Proceedings of the Standing Senate Committee on
National Finance
Issue No. 47 - Evidence - November 8, 2017 (afternoon meeting)
SASKATOON, Wednesday, November 8, 2017
The Standing Senate Committee on National Finance met this day at 1:03 p.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: Honourable senators, I see that we have a quorum and I declare the meeting in session.
At this point I would like to ask the senators to introduce themselves, starting on my left, please.
Senator Jaffer: Good afternoon. My name is Mobina Jaffer and I am from British Columbia. Welcome.
Senator Pratte: Good afternoon. André Pratte from Quebec.
Senator Andreychuk: I’m Raynell Andreychuk, born in Saskatoon and living in Regina.
Senator Oh: Senator Oh, Ontario.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Neufeld: Richard Neufeld, British Columbia. I don’t live in Vancouver; I live in Fort St. John.
Senator Cools: Anne Cools from Toronto, Ontario.
Senator Mockler: Percy Mockler, a senator from New Brunswick.
Before I introduce the witnesses officially, the Standing Senate Committee on National Finance was authorized with an order of reference by the Senate of Canada to examine and report on the Minister of Finance proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved.
Our first witnesses are from MNP LLP: Tanya Knight, Partner and Senior Vice President, Client Service; and Kim Drever, Partner, Taxation Service.
Thank you very much for accepting our invitation so that you can share with the committee that is crossing across Canada your comments, your views, your opinions and your suggestions on the matter.
I am informed by our clerk that Ms. Knight will make the presentation and then the senators will be asking questions.
Ms. Knight, the floor is yours.
Tanya Knight, Partner, Senior Vice-President, Client Service, MNP LLP: First of all let me say welcome to Saskatoon. I applaud you all. I think your stops across Canada are noticed and well received. We certainly appreciate your taking the time. I know it’s not easy on anyone’s schedule. We appreciate your making a stop in Saskatoon.
As was said, my name is Tanya Knight and I’m a partner at MNP here in Saskatoon where I work with many private businesses. I am joined here by my partner, Kim Drever, who is a tax specialist in Canadian private business.
At MNP we work with over 150,000 small business clients including 16,000 farms. We are the country tax experts on small business. No one in Canada works with more small businesses day in and day out than MNP.
There is consensus among the business community that the July 18 proposals are detrimental to small business in Canada. We share similar views but want to give a different perspective. We want to share some stories of our own clients, stories that highlight the impact of these proposals on small businesses and on family farms.
We are here to help and cooperate with you as senators on solutions. We need to be clear. Without comprehensive tax reform we will have a much more and costly tax system that will harm small business. There is no such thing as a quick and simple tax fix.
Let me introduce you to Marie, one of our clients. Marie is a small business owner. She has been an entrepreneur for the last three decades here in Saskatchewan and a few years ago made the decision to retire. As part of that plan she transitioned her business to her children. As part of her retirement planning she has been redeeming preferred shares at a rate of $40,000 per year. Marie is paying about $7,000 in corporate tax on this amount and when she draws out or redeems these shares she pays $1,000 in personal tax.
Under the proposed legislation Marie will now be paying $16,000 in personal tax, a 16-times increase. Marie would see a 41 per cent drop in her after tax cash available to use to pay her monthly bills. Now her monthly cash flow is around $2,000 and Marie is concerned that this will not be enough. On her total income, corporate and personal taxes together, Marie will be paying $23,000.
If you compare this to an employee making the same amount of money, their tax liability is $7,000. This does not seem to achieve neutrality or fairness. Marie is not a high income earner, yet she is significantly impacted. We understand that Finance is aware of these unintended consequences of the TOSI rules, but we have not yet seen the revisions. We just want to make sure that people like Marie are not forgotten.
Now let me introduce you to John and Heather. The agriculture industry has been founded on family farms where they’re run by siblings, husband and wife teams, or multi-generational families. They are often run through partnerships or corporations. Heather and her husband, John, run a family farm in Saskatchewan. They have been in partnership for over 20 years, and together they have grown a very successful farm operation. While John is often out in the field directing employees, running equipment and making different decisions, Heather maintains the farm finances and provides meals for the crew during seeding and harvest. On top of this she is also required to manage the daily house duties, to raise their three children, to run to town for groceries, at the same time pick up some parts along the way, and to do the banking. The work that both John and Heather do together is the reason for the farm’s success.
The TOSI rules will soon force us to make a decision about whether John’s contribution to the farm is the same as Heather’s contribution to the farm. We will need to quantify the amount that we would pay to an arm’s-length person. We will need to look at the capital invested and we will need to look at the risks they’re incurring. This may work for certain businesses but it really discounts the role that spouses play in family business, particularly in farms.
In the past our society has been challenged to call these roles equal. We as women have worked really hard over the last number of years and decades to say that they are. The introduction of this type of legislation is contrary to any movement toward gender equality that this government is trying to achieve.
These proposals impact all private businesses. We see that they will negatively impact Marie’s retirement plans and her cash flow. We see that it will impact Heather and John and force them to place economic values of labour on each of the different roles that they contribute to the family farm.
We often warn our clients to not let the tax tail wag the business dog, but unfortunately that’s what these proposals will do. The impact of the proposals is very widespread and could potentially result in some irrational behaviour negatively impacting the Canadian economy.
The passive income proposal could inhibit Canadian entrepreneurs from being able to weather the economic fluctuations and to fund innovation, growth and expansion by not allowing them to have the necessary capital. One size does not fit all. A $50,000 annual threshold on passive income may be sufficient for a small business or a startup operation looking to fund an expansion, but it may not be sufficient for a medium and large business.
Kim and I can both speak to examples of many of our clients who went into the last economic downturn with enough assets set aside. They were then allowed to continue to employ Canadians, to service their debt, to pay their monthly operating expenses, and made it through this recession. There are a lot of examples of businesses that didn’t have the necessary assets and were forced to make some truly difficult decisions: to lay off employees, to take their equipment for auction and to do anything they could to scrape by and not declare bankruptcy.
The government has abandoned their proposals on the denial of the capital gain exemption and the topic they had called converting income to capital gains, which was causing double tax in family succession, and we applaud this.
We would like to express our concern that the tax proposals are highly complex and create uncertainty due to their broad application and lack of clear guidance for administration. Our recommendations follow the guiding principles of creating and implementing comprehensive tax reform and legislation that is fair and predictable for all taxpayers in Canada.
Please consider these two recommendations. First, let’s set aside the current proposals and undertake a substantive and collaborative consultation that includes all stakeholders, to ensure fairness, certainty and predictability. Second, let’s ensure that any new proposals are simple and administratively executable for small business owners.
We know the tax system needs to be updated. However, the current path we are on proposes rules and standards that are too vague and will end up in litigation for years to come. The uncertainty will influence many business owners to hold off investing in their businesses, which will limit job creation, economic growth and opportunities for women and millennials. We are hopeful that parliamentarians working together with open-minded stakeholders can develop better tax policy than the judicial system.
We look forward to the committee’s questions, and we thank you for your time.
Senator Mockler: Thank you very much, Ms. Knight.
Senator Marshall: Thank you very much for your presentation and thank you for the document that you provided.
You have given us some insight into your clients that will be directly impacted by the proposed changes, but I’m sure that in your client base not everybody is impacted directly by these proposals. I’m more interested in who else is in your client base and how are they being impacted by the proposals.
I know they are not impacted directly, but we have seen a number of changes the last couple of years in taxes with the new 33 per cent tax rate. We see these changes now on the private corporations. It’s sending a message through the system. What are you hearing from your other clients that aren’t directly impacted by this?
Ms. Knight: I’ll answer and then I’ll let Kim. Kim is our tax specialist, so when we get into some of the more technical questions I will defer to Kim.
We do have a diverse practice. I practise in Saskatchewan and a large majority of our clients fall into these rules. They are family-owned businesses. Further to your point, what I would say is for those clients that aren’t directly impacted by these rules, what we’re seeing is that we’re creating uncertainty. My biggest concern from conversations with clients is that any time there is any kind of uncertainty people press the pause button. They just want to sit back and wait until they know what will come next. They are willing to take calculated risks, but they want to know what the rules of engagement are. My biggest concern is that we’re creating an environment that’s causing people to pause or to look elsewhere if the rules are simpler. Capital can go anywhere these days and my concern is that it may not stay here.
Senator Marshall: We don’t really know what the final package will be. We won’t know until we see the 2018 Budget. When you answer, Ms. Drever, perhaps you could take that into consideration also.
Kim Drever, Partner, Taxation Services, MNP LLP: These rules impact all private business. A Canadian-controlled private corporation is any corporation that is not controlled by public entities. It doesn’t have shares on the stock market. It also is not controlled by non-residents. The vast majority of our client base is Canadian-controlled private corporations.
We were actually here for the testimony this morning. One of the gentlemen from the Saskatchewan Chamber of Commerce said that a small portion of their membership would be impacted. He actually said that backward. It’s a large portion of their membership that would be impacted because most of their membership would be Canadian-controlled private corporations, not public entities.
We say that these rules impact every private business. We say business on purpose instead of corporation because it also catches all partnerships. It catches proprietorships that are sharing income with other family members. A family farm with a husband and wife partnership or a family farm with a parent and child are caught by the tax on split income rules.
With respect to the people who aren’t impacted, it would only be our public company clients who would not be impacted directly in their pocketbook. They see what is happening, and a lot of them use private companies as contractors, as part of their supply chain. As taxes go up, costs go up and prices will probably go up. All kinds of things like that will impact the economy. We’ll see quite a bit of press pause.
Senator Marshall: What do you advise clients who are waiting for the finalized proposals to come out? I know Ms. Knight said it’s like hitting the pause button.
Ms. Drever: Right.
Senator Marshall: Are people sitting around waiting, or are they doing something to prepare themselves? If so, what are they doing?
Ms. Drever: People are doing things to prepare. There are two issues out there. There is the tax on split income rules and there are the passive investment rules. A lot of people are deciding right now what they think they should be doing in 2017 for compensation models for their family. To be perfectly blunt, there are a lot of husband/wife businesses and we don’t know what will actually be the next parcel of legislation and how to defend. We might be pulling out big dividends this year in anticipation that we probably can’t do it in the future, maybe. Because we don’t know how to defend, we’re waiting.
Senator Marshall: What about passive income?
Ms. Drever: For passive income, because we know that there will be some level of grandfathering, some investment advisers are actually encouraging their clients to start leveraging up their businesses and stuffing them with passive assets. That may not be a good thing overall. We’re very impacted by interest rates. There are businesses that are probably taking on debt they maybe shouldn’t be. In anticipation of what they think is about to come, they are making moves they think will protect them in the future but they’re really not.
Senator Marshall: It’s a gamble.
Ms. Drever: It’s a gamble. Everything we’re doing right now is a gamble. We have about seven weeks left now before these rules come into effect, and we still don’t know what the rules are.
Senator Marshall: You don’t know what the rules are.
Ms. Drever: We don’t know what the rules of the game will be.
Senator Marshall: I mean there is an indication that there will be grandfathering but we really don’t know what form that it will take or to what extent.
Ms. Drever: We don’t know what form. There is another thing with these passive income proposals. I’ve watched quite a few of the hearings, and this hasn’t come up as far as I can see. Passive investment is not a bunch of money stuck in a term deposit or something. This is rental properties. This is companies with small storage bays. This is businesses that used to be farms, but now that they have retired they’re renting out their farmland.
It’s also one of the things that will get caught as a capital gain. You might sell an asset out of your active business. You might sell your land and buildings. You might sell your farmland out of your corporation. You might sell all of your assets, and one of the assets you might sell is goodwill. That creates a capital gain.
A $50,000 threshold on passive income is actually a $100,000 capital gain. When we go to dispose of our active assets out of our corporations, our tax rate will be up to 73 per cent, potentially, on a capital gain it’s up to about 60 per cent. Currently our capital gain rate is about 26 per cent flowed through. With the way these passive income proposals are, capital gains inside private companies will be highly punitive. I question the fairness of that.
Senator Marshall: I have one more question. Some of the experts have talked to us. Now you will have to keep track of different pots of money to carve out what’s passive, what’s active, et cetera. Yesterday we had a witness tell us there would now be five pots of money.
Do you see that now as a big impediment to doing this? Does this add to the complexity? What are your views on that?
Ms. Drever: The complexity in filing corporate tax returns has become more and more and more complex every year. This is just adding to it. Now we have to start tracking five different pools. I question how a lot of private businesses will be able to do that. They are not going to have passive assets because it’s too difficult.
Senator Marshall: CRA still has to audit it.
Ms. Drever: CRA has to audit. That’s another thing. The concept of reasonability, for instance, is an ambiguous concept: reasonability for work performed, capital contributed and risk taken. When you start looking at reasonability, we will be asking thousands of auditors across Canada to be using personal judgment to determine what is and is not reasonable. We will not have any consistency across the country, so we will be in litigation for years and years and years before we have any indication of what this is.
Senator Jaffer: Thank you to both of you for your report. It really brought up a lot of issues. You brought it together for us. I commend you on this. This is will be my reference paper for a long time.
I have always asked if there was not an economic impact assessment, and you have presented a very useful paper. I could go on and on and have many questions but, as you can imagine, each of us has limited time.
Both of you said that people, as they would, trust you. They come to you. They seek your advice. You will give advice but at the end you will say you’re not sure. Where do they turn? I don’t need you to answer that. This is our dilemma but that’s the kernel I get from you.
Very quickly, on reading through the stuff there are two things on page 6 of your presentation that are really worrying me. You say that many Canadians will risk their retirement to get into angel investment rules and invest in much riskier investments than they otherwise should.
Could you expand on that? That really worries me.
Ms. Drever: We know they have suggested that there will be carve-outs for angel investors. There will probably be very specific definitions of what angel investors are, how much they invest and what kinds of risk tolerances they have. People will risk capital that they shouldn’t.
Angel investors are there for the wealthy. They give financing for startup companies, or they buy preferred shares in startup companies. They do that to help grow the economy.
Senator Jaffer: That’s not an angel investor. A retiree is not an angel investor.
Ms. Drever: No, a retiree is not an angel investor. I really worry. Whenever there ends up being very punitive tax results for doing something like making a passive investment and then there’s a much better tax result for doing something much riskier, people will inherently do the much riskier thing. They will put the tax cost in determining the rate of return. Perhaps one has a tax cost on it of 73 per cent. Actually the dividend rates are going up because the small business deduction rate went down. It’s actually not 73 per cent as an average anymore. It’s more like 75 per cent. If you will be determining your rate of return on something and you’re putting your tax cost in there, you will actually accept a much higher risk tolerance on something and risk your capital that you probably should not be doing.
Senator Jaffer: It is a not for a retiree.
Ms. Drever: It is not for a retiree and not for people who just have a couple million dollars to play with.
Senator Jaffer: My second question is on the same page where I see advisers encouraging private business to take on debt to stuff their companies with passive assets which can be grandfathered under passive income proposals. That’s really dangerous.
Ms. Drever: It is dangerous. We are very concerned about this as accountants and for our clients for taking on risk that they shouldn’t be taking on.
Senator Jaffer: My last question for you is on your client coming to you for advice at this point on these three issues. You know just as much as your clients and your clients have a tremendous risk. I’m not blaming you; don’t take me wrong. Your clients have a tremendous risk they have to take with less knowledge than you two have.
Ms. Drever: That’s correct. We’ll tell the clients that are talking to us that because we haven’t even seen legislation on the passive income proposals, it’s a wait-and-see game. We shouldn’t be doing things like stuffing our companies. I have nothing to gain from having clients stuff their businesses, whereas, if I’m an investment adviser I do have something to gain. There is some of that happening.
Senator Neufeld: Thank you very much, ladies, for being here and your very good presentations. Your bringing out real life stories of what will take place if in fact all of the things the government is proposing go through.
That’s very useful to us in how we develop our report that will go to government. They may not look at it. They will do with it what they want. Hopefully, from our viewpoint, they actually take a look at it because what we’re hearing, not only in Ottawa when we had hearings there, but also beginning in Vancouver and Calgary and now here, it’s pretty much the same. There is not much difference in what we have been hearing in different parts of Canada so far.
I guess to add to that, these real life stories demonstrate what happens in Saskatoon or Calgary or wherever. We have heard them. It’s a whole different world than an academic advising a bureaucrat in Ottawa that we should make these changes because they have never had that experience on the ground.
I will ask just a couple of questions. On the first recommendation you make, are you saying to set these proposals aside and study these proposals, or are you saying to set it aside and review the whole tax system that we have in Canada?
Maybe just clarify because I’m not really sure what you mean there.
Ms. Knight: It is number two. We are saying that we should be setting this aside and doing a full comprehensive review.
Senator Neufeld: Is that a full comprehensive?
Ms. Knight: Yes.
Senator Neufeld: You believe in a full comprehensive review. I wanted to make sure we got that on the record because basically we’re hearing that all over the place.
I want to read a little something to you. This is the minister in response to a question from our committee. The Minister of Finance told the committee that the government recognizes the need to retain funds within a corporation for business purposes, but it wants to discourage using private corporations to save for their retirement.
How many of the people that you do taxes for, and you say it is mostly private, actually are thinking about retiring on what their businesses have provided them? Is that in fact correct?
Do they go through life having a business and say, “I’m not going to worry about my retirement because I’ll be okay,” or are they actually building their businesses so that they can retire at some point?
Ms. Knight: I would say that business owners and entrepreneurs are building their businesses.
Number one, they get into business because they’re passionate about something. They’re willing to take a risk and invest in the economy. Along the way, hopefully, they’re continuing to look at what the end game is and at what the succession planning and transition planning are. They’re not building up giant pockets of cash just to fund their retirement. They’re building these up to reinvest in their business, to make expansion decisions, and as part of their retirement planning.
I think Ms. Drever can speak to some of the mechanics of what is allowable out there for employees and others. The business owners and other people have spoken to them. Business owners don’t have access to the same opportunities to pension plans and the different RRSPs. There are different reasons why they would hang onto cash flow in their companies.
Ms. Drever: This isn’t just about retirement funds. If this were just about retirement funds, it would be a completely different piece of legislation than what we received. When these rules first came out, being a bit of a tax geek that I am I actually went through them and then decided I would do some analysis and determine if this is based on policy reasons or if this is based on some politics.
What I did was just compare a person. If we’re worried about retirement funds, let’s look at a person making $200,000 a year as a small business owner or as an employee. This $200,000 a year would be after all the expenses of the small business owner.
We put this actually into our finance submission. We gave them all of the graphs and everything with it. If you were to take $50,000 a year, let’s say, of the pre-tax earnings of the employee versus the small business owner and pay some tax on it, yes, it is true the person who gets a small business deduction can build a bigger investment portfolio at the end of 25 years than the employee that has a taxable portfolio.
That is not true of the employee that has a registered portfolio. The employee that has a registered portfolio can take $26,000, being the RRSP limit, and let’s say put it back in their refund. They can put about $38,000 a year away. At the end of 25 years, before they start drawing on it, they have about $2.2 million inside their RRSP, which now they can income split. They could have been buying spousal RRSPs and if it was in an RPP, they could income split. They now have $2.2 million.
The employee with the taxable portfolio has just shy of $1.5 million. The small business owner that got a small business detection has just over $1.5 million. There is less than $100,000 difference between those two at the end of 25 years. Then a small business owner or a private business owner that didn’t get a small business deduction has less than the employee has.
That’s not the full story because at the end of 25 years I have money that’s inside a company and I have money that’s outside of a company. The money that’s outside of the company is all tax paid and in my jeans, essentially. On the money that is inside the company I still have to pay personal tax to get it out.
Then what we did is we said we would carry this forward another 25 years. Now I am paying out an annual payment from this fund. After tax, the employee with an RRSP has about $140,000 of after tax cash in their jeans with the RRSP or the pension. The employee that had the taxable portfolio that was putting $50,000 of pre-tax money in every year has about $100,000 after tax in their jeans. The small business owner that got a small business deduction gets about $75,000. The business owner that doesn’t get a small business deduction has about $68,000.
Then, if I take that and look forward at what these proposals are, I start off with $50,000 a year to invest at the corporate level. After investing for 25 years and then the next 25 years of my retirement, if this legislation passes as it is, those individuals will be getting about $52,000 a year of after tax cash in their jeans. This can’t be based on policy. It does not make sense.
We’re looking at the small business deduction rate and at the employee rate, and we’re saying 50 per cent or 85 per cent in your jeans at the company level. Somewhere along the way we have completely disregarded the fact that a lot of small businesses, a lot of private businesses, do not get a small business detection and they’re paying 27 per cent tax. We keep comparing people with a small business deduction to people that are employees. I think it’s a faulty comparison.
Senator Pratte: Your comments are very interesting. Like many witnesses that appeared before us, your preferred scenario would be the government hitting the pause button and doing a thorough examination of the Income Tax Act. However, the minister, when he appeared before us, seemed to rule out that scenario and expressed his will to move forward with what was left of the proposal.
We also have to look at other scenarios or recommendations to improve the proposals as they are or to mitigate the unintended consequences, for instance, ideas on passive income. Should we recommend increasing the threshold or other possibilities to achieve what the government’s goal is, for instance, on income sprinkling for the reasonableness test?
We know you have another preferred scenario. If that doesn’t go forward, would you have ideas to improve the proposals if the government moves forward?
Ms. Drever: We actually do. One of our biggest concerns with the passive income proposals is that one size fits all and everybody gets the $50,000. In the Income Tax Act there is a definition of a small business corporation. A small business corporation is one that uses more than 90 per cent of its assets in active business either by itself or it owns shares of another company that does. This one size fits all will not help very many businesses of any size or very many of the employers, or even company with 20 employees. I am from the Peace River region of Alberta. We have a very high concentration of ag, oil and gas, and forestry. These companies buy a lot of the equipment for millions of dollars. The $1 million is not enough, but they might have $20 million of assets on their balance sheets. Their passive income limit should be higher than one of a professional corporation, for instance, or something else.
We think there should be an exemption if your company is still a small business corporation. If you don’t meet the small business corporation test, then maybe you look at some kind of a threshold. At that point you’re catching the very small people who in essence have their retirement plans in their companies, which is the perceived problem.
Another one for passive income is that it should not catch the disposition of the active business assets out of a company. If you can’t sell the assets out of your company, you will essentially be forced into share sales. that’s not always the way the transaction is to work. We do have to look at that, too, and say that any company that is selling active assets should not be subjected to these rules.
For tax on split income I have a couple. Right now I’m going to call it a safe harbour. There is no reasonability safe harbour on companies that earn passive income or that have more than 50 per cent of their income from a capital gain. That means at the time of a sale, not only will I be subjected to punitive rules on the passive side, but anything I pull out of the company will be subjected to tax on split income.
For tax on split income there should also be an exemption for a situation like Marie where we’re redeeming her preferred shares. If you have existing value in that company, or you have preferred shares, I should be able to buy back those preferred shares without being subjected to this reasonableness test.
When I read this legislation the perception is that they are trying to stop somebody from splitting income with their “spouse” and children to fund education. A lot of companies are husband/wife owned or two brothers own them, say. Every individual shareholder in those entities is now subjected to tax on split income. That’s a really big drafting flaw in this legislation.
Senator Pratte: I’m not sure if you provided to the committee the brief that you submitted to the Department of Finance.
Ms. Drever: I didn’t.
Senator Pratte: It would be very useful if you did.
Ms. Drever: We could send that to the committee. We didn’t submit it because it has 40-some pages or something like that.
Senator Pratte: Still, I think it would be very useful. Also I would be very curious to see the details of how you calculated the case of Marie.
Ms. Drever: We could provide that.
Senator Pratte: If you could provide that to the clerk, I would appreciate it. Thank you.
Senator Andreychuk: Thank you for your presentations today. We’re getting the practical side of the implementation. We have heard what it might do, but you’ve given us cases. You’ve also given us some recommendations, et cetera.
Did I hear you correctly that you are saying this was probably not done for good tax situations and therefore income for the government? To put it in a very simple way, it was done with some sort of policy idea. I think Senator Neufeld pointed out that we got something out of the minister saying that passive income shouldn’t be used for retirements. Then there were some other policy issues about income splitting that the government didn’t like.
What you have pointed out to us is some of the ramifications or the unintended consequences of what they may have been doing.
Ms. Drever: Right.
Senator Andreychuk: How do we ferret that out? The business community has in spades talked to the government. They were saying they were blindsided. They didn’t like the tone. They didn’t like to be accused. They pushed back with all of these proposals. The government yielded on the one case, on the intergenerational point. They’ve taken it off the table, but there is this angst that it could come back.
Ms. Drever: Right.
Senator Andreychuk: They came back very quickly with two proposals. As you have pointed out to us, those have their own flaws in them. They have added to the others. Then the government is saying that there is less than two months now to put out all of the protocols and instructions to CRA. CRA has said yes, it is very complex, but I guess they will have to manage. I mean they get instruction. How do we grab the government’s attention in the next two months?
We will be in the conundrum that it’s an implementation strategy. The voice of all the businesses hasn’t seemed to resonate very much with the minister in changing their mind on the policy.
Ms. Drever: We think we should set these aside and actually do a comprehensive reform with all the stakeholders at the table. If the minister and the Department of Finance were completely honest about what their goals and objectives were, they would have people helping them build something for those goals and objectives.
We don’t actually know inherently what all of those goals and objectives are because sometimes what has been stated as the goal is not achieved by what was provided. It’s very difficult for us right now in the accounting profession or the tax profession to look at this and say how we move forward with these in a way that achieves their objectives.
We don’t think that they do. We think that what they have done is they have just created a lot of ambiguity and uncertainty. We have a situation where people don’t know what to do. At a minimum this should not be coming into play on January 1.
Ms. Knight: Perhaps I can share an example. I think it is part of the storytelling. It’s continuing to tell the stories of Canadians. I was talking to a client who is a doctor that has a clinic. He moved to Canada, I want to say, 20 years ago perhaps from South Africa. He had young children at the time and he invested a lot. He lives in a rural community. He knew that he’s kind of “the doctor” in town where there’s a lot of people to help and an opportunity for him. He worked an incredible amount of hours. He knows that created a lot of sacrifice at home. Some 20 years later he realizes he did miss seeing his children grow up. Now he’s given me an example. He looked at these tax changes and said, “I’m not sure it’s worth the sacrifice. I think I might downsize. I might lay off some of my employees.”
That’s our concern. If we had a client come in and suggest that they wanted to do some sort of massive change or go into a different area of business, we would sit back and talk exactly to what Ms. Drever said. We would ask, “What are your goals and objectives? Let’s do a feasibility study. Let’s do an economic impact, perhaps. Let’s understand the business. Let’s really plan this out.”
We believe that’s what should be done here. There should be a full economic impact study. How many clients are there like my client that will actually reduce their investment and reduce the number of employees they have? What’s that going to do to our economy?
Senator Andreychuk: Can you talk beyond the ministry of finance? We have the other side of it where the government is saying that the backbone of the Canadian economy is the small business, the medium size business. We have to grow them. They have to be competitive around the world. They have to be sustainable to provide the future for Canada.
I hear ministers talking about that, selling that across the world. That seems to be the right path. We’re doing trade agreements in a very volatile world, but then there’s the finance ministry doing something that is counterproductive.
I’m trying to find out: Okay, you’re doing this, which seems to be the right direction, but this will really scupper all that. Do we need to be pointing the message somewhere else than at the Ministry of Finance?
Ms. Knight: That’s a great question. The more that people can start telling the story, the better. We have really talked specifically around taxation and haven’t got into all of the different trade agreements, NAFTA, and all the other things facing businesses like carbon tax with farmers in Saskatchewan.
There’s much uncertainty right now. I do believe there needs to be more communication between departments on the impacts. The biggest challenge here is that there’s not enough information to share. We just do not know the economic impact of these decisions.
Ms. Drever and I were saying that we’ve never had so many clients ask us about investing in other areas. They are looking at real estate in the United States. They are looking at other opportunities. They are asking questions. They are not at the point where they are making decisions yet because everything is just draft at this point. That’s big concern for us.
Senator Andreychuk: Just to follow up, I think you said, Ms. Drever, that they may be taking on debt to avoid this passive income dilemma that they have.
Ms. Drever: Right.
Senator Andreychuk: We have constantly coming out of the government statistics pointing out that consumers are taking on debt. In other words, the average Canadian is taking on debt. We have a government that is taking on more debt.
Ms. Drever: That’s right.
Senator Andreychuk: Now you’re telling me that business will likely take on more debt.
Ms. Drever: That’s correct.
Senator Andreychuk: That, to me, is probably the eye-opener today, to hear t that will happen now in business. I thought they would generate the income, and now you’re telling me they will generate debt.
Ms. Drever: A lot of them will be generating debt in the short term because they’re trying to anticipate what’s coming. What they’re doing is they’re taking on a couple million dollars more in debt so that they can put a couple million dollars on their balance sheet as a passive asset to be grandfathered.
Senator Andreychuk: That’s frightening to me.
We have talked about entrepreneurs. Some of us are not risk takers. A bird in the hand is what my parents taught me; keep what you’ve got. It’s because of their background. There are all these other people who have a crazy idea that the farmer is going to adapt something. Lo and behold, he has a business in Yorkton and a business in Asquith.
They’re risk takers, but for every risk taker that makes it to get to the passive income problem how many will be in bankruptcy or giving up the business? How many good ideas never get to be a small corporation and that successful?
Ms. Drever: That is a very tough question. That is one of the inherent problems with this because we don’t know how many people will change their behaviour because of the tax consequences.
How many businesses fail to start? How many businesses fail to expand? How many people don’t take that next step because they are uncertain and fearful of paying a 73 per cent tax rate? How successful do you want it to be if you are to be paying the government the vast majority of your income?
Senator Andreychuk: Thank you for the practical getting down to the cases. I think we have our work cut out for us.
Senator Oh: Thank you, witnesses, for appearing before the Senate Finance Committee. Before going on the road and since then, the message from Canadians has been loud and clear. We haven’t heard anyone talk about supporting the tax reform changes. The only thing we hear about is worry. It seems every day we see that more tax is possibly coming our way. I thank you for this very informative report about true Canadian middle class and small family.
I have a question for you on the July consultation document put out by the Department of Finance Canada. On the proposed changes to the conversion of income into capital gains, the government decided not to proceed with these changes due to the impact they would have on the intergenerational transfer of family business. Can you comment on how the government could improve the ability of families to transfer their businesses from one generation to the next? I think this has a lot to do with Saskatchewan.
Ms. Drever: This one is actually a very technical tax question. The provisions that we’re talking about is called section 84.1. If you were trying to transfer shares of a company to another company and you are related, if these companies are related or you’re doing this among related people, it’s making you pay tax dividend rates to transfer that company. You can sell your shares to a public company or to your neighbour or somebody unrelated to you. If I were to try to sell a company that is worth $1 million, I would pay about $40,000 tax on that $1 million to get that to happen, to sell that company to my neighbour or to a public company because I will get a capital gain exemption.
Now, if I were to try to sell that to my child’s company, I will be paying upwards of $450,000 tax to make that happen, or I could choose to pay the tax at capital gain rates or $240,000, which is what they were making us unable to do. Currently we do a lot of tax planning whenever we’re doing succession of family businesses to make sure we’re paying no more on that $240,000 on transferring that business that’s worth $1 million. I’m still being greatly disadvantaged compared to selling it to somebody else where I would be paying about $40,000 tax.
Two private members’ bills came before the house, Bill C-691 and C-274. Those two bills both had a lot of merit. I think we should go back and look at them. One had a five-year hold on it and one had a two-year hold on it. We see the merit of having a hold period on that. That would be to help minimize mischief that could be done, but a five-year hold we don’t like. We don’t think that makes any sense because at the end of five years the return when you recorded that gain is already statute barred. The five years doesn’t really work. It shouldn’t exceed three years because that’s the statute-bar period. Three years probably makes a lot of sense as well because in a farming situation you can transfer intergenerationally from one generation to the next. As long as you haven’t sold those shares or sold that land for three years, the rollover happens. In a farming situation we already have a three-year concept involved. It would make sense that maybe we do something on a three-year test.
If we look at comprehensive tax reform, this is something that needs to be on the table as well. We do see those changes still coming in section 84.1. We hope that we never see what was in that section 246.1 again because that piece of legislation was just a complete and utter nightmare to try to figure out what it would catch. If you actually read the legislation it looked like it caught every single disposition. Every single extraction of funds out of a company, even as a shareholder loan, could potentially get reassessed by the CRA. Finance said they didn’t intend to catch that, but Finance and CRA are different bodies.
Senator Marshall: We have section 84.1. There are no changes to that, right?
Ms. Drever: Yes.
Senator Marshall: That’s set aside. We’ll worry about that later.
Ms. Drever: Right.
Senator Marshall: I was really interested in when you were saying your examples earlier and you were throwing out a lot of numbers. I didn’t write them down.
I think what you were saying is that the examples provided by Finance in the recommendation paper didn’t give the whole story. Is that what you’re saying?
Ms. Drever: That’s correct. That’s what I’m saying.
Senator Marshall: Some of the other submitted briefs have indicated the same thing. I don’t know if you’ve read the one by CPA Canada. They have said something very similar.
Ms. Drever: Right.
Senator Marshall: I know you’re going to provide a copy of your brief to Finance, but does your brief include those examples? You were throwing out a lot of numbers.
Ms. Drever: It does.
Senator Marshall: I was very interested, but does that brief include the examples?
Ms. Drever: It goes through the examples and then it gives it all to you in graphs.
Senator Marshall: Perfect. When I look at the transcript of whatever you told us today, I should be able to follow along by looking at your brief.
Ms. Drever: That’s right.
Senator Jaffer: This has been absolutely fascinating. There is a lot we learned. Please make sure we get your brief so we can really study it.
One of the things we do is that we make recommendations. Ms. Drever, you spoke about some things specifically to do with passive income. If they were to do it you had said they must do some other things.
Could you please give us recommendations? You are the experts as to what you think we should recommend. If the minister decides he will proceed, he should at least look at A, B and C?
Ms. Drever: Right.
Senator Jaffer: It would really help us if both of you could give us the recommendations. Obviously we will study them but it would help. You are the experts, so if you can do that.
Ms. Drever: Yes.
Senator Jaffer: I am sorry I’m giving you more work.
Ms. Drever: No, that’s okay. We have some very brief technical issues on the very last page. A couple of them are included, but we will give you some of our suggestions, absolutely.
Senator Jaffer: I haven’t had much time to look at this, but I’m really interested in your two proposals because this is something we have heard everywhere. The last proposal would be simple and administratively executable for small business owners. I’m smiling because everywhere we have gone they’ve said keep it simple, keep it simple; but every time we talk the Income Tax Act gets more and more complicated.
Ms. Drever: That’s right.
Senator Jaffer: What were you thinking?
Ms. Drever: The Income Tax Act we have today comes out of the 1972 tax reform. I will use an analysis for this. Let’s say the act from 1972 is a bike tire. That bike tire has been blown so many times that now you can’t even see the bike tire. All you ever can see is the patches. Every time we have new legislation, we’re just putting a new patch on to stop something from happening or to try to create society to act a certain way.
We have such a poorly patched bike tire at this point in time that it’s almost unrecognizable. I think we should actually do the comprehensive tax reform. One of the conditions of reform needs to be simplicity. We need to go back.
I heard one of the witnesses talk about many people trying to determine whether they are between a comma and a semi-colon. The Income Tax Act is very complex. I have spent 20-some years working in tax, and still there are times I read legislation and it makes my head hurt because it is so complex. That’s great for accountants and it’s great for tax lawyers, but it’s really not great for the general population.
Senator Jaffer: This has been amazing. Thank you.
Senator Mockler: Ms. Knight and Ms. Drever, you have certainly been informative and enlightening, not to say educational also. Thank you very much for sharing your opinion. We will table our final report on December 15. If in the interim you want to add something, do not hesitate to send your documents to the clerk.
Our next panel is composed of the Agricultural Producers Association of Saskatchewan, Todd Lewis, President; and Terry Youzwa, an independent farmer.
Thank you very much for accepting our invitation. You can share with the committee your vision, your comments and your opinions.
I have been informed by the clerk that Mr. Lewis will make the first presentation of not more than five minutes, but there is a tolerance factor, and that will be the same for Mr. Youzwa. Then the senators will ask questions.
Mr. Lewis, please make your presentation.
Todd Lewis, President, Agricultural Producers Association of Saskatchewan: Welcome to Saskatchewan, and thank you for coming out and visiting our fair province. I hope you enjoy a bit of early winter.
I was talking to my brother this morning, and a year ago today was our best combining day at plus 17. It was quite a difference a year ago. We still had quite a bit of harvest left to do last November. We were fortunate to get the weather, but certainly winters come early here.
I represent APAS, the Agricultural Producers Association of Saskatchewan. We are Saskatchewan’s general farm organization. We have a close affiliation nationally with the Canadian Federation of Agriculture. Our mandate is to provide a unified voice of ag in Saskatchewan. We have thousands of ag producers in our group. The biggest thing we like to say is that we’re all about ag policy. That’s what we do.
Certainly the tax policy has been very interesting here over the last 90 days or so. It was big surprise when it hit us like it did. I think farmers were disappointed with how tight or how compressed the schedule was. It’s a busy time of the season for us. Certainly we pushed back pretty hard on what was put forward.
The CFA was unable to meet with your group, but they have put forth their proposal to your group. You can look to that for a lot of the technical issues that we have seen.
Some 25 per cent of Saskatchewan family farms are incorporated, but that doesn’t mean they’re not family farms. The family farm has been what has made agriculture successful and will continue to do so. That’s important to remember as we go through this.
Over $50 billion of Canadian farm assets is going to be transferred in the next generation. A lot of that is going to be in Saskatchewan. We have over 40 per cent of arable land in the country. It’s a huge, huge tax liability, which is why farmers got so excited about some of these proposals.
On the reasonableness test in income sprinkling, the biggest issue for farm families is that it’s not a nine-to-five job. It’s more like five-to-nine, seven days a week or 365 days a year. It’s difficult. You’re looking at a reasonableness test to see that it’s not too subjective. We’re looking for some rules that can fit. Every family farm is different. It’s not one size fits all. Certainly there is the concept of how families actually live on the farm. In a lot of situations it’s isolated. You’re far from services. Things like child care and those kinds of things aren’t available. Daycare spots in rural Saskatchewan are very limited.
If we make it too subjective and too difficult to pass those tests, in a lot of cases families won’t be able to live on their farms. They’ll have to live in bigger towns and cities to be able to afford daycare and things like that. If it’s too subjective of CRA, it won’t be consistent across the board. We’re looking for tests that will fit well in the variety of situations right across a province like Saskatchewan. We have over 30 million hectares under cultivation with range land above that. It’s a huge area. It’s difficult for farm families to fit in one box, that’s for sure.
Certainly on the passive investment side, there is a lot of concern. We’re highly capitalized. It’s not uncommon now for even a small farm to be worth $3 million, $4 million or $5 million on paper. Lots of farmers are very asset rich but cash poor.
Land prices have gone up. We’re a fifth generation farm ourselves. We’ve land in our family farm that was bought at $2 an acre or $3 an acre by my great-grandfather. That land now is worth $3,000 an acre. It has never not been farmed. If we have to pay tax liability on that every time there is switch we will have to pay a big tax bill. We successfully passed our operation on down to a third generation. I’m the fourth and, as I say, we have a fifth generation farm now. I’m hoping I can pass it on to the sixth. If we have to pay a big tax bill every time that switches, there is not going to be much farm left for my grandchildren, that’s for sure.
On passive investment, for a lot of farmers it’s a big part of their retirement. With these high land values and so on, cash rent is a common thing that’s done now. If a farmer is no longer farming that land and it’s deemed as a passive investment, that could be a huge tax hit for those people as they get cash rent per hectare. If they have to pay a high tax rate on that, it will make them sell. One of the big sources of land for young farmers and people entering the industry is to rent farmland off their neighbours under those kinds of arrangements.
I spoke a bit about the intergenerational transfers. It is the backbone of our industry that we’re able to pass it down from father to son to daughter or from mother to son to daughter. For the first time in a long time in the last census there were more young people involved in agriculture. Agriculture has done very well. In all the statistics and everything we’re looking at, agriculture is going to be a big driver toward the future. It certainly is in our provincial economy and I think it has taken its place as a major driver in the Canadian economy too.
I want to see the farms stay as family units. A family unit could be 10,000, 15,000 or 20,000 hectares. Those are still family farms. Economies of scales in agriculture are like any other industry, but still the base or the vast majority of many of these operations are family farms. How they’re treated in the generational transfer is very important if we are to see family farming continue.
Senator Mockler: Thank you.
Mr. Youzwa, please make your presentation.
Terry Youzwa, Independent Farmer, as an individual: Thank you for taking on this task in what you’re doing to allow us opportunities to speak to this and hopefully have our message heard through you as well as through every other avenue we pursue.
I’m speaking today as an independent farmer. I have served on various farm organizations for over 25 years. I continue to be a director on Cereals Canada. I’m a past chairman of the Canola Council of Canada.
I have circulated two items. One is of an op ed that I wrote back in September that was published in the Financial Post. The other one is something I put together the last few days to try to be more current.
You should know that I’m a proud Canadian who has been involved in the farm in a greater way beyond his community. I see this not as a political issue. For me it’s much more of a right/wrong issue as the government is contemplating changing the fabric of our country.
As you well know, if you are going to reform tax legislation in a massive way, and this is the largest one in 50 years, you need to consult with the financial experts. You had a couple of them here earlier. It was very timely and much appreciated. I’m glad I heard them. You need to consult with them first so that these issues are resolved prior to your launch. The financial experts we rely on give us advice. They actually interpret the legislation in the same way the government and Department of Finance do. We just haven’t had that all the way along this process. It’s very frustrating for those of us operating small business companies.
After attacking small business for 75 days during harvest, how does one trust the government’s statements about improvements? They should have never made such a flawed reform package in the first place. Where is the economic impact analysis?
Minister Morneau called me in September. By the way, I’m Terry the farmer. He used me as a media stunt to get some publicity. I believe it actually worked in the opposite as it provided an opportunity for me to have a louder voice. I have said in a number of interviews that this is a hill to die on. I’m certainly not going to be silent on this issue.
Anyway, we identified in that phone call that there is a huge disconnect between what the Department of Finance was spinning at that time and what the financial experts were interpreting in the proposals. That continues to exist today because we still don’t have the detailed legislation. When will it be available for proper scrutiny? We are left with the situation where we get press statements that have nice sound bites, but it’s really, “Trust me, I’m from the government and I’m here to help.” Well, that doesn’t really give us much comfort.
Why does the Department of Finance continue, as it has really done through this whole process the whole time, waste the time, energy and resources of the financial experts across the country?
Let’s talk about all the stress everybody in small business has gone through by them not doing a proper consultation, allowing a proper study and moving forward.
Let’s talk about unintended consequences. If it was a good plan the unintended consequences would have been studied and addressed before it was launched. We have to believe that they are objectives. Otherwise they would get fixed. You can bet with the pace that they’re moving there is going to be more of them that come to surface in coming months.
As a result of the revolt the tax reform stated, we’re starting to see the government back off on a number of these initiatives. If the revolt hadn’t occurred it would be an even scarier situation. It appears the government has floated a big trial balloon, backed up a bit and is determined to ram the rest of it down our throats.
What kind of a government plants the seeds of a class war in our great nation? Why is all this chaos worth pursuing for so little revenue?
Every household, every government and every business have to balance both sides of its ledger. They can’t only focus on one side and ignore the other. You have to look at revenues and expenses, and you have to make them align. It’s not rocket science. It’s common sense. It’s seriously flawed to compare individuals with private business companies.
I thank the government for lowering the small business tax. This will help be competitive and encourage investment. Really, though, with the harmonization when you withdraw personally you end up with the same as a personal tax rate. I notice the government has finally stopped talking about this a bit and referring to it less as their talking points. It really never did have any validity.
There is a need for Canada to allow Canadians to prepare for success. We compete globally for capital, talent and quality of life. The objective of government should be to help facilitate this. Rather, it seems they’re focused on where we can tax more.
People and capital are mobile. We need to be competitive both internally and externally. Why place all this at risk? You just heard two experts talking about small businesses pausing. That’s really where we’re at.
My son quit a full-time job with a pension cheque to come home and farm a year ago. There’s an extra cloud hanging over your head that’s pretty damn significant right now with all of these changes up in the air.
Our future isn’t as bright as it was a year ago. We’re doing exactly that. We’re holding. We are stuck in a holding pattern, until we know what the rules are and how we can deal with them. We still don’t know. We’re left the message of keep the heat on the Liberal MPs to try to be heard.
It has been said that a lifetime capital gains exemption will be protected. Financial experts believe they will focus on the parent/child transactions. Financial experts are also concerned about the sibling transfers. When a farmer wants to buy out his brother, it’s viewed as a deemed dividend rather than a capital gain, and more tax will be triggered.
There will still be incentives to sell to a third party as the Department of Finance does not recognize sibling transfers as arm’s-length transactions. Many details of eligibility of lifetime capital gains exemptions remain unknown. This is part of the diligence that’s lacking. They say they’re protected, but depending where you fall in the eligibility rules it may not work in your situation. We don’t know any of this.
Farming is a capital intensive asset-rich/cash-poor business. If we have to divest assets to pay taxes every time we transfer the land, we no longer have the critical mass to not only sustain our business but to prepare it for its success. If many factors are not taken into account, farmers will be given incentives to sell to public corporations or third parties rather than to family members.
Income sprinkling is such a play on words. A spouse has to provide a personal guarantee for the company. A spouse feels the pain when the company loses money. A spouse may not be able to work in order to support the business when needed, yet often doesn’t draw a regular wage. Upon a matrimonial breakup, a spouse gets half the company. A spouse is clearly a risk taker in the business. Therefore the partner/spouse should be exempted from these reasonableness tests and new sprinkling rules. One is left to wonder if the cost of monitoring reasonability compliance is worth it.
I have a few comments about passive income. A farmer owns land in a company. Lots of us are in that situation. He no longer farms. I was heading down the path of preparing for retirement and not having a successor. I would have been there, but my son changed his mind and came home a year ago. That’s good news, but this would have been me. He’s now renting his land out and that’s his retirement income. That’s where his assets were. The proposed passive income rules will have him paying 73 per cent on land above his $50,000 income.
What other pensioners will be subjected to this level of tax? Will it be our Crown employees, public company employees, professors and members of parliament? Who pays 73 per cent on their retirement? What kind of country does this government seek?
Why do none of these passive income matters apply to publicly traded companies? Is that another objective? It sounds like detrimental harm to small business, not help.
In conclusion, if you’re going to continue with this tax reform, slow down and do it right and consult the financial experts so that we have consistent legislation, implementation and less unintended consequences. The lifetime capital gains exemptions have massive ramifications for the future of our family farms. Again, consult financial experts so that it mitigates those risks, provide full exemption for spouses in regards to the income and dividends new sprinkling rules, and please tell me it can’t be the government’s objective to steal the retirement plans of people who have worked for 30 to 40 years to do that.
Small business is a powerful economic engine of our economy. We should be trying to facilitate how it can do better, not how can we tax it more. Thank you.
Senator Mockler: Thank you, Mr. Youzwa. I did not say Terry the farmer. I said Mr. Youzwa.
Senator Marshall: In your opening remarks you talked about where the economic impact analysis is. There is nothing on the original proposals and there is nothing on the revised proposals. We don’t know what the impact will be on the economy or on individuals.
My concern as a member of the finance committee is that we will get a budget bill and we will two weeks to study it. It is going to be quite complex.
Our previous witnesses were talking about what individuals were doing in anticipation of changes. I have two questions. The first is: What are farm families doing in anticipation of the changes? Are they just sitting tight waiting, or are they doing things like selling their land or borrowing money to put passive assets aside, thinking that this will all be grandfathered in? We don’t know whether it will, but is there some of that going on? Are farmers gambling?
Mr. Youzwa: I think people are still asking questions in a pause and wait mode. You’ll see a lot more activity in the last three weeks of December when there’s a bit more knowledge about what the new rules might be. For us it’s a pause. It’s a holding pattern.
It really depends on your individual situation. If you’re already in a situation with an existing hold-co and op-co, then you have some different deliberations to make. There just isn’t enough ability to do proper due diligence because the government didn’t do proper due diligence.
Senator Marshall: You don’t have the information, either. In your own circumstance you thought a year ago that your son wouldn’t come back. You could have been in a position whereby you could have sold your land. Now your son is back with you, so that option isn’t there. I’m interested in what other people are doing. What are other farmers doing?
Mr. Lewis: What we hear from our membership is much like Mr. Youzwa says. It’s kind of wait and see. Over the summertime and fall lots of farmers who were combining were on the phone with their accountants to ask what’s this was going to mean to us. When the announcements came out they pulled back totally on some of the proposals. They talked about some changes coming but were not totally clear. There was not much clarity about what was to happen.
I agree it’s in a pause mode. Everybody is still waiting and seeing. At the end of the day some decisions will be made, but it will be awful compressed. As this plays itself out, I don’t think the accountants know for sure either what will happen.
You can talk to our membership. One of our members talked about talking to three different accountants and getting three different answers about possibilities and what could happen.
It’s difficult. Certainly farmers are always trying. We’re planners. We’re planning for next year’s crop. We’re planning for sons coming back to the farm and kids in school, all those things. This is throwing a wrench into those plans.
In the last census they talked about succession plans. I think it was under 12 per cent of farmers actually had an active succession plan. You could make the argument right now that it is pretty close to zero per cent because nobody really knows how these rules will affect things and what will come out.
They have said they will pull back on this. We’re trusting that’s the way it is. That’s what we would like to think, but when we talk to the accountants they’re far from sure that there isn’t some more stuff coming down the pike, or some of the stuff that they have proposed will seriously affect people’s plans. Those plans have been put in place in a lot of cases for decades. It has really changed things.
Senator Marshall: Some of the witnesses we’ve been hearing from are hoping that these will be taken off the table like some of the other proposals. Minister Morneau testified before us last week and the impression he is giving us is that he is adamant that these are going through.
Even though we don’t know the details on the passive income, we know some things. We know there is a $50,000 limit. We can sort of think what the grandfathering will look like.
What do you think farmers will do if it goes ahead as we think it will go ahead?
Mr. Lewis: People will make decisions. I guess at best we would hope it’s clear and it’s a hard line so we know which way to fall on it. If the uncertainty continues, there will be people making decisions 6, 12 or 18 months down the road that may have been the wrong ones because they weren’t clear about what was actually intended or what would happen.
One of the biggest risks going forward is that people make decisions based on what might happen or how we feel things will happen or how we hope things will be. Just the uncertainty is a big part of it.
Mr. Youzwa: I talked to an accountant yesterday actually who is with MNP. He helped me vet some of the stuff that I have done. They really don’t know what the grandfathering means yet.
Senator Marshall: That’s right.
Mr. Youzwa: When does it start, how is it implemented, which is in, which is out and eligibility all are unknown. If they’re unknown, and you went through this with the former panel, where are we? It’s a gamble like was stated. If you’re shuffling it all in, is it already existing or can you transfer within a window? It’s a holding pattern. You’re not making an informed decision if you’re making a decision now.
Senator Jaffer: Thank you very much for your presence today and for the work you are doing.
My colleagues know, but you wouldn’t know, that I am from an egg farming family in the Abbotsford area. One of the things that hasn’t been talked about here is that farmers are selling farms. That’s not how we were raised. We’re not talking about selling. It’s keeping it, like you were saying, five or six generations. It is like forever. You’re not selling, but you’re forced to sell to pay the income tax debt. This takes us away from being farm holders because we can’t afford to be.
The bigger question, because you are active farmers, meaning active on these issues, is what will our country look like if we don’t have farmers? I mean a farmer is a special kind of person, as you all know. I will not repeat, but we do things differently. We went without stuff because it was for the farm. Everything is around the farm. It’s like forever and ever in the family.
My family has not been here as long as yours has but it’s still our farm. That needs to be talked about someplace as well. We will lose our farms to pay the tax. The family will lose the farm to pay the tax. I would like your opinions on that.
Mr. Lewis: Thank you for your comments. You’re exactly right. Parts of my comments were around the capitalization of modern agriculture. It’s big business, but at the same time it’s big risk.
There is a family backing that risk, a family member who will stay out until midnight or two or three o’clock in the morning, who will pull a calf at four or five o’clock in the morning in a blizzard, and all those kinds of things. Family members do that, not a hired foreman or somebody who is getting paid $8 or $12 an hour.
The family farm has been the unit that’s made agriculture successful in Canada. If it’s to continue to prosper and grow, it’s the model we still have to continue to follow. We have to be able to support that model. There is lots of capital out there looking for a place to park. Ag land will be a more and more attractive investment for big money in Canada. People want this land. They recognize the Bart report and so on. Agriculture is an up and coming industry. It’s being recognized.
There’s lots of pressure on people wanting to get into agriculture, but at the same time the family unit is what’s made it work. It has to find a way to prosper and be maintained because that’s what will make ag successful.
Mr. Youzwa: It’s very opportunistic of the government to pick this point in history in the way they’re approaching the capital gains exemption and how it gets implemented. There is much land that will be transferred from one generation to the next over the next 10 years.
If exiting farmers are given a better opportunity or a better return by selling to a third party instead of to their own family, what is the objective of the government? Who do they want to farm in the future? Public companies have other advantages. Foreign entities may become a more significant player.
There is a whole other twist in passive tax here that hasn’t been stated yet. You already have the Canada Pension Plan owning a significant amount of land in Saskatchewan. You could have other public players over the course of time. They will not be taxed the same as the existing passive holder. How does that play into land rent? That’s a whole thing that has all kinds of ramifications that are totally unknown but place a whole new dynamic of risk on existing decisions that you’re making in the future and on the viability of your family farm.
Senator Jaffer: Another thing that has not been brought up as much in our hearings is that farmers have enough to worry about at the moment with NAFTA. Supply management is a huge issue for an egg farmer or a dairy farmer as to what will happen. This is sort of breaking the back of worrying about what will happen down south with NAFTA and CETA, and then having one thing after another. There is this feeling that people don’t want farms anymore. How are we going to eat?
Mr. Lewis: I totally agree with your comment. We should be focused on a positive road for the future. We have some tremendous opportunities by reinvigorating NAFTA and TPP without the United States, which would give us significant advantages and opportunities to grow our businesses, opportunities to contribute positively to the economy and to have a better country. Instead, we’re putting a hammer down and it’s not a healthy situation.
Senator Neufeld: Thank you very much, gentlemen, for telling us some of the things that you think you will experience.
I heard, not just from you folks, that an economic impact study should have been done. I don’t disagree with that for a moment, but if the economic impact study was as flawed as what the proposal is to change the taxes because it’s put together by the same group of people, it would just be something else that we would have to argue against. Maybe, in relative terms, it’s just as well they didn’t do a lousy job on an economic impact study so that we can actually get to the meat of the problem. I don’t know whether you would agree with me there, but that’s kind of the way I look at it.
Mr. Lewis, you talked about 10,000- and 20,000-hectare farms. Those are big operations. There is a lot going on, a lot more than a bureaucrat in Ottawa would understand. Can you tell me how many of those kinds of farms can survive on a $50,000 cap on passive income? Maybe a better question is: What size of farm do you think could actually survive and carry on with just a $50,000 cap? Apparently no one has studied the $50,000 cap. We can’t find anyone. Whether we talk to officials at the ministry, to accountants or to anyone, everybody kind of says, “I guess it just came out of the air.” All of this has just come out of the air.
Mr. Lewis: In the way it was explained, it was $50,000 of interest income on that cap, so $2 million to $3 million at 5 per cent. At a million dollars you don’t say the end, if it is 2.5 per cent or whatever. Pick a number.
Senator Neufeld: Let’s use 5 per cent.
Mr. Lewis: On our farm, for instance, I would say we have probably $7 million in equipment. A top unit air seeder and tractor would be $1.2 million or numbers like that. We’re not an exceptionally large farm by any means. It’s my brother and I, my nephew and a couple of employees.
When you start throwing around numbers like that and you’re trying to put money aside to make purchases like that, it’s not wrong to say that you need a $4 million or $5 million buffer there. If you’re to put money in place to buy some of this equipment or to replace things, it’s problematic in some cases. It just goes to show that we’re highly capitalized.
Lots of money goes in and out of these operations. It’s high risk. To put a number like $50,000, if that’s what the true number is, it may be a problem for some producers. As you related, nobody is really sure where it came from or why. It’s not necessarily guys that are huge, huge operators. Some of the medium size guys, too, will have some issues with that number and pay a higher tax bill because of it.
Senator Neufeld: I will get you to respond too, sir. You would say that there are very few farmers. They would have to be a relatively small farm.
Mr. Lewis: No. If you had a median, that number might fit for 50 per cent of the farms, maybe.
Senator Neufeld: Did you say 50 per cent of the farms?
Mr. Lewis: Yes, or less.
Mr. Youzwa: It could be even less because ultimately it’s your retained earnings and the return that they have produced.
Mr. Lewis: That’s correct, yes.
Mr. Youzwa: The example I’ll use is what I was trying to speak to a bit in my comments. You don’t have a successor. You have 10 quarters of land in a company because that’s the financial advice you got from lawyers and accountants. You made informed decisions. You did everything right. Now you’re renting that out instead of selling it to keep your legacy in your family at least, even though nobody is farming. You’re going to get taxed 73 per cent on over $50,000. You’re going to collect well over $50,000 in rental revenue from 10 quarters of land.
How is that fair? Where is the fairness? It doesn’t exist. The way I thought they got to a million was a million at 5 per cent. Gee, a lot of people have pensions over $50,000. It needs to be eliminated, or at least get it all back to the punitive rate of 52 per cent upon withdrawal.
Mr. Lewis: Yes, I would agree with Mr. Youzwa that if you’re putting land in there, in those cases 80 per cent of farmers or maybe more would be affected that way.
Senator Neufeld: Exactly.
Mr. Lewis: Yes.
Senator Neufeld: You’re preaching to the converted. I certainly agree with you. I guess, to use a nice word, and I’m not always known for that, I find it rather unpalatable that the government would even been put in an amount that’s a cap and say to you as entrepreneurs, “You are going to do what I am telling you to do and, if you don’t, I’m going to tax the heck out of you.”
To me, I mean, that’s totally foreign to my thought process for my whole life or my family. Thank you for those answers. I appreciate it.
Senator Pratte: Thank you for being here. I want to clarify a couple of points at the beginning.
As far as my understanding of the capital gains exemption changes made in mid-October by the government, they did withdraw the measures that would have limited access to the lifetime capital gains exemption. My understanding is that is off the table, right?
Mr. Youzwa: It’s a sound bite, so there are still eligibility factors which will affect individuals differently. It’s not that there is no risk of it. It’s how it affects your individual situation. Yes, I take a lot of comfort in that announcement, but clarity is required.
Senator Pratte: As far as intergenerational transfer, changes were announced on July 18. They have decided to take that off the table. The problems that exist currently are sort of old problems that already existed before and are still there, right?
Mr. Lewis: Overall I would agree with that, yes. Certainly there was a private member’s bill that didn’t pass which had a lot of good measures in it. We put forward on Parliament Hill that it needs to be looked at again. I hope the legislators up there are looking at that seriously. Even under the current rules an arm’s-length transaction is actually more beneficial than transferring to a family member. That’s correct.
Mr. Youzwa: Maybe you ask an accountant if we can review the capital gains exemptions laws that the government is moving forward after December 15.
Mr. Lewis: You’re correct.
Senator Pratte: In the reasonableness test for income sprinkling I understand you would exempt the spouse, at least, from any kind of reasonableness test, right? That’s my understanding.
Mr. Youzwa: I’m not alone in that viewpoint. That seems to be a healthy starting point. Some of the other aspects are more subject to criticism. That one to me is a no-brainer. They are an equal risk taker in the venture. Why should they be punished? Often they have to not work in order to support the farm and they don’t take a wage.
If you look at doctors, the spouses have to stay at home so the doctors can go in at three o’clock in the morning. I’m not here speaking on behalf of them, but it’s a common issue across the fronts.
Mr. Lewis: I would add to that. Some of the original proposals seemed to pick out 18- to 24-year-olds. That’s a time in our kids’ lives when we want them to leave the farm to get some training. They have to be totally removed from the farm, unable to draw a wage over that time. In the majority of cases they have to leave home. They will not get a good education in rural Saskatchewan. They have to go to a major city and so on.
For instance, in my family I have a daughter attending school. She runs an air seeder all spring and ran a combine this fall. She probably did 75 per cent of the work this year. If she qualifies as a full-time student and is unable to draw wages off of our operation, that hardly seems fair. She sold soybeans last week. It’s all these kinds of issues that.
When one size fits all, I can’t the point strongly enough that it just doesn’t fit for family farms. Every family farm is different. If the contributions to the success of the farm of the kids and spouses who are involved are somehow taken away, in a lot of cases that farm just won’t exist. They will not be able to afford to pay the tax on the proposed wages that they will be charged. It’s just not going to work. It’s going to make it very difficult for farms to continue.
Senator Pratte: On passive income, for instance, if the government were to increase the threshold or find a formula where the threshold would be related to the revenue of the business, where you would have a percentage of revenue of the business or something like that, would that be acceptable?
Mr. Lewis: There are ways of getting around the passive income issue in a situation like Mr. Youzwa is talking about where a farmer is renting his land out with a cash rent. He can stay as an active farmer and go on a joint venture with a neighbour renting land. It’s just an over-complication. Guys will find ways around it and operators will. The experts before us talked about the complexity involved in our tax code. When you put in these rules, people will find a way to still be involved in their land and not sell their land. They will have to stay involved in it in other ways. It will further complicate arrangements between themselves and who they want to farm the land.
It’s a pretty simple case now. They can rent it out for cash. It’s nice and clean. It’s not something that’s too hard to figure out, but I mean those kinds of arrangements will end up being more and more common. It will just add another level of complexity for people wanting to get into the industry or exit it.
Mr. Youzwa: When you’re operating a small business company, you’re typically not pulling out as much of a wage as you might compared to other sectors or compared to other businesses. You’re leaving the money and the capital in the company so the company is healthy and the company is positioned to grow.
Circumstances change, and all of a sudden you’re exiting. You don’t have a healthy RRSP account because you just put 30 years into the company. Now you’re in that situation.
My question could be the other way. Why are small business companies treated differently in regard to passive income than public companies? They have no rules in this. Why do small businesses have to have them?
Mr. Lewis: For lots of our members their retirement is their farms. That’s how they’ve worked over the last 40 years. If they’re to change the rules, that’s going to be pretty unfair to those people.
Senator Andreychuk: Thank you. I think my colleagues have covered a lot of the points on the amendments and the initial proposals.
I want to go more to social policy. We’ve had in this province a lot of debates about the family farm or a family corporation. I thought we struck both federally and provincially a balance, as you can, saying that family farms have to change. They did. We incorporated and some didn’t. They are now a viable business as well as a family unit.
The family farm has changed and farmers have changed, but it’s still the essence of a family farm that we want to keep. That’s not from your succession. It’s in my best interest that we have safe farm products and that we can rely on the best use of the land. It’s all the social policies that have gone into reinforcing family intergenerationally because we know we can rely on it.
We have just gone through a debate provincially as to who should own the land. I see big landholdings internationally that are in it for the profit only in other countries. We have always been very conscious that land is very precious and that our food supply should be very precious.
It seemed to me that it had been an objective over a number of governments of all stripes to say that land was best held in family units that prize the land. France is built on that. The United States is a mix of those things. It seems to me we’re not only attacking tax issues. We’re also attacking some fundamental social issues, and I haven’t heard much talk about those. That’s one thing.
The other is that I was involved 40 years ago in saying a family unit is important and a woman’s contribution shouldn’t be devalued as it was at that time. We finally got the 50-50 rules. We’ve heard from witnesses that we only apply that now on divorce or on dissolution. It was this last vestige where you could income spread. I don’t like sprinkling because that’s sort of selective. That was still recognizing that there are no standards for a family unit. Every family is different. It functions differently. We only intrude on minimum standards, when there’s abuse or something. We let families operate in Canada as they can and wish. That’s the best growth area for future generations. It seems to me we’re not talking about the aspect of the social good of having the entire family involved in the family farm.
To finish on that point, listen to a reported incident in Saskatchewan with the fires we’ve had and a farmer talking about how land is so precious, that topsoil is precious, and that he hadn’t seen a shift after the fire since the seventies here. He said, “I’m going to have to plant durum next year, which is not going to be the most economically viable one, but I care about the land. It’s going to take, three, four or five years for it to come back.”
I don’t see that kind of thinking in huge corporations that want to come in, but I do see it in family farms because you pride what your father did and you want to pass it on. How about the social aspects of farming?
Mr. Youzwa: You’ve raised some excellent points. As you’ve probably noticed, we’re both proud farmers. I’m third generation. My son is fourth generation. We’re newcomers in the area. Grandpa moved from Wakaw to Nipawin in 1946, so we’re still newcomers in our area. People don’t always appreciate the longevity of farms.
I was doing an interview with Arlene Bynon on Canada Talks and that was one of the things we talked about. Certainly we take pride in the stewardship of our land. We want to leave it better for the next generation than we found it. That’s our legacy. That’s our ultimate objective. We are proud to do that. We are seeing farmers more willing to be public advocates for their industry.
When I was part of Sask Canola a couple of years ago we launched a film called License to Farm. If you haven’t seen it, I would encourage you to do so because a lot of people have the belief that farms should stand still and still be in the fifties while the rest of the world progresses. That isn’t the case. We pride ourselves in using safe technologies to advance common interests.
If they aren’t producing safe food, we don’t want to do it and we wouldn’t do it. We need to get better at telling our story. We are trying to take steps to do that, but the audience is never big enough and too often you’re preaching to the choir.
Mr. Lewis: In the recent history of agriculture the last 10 years have been pretty good, but the previous 20 to 30 years were pretty hard years. Certainly that’s what got agriculture through. You only have to look at what we sell. Mr. Youzwa talks about canola. It didn’t exist until 50 years ago. It was driven and invested in by the farmers in this province. It was created here at the University of Saskatchewan. Pulses are another huge success story that has been driven out of Western Canada and out of Saskatchewan specifically.
Those farmers stick their necks out. The increase in soybean acres currently is a result of farmers taking those chances. They invest in the technology. They’re doing it because it works. They take the risks. When you plant a new crop it can go sideways pretty quickly, but farmers do that and that’s what created canola and pulses.
The entrepreneurial spirit in agriculture is what drives the economy of Canada, and families drive entrepreneurs. That’s why guys are doing it. It is for their family. It’s very important part socially. There are huge areas of Saskatchewan that are underpopulated. If farmers weren’t there fencing it or tilling it, it wouldn’t be a very good scenario. If there weren’t cattle out there keeping that grass that did burn down, it would have been a lot worse than what it was. I couldn’t agree more with some of your comments.
Senator Mockler: Before I recognize Senator Marshall, I would like to come to your statement, Mr. Youzwa. I am reading it here: “I’m Terry the farmer. Morneau called about tax reforms.” How come he called you?
Mr. Youzwa: Apparently a Conservative MP responded to that in the House of Commons and put my name forward. Morneau asked within the house.
Senator Mockler: Can you share with the committee when you hung up what your impression was?
Mr. Youzwa: Actually, I learned very little from the call. What I got was, “I have heard your concerns. That’s not true.” I raised the issues of passive income and lifetime capital gains exemption, and he said, “That’s not true.” I said, “How come the accountants are interpreting that differently?” “That’s not true.” I said, “Actually it has happened. Why aren’t you going after offshore accounts in a greater way,” and his answer was, “I’ll forward you material. We have funded CRA to do that.” I gave him my email address and I’ve still received nothing in that regard.
Senator Mockler: Is there any other information you would like to share with us?
Mr. Youzwa: Really, that’s it. It was a nine-minute conversation. I thought I was taping it but the button didn’t work. I have myself, a witness and notes. I got three things out of him: “I’ve heard your concerns,” “That’s not true,” and —
Senator Neufeld: Be happy.
Mr. Youzwa: Yes, “Be happy.”
Senator Mockler: Can I say this, Terry the farmer? That’s probably why the Financial Post did the write-up and you stated your comments.
Mr. Youzwa: I sent that up to nine or ten places. I believe it was eventually printed in the Manitoba Cooperator, the Parkland Review and some other small papers as well, but the Financial Post picked it up a lot quicker. I thought it was going to be in The Western Producer, but two weeks later they changed their mind. They gave a lot of favourable indication earlier.
Senator Marshall: Mr. Youzwa, you said something that sparked my interest in this question. Who’s buying farmland? Did you say foreigners and the Canada Pension Plan?
Mr. Youzwa: I said the Canada Pension Plan. There are still land ownership rules in Saskatchewan, but I’ll use Senator Batters’ word. If you are going to make these kinds of Draconian changes, who knows what is coming in the future? What’s your objective, to speak to her question as well, on who you want to farm the land in the future? If you’re worried about a 10,000- or 20,000-hectare farm being big, take a look at Brazil or the Soviet Union breakup where they have guys with 20 combines running 180,000-hectare size farms. They are not uncommon.
What we’re doing here is on a different scale. If you want to maintain some continuity, that has to be part of the fabric. If you want a wasteland with a much smaller sped-up rationalization where it’s farmed by public companies, you’re helping facilitate it by placing incentives to exiting farmers to sell to others.
Senator Marshall: You mentioned publicly trades companies.
Mr. Youzwa: I can’t remember what Canada Pension Plan already owns. They took over the Assiniboia land trust in Saskatchewan. They are a significant landholder within in the province now. There are publicly traded companies managing landholdings in Alberta in a bigger way than there are in Saskatchewan because the land rules are different. There is a balance between competitiveness and social fabric there that is challenging. Yes, Saskatchewan presently has different rules.
Senator Marshall: I mean things always change. We’re seeing what’s happening now with private corporations, but I mean last year we saw the 33 per cent tax rate for the one percenters. This year we’re seeing the private corporations, so maybe we’ll hear something about the publicly traded companies next. I see this as a continuum.
Mr. Youzwa: You’re very right. Lots of farmers sit back and say, “I’m not farming in a company right now” or “I don’t have land in a company yet, so it doesn’t really affect me.”
Where do you think they’re going next? It does affect you and it will affect you.
Senator Marshall: Yes, it will affect you.
Mr. Youzwa: If we don’t stand up, oppose and speak aggressively to these things, they will continue to drive a bus over us. I didn’t say it, but you all know it. We have worked on succession in our farm for decades. I went through it with dad in 2005. I’m going through it with my son now. The accountants have been thrown under the bus in this exercise, and they’re professionals. They can’t give you advice because they don’t know the rules.
Senator Marshall: They don’t know.
Mr. Youzwa: The point in time when you flip that switch will have huge impacts in deciding winners and losers. Is that fair, appropriate or proper? Not in my opinion.
Senator Marshall: The rules change. Sometimes there are retroactive changes.
Mr. Youzwa: You never know enough about timing and retroactivity. The passive hold-co might get grandfathered, but will it? If I set that up next year will it still qualify?
Senator Mockler: Thank you very much to Mr. Lewis, and may I say Terry, the farmer?
Mr. Youzwa: Okay, only if you say it to the press.
Senator Mockler: Thank you very much for the information you have shared with the committee.
On our final panel of witnesses, we have with us Chris Guérette, CEO of the Saskatoon & Region Home Builders’ Association; and Stu Niebergall, President and Chief Executive Officer of the Regina & Region Home Builders’ Association.
Thank you for accepting our invitation to come and share your opinions, your views and your comments. Would you please make your presentations, and they will be followed with questions from the honourable senators.
Chris Guérette, Chief Executive Officer, Saskatoon & Region Home Builders’ Association: Thank you for allowing us the time to meet with you today to add our perspective on the government’s proposed changes to tax planning and business management for private corporations. I know you have a very tedious task ahead of you, so thank you very much for your time.
My name is Chris Guérette and I’m the CEO of the Saskatoon & Region Home Builders’ Association. I have the pleasure of being here with my colleague from Regina. Although we’re two very similar associations, we are very independent in nature, but we are the only two professional associations representing the residential construction industry in our province.
Since we are both presenting today, we have worked together to ensure that we don’t duplicated our efforts. I will be covering a bit of the technical aspect and my colleague, Mr. Niebergall, will be following a bit of the entrepreneurial spirit and some actual concrete examples from his area.
Our association has been the voice of the residential construction industry in Saskatoon and region for almost 65 years. This means we represent approximately 270-member companies involved in one way or another in the development and residential construction industry. Developers, builders, renovators, tradespeople, suppliers, financial and legal professionals, all local businesses, have worked hard to not only build their own business but to help build Saskatoon because of their entrepreneurial spirit and success.
Every member I have spoken to has confirmed that the proposed tax changes will have an impact on their business and their future plans, either in development and growth or in how they will retire. Although the government has announced some adjustments to its proposed tax changes, and we were pleased to see some of these rollbacks and modifications, there are still a number of concerns as we move forward, primarily regarding lack of detail and clarity, as well as the need for what we would recommend, a proper impact assessment.
Questions you would ask in proper impact assessments would be: How much revenue will be raised with such measures and when? What is the impact on business resiliency? What is the impact on availability of capital for start-ups and business expansion? What is the impact on retirement savings? Particularly for our industry when we look at any changes in policy, how will they impact growth? Without growth, our business can’t strive.
The residential construction and renovation industry is made up mainly of small family-run businesses. Some 83 per cent of construction, renovation and associated businesses have less than nine employees and two-thirds of all onsite employment. In Saskatoon, for example, 65 per cent of our builders build fewer than five homes per year. Some 75 per cent build fewer than 10 homes per year. The economic impact of this is actually quite large. It means 5,800 jobs or $355 million in wages and $1.5 billion in investment value for Saskatoon and surrounding areas. Those numbers are from 2016.
The residential industry is cyclical in nature and vulnerable to regional economic conditions. The fragmented nature of its trade and sub-trade work, and more importantly the liability issue that comes with the job, has meant that industry is largely comprised of small companies and incorporated individuals. These factors mean that the industry is particularly sensitive to changes in the business environment. We certainly have evidence of this with recent provincial changes in Saskatchewan.
When the government’s plans were initially announced we were concerned about certain practices and the impact of the important involvement of families in the business carrying considerable equity that can be liquefied quickly to take advantage of business opportunities such as purchasing land and having the kids buy you out to help fund your retirement.
Despite the recent changes there are still numerous details to be clarified. We have the following comments on some of those: We still do not believe that any changes in the current rules regarding passive investment are necessary. Some businesses may face exorbitant tax rates. We have heard up to 73 per cent. This could very well lead to increased investment capital fleeing the country, or in our case the province as well.
Businesses in our industry are increasingly requiring deeper pockets to operate. When we talk about the examples of small businesses, we’re seeing that the middle size companies are either deciding to stay small or grow large because there are deeper pockets required to operate in our industry.
The government has also indicated that it will expand the definition of meaningful contribution to a business in regard to its proposal around income sprinkling. However, the fact remains that any restrictions will still apply to businesses at all income levels, not just the top earners.
The proposed changes do not reflect many formal and informal ways. I know you’ve heard a lot about family members participating in businesses, especially when it comes to the participation of spouses. We would agree with the recommendation that there be, at minimum, a full spousal exemption under the income splitting rules. This will recognize the key roles spouses often have in a business, one that cannot always be clearly quantified.
Additionally, we would also agree on fresh consultations regarding intergenerational transfers in order to find ways to make it easier and less costly to pass the family business on to the next generation.
Finally, while the plans to reduce the small business tax rate are welcome, the benefit is lessened when you consider the discontinuation of the small business tax credit job credit at the beginning of the year. While overall EI premiums were lowered, EI premiums for small businesses actually went up. Lower taxation of profits certainly helps when business is good, but I think you’ve heard from others that it doesn’t help when business is bad.
In a similar way uncertainty is always bad for business. The government’s proposals have created a great deal of uncertainty in the industry. That uncertainty is still with us today. It’s imperative that the government release final and detailed rules and implement timeframes for the provisions that are moving ahead so that businesses can make any necessary adjustment they may require.
It’s also critical that the Department of Finance, the Canada Revenue Agency and private industries work together to ensure that the interpretation guidance for the legislation is clear. I can provide a quick example with some significant tax changes that happened in our province. It is quite painful for businesses when the policy arm is not in coordination with the administration arm. At the end of the day it’s the business that has to figure it out and it creates a great deal of red tape.
We certainly urge the government to take a step back on all of its proposals and launch meaningful consultations including impact assessments for any proposals with the business community to address any shortcomings in tax policy without unfairly targeting small and private businesses.
Thank you. I will leave it to my colleague, Mr. Niebergall.
Stu Niebergall, President and Chief Executive Officer, Regina & Region Home Builders’ Association: Thank for the opportunity to bring our perspective to the Minister of Finance’s proposals for improving fairness in the tax system.
The Senate of Canada is taking the time to hear from Canadians and understand the impacts of the changes in this legislation. It is the kind of leadership Canadians are looking for from the Senate, and we certainly applaud you for listening.
You have heard and will hear from many who can bring a lot more tax expertise than I can today. What I would like to share is examples of the unintended consequences for our young, our middle class and newcomers to Canada who have a key interest in their entrepreneurial dreams.
I will share with you an email that was sent to Minister Morneau that I was copied on. The author of the email was not willing to allow me to share his name. Like so many members I have heard from, they are concerned that by going public they would only become targets of the CRA. That in itself is quite telling. A young entrepreneur wrote: “I am a small business owner in Regina. I am 28 years old and have been running a roofing business for the last nine years with my business partner. I went to the University of Regina and obtained an engineering degree while running this business. When I finished my degree I had a choice of using my degree and going to work for a large corporation. I decided I liked the small business world better and enjoyed working on the ground level with everyday people. We currently employ 25 to 30 people who are aged from 18 to 35. I feel obligated to each and every one of them. We have built our business on being able to save income through the corporate income tax structure so we can grow our business. We have structured our retirement savings plans around this model. You are increasing the risk of shutting the doors on many small businesses and each and every family that works with that business. I really hope that you reconsider this tax change and thoroughly exhaust all other options before you hurt our families and our future. If the tax changes are not calibrated just right, how many young entrepreneurs will choose to not take the risk and simply go to work for somebody who is already established?”
Another young couple of 35 years of age within the last five years have emerged as an innovative homebuilder in Regina. Today they build 30 or 40 homes a year. They have suggested that if the full extent of tax changes go through they will continue on as builders, but they are already investigating making those investments south of the border where the tax and investment treatment are much more attractive.
Finally, I would like to share a story about a young couple who emerged from war-torn Serbia, coming to Canada as refugees. They worked hard, developed skills, he in trades and she as an engineer. They settled in Regina, pooled their resources and built a homebuilding business together, creating jobs and economic benefit for the whole community.
How many times has the entrepreneurial immigration success story played out in Canada? We applaud the federal government’s new immigration targets that were just announced. It is my hope that many of them find Regina, Saskatchewan, as welcoming a place as I know it is. However, what does it look like if our tax laws encourage newcomers to Saskatchewan not to pursue their entrepreneurial dreams or, even worse, infer that they are somehow tax cheats? We need tax rules that encourage entrepreneurialism, not diminish it.
Just this week roughly 3,300 companies and individuals were identified in the Paradise Papers as benefiting from offshore trusts to legally avoid or potentially evade paying taxes at home estimated at $6 billion to $8 billion a year. Maybe the place for Canadian tax fairness to start is to stop facilitating corporate tax havens through what is being described as treaties and secrecy laws.
Finally, I would like to say thank you to the Conservative caucus in Saskatchewan for their support on this matter. Conservative leader Andrew Scheer took the time to meet with the Regina & Region Home Builders’ Association. On October 2, MP Cathay Wagantall and Senator Batters walked with us in a rally we held so that we could have the opportunity to make our perspective heard.
I also want to thank Minister Ralph Goodale who reached out after our rally to communicate the adjustments the government was planning on corporate tax rates and adjustments to the original proposals.
Similar to what Ms. Guérette has described, while our members were pleased to see the government adjust some of the original proposals, a proper impact assessment should occur to consider four questions and be transparent in making the case for change.
How much revenue will be raised by this measure and when? What is the impact on business resiliency? What is the impact on availability of capital for start-ups and business expansion? What is the impact on retirement savings?
Given the complexity of these proposals, more analysis and consultation is needed to fully understand the effect on entrepreneurialism in Canada.
Again, we thank the Senate for their leadership on this important matter, and we can take any questions you might have.
Senator Marshall: Before I get into my questions, there are two items Mr. Niebergall mentioned that I wanted to pass comment on. One is the reluctance of the individual who didn’t want his name to go public because he thought he might be a target of the CRA. I have actually had comments like that made to me. That’s very concerning for the government. The other is the comment he made with regard to the Paradise Papers and the unfairness of it that has also been made.
Ms. Guérette, my question is for you. In your opening remarks you began by referencing the impact assessment that wasn’t done by the government. It sounds like you’ve done one yourself. You’ve thrown out some additional information.
Did you give us everything that you have, or do you have additional information you can provide to us? It sounds like you’ve done quite a detailed assessment.
Ms. Guérette: No, unfortunately I don’t think we would have that expertise. I think you would really need something in depth to properly understand the whole mechanics of such policy changes.
We can say that we have heard from our members what that impact is in terms of what decisions they would or would not make based on such policies. We know the impact economically of our industry, but it would be very hard for our professional association to track how the changes would impact the market and the industry.
Mr. Niebergall: If you can just give me a bit of leeway here, locally in Regina we did a study starting in 2011. We just completed another one in 2017. We have done a very unique study, the only one of its kind in Canada. We managed to convince a cohort of land developers and builders to open their books, which are often quite well protected. We worked with the University of Regina to do a complete study looking at housing in 2006, 2011, 2014 and 2017 to really understand the cost structure change in the housing market during this particular period of time. We have the ingredients from all the players to understand how this plays through.
I have an overall summary of why this is important. It is a complex study but, to make a long story as short as possible, if you clump altogether in the Regina marketplace the price of a housing unit, it all kind of averages out to about a 10 per cent gross margin on a house.
That is important in this conversation because you can have your own perspective on that. We have explained why this matters many times to the municipal government and the provincial government here in Saskatchewan. Yes, you are going to make the changes and make the decisions around tax rules that you have in place, but if you think for a second it will ultimately be absorbed by the business that is not going to happen. That is absolutely going to get passed on ultimately to the final home buyer.
It’s interesting to think, as you make tax changes that will have a negative impact on business, at the very same time up to this point the federal government in many different ways has shown concern about the affordability of housing in Canada. These two different policy silos will have the impact of only continuing to erode housing affordability because these tax changes ultimately will end up in the price of the next homes.
If you think of that dragging that out even further, when you consider the level of homes that are bought in Canada through mortgages that tax increase is now amortized through somebody’s mortgage over a 25-year period of time. You can pick some numbers on an interest calculator and change some factors, but $100 worth of taxes really turns into somewhere between $180 and about $225 for every $100 of increase.
Another very interesting thing came out of the study that was very surprising to us. When you load up all of the different taxes the three levels of government actually get out of the housing industry from new home buyers in Regina terms, and I think it would be relatively consistent across the country, right now that is getting close to 25 per cent of the price of a new home.
The reality is that a lot of the people who make money through the purchase of a home because of the multitude of players and stakeholders from the land, right through to installing the eavestroughs. There is no group that gets a larger percentage of a home than the three levels of government. There is nobody in the industry that is making 25 per cent on the price of a home.
That’s where I think that fits into the context of this conversation.
Senator Marshall: That is who the winners are.
Mr. Niebergall: That’s who the winner is on this. The government is already doing very well.
Senator Marshall: With the homebuilders.
Mr. Niebergall: With new housing in the country, yes.
Senator Marshall: The cost structure of the homebuilder is very interesting. They opened their books. I think I know the answer, but I have to ask the question.
Mr. Niebergall: Sure.
Senator Marshall: Would that have given you any insight into what they’re holding in passive income? Passive income is one of the topics we’re here to discuss. Can I make that leap? Can you make that leap?
Mr. Niebergall: No.
Senator Marshall: No, we can’t make that leap.
Mr. Niebergall: If there was a challenge in the study, it was really in terms of understanding how builders allocate their administrative costs. They do it differently. As the previous speakers before us spoke, I mean this really is about how you manage your retained earnings. That is going to vary.
What has been interesting and surprising to me as we’ve gone down this journey in the past couple of months with our members is why some of our largest corporate builders within the marketplace would get so wound up about the issue because this literally does not affect some of them from that perspective. Yet sometimes they have been the most vocal to us on this issue. The reason is that they understand the impact to them through their customers because the vast majority of their customers are not home buyers. It’s all the contractors and small businesses that come together for the development of that land or the construction of the housing unit.
Senator Marshall: In light of the proposals I think it was Ms. Guérette who said that they either stay small or they go big. Then one of you said that somebody has gone south of the border. Why would there be an impetus for them to go south of the border if it doesn’t affect them directly? Could you just reconcile that for me?
Mr. Niebergall: In terms of the one example I gave of the young couple who are investigating going south of the border, there is a lot of market factors that go on for them. They’re in a very competitive environment. They have been successful in building this new homebuilding business over the last five years. They have built up their passive income to reinvest within the marketplace. Although they’re a local builder, when you put in all the pieces that go together and add this one on top of that, at some point it’s the straw that breaks the camel’s back, and they say they’re better off to investigate that capital somewhere else than here in our local marketplace.
Senator Marshall: That answers my question. Thank you very much.
Senator Pratte: Mr. Niebergall, the first young entrepreneur you quoted said that this tax package needed to be calibrated just right. One of the things we are looking at is how these changes could be calibrated just right.
We know because the minister has told us that he was moving forward with what remains of the package. Although most witnesses we’ve had before us have expressed the wish that the government would hit the pause button, I think probable the government will move forward with what’s left of its tax reform.
I’m wondering whether you would have some suggestions as to what the government could adjust to both the passive income proposal and the one on income sprinkling to make it more palatable.
Mr. Niebergall: I wish we could bring that level of expertise. That is certainly the challenge. I was hoping to communicate that through our presentation. That is why I appreciate the question. The government should really do, as others have described, a full assessment of the impact of this. Even over and above that it has to give some thought to what it wants to accomplish around entrepreneurialism in our society.
Again, we’re bringing in all of these immigrants, which is fantastic. Many of them come to Canada for a better opportunity and have certainly been very engaged historically in developing entrepreneurialism, in developing their own businesses and in finding great ways to contribute to the building of this great country. Will our tax laws help them make those particular decisions and make those investments?
What worried me the most or was not clear to me about the comments in the example I gave about the young man who opened the roofing business is: If he were graduating today from the University of Regina, would he make the decision based on the future rules to take the risk on investing and getting into the roofing business, or would he be better off to work for one of Canada’s numerous corporations?
We need both in our society, but there is no doubt the entrepreneurial side has been historically the backbone of our country’s economic success. For me, that would be the place in this conversation where the government should be starting in terms of trying to figure out what it’s trying to achieve. Then all the tweaks and balances will start to maybe potentially make sense after that.
Ms. Guérette: Another section that could be included in impact assessment is something we haven’t mentioned: the impact on the underground cash economy. When we make adjustments to tax policy, such as if we increase taxes on cigarettes, we all know that we are not necessarily going to see all of that revenue. What would that be for the residential construction industry? If we say we calculate the underground cash economy at an estimated $42 billion, we’re not proud to say that our industry is responsible for a large, if not the largest, share of that at 28 per cent. If we prorate that, that’s $1 billion in Saskatchewan.
Let’s calculate this change. That’s certainly something that frustrates the professionals in the industry who are trying to counteract the cash economy. How much would that number go up? Those are dollars not going into government coffers. That would be another important question to ask in the impact assessment, in our opinion.
Senator Pratte: I want to make sure I understand correctly the impact on your members. I am not talking about the impact that your members think it could have on some of their suppliers, but the impact on your members as far as passive income.
The fact is that the government has put a threshold of $50,000 on passive income. I understand that many things are not clear, but does the principle of it change anything as far as your members are concerned?
Mr. Niebergall: This is a complexity of the government in trying to understand how this impacts all of these different businesses, whether it’s the agricultural sector we were speaking about before or here, because it’s going to impact everybody in different ways.
The challenge for a homebuilder is that essentially through complicated financing and a whole bunch of very complicated components you have to pay to build the house or the project in advance of ever collecting the money from the buyer. That takes huge amounts of capital.
If I take it to the broader side, the actual land development side and the level of capital required, over the last 30 years the level of infrastructure that has now been downloaded to the residential development industry is so astronomical that it takes very deep pockets to be able to play in that sector. A lot of the time that is corporate money, but certainly there are sprinkled right across Canada private corporations with that type of investment that are doing land development at local levels. that requires gigantic amounts of passive income because you’re putting money into a project that you may not start to see a return on for five, ten and sometimes fifteen years. From that perspective, the $50,000 in that game means absolutely nothing, right?
You have asked a good question. We actually have to go back and look. Would this actually be something now that would remove smaller land developers right out of the marketplace in its entirety and really provide favoritism to only the large corporations in the land development industry?
It’s tricky for us as an association because we represent both, but there certainly is an unintended consequence that hasn’t been thought out related to that.
Senator Neufeld: I thank both of you very much for your presentations. I can tell you that we have consistently heard a lot of the things you have said in all of our hearings. That doesn’t mean you shouldn’t say it because the more we hear it, the more it may have some effect on a government official. We hope. At least we hope.
Passive investment seems to be a very big one. Can you tell me what size of a cap should be put on passive investment, or should there be no cap, or if you think there should be a cap why do you think that?
Ms. Guérette: The earlier witness from MNP was enlightening. If I understood correctly one of her suggestions in terms of a cap relative to the size of a corporation, I think that makes sense. Certainly the realities are different from a builder who is building five homes a year to a land developer who needs a considerable amount of capital to seize opportunities at the right moment. That would be a suggestion.
One size fits all does not seem to work. Perhaps there can be a way to prorate that depending on the size. I don’t know the answer because I’m not an expert, but it would appear that might be a better fit.
Senator Neufeld: Why would you think there should be a cap on an entrepreneur? I guess that’s my big point. Why do you think there should be a cap?
Ms. Guérette: As in our notes, we would argue that we shouldn’t have a cap.
Senator Neufeld: You shouldn’t have a cap.
Ms. Guérette: Yes.
Mr. Niebergall: We would very much be in agreement with that. Everybody appreciates the corporate tax reduction, and this is very anecdotal from offside comments from different members as we’ve talked about this, but quite frankly I think they would have rather had a corporate tax increase and just skip all of this. This is just about raising more money for government coffers. Again, with the level of complexity this adds to the business it just seems like a lot of work.
Senator Neufeld: Yes, for what they’re going to receive.
Mr. Niebergall: Yes.
Senator Neufeld: I believe I understand that change is less than $250 million for sprinkling in a $300 billion budget. I mean $200 million or $250 million is a lot of money. Don’t get me wrong, but when you compare that to $300 billion it’s really not that much cash for, exactly as you say, the complexity. It’s the complexity, but it’s also how people are unsure what that complexity will be and how to apply. I know one CRA officer will apply it differently where I live than they will maybe in Ontario. It is not because they want to do it. It’s just human nature if they’re left to think it out. Would you agree with me there?
Mr. Niebergall: Yes, I think it has been just very well proven, well documented and well understood that as you get down to the nitty-gritty these things end up being relatively subjective from tax audit to tax audit.
If your auditor perceives things in a certain way, it puts you in the situation that you have to go through some format to appeal your disagreement, get a tax ruling and all the complexity with that. This will probably increase the risk of all that stuff. It comes back to me again that this just seems like a lot of work to accomplish a different outcome.
Senator Neufeld: Very little.
Senator Andreychuk: Thank you for coming forward on behalf of a province that I cherish. I wanted to make a statement. I thought your approach, Mr. Niebergall, was interesting for some of my colleagues. You in business got them to do accountability and transparency, at least in that way. Also there was the fact that you worked with the university. So you have put together the academic, the theory and the practical people. That is what has been missing in this exercise. We have the people in the finance department, but we haven’t had the people on the ground in a way that would be meaningful in partnership. I want to laud the university and you for that kind of partnership. I think that’s the strength of where we’re going.
My question is more on new immigrants, newly arrived immigrants that you talked about. The first immigrants into Canada in bulk with all kinds of exceptions were people who wanted the land. They knew the land. They were from a peasant kind of stock, so they valued farming and agriculture. The newer immigrants come with a more urban experience and a more entrepreneurial experience in markets, real markets like souks, et cetera. I’ve been surprised how many of them have gone out into rural Saskatchewan and have taken risks. Why another franchise out there? Why is it open 24 hours a day? They’re putting their money and their skills in there. They’re also being pushed into being incorporated because they’re often franchises. They don’t have a track record in Canada. They may have money somewhere and some of them have brought money but they don’t have a track record here, so incorporation has been the tool for their legitimacy to extend.
Have you heard government say anything about that? We have brought new immigrants in. We will need more immigrants. One of the tools they need is incorporation for legitimacy. That seems not to have been in the mix, coupled with the fact that your study was on affordable housing. Saskatchewan rates were pretty level for a while, and then they shot up. Rental properties weren’t around. Rental housing wasn’t available to young families, et cetera.
To me, it’s more than a tax policy. It goes into citizenship and immigration. It goes into housing policies.
Have you been able to capture anyone including the minister from Saskatchewan in saying, “Look, these tax things have a reverberating effect on all of the other fabric of what you’re trying to build?”
Mr. Niebergall: No. It is a fantastic suggestion because it’s a very important piece. One of the challenges is in how government often perceives the construction industry. It kind of gets broad-based across the whole component of construction. There really are three areas of construction: industrial, commercial and residential. We actually operate very differently from the residential side. In many ways the residential industry doesn’t necessarily hire people. What it really hires is businesses.
As an example, let’s say I knew how to drywall. I went to a builder and I said, “Do you have any work?” In many cases the builder would say, “No, I don’t have any work.” If I showed up and said, “I’m Stu’s drywall contracting limited, do you have any work?” “Yes, I’ve 10 houses I need done.” It’s just the way our business operates. On a large industrial site, they would tend to be union shops and would hire people through that particular process.
Why entrepreneurialism is so important to our business is that as we’re trying to attract skilled workers to our country, which is a big reason the federal government has explained its new immigration targets, our industry really needs it. If we’re to fundamentally affect the cost of housing within the marketplace, yes, we need skilled workers, but we actually need more competition which means more entrepreneurialism.
Let’s say as an example that we had in Saskatoon three concrete finishers. A bunch of skilled workers were brought into Saskatoon, and they all ended up working for those three finishing contractors who were already established here. The work will get done faster, and that’s a good thing, but you’re not going to fundamentally change the cost structure of getting that finishing contract work done here.
However, if you brought in people and got them set in a more entrepreneurial environment, and you went from three contractors to six contractors that will now have to compete for that work, you will get much better outcomes in terms of affecting the ultimate price of the product of that home at the end of the day. Then you’ll be adding new competitive pressures to the market.
Entrepreneurialism solves a lot of Canada’s problems on a whole bunch of fronts. That goes back to my earlier comment: Will the tax law fundamentally encourage entrepreneurialism or will it diminish it?
You have heard from everybody who is having trouble. Even with a lack of understanding, what does this actually look like at the end of the day? It’s so complicated that even MNP, Deloitte & Touche and all that can’t give you good advice about that.
For an entrepreneur who has now just recently come to Canada to start to establish a business, even the chatter about this starts to create artificial risks to making the investment of their own capital to start those entrepreneurial businesses.
Senator Andreychuk: Just to follow up on that, I know what tax loopholes are. There are advantages and interpretations of the act so a tax lawyer can interpret but then the CRA has the final interpretation. We know that’s part of a system of anything. Tax evasion is totally different. I used to spend time as a lawyer saying to my clients, “You can take the maximum advantage of the way, and I will help you, in the way you want to drive your business.” There are all kinds of case histories, where they fall over that line and encourage me to look at an evasive tax. They are not inventing new law. They know when they’ve crossed the line.
There was an implication that maybe they had crossed the line and we want to reel them in. What has happened is that the minister has been persuaded in one way or another that he is making a system that’s more restrictive where in fact entrepreneurial spirit needs more flexibility.
I see it going in the wrong direction. It should not be a debate of those who have crossed the line. It’s really: How do we within a lawful tax system that can be interpreted give the maximum flexibility for all those ingenious entrepreneurs that you work with?
Mr. Niebergall: That’s really well said, yes.
Senator Andreychuk: I’m from Regina. I’ll admit that.
Senator Mockler: Thank you. This concludes our day in Saskatoon.
Thank you, Senator Andreychuk, for the hospitality.
Ms. Guérette and Mr. Niebergall, thank you for sharing your comments with us.
(The committee adjourned.)