Proceedings of the Standing Senate Committee on
National Finance
Issue No. 46 - Evidence - November 7, 2017 (morning meeting)
CALGARY, Tuesday, November 7, 2017
The Standing Senate Committee on National Finance met this day at 9:01 a.m. to study the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved.
[English]
Senator Mockler: Welcome to this meeting of the Standing Senate Committee on National Finance. My name is Percy Mockler, a senator from New Brunswick.
First, I would like to ask the senators to introduce themselves, starting on my left, please.
Senator Jaffer: My name is Mobina Jaffer, and I’m from British Columbia. Welcome.
Senator Pratte: André Pratte from Quebec.
Senator Neufeld: Richard Neufeld, British Columbia.
Senator Oh: Victor Oh, Ontario.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Cools: Anne Cools, Toronto, Ontario.
Senator Mockler: Thank you. To the witnesses, thank you for accepting our invitation so that we can hear your comments, your recommendations and your opinions.
The Standing Senate Committee on National Finance was authorized by the Senate of Canada to examine and report on the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved, in particular: income sprinkling, holding passive investment inside a private corporation and converting income into capital gains.
Also, the committee is to take particular note of the impact of the government’s proposed changes on incorporated small business and professionals, economic growth and government finances, the fairness of the taxation of different types of income and other related matters.
The committee will submit its final report to the Senate no later than December 15 and retain all powers necessary to publicize its findings for 180 days after presenting the final report. This was the order of reference given by the Senate of Canada.
So far, in Ottawa, we have held 13 public meetings. We heard from over 60 witnesses and received more than 30 written submissions. There is a lot of interest in this study and the committee felt more consultation was needed, so we decided to go across Canada to hear from Canadians about their comments and opinions. Yesterday we were in Vancouver for a full day of public hearings.
Today we continue our work here in Calgary, Alberta. Over the course of the day, we will have before us either people who requested to appear personally or representing different associations, people whose names were submitted by senators and other at large from the public.
This morning, honourable senators, we will have the first panel composed of the Calgary Chamber of Commerce, Mr. Adam Legge, President and Chief Executive Officer. Mr. Legge, thank you for accepting our invitation.
Adam Legge, President and Chief Executive Officer, Calgary Chamber of Commerce: Thank you.
Senator Mockler: Secondly, we will have, from the Alberta Chambers of Commerce, Mr. Ken Kobly, President and Chief Executive Officer.
I would now invite the witnesses to make their presentations, and following your presentations you will have questions from the senators. I have been informed by the clerk that Mr. Legge will be the first presenter, to be followed by Mr. Kobly, and we have put you in a slot of five minutes each. Mr. Legge, please.
Mr. Legge: Thank you, honourable senators. Welcome to Calgary. Thank you for taking time to explore this very important issue for so many Canadian entrepreneurs and business owners. I will do my best to get into the five minutes, so I will speak quickly.
The Calgary Chamber believes the tax system in Canada should be fair, minimally complex and encourage growth for all Canadians. I contrast this set of proposals we’re dealing with today, to negatively target dedicated and committed entrepreneurs in our communities whose investment in their business, job creation, and our communities, to the recently highlighted issues of offshore tax shelters that our own tax collection agency, the CRA, is unwilling to address, making Canada one of the only OECD countries that does not know its own tax gap. This is an issue that your counterpart, Senator Downe, has been pursuing, and a greater focus of the Minister of Finance and the Prime Minister should be on these issues rather than making it harder for farmers and small businesses to be successful.
The changes as initially proposed will create additional uncertainty and administrative requirements for small businesses, disincent investment and entrepreneurship, and increase the tax burden. The updates to the tax proposals announced in October, while not perfect, do represent positive steps away from the original proposals. However, there’s still significant uncertainty around the details of the proposals, and we’ll have to wait for the legislation to see what has changed to determine the impacts. As such, my comments will address both the proposed changes announced in July and those amendments from October.
After consulting with our members, the Calgary business community, we made recommendations to the Department of Finance in the following areas: first, Canada’s business competitiveness; second, income sprinkling; third, holding passive investments inside a corporation; fourth, converting income into capital gains; and, fifth, the consultation process itself.
First, on the matter of Canada’s business competitiveness: Canada is in a global competition to attract talent, business and investment. The chamber is concerned that these tax changes will not only increase the compliance of tax burden for business but will significantly reduce Canada’s overall competitiveness. We urge the government to not just consider the costs of these proposed changes but to consider the added costs being implemented at a time where policies from all levels of government are making it harder for business to succeed — what we call a rising cumulative cost to business.
In Calgary, businesses are facing a new carbon levy, rising cost of labour due to minimum wage hikes, new labour code reforms, escalating property taxes municipally, higher corporate and personal income tax rates, greater Canada Pension Plan contributions and trade uncertainty, all while low oil prices and consumer spending remain challenging.
With the United States looking to reduce the burden on corporate taxes, the Government of Canada must ensure Canada has a competitive tax structure. The chamber supports the federal government’s announcement to reduce the small business tax rate to 10 per cent in 2018 and to 9 per cent in 2019.
Second, the matter of income sprinkling: The proposed changes demonstrate a lack of understanding of how many businesses, especially small and growing businesses, really work. Families, especially spouses or partners, make large investments and sacrifices for a business to succeed. Often a spouse may give up full-time work to support the business directly and indirectly. Canadian marriage law operates under the recognition of collective partner effort and rights to own family-owned property. With two-thirds of Canadian incorporated businesses being majority owned by men, expanding the tax on split income to apply to spouses will have a larger negative impact on women, and 63 per cent of businesses surveyed in Calgary said they will be negatively impacted by the original proposed change.
We support the federal government’s commitment to simplify the original proposal and reduce compliance burden. However, we will have to wait for the details. We recommend the government refrain from applying the rules of tax on split income, or TOSI, to dividends paid to spouses and common-law partners.
Third, the holding of passive investments inside a corporation: The original proposal would damage business owners by targeting savings and money, not saved to avoid taxes but set aside to support operations during downturns, to fund new ventures, new jobs or expansion in capital investment. The legal practice has been in place since 1972 and has encouraged business and economic growth.
The rationale behind the changes seems to suggest the government thinks income earned by business owners should be considered and taxed the same as employees. This is simply wrong and misinformed. Unlike an employee, a business owner does not receive pension plan, Employment Insurance protections, health benefits, paid sick days, vacation pay or guaranteed paycheques. This is viewed as they’re creating their own safety net since the path that they have chosen eliminates much of the traditional ones that have been put in place within the Canadian system.
With limited Employment Insurance benefits during maternity leave, female-led businesses rely on passive income investments to ensure their business remains operational during maternity leave. These investments protect the female entrepreneur’s income and her employees’ jobs, and 76 per cent of businesses surveyed in Calgary said they will be impacted by the elements of the original proposals.
The government’s announcement to allow the annual $50,000 passive income lacks detail and will add a layer of complexity to the current tax system. This amount is also too small to enable growth or reinvestment back into the company.
We recommended Finance Canada allow private corporations to retain a certain level of passive investment tied to a percentage of existing capital or a similar standard that considers specific capital needs and the cyclical realities of any given industry. At the very least, private corporations should be able to follow a similar model that governs registered charities, which are permitted to make passive investments of surplus funds that will build their asset base in order to carry out future activities.
Fourth, the converting of income into capital gains: Many business owners raise concerns that the original proposals would make it harder to keep their business within the family than sell to an unrelated domestic or international buyer, and 66 per cent of businesses surveyed in Calgary said they will negatively be impacted by elements of the original proposal.
The chamber supports the federal government’s decision not to move forward with these measures and is encouraged to hear the federal government has committed to working with family businesses, including farming and fishing, and to make it more efficient or less difficult to hand down their business to the next generation.
Finally, the consultation process itself: There’s an increasing perception amongst the business community that Canada is becoming less open for business. The Calgary Chamber’s business leader market perception survey this spring found that after reducing fees and taxes, the next and most significant way the government can support business is simply by having a more business-friendly attitude and tone in their approach. This simple and free change would show the government understands the importance of the business community, appreciates the work they do to create jobs and prosperity, and recognizes the challenges they are currently facing.
Unfortunately, the rhetoric used during the consultation period, including the government’s own discussion paper, has added to the perception that Canadian governments at all levels do not understand business realities, nor appreciate the benefits and prosperity that businesses help create. In fact, many small businesses have been made to feel as if they are tax cheats by simply following the rule of the law, and 92 per cent of businesses surveyed in Calgary wanted the government to extend the consultation period. Sadly, this did not happen.
In conclusion, the proposed tax changes shine a light on the major issue with Canada’s tax system; namely, that it is complex. This complexity is especially impactful for small business.
In closing, it is unfortunate and disappointing our federal government has chosen to target the exact group who we should be enabling. These business owners create jobs, economic growth, pay taxes and are representative of a spirit and ethic that we need to encourage more within Canada and not discourage. There are far better and bigger issues in our tax landscape to address, ones that will not impair Canada’s prosperity and economic activity. This country was built on the backs of people who came here to start something new. We need to preserve that, encourage that and nurture that.
Thank you very much for your time and attention today, and I’m happy to take any questions.
Senator Mockler: Thank you.
Mr. Kobly, please make your presentation.
Ken Kobly, President and Chief Executive Officer, Alberta Chambers of Commerce: Thank you, senators, for coming to Alberta in the dead of winter. We certainly appreciate it. Calgary is normally much warmer than this in November, about 12 to 15 degrees, so thank you for still coming to Calgary.
I assume that you’ve received our formal submission, and I’m prepared to answer any questions on that formal submission. I’m going to be talking a little bit on different issues with my oral presentation.
I know that yesterday you heard from my counterpart at the B.C. Chamber of Commerce. I know upcoming you’ll hear from my counterparts in the Saskatchewan chamber and the Manitoba chamber as well.
The Alberta Chambers of Commerce is a federation of 126 community chambers in the province of Alberta, who in turn represent 24,000 businesses in this province, and 95 per cent of those businesses that the community chambers represent are small and medium-sized enterprises, so we’ve certainly been getting an earful on what’s going on with these proposed tax changes.
Overall, I would say that the tax changes that were proposed by the Government of Canada in the dead of summer have seen the most pushback that I’ve ever seen in any tax change since the introduction of the GST. That will give you sort of a scale of just how important these changes were and, to some degree, the offence that people took to these tax changes in small business.
The tax changes process initially was flawed, in my opinion, from the beginning. I think it was ill conceived and I think it was ill informed, based on the changes that were brought forward.
We also only have had online consultations with this issue. Other than your hearings — thanks to Senator Black for bringing that forward and fighting for it, we sure appreciate it — there has been no face-to-face consultation with the Government of Canada on these proposed presentations with individual small- and medium-sized businesses. There have been a few scattered presentations and face-to-face presentations with members of Parliament, but I’ve got to tell you that through this whole process, it’s been very difficult for us to meet with our MP to discuss those issues, and we have three Liberal MPs in the province of Alberta.
The consultation was only 75 days. It was introduced in the middle of July. There was only online consultation. To be honest, I don’t think the Government of Canada really expected that they would see the amount of pushback that they did receive on this, given it was introduced in the summer. As a result, there were, as I understand it, 21,000 written submissions to the Department of Finance on this.
One of the things that I probably find most disturbing about this whole process is the inflammatory rhetoric that’s been used and has framed this issue right since the beginning. In some degree, I’ve taken a great deal of offence of that. I think it was aimed at generating support for changes from some Canadians at the expense of other Canadians. I think it was intended to basically pose a target in support of what the changes were that were proposed. Among other things that I’m talking about is suggesting that SMEs, small- and medium-sized enterprises, incorporate simply to avoid tax. That is not correct.
In a previous life, I was an accountant in public practice. I’m a CPA. I can tell you that for the majority of the folks that I dealt with who were small- and medium-sized businesses, taxation was, yes, one consideration, limited liability was another consideration, and in many cases if they were looking for a contract with a larger company, as we have in Alberta, the only way that that company would bring them on is if they were their own limited company, for various reasons that I am prepared to answer in questions.
There is the negative connotation of certain words that have been used right from the beginning: loophole. Certainly these are not loopholes. These are issues that have been within the Tax Act for many, many years, and they’re not loopholes. They’re part of the law. Sprinkling in itself is a negative connotation. It is not income sprinkling. It is income sharing between the partners of the small- and medium-sized business. The overall message that small- and medium-sized business owners, farmers and professionals are rich and simply gaming the system is purely offensive.
I think the three issues that the government has picked in this latest tax change are cherry picking three particular issues in the Tax Act, those being passive income, income sharing, conversion of income and capital gains, which, as my colleague mentioned, would make it much more difficult in the original proposal to transfer business and farms inter-generationally.
We now have changes to changes. We’ve not seen the technical documents on these proposed changes. As I understand it, the change to capital gains is going to be subject to further study over the next year. Before we give it a thumbs up or a thumbs down, we would like to see the technical details because, as we found in many cases and in particular with these particular changes as well, until you see the technical documents, you don’t really know what you’re dealing with.
We understand the initial proposals have been scaled back, and I think that’s a good thing. Plus, there was a change to the small- and medium-sized tax rate. The reality is our organization, the Alberta Chambers of Commerce, has not advocated at this point in time for a decrease in the small- and medium-sized tax rate. We have a policy in place that says that we would call on both the Government of Canada and the Government of Alberta to reduce the small- and medium-sized tax rate when they have the fiscal ability to do so. When you have both the federal government and the provincial government running multibillion dollar deficits, we appreciate that they’ve reduced the small and medium-sized tax rate, but it’s not something that we were in fact looking for at this point in time.
By the way, with that change to the small- and medium-sized tax rate, I understand Mr. Moody will be speaking to you this afternoon, but this in fact may trigger a change to the change to the change unless there’s an amendment to the dividend tax credit. In fact, the small- and medium-sized business owners, by 2019 when the full amount of the tax reduction kicks in, will be paying an increase on their tax rate of 1.5 per cent. So it in fact will trigger it, unless there’s an amendment to the dividend tax rate, and hence my point about change to the change to the change.
You know what? I guess this is indicative of also what we’re seeing with some of the other most recent changes and interpretations by CRA, things like trying to tax employer-provided medical and dental premiums or the disability credit for diabetes, as blew up a couple of weeks ago.
I’ll wrap it up. Sorry. I get very passionate about this issue, as you can tell. To sum it up, we have had a tax act that has not been the subject of a royal commission for well over 40 years. To put that into perspective, I was in high school when the Carter commission came out. What we’re proposing, and what 99 per cent of the delegates of the Canadian Chamber of Commerce AGM proposed, is a royal commission that is impartial, survives election cycles and can look at the entire tax act with the goal of fairness and simplicity, rather than continuing to patch and patch and patch an old house.
Thank you, senators.
Senator Mockler: Thank you.
We will now turn to questions from senators.
Senator Marshall: One of our terms of reference is to look at the impact on the economy, because that wasn’t done by the government before they released their proposals. I wanted to get a handle on exactly who your members are and how many there are. You did give the numbers, but how many are impacted by these changes and how they are impacted?
Mr. Legge could start, because you represent Calgary, and then we could probably get into the whole province. Could you just start and give us an idea as to how many of your members are going to be impacted and how they’re going to be impacted?
Mr. Legge: We represent around 1700 businesses. There’s a landscape of about 50,000 businesses in Calgary. Our membership base employs about 400,000 Calgarians, so that’s about half of the employed workforce in Calgary.
During our consultation period with them on this topic, in round numbers, about 75 per cent of the companies that would be impacted by this. Some of our members are publicly traded companies, et cetera, that are not necessarily under the purview of this, but 75 per cent of the companies that are in this space would be negatively affected.
Senator Marshall: So that’s about 1,000?
Mr. Legge: Yes.
Senator Marshall: Okay.
Mr. Legge: So if you were to then extrapolate that to the 50 odd thousand businesses, you’re looking at about 30,000-odd potential companies in Calgary that will be affected in some way or another.
We’ve heard various ideas of how it would be impacted. I know there are many entrepreneurs that would have said they would go as far as completely relocating their business outside of Canada. They would completely stop any investment and growth within Canada and would look to expand internationally in places that have better and more competitive tax regimes. We have seen people that have said, “I will just completely close the company and go get ‘a real job’.” We have seen people say they will halt hiring. It’s a significant impact.
You may or may not see significant business closure necessarily in Canada, but what I see is a very, very detrimental effect to an upward trajectory of Canada’s growth from an economic standpoint, a job standpoint, an investment standpoint and an innovation standpoint. You can think of those thousands of companies In Calgary alone and extrapolate that across the country.
I would echo the comments of Mr. Kobly. In my seven years at the chamber, I have not seen an issue that has galvanized the business community such as this one. It is one that touches to the absolute core not only of why these individuals started their business, not only why they work seven days a week, 24 hours a day, not only why they make many sacrifices, it is because they want to do something different, chart a course of their own making and utilize the system to enable that to help them grow and generate prosperity.
Senator Marshall: So are you seeing signs of those sorts of things happening? One of the points we’ve been discussing is that quite often changes are made and businesses will react and say such and such is going to happen and the sky is falling, but usually, businesses will just struggle on and adjust to whatever changes are made. You’re hearing that from the businesses, but are you seeing any evidence? Are people telling you specifically that they’re closing up? What’s happening in reality?
Mr. Legge: Yes, very much so we are seeing actual implications of this. The reality is we’re still in this zone of uncertainty while the legislation is being drafted and reviewed, so investment decisions and expansion decisions are absolutely on hold.
Senator Marshall: For Calgary, you have just gone through a couple of very bad years.
Mr. Legge: Yes.
Senator Marshall: Just put the tax changes aside for a minute. Has the economy started to rebound? What are you hearing from your members? Have they bottomed out yet and are on the way up, or are they still down in the valley?
Mr. Legge: I think the business community would relatively say we found bottom and stability. I don’t think anybody here is feeling that we have hit any significant trajectory of growth. The reality is we’re still working as a community to rebalance, recalibrate —
Senator Marshall: Survive.
Mr. Legge: — diversify, and, quite frankly, get our cost structures under control so the companies can survive at $50 oil and make money. It’s still a very fragile recovery.
I have been very specific and vocal in my commentary that I believe it’s going to be about a decade before this province —
Senator Marshall: Before it rebounds.
Mr. Legge: — overall and this city feel like they have the worst of it behind it.
Senator Marshall: Okay. Mr. Kobly, that gives me an idea of what’s happening in Calgary and a little bit of an idea as to what’s happening in the province, but could you just build on that? The information I have is that you represent 24,000 businesses. How many are small businesses and, based on what you know, how many are going to be impacted by the tax change?
Mr. Kobly: Sure. By our estimate, 95 per cent of the businesses that are members of the community chambers through the Alberta chambers are small and medium-sized businesses, so that would be in the range of about 23,000 businesses, roughly.
Certainly the number of small- and medium-sized businesses that are affected now, after we’ve seen changes to the changes has been decreased. In particular, the issue of passive income certainly decreases the number of people that would be affected.
The major impact at this point in time is the question of income sharing or — I really don’t like the term “income sprinkling” —
Senator Marshall: No. Income splitting.
Mr. Kobly: — because I would suggest to you that for the majority of small- and medium-sized businesses, simply that’s how they establish the limited company. If there’s a husband and a wife who are becoming partners in a small-and medium-sized business, automatically it’s set up as a 51/49 split. So that effect will happen.
Senator Marshall: So you’re talking about 23,000 businesses. How many of them, based on your knowledge, are affected by the income splitting proposals?
Mr. Kobly: Again, this sort of draws on my previous experience as a CPA, CGA. I would say that probably about 90 per cent of the structures that are set up are between husband and wife.
Senator Marshall: Ninety per cent?
Mr. Kobly: You had a comment or question previously as to whether people are going to actually move because of these tax changes.
Senator Marshall: Yes.
Mr. Kobly: I’ll tell you yes. I do know of a situation of a small accounting practice, a very well-established accounting practice, in Edmonton that is currently going through the process of moving three dentists from the Lower Mainland of B.C. into Bellevue to practice. They’ve simply had enough.
I know that there have been comments in the previous week of Senate testimony that businesses suggested that business will pick up and leave.
Senator Marshall: And they’ll adjust.
Mr. Kobly: We haven’t really seen proof of that. The reality is that when businesses pull up and leave or professionals pull up and leave, they don’t say good-bye. They just leave, so it’s very difficult for you to have information on how many people actually moved or will move because of this because they’ll simply move.
Senator Marshall: But you know of actual cases?
Mr. Kobly: Oh, yes. And that’s a small practice where I know of three dentists that are moving out.
Senator Marshall: Okay.
Mr. Kobly: And the implication of doctors or dentists leaving rural Alberta is not just a medical issue. It is also an issue that affects the economic viability of those small communities.
For example, years ago, the community of Manning, which is very far north, lost their two family docs and people simply drove to Peace River to get their medical attention. Well, when they’re in Peace River, they buy all of the stuff that they need to survive, such as food, such as clothing, everything, which directly affects the local economy in Manning. Luckily, they now have their doc back.
But any process that would remove doctors or dentists, particularly from rural Alberta, will have an effect on the economy of that particular community. I guarantee it.
Senator Jaffer: Thank you to both of you for being here. I have appreciated your comments and also the briefs that you have provided. I’ve read them carefully.
I want to follow up on what Senator Marshall was saying about economic impact. Coming from a neighbouring province, we see from nearby how much Alberta has been affected by the fires and by the pipeline, and it goes on and on, and then these changes come. What I’ve heard from people from this area is this is sort of the last thing, most importantly because of the way it was said, that it was like cheating. Because you have your fingers on so many groups, so many people, can you give us an idea of what damage this kind of rhetoric has done to Alberta?
Mr. Legge: As I said in my remarks, I think there’s an overwhelming feeling amongst — I would pause at Canadian businesses, but I can speak quite frankly really only on behalf of my constituents, which is the Calgary business community. The government just simply has lost touch, and this is all three levels, with what it is like to be an entrepreneur and a business owner and what it takes. They are feeling absolutely attacked from all sides and in every which way, not only from a hard cost standpoint of increased taxes and fees, but by this rhetoric raised by my counterpart Mr. Kobly that they’re being vilified as cheats and evaders by simply utilizing the mechanisms that exist within our tax code. They’re standing there saying, “What the heck did we do wrong? We’re just doing what we’re allowed to do.” Someone has made up this narrative within the federal government that all of these people have contrived plans to cheat, avoid and minimize the tax they have to pay and are really, really not good people at their core.
The reality is that our entrepreneurial community is some of the most hard-working, dedicated and committed Canadians that I have ever met. I’ve had the privilege of serving in this role for seven years. I can tell you there is a spirit, a passion and a commitment to this country in these people. I can think of no greater way to establish roots in a community than to start and grow a business in that community. You are tied to that community. Your colleagues and your employees live in that community.
There is an absolute disbelief and awe about what is happening, and then on the flip side is nowhere in government are we seeing the recognition of what it takes to be an entrepreneur. No one is saying, “You know what? Thank you for creating jobs. Thank you for supporting this community.”
I have long been saying, and I keep saying it more and more often these days, that everything we hold dear in this country from a quality of life, whether it is our parks, our recreation, our education or our healthcare, all of that starts with a dollar of profit because that dollar of profit can be used to be taxed, it can be used to create a job and it can be used to create investment. We need to nurture that spirit to generate business and entrepreneurial attitudes, to support the creation of profit, to tax it fairly — absolutely, no one is saying that — and to recognize the value and the contributions that entrepreneurs play in our community.
Mr. Kobly: I would like to lift that sentiment and take it one step further as far as rural communities are affected. Small- and medium-sized businesses are simply not there to take and take and take. If you were to go to any small business in any small community in Alberta, in Canada, you’ll find that the folks who volunteer to coach baseball, to coach hockey and to work at their church are probably small- and medium-sized business owners.
Again, just to reinforce my initial points, whether it’s the federal government or the provincial government or the municipal government, businesses are getting really, really tired of being posed as the enemy and the reason why Canada is sitting in a deficit position and simply, again, being posed as the folks who are ultra-rich or rich, not part of the middle class. I tell you that the majority of the folks that I know and have known that are small- and medium-sized businesses are severely middle class and they pay their fair share of taxes. However, in this particular proposal that’s come forward from the Government of Canada, as my colleague said, they’ve been vilified on this, and it’s not fair.
Senator Jaffer: Mr. Kobly, last evening I was preparing for today and looking at what we heard yesterday. One of the things that really is frustrating me is that there really isn’t the concept of who is a business owner compared to an employee. Both are very honourable people. I’m not taking anything away from anybody.
I’m going to give you two a task, if I may. We are going across the country talking to people. It would be really helpful if you could tell us what recommendations we should make to get across to our government and people what a business owner is. I’m shocked that they have put these two against each other. The government has done tremendous damage, I believe, because of this. It’s comparing apples and oranges. I tried to argue with a professor yesterday. It’s useless to argue with an expert that can go all around you. So I leave it to you two.
I have one question for you before I am cut off, Mr. Legge, and that is the question of women. You said women got affected more. I have to tell you that I get very upset when I hear that women are getting the advantage with income splitting rather than them being the supporters. I really want it on the record as to what you were saying, how women are affected, from both of you, because I think we should get what you are hearing from your members.
Mr. Kobly: Well, I think it’s clear that when you’ve seen the information that’s coming forward from, say, the female doctors, they have no coverage for medical leave so they’re, in fact, with the passive income, storing that in their limited company in order to pay for their maternity leave. That’s a clear-cut example there of folks who are impacted more than men. This idea that income splitting or income sharing in fact enriches one spouse or the other more is incorrect because it’s basically family income.
These proposals have been brought forward as trying to grow the middle class, as to try and make the system fair and make the taxes fair for middle-income individuals. Perhaps we only need to go back about a year and a half, maybe two years, in the federal budget when the family tax cut was eliminated from the budget, which effectively cost my daughter’s family, which is severely middle class, $2,000 additional taxes.
We need to not only look at fairness and how it affects family units, but we also need to in fact look at how these changes affect, as you pointed out, females. To be honest, with these particular tax changes, I think they should be completely scrapped and I think we need to go back to the drawing board on the entire tax act.
Senator Mockler: Mr. Legge, on that same question, did you have a comment?
Mr. Legge: Nothing other than to reinforce the comments of Mr. Kobly.
Senator Mockler: Thank you.
Senator Neufeld: Thank you, gentlemen, for being here. Coming from rural B.C., northern B.C., I can certainly relate to Mr. Kobly’s talk about professionals, doctors or dentists. When they leave the community, it has a dramatic effect. We have a hard time getting enough to start with, let alone use them, so it becomes very important to me also. I’ve made it known in other meetings that when the federal government starts messing around with us losing more doctors, I get really concerned for the people that live in the communities or the area where I live in northern British Columbia.
You’ve used the term “middle class,” and I appreciate that. The government, I’m sure you know, talks about the middle class all the time, and has been for the last two years and even before that, but to this day, to my knowledge, after many questions to the minister about what he says is middle class, he’s not been able to answer. They still haven’t figured out who the middle class is, let alone anything about small business. It’s interesting.
I want to ask you a little bit, as some of the other senators have, about passive income. The minister is on record as saying that he doesn’t want companies to use passive income for retirement purposes. I find that quite interesting, and I would like to know your viewpoint on that. I mean, that’s a direct comment from the minister. I think it’s wrong, but I would like you to tell me what you think.
Along with that is the $50,000 threshold that they’ve put on passive income. I don’t know if you have any knowledge about where that number came from or how it was derived. We can’t seem to find out. It seems to be just something plucked out of the sky and stuck in there by someone. We don’t know who, but maybe you could comment on that a bit and help me here a bit.
This isn’t about income trusts, but we know there are some people that are heavily involved with these changes to taxes that have income trusts. Are they not a method of putting away money for retirement? I guess what I’m saying is the finance minister says, “No, small business, you can’t use passive income for retirement, but we’ll use our income trusts and that’s okay.”
I would like you to comment on that, and then I have another question.
Mr. Kobly: That’s a really good question. The whole issue of having passive income in a limited company in order to provide for your retirement income is pretty much a necessity because limited companies — and we know all too well in Alberta the cycle of our economy. I mean, I’ve seen this rodeo four times in my lifetime. Those who are prudent and put money aside for the eventual downturn will use it when that downturn comes, perhaps in order to preserve employees and make sure that they’re taken care of.
However, the suggestion was, and I’ve heard it in a number of cases, “Why don’t you just simply take that money out of your limited company and stick it into an RRSP like everybody else does?” The reality is that because of the uncertainty of business, particularly with our economic changes, once you take that money out of your limited company and stick it into RRSPs to provide for your retirement, if you need that cash back in your limited company, you would have to collapse it out of your RRSP, pay probably the highest marginal tax rate on it, and then give it as a loan back to your limited company. The reality is there are changing purposes for having cash sitting in a limited company.
The whole issue of where did the $50,000 threshold come from, I’m guessing it’s sort of, well, 5 per cent of $1 million. I can’t give you any other credible source as to how that number was arrived at.
To your third question, income trusts are a form of providing for your retirement, which again brings back my point about if we’re looking at fairness and simplicity in the tax act, we need to review all of the provisions of the tax act: individual, corporate, and the GST.
Mr. Legge: Senator, I think if you were to ask any entrepreneur or business owner about the passive income and retirement, I think they would tell you that their business is their retirement. Whether it is through a sale of that business or whether it is amassing certain savings within the passive income permittance, it is how they are planning to bring together a convergence of realities, which is how do I grow the company, how do I ride out economic uncertainties or down years, and how do I make sure I can afford to live when I retire or sell the business. It is that all together.
I think that this notion of this $50,000 limit is egregious and without any sort of substance or merit whatsoever. My only speculation is if we wanted to consider what middle class is, you may want to consider that a middle-class household income could be $100,000 a year, and $50,000 would represent half of that or one individual of that household’s income. That’s a possible scenario.
I’m not an expert on income trusts, so I’ll leave that to my learned CPA counterpart here, Mr. Kobly, and suggest that the passive income aspect of this structure needs to remain in place.
Senator Neufeld: Okay, thank you.
Just so we get it clearly on the record, would you say that with all of these measures, the government should back off right now and begin a total review of the whole income tax system and deal with everybody instead of cherry picking just a few? I would like to get something on the record to that effect, if in fact you agree with me.
Mr. Legge: Yes. The Calgary chamber believes that the federal government should cease with the proposed tax changes in aggregate. Yeah.
Mr. Kobly: Certainly. The Alberta Chambers of Commerce believes that as well, and, also, it was adopted by the Canadian chamber to take that position as well.
Senator Neufeld: And begin a review of —
Mr. Kobly: Begin a total review of the tax act through a royal commission and scrap these particular changes.
Senator Neufeld: Thank you.
Senator Pratte: Well, many people may wish that the government back off the whole proposal, but I think that’s not very probable. We’re looking for alternatives or recommendations that we can make to the government. In the event that they don’t back off on the whole proposals, we may suggest ways to make the proposals better.
Mr. Legge, I’m not sure I understood, so I want to give you an opportunity to elaborate on your recommendation concerning passive investment. Rather than the $50,000 threshold, I understood you to say that you proposed a percentage. Would you care to elaborate on that exactly just so I understand it and that the committee understands what your proposal is?
Mr. Legge: The reality is we believe there shouldn’t be a prescribed dollar figure because the circumstances of each business are different with respect to their cyclical needs, their investment needs, the nature of the corporation in and of itself, the familial structure that supports that corporation, the geographic location within the country and the industry that it is part of.
We’re proposing that, if the government is to move forward with this, there be some mechanism that ties in all of those realities and creates some way of enabling a company to operate so that it can have enough money to make investments or have enough money to ride out cyclical downturns. We don’t have the mathematics behind that worked out, but some of those realities should be part of the mechanism that would determine how much passive income can remain within the corporation and how much would be required to be taxed.
For example, there are companies that have very low capital needs and very low purchase requirements. There are others that are making millions, tens, hundreds of millions of dollars of investments to be able to grow and create jobs. Those should not be considered apples to apples. We need to be respectful and understanding of the different needs and cyclicalities of different companies and create a mechanism that enables some companies to have more passive income within their structure than others who just simply don’t have the need.
Having said that, that is if the government proposes to go forward with this, and we recommend that it not be put in place at all.
Senator Pratte: So it would be a percentage of something? A percentage of revenues?
Mr. Legge: A percentage of capital assets, historical investment levels, historical income cycles or loss cycles, et cetera.
Senator Pratte: Okay. As far as the impact of those proposals on small- and medium-sized businesses, one of the difficulties that we’ve had as a committee is that the government has provided figures to us and to the public on both income sprinkling and passive income that indicate that only a small minority of CCPCs will be affected.
We’ve heard the other side of this from many representatives of small businesses, and you again today have mentioned it. In Mr. Legge’s case, I think you mentioned a poll that your organization has made and I think 63 per cent of your members have indicated that they would be affected. Mr. Kobly, you mentioned something like 90 per cent and, from your own experience, you’ve mentioned something like 90 per cent of small business people do use some form of income sharing. The government mentions that income sharing is only used by less than 3 per cent of CCPCs and passive income, again, over the threshold of 50,000, only 3 per cent again.
We have these two very different pictures of either the government says only 3 per cent or less of CCPCs will be affected, and we have people who tell us that a majority of small companies, of privately owned small companies, will be affected. So which is it?
Mr. Kobly: Senator, I guess the answer is probably similar to the answer that I gave the other senator on where did the $50,000 come from. I think those numbers are probably coming out of the sky somewhere.
I would ask also if the government said that there was only 3 per cent of CCPCs that are involved in income sharing and only 3 per cent of CCPCs that are involved in and hold passive income, why were these proposals brought forward in the first place? If it’s that small a number, which I personally don’t believe simply from previous experience, I’m not sure why they would even open this can of worms and create this amount of angst amongst all small businesses in the country, and further, why they would ratchet back on their original proposal and modify it with the latest changes that we’ve seen.
Senator Pratte: If I may play the devil’s advocate, on passive income, the government would tell you that those 3 per cent hold over 80 per cent of the passive income, or receive over 80 per cent of the passive income.
Mr. Kobly: I guess the issue is though, again, if we’re talking about tax fairness, which is how all that these policy changes have been brought forward and we’ve heard nothing other than tax fairness over the last two years, then let’s look at all the provisions of the entire tax act to ensure that we don’t end up with unintended consequences and changes to changes to changes on legislation.
As far as suggested changes to this particular piece of legislation — you know what? — I think it’s beyond repair and I think it’s beyond the ability to get Canadian businesses to buy into it simply because of how it was handled right from the beginning.
Senator Pratte: Thank you.
Mr. Legge: Senator, just to verify some of the figures in that, of our members affected by this, so the CCPCs, on the income sprinkling issue, 63 per cent of them indicated they would be negatively affected, and on the passive income side, 76 per cent said they would be negatively affected by these changes, so quite a significant variance from the 3 per cent proposed by the federal government.
Senator Pratte: Thank you.
Senator Andreychuk: I apologize that I had an interview and came late, so I’m picking up what you’ve said.
I want to go back to a question that I put over and over: Why are we doing this? The answer always comes back: Fairness. That’s an interesting definition because fairness is in the seat you sit in, I guess, is the way it’s said.
This government particularly has paid a lot of attention to small- and medium-sized businesses. They’ve said in other ministries that that’s how we’ll grow our economy, that they’re the hope of the future, that they’re going to take young innovators and give them enough flexibility to be able to compete competitively internationally. Minister Champagne is now in East Asia, and that’s what he’s zeroing in on: more opportunities for small- and medium-sized businesses.
Now, consider the doctors. We know that we’re an aging society. You just have to look at me and you’ll know. We need more doctors, and we need more specialists. The Ministry of Health is struggling with the confidence that we’re going to need and the capacity we’re going to need.
I see ministries all over addressing it — perhaps it’s only in words yet, I haven’t seen the actions — and yet we have a ministry here where a minister must have received advice from within, because these proposals have been floated before but not accepted.
Have you reached out beyond the ministry to the government to say, “This is not going to go well for Canadians competitively in an uncertain market”?
I say that for Alberta because years ago I worked a lot in Alberta, and entrepreneurs would come to me, spinoffs from oil or something, and say, “I’ve got an idea.” And I would say, “You’re never going to make this work.” And they did, despite all odds. They found ways to be creative and spin off small companies that kept their families going.
How do we get the government’s attention? I think they get the message of where we are in the world and how we have to compete, and yet when it comes down to it, the very people who should be encouraged are now the targets. How do you explain that, if you can?
Mr. Kobly: To answer your last question first, we did reach out to Minister Morneau on behalf of the Canadian Chamber of Commerce, and he finally agreed to come to a session at our AGM in New Brunswick this past fall.
As far as reaching out to other MPs, particularly —
Senator Andreychuk: Ministers.
Mr. Kobly: — particularly on the government side, on this issue, it’s been very difficult. They’re not really willing to — at least in Alberta. I can’t speak to other provinces. But they’re not particularly willing to meet with actual business constituents. There have been some one-off meetings, but there certainly hasn’t been the ability for wide-ranging meetings with small- and medium-sized businesses.
The issue we always hear, particularly at election time, is that small- and medium-sized businesses are the backbone of this country, that they are the generator of the economy and that they are the employment generators of the economy. The good work that other ministries are doing trying to involve and enhance small- and medium-sized enterprises certainly has been severely wounded by what’s happened with these proposals that have come on small- and medium-sized businesses, especially the rhetoric that was involved with them.
On your point about these issues having been floated to previous finance ministers before, yes, they have. Unfortunately, this is the only finance minister who actually bit on it. I’m sure that the folks in Finance did provide him with advice that this could be the third rail when it comes to small- and medium-sized businesses. I just don’t see evidence that they in fact listened. I see that there have been changes to the changes, again, but I think those were simply due to the pressure that people put on them and not necessarily to do the right thing.
Senator Andreychuk: Mr. Legge, on the 50,000, you proposed somewhat of an alternative. As I understood it, if you had to start judging every business, it would be even more complex and more judgment-laden for a CRA than we already have. We’ve already got the farm problems of how does the family contribute and what is its value. Now, if you’re going to say what is the flexibility within a company and what is its value, it leads me to say we’re layering more complexity and giving more discretion to the CRA, who already are saying that what the government is proposing is going to be difficult and complex.
Mr. Legge: The reality is that no one relishes the thought of giving CRA more rules to enforce, but if the government is set on creating rules and regulations around the passive investment side of the equation, perhaps the alternative would be a sufficiently grand amount of $100 million that would be exempt. The reality is there are just too many differences regionally, industry, cyclically to paint every single business in Canada with the same brush. I mean, the notion of a $50,000 limit is, as I said earlier, egregious. It’s offensive.
Mr. Kobly: On the whole issue of income sharing and trying to build a fence around that, I’ll tell you that when you are face to face with a CRA auditor and they’re saying “This is my interpretation” and you say, “No, this is my interpretation,” and then you’re basically off to the races as far as perhaps through the appeal process, the reality is you have the full force of the Government of Canada against a small taxpayer. And, let me tell you, that’s not a fair fight.
We’ve obviously looked at their specifics within the tax act that are subject to interpretation, and there will always be subject-to-interpretation areas. However, the most recent ones are particular examples of issues that were subject to interpretation that went way overboard, like taxing the kid who is coming off of a shift at McDonald’s for getting a free hamburger, like removing the disability tax credit for people who are diabetic and like removing the disability tax credit for people who are mentally ill. These are all things that have been in place and been permitted for a number of years, and then all of a sudden CRA changes their assessment practice on it.
That’s why we need to ensure that we have a clear-cut tax act, as much as you can, and that it is redesigned so that it is fair. Through the patches over the years, it has become unclear and subject to more and more interpretation. Whether the process will be enhanced by having additional folks from CRA able to make decisions on particular parts of the tax act, I’m sorry, I wouldn’t agree with that.
Senator Oh: Most of the important questions have been asked, but I want to thank the two of you.
You have over 40,000 members in Alberta, and it is important that you are representing the voice of the people here. The Senate has found that the people of Canada are speaking out. They have spoken out about the concern of SMEs and the middle class. Minister Morneau and the Prime Minister have been featuring both of them as middle class. Can you give a definition of what is middle class and SME?
Mr. Kobly: That’s probably a real tough question, varying from community to community. The issue of what’s middle class in Calgary is maybe different than what’s middle class in, say, Fort McMurray, so that’s a very difficult question.
Again, that’s part of the problem when you’re gearing your tax act to assist the middle class. That target is moving constantly from municipality to municipality, province to province. I would wish anybody good luck at coming up with a definition as to what in fact is middle class.
As far as what is a small- or medium-sized business, the tax interpretation of it is any organization or any business that has less than a certain amount of net income on their tax. I’ve seen other definitions that suggest that a small business is any business that employs less than 50 people.
Mr. Legge: Senator, my only response is that my view is that the middle class is a social construct. It’s impossible to nail down. I’ve seen attempts to do so, but they vary across the country, depending upon earning potential and cost of living in each community. It’s a social definition that we’ve had since post World War II that defines a certain segment of society which remains nebulous. It’s this notion of what is a small business. The reality is if you use certain measures, like employees, Warren Buffett’s Berkshire Hathaway is a small business.
Senator Oh: Thank you.
Senator Cools: I wish to thank the two of you for your candour and also for your deep sensitivity to these issues and your grasp of them and your comprehension of them. You have essentially put a recommendation before us, which has happened in the last several days, that the government should scrap everything and start over, back up and start over from scratch. I think our recorder here has made a very worthy note of that.
I’m very impressed by the fact that you raise this whole issue of the inflammatory language, the very unnecessary language and very unnecessary rhetoric that has caused Canadians a lot of pain. As you said that, what came to my mind is the fact that the business of taxing is a very sacred trust. It’s a fruit of the constitutional relationship between those who govern and those who are governed, in other words, the leaders and the population. It is as though we ought to refresh this thought in our leadership and remind the leaders that every time taxes are to be raised, it is supposed to be hedged by all manner of constitutional limitations in the interests of protecting the population.
I’ve read a lot on this, colleagues, on the years. I’ve made it my business to know the history of the national finance and the public expenditure. Colleagues, maybe we should include in our report a small passage or two on this very fact. Taxing is not a wish or a whim. That went out in the third century in the U.K. That’s why we have House of Commons and that is why we have the expression “no taxation without representation.” I think we should also include in our report a tiny little 200 word, 300 word —
Senator Mockler: And your question? That was a comment, not a question.
Senator Cools: Well, no, I wasn’t asking a question —
Senator Andreychuk: Do you agree?
Senator Cools: Yes, do you agree?
Mr. Legge: Yes.
Senator Cools: I’m with them because they agree.
Senator Mockler: Okay, thank you.
Senator Cools: But what you have said has been told to us by many people, and that hurt is very deep that you’re talking about. Thank you.
Senator Mockler: Thank you, senator.
We have one minute left. Senator Marshall.
Senator Marshall: The only other thing I could think of is going back to my initial question on what kind of impact it will have on small businesses. Somebody yesterday mentioned — I think it was yesterday it was mentioned — that there’s always the possibility that these small businesses will be taken over by larger public companies. What’s your opinion on that?
Mr. Kobly: On the issue of small businesses being taken over by larger corporations, I don’t see that happening. I don’t see a large international company coming in and buying up Bob’s Welding, who operates in Provost, Alberta. I don’t see a large corporation coming in and buying Top’s Pizza, who operates in Medicine Hat. Certainly in the tech world that may happen, but you know what? The majority of small businesses are there and they may want to pass it on to their kids, but they’re there and they’re working in the community to make a living for their family.
Senator Marshall: Yes. So they’ll either struggle or close up or move shop?
Mr. Kobly: Yes.
Senator Marshall: Thank you.
Senator Mockler: Witnesses, thank you for sharing your views, your comments and your opinions. It was certainly very informative.
Honourable senators, our next witness is Mr. James Boettcher.
Thank you for accepting our invitation to share with us your views and comments about the order of reference that we have received from the Senate of Canada. At this point, I’ll ask you to make your presentation, to be followed by questions from the senators. Please proceed.
James Boettcher, Chief Executive Officer, Fiasco Gelato: Thanks, senators, for travelling to Calgary. Ironically, I’m in the gelato business in a city where it’s winter most of the time, but always sunny.
Thank you for taking the time to understand that the current recommendations for small business and entrepreneur taxation is hasty and needs extensive examination before such a drastic change can be considered.
I run a small business here in Calgary, recently recognized for making the Profit 500 list for the third year in a row, and our company manufactures and sells gelato across Canada. It has quickly been acknowledged as a pre-eminent category disrupter — not for how we make a delicious product, but more for how we do business differently.
You see, for me, my journey in entrepreneurship began with growing up in a single-parent household here in Calgary, in low-income housing, and acknowledging that any change would require hard work and determination. From the age of eight, I helped put food on the table for my family by shovelling walks and collecting bottles and then bagging groceries from the moment I turned 14, always striving to be the hardest working employee for any company I worked for.
Then came that moment when I realized that truly to make a difference in the world, I would need to go out on my own. I failed two companies before this one, and both times was left with bills with the government I cleared up, and I had little or nothing left to show for it. I took over Fiasco with $1,800 in my bank account and a commitment to repay a large sum to the original founder over three years. I did it, but only because I paid myself little to nothing, while always paying my people fairly.
The word I would use to describe the last eight years is simply “sacrifice.” Inherently, that is what true entrepreneurship is. You have an idea or a service that you think can make the world a better place and you give everything you have to do so.
Fiasco is nothing short of that. We offer a living wage and up to all of our employees, along with full benefits, and a great amount of support and freedom to ensure they are able to look after their families just as much as they look after our customers. We donate a great amount of time, resources, and, yes, gelato to our community to leave it better than we found it. We operate with environmental stewardship at the forefront of all decisions, diverting 95 per cent away from a manufacturing facility, simply because we give a shit.
Before you action a plan to paint every small business with one brush, recognize that there may be 1 or, as we acknowledged earlier, 3 per cent who take advantage of whatever system has been in place for a very long time, but there are far more businesses out there trying to make cities like Calgary attractive to the likes of Amazon and make Canada proud by exuding what makes this country great. Many of those small businesses were founded by people like me, who wanted to make the world a better place, not simply save money on taxes. In fact, I’m not even sure I would know how to.
That is why I would like to open a larger discussion with you about re-evaluating the idea to simply just raise small business taxes. Such a primitive approach to the problem actually inhibits opportunity for employment, growth, export, attraction and ensuring that Canada continues to be recognized as a country that embraces innovation and opportunity, not stifles it. I do believe that a tiered approach, with parameters around tax breaks for companies that use business as a force of good, like mine, would show strong results and a focused commitment to Canadians’ concerns.
Our team at Fiasco is a perfect vessel for supporting this. We are a triple bottom line company, we have what’s called a B Corp certification, and we are growing the economy, as referenced by our Profit 500 performance, in Alberta and growing national recognition. I also sit on several advisory boards already, including the board of directors here with the Calgary Chamber of Commerce, as well as a business organization called REAP, Respect for the Earth and All People.
Together we can formulate a well-thought-out approach that will continue to ensure our country is the greatest in the world and show a commitment to Canadian entrepreneurs and businesses that resonates with everyone. Thank you.
Senator Mockler: Thank you.
Senator Jaffer: Thank you very much for coming today. We can’t hear enough from people like you, who sacrificed everything. You used a very important word, “sacrifice,” and I’m sure you could spend two days setting out all the sacrifices, and we respect that very much. There’s sacrifice, and there’s also risk, a tremendous amount of risk you take the day you decided that you would take that big loan. Just with $1,800, that was a huge risk you took, and also jobs you created. And it goes on and on.
Unfortunately, I believe that the Minister of Finance has done tremendous damage when he has put people like you who do all this work to create employment and growth against others who work just as hard but in a different way. They take different kinds of risks. It was interesting that you said, “Well, I don’t worry about the tax. I just keep working.” Did I hear you say that?
Mr. Boettcher: Correct, yes.
Senator Jaffer: So it’s not like you get up in the morning and say, “What loophole can I look at?” You look at how you can grow your business, right?
Mr. Boettcher: Correct.
Senator Jaffer: That’s right. I wanted you to talk about that. You don’t get up every day and say, “How can I pay less tax?” You get up and say, “How I can do more; how I can earn more?” Can you talk about that, please?
Mr. Boettcher: Yes, for sure. You can call me whatever you want. That doesn’t really matter as much. I think the way Minister Morneau has portrayed entrepreneurs and small business owners is unfortunate, but a poor choice of words is not why I’m here today.
I think for me, the thing that is most important at the end of the day is that we just don’t make an arbitrary decision. Even the $50,000 comment that Mr. Legge was talking about earlier to me is just a feeble attempt at repairing some damage there.
When I think about a tax cheat, it’s actually the hot dog vendor on the side of the street that takes cash only and never reports any income. He’s trying hard to stay alive as well, but at the end of the day, for our business — we actually just had a CRA audit in the building yesterday, and they told me that they would be there for two days. They left at noon, shook my hand, and thanked me for the great environment I’ve provided for my employees. We were lucky to have them on our own turf. It’s a fun place to be most days.
But, yes, every morning when I wake up, it’s not about how much tax do we pay or how can I pay less personally or how can the business pay less. We just want to grow.
Again, going back to having a gelato shop in Canada, let alone Calgary, Alberta, and converting that business into a wholesale business, this year we might be close to 10 million in revenue, and when I took it over we did 120,000 a year. So it’s less about trying to figure out ways that we can pay less and more about the principle of how do we make sure that when things don’t go well, that I can still take care of the people that I’ve inherently been responsible for, my employees and their families, and not have to lay anyone off or close the business.
We talked about rural Alberta a little bit and some small businesses. I have so much respect because I know how hard it is in those early stages, and overlooking that I think is just ignorant.
Senator Jaffer: You also said that you were on an advisory board, and I would imagine that the people that were here before are probably your colleagues.
Mr. Boettcher: Correct.
Senator Jaffer: One of the questions I asked them, and I’m going to ask you — you don’t so much need to do the answer now, but you could provide it — is how do we get across this? I never thought that we would even ask this, but what does a small business owner or a business owner do compared to what an employee does? I’m not trying to put one against the other, but the government has by saying this is unfair. I’m not doing it; the government has done it. Every time we hear from a person like you, we know this is why we are doing the consultation. We want your voices to be heard. I’m asking you to help us to craft the message so people understand the challenges you have but also the great rewards you get from your businesses.
Mr. Boettcher: Right. A massive amount of risk, obviously, as mentioned earlier. An immense amount of time. An insane commitment. I made a commitment when I had four employees that I would never lay anyone off. I have 41 full-time employees now. We went through some pretty hard times in the last few years here in Calgary and in Alberta, where we had to make some tough decisions. Instead of saying simply we’ll cut people, I paid myself a dollar for three months. I didn’t make much at the time, I made 45,000, but that type of sacrifice is the sacrifices I have to make to ensure that the people I look after are there.
People have left my company and for whatever reasons and might have ended up on EI and the likes of. When I was 17, the business I worked for went out of business. Instead of using the government to take some time and receive EI, I immediately found another job. Again, as a bit of a testament, I said I never wanted to take money from the government that I didn’t need to.
All of these things, I think, collectively discern the difference between an entrepreneur or a small business owner from an employee. It’s tough for me because we encourage what we call entrepreneurship within the organization. Everyone is involved at decision-making and, like I said, things like living wage and unlimited vacation for us, those are all things that allow these people to live their lives as if it was their business. But, yes, they don’t have the risk at the end of the day. If we go through eight months where the revenue isn’t there, I’m the one that has to make that up and take on additional risk most likely.
Senator Jaffer: Thank you.
Senator Marshall: Thank you very much for your very interesting presentation. I know we’re going to ask you about the challenges facing you now with these proposals, but I would like to go back a little bit. You indicated that you’ve had several failed businesses and now you’re onto a successful one. Can you just tell us a little bit about the challenges that you faced, bearing in mind that I will only have about four or five minutes. I’m just interested in knowing what challenges you faced coming up through those failed businesses and then with your successful one. What did you overcome? And then I’m sure other senators will ask you about the impact of these proposals. I’m just trying to get an idea of all these challenges that are being piled on top of you.
Mr. Boettcher: For sure. When you start out and it’s only you, I always say a small business owner is somebody that exists on their own and maybe doesn’t grow too much. An entrepreneur is somebody that wants to make a massive impact in their community.
Access to capital was probably the biggest thing. What I had in the bank account was all that we had to survive, so if you have one bad month, you’re effectively out of business. Those are the things I think about when we look at retained earnings, and the ability to have some money in the account for a rainy day is super important, especially as a business gets to a scale. My payroll every month is $120,000, so being able to do that.
The small, small, small businesses, no employees, one entrepreneur, one small business owner, really, I think at the end of the day, if the government is able to acknowledge some way of ensuring those businesses have a fighting chance, that would be very helpful.
I alluded to a few things. I know that you guys asked some questions earlier about tangibility and some concrete numbers or some concrete suggestions around middle class and all that kind of stuff. I’m happy to talk to those points later because I do have some ideas.
As I converted into Fiasco, it’s a crazier story. We had a fire in 2009, before I ever opened the doors, and really I should have walked away, but I had one employee at the time and I decided I would fight for us to reopen. When we reopened, we had six months of great business, and the landlord showed up and said, “Sorry, you’re going to have to pay double what you pay now.” So outside forces against businesses are great even without the government.
What I would have loved at that time is if there was an acknowledgment from some level of government for an ability to have access to something that would have allowed us to continue. That would have been —
Senator Marshall: You mean with regard to funding?
Mr. Boettcher: Yes, something like that. When I look at Canada, specifically Calgary and Alberta and the groups that I work with, that’s what makes this city great. When people talk about Calgary, they talk about businesses that are thriving or doing great things or contributing to the community. We just had our small business awards, and the businesses that were recognized are what you would list if somebody said they were coming to the city and had to see it.
These are really the things that encourage this country to be great, and I think that that’s where we’ve got to make sure that we don’t paint these businesses in a way that is negative because, as alluded to before, sometimes people will just take their toys and go play somewhere else, and we definitely don’t want to encourage that.
Senator Marshall: So the government’s proposal, the passive income proposal, will that affect you? You’re talking about funding and having funding there to grow your business.
Mr. Boettcher: Yeah.
Senator Marshall: Will that affect you?
Mr. Boettcher: I wish we were profitable enough to say that there’s a lot to sort of keep for a rainy day, but I do recognize that, as we continue to grow, it’s going to be a real thing. What’s happened in the past for me, when I’ve been in a tight situation, is I’ve actually had to go to people that are independent that had passive income and borrow from them. The more that we stifle that, the less access I would have.
Senator Marshall: The less access you would get.
Mr. Boettcher: I mean, these are people that have worked hard through their life and put a bit away, and that’s really where we have access to that.
I acknowledge now that if we put some arbitrary number on that, it’s going to be really tough to say, okay, this is the right number. I think a percentage of income — when you look at simple personal finance and what a rainy day fund looks like, people often say it’s between three to eight months is what you should have set aside; and I think a business is no different.
Senator Marshall: The last federal budget was called the innovation budget. Has there been any benefit in that for you?
Mr. Boettcher: Not really. I think that, again, it was talked about earlier. Lowering the tax here for businesses is a great gesture, but I don’t think that’s an overall solution.
Really, where I put a flag in the ground and I want to fight for something different for our great country is — I’m sure a lot of the senators aren’t familiar with B Corp, but it was created in the United States and companies like Patagonia donate $10 million on a single day to protecting the planet. These are the organizations that belong to this group. There are only 1,800 businesses in the world. Three frozen dessert ones were one of them. But what happens is you go through a process where they have to go through how many women are involved in the organization, what your board looks like, employee ownership and environmental stewardship.
Those are really important things that I think, as we acknowledge those with business, could be a great way for the government to say, “These businesses are contributing more than just jobs to our country.” Maybe there’s a way to find something in there that says a company like Fiasco Gelato is exemplary of doing business for the force of good. Can we look at them through a different light than maybe a business that is just making money, we’ll say.
Senator Marshall: I represent Newfoundland and Labrador, and I’ve served on boards for kids’ sports, and we depend on small business owners to help fund the soccer jerseys and things like that. One of our witnesses said, or maybe I read it, that one of the impacts of this proposal is that it’s going to affect small businesses being able to support their community through programs like that. You’re on the ground floor. Do you see that as a possibility? Do you think that will happen?
Mr. Boettcher: Absolutely. In our budget, we plan for how much donations and sponsorships we’re going to participate in. It was mentioned earlier something as simple as an entrepreneur that has a flexible schedule being able to coach hockey or a sport is kind of the ground level, where I think that that’s where we’ve got to make sure that we have a commitment.
We participate in a lot of different things, especially right in our community, and I do think that if we were in a bit of a stranglehold — we operate on a very small margin as is and we contribute a lot to our community and we pay our people and take care of our employees. We happen to have a little bit left that we put back into the community. The more that we don’t allow for there to be a safety net for the days when things don’t go well, I can’t donate to those teams and then hope that when we’re in the weeds they’ll look after us. So I agree.
Senator Marshall: Thank you.
Senator Neufeld: Thank you very much. It is very refreshing to come and explain in your own terms what you think an entrepreneur is, and I would say that you hit the nail on the head very well. I appreciate all those things you said. We hear it in different ways from different people, but you’re young. You talk about how you failed twice and now you’re on the growing side, which is very good. I appreciate all that.
Is there something in these changes that the government is talking about that would negatively affect you and your business moving forward? The other thing I would like to ask you is, although you’re young and you’ve got lots of years ahead of you, people say you should start planning for your retirement as soon as you possibly can. I would assume that that’s maybe in the back of your mind, and maybe it isn’t, but do you think that you should be able to save income out of your business to whatever you think you should save for your retirement?
Mr. Boettcher: Well, as mentioned earlier, I will answer the last question first. Fiasco is my retirement plan. Every penny I ever have left over goes into it. I have a few other companies as well. If there’s any money there, it generally ends up in the gelato company, so at the end of the day this is truly where it all sits. I cashed out my RRSPs a long time ago to become an entrepreneur, so maybe not the best decision but it was the right decision at the time.
My fiancée is an entrepreneur as well. When we look at how some of these things impact our ability to build a family and plan for the future, it’s quite difficult and quite discerning. Every day we say we have to go to battle and put on our armour. It’s not that we don’t love what we do, but when you put in 12 to 16 hours a day, fighting for every inch for mostly your employees and the communities you serve, sometimes it begs the question, should I just go get a real job, kind of thing.
Yes, I’m 34. I’m still young. I feel about 100 some days, but that’s a different story. But at the end of the day, the thing I worry about the most with these changes is really that retained earnings piece.
It’s been an interesting two years. We went from being very aware of brackets on our net profit line to now just making enough to make sure that if we have a bad month, it doesn’t capsize the ship. We’re fighting to get to a place where we can have a bit more there. I’ve always paid myself very little. When I start to think, okay, well, why am I sacrificing so much so that at the end of the day we can’t ensure the business’s viability, it’s a tougher question.
I think that the more that you try to police this — I think Trudeau’s comment was combat. That’s a really interesting choice of words. We’re going to combat this thing. I just said the more that you try and do this, the more people are just going to try harder to not pay it. I think, similar to what Mr. Legge said, a full review of the system is really what needs to be done. You can’t just decide off the side of your desk you’re going to combat tax evasion. It’s totally insane that that’s the thought process right now, and then obviously with all these things coming up now about Morneau’s personal finances and yada, yada, yada, it’s a total mess.
I think that the best decision that can be made is to say, “Okay, well, maybe the system is outdated and maybe we’ve got to revisit the whole system and encourage people to keep their money in Canada instead of putting it in these offshore accounts or however they’re doing that.” That seems pretty simple to me, but, again, I’m young.
Senator Neufeld: Thank you.
Senator Pratte: I want to go back on the issue of passive income. I’m not sure if it was when you were with your present company or previous companies, but you mentioned that at some point you needed some money and you went to see other entrepreneurs to borrow some money, and obviously they took that money from their own passive investment. I understand that at the time you couldn’t go to the bank. No bank would have —
Mr. Boettcher: Correct.
Senator Pratte: — loaned you some money. That is something that we’ve heard often. Companies that have passive investments themselves have loaned some money to other entrepreneurs. Tell us more about that.
Mr. Boettcher: Yeah. It’s a long journey in terms of my banking in Canada. Banks are really great at the sales and marketing, and I think every bank right now is on the entrepreneurship train, but when you get to whoever is the underwriter taking a look at risk, very rarely are banks keen on risk; right? CPG is the category for consumer package goods that Fiasco falls under. They end up with a capital company that loans money like at Money Mart rates. It’s not good for business.
The fact that I had a few other entrepreneurs that I had access to and that believed in what I was doing and were interested in a fair rate of interest for a short period of time is very important. At the end of the day, I would say it even extends into the community, so having the ability where some money might be set aside, and an unexpected expense comes up for one of my employees, as has happened several times, you want to be in a position where you can help those people out.
Restricting all of these things doesn’t allow for people to do what is most important, which is make sure that you get through the tough times. I always say tough times don’t last, people do. When I look at who supported us during those tough times, those are the people now that are a part of a group of colleagues or advisors that I speak to on these topics, and they’re saying, “You know what, James? If this was in place then, I don’t know that I could have helped you out.” To me, that’s very disheartening.
Senator Pratte: So when your company continues to grow and revenues increase and so on and you can envisage that you will be able to have larger passive investments in the future, how can you envisage having passive investments? What would that money be used for in priority?
Mr. Boettcher: I think first and foremost any money that we have is used for growth or improvement on anything from quality of life for my employees or efficiencies that allow for the job to be more enjoyable, those types of things. There have been some small moments. I represent the food truck industry community here in Calgary where I’ve been able to help those people get through some tough times. Again, you can’t really run a food truck when it’s minus 20 outside. That is the reality of how the money is used currently.
As we get bigger, I do think that job creation is always a priority for me. It was an epiphany I had when I first took over Fiasco and we were a one-scoop shop doing a hundred grand a year, and inspired by Starbucks saying if you can put a great cup of coffee in a lot of people’s hands, you can employ thousands of people. For Fiasco, that’s always been the goal. How can we continue to create a great work environment for people? That’s really where the focus is.
Other businesses, again, in small touches, are there. I love entrepreneurship. At the end of the day, when somebody comes with a great idea, I want to be involved; but, again, access to my passive income determines if I can just be a friend or a part of it.
Senator Pratte: Finally, we haven’t mentioned at all income sprinkling or income splitting or income sharing. Is that at all an issue?
Mr. Boettcher: I like the word “sharing.” Sharing is a nicer word.
Senator Pratte: “Sharing” is a better word. So is that at all an issue with you? You mentioned that your wife is an entrepreneur also.
Mr. Boettcher: Yes. We have no children, so right now it’s not a thing. I have a friend who is a doctor. His wife is a doctor as well, and they just had a kid. He’s been going to school since I can remember. He’s in his thirties now. With the amount of sacrifice that is required to get to that level where we have great Canadian doctors, for him, I would attest that he should be able to ensure that his family is looked after. So not personally, but I do relate a lot to people that make this country great and should be allowed to decide that for themselves.
Senator Pratte: Thank you.
Senator Oh: Thank you for being here. I heard last night that many small businesses have closed in Alberta over the past two years, and while unemployment is down, it still remains high. Do you feel that the tax reform changes may hurt a lot of businesses that are still struggling to get back on their feet? What kind of incentive do you think the government is giving to entrepreneurs such as you to stay open and create jobs and also promote local growth?
Mr. Boettcher: Currently I don’t believe in all three levels of government that there’s anything tangible in terms of support. I think the forces on small business or business in general in our country are very difficult. The NDP came in and arbitrarily decided they would raise minimum wage by X amount. I’m a fan of paying people very well. When you start at Fiasco, you get paid $17 or $18 an hour to start, so minimum wage doesn’t apply to me, but I don’t think an arbitrary number across all industry makes sense.
Approximately 7,000 businesses have closed in Alberta in the last two years. Looking at that stat, when I speak to businesses that are failing or on the cusp of closing, I would say that often, they’re just exhausted. They’re at the end of their ability to operate. I believe that that’s where the government has to step forward and ask how it can help these businesses.
Don’t get me wrong. There are lots of people that get into business with bad ideas and sometimes they don’t work, but I do believe at the end of the day the government needs to show tremendous support for the risk takers and the people that sacrifice to do it. There’s no one that starts a business and works six hours four days a week and gets to stack a bunch of cash for doing so. It’s a tremendous amount of sacrifice. Whenever I travel or people ask me what to do when they’re in Calgary, often it has to do with small business and small business owners that have taken the risk and the leap to do so.
I think on that note as well, I realize that Minister Morneau has put himself in a pickle, we’ll call it, with some of his language. It is what it is. I do think at the end of the day, similar to what Mr. Legge said, I always believe in humility. Humility is a great leadership trait. If there was an opportunity to say, “You know what? We came in hot. We did this all wrong. We didn’t get enough consult from actual business owners. We’re going to table this for a bit, review all the great work the senators have done, and come back to the table with something that’s meaningful,” then all of a sudden you change the tone of everyone thinking the government is against them and possibly working for them.
Senator Oh: You must be doing well because you’re doing a lot of local support and promoting local growth. What’s the business turnover here?
Mr. Boettcher: I don’t know about doing well. I sleep very well at night because of the great work we do in the community.
Senator Oh: That’s good.
Mr. Boettcher: It’s easy to fall asleep. I think that’s a wonderful thing to have. I wake up every morning excited to bring about positive change. But by no means do I drive a Tesla or have a helicopter or any of that fun stuff or an offshore account anywhere. It would be nice, but it would be empty.
Senator Andreychuk: I just want to comment on what you said. It would be nice if Mr. Morneau just had some humility and said, “We tried something. It didn’t work. We’re listening to the people that are going to be affected.” Sometimes governments do that.
What I heard from Minister Morneau was, “We’ve heard the people and we’ve made the amendments and we’re going to implement, come what may, in a couple of months, but we’re not quite sure what the implementation is or what the rules and structure will be.” So a lot of people are saying, “How can we react when we really don’t know, because you’re saying, ‘Trust me, it’s going to be fair, it’s going to be simple, because we heard you.’” Do you think that that’s good enough, or are you saying something else should be done?
Mr. Boettcher: I think that would be a grave mistake. Similar to Senator Cools’ recommendations for what should be on the record today for the discussions, the government isn’t put in place to take such drastic measures without ensuring that it’s in the best interests of the people it governs. I strongly believe that if that decision comes down as is, you will see a great shift in businesses that choose to grow in this country, businesses that choose to open, never mind continue to operate.
I’ll put it in simple context for me. I have a decision to open an additional facility in Ontario. We’re looking at places where jobs have been taken away, like Oshawa, and I can decide that or I can decide to open in Detroit. I think at the end of the day, decisions like that make it really compelling to say, “Fiasco is a business that has tremendous impact in its community. There’s got to be more like them. Let’s make sure those guys want to do everything in Canada.”
Senator Marshall: I have a quick question. How long have you had this business, Fiasco?
Mr. Boettcher: I took it over in 2009.
Senator Marshall: 2009.
Senator Cools: Eight years. So he’s on his way.
Mr. Boettcher: I had no idea what I was doing. I still don’t know, but that’s another story.
Senator Mockler: I was saying to the clerk, and I want to share this with you, that we have something in common, you and I. I’ll ask you a personal question, but it’s public for the record. You said it was a single-parent household. Mother or father?
Mr. Boettcher: Father.
Senator Mockler: Father.
Mr. Boettcher: Yes.
Senator Mockler: He should be very proud of you.
Mr. Boettcher: Yes. He actually works for me. It’s an amazing turn of events. My dad spent 18 years with an organization that failed to recognize his commitment, and one day he asked if he could be the janitor. I said, “I don’t need a janitor, but I need a shipper receiver.” He’s 64 now. He’s been with me for five years.
Senator Cools: Is he happy?
Mr. Boettcher: The best and worst decision I’ve ever made. But I get to hang out with my dad every day —
Senator Cools: Lovely.
Mr. Boettcher: — and it’s very rewarding.
Senator Cools: That’s beautiful.
Mr. Boettcher: So, to go from where — sorry, I get a bit emotional with this, but —
Senator Cools: Of course it is.
Senator Mockler: You are great. You know that?
Senator Cools: We love hearing it.
Mr. Boettcher: To go from diving through dumpsters for pop bottles and cans before school to be able to employ my dad is pretty special.
Senator Mockler: Mr. Boettcher, I also become very emotional. I’m the son of a single mother, born on welfare, and I took my first student loan and I put the water and sewage in that little house. My grandfather, my grandmother, my sister, my mother, and I.
When I look at the Collins Dictionary and they describe “fiasco,” it’s an event — an attempt to do something as a fiasco, a complete failure. But you’re not a failure, my friend.
Mr. Boettcher: Thank you.
Senator Mockler: I’ve learned through life, with seven elections under my belt, and I never thought I would serve my people. I never, ever thought or dreamt I would be sitting here. What you’ve shared with us, it’s what Canada is all about. I know you know and we all know that people don’t care who we are until they know what we care for. We know what you care for, making Canada the best country in the world.
Mr. Boettcher: Absolutely.
Senator Mockler: We say to you, thank you very much, and continue. And if you want to move down East, let me know.
Mr. Boettcher: All right. Thank you.
Senator Cools: The New Brunswick area.
Senator Andreychuk: Do you want a job? A real job?
Senator Mockler: Mr. Boettcher, thank you.
Honourable senators, our last witness is Mr. Derrick Hunter, President of Bluesky Equities Limited.
Thank you very much, Mr. Hunter, for accepting our invitation to come to the Standing Senate Committee on National Finance to share with us your views, your comments and your opinions. I will ask that you make your presentation, to be followed by questions from the senators. If you have any opening remarks, please proceed.
Derrick Hunter, President, Bluesky Equities Ltd.: Good morning. I’ve never done anything quite like this, so thank you for providing me with this opportunity to present my views on what I consider to be very ill-conceived tax legislation. The proposals have plenty of design flaws that have been widely discussed, but my primary concern is what it is going to do to capital formation for new ventures in this country.
My name is Derrick Hunter. This is a topic close to my heart. I’ve been an entrepreneur many times in my life, having cofounded or founded enterprises in the energy, real estate and technology sectors. In my current role as President and CEO of Bluesky Equities, I’ve invested capital in over two dozen Canadian start-ups. I’ve supported entrepreneurs as a member of VA Angels, an entrepreneur’s organization; as a founder of the Creative Distraction Lab, Rockies; and as a director of Futurpreneur Canada.
I’m also a trustee of the Hunter Family Foundation, which created the Hunter Centre for Entrepreneurship and Innovation at the Haskayne School of Business. To date, we’ve trained more than 2,000 students at the University of Calgary in the mindset of entrepreneurial thinking. In May of 2017 we announced the new Hunter Hub for Entrepreneurial Thinking, which is now bringing the curriculum to over 30,000 students across the entire campus.
Furthermore, over the past two years I’ve watched a number of exciting local initiatives take root in Calgary, including Rainforest Alberta, Nucleus, Creative Destruction Lab and the Calgary Innovation Coalition. These groups have built momentum while the energy sector has suffered hard times.
In my view, the potential for Calgary’s innovation community has never been better. As such, this legislation is a direct kick in the teeth to those of us that have worked hard to build up this ecosystem. It is precisely the opposite of good policy. Rather than encourage our entrepreneurs, we’re about to take them out at the knees. I don’t know whether this government is acting from a desire to create class warfare for political gain or from simple ignorance of the importance of entrepreneurship, but either explanation is not very flattering.
In my preparation for today, I reviewed the Wikipedia biographies of the entire federal cabinet, and it was revealing and, I have to say, more than a little shocking to discover there was not a single reference to anything entrepreneurial among the lot of them. This strikes me as a pretty massive hole in the collective experience.
Just about everything you use in your daily life, from the car you drive to the iPhone in your pocket, is the result of some entrepreneur identifying an opportunity, taking initiative and bringing it to market. Entrepreneurship is what leads to positive rate of growth for an economy and a better quality of life for its citizens, but Canada is now being governed by a group of people who haven’t started a business, met a payroll, raised seed capital or worked through a succession plan. Perhaps it’s little wonder that this group couldn’t foresee severe negative consequences of this proposal.
Start-up companies typically go through three stages of financing, which we characterize as friends and family, angel, and Series A. As companies grow, they pass through these stages as their capital requirements get larger.
While recent announcements by the government have attempted to quell the backlash they created, if you parse their language, you see little evidence that they actually understand what they’re unleashing.
First, in the friends and family round, it’s usually the first money raised by an entrepreneur. Under the expanded tax and split income rules, which the government has stated it will enact, it will basically become the friends only round because if a business succeeds, related individuals that invest would be subject to taxation at the top provincial marginal rate rather than capital gains rates. For context, this rate would be at least twice as high as if the individual had earned a similar amount through an investment in a public company such as a bank or utility. Thus, the higher risk investment with no liquidity attracts twice the rate of tax as the low-risk publicly traded investment.
I have been advised that the government does not consider this source of capital to be material but, as somebody who has literally seen hundreds of private companies searching for financing over the last ten years, I can tell you that basically all private companies rely on relatives for early-stage financing. It’s called “love money” for a reason.
Angel rounds, which I often participate in, can involve investments from seasoned entrepreneurs frequently from within an investment holding company. Under the original discussion document, the total tax to be paid on a successful exit would increase substantially, to about 73 per cent on a nominal basis. The government has made plain its intent to eliminate investment holding companies, but these currently represent some 88 per cent of all the angel capital in Canada. In my opinion, that’s a lot more than we can afford to give up.
In response to public outcry, the government has floated concepts of exempting angels and grandfathering existing investments, but the devil will be in the details, and we’re told not to expect details until spring. Facing this uncertainty, angel investing is largely on hold.
The Series A rounds received from established venture capital firms are available only to the most successful enterprises, which constitute a tiny percentage of those that are established. VC firms rely on angel investors to bring companies up to the development curve so they have the necessary scale to merit a VC investment. Like angel investors, VC firms are facing considerable uncertainty and will have a much smaller deal flow to work with due to the impact on the angel sector.
My take is that Canadian investment capital for this asset class has been greatly diminished since July 18. Despite recent pronouncements that the government is listening, to date they have shown nothing but concern and confusion. The recent decisions to lower the small business rate just exacerbate the massive differential between low small business tax rates and high personal marginal tax rates, which is the underlying cause of the situation.
The $50,000 annual permitted cap on investment income is random, insufficient and will be complicated to implement. It baffles me that our leaders appear unconcerned that our major trading partner is moving policy in exactly the opposite direction.
So far, the government has ignored simple solutions in favour of complicated approaches that will lead to years of litigation, a flight of capital and massive compliance costs. In reality, the situation can be rectified with two simple initiatives: First, raise the small business tax rate or lower the deduction limit, as has been done in the U.K.; and, second, allow all families to income split, as is done in the U.S. Problem solved.
In sum, if we are striving to create a nation of public servants, we’re certainly on the right path. Entrepreneurship is not for the faint of heart. There are serious risks and challenges involved that you never have to face if you get a job in the public sector, along with the guaranteed pensions, sick days and other benefits you’ll pay for but never receive. In short, you get to keep the downside, but the government will help itself to a big chunk of your upside. Unfortunately, once we’ve annihilated our entrepreneurial class, there won’t be much growth or wealth for the rest of us to share, and Canada will be much poorer as a result.
Thank you.
Senator Mockler: Thank you.
Senator Marshall: Out of everything that you said, I think the biggest concern that I would have would be that the proposals are going to have an impact on access to start-up money. The last budget was an innovation budget. Could you just talk reconcile the government’s support in the budget for innovation with what’s happening with these proposed tax changes? Could you try to reconcile the two?
Mr. Hunter: Try to reconcile. It seems to me that it’s one thing to support innovation. When we talk about supercluster initiatives or centres of excellence and that sort of thing, we’ll spend money as a country on research and development of technologies, but that’s quite different than moving it into the marketplace, which is really where I’m primarily concerned.
We have a real challenge in this country, have for years, trying to encourage people to invest in our start -ups. We don’t have an abundance of capital at all, particularly for those very early-stage investments. So while I think that it’s popular for a government to announce that they support innovation, because that’s an easy thing and its pretty motherhood, what we see with these proposals is really the opposite. The ability for companies to get off the floor, to take something to market, will be seriously damaged.
I run a company. We see over a hundred start-up deals every year. We invest in a few of them. But it’s difficult. It’s challenging for young Canadian entrepreneurs to get financed. I think it’s really the difference between putting money into research institutions and universities and actually having them come out with a commercial product.
Senator Marshall: Witnesses are saying that something’s going to happen. Is it happening or do you think it’s going to happen?
Mr. Hunter: It being what?
Senator Marshall: Access to funding. You were talking about —
Mr. Hunter: Oh, it’s frozen.
Senator Marshall: It’s happening?
Mr. Hunter: Absolutely. There’s no question. I’ve had lots of conversations with people like myself that do invest in start-ups. I’m not saying it’s gone to zero, but most people are saying, including myself, that we are on hold. We’ve put on a moratorium from July when the proposals came out. Until we understand what the ground rules are going to be, we’re not investing in early-stage ventures.
Senator Marshall: The government has indicated that the proposed changes but the details aren’t available. They backed off on some, but for the others, the details are going to be in Budget 2018. Regardless of what the outcome is or what the final decision is, do you think that the money will free up once the details become known and it’s nailed down, or does that depend on what the details are?
Mr. Hunter: It really depends on the details. I’m concerned because nobody knows. There’s a lot of speculation —
Senator Marshall: No, that’s right, nobody knows.
Mr. Hunter: All that’s happened is that they put out press releases saying that they recognize that angel investors and VCs are important, but nobody actually knows what the rules are going to say. I’ve heard all sorts of different speculation about what it might mean. What does it mean to sort of exempt certain asset classes? How do you designate one company as a true angel investor and another one isn’t? What does it mean to grandfather a particular investment? Does that mean that the follow-on investment rounds don’t count? How do you set the valuation at that time? It’s going to be complicated and messy.
Senator Marshall: So where are the investors going? You’ve mentioned south of the border. I think you mentioned south of the border. Where are they going? They’re just going to other countries?
Mr. Hunter: Well, I know from talking to a few friends in accounting firms that there is money poised to leave.
Senator Marshall: To move?
Mr. Hunter: And some money has left. I don’t think I said the money is going south of the border specifically. My take is that for the most part, the number of investments that are being concluded has dropped. The people that I know that are familiar with this and invest in this asset class are like me. They’re waiting to see, when the smoke clears, what the rules are really going to mean.
There’s talk about ring fencing early-stage companies. How do you define what qualifies as an early-stage company? Is it valuation? Is it when it was founded? It’s just a slippery slope. It strikes me that we’re heading down this really complicated set of rules when really the whole thing could be much, much simpler.
Senator Marshall: My last question is this: We know that there are some changes coming in certain areas, but it’s also left this environment of uncertainty. Just because we get certain packages in the 2018 budget, there may be more to come. This time next year, we may be looking at other proposals.
Mr. Hunter: Right.
Senator Marshall: So do you think that that will also have an effect? Say what comes out in 2018 is pretty good, or it’s not bad. Do you think that that air of uncertainty will still hang over, or do you think it will bounce back?
Mr. Hunter: I don’t know. I mean, what would be good is if they sort of backed off entirely. Now, I don’t imagine that’s going to happen. I suspect what will happen —
Senator Marshall: No.
Mr. Hunter: — is it will be a convoluted kludge of legislation that’s going to lead to all sorts of accounting nightmares and compliance costs and we’ve got to create different pools for different streams of income and so forth. It’s just going to be a nightmare for small business.
I think that there’s a concern right now. We’re not expecting to see legislation probably until March, I assume, but will it be retroactive to January 1, 2018, perhaps?
I think there’s a credibility issue. I mean, I don’t really trust them. This is a pretty rapacious government that’s talking about taxing waitresses’ meals after work, and you name it. I don’t know that anybody is going to be fully comforted with whatever they come up with.
Senator Marshall: There will always be that air of uncertainty.
Mr. Hunter: Well, I think the character is well established of this government.
I can’t predict the future, but what I can say is that here in Alberta, we have one active angel group. There are about 60 members between Calgary and Edmonton. I’ve been part of that group for over ten years. It’s challenging, but it’s an important part of the ecosystem that there are people that are prepared to write those seed capital cheques for 50 or $100,000 to get companies that have merit up and running. Making it so unattractive to pursue that asset class, I can’t understand why people will consider continuing down that road, and that’s clearly the direction we’re pointed in.
Senator Marshall: That’s where we’re headed. Thank you.
Senator Jaffer: Thank you very much for your presentation. Listening to you, I find it a little depressing, but —
Mr. Hunter: I have that effect on people.
Senator Jaffer: It also is a wake-up call. Listening to you, it really came home as to the grit of a business owner and the risks people take. You talked about family and friends. One of the things I didn’t hear you speak about, but maybe you did and I missed it, was the issue of passive income. Often, families have used passive income to help, and I was wondering if you could comment on that.
Mr. Hunter: To the extent that angel investors and VCs, really they’re generating passive income. To the extent I made my comments with respect to those types of investors, that really was going to the passive nature. The notion of effectively eliminating the capital dividend account, which has the effect of massively increasing the tax rate of an investment company, in my view, why would you it take on? The riskiest investment opportunities in the country are these start-up illiquid private companies, most of which are going to fail. Why would you take that risk if you’re going to face that tax rate? Whereas if you put your money in RBC or Bell or something like that, you get capital gains treatment and you’ve got liquidity and much, much lower risk.
The whole sort of turning the tax regime upside down and sort of piling on that asset class seems crazy to me, particularly when really what we need in this country is more Shopifys and Hootsuites. We need to encourage these start-ups. Some of them will grow, and it will be a tiny percentage, but the more you sort of seed, the higher the probability that you’re going to have one catch fire, and those are what really lead to growth and to an improving standard of living. Every established business was a start-up at one point.
I purposely avoided talking about passive income in the context of the doctors and others who have talked about splitting income with spouses or whatever. I think it’s problematic. I have a very good friend from Calgary who started a successful software company. He and his wife mortgaged their house to get the business started. Now they employ 100 people and they’ve raised something like $80 million in start-up capital. So it’s a huge Canadian success. But under these rules, she’s not actively involved in the business even though they pledged their jointly owned capitol to provide the seed capital. She’s not entitled to any return from that, and that just strikes me as crazy.
Senator Jaffer: Listening to you, I realizing even more that it feel that the government — I have no inside knowledge — one day got up and said that they had put in the election campaign that they would do this, but it’s more and more becoming important to see that they should have first done an economic impact assessment as to what this would lead to, what it would be, and they started the wrong way.
Mr. Hunter: That’s a very interesting perspective. I think you’re right. It’s public knowledge that the government was basically taking their cues from a group of academic economists: Michael Wilson at Ottawa and Kevin Milligan at UBC. I went to listen to Kevin Milligan — he came to Calgary, which was pretty brave of him — and I went to listen to him, and I’ve read Wilson’s paper as well.
Where they’re coming from, having gone through their presentations, is this sort of fundamental belief that a dollar is a dollar and they should all be taxed exactly the same. Taking it to its logical conclusion, it suggests that the dollar the fellow that got paid today for the shift at the passport office a week ago is no different from the dollar that my friend will earn when he sells his business, even though that money went in ten years ago, and they’re identical.
If you take that sort of academic view, which is really what’s informing the government’s approach, and that’s clearly the message from these academic economists, who are tenured and who have pensions and all the security that entrepreneurs don’t have — to me, I look at that and think, well, the message is pretty clear. It’s pretty attractive to become a public servant, then, if all these dollars are the same. But as a community, as a country, we need more of those start-ups. Unless you have those start-ups to take root and grow and develop and flourish, we really don’t have a pie to actually share through taxation.
I personally think that the notion that a dollar is a dollar is wrong headed. There are certain things you want to incentivize, and we do that in all sorts of ways through the tax system. Why would we now want to single out small business and entrepreneurs for especially harsh treatment? I don’t understand.
Senator Jaffer: I have been working on this file and thinking a lot about this. I also come from people and I also had small businesses, but I’ve always felt that small businesses, the people who do the growth, give the money for the civil servant to get paid or the hospitals to be paid, and I think there isn’t that understanding that it’s not all the same. It comes from different pockets. Am I wrong?
Mr. Hunter: Well, I agree with you. Michael Wilson does not.
Senator Jaffer: I know.
Mr. Hunter: It’s a philosophical question. There are lots of areas in the Income Tax Act that sort of exempt or sort of favour certain activities because we consider them to be desirable. I would certainly argue that encouraging small business to develop and grow should be one that we want to encourage more of.
I made the comment that our company invested in over 30 start-ups, and a lot of them fail. It’s a risky, difficult trajectory, but a small number thrive, and you just don’t know who it’s going to be when you put your money down. You can do all the due diligence in the world, but there is just no certainty for how things really are going to play out in the real world.
We take a portfolio approach to say we support this sector because somebody has got to do it, but it really is profit seeking because we believe that if we have enough exposure to enough different entrepreneurs, that statistics will work in our favour. I think that’s been borne out by the results we’ve seen.
I think the same applies to a nation. You’ve just got to encourage lots of start-ups to get going. We have a lot of bright, talented people in this city and in this country. We don’t need to make it harder for them to decide to step out and hang out a shingle.
Senator Andreychuk: To follow up one point you said about the academics who have a theory, it seems to me they did that prestudy in their minds or in their studies with their colleagues about how to change the tax system and the dollar is a dollar. Some of that is based on the Scandinavian models where you reward entrepreneurship in a different way, but everyone pays a very high tax to get a guaranteed social structure. Every time I read one of those theories, there is a subset that said Canadians probably wouldn’t abide by the high tax brackets that, say, our Danish colleagues, et cetera, work on.
The government must have a tax theory, but they didn’t include discussing it with the public. And am I getting that you think we’re stuck with what we have now?
Mr. Hunter: Stuck with?
Senator Andreychuk: With the tax reforms with the amendments. Or do you think that there is some room to say, “Hey, you really are changing the tax system in Canada, and we want to be part of that dialogue, so back off and give us the dialogue?”
Mr. Hunter: Well, yes. I know that Kim Moody will be speaking to you folks this afternoon, and I’ve heard him speak, and he’s obviously one of the most knowledgeable people in this field. I imagine he will say that this is the biggest tax change in his career, and to do it with a 75-day consultation period starting in the middle of July is really not a discussion period at all. I shouldn’t, I guess, presume to put words in his mouth. These would be my views as well, that something as fundamental or as sweeping — really, the last time the country went through this was I think in the 1960s, and they spent four years or more with the Carter commission developing kind of a comprehensive plan.
Taking these little pieces sort of scattershot and sort of picking them off when we all know that there’s plenty of flaws in the — there’s plenty of room for improvement in the Canadian tax system even outside how we tax small business. I think the best move would be to take a step back and step back from the ledge and probably do something grander that can address it in a more holistic way.
You mentioned the Scandinavians. I’m certainly no expert on Scandinavia, but three years ago I was in Iceland, and the fellow that picked me up at the airport, on the ride back, was telling me what a high tax country Iceland was, and his tax rates are a lot lower than ours, so they manage to have that Scandinavian sense of community at a comparatively lower tax rate there.
Senator Andreychuk: We heard at the start a lot that it was an advantage to incorporate for small business and that that was the reason that people were incorporating, but listening to some businesses, they said, well, of course, that may be one of the reasons, but I have a whole bunch of other reasons that I have to incorporate, including if I’m going into a franchise, they’re demanding that I be incorporated; anybody lending demands incorporation; and it’s also to allow the lenders to be able to maximize any losses should your business fail so that you can avoid some of these civil liberties acts that provinces have. Is that the same in Alberta as it is elsewhere?
Mr. Hunter: Yes.
Senator Andreychuk: Can you comment on why people incorporate small businesses?
Mr. Hunter: Well, I think there are multiple reasons, and I think you’ve listed several of them. Limited liability is probably the big one. But, you’re right, certain lenders will require incorporation.
From the perspective of earning passive income, i.e. interest or dividend income in a corporation, you actually pay a higher tax than you would if you held it personally, so there’s no direct benefit of incorporation for sort of what you do with earnings after they’re earned.
It’s a bit weird about Canada, right? We’ve got these very high tax rates. If you live in Ontario or Nova Scotia, you’re approaching 54 per cent at the top end, which is awfully high. It’s more than half. The government gets more than you do after you get to a certain perspective. At that point, the threshold that those rates kick in at is in fact much, much lower than they would apply in the United States, so lower rates in the U.S. at a much higher threshold.
So we’ve got these very, very high rates, and the perspective of the government is that, well, it’s still not fair and the top 1 per cent of taxpayers aren’t paying enough, and these have to be constantly raised, but yet on the other hand just sort of extolling the virtue of taxing small business at a very low rate, and recently dropped to 9 per cent federally, and I think in Alberta that takes it to like 11.5 or something. We’ve got this sort of weird contradiction in this country where we think that it’s important to have low small business rates, but it’s also important to have extremely high personal rates. It just sort of feels like we’re sucking and blowing at the same time. Low taxes are important to this group of people, but high taxes are important to this group of people.
Really I think where we get into trouble is the delta. The difference between the two is so big that I don’t doubt that some people say, well, it’s 54 per cent here and 11 there. We’ve baked in this crazy incentive to try and do that in some cases where it might not otherwise occur. That’s not the right reason to incorporate, just for tax reasons. I have no idea to what extent it’s done for that reason in this country, but I would sort of take the view that really what we should be thinking about is narrowing the difference between the two of them.
Jack Mintz talks about how very low small business rates basically act as a wall to sort of dissuade companies from growing too large because their effective tax rate becomes very high after that. That makes sense. I sort of find myself thinking, oh man, at 54 per cent, haven’t we crossed the Rubicon? The federal government actually took less in income tax after they raised that top rate, took it to 54 per cent, than they did the year before. Have we gone over the top of Laffer’s curve, where higher rates produce less revenue? I don’t know.
Senator Pratte: If I look at the backgrounder that was published by the government mid-October when they published the changes to the proposed changes, they say that they will ensure that, as the government moves forward with tax changes, incentives are maintained so that Canada’s venture capital and angel investors can continue to invest in the next generation of Canadian innovation, and the government will work with the venture capital and angel investment sectors to identify how this can best be achieved. Are you reassured by this announcement?
Mr. Hunter: Not particularly. Just for context, I’ve had quite a few conversations with both the president of the National Angel Capital Organization as well as the Canadian Venture Capital Association on this topic. My sense is I think it’s positive that the government has announced that they recognize there’s an issue.
For me personally, it was very interesting. I got the notice of this in mid-July. I was on vacation, and my immediate reaction was this is terrible. This is going to be incredibly damaging to this economy. It took a long time for the outcry. At least, to me it felt that it was taking a long time for the outcry to develop, and ultimately it did, but most of the attention seemed to be focused on things like farmers, succession, doctors, splitting income and that sort of thing. In the midst of all that noise, it’s a positive that they have kind of made those soothing words, but I’ve talked to the CVCA, asking, “Do you have any idea what this is going to look like?” The answer is no, they don’t.
As I commented in my presentation, it’s one thing to talk about grandfathering or exempting certain asset classes or saying that early-stage investments are somehow excluded from these rules, but, the devil is in the details, and until the legislation is written, we really don’t know how it’s going to impact.
It’s a bit like trying to define “reasonable.” Under the TOSI rules, they’ve got all these reasonable tests, but they can’t answer what “reasonable” actually means. I’ve asked accountants what “reasonable” means in this context, and nobody knows. The answer I’m told is that it will take ten years of court cases and it will be litigated and at some point in the future it will get established.
I worry that the angel and VC rules are in that same sort of category. I think it’s positive that they acknowledge that this is something that’s got to be looked at, but the devil is in the details, and until there’s a clear understanding of what the actual legislation is going to say, my view is that those pools of investment capital are going to be seriously limited.
Senator Pratte: I know this is complex, but since the government is in fact sort of appealing or asking the industry for suggestions or ideas, are there some recommendations or ideas that you have as to how the angel and venture capital could be protected from those measures, any ideas that you would have?
Mr. Hunter: I don’t think they should be protected. I think this whole rabbit hole that we’ve gone down is just going to make a complicated tax system more complicated.
As I said, my view is that if you raised the small business tax rate or reduced the small business deductions so that you didn’t have this ultra-low tax rate, and if you allowed families to income split, you’ve basically addressed all the concerns that were originally raised. Personally, I don’t see what’s wrong with successful companies using some of their capital to invest in the next generation of successful companies.
Senator Pratte: The problem we have, sir, is that the government pretty well has decided to go ahead.
Mr. Hunter: Yes. Pretty well.
Senator Pratte: We’re trying to find ways to make those ideas or the government’s plan better, and we’re looking for ideas or recommendations so that those plans are made better. I know many people would like the proposals to just go away, but very probably that’s not going to happen.
Mr. Hunter: Yes, you’re probably right, and that’s unfortunate. I don’t know. I’ve asked the CVCA guys that question. How do you draft language to ring fence this specific asset class? I don’t know how you do it. At what point do you draw the line? I mean, you really can’t do it on valuation or age of company or geographically. I can’t even imagine how you start to say that you can invest in this company but you can’t invest in that one, which is essentially what it’s coming down to. At some point you’re going to get into this grey area of, well, does this qualify?
To me, it feels like all these proposals are just designed to add complexity, and really we should be searching for simplicity. I got nothing. I’m sorry.
Senator Pratte: Thank you.
Senator Neufeld: Thank you for your presentation. One of the challenges of coming last is that all the questions are asked, but you’ve explained to us very well, I think, some of the problems that we’re going to face. I would hope that the government would see its way clear to say, for the amount of money we’re going to raise in this process and the amount of complexity we’re going to add, this just doesn’t make sense. Maybe that’s too practical. I’m a bit practical. I don’t think they are with the theory that they come up with.
For sprinkling, I believe it’s about $250 million, or maybe less, that they may gain in a $300 billion budget. I mean, 250 million is a lot of money, but, boy, when you’re talking about that in comparison to 300 billion, it’s not very much for the complexity that they’ll add to it and the costs that will come to actually administer those new complex regulations and all of the things that go along with that. It may be designed to hire more people in government, and we know sometimes that’s how government works.
If in fact, as my colleague says, they’re going to go through with it, I’m always optimistic, and I hope they look carefully at what they’re doing, but if they do and in fact you still don’t agree with the changes, where would you go? You’re an investor. You believe in entrepreneurs. We had one here earlier, a great entrepreneur, who talked in realistic terms about what it takes to be an entrepreneur and start from the bottom but needing help from angel investors and those kind of things. Where would you go or what would you do? What’s available for a person like yourself and others in your same position?
Mr. Hunter: Well, I’ve spent a lot of time contemplating that question since July, obviously. I’ve been an entrepreneur many times myself. I started lots of companies and things.
I think the first step is that if the rules were passed as presented, it wouldn’t make sense, in my view, for any Canadian to invest in private companies any longer. I made the comment in my remarks that, as originally presented, we’re proposing to tax the riskiest, most illiquid asset class at the highest rate. So why would anybody do that? I mean, you wouldn’t; right? So for us, it would certainly mean not investing in that asset class. You could put your money in publicly traded companies. If you invest in a dividend-paying public company, your effective tax rate is way less than it will be under these rules with way lower risk, and you can sell it any time you want. So that would be sort of the first obvious outcome. I think it’s totally foreseeable and a hundred per cent predictable.
I think the second thing is that you would likely start to see capital migrating. I shouldn’t say “start” because it is happening now. I am aware of people that have chosen to leave Canada because of this tax law, and I’m sure everyone in this room is aware of that. I believe that it will likely accelerate and that funds would move to other countries where it could be invested anywhere outside of Canada, which is 97 per cent of the world. The rest of the world is available, and I don’t think there’s any doubt that it would lead to a flight of capital. I think that that’s pretty obvious.
This is sort of anecdotal, but I was in Toronto a couple of weeks ago because I’ve become involved with Creative Destruction Lab, which is a very successful, kind of uber-incubator based out of the Rotman School at the University of Toronto, and we’re bringing it to Calgary this month for the first time. There’s a lot of excitement around it. But part of participating in that group is you’re taking science-based Canadian technologies and typically young teams and basically challenging them and helping them. You’re mentoring them, but you’re also financing them.
I asked a bunch of folks in Toronto, “How do you feel now that we’re in this vacuum? We don’t know what the rules are, so how are you feeling about what we’re going to do with CDL?” There’s no question that the reaction is just a lot more caution, a lot of uncertainty and pulling back from investments. I’m not saying going to zero, but certainly reduced, and potentially reduced substantially if these rules proceed.
I’ve kind of rambled a bit, but I think that’s really what it amounts to.
Senator Neufeld: Can you give some sense of how much that you know of has left?
Mr. Hunter: I know it’s billions, for sure.
Senator Neufeld: Okay. I don’t expect an absolute answer, but if it’s thousands or millions, it’s —
Mr. Hunter: Oh, it’s billions, for sure.
Senator Neufeld: Okay.
Mr. Hunter: But that was in the press a month or so ago. It’s sort of well known. Honestly, I know for sure of billions of dollars that have left and lots more just anecdotally through conversations with accounting firms. They don’t release names or anything like that, but there’s certainly plenty poised to leave.
Senator Oh: Thank you, witness, for being here.
Yesterday we had a witness who said that high taxes and bad business investment don’t matter because Bill Gates started his business in a garage and he didn’t care about tax incentives.
In the whole century, we only produced one Bill Gates. My thinking is that we have millions of SMEs everywhere, and I think the government’s promotion on creating a good investment opportunity is still the most important.
As you say, in Iceland the taxes are much lower than ours. In Scandinavian countries, it is the same thing. Here, with this tax reform going on, plus provincial taxes coming in, minimum wage, the costs are rising. I have a friend here in Calgary who employs 400 people, and they are facing a big problem with the incoming economic situation. Can you comment on that?
Mr. Hunter: Well, yes, there’s only one Bill Gates, but there’s lots of successful entrepreneurs, and it would be nice to see Canada get its share. I do think that some people are going to be inclined to continue to try and succeed in start-up, irrespective of what the tax landscape looks like. Tax is just one albeit very important, component. I think a lot of early-stage entrepreneurs don’t necessarily think about the tax ramifications when they try to get started because they’re not facing high taxes until they succeed, but certainly the investors are well aware of the tax rules. That availability of capital question is the one I’ve been most concerned about. I’m not sure I’m answering your question exactly.
Senator Oh: But I’m sure if Bill Gates now is looking for a good country, good investment environment to go into, he’s going to invest anyway.
Mr. Hunter: I believe he invests all over the world, yes.
We’ve had the Hunter Centre running at the Haskayne School for four years now, and a couple of years ago we did a pilot project, and they offered a course. Fundamentally, what we teach is entrepreneurial thinking. It’s very foundational, granular kind of stuff. It’s about ideation and opportunity identification, and it’s actually the only university that I’m aware of in the world that makes it mandatory for all commerce students to complete this course. It’s challenging.
I’ve talked to lots of students that have done it, and it’s really binary. It’s either the best course they ever took or the worst, because it’s hard work. I always end up saying, well, you know, it’s like Buckley’s Mixture. It’s for your own good and someday you’ll thank us. Because they’re 19 years old, they don’t really see it that way. But, anyway, I cling to this belief they will.
We’re really getting them, I would say, demystified. What is it really like to be an entrepreneur? Because things are changing, and the nature of work is changing. I believe that students today believe that they’re not going to graduate and go to work for Deloitte’s for 40 years. They expect that they are going to have to change direction several times over the course of their career, so part of what we’re trying to do is sort of get them thinking in that mode. Even if they go to work for WestJet or some large company, that’s okay. This is still helpful within big organizations.
Anyway, about two years ago, we did a pilot project, they opened it up to any graduate student at the University of Calgary to take basically that same course, and they had about 78 participants. I was asked to be one of the panelists at the end. I’ve got to say that, they just blew my socks off. We had students from medicine, computer science, law, engineering, commerce — I mean, right across the faculties. These were all older students that were on their second or third degree and had expertise in the domain, and they had identified an opportunity and they were using this course as kind of an opportunity to build up their business model and sort of get straight in their heads what they were going to go forward with. I was one of about six people on the panel that were listening to these presentations at the end of the course, and they just blew me away. We have some incredibly brilliant students and a real opportunity to sort of harness that student power.
Our challenge as a city in particular, but as a country more broadly, as we encourage these students, our best and brightest, to move out and take that chance, is to do a better job of receiving them into the community so that they can find the contacts that they need, raise the money, get the expertise, whether it’s marketing or legal help or whatever they need. We have to do a much better job if we want to grow and develop this economy for the next 20 or 50 years.
Tax law is only one part of the whole piece. I commented about a bunch of these things that are happening in Calgary. We have an energy-centred economy. I started in the energy sector, and it’s in tough shape, but in the midst of all this, we’ve seen all of these green shoots pop up, which is very, very exciting. I just lament that now we’re starting to really see some traction, and, at the heart of every substantial innovation ecosystem, whether it’s Silicone Valley or Kitchener-Waterloo or Boston, there’s always a research university at the heart of it. Right? So we’re trying hard to transform our research university into the heart of what will become our innovation, our entrepreneurial community, and the last thing we need is our government working at cross-purposes to make that more difficult. That’s why I’m here today.
Senator Oh: Good. Thank you.
Senator Andreychuk: I just want to follow up on that. In my work on international issues in the Foreign Affairs Committee, we travelled to India and met Canadians of Indian background. They may have immigrated to Canada or been born in Canada, and they’re doing their business, small entrepreneur business, in Mumbai. When we asked them why, they said that’s where it’s at now. So I said, “You’re going to settle back there?” “No, we’re going to watch where in the world is best. Is it Silicone Valley? Is it going to be Toronto? Is it going to be Calgary?” They’re much more mobile. They’re much more international. As you said, they’re not going to stay in one niche. They want their skills and they want the challenges and they want the rewards. So they’re going to base all that.
We’ve got this tax problem that we’re dealing with, but it’s in an environment. We don’t know what’s happening south of the border. We’ve got changes within Canada. We’ve got a European mix. We’ve got China on the rise in many different ways, et cetera. To what extent does that impact on the new entrepreneurs, the environment beyond the tax base? Or is this the one thing that really is going to be the breaking point, you can call it, or the signal that we should really pay attention to, or is it one of a mix?
Mr. Hunter: Well, I’m sort of wired to worry about tax, but it is one of many factors.
I’m on the board of Futurpreneur, which is a national organization that is designed to support young entrepreneurs. When these rules came out, I called the CEO and I said we have to stand up and we have to say this is wrong because we have to basically defend our constituency. At that point they weren’t hearing from their constituency, which were all Canadians under the age of 39, and they’ve placed over 10,000 loans among them. It’s been an impactful organization, but they weren’t sort of hearing from their constituency. In the end, we did actually make a submission as an organization.
I would say that most of those 10,000 young Canadian entrepreneurs that we support really weren’t aware, but they will be at some point. When they go to sell a business or pass it along or it hits their target and they succeed beyond their wildest dreams and suddenly they’ve got — they will get there. That’s a bit of why I was pushing that group. This will be a problem, even if people don’t recognize that that’s a problem.
As far as the sort of international landscape, it’s pretty interesting, and I’ll just give you an example. There’s a pretty successful tech accelerator in Silicon Valley called RocketSpace, and they’re moving into Calgary, and there’s been quite a bit of fanfare about that. Well, why did they pick Calgary? They can go anywhere in the world. They’re opening in London and Sydney, Australia, and Calgary. Well, how come? I think there’s a bunch of reasons. It’s a good workforce and cost of living is reasonable and the quality of life and there’s a lot of head offices in this town. And we don’t have Trump, so you can bring programmers in from around the world and you’re not dealing with the H-1B visa issue. So there’s a number of attributes that we do have in our favour.
I would argue that, as a country, we should be really trying to encourage that train of thought and be competitive and take advantage of those attributes. But, on the other hand, if the Republican tax plan gets approved, their tax rate will be half of ours. Will that be enough to allow us to outperform? I don’t know. I worry it won’t be.
I’ve got kids, one of whom is in university, and I think you’re right. They are keen to travel the world and they don’t expect to be in one career for 30 years or anything, and they’re as mobile as capital is. I guess we’re sort of weighing pros and cons, but do we really want to hamstring ourselves with uncompetitive tax policy, even though it may not be the final straw.
Senator Andreychuk: We have all of the advantages.
Mr. Hunter: We have lots of advantages, sure.
Senator Andreychuk: Thank you.
Senator Mockler: Mr. Hunter, thank you very much. You’ve been very informative, and thank you for sharing your opinions. As we go forward, if you want to add additional information before we report to the Senate on December 15, please do not hesitate to do so through the clerk.
(The committee adjourned.)