addition, pre-2018 capital will be taxed under the old system; post-2018 passive income will be taxed under the new rules.
When I went through this scenario with my tax lawyer and asked him how anyone is expected to track this, he replied, “Well, that’s up to the CPA.” Ultimately that means more cost for taxpayers. This Band-Aid has also inadvertently created two groups of business owners: those grandfathered under the old rules, or the old boys, and the second are the young entrepreneurs trying to build their financial lives.
I would like to read a statement from a successful young business owner pm how the tax changes have impacted his outlook:
We run a building supply operation in eastern Ontario, now in its 3rd generation. Success has come from many years of forward thinking, careful management and steady commitment. Our growth opportunities include increased hours, new products, and new locations.
All require significant investment and will create jobs that could number in the dozens.
The question is; why would we take any of these steps, if the incentive to do so is being removed.
As a business owner we expect risks, but the proposed tax changes simply remove the incentive to be in business, and make it extremely difficult to successfully transition any family business to the next generation. All of which has damaged the trust that we have in our current government.
Luke McLenaghan, President
Perth Planing Mill Supply
It’s a fact that it’s much more tax efficient to sell your business to a stranger or large company than it is to your children.
I feel compelled to speak about our doctors and how recent governments have treated them like an endless well of taxation revenue, all the while painting them as the wealthiest Canadians skirting the tax rules.
In my hometown of Perth, Ontario, we have many fantastic doctors, but we also know that recruiting new doctors has been a challenge. Ontario physicians bargained in good faith for a negotiated benefit allowing income splitting in lieu of fee increases.
According to the rules, these same physicians have designed their long-term financial plans, which include retirement, pregnancy, illness, business expansion and funding their children’s education. Many physicians are left scrambling trying to adjust to new rules 10 years after the fact.
Also consider the pull of the United States for young physicians or, worse yet, the brightest young women and men who won’t enter this profession at all.
The arbitrary $50,000 limit on passive income in a corporation is simply not adequate to exempt income and retirement funds. The commuted value of many public service pension funds, including those for members of parliament, would be around the $2 million mark. Keep in mind, this public service pension has never been taxed. It is only taxed upon withdrawal and it’s eligible for pension splitting with a spouse.
If a small business or incorporated professional saves $2 million, which is after-tax dollars, it will have its investment earnings taxed in the two-tier system that I described earlier. When the shareholder draws out dividends in retirement, he or she pays a maximum of 45 per cent tax, and those dividends are not eligible for splitting. Class warfare indeed.
I have one final statement. Our dealings with the CRA lately have shown an agency in chaos. Requests that routinely took two weeks are taking two years. The tax changes that are so poorly drafted will certainly be tested on every level. I’ve heard the estimates that the reasonable contribution test determined by CRA could take 10 years to find its way to the Supreme Court.
Valentin Erikson, Real Estate Tax Lawyer, Erikson Law Firm Professional Corporation, as an individual: It is a real honour to testify before you. I’m a real estate and tax lawyer in Ottawa. My business is incorporated. Its official name is Erikson Law Firm Professional Corporation. Being self-employed and in my thirties, it is prudent to start planning for a comfortable retirement. Some people may think it is too early to plan for retirement when you are in your thirties, but I know most you would agree it is wise.
How much do I need to save, to live on once I stop working? The answer is well documented. All the experts agree I would have to replace approximately 70 per cent of my pre-retirement income to live comfortably in retirement.
Let’s say, for the sake of argument, I make $100,000 a year. I have to make sure I have about $70,000 saved. If I retire at the age of 65 and hopefully live for another 20 years, I’ll have to have $1.5 million in my account.
Unlike government employees or other salaried individuals, I do not get overtime pay, minimum wage, paid vacation, Employment Insurance, parental benefits, health benefits or consistent paycheques, and I’m at risk of losing all my personal assets. I need to be prudent with my money and save.
There is this attitude in our society that if you’re self-employed or you’re running a business, you’re filthy rich. If people think you’re rich, you should be punished. Taxing businesses sells politically; taxing employee discounts does not sell politically.
In 2016 the federal government eliminated ways to maximize the small business deduction. The government also took aim at tax deferral opportunities afforded to certain professionals, including lawyers, by proposing to eliminate billed basis accounting.
Now the federal government proposes measures to constrain use of private corporations to gain tax advantages. These measures, which the government wants to take effect in 2018, will dramatically impact lawyers like me and my clients carrying on business in professional and private corporations.
The changes we’ve heard include restricting the ability of business owners to sprinkle income with family members. Now, to be fair, lawyers are not allowed to do that because only members of a law society in each province are allowed to sprinkle income. Proposals include limiting a business owner’s ability to claim business income as capital gains. Another proposal would look to close a loophole that allows individuals to pay lower taxes on passive investment income that is held in a corporation.
In my view, these changes would negatively impact lawyers in small firms, and particularly lawyers in smaller law firms. I know some lawyers have started a petition supporting these proposals, but they’ve also admitted that these proposals mostly affect equity partners and sole practitioners. They don’t affect employees.
While the proposals are meant to target the wealthiest, as the Minister of Finance said, a vast majority of lawyers make less than $220,000 per year, which is identified by the government as an example of a high income in its consultation paper on the topic.
In my view, it will affect the ability of independent businesses and professionals, including lawyers, to survive in challenging times because we will not be able to save. It will not help financial growth, innovation or job creation.
The changes will make lawyers less aggressive entrepreneurs. When I started my business, I took a risk but I always wanted my law firm to grow. I have seen my law firm grow and double in size. I’m very happy about it, but I was only able to do so by putting some funds aside so that I don’t have to go into the red. I don’t have to go far into a line of credit or for a loan. I might not have taken the same risk with the proposed changes in place.
Let me be clear. I’m not against paying taxes. As a citizen I understand that a tax system should raise sufficient revenue to finance government operations. A good tax system, however, is about more than generating sufficient revenue. A good tax system should be neutral, efficient, fair and equitable, and administratively simple and certain.
In my testimony I would like to briefly concentrate on the concept of equity and leave you with the following question: In your view, are the minister’s proposals fair and equitable?
Tax equity is concerned with optimality of distribution. An equitable tax policy is one that treats similarly situated taxpayers in a similar manner and promotes fair distribution of income. Most people would agree that individuals with higher incomes should pay more tax than individuals with lower incomes.
I submit that with its new proposals this government has distorted principles of equity. Why? It is because similarly situated taxpayers are not treated in a similar manner.
Let’s consider this. Most people would agree that an individual who earns $100,000 from employment should be taxed at the same rate as another employee who earns $100,000. As an example, let’s say Jennifer earns $150,000 as a public servant in government; another person, Michael, is employed in the private sector and earns $100,000 in salary but also gets free accommodation valued at $50,000. Applying the principle of equity, we should tax both Jennifer and Michael in a similar manner. However, the equity also requires that we recognize a taxpayer’s ability to pay, which might be quite different from their income.
Government should recognize that business owners don’t have the benefit of overtime pay, minimum wage, paid vacation and Employment Insurance. Based on the principles of equity, the government should drop this proposal.
The Chair: Thank you, Mr. Erikson.
Senator Eaton: I’m going to go to Mr. Kepes. I thank all of you for your presentations. The thing that struck me first and foremost was when we talk about competitiveness. These new taxes don’t seem in any way directed to that.
You said in your presentation that you export all of your products. Do you feel that this will have an impact on your competitiveness in the United States? That’s the first part of my question. Of course, if the Americans bring in their tax cuts, which they’re threatening to do, that could have a further impact.
Have you thought of leaving the country, or taking some capital out of the country, or manufacturing elsewhere if the so-called closing of these tax loopholes goes into effect?
Mr. Kepes: You asked about the competitiveness. Let’s start with the $500-million number. According to the economic update released yesterday, these tax proposals are anticipated, not early on but eventually once fully implemented, to bring $500 million of additional tax revenue to the government.
From my perspective, I would prefer to have that $500 million in the hands of entrepreneurs, professionals, and the economy in general rather than it being taken out, particularly because of the uncertainty over NAFTA. That’s why I said it’s the wrong time to have these proposals and to be taking that amount of revenue out of the economy.
In terms of the other question about leaving the country, I’m in a bit of a different position than for somebody who is, for example, in IT or an engineer or an accountant or a doctor, because all of their knowledge is in their head and they can leave relatively easily to practise their professions somewhere else. Lawyers, on the other hand, are fairly local, so it’s unlikely that I will pick up and practise law in New York.
As far as the company is concerned, that’s a different question. It has crossed my mind because, first, there are machine shops in the United States that do part of what we do. It is possible to subcontract to them to have parts made and assembled there. That might be required in the same way that Bombardier has recently sold the C series to Airbus for manufacturing in the U.S. We could do the same, particularly if NAFTA is not finalized and, for example, the United States imposes tariffs.
Senator Eaton: I am thinking about the passive income, which we’ve heard much testimony on. You made a good case, and we have heard it before, that $50,000 might seem like a lot of money but if you’re in a highly sophisticated business you need bigger amounts for tax flow if you want to expand. I’m sure your machinery is extremely expensive.
If that tax loophole was closed and you could not have a passive income and you could not collect more than $50,000 a year, would that affect your competitiveness or your prices, for instance?
Mr. Kepes: The short answer to that is yes. The short reason is because the more profit we have, the more we have to be able to reinvest in our company. The higher the taxes, the lower the profit, which means there is less to be able to invest in the company.
Senator Eaton: It will not affect your prices going into the States. If you have lower passive income, it will not affect how much you sell your machines for.
Mr. Kepes: No. It only affects the cash flow and financial health of the company.
Senator Eaton: Thank you.
Senator Moncion: On the same topic, it depends on what the passive income is used for. If it’s used to expand your company, then passive income is used, according to the finance minister, it is going to good use. If it’s just to save for retirement, I think that is where there might be fairness issues.
I really enjoyed your presentation because you gave quite a few good examples of how we can change what is being proposed right now. I really liked what you were saying about the capital gains used in real estate and capital gains used in business which are not taken into consideration here.
You propose exemption for Tensor, a company of your size. You also mention three companies with three employees or more. That’s where my question is going, but I want to finish with the comments you made that I really thought were excellent.
When you are talking about a professional corporation, something we haven’t heard so far is what the CRA will expect as opposed to how the rules will be put in place: the difference between the interpretation, what people think, how it will be interpreted at the CRA level, and the burden of proof which always lies on the taxpayer’s shoulders.
Going back to the question I have, do you think three employees are enough? From what we see right now, I don’t think three employees are enough. I would see a proposition like this for companies that are bigger than three, so why three?
Mr. Kepes: The Income Tax Act does have some rules with expect to five or more employees. That’ is where a distinction is. If a corporation is earning passive investment income like rental real estate and has five or more employees, they’re entitled to claim the small business deduction.
I chose three primarily because in Quebec the tax act started with the professionals only being able to claim the small business deduction if they have three or more employees. In fact, what they found was that’s not such a good test because you could have four or five part-time employees. In fact they changed it to a number of hours in a year. If you have people with 5,300 hours in a year, the corporation is entitled to the small business deduction. I was only really picking the three-employee test to have a parity between the existing rule that Quebec has.
Senator Moncion: That’s another very good point. Thank you.
Senator Marshall: I will start off with Mr. Kepes. I have questions for all witnesses but I’m sure, Mr. Chair, you will cut me off.
Just following up with your response to Senator Eaton, you’re a tax lawyer. You have a benefit now because you’re a tax lawyer and you run a company. You can look at these proposals from two angles.
Knowing what you know now and what you have seen with regard to what is coming down with the changes to these CCPCs and more to come, would you advise people now to incorporate? Do you have second thoughts now about how you would proceed, even if you would set up a business?
Perhaps you could start there. Is it even worth while to set up a business and, if you did, would you incorporate it?
Mr. Kepes: That’s an excellent question. As a lawyer, I would be advising the corporation for primarily non-tax reasons. This is not the same as the doctor who is a sole practitioner on a Friday, has a professional corporation on a Monday, and is now claiming the small business deduction. There are myriad reasons why people have corporations to begin with.
Senator Marshall: That’s right.
Mr. Kepes: Every Tim Hortons franchise is a corporation. There is ease of financing. Banks understand the corporate structure. There is well settled law as to what are the liabilities of directors and officers.
It’s much more difficult to be carrying on business in a partnership or a trust. There is settled corporate law on what a corporation is, particularly with respect to limited liability. Nobody would own a chemical plant in their own personal name. It would always be in a corporation.
Senator Marshall: You would look at the tax structure but because of the other issues incorporation would be the way to go.
It seems that the Department of Finance is focusing on 29,000 CCPCs which have quite a lot of money in passive income. You gave me the impression in your opening remarks that you’re not one of them. I was a bit surprised by that.
We’ve had different witnesses here and I keep asking. I’m trying to get a handle on who has all the money in passive income, and nobody wants to confess. Would you have any ideas as to what sorts of companies would have all this money in passive income? Would it be certain types?
Mr. Kepes: If I had to speculate, I’m guessing a lot of private companies are land developers that have accumulated vast amounts of wealth through real estate over the years. They are commercial and real estate developers. They’re not public companies but private companies. That might be one guess.
Another guess is that it could be a company such as ours that started as a private company and eventually grew to the size where it became a public company. The founding family may very well have their shares in a holding company. You could imagine somebody who is a household name today, but very likely their wealth is in a holding company.
It’s possible that through the ownership of that public company dividends have been paid up to their own private holding company, and it has just been sitting there.
Senator Marshall: Those would be gross amounts.
I have a last question for you. When you were speaking, the first thing that came to my mind was that you’re an innovator and this government has an innovation agenda.
Do you feel that the tax changes conflict with the support for innovation?
Mr. Kepes: The innovation that I would see for our company would be the scientific research and experimental tax credits. There are provincial programs that provide financing, or there’s the Export Development Corporation which provides assistance.
On the innovation side, Tensor is well served. With these passive investment rules, my focus is mostly on the horrendous recordkeeping that companies will need to have. It has been mentioned by another witness that the accountant will be in charge of keeping track of all these pools.
When I think about things that are anti-competitive, there is the macroeconomic issue of NAFTA, but then there’s the micro issue of now having to pay more for bookkeeping, accounting and keeping track of the compliance. I consider that to be a headwind that companies like ours really don’t need.
Senator Pratte: I have a specific question for Mr. Kepes and then a more general one.
Mr. Kepes, there’s something I’m missing, and forgive me for this. My understanding of passive investment has always been that if a company reinvested its investment in the company, eventually, then the issue of a 72 per cent or 73 per cent tax rate does not come into effect and therefore there is no issue at all.
If a company had $3 million in passive investment and eventually invested that income in dividends,there was no problem. Am I correct on this? Is my understanding correct?
Mr. Kepes: You’re correct, but not because of the reason you think, at least the way I’m understanding your question.
Senator Pratte: All right.
Mr. Kepes: If the company has $1 billion in the bank and earns $3 million of interest income, then you are correct if it spends that money. There aren’t $3 million to be taxed, if it spends $1 million on employees or computers within its business.
You are correct that if the money is spent reinvesting in the business, there won’t be $3 million of investment income to be taxed. It’s not the tax system that does that. It’s if the company decides to spend the money within its own business.
Senator Pratte: I wasn’t talking about the investment income. I was talking about the investment capital itself.
Mr. Kepes: You’re right. If there’s $3 million of capital and out of that $3 million $500,000 is spent on new equipment and there’s only $2.5 million left, then these rules will only tax the investment income on that $2.5 million.
Senator Pratte: Then the issue really is what the company decides to do with its passive investment, right? That’s what the issue is. If the company really uses this money for company purposes on a rainy day and a rainy day comes, then there’s no problem.
Mr. Kepes: The only concern is with respect to the timing. You’re correct. If the company eventually uses that money within its business, then there will be less investment income and less income to be subject to these rules.
The issue is that the $50,000 threshold or the investment income above the $50,000 that will be subject to these rules is on an annual basis. Somebody could have savings in 2017, hoping to spend them in 2018, but the tax will apply this year. Even though you’re saving up for that rainy day next year or for a typical business cycle in two or three years, unfortunately that tax applies on an annual basis. It doesn’t look to the business cycle or what are the changes in working capital of the company over a two-year or three-year period.
Senator Pratte: And the tax will apply on that $50,000, whatever you do with that $50,000, even though you would reinvest it in the passive investment?
Mr. Kepes: Yes, the $50,000 is sort of this safe harbour that everybody would get, and then it would be taxed over the $50,000.
Senator Pratte: Over $50,000 is taxed.
Mr. Kepes: Yes. The 70 per cent, by the way, is the maximum. It’s not an automatic 70 per cent tax. When tax accountants and tax lawyers use these examples of marginal rates, typically we with use the top marginal rate.
Here’s where that 70 per cent comes from. Let’s say a company earns $100 of interest income. Under these proposals it will pay a flat 50 per cent tax on that $100, so it has $50 left. If it takes the $50 and pays it out as a dividend to the shareholder, the shareholder pays 40 per cent tax on that dividend. If you add the 50 per cent and the 20 per cent personally, that’s where you get the 70 per cent; but the 20 per cent paid by the shareholder depends on that shareholder’s tax rate.
For illustration purposes, we always use the top marginal rate. That’s where the 70 per cent comes from. In fact, actually, it’s a bit higher now because the government yesterday increased the tax on dividends by 1.5 per cent. I noticed that.
Senator Andreychuk: I am tempted to continue on that line, but I want to change to Mr. Acton and Mr. Dyke. Both of you have talked about loopholes, the difficulty and complexity that will come from this, and an already complex tax system.
We’ve gone over with many witnesses what the reasonableness test will be. I’m still not clear what the government was trying to accomplish, other than securing more money for the treasury.
I continue to hear the CRA is already difficult. It’s a reverse onus. They finger you; you have to prove your innocence. Perhaps I worked too much in the criminal courts, and I find reverse onus difficult to start with.
Is that where the minister would have got his advice to say that all these people are not responding in a positive way and paying up? Instead, they’re finding ways to say, “But I gave this to my wife and it’s reasonable,” et cetera. Was it a pushback from CRA saying, “You’ve got to do something about this because we’re spending many hours trying to figure out what’s going on today?” From what I hear from you is that it’s going to get even worse, so we won’t solve that problem.
Mr. Kepes: Is that a question directed to me?
Senator Andreychuk: Any one of you.
Mr. Dyke: I’m not sure where our finance minister gets his advice from. I wouldn’t like to speculate on that.
As far as the pushback from CRA, I’m sure they have some involvement in that, but I really don’t think it would be extensive, in my opinion.
Mr. Acton: Again, as Mr. Dyke states, I’m not sure where that would have come from. I remember the Prime Minister stating two or three years ago in the election campaign that he thought private companies were ways for wealthy people to save taxes.
It might come from there. A reasonableness test is interesting because a spouse with a partner may be at home raising children and taking care of all of the household duties. My expertise is mostly with physicians. Physicians work 60 to 70-plus hours a week. To say the spouse isn’t really involved in that is not accurate, in my opinion, because it is a true partnership. It has to be, because it can’t work any other way.
When you have a reasonableness test and a contribution to the actual business, technically there might not be that much of a contribution on a business side. As a family, there’s a huge contribution because it’s one unit.
Mr. Kepes: I can give you a history on where the reasonableness test comes from, if that was your question. The starting point is section 67 of the Income Tax Act, which says that for any expense to be deductible it has to be reasonable in the circumstances.
If Tensor were to pay my wife a salary, that is deductible by the company only if it’s reasonable in the circumstances. There is a body of tax case law dealing with what’s reasonable in the circumstances.
A case was mentioned earlier, not by name, but t Supreme Court of Canada case called Neuman v. The Queen, where Mr. Neuman was a lawyer and his wife was an inactive shareholder in his management company. The management company paid her a dividend and the Canada Revenue Agency felt that dividend really should have been taxed in Mr. Neuman’s hands because Mrs. Neuman was not active in the business.
The case went to the Supreme Court. The Supreme Court basically said that there’s no difference between dividends that are paid from a private company and dividends paid from a public company. I don’t have to work for the Royal Bank to justify getting a dividend from the Royal Bank.
It’s the same with public companies. The fact that she was inactive in the business did not disqualify her from getting a dividend. That’s why in 1999, the tax on split income was introduced, but only with respect to minors. Now they’re trying to introduce the tax on split income to spouses and adult children.
What they’re trying to distinguish is the shareholder, say the spouse who is inactive in the company versus the spouse who is active in the company. Now they’ve come up with this reasonableness test composed of the criteria of contribution of labour, capital or risk. That’s what they’re trying to do. They’re trying only to restrict it to dividends being payable to spouses or adult children who contribute in some meaningful way to the company.
The Chair: For the benefit of all senators. I’ve been informed that bells will start ringing at 4 for a vote at 4:15. We have a second panel and we have three other senators identified for questions.
At this point time is of the essence. Perhaps we could ask questions and have answers as short as possible.
Senator Black: On October 19, which is, of course, last week, Jack Mintz, an economist who writes very regularly in Canada, had an article appearing in the Financial Post that said Morneau’s fixes are worse for business and our tax system. By fixes he was referring to the tinkering that went on last week. I want your comments on this because this is only his opinion. I want to hear from people who are on the front line. When he is talking about the $50,000 limit to passive income, Dr. Mintz suggests:
. . . While the government justifies it as enabling small businesses to accumulate retained earnings to fund future expansion, it has the unfortunate effect of creating a tax wall for growing companies. Along with rising marginal personal tax rates on income and capital gains, the tax system penalizes success.
Do you agree?
Mr. Kepes: I would say I don’t agree with that. I’ve heard the argument before that the small business rate should be eliminated because companies will not grow beyond paying tax at 15.5 per cent or whatever it is.
From my perspective that’s really just calling entrepreneurs lazy. I don’t know any entrepreneur who’s not interested in growing their business. To me the purpose of any business is to prosper and succeed. There is no other reason to go into it.
I don’t understand those comments. I can see some of them, from an economic perspective, saying maybe there’s some hindrance on growth because at some point you end up paying more tax.
Senator Black: That was the point, as I read it, but you hear something different.
Mr. Kepes: I interpret it that way but that doesn’t apply to me. It’s not the tax rates that are stopping me from growing. It’s other things.
Mr. Acton: I would agree with that. For company planning, at a 5 per cent interest rate, why would you want to accumulate more than $1 million in your corporation? As far as on the pension planning side, self-employed physicians have to accumulate more than $1 million.
In terms of the management of a portfolio, we’re mandated on how we have to manage. It may introduce intricacies or biases in the way you would manage a portfolio to try to limit income. It’s a very funny number. I don’t understand where it came from or the justification for that number.
Mr. Dyke: Certainly the $50,000 is very arbitrary. A lot of physicians, as Mr. Acton has stated, have to save in a corporation for retirement. Their only options now are individual pension plans or RCAs, which are also offerings of Morneau Shepell.
Mr. Erikson: I agree that $50,000 is arbitrary and all these fixes in a way penalize corporations.
Senator Neufeld: Thank you, gentlemen, for your very interesting presentations.
Further to Senator Pratte’s question in regard to reinvesting the money in your company, this is a process of saying either you reinvest in your company or we will tax you and take a good portion of it away from you. As a previous small business operator, I find that a little hard to swallow. Would you agree with me that is what the intent is?
Second, if you had two businesses, or if you had some extra money from a good year and you wanted to invest in another business, you couldn’t really do that. You would still be taxed at the high rate. Is that correct? Then whatever was left, you could to the other business.
Or, if you had two operating businesses, one has a bad year and the other one has a great year, can you actually feed money across to keep that second business in operation, or does it just lose, or you pay the high tax and send the money over?
Mr. Kepes: The $50,000 threshold was meant to be a form of appeasement to try to put out the wildfire of controversy with respect to these rules. Up until the $50,000 threshold, all of the income from dollar one was to be subject to this passive investment rule.
It seems that the $50,000 comes from this arbitrary 5 per cent rate of return on $1 million. The 2.5 per cent rate of return means that they are allowing the company to accumulate $2 million before hitting that $50,000 threshold. It is just a way for the government to think that this is enough for somebody to save within their company before they start to pay that new regime passive investment tax.
Jack Mintz’ comment with respect to it being a barrier may come from the strategies of some accounting firms that have said there’s no point in leaving money in your company. It’s not that the tax rate would stop a company from growing. It’s this punitive tax rate will stop companies from wanting to keep passive investments in their company, which means they will pay it out, say, as a salary to the owner.
On the second question about using one company to feed another company, one of the faults of the system they propose, aside from the capital gains not getting the same tax treatment, is that if Tensor invests in another company that is carrying on an active business and sells the shares, the system now is that those shares will be subject to the new regime. The government has said that they will try to look into whether they can come up with some relief between now and the next federal budget to provide companies like Tensor, which invests in other companies, with some kind of capital gains relief, provided those other companies are carrying on an active business.
I don’t know if that answers your question, but it’s a wait and see on that one.
Senator Neufeld: If you own two companies, one has done really well one year and the other one hasn’t, you could stand to lose it. Can you take money out of that company that did well, as you would normally have before, to help the company that’s not doing so well?
Mr. Kepes: I think nothing has changed on that, but I can’t say that I know the answer to that.
Senator Neufeld: Does anybody else know the answer?
Mr. Dyke: In my opinion you can still move that money.
One of the other comments has to do with dead money. The government keeps referring to this as dead money or dead capital. That’s why they’ve introduced what I think is a tax grab. I don’t know of any dead money in any corporation. It will be invested in a portfolio. Even if it’s in a bank, the bank loans that out as bank loans. That’s not dead money.
Senator Neufeld: I agree.
[Translation]
Senator Forest: Thank you for your testimony, which is very useful for us. The objective of this whole initiative is for us to table a report in the Senate proposing a tax scheme that is fair and, at the same time, that creates a favourable environment for economic development in Canada. I will be taking another approach, because, for several days, we have been hearing presentations that all more or less correspond to the direction that you are pointing us in. You said earlier that you did not know who was advising the Prime Minister. If you had to advise us, what would be the first recommendation that you would ask us to include in our report and that would serve to implement a fair tax system and create a favourable environment for economic development?
[English]
Mr. Acton: I believe your question was how do we make the tax system fair, in essence.
[Translation]
Senator Forest: Yes.
[English]
Mr. Acton: I would say these tax measures were targeted at professional corporations. I believe that is what the main objective was. We all want a fair tax system. I would look at two areas: the tax deductibility of stock options for CEOs and senior executives and at income sprinkling through family trusts.
Those two areas wouldn’t impact business, shouldn’t impact growth as much as these rules would and, in my opinion, wouldn’t impact employment. Really, those two areas would make the tax system fairer and actually generate more revenue.
The CBC estimated that the tax deduction on stock options costs Canadians close to $1 billion a year or $800 million a year.
Mr. Dyke: The last time we had tax changes of this magnitude was 45 years ago. Before they did that the Carter commission studied it. An independent royal commission studied it for six years. Then they took two further years to implement those changes.
We can’t do this in 75 days. We have an old house that we’re patching up. The foundation is leaking and the roof is leaking. We need to tear down and we need an architect to design and build it properly, and that takes more time.
The Chair: With that, honourable senators and witnesses, thank you very much. There’s a second panel waiting, and then we have to vote when the bells ringing at 4.
As we go forward, if you feel you want to add additional information when you listen to the presentations of future witnesses, please do not hesitate to bring it to the attention of the clerk.
Welcome to the second panel of witnesses. Thank you very much for accepting our invitation to share your opinions and your comments with us as per the order of reference from the Senate of Canada.
[Translation]
In our second group of witnesses, we welcome Joanne Sirois, President, Assurances Sirois Insurance, Inc., Laurent Proulx, Chief Executive Officer, Groupe Le Canadien, and Robert Boudreau, President, Robert Excavating.
[English]
I have been informed and have to share with you, Ms. Sirois, that we need to be in the Senate for a vote. I apologize on behalf of senators.
In the event that you want to add additional information, please feel free to send your information to the clerk, Madam Lemay.
If we look at the time frame we have, there will be some questions by the senators.
[Translation]
You now have the floor.
Joanne Sirois, President, Assurances Sirois Insurance Inc., as an individual: Good afternoon, honourable senators. My name is Joanne Sirois and I am the President of Assurances Sirois Insurance Inc. You have my sincere thanks for kindly taking the time to listen and accept our comments, our criticisms, and our concerns, following Mr. Morneau’s proposals to amend the tax legislation. I am not here today only to represent my own interests, but also those of business people in eastern Ontario, particularly the small businesses.
First, I would like to draw your attention to the communication strategy currently being used by the Trudeau government. In my opinion, unfortunately, it is false and biased. The proposed changes are being presented as necessary in order to deal with tax loopholes. My tax experts tell me that the definition of a “tax loophole” is as follows. A tax loophole occurs when taxpayers use or interpret an imprecise or obscure provision in the legislation in a way that allows them to obtain advantages that the legislation did not intend. My companies have never benefited from grey areas in the legislation, and I assume that such is also the case for most small and medium businesses in Canada. We have always operated according to the parameters in the legislation. It is unfair to portray business people as profiteers. If some companies are benefiting from supposed “tax loopholes,” we are asking you to focus on those companies, not on all the companies that are following the rules and that have structured their business transfer strategies according to the rules currently in effect.
Mr. Trudeau also makes the case that those earning less than $150,000 will not be affected by these changes. That statement is equally false. They will also affect a good number of very small companies. If the Trudeau government needs more money to fill its coffers, I encourage it to be honest and to clearly state that it wants more money, instead of manipulating public opinion against business people who, like myself, have always been law-abiding. We are Canadian and we are honest. We do not lie and, above all, we do not manipulate public opinion to deviously push through changes that will harm thousands of business people and that will influence the Canadian economy.
At the moment, small businesses do not really understand what will be happening and how it will affect them. The implementation of these changes has not been very well set out and the information is constantly changing. Mr. Morneau says that he will make things clear in the next budget, which will be brought down in March or April 2018, but that changes in the regulations are still scheduled for January 2018. Saying that clarifications will be provided after the regulations are put into effect, is not an appropriate way of proceeding, or of communicating information that is constantly changing.
First, we are asking you for a reasonable timeframe, to give the government the time to study the 21,000 documents it will have received at the end of the consultation period. Professionals, some of the best tax experts in the country, have taken the trouble to submit pertinent comments. The government must study those comments because its first proposals had serious flaws. Second, we are asking you for a reasonable timeframe to give people time to understand the changes and to take the measures required for their businesses and their structures. If you tell people in April 2018, but the changes have occurred in January 2018, they will no longer be able to adapt.
There were serious problems with the initial proposals, especially with the transfer of family farms, and the government had to back down on some of those proposals. However, there are still serious problems with the government’s proposals. Let us take the time to do things properly, to study the documents submitted, to fully understand the situation and to implement measures when the consequences of the proposals have been fully understood. You have to understand that we are operating within parameters that have been essentially the same for more than 45 years. Giving businesses one or two months’ notice to adapt and for our professionals to do their work is really very little time, and somewhat unfair.
What are the problems associated with Mr. Morneau’s proposal and how will it affect business people? My tax people tell me that they are constantly focusing on the complexity of the proposal. A nightmare; that is what accountants and tax experts call the systems that will have to be in place to track the old passive capital that is not subject to the new regulations versus the new capital. With those regulations, it will be very difficult for young entrepreneurs to set capital aside.
In conclusion, in my view, Canada is a country of entrepreneurs in which small businesses are the engine of the economy. The people who invest in those companies, including incorporated professionals, are among the most innovative, the most savvy, and the most risk-tolerant in the country. They are also among the most mobile, and, if the tax system is unfair to them, they can leave. Let us make sure that we protect the interests of our small businesses. Canada is known around the world for the quality of life it provides, as manifested by values of transparency and honesty, among so many others. It all starts with the governance. Honourable senators, it is up to you to ensure that the proposed changes are fair.
Thank you.
Laurent Proulx, Chief Executive Officer, Groupe Le Canadien, as an individual: Good afternoon, ladies and gentlemen of the committee. Thank you for giving me the opportunity to appear before your committee today. My name is Laurent Proulx, and I am Chief Executive Officer of the Groupe Le Canadien, in Notre-Dame-du-Bon-Conseil, Quebec.
Before I begin my presentation, I would like us to be clear on one point. My presence here today should come as an alarm signal to you that something is not working. When a 30-year-old businessman drives for seven hours on a weekday to come and testify for 10 minutes before a Senate committee, it means that something is not right.
I would like to quickly introduce my business. It is a restaurant in the village where I live. In four years, my business has grown by 250 per cent. We have a food truck division, entertainment events, and, very recently, a retail division, selling petroleum products.
The tax reform essentially covers three major areas: income sprinkling, converting income to capital gains, and passive investments. I am here today to mostly focus my presentation on passive investments.
In my opinion, taxing the capital accumulated in a company is highly detrimental to economic growth. In the food and retail business, capital is crucial because banks are hesitant to lend money, given the high level of risk, and the small margins on large volumes. You need capital in order to grow. No bank is going to help us unless we invest hundreds of thousands of dollars in a project. Taxing it is somewhat unfair. As Ms. Sirois mentioned, when I hear that those earning less than $150,000 will not be affected by these changes, I know it is false, given that young business leaders, like myself, voluntarily reduce their own salary to put more money into the company and to fuel their dreams of growth. When I am told that I will not be affected, I do not believe it. I leave money in the company because I want to make acquisitions. I employ 40 people in Notre-Dame-du-Bon-Conseil and I would like my business to expand.
I have often heard the Prime Minister saying that the government will be asking people who have the means to do more. What does to do more mean? Clearly, if you tax capital, we, like every good corporate citizen, will be doing what the Canada Revenue Agency is demanding. But it does not stop there in my case. I have 40 employees counting on me, and investors. If you collect more money, it has an impact on my accounting. Then I have to sit down and work out how to make up for it. I have to come up with solutions. I must be creative in order to conserve my margins and continue to move forward.
That is exactly the point that I wanted to draw your attention to. In this reform, the government is asking us to do something that it is unable to do itself. I will not list for you all the expenses that might or might not be considered legitimate. I am here to tell you that, if I go to my banker for more money, he is going to look at my financial statements. If I spent $6,500 to send a photographer to Paris, or $12,000 for three days of meals for three employees, my banker is probably going to say to me, “Look, dude, perhaps you should rethink the way you run your business a bit more before you come and ask me for more money.” That is the kind of thing that, for business people, represents unfairness.
I have nothing against the middle class. I am happy that a government is doing more for the middle class. However, is pitting the middle class and entrepreneurs against each other really the best way to go? If I look at government expenses, I would be curious to know if anyone, here in this room, could tell me that the government has done everything in its power to eliminate all superfluous expenses from its budget before asking entrepreneurs for more money.
I collect the GST, because I work in retail. I spend one hour per week working solely to send GST payments to the Government of Canada. That comes to 52 hours per year, one whole work week. The first week of the year, I spend calculating what I am going to send to the government as a result of what I collect from people who make purchases in my businesses. I am not paid for that week of work. I get nothing for it. It is part of my labour costs, pure and simple.
Capital is necessary for growth, especially in the retail trade. I heard someone earlier talk about reserves for hard times. I would humbly submit that, in retail, those hard times can come very quickly. In difficult economic times, the first things to be cut out of a family’s budget are restaurants, and entertainment and leisure activities. We are very susceptible to economic fluctuations. As well as having to keep capital for growth, we also need it to keep the company going and to immunize it from the vagaries of the market and the economy.
In conclusion, my comments are very simple: before looking to SMEs for more effort and more money, you have to look elsewhere. I have heard that billions and billions of dollars are sitting in the coffers of some companies, but the ceiling of $500,000 is clearly too low. My company has 40 employees and it is possible for me to think of exceeding that ceiling in the coming years. However, I am far from being a major company. I am not Alimentation Couche-Tard yet.
It is important for you to take the time to examine this aspect if that is where you really want to go. I will not lie to you: we are going to keep growing. But we get a strong feeling of injustice, in the sense that no one is able to prove to us that the government has done everything possible to get rid of everything superfluous before asking for more. That is the basis of all business dealings.
The Chair: Thank you, Mr. Proulx. Your turn, Mr. Boudreau.
[English]
Robert Boudreau, President, Robert Excavating, as an individual: I wear the different hats of a heavy civil contractor, developer, farmer and a school operator. It is kind of left field, right field, a little bit all over.
This is the time to implement change allowing for proper delays and ensuring proper impact. Just like the previous change, the federal government continues to push cover-all tax measures that will result in unintended impacts. The measures are much more complicated than just increasing or decreasing tax rates. They change the fundamentals, many of which have been in place for decades.
I will not pretend to understand all of these changes. I don’t. I rely on professionals to guide me, as I have since I started my business. They tell me that they’ve received over 21,000 letters, some of those over 100 pages long, on how this will impact us. They went through that in two weeks and were not really responded to. As a very simple person, which I am, I always bring everything in front of me so I can make the right decision. Obviously this did not happen. To me that’s very scary.
To have all of this in front of you and turn it over in a very short time, their minds were made up and they do not care about Canadians.
The complexity of change and ambiguity leaves too much room for interpretation. Please not that any tax changes that help business owners generate more free cash flow helps our economy. I have lived it. I’ve been around for quite some time.
I remember back in the day when at the end of the year I had two choices: Get your money, leave your money in the company, pay your corporate tax, and get your dividends out. At the end of the day we would have been paying 62 per cent or 63 per cent. Back then I had to send the money to the government at the end of the year. As a contractor, a lot of money was in holdbacks. A lot of money was not paid. I had to borrow money to operate.
Then in 2006 everything changed. This kind of went by the wayside. We went through a recession in Canada in the construction world. We were hit really hard, but because of the new tax laws back then, in 2006, we lived through it up until now.
Now they are going to bring in all these other changes and we are going back in time. If we get hit again, I’m not sure any young entrepreneur could make it through. I don’t understand all that’s coming. All I understand is it’s not going to be pretty.
I was a young entrepreneur at one point. I worked 60, 70 or 80 hours a week. I had a wife who was home. She picked up the phone for whoever called. She brought up our daughters and everything. You work hard. Then, at the end of the day, she worked as hard as I did and had to put up with me. She had zero wage.
You come in and you’re upset that somebody didn’t pay you. You’re having challenges with employees. You’re having challenges with everything. It’s a very stressful life. It’s not hell every day, but it’s not easy.
It is very dangerous to say that this person is not allowed to have a dividend because she’s not working, or ask to what extent and what is the interpretation. That’s going to be very tough on all the young entrepreneurs.
Rather than repeat what everybody else has said, I will shut up and wait for questions.
The Chair: Mr. Boudreau, thank you very much. Well done.
Senator Marshall: Thank you very much. The three of you are talking about what is happening, all the pressures, and the impact it will have. Do you think at the end of the day it will really make any difference?
You’re going to keep your companies. The taxes are going to increase. Is the result going to be a diminishing of private companies? What’s the bottom line?
I know you’re not happy with the tax proposals. I got that from your testimony but, really, at the end of the day what will be the outcome? You’ll just pay the additional taxes and move on.
Ms. Sirois: I’ll give you an example, if you don’t mind. One of my daughters went to study in Switzerland. She then worked in China for a year. She was all over the place. She went to Australia. I have two daughters. They’re both working for external businesses because in my family you go to learn elsewhere, you come back, and you bring outside expertise to the family business.
We’re on the cusp of starting a new business of buying international art overseas and importing it. They’re looking at these tax changes. One of them immediately said, “One of the things we’ll have to compare is where to set up our company because there are no boundaries anymore, mom. You have to understand. If the laws in Canada are not favourable to our type of company, we’ll just have to go elsewhere.”
That is the new people. They buy on the Internet. For them here are no boundaries.
Maybe for me I’m old money, like the guys were talking about. My capital is in my companies, and it will not be touched. What about the new ones coming in? Who will pay for the future social programs if our young entrepreneurs are not looking at us anymore? Do you know what? The deal isn’t so sweet in Canada anymore. What’s going to happen?
I like what the gentleman from the previous panel said. He said that this was a major change, that we haven’t seen a change like this in 45 years, and you guys want to push it through in 75 days.
Senator Marshall: Mr. Proulx, I would look at you and say you are of the younger generation. Where do you think it’s going? You were talking about your business. I think you even used the terms unjust and unfair, but at the end of the day where does it end for you?
Mr. Proulx: At the end of the day, there will be an impact. For sure there will be an impact. I think I’m educated enough to inform myself about that reform. When I look at it, it is so complicated that I’m not able right now to answer your question about how big of an impact it will be. It’s too soon.
There will be an impact. For my part, I’m not talking about leaving. I’m well implanted in Quebec. I want to do business in Quebec. I don’t plan on leaving. The reason I’m here today is because you’re asking for more without making a strong case that you’ve done anything in your power before you come to ask for more.
The thing is that before you come to see, an entrepreneur says you need to do more for the middle class. I can answer that some government expenses happen in Paris. At no point are they related to the middle class. They could have been avoided before you come to ask more from me. That is the point.
For the bottom line, I don’t know yet, but what is sure is that when the Prime Minister says, “We’re going to ask some people to do more.” Do more for me is not only pay more. Once I’ve paid, I need to go back to work and be creative to find some revenue or some way to lower costs to absorb this new tax.
Senator Marshall: I have just one comment for clarification. The Senate isn’t responsible for these proposed tax changes. It’s the government.
Mr. Proulx: I know.
Senator Marshall: It’s a different body.
Mr. Proulx: I’m fully aware of this, but since I’m not a member of the House of Commons, I assume that you guys will take my message somewhere else.
Senator Marshall: Thank you.
[Translation]
Senator Pratte: Thank you for travelling to meet with us this afternoon. What I find astonishing in the comments you have made is the impression I get that nothing happened last week. Yet the government announced a number of changes to the proposed reforms. This included abandoning some major aspects of the reform; it also announced and confirmed this week that there will be a reduction in the tax rate for small businesses. A number of changes have been made, which have even been well received by a number of groups that were very critical of the reform to start with. Have those changes, and the reduction in the tax rate, done nothing to reassure you, to address your concerns?
Ms. Sirois: You announced a reduction in the rate —
Senator Pratte: Not me personally, the government. It is not the same.
Ms. Sirois: The government announced a reduced rate, and when Mr. Trudeau introduced it, he said the intent was to give us more than $7,000 back to help us hire people. First, the $7,000 is only for big businesses. Second, we can agree that you do not hire many people with $7,000 these days.
In addition, has anyone thought of the additional professional fees that we’ll have to pay only to keep up with what you are asking us to manage now? The complexity of the system you are proposing will result in additional fees, which some believe could exceed the benefits gained from lowering the tax rate from 10.5 per cent to 9 per cent, I believe.
I would also like to add that what you said about family farms no longer being affected by those measures made me wonder seriously about the person who thought about including the transfer of family farms in the first place. It’s as if no thought was put into it at the outset. They decided to launch the initiative and then see how people would react. I think they were shocked at the reaction. I have never been passionate about politics in my life, but I’m sitting here talking to you because that’s how absurd I think this is.
I see the Liberal government playing the game, to please people, because many more middle-class people are voting. This is serious; it’s not an issue you use to buy votes. We are talking about an overhaul of the tax legislation; we are talking about transferring family farms. Do you want to drink milk from the United States that contains preservatives or do you want to maintain Canadian family farms so that Canadians have access to fresh food from Canada? This has not been well thought out.
Mr. Proulx: Senator, I’m glad you asked that question, because I thought about it as well. In terms of the government’s announcement to lower the tax rate to 9 per cent, I personally think it’s an excellent thing. I think a low tax rate for businesses is a guarantee of strong economic growth.
That being said, Ms. Sirois raised part of the issue. If the intent of the reform is only to improve economic growth by lowering the tax rate, that is fine, but if the intent is to make up for the subsequent taxing of capital, I humbly submit that it would be better to leave the tax rate at 11 per cent. That’s because, later, the difference between 11 and 9 will cost me more in tax experts and accountants.
Here is my proposal: the government would be better off leaving the rate at 11 per cent, as it will save time. Changing a tax is complicated. It is expensive in terms of human resources in the public service, in all sorts of related costs, in consulting fees. It costs the middle class money. If the plan is to compensate for this, leave it as is and give back what you will be saving in consulting fees to the middle class. It’s that simple.
You change something, and then you make another change, the effects of which will be mitigated by a reduction in the tax rate. You might as well just not change anything; give the money you save in fees back to the middle class, and I will be very happy.
Senator Forest: Thank you very much for your testimony. It’s really interesting to find out about your daily reality.
By the way, we are not in charge of collecting taxes and of management. Our responsibility, and the purpose of the committee, is to hear from you and to ultimately table a report that we hope will be able to influence government decisions.
Mr. Proulx, I admire your drive. You talked specifically about passive investments. According to you, this is the main constraint. There are four major areas in the reform, which you mentioned just now, but you think this type of tax break would penalize the growth of your businesses the most.
Mr. Proulx: Absolutely. It’s directly related to growth. Now, in terms of income sprinkling and the other components, in all honesty and any partisanship aside, I think there is room for debate, depending on people’s wages. It is true that entrepreneurs take a risk and all sorts of things are open to debate about income sprinkling, for example.
However, the reason I drove for seven hours to talk to you for 15 minutes — for which I’m very grateful, by the way — is that, personally, my ultimate goal as a 30-year-old entrepreneur is growth. I voluntarily reduce my salary to invest in the company in order to be ready for a potential business opportunity.
Right now, probably in all the provinces, but particularly in Quebec, all the experts agree that, in the next five years, there will be between 40,000 and 50,000 businesses for sale in Quebec. People who have built fine businesses and are of a certain age will want to sell those businesses, and you need capital to buy them. It is not true that we can simply finance, finance and finance; you have to put money on the table. In addition, the sellers want the money, and with good reason. They want to withdraw their money so that they can retire. They have done enough.
So you need money for growth, and that’s why I’m here, standing up for passive investments, which are the crux of the issue.
[English]
The Chair: Could we ask the two senators to ask their questions because we have to go and vote? We will have the witnesses respond in writing.
Senator Oh: My question is about the gender implications of the income tax reform.
The federal government says it is committed to undertaking an analysis of the gender impacts of the measures being contemplated with respect to private corporations.
However, for example, some incorporated female physicians across the country have reported that proposed changes will significantly hinder their ability to pay for overhead expenses, as well as to save for maternity leave, retirement, and so on.
Is it your opinion that in the short consultation period the federal government was successful in acquiring a strong understanding of the gender implications of their proposed changes?
[Translation]
Senator Moncion: My comment is about the 21,000 submissions that were received two weeks ago, and that the government did not get. The majority of submissions received are similar in terms of the proposed reforms and the comments.
It is interesting to hear your point of view as an entrepreneur on the ground. You are giving us a different view from what we have heard so far from the two groups of witnesses. The entrepreneurs who appeared earlier gave us a different perspective and that was very interesting. You have not come all this way for nothing.
You talked about access to capital, which is challenging. You talked about the issue of passive capital. I think a company like yours, which is growing, will be less affected at first, but as you grow and make a profit, you will probably feel the impact of the reform.
Since 2008, the asset-backed commercial paper crisis has muddied the waters for the financing of small and medium-sized businesses, and it has become increasingly difficult for entrepreneurs like the three of you to find funding. However, in the last six or seven years, there has been growth in passive capital. It’s a phenomenon that has grown.
The Chair: Do you have a question, senator?
Senator Moncion: I have no question, as I said earlier. It was just a comment for the witnesses.
The Chair: Thank you very much, senator. In terms of Senator Oh’s question for our witnesses, our clerk will send you the exact question and you can answer it in writing.
Thank you.
(The committee adjourned.)