Proceedings of the Standing Senate Committee on
National Finance
Issue No. 48 - Evidence - November 9, 2017 (morning meeting)
WINNIPEG, Thursday, November 9, 2017
The Standing Senate Committee on National Finance met this day at 9:08 a.m. to study the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved.
[English]
Senator Mockler: Honourable senators, I welcome you to this meeting of the Standing Senate Committee on National Finance. I see we do have a quorum; I declare the meeting in session.
This morning we have the pleasure and the honour to receive the Minister of Finance of Manitoba. Minister, thank you very much for accepting our invitation. And since we are in Manitoba, in Winnipeg, although I will be introducing you formally to make your presentation, you could welcome the committee here in Manitoba.
Hon. Cameron Friesen, MLA, Minister of Finance, Government of Manitoba: Good morning, everyone; welcome to Winnipeg. It’s cold today, but I am very happy to be here with you. The weather is not cooperating, so there will be no joking about that. We usually have a lovely warm November, but we are not having that this time around. I know you have been busy in your travels for the purposes of this meeting, and we welcome the opportunity to be able to feed into this worthy enterprise and provide a Manitoba perspective that you can consider. So welcome everyone, and thank you for being here today.
Senator Mockler: Thank you, minister. My name is Percy Mockler, a senator from New Brunswick. At this time, I would ask the senators to introduce themselves.
Senator Pratte: Senator André Pratte from Quebec.
Senator Oh: Senator Oh from Ontario.
Senator Andreychuk: Raynell Andreychuk from Saskatchewan.
Senator Marshall: Elizabeth Marshall from Newfoundland and Labrador.
Senator Neufeld: Richard Neufeld, British Columbia.
Senator Cools: Anne Cools, Toronto, Ontario.
Senator Mockler: Thank you.
The Standing Senate Committee on National Finance was authorized by the Senate of Canada to examine and report on the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax-planning strategies involved — in particular, income sprinkling, holding passive investment inside a private corporation, and converting income into capital gains. From our order of reference, the committee is authorized to take particular note of the impact of the government’s proposed changes on incorporated small businesses and professionals, economic growth, government finances, the fairness of the taxation of different types of income, and other related matters. The committee will submit its report to the Senate of Canada no later than December 15, 2017, and retain all powers necessary to publicize its findings for 180 days after presenting the final report.
Minister, before that, in Ottawa we held 13 public meetings, heard from over 60 witnesses, and received more than 30 written submissions. There is a lot of interest for this study, and the committee felt more consultation was needed. Therefore, we decided to criss-cross Canada, and this is our first trip in Canada, the Western trip, and we will follow up in two weeks with the Atlantic trip.
Over the course of the day, minister, we will have before us people who requested to appear, or people whose names were submitted by parliamentarians, and also from the public at large.
I would introduce the Minister of Finance for Manitoba, the Honourable Cameron Friesen. He was born and raised in Morden, Manitoba. After graduation, he earned a degree in music from the Canadian Mennonite University and the University of British Columbia. He returned to the province and earned his education degree at the University of Manitoba.
Minister, please make your presentation, and following which the senators will ask questions.
Mr. Friesen: Thank you, Mr. Chair. It is a great honour to be with you here today; it is an exciting time for Manitoba. We are a new government. As some of you might know, we were elected in 2016, in the spring just over 18 months ago. And we have been working hard in Manitoba to restore fiscal stability after inheriting an almost $1 billion deficit and a net debt that had doubled in the course of six fiscal years.
We have had challenges in front-line services, in the quality of those services, so we are working hard, and we are making progress on behalf of all Manitobans. We have had among the lowest unemployment rates in Canada. I just saw new statistics yesterday showing we have added 14,600 new full-time jobs from last October to this October.
We continue to have the lowest household per capita debt of any Canadian province. Our housing starts and commercial real estate demand are at an all-time high. We are seeing record levels of private investment, and, as I referenced, we have made some progress on behalf of Manitobans in reducing our deficit. We released the public accounts for the previous fiscal year at the end of September and showed a $147 million reduction in the deficit, so we are heading in the right direction.
The approach that we have taken is a balanced and moderate approach. We are demonstrating our commitment to small business with efforts to reduce red tape through our Bill 22, the Regulatory Accountability Act. We are focused on affordability. We are focused on keeping taxes low. We have indexed the tax brackets. We have indexed the basic personal amount that will provide $35 million in tax relief to Manitobans by the year 2020.
Immediately, by increasing the basic personal exemption, we remove over 2,200 people from the tax rolls, and we are reviewing Manitoba’s tax credits. We have over 30 credits in this province, with a value of over $600 million. And we are working towards what we have described as a coherent and comprehensible tax system that meets key policy objectives and focuses on simplicity and transparency. We are saying here that we are well on our way to becoming Canada’s most improved province.
The federal Liberals’ plan to change the way that small businesses are taxed threatens a major economic engine for the Manitoba economy. The federal proposal seems to ignore the millions of middle-class Canadians who are utilizing legitimate, long-standing tax-planning rules for their businesses.
The rhetoric that we have heard from the federal government has not been helpful in this conversation. Hard-working, law-abiding business owners have felt stigmatized. They have been described as tax cheats, despite the fact that they are in compliance with long-standing tax laws — tax laws that have been in place in this country, as you all know, since the last comprehensive tax-reform initiative in the early 1970s.
In this province I have heard from small-business owners, farmers, municipal officials and other professionals. They share a concern about the negative impact that these changes, if implemented, will have on their businesses and on the people that they employ. Let’s be clear: These changes will have the most impact on lower- to middle-class business owners, not the truly wealthy citizens of Canada, who are a small percentage of taxpayers and who have a greater ability to defray high tax than the average-income Canadian.
According to Statistics Canada, what this means for us is the following: Manitoba has approximately 120,000 small businesses employing 77 per cent of our total work force. Additionally, we have approximately 21,000 micro businesses, employing between one and four employees. Those operate primarily in the sectors of construction, agriculture, transportation, professional and scientific services and health care.
We have left you with a package, and in it you will see that in this province, as in other provinces, we have seen a significant growth in incorporation rates from just around 16,000 only a few years ago to now 24,000. And there are reasons for that that we will discuss. It is these business owners we have heard from expressing concerns that the federal tax measures are targeting private corporations.
We know that 56,000 small corporations in this province would be subject to the conditions under the federal Liberal tax proposals, and 25,000 of those are taxable in any given year. Also, 25,000 individual Manitobans and taxpayers claimed taxable dividends from small businesses; that includes both the principals of corporations and shareholders sharing in the income of those corporations.
We believe that the proposed changes to the tax treatment of small business discourage hope and penalize ambition. We believe that these changes were poorly conceived, and they have been poorly communicated. And the consultation period was a poor accommodation, with only a 75-day comment period taking place in the middle of a Canadian summer.
Terry Fehr, President of Meadowlark Honey Limited, has a small business in the province. He wrote to me to advocate on behalf of small-business owners. He said he would now be paying over 50 per cent of his total income in taxes. He noted that some businesses will pay much higher rates under the federal proposals. Tax policy analysts and economists have stated that once you get to that 50 per cent of income going to the government in taxes, it becomes counterproductive to the economy; it becomes counterproductive to revenue.
One Manitoba farmer, Amanda Layton, asked me to oppose Minister Morneau’s tax changes so that she would be able to hand her farm on to the next generation.
Her comment was that the federal government should be comprehensively reforming the tax system to support the family farm rather than dismantle it.
I heard from one family physician about the reductions in clinical hours and administrative staff that she would be forced to make in her practice if these tax measures are implemented. I will speak further about that later.
It is completely contrary to the promises made by the Liberals in the last federal election on what they described would be measures to support the middle class, and a commitment to lowering taxation. These proposals do not accomplish that policy goal. If the finance minister’s proposals are implemented, business owners will be forced to change the way they do business. They may decide to get out of business altogether, they may move their business to another jurisdiction, or they may simply stop making the significant investments within their business to grow it, taking more of a caretaker approach. And we all understand the negative effect on our economy that that would have.
The Manitoba Chambers of Commerce stated that these changes would reduce economic growth and job creation in the province of Manitoba. There is another side to these changes, and that is that it becomes harder for provinces like Manitoba, who have done so much to recruit and keep doctors and nurses, to continue to guarantee the provision of health service in our communities. We have made investments. We know that these changes will make it more difficult and will add layers of cost for a province, or whole new approaches would be necessary. We could go backwards very quickly from the important and significant gains that we have made thus far.
I have received numerous letters from those in the health care system about the impact these changes will have on services to patients. I received a letter from an anesthesiologist who told me about the sacrifices he made over the years to become a professional and how he is dedicated to serving his patients without breaks and the kind of benefits other workers take for granted. He said he was sickened to hear that the federal government described him as a tax cheat when he is paying more in tax than other colleagues through his corporation. I know that this is a theme you have heard in other discussions.
He said the effect of these changes would be that he would cut his practice by 20 per cent, which would affect wait times. He is seriously considering job opportunities in the United States, Australia and New Zealand, and he has heard from physician colleagues who will also reduce hours worked. We know that this will increase our health care costs in the province at a time when Manitoba has made it clear that the federal government is backing away from what we have described as an appropriate level of health funding in the province through Canada’s Health Accord.
In short, these proposed changes would cause business owners to take fewer risks, create fewer jobs and contribute less to the growth and success of our economy.
Let me walk you through the changes from the Manitoba perspective. First, on income sharing, Canadian small businesses have a long-standing history of using tax-planning approaches like the sharing of income among family members through private corporations. This has enabled entrepreneurs and small businesses to grow their enterprises. It has been successful in Canada as well as in Manitoba. We know that marital partners share in the risk of the enterprise, and we know that marital partners put their personal assets at risk. We also know that the degree of risk is not always readily verifiable or visible to those peering into the enterprise.
This relates to a concern with administrative complexity. In a bold departure from current conventions, the way we structure the rules around the sharing of income presents many challenges. They raise fundamental questions about how you measure the value of these contributions — labour, risk and capital investment. I have heard from experts who are clear that even though the federal government has said that they value keeping it simple, these proposals will be administratively difficult and will add complexity to our tax system.
There is sufficient ambiguity, even now, on what is called the reasonableness test for the sharing of income for dividends and capital gains. This will create further administrative complexity for business, for the CRA, for the appeals process and for the courts.
I would say that there must be a measure of the necessity for practicality; practicality must be figured in when it comes to trying to design a test of reasonableness. It has been related to me from experts who work with these issues every day in the professional community that we are inviting exasperation on the part of those who work within our system. Our system is based on trust. It depends on a broad-based buy-in to the rules.
I sense, through the anecdotal evidence that I receive through the letters that arrive at my office, that these changes would invite a response of simply saying, “I have always approached the rules this way. I don’t understand how to additionally quantify this contribution of another person within my organization. I will continue to do this as business as usual. If there is a problem, someone will signal it to me.” I suggest to the members of this group that this is not a path that we, as Canadians, want to follow.
Additionally, the set of proposals have the potential to affect all private corporations with family members and shareholders, regardless of income level. On page 7 of the presentation that I am leaving with you, there is a graph that shows that over 10,000 Manitobans are of modest-income levels of under $85,000 a year and receive dividends. Slightly fewer Manitobans over the $85,000 income level are also receiving dividends. It shows that these changes in tax treatment will impact many Manitobans, not only at a high level of income, but also at a moderate level of income.
It comes down to a principal concern around how to quantify the investment of a significant other, a spouse or a marital partner, in the enterprise. We know the background; we know the collapsing of the kiddie tax provisions that were done in the 1990s; and we know that there is a desire to raise the threshold once again. But in particular, when it comes to a spousal contribution within this first proposal framework, it is exceptionally difficult to quantify that non-operational commitment and contribution that the spouse makes. How do you quantify the dialogue that goes on between those individuals within that small corporation when it involves a decision to invest, to take on debt, to make the next investment, to build, to put capital at work, or to hire? I suggest to the panel that, administratively, a test would be difficult and costly. In many respects, I think it would be a solution in search of a problem.
We are agreed in this province that it does create a compliance burden on a small business. We know that uncertainty will proceed among tax planners and advisers — exasperation will proceed amongst small business, farmers, families and others.
The second proposal, passive income, is important for a small corporation. We know that passive investment is used to support businesses during economic downturns by allowing them to build up capital for use in a time when they are facing a slowdown. But let’s not forget that it is also necessary to be able to invest incrementally, to save up for the right time to make that investment and, of course, to save up for retirement. These individuals within a corporation do not have access to other conventional methods to prepare for retirement that others, without a small-business corporate structure, will have.
Trevor Sprague, a tax expert here in Manitoba, said that when it gets to the concept of integration and deferral to passive investment income earned indirectly by an individual through a CCPC, the result is that, in Manitoba, you are actually paying an additional 6.19 per cent of tax — a total effective tax rate of 56.59 per cent inside a small corporation. That is once you have paid that 20 per cent in corporate tax and the 45.74 per cent in personal taxes. In other words, a passive investment income earned indirectly by an individual through a CCPC is currently taxed in Manitoba at a higher rate than non-dividend income. There is not an imbalance needing to be addressed.
I note that Scott Clark, Peter Devries and Len Farber, former federal Finance officials, wrote an article this week in which they condemned the process that has been followed by the federal government leading to those proposed changes. And they say as much on this subject.
I recently received a letter from one entrepreneur in southern Manitoba. This individual owns a Canadian Tire, and he said, on this second proposal, that he takes much of his profits and plows them right back into the business in order for it to grow. But he has indeed put some of the profits into passive investments. He indicates he has done so to save for expansion in the future, and now he is planning a capital expansion in his business that will cost him well over $1 million. Keep in mind that this would exceed even the new threshold, that new scale proposed by the federal government in the amendments to their original proposals.
This individual says he has been saving for this expansion for a number of years — not using a loophole. He says that instead he has been prudent with extra profits to grow the business for the family, for the staff and for the community. I look forward to that investment that this individual will be making; I know it will result in jobs and additional taxation for us. I am concerned about the degree to which the rule changes would create a disincentive for individuals like him who might simply throw up their hands and not make that good investment. We need to provide the runway, the consistency and the certainty that will enable entrepreneurs to make investments that will be good for the whole economy.
Without that capital on hand, businesses could be forced to lay off workers, reduce operations or shut down entirely. I have heard this first-hand, and I think in many cases the most significant threat would be simply to not grow.
The third proposal is the conversion of dividends to capital gains. I understand that at this point in time there is a hiatus on this, and there is no immediate path forward. We share the concerns that so many others have regarding this limitation of the measures to convert dividends to capital gains. This would have a harmful impact on intergenerational transfers of property and, in particular, family farms. We heard this again and again at my pre-budget consultation meetings with Keystone Agricultural Producers as well as other groups who came to advocate on behalf of their members.
Consider as well that Manitoba has high dividend tax rates, and that means this conversion is very significant in this province. Given the important role in our economy played by family farms, this has been a particular concern for agricultural producers. It is a classic example of unintended consequences, but it has an undeniable impact on our economy. Whether it is a farm or any other small-business practitioner, it is clear that currently there are significant tax advantages in the Income Tax Act when it comes to multiple income earners compared to the same income level when the household has only one income earner. As Canadians, we are all aware that this imbalance exists. This is a more high-level observation, but I am sure it is one that you have heard before at this table as you have held your meetings across the country.
I want to make the point that we got here somehow. In Canada, under the new proposals a two-income family continues to pay significantly less in tax than single-income families.
The current rules for Canadian corporations acknowledge this. They create a framework in which self-employed Canadians could save adequately. It is important to remember that our taxation system is based on the principle of taxing citizens based on their ability to pay; it is why we have graduated tax rates. The more you earn, the higher rate of tax you pay.
Each family has the same family expenses, the same desire to help their children with education and the same ability to pay tax at the same income level. The federal government believes that taxing single-income families at a much higher rate than two-income families is fair. I remind you that this includes Canadians like single mothers who are raising children. The federal government’s proposal seems to suggest that this should be further expanded with these proposals.
Tax fairness should include our goal of not punishing certain sectors of the economy. That should be a fundamental feature; it should be focused on creating balance and symmetry. This federal approach creates further imbalance while failing to recognize the risks and sacrifices that people in small corporations make in order to create jobs and grow their businesses and our economy. I would say that what we heard back is that it needs to be fair, but it is not the same. Working for wages is not the same as growing a small business. We need to have a more nuanced view of how our economy works in Manitoba, and in Canada.
From a more global perspective, we are concerned with the impact that such a complex series of changes will have on small businesses that do not have an expert understanding of how the tax system works. I would suggest to you that, with the smaller business enterprise, there would be reduced ability, capacity, resource, and time to understand and respond. Small business already has a lot to worry about. Making the tax laws even more complex, and compliance an even greater challenge, will only add to their stress.
Dale Ammeter is a local tax specialist here in Manitoba. He pointed out that the increased tax complexity of the changes puts unique burdens on taxpayers to comply and makes it difficult, or impossible, for the CRA to properly administer the provisions. The federal government has said that they are committed to keeping the process simple, but these changes do not invite simplicity; they invite complexity. We are now told that we will only see draft legislation on that subject in the spring. I think that this underscores the extent to which federal officials are becoming increasingly aware of the complexity that they have, perhaps inadvertently, created or invited.
As to the specific impact that these proposals have on Manitoba, it is concerning that the government only released estimates of additional revenues that would be generated from the income-sharing provisions — none on passive investment. There are no estimates for the changes relating to the revenue from passive investment. Nor were there estimates for the changes targeting the diversion of dividends to capital gains prior to the federal government backing away, or climbing down, from those first proposals.
Small business is the foundation of our economy here in Manitoba. In many cases they don’t have those other conveniences, nor those features that other Canadians may enjoy. Millions of Canadians have workplace pension, health plans, parental leave and sick-time benefits. We welcome those benefits. At a very fundamental level, business owners forego some of those benefits for an opportunity they see that they want to invest in. We must make sure that we are putting adequate value on risk as we embark on this path.
It is also unfortunate, and my premier has made this point, that the federal government has continued to use the rhetoric of middle class versus high-income earners. Some of the evidence we left you clearly shows that, in our estimation, these are not the people earning $1.8 million per year, as suggested by Finance Canada documents. Manitoba continues to work with the other provinces, the territories, the federal government, Finance Canada and the CRA on legitimate issues of tax avoidance, tax evasion and the transparency of corporate ownership. We are not against these things; we have stood in favour of them. We have spoken on those matters at our federal, provincial and territorial meetings, and we will continue to do so, but we must not confuse them.
Let me say a word about the tax-rate reduction. We recognize that the proposed two-increment tax-rate reduction, from the current 10.5 per cent to 9 per cent, will allow corporations to retain additional income. But in principle it only exacerbates the large gap that exists between the personal income rate and the corporate income tax rate. Again, the fundamental question is, how did we get here?
The Prime Minister and the federal finance minister expressed concern about the rate of incorporation. Incorporation makes sense on the landscape of Canadian taxation as we have defined rules.
In conclusion, these are all serious questions, and you have heard from serious Canadians opining these things for some time now. From my perspective, I must arrive at simplicity, on the far side of complexity.
What is the fundamental question we have to ask? For me, it comes down to this: Who do Canadians trust to create jobs in Canada? Is it the small businesses who are the backbone of our economy, or is it the federal government? We need to encourage risk taking that creates employment for Canadians.
Instead of taxing it, we need to promote investment for economic growth. This plan will cost jobs, it will hurt the middle-income earners, it will hurt small business, and it will hurt start-ups. Family farms could be penalized through this. If it is bad for the family farm, it is bad for the Canadian economy, and bad for the Manitoba economy.
Our premier and this government have led the fight to stop these poorly considered proposals. We continue to stand for a system of taxation that is fair for all Manitobans and for all Canadians, families, wage earners and their employers, and business owners.
Similar to what the former federal Finance officials had said earlier this week, I believe that what is truly required if we are going to embark on this path is an independent tax-reform commission similar to the Carter commission. It would have a specific mandate, resources sufficient to take on a comprehensive examination of who we are as Canadians and how we view the right to fundamentals like owning private property. We must recognize and accommodate that differentiation between those who put capital at risk and invest in their own enterprise, and those who earn wages in our system.
I started by saying the future is bright in Manitoba — we believe that. We need a tax system that keeps it this way. Thank you so much for your attention today. Thank you for being in Manitoba, and thank you for this committee’s focus on what I consider to be a fundamental issue of importance for Canadians at this time.
Senator Mockler: Thank you, minister. Now, we will move on to questions.
Senator Marshall: Welcome, minister. Thank you for your remarks and for the document you left. There is a lot of good information here for us.
My interest is with regard to the overall Manitoban economy. I did read your budget paper on the economic review and outlook. Based on the information there, it seems that Manitoba has come through a decade that hasn’t been great, but it is on the upswing. You still have some challenges ahead, such as NAFTA, rising interest rates, the fiscal position of the province and the current indications of economic downturn.
I realize that this may be a bit of an unfair question because the proposals have yet to be finalized, and we don’t know the details, which will be announced in the 2018 budget. What are your fears about the impact of these proposals on the economy of Manitoba? Do you think that this will just be a little blip on the economy, or do you think that there are some big challenges ahead because of these and maybe future proposals?
Mr. Friesen: Thank you for the question, senator. Certainly at a very high level, they don’t help. I think that I am unable to fully answer the question, precisely for the reason that there is so much that we do not understand, both with respect to the original proposals and now in the walking back of certain parts of these proposals. We are struggling to understand and to scope out that change and its effect. We have seen estimates of revenue for only one facet of these changes, and have seen a variance already.
Tax officials who have done this work for decades are left scratching their heads and saying, “We really don’t know.” And federal officials have yet to describe how they would deal with this. There are aspects of this discussion that I have left out today because there are still question marks in the margin, and others arise on a daily basis. This is exactly the narrative we have embarked on with Manitobans; saying that we are going to be good managers. We intend to be good managers of public money, and we must do better on the expenditure side. Our predecessors always took the view that revenue would allow them to catch up and find that sweet spot. We found that during this new low-growth normal that all provinces, U.S. states and the federal government are experiencing, jurisdictions must put their focus on sustainability through enterprise management.
Having said that, the risk is all over the board; you described it accurately. There are those risks and others. You are in Manitoba today, and we are looking at major snow in the first week of November. We are a province of floods and forest fires and significant weather events. I continue to meet with people in the private sector who say that the biggest concern for them going forward is the weather risk to their enterprise. So we face challenges. We need to have the fundamental confidence in the Manitoba economy that it will continue to grow.
As a government, we must do everything we can to support the effort of those who invest in our economy. When these individuals are telling us that they have significant concerns on these proposals, I must point out that we share their concerns.
Senator Marshall: Thank you.
Senator Pratte: Mr. Minister, thank you for this document, which is very instructive and useful.
On page 5 of your presentation, there is a graph that shows the growth in the number of incorporated small and medium-sized businesses in Manitoba. This parallels the information that has been given by the Department of Finance Canada about the growth in CCPCs at the national level. It shows a significant increase in the number of incorporated businesses, especially in the farming and medical sectors from 2006 to 2010.
Page 12 shows a significant increase in passive investment income, especially in farming and with physicians. There is an incredible increase in passive investment income from 2010 to 2015, which is precisely what led the government to some of the proposals it is making. It is a concern that some businesses are using the CCPC structure not as a legitimate instrument to put money aside for future investment but specifically as a tool to reduce their income tax, for fiscal purposes, and for future retirement — as a tool in the CCPC structure that other Canadians cannot use. Would you have any comment on that?
Mr. Friesen: Thank you for those comments, Senator Pratte. In our presentation, I included charts in order to show that, not unlike other jurisdictions, we have seen that increase in incorporation rates. We know that the differential between private and corporate rates has driven that interest in incorporation. In this province, the right to incorporate was a collective bargaining provision made to physicians; we know that this would explain a lot of that increase.
In essence, you said that there is an opportunity available to those in private corporations which would not be available to other Canadians; that is true. However, there are many advantages in the tax system for other Canadians — advantages that are not available to those who run their own business. That is why I make the claim in my presentation that we need to have a nuanced approach. We must understand that it is not the same; we must have a differentiated view.
Now within that, of course, we must talk about what is reasonable. It is our opinion, and that of those that have written to me or come to my pre-budget consultation meetings, that these proposed changes cast an initiative far too widely to be able to address what is articulated as a very focused concern.
Our documentation clearly shows that this goes to the heart of the middle class; it is not an issue of the uber-rich. But, let’s remember that those physicians often save within the corporation — within those micro-business structures.
A short anecdote, if I may. I was on a plane three weeks ago and I sat next to a doctor. She was coming back from a conference; she recognized me, and she said, “I want to talk about health care.” What she wanted to talk about was the federal proposals. She said, “I am a woman, a specialist, a family practitioner who has become a specialist, and I live in Manitoba.” These changes strike right at an individual like herself, she said, and her ability to take maternity leave.
There are many reasons why small corporations store capital in passive investments. She told me that medical practitioners often have incredible debt that they incur — those eight, nine, ten years of post-secondary education, their internship – and then finally they have that very significant income in the first years of their profession. But, she said very clearly, if it is a female doctor at the age of 30 who wants to start a family, the window for that is somewhere in those next five years. She said the federal government is asking the wrong question. They are asking about annual income, but they should be asking about net worth, because in their profession, that individual is upside down for many years. Capital is being stored to enable that individual to leave the work force and return to it.
So senator, it is not a complete answer, and I am sorry if I didn’t get to the heart of your question, but I believe we need to have a nuanced view, and ask important questions about why small business does store capital.
Senator Pratte: I don’t want to start a rhetorical debate here, but in the case of many provinces, Manitoba included, in the negotiating process, doctors were allowed, if not encouraged, to incorporate to access these tools so that they could improve their financial situation. In a way, their financial situations should have improved by an increase in their fees. And since provinces judged that they could not afford an increase in the fees, they went through this process for nothing.
It is an indirect process, and I am not sure that doctors really can compare to other small businesses. Their situation is very different from many of the small businesses that you were talking about; their risk level is not the same. This is where we find ourselves today; the government is obviously targeting those kinds of professionals and, by targeting them, probably hurting many other small businesses.
Mr. Friesen: I understand the point you are making, and I agree with you. It is a blanket provision, and there will be unintended consequences to it. I am not suggesting that there isn’t a need to retool. I think it has been a very long time since we have had that broad conversation, as Canadians, about our fundamental approach to taxation; we need to have those conversations.
This is ad hoc. This is sudden, and the degree to which we don’t invite a better conversation is the degree to which we will invite further complications and unintended consequences.
If I can return to that same anecdote that I shared, what troubled me the most about the conversation I had with that doctor is what she said about the practicality of the matter. She said, “I am incorporated. I am not only a doctor, I am a small-business owner.”
Two things will happen, she said, if these changes are enacted. First, she will release her office manager because she cannot afford to keep that individual, even though they perform a fundamental service. Second, she said she will have a meeting with her CPA. She will invite her professional accountant to draw a line across the page horizontally and indicate to her where the threshold exists above which there is no fundamental reason to continue to work because she is essentially working for free.
She provoked me when she said, “Ask me where that line exists?” I said, “Where is the line?” She answered, “Thirty per cent of my billable hours.”
I cannot think, if other physicians had a similar approach, what it would mean for us, as a province, in terms of doctor recruitment and retention. Our system would have to come up with those additional bodies; it is not just paying billable hours, it is finding work force. That is the challenge in all of this.
Senator Pratte: Can I make a small additional comment? I would say, looking at page 13 of the document that the minister distributed to us, that I am not sure that the comparison on passive investment between the present rates and new rates, according to the government’s proposed reform, is suitable. According to the present system, those are the rates before distribution of the dividends — I am not sure that it compares. We could discuss this at length. I think the rates should be given after distribution of the dividends; then the comparison would be much more precise.
Senator Mockler: Thank you.
Senator Neufeld: Thank you, minister, for being here; it is much appreciated. We have heard from the federal minister, and now yourself, from Manitoba. I think we look forward to hearing from some other Ministers of Finance, when we do our trip to Eastern Canada. I appreciate your taking time out of your busy schedule to be here.
It has been told to us, as a committee, by Finance officials, that no impact study was done prior to these changes being floated out there for Canadians. Because it was so poorly put together, these tax changes, maybe it is best that they didn’t do an economic study. Besides that, prior to making what we are told are some of the most dramatic changes to the Income Tax Act since 1972, would you, as a minister in Manitoba, have done an impact study on the economy of Manitoba so that you had a feel for what was actually going to take place? From much of the testimony that we have had, from yourself and others across the country, the impacts of this that nobody thought of are huge, including how it could affect farmers or the small-business corporations or professionals. Would Manitoba actually do at least a bit of an impact study to figure out what would happen before you do a tax change or anticipated tax change?
Mr. Friesen: Thank you for the question, Senator Neufeld. Your point goes fundamentally to the issue that this process has been rushed. I called it ad hoc; it is not comprehensive. Compare this to the Carter commission that had a comprehensive, all-party mandate. It was composed of individuals who understood the scope and who could go across the country, speak to experts, speak to everyday Canadians, and ask questions from a 40,000-foot viewpoint about who we want to be as a nation. Then there was a careful process by which they reported back. These findings were received and contemplated, and changes came as a result. Those very significant changes have shaped the way we earn, the way we pay and the way we grow as a nation.
You pointed to the fact that an impact study is lacking, and that has certainly caught everyone off guard. We have sought to understand the extent of these changes, and in some fundamental ways we just don’t have access to the information. We favour that more comprehensive view.
I just want to reinforce that it is not as if we are saying that this work is unnecessary; we are not saying that the system is perfect the way it now stands. What we are saying is that there has to be that commitment of Canadians to eject the politics out of this kind of thing and to go at it comprehensively and in a manner that will give confidence rather than to invite the kind of irritation and exasperation that has clearly been the case in the last number of months.
Senator Neufeld: The government has talked about professionals incorporating so that they can put money in passive investment and have better income at retirement. They have done it under the rules that are in place. They have done it honestly. Yet, when you talk, when you see on TV, or when you hear about some individuals that have income trusts, which are the same thing, they are basically looking after themselves in the future and taking advantage of whatever tax benefits that would bring. We have the government defending those things, but saying that there is a small segment of the Canadian population that we want to target in these proposals. What is your viewpoint on that?
Mr. Friesen: Senator Neufeld, that is why I think so many Canadians have responded by saying these changes are unfair. I used the word “ad hoc,” but I could just as easily have used a term like “focused”; they are focused on one area of our economy.
You raised the issue of trusts, but there are other ways that Canadians derive income. There are other ways that Canadians of significant means structure their finances. The rules are complex, and people fundamentally have the right to arrange their affairs in such a way as to maximize their tax savings; this is a fundamental concept that we adhere to.
This breaks out that better conversation. Here is an early opportunity when it comes to tax reform that doesn’t work. I had one tax professional here in the province, Dale Gislason, who said the proposals try to measure the taxation of outputs based on inputs — measuring tax levels by effort or hours put into the business. In the entrepreneurial world, that simply doesn’t work. You could have a fantastic idea in two days that creates wealth and gain for a corporation over the next 20 years. Or, you could struggle alone, 60 hours every week, but not provide the value. I don’t trust tax officials to get that level of complexity right on the first round, it having been broken off from the better, and bigger, conversation.
I won’t go down the path of the other areas that are left unexplored, but clearly we understand that we only have to look back to the Carter commission to understand that there are much larger issues that have not been addressed in this way.
Senator Neufeld: The government has talked about innovation in Canada, about creating jobs through innovation, and all good things to think about. We need to do that. What do you think these proposed changes have done to those people who would go out and actually put their house up, all of their savings, get their friends’ savings, get family savings to invest in an innovative idea that they had? But all of a sudden, these things were foisted on them. What do you think it has done to those people who were dreaming about having a chance in Canada, when all of a sudden in the middle of the summer this kind of tax change was dropped on them?
Mr. Friesen: Well, Senator Neufeld, we are changing the rules midstream, so of course that creates anxiety in those who thought that they understood the rules. We are concerned about that. Clearly, this also goes to the point of its being different; a small corporation is different. We have to understand that. Just like that individual I mentioned who owned a Canadian Tire store, year after year small businesses plow profit back into the business. This creates jobs, and it creates taxation. I was a student trying put myself through university, and a small business took a chance on me. They hired me, brought me on for a summer for four months. I was able to save and defray that overall cost of my education by having money up front. I worry, at a fundamental level, about the commitment of businesses to continue to make those jobs available to my children, who are now university students. There is a difference between annual income and net worth; we must recognize that in all of this conversation.
Senator Neufeld: Thank you.
Senator Mockler: Honourable senators, I have been informed that the minister has five minutes with us. Minister, you have been very generous with your time and your presentation for Manitoba.
Senator Andreychuk: Thank you, minister. You have put a lot before us, and in a very practical way, you said that the necessity for practicality should be the thing. We have heard from you, and from others, about unintended consequences. It appears tax officials were looking at the dollars, the graphs and the charts in order to find ways to continue to generate revenue. They came to some conclusions about some inequity with small business.
We have seen why the doctors incorporated. I could probably give you the answer why farmers incorporated around 2006. Also, we have heard from a lot of people that you don’t just incorporate for tax advantages — you are forced to if you are a franchisee. A lot of our new immigrants are coming in, and they can’t get the lending, so they have to incorporate just to collect the revenues.
My concern is the unintended consequences to the entire fabric of Canada — the health system, young entrepreneurs, our education system and our immigration system. How do we fix that? Is it through a Carter commission, or do we go back to the government to say the unintended consequences are not only those we have been hearing about in spades, but also those that haven’t even been thought through because revenue people have not talked to the health department, et cetera?
The other concern is how do you measure what people won’t do. I think that is the risk for Canada. I would like your comment on that.
Finally, were you consulted at all in July? They are always doing different things with tax. Were you aware that they were coming, or were you as blindsided as the businesses tell us that they were?
Mr. Friesen: Thank you, Senator Andreychuk, for your point. I know we are under time constraints. Let me quickly say that the first time I heard Minister Morneau use the term “income sprinkling” would have been in the June meeting that I attended last year, 2016, when I was a newly minted minister. At that time, though, the minister clearly described this as trying to focus on the richest Canadians, those who might be going around the rules and improperly using some rules. We all, in that room, were focused together on what we thought was a relatively small group of Canadian income earners. This, obviously, is not the case. You will have received evidence that clearly this goes to the heart of the middle class. It was not what was described to us. I am not saying the discussion didn’t proceed before that, but that was when I was new at the table.
You pointed out the disconnect that is there now. I described some unintended consequences that we have already perceived here in our economy, but you commented on how to measure that which would not be taken on. This is the nation we are; these are fundamental decisions about how we understand our rights to acquire and own property, to make investments, to plan appropriately for our retirement and for succession. In this province, where land values for farms have been going up by astronomical rates, incorporation has been important. It has been an important tool, and succession is also important. This catches everyone off guard.
I won’t say that I have the solution on the approach today, but I would say this: Back up, go to a high level, do this well, and take sufficient time and expertise to do it in consultation with Canadians.
Senator Mockler: Honourable senators, I know that the minister has to direct himself to the legislative assembly. Minister, you have 30 seconds to wrap up, please.
Mr. Friesen: Thank you all for being here. It is great to have you in our jurisdiction, and to hear what I imagine are similar themes coming out. I welcome this work. This is the work that I think is essential for having us understand that it is important that we get this right. It is important that we hear from Canadians. It is important, when it comes to a conversation about tax fairness, that we understand that we need to be fair and that we need to proceed cautiously. But we do invite a conversation among Canadians about how we do this together. Understanding that the decisions we make in respect of these choices, and others, will guide us. They will inform who we are as Canadians, in our families in 20 years, in 30 years, just as the Carter commission guided us before.
We think it is time to put the big pause on these changes and to go back to the table to have a better conversation with Canadians.
Senator Mockler: Minister, thank you very much.
Honourable senators, our next panel is composed of Mark Jones, a board member of the Winnipeg Chamber of Commerce; and Chuck Davidson, President and CEO of the Manitoba Chambers of Commerce.
To both of you, thank you for accepting our invitation to share your opinions, your comments and your recommendations on taxation with the Standing Senate Committee on National Finance.
I have been informed that Mr. Jones will make the first presentation, followed by Mr. Davidson, and we have a time frame of five minutes. I have to admit that we were over-generous with the minister, but he was talking about Manitoba, and I know that you will be talking about Manitoba also. So, Mr. Jones, please make your presentation.
Mark Jones, Board Member, Winnipeg Chamber of Commerce: Thank you very much, and good morning. I would like to welcome you to Winnipeg and thank you for giving us the opportunity to be here this morning. I am a board member with the Winnipeg Chamber of Commerce, and I am also a partner with Olafson & Jones, Chartered Professional Accountants.
Just a little bit about the Winnipeg Chamber of Commerce, to start. Founded in 1873, the Winnipeg Chamber of Commerce is older than the City of Winnipeg itself and is one of the oldest chambers of commerce in Canada. With over 2,100 members representing 90,000 employees, the chamber truly represents the voice of business in Winnipeg.
It is my pleasure to be here today to talk about an issue that rocked our chamber and business community this summer; that being the Department of Finance’s proposed tax changes for private corporations.
When we are talking about private corporations, we are really talking about small business. There are over 1.1 million employer businesses in Canada. Of those, 95 per cent have fewer than 50 employees, and almost 75 per cent have fewer than 10. These are local shop owners who are our neighbours, friends, community builders and job creators.
From 2005 to 2015 the private sector created over 1.2 million jobs in Canada with over 1 million, or approximately 90 per cent, being created by small business. As this committee has heard, and said many times, small business truly is the backbone of the economy.
The changes under consideration are broad and far-reaching, and as a result, they carry many unintended consequences.
The Winnipeg Chamber of Commerce was pleased to see the government make changes to their original proposals in October. There is no question that there were some improvements; however, we are very concerned about the ongoing lack of details in the announcements, and that some of the biggest risks remain unaddressed.
All businesses accumulate surplus funds that can be used to take advantage of opportunities to grow and expand or, conversely, to get them through economic downturns.
During the 2008 financial crisis, for example, there were over 30,000 more business exits than starts in Canada. Approximately 30 per cent of all businesses started don’t last two years, and close to 40 per cent don’t make it three years. It is already extremely difficult to start and maintain a successful business, and inhibiting the ability to build a financial cushion will increase the risk of failure of small businesses in future economic downturns.
If the government hits investment income with a 73 per cent tax, business owners will have no incentive to keep surplus assets in the business. Many will be forced to make a bad business decision solely to avoid losing three-quarters of their surplus assets.
The minister announced a passive income threshold of $50,000, below which passive income would not be taxed at these higher rates. This is an improvement over the initial announcement. However, that low threshold doesn’t give much room to save for capital investment. This punitive tax would cause them to invest less, cap the size of their savings and hold less productive assets. This means it will take longer to save and to expand or grow their business. Ultimately, it will impact job creation.
Moreover, the complexity this brings would be mind-boggling. The government says investments that currently exist will be grandfathered in, so we can only assume there will be some valuation day to report on existing investments as well as the ongoing reporting requirements to separate post-valuation day investments and the related income.
One of the government’s principles in this process is to avoid creating unnecessary red tape for hard-working small businesses. This change is obviously contrary to that principle and will dramatically increase the red-tape burden for small business. The proposed changes and the uncertainty around them have created great concern for our business community.
On income sprinkling, the government clarified that their reasonableness tests would look at whether a family member has made labour contributions, capital or equity contributions, or taken on financial risks, and/or prior contributions in any of the above three areas.
Again, much uncertainty remains over these subjective reasonableness tests, and the lack of guidance on how Canada Revenue Agency will measure reasonableness is akin to driving your car on the highway without knowing the speed limit until you get pulled over. For example, if one spouse is paid $50,000, but the CRA assesses his or her labour at $30,000, how does one prove the value of the contribution? Clearly, being forced to substantiate the value of the spouse’s contribution will increase red tape for small businesses.
Income-sprinkling changes are scheduled to come into effect January 1,, 2018, which is only weeks away. Businesses need to actually be given the rules, then given some time to plan to work within the new rules, as opposed to being shoved into the unknown and asked to suspend disbelief.
There is also the fairness question: Why shouldn’t business owners be allowed to split income? For the vast majority of small businesses, family savings are invested to start the business. Those savings could have gone into an RRSP, which would be fully tax-deferred, and then upon withdrawal at retirement would be eligible to be split 50-50 with their spouse after age 65, with no reasonableness test. If the intent is to make the playing field equal, why shouldn’t business owners be allowed similar tax treatment as one gets with an RRSP?
Many of Canada’s competitors are looking to reduce taxes. France has just embarked on major tax reforms, while in the U.S., Congressional Republicans are determined to press ahead with the biggest tax reform in 30 years. They are looking to support the job creators, while our federal government is looking to do the opposite. The content of these proposed changes was a terrible signal to the business community, and the way they were communicated has set an environment of conflict in which business is to operate. The changes were first announced on July 18, and since then we have seen flat GDP growth in July and a 0.1 per cent contraction in August. While many factors influence GDP growth, the immediate data set shows that just the spectre of these changes certainly hasn’t helped our economy.
Canada’s tax system should support investments in productive assets and business growth. Instead of penalizing passive savings, Canada should offer incentives for businesses to grow.
Our members are deeply worried about their ability to grow their business if these changes come to pass. That is why the Winnipeg Chamber of Commerce recommends that the government do the following: First, take these proposals off the table. Second, launch a more meaningful consultation period. Over 21,000 submissions were received in the original, paltry 75-day consultation period. Canadians obviously have a lot to say on this matter, and more time is required. The sober second thought and thorough study that the Senate provides are exactly what is needed. Third, present clear and transparent economic modelling which demonstrates the various impacts of these changes. And finally, and most significantly, establish a commission to undertake a comprehensive review of our tax system to make sure it is fairer, simpler and more competitive. Winnipeg Chamber of Commerce would be more than pleased to help with just such a review.
With an independent review, Canada could create an internationally competitive system of business tax that rewards entrepreneurship, attracts capital, and encourages businesses to invest and grow. I would like to thank you for giving the Winnipeg Chamber of Commerce the opportunity to be here this morning, and I would be happy to answer any questions.
Senator Mockler: Thank you.
Mr. Davidson?
Chuck Davidson, President and Chief Executive Officer, Manitoba Chambers of Commerce: Thank you very much. I want to applaud the committee for taking the initiative of coming out and talking to business owners across Canada. I think this is well received, long overdue, and, especially on this issue, extremely timely. We think that this is an extremely good process.
The Manitoba Chambers of Commerce was established in 1931— not as old as the Winnipeg Chamber of Commerce — and is the umbrella organization for Manitoba’s chamber of commerce movement. With a membership comprising 71 local chambers throughout the province, as well as direct corporate members, our organization is Manitoba’s largest and most diverse business lobby organization. It represents more than 10,000 businesses and community leaders.
In mid-July of this year, Finance Canada launched consultations on proposals to stop corporate tax-planning strategies which are being used to gain unfair tax advantages.
First and foremost, it is regrettable that the federal government has chosen to position this in terms of “fairness” and “loopholes.” The tax strategies being followed date back to the 1960s and have been refined and tested over many decades. It is concerning that the federal government has engaged in a rhetoric that divides the country, directly stating that small-business owners do not contribute to the well-being of the country, implying poor character on their part if they employ long-established tax-planning strategies to encourage growth, sustainability, innovation and entrepreneurship and to compensate small-business owners for the higher level of risk they undertake in their venture compared to the risk of an employee.
Since these proposed measures were announced, MCC has had the opportunity to have a series of conversations with business owners and tax experts to gain a better understanding of the potential impact of these changes. From those discussions it is clear that the proposed changes to the business-tax structure are of growing concern and demand an immediate and concerted effort to inform businesses of the changes and bring their voices to the government.
It is our belief, following discussions with those small-business owners and tax experts, that these changes will have a significant impact by raising taxes and increasing the administrative burden on thousands of businesses across Canada.
I am going to talk a little bit about some discussions I have had with specific CPAs and some of the concerns that they have raised to our organization. I don’t profess to be a tax expert at all. I will be blunt: Getting our heads around the changes that were being imposed on businesses was something that we are not experts on, but we gathered experts around the table to get greater concern and to have greater information in terms of where they were going.
One Manitoba CPA said he estimates that currently he is spending one to two hours every single day with clients trying to explain the potential changes they may be facing. In every case, he has to clarify that the information is based on what has been announced up to the previous day, and this may change on a daily basis. The uncertainty is the biggest hurdle facing Manitoba businesses at the moment.
Comments raised by some of the tax experts include the following: We see no compelling need for the passive income rules and recommend they be withdrawn completely, or at least put aside until a full impact study has been completed.
There is very serious risk of unintended consequences, and there is no need to rush. If they insist on pushing ahead, the threshold should be increased, and it should not be one-size-fits-all. As corporations and different industries require varying levels of capital, and if the premise behind the $50,000 passive income limit is to mimic income on savings in a pension, then perhaps a one-shareholder CCPC should not have the same limit as a 10-shareholder CCPC.
Also on the passive income rules, if government is saying that $1 million can be saved in the corporation for various purposes, including retirement, then there should be an ability to split the income with a spouse when it is withdrawn. This is just simple fairness, as employees with pension plans can split their pension income with their spouses.
Concerning tax on split income, we have serious concerns with the reasonableness test. The minister says that the test is used in other areas of the act and that it won’t be a problem. This individual disagrees. The test is not effectively used in these sorts of family situations. We realize that there is a test for salaries, but it is not often relevant or tested because corporations have been paying dividends to family members instead, often to avoid the problems that would arise around proving the reasonableness of salaries.
There were also concerns about the tax on split income rules that could impact existing structures, for example, parent-owned preferred shares which completed a freeze and are now being redeemed.
Overall, it seems, from the discussions that we have had, that the majority of tax accountants are concerned about three general issues going forward: one, the extra work required by the clients and accountants to try and comply with the generalities of the proposed rules, especially on passive investments; two, the potential liability issues and costs to accountants; and three, the tax on split income issues.
Another tax expert I talked to indicated that he has spoken to clients who are concerned about how to prepare for December 31, 2017, as well as subsequent years. They have been given general information but no specific details.
The uncertainty is so great that it is becoming impossible to do any tax planning or provide any professional advice to clients currently. With these new changes, and all of the 2016 changes to specified corporate income, related small-business deductions and inter-company dividends, many accountants are concerned about providing incorrect advice and risking legal consequences.
It is clear to me that the changes that the federal government is proposing for the tax system have created far more questions than answers, have created tremendous uncertainty, and have created a divisiveness between business and government that doesn’t need to exist.
At the most recent Canadian Chamber of Commerce annual general meeting in Fredericton, New Brunswick, the chamber network debated this issue over the course of a day, and we would urge the federal government to take the following actions if it is genuinely interested in creating a fair tax system for all Canadians. One, extend the consultation period to ensure broad participation by Canada’s SME community. The chamber network has provided an opening for Minister Morneau to hold meetings across Canada, and it would be glad to be part of that process.
Two, as mentioned repeatedly, establish a royal commission to undertake a comprehensive review of taxing statutes guided by the principles of simplification and modernization, as well as having the goal of reducing compliance costs to make Canada a competitive tax regime once again.
And three, establish a standing committee, with active representation from the SME community, to support the commission by continuously monitoring changes and publicly reporting progress on an annual basis.
In conclusion, this is an issue that I have heard from virtually all of our 71 chambers across the province, and many of their members are concerned about the impact it will have on the business economy. While we can agree that no one wants to see individuals scam the tax system, there is no reason to vilify legitimate business owners. The federal government needs to rethink the tax proposals. If they do, they will have the support of business in designing measures to clamp down on tax evasion without sideswiping entrepreneurs and discouraging job growth.
The process should result in a frank and open discussion about how Canadians are taxed and how to support business growth. To reach that goal, facts and direct impacts of how these changes will impact small-business owners, entrepreneurs and those looking to bring their ideas that will enrich the lives of Canadians need to be collected and shared with Finance officials. The best way for the government to start a dialogue on tax fairness is to demonstrate that its own actions are fair.
Thank you very much for the opportunity.
Senator Mockler: Thank you.
Senator Marshall: Thank you very much for being here today. You were talking about there being no concrete proposals, so everybody is just taking what we have and trying to read into it what we will. So I am interested in what your members are saying, because everybody is in a vacuum. What are your members saying? What are they doing now? I am not interested in what they are going to do in the future. We are going to get some kind of concrete proposals; Minister Morneau says this is going ahead, so we are going to see something. But what we are hearing, or what we have heard from some of our witnesses, is that some corporations and some taxpayers who are going to be impacted are doing things now; they are borrowing money to load up on their passive investments in anticipation of being grandfathered in.
So, my first question is what are they doing now in preparation for what is coming in the budget in 2018? I will ask you the second part of the question as to what they plan to do after, but what are they doing right now? Are they just sitting, meeting with their accountants, just as you were saying?
Mr. Jones: It is a great question. It runs the range from doing nothing, to trying to make moves and guessing a little bit in the dark, to outright panic. Our members are all asking questions, and the uncertainty is the issue. Give us the rules; let us plan for the rules to be within them, so we know what to do. There is so much unknown right now, and there is so much time spent away. I am also a CPA, and as Chuck said, we spend hours on the phone with our clients, who are saying, “What are we going to do with this?” The truth is that we don’t know. We don’t know what changes truly are coming. Some are taking guesses at it, and some are taking shots. It is hard to advise on the rules when you simply don’t have the answer.
It definitely has created uncertainty and has taken the focus away from running their business; the business of running their business now overtakes what they do for a living.
Senator Marshall: Mr. Davidson?
Mr. Davidson: You hear from young entrepreneurs who are considering getting into business. When they talk to the tax professionals and hear about the pending changes, they tend to rethink in terms of, “Do I want to go through that process, knowing that in the first couple of years of being an entrepreneur and starting a business, it is going to be extremely challenging? Doesn’t it make sense to work for someone else and have that solid salary?” That is a big concern that I am hearing; we are losing that entrepreneurial spirit — it is being affected by this.
Secondly, I am also hearing from business owners who are already well established, and they are making decisions based on what they are hearing and based on the changes to determine what is the long-term focus of their business. If it is a family business, what is the process of being able to pass it down to their children? I talked to one business owner who has been in business for 30 years, and he is finally getting to the point where his business has become something profitable for them. Their concern is that now they are being penalized for the years that they have gone through building up their business. Now they are going to be significantly impacted, so they are making decisions about how much more they want to continue to invest in their business.
That is the big concern — the uncertainty. From a business perspective, if there is one thing that businesses hate, it is uncertainty. Give them the rules, they can deal with the rules, they will play by the rules, as they have always done. But if you create uncertainty in business, they will start making decisions that will mean not investing in capital, not investing in people, not hiring individuals, and not continuing to invest. And one thing that gets forgotten as well is the amount of money they will put into communities through investments, sponsorships and hockey teams; when you take that money out of their pockets, where does it go as it did in the past? Those are decisions they are looking at right now.
We need sober second thought. Discussion with the business owners, in terms of what those consequences could potentially be, is greatly needed.
Senator Marshall: What are some of the big decisions they are looking at?
Something is coming in the Budget 2018. So what are they thinking about doing after the budget comes down and there are some changes to come into effect? What is on their mind? We hear things like flight of capital, and moving parts of the business to the U.S. What sorts of things are you hearing from your members?
Mr. Davidson: We do hear those issues. The challenge right now is that this seems to be a policy that changes on a daily basis. We hear this from tax experts, as well, when they are giving advice — that we are not 100 per cent sure, and it is difficult to determine where they are supposed to go.
Most small businesses don’t spend a lot of time worrying about tax changes that the federal government is making. But I can tell you on this specific issue, through the chamber network, we have never seen businesses get more concerned about an issue. Typically, with business owners, on a specific issue you will get one or two individuals who will raise concerns. On this issue, thousands have been willing to send their concerns to Ottawa about the potential impact that this is going to have on their business. I am also concerned about what is going to happen if there is no change to the current policy and if it is to go forward as is. I am greatly concerned about the potential impact that this could have on business in Manitoba, and Canada, based on what we are hearing from our members. I have been in the chamber network for 15 years, and I have never seen the network get as worked up about an issue as they are on this one.
Senator Marshall: Mr. Jones, are you hearing similar comments from your members? I realize some members belong to both organizations. I would like to hear your views on what you are hearing.
Mr. Jones: Agreed, there hasn’t been an issue that has gotten so much comment or concern as this one. Our members are very concerned about the unknown and what is going to happen. To your point, we know something is coming, but we don’t know what it is. There is so much uncertainty that it has caused angst and a pause in their business regarding what they are going to do. It is impossible for them to do anything because of the unknown. There is already uncertainty and risk in being a small-business owner, and this just adds to the environment. It has been difficult.
Senator Marshall: Thank you very much.
Senator Pratte: Thank you for being here today. I understand your wish for these proposals to be put off, but we understand from the minister that he would move forward with what is left of the original proposals because the government thinks it has a legitimate goal. So I am looking for ways to alleviate some of the concerns, improve the proposals so that some of the concerns can be mitigated.
You have mentioned that one of the concerns is that small businesses will not have time to adapt once the details of the proposals are known. For instance, for income sprinkling the government has announced that the new rules will be enforced on January 1, 2018, which is five or six weeks from now. Would another date, January 1, 2019, for instance, be more satisfactory? Would that be a possibility? If so, I would ask you to respond to that.
On the threshold for passive income, which has now been set at $50,000, I believe, Mr. Davidson, that you said or you quoted some expert saying that one of the problems is that the one-size-fits-all approach is not really appropriate.
Would there be, or did you hear someone suggest, another approach, another threshold, a higher threshold, or another way of measuring passive income, such as a percentage of total revenue?
Mr. Jones: In terms of the date, it is not. I go back to what I said earlier: Small business needs to be given the actual rules to understand what they are, and time to plan within them. I appreciate that there is something coming, but I have to reiterate the need to take a step back and really examine this. The uncertainty that this causes only underscores the need for a commission on tax reform. I think we have to ask, do we want to do this fast, or do we want to do this right? So picking another arbitrary date in the future isn’t so much the issue as the process behind it, announcing the rules, giving people time for a chance to work within those rules.
If I could just comment on the passive investment income as well, the problem with the one-size-fits-all approach to this passive investment is that it creates a reporting requirement for 100 per cent of small businesses. There has been a lot of talk that only 3 per cent of small businesses will be affected by this rule; that may well be true, but I can’t confirm or deny that. But 100 per cent of small businesses will have a new valuation date reporting and then an ongoing reporting requirement from then. Further, will that $50,000 be indexed? What about in 10 years when that $1 million has grown? Will it then be $75,000 that is allowed or not? What if you have one good year — you bought Facebook stock and then sold it and realized a significant year — and then you go back to a more conservative investment approach. All of those things are uncertain and unknown. That is really what is bringing a lot of uncertainty and again underlines the need for stepping back a little bit and getting this right.
Mr. Davidson: My comments on the date as well — I have always been in support of the idea that when government policy is made and we know what all of the rules are and there is no more uncertainty in terms of what the impact should be, then there should be a time frame of at least six months before something is put in place, so it gives businesses time to prepare. We look for that on a variety of different issues to be able to adjust. If the change is to occur in six weeks, is that going to make for a very busy Christmas season for lot of small-business owners, as well as accountants in Canada? Absolutely. I think that when you are making tax changes like this, which individuals have said have not happened in close to 30 or 40 years, making sure that you get it right is more important than the time frame.
I will simply echo Mark’s comments on the levels. I don’t have a number, and I haven’t heard what that passive income number should be. The concern I am hearing is that one-size-fits-all doesn’t always necessarily fit, from a business perspective.
Senator Pratte: If I may continue the conversation, Mr. Jones, the difficulty that we have is that many witnesses have suggested that the government take a step back and have a royal commission of some kind, a long-term exercise to study the Income Tax Act in depth, and I personally agree that it is necessary to do that. But if we recommend to the government to do that as an alternative to the current proposals, I think there is a very high chance they will not accept it. I think they could accept it, but not as an alternative to the proposals. I think they won’t back away from at least part of what they want to do because they believe that it is legitimate. They have a legitimate goal. That is why I certainly am looking for avenues to improve the current proposals, as well as proposing a royal commission or a thorough examination of the Income Tax Act.
Mr. Jones: I am not suggesting that the proposal to tax passive investments differently should be completely abandoned; perhaps pushing the date back, and having this as a key part of that analysis, is the way to go.
There is no question that change needs to be made. I don’t think either one of us is suggesting that change isn’t needed, but it is the way that it is done. I think you could go back and say, “This is clearly not a fit. You have a point, but this is clearly not a fit. The immediate part of this review has to address this passive income, but it has to do it the right way.”
It is difficult for me to say that it should come in as it is in 2019 or 2020. It is still fundamentally flawed. It has got some merit, but the methodology that is coming in is fundamentally flawed.
Senator Pratte: Thank you.
Senator Neufeld: Thank you very much, gentlemen, for being here. I wanted to tell you what we are hearing consistently across the country since we started in Vancouver. Prior to that, we held quite a few hearings in Ottawa to facilitate speakers from Ontario and Quebec to come. We are going to go to Eastern Canada, but we are hearing basically, in different words, the same ideas.
Senator Jaffer, who is not here, always asks the question about class warfare, to a degree, and pitting different organizations and groups against one another, some saying, “Hey, it is time this happened,” and others saying, “No, we have lived by the rules, and we have done everything that the tax law allows us to do.” But we are told they were using loopholes and probably cheating the system.
Do you think that there is a bit of class warfare here, started by the federal government, that they have to look at also when they start reviewing what they have done with these proposals?
Mr. Jones: I definitely think there has been a difficult environment set in the tone and in the way that these announcements have come in. I heard it here this morning that the small-business owners who have abided within the rules are now being told that they are tax cheats, as if they appeared in the Panama Papers. Again, I think this underscores the need for that commission to get away from the class warfare. This isn’t about taxing the rich or taxing this class or that class of taxpayers. This needs to be about a fair allocation of the tax burden that promotes growth, promotes entrepreneurship, rewards investment, recognizes the risk so that not everything is apples to apples, and supports the Canadian economy. I think that this is the danger here; the way it is going on right now has set a bad tone for Canadian business versus the government, if you will.
Mr. Davidson: I would echo those comments. I am a policy wonk in terms of how you develop good public policy, and I think the process that we have gone through in developing this public policy is not the process we should be going through, especially when you are dealing with something as important as this issue. Typically with a public-policy process you would develop a white paper, go through consultations and have discussions with business owners prior to putting documents together. That wasn’t done. This was brought in in the middle of summer with a hard date for when consultations had to be completed. Not everyone was invited to be part of that process, as well.
There is no question in my mind that there was a direction that the government was looking to go in. And I think that what they didn’t take into consideration was the backlash that they were going to get from the business community on this, specifically because the business community felt that this was creating a divisiveness that didn’t need to happen.
Both government and businesses want to create a prosperous Canada where we are growing businesses and we are creating wealth for all Canadians, creating the country that we want. I think that what has happened is that we have lost a little bit of that. There is some distrust within the business community right now around what the intentions of government are. Sometimes when policies are brought into effect through bad public policy, you are going to have those unintended consequences that weren’t taken into consideration, but that should have been before the policy came forward.
You know that the government has made some changes to that policy to be able to mitigate some of those challenges. I think they need to take another step back, though, and have further discussions and consultations with business owners, farmers and Canadians about what the potential impacts of this legislation could mean from a business standpoint in Canada.
Senator Neufeld: Because we are short of time, I will ask a quick second question.
The present government has talked about innovation and trying to encourage investment. Innovation is usually people who have some idea that hasn’t come to fruition yet, hasn’t made money. They need angel investors, they need family, they need friends to invest and all of those kinds of things. I believe that this is good; this is what makes our country tick. That is, as you folks said, the backbone is small-business operators across Canada. Regardless of where you go, those are the people that keep things going and employ people.
When you are trying to promote innovation as a government in a country, why would you turn around and target certain individuals, and target them really hard the way they have been targeted by this present government, thinking that you are still going to get innovation happening in Canada? Do you think this has put a chill on a lot of people that would like to do something that maybe would be better for Canada but that also would actually be better for them and their children in the long run?
Mr. Davidson: I think clearly this has created that level of uncertainty; it has created an issue where entrepreneurs are thinking, do I want to go down this path? Is it worth it to be an entrepreneur in Canada if it is going to be a challenge to do that? I think some of the language that was used early on in regards to loopholes, tax cheats and things like that that was coming out — I am unclear as to why they would go down that path, and for the simple reason that these weren’t loopholes; this was the tax system that currently existed. Businesses felt that they were playing by the rules that existed, so they weren’t considering themselves to be tax cheats, and being branded that way was unfortunate.
I think we need to continue to create that climate in Canada, and Manitoba, that we encourage innovation, we encourage entrepreneurs, we want to grow businesses, and we want to create a strong business climate here in Canada. I think that this is the business standpoint, the government standpoint that we should all be on the same page on. It is unfortunate, but I don’t think we are on the same page in terms of where we are going and in terms of creating that climate in Canada. Certainly this has not helped. I think there is an opportunity to make adjustments, and I will applaud the federal government for recognizing that and being prepared to make some adjustments based on the feedback and the backlash from Canadians and the business community. We are asking to go a little further.
Mr. Jones: Has the risk brought a freeze into the economy? There was a piece in this passive investment specifically for angel investors, and the government has said that they will ensure that there are methods that won’t impede angel investors, start-up monies or things like that. I believe the Minister of Finance asked this committee to suspend disbelief when it comes to those type of proposals and those types of allowances.
No one is as willing as they were prior to this to invest into those kinds of start-ups that you mentioned. You can’t risk that kind of money and just hope it works out. We need to see the rules, and we need to know there is a framework in place so that your money is safe.
Senator Neufeld: Thank you.
Senator Andreychuk: Mr. Jones, one of your answers, I think to Senator Pratte, was that there was merit in what the government was doing on passive income.
That was the first time I have heard a witness say that. Most of them said government should not intrude on how we invest our money for the future, and while there is a debate as to whether that is a vehicle to use for long-term pension planning, it may be a separate thing. But, you seem to say there was merit in it.
Given that businesses make choices, and you seem to say they shouldn’t be making some choices, what part of it is meritorious, and what part of it is not?
Mr. Jones: I thank you for that. I guess to clarify what I mean is that we are not necessarily suggesting that change, as a whole, is not appropriate. We are not suggesting that these things shouldn’t be reviewed, so when I say there is merit in looking, I mean there is merit in looking at the tax code and the tax structure in that royal commission. I don’t believe that the current proposals are the right proposals; I think they should be withdrawn and restudied. Potentially, that scenario needs to be looked at. To Senator Pratte’s question, the government is fixated and believes that there is a problem there. Well then let’s fix it the right way. So, not merit in the proposals. Thank you for that.
Senator Andreychuk: I am glad you clarified that. I wondered whether we had a recommendation.
Mr. Jones: No, I appreciate that.
Senator Andreychuk: The other point, again on Senator Pratte’s, is the timetable. It seems to me January is like Christmas, and some of us have a Christmas in the first part of January, as opposed to December 25; Manitobans would know that, Orthodox Christmas. I think 2019 seems reasonable, provided that there would be a timetable of when they would put the proposals out, how much time you would have and what the readjustments would be. In other words, it won’t be just extending it for the extension, but it would be a workable timetable for the kind of real consultation. The courts have come up with a lot in the Aboriginal field, and elsewhere, as to what meaningful consultation is. And I think I have heard from some businesses that simply to have a tick mark, 75 days we have consulted, is not working. So, if that year were used efficiently with what would be reasonable for a business community to respond, would that be a way to go, separate and apart from the whole tax code? To engage the government in a dialogue in these broader issues of how you support the economy, how you put forward entrepreneurs, and what will it do to our health system — those would be the kind of consultations to get into.
Mr. Jones: I couldn’t agree with you more. To back it up, have consultation, announce the rules and framework, and then, here is the limitation date. I simply couldn’t agree with you more.
Senator Andreychuk: I have a subset to that. The government came out saying that they are doing this because it is unfair — I won’t talk about the loopholes — to employed workers to have this advantage over self-employed. They recognize that the methodology they may have used needs fixing, but last week the minister again talked about the unfairness between these two groups. Is that going to be an impediment to any real consultations?
Does the minister have to acknowledge that it isn’t apples and apples, to use your words?
Mr. Jones: Absolutely. Fairness doesn’t mean the same, and you are absolutely right. The foundation of this is that it has to recognize the risk factor. I believe Minister Friesen talked about it, and I am sure you have heard it in all of your meetings; there has to be recognition of the risk involved in being a small-business owner, the 24-7 nature of it, the capital at risk, and the family savings that are at risk. That has to be a significant consideration in any of these proposals.
Senator Andreychuk: That is not to diminish that there might be risk for employees, and they have to be addressed differently.
Mr. Jones: An employee takes on a different amount of risk. We have some great employees in Manitoba; they are very engaged, very committed. The reality is that they don’t have skin in the game, if you will, in being a business owner. If the business fails, there is an EI safety net, there are a number of opportunities, or they can go and get another job. For the business owner, if the business fails, you have lost some of your life savings, you have personally guaranteed some of the loans, and you are faced to clean up the issues that are there. So, very apples and oranges.
Senator Andreychuk: Thank you.
Senator Oh: Thank you, witnesses, for being here. I am going to go straight to my question. With regards to the reasonableness test, how would you propose that CRA measure the intangible contributions of spouses, and should, for example, a husband now hire his wife to provide child care and house care in order to ensure that she is compensated now and in the future? Can you comment on that?
Mr. Jones: It is very difficult to measure that intangible. I think about our members. That one spouse is running the business; they come home and sit at the kitchen table at dinner and they talk about what is going on, talk about the risks and talk about investment. There is support from just dealing with the household issues from the other spouse. It is difficult to measure those kinds of inputs and that kind of support. There are rules in place around the tax on split income for minors, and there are rules in place on income to spouses; it has to be a fair income. In terms of the family investment going in, I honestly don’t have the answer for how you measure that, and how it could be so subjective.
The reality is you are going to have one — you asked about CRA, how they will measure it. One CRA official measures it one way, and another measures it another way. It is a subjective measurement. It is difficult, if not impossible to have consistency, or opportunity to plan. And that, really, is at the heart of the concern around income splitting.
Mr. Davidson: Those are exactly the same comments we have heard: What is determined to be reasonable, and how are you going to go about that process? And, having different CRA officials interpreting it subjectively and differently based on that is a huge issue. Talking to experts, I have got a list of about 20 questions on that issue alone, what they think is difficult to understand, or issues that they would have with this proposal, and in terms of what you go through with that process. This is a very messy one; it is going to be a real challenge to determine what that means.
Senator Mockler: Thank you very much, witnesses.
Honourable senators, we have as our next witness, from the Keystone Agricultural Producers of Manitoba, President Dan Mazier.
Mr. Mazier, please make your presentation, and it will be followed by questions from the senators.
Dan Mazier, President, Keystone Agricultural Producers of Manitoba: Good morning, and thank you for allowing me to speak this morning.
My name is Dan Mazier, and I am the President of Keystone Agricultural Producers, which is Manitoba’s general farm policy organization. We are member funded, member directed, and take great pride in being the voice of Manitoba farmers.
We are here today to discuss a set of tax proposals that initially caused our farmer members a great deal of concern. In their original form, the July 2017 tax proposals presented by the government were very troubling to farmers, especially those who are incorporated. Nearly a quarter of Manitoba’s farms have chosen to incorporate, so any sweeping reform to legislation affecting the way that private corporations are taxed understandably creates anxiety.
Most concerning were the proposed limitations on access to the lifetime capital gains exemption and new rules designed to stop the conversion of income into capital gains. Approximately 98 per cent of farms in Canada are still family run. Thus, maintaining the ability of farmers to pass their operations on to the next generation is of the utmost importance to preserving this defining feature of Canadian agriculture.
We are very relieved that the government recently announced that they would not move forward on these two proposals. However, it was unfortunate that it took a great deal of public outcry to demonstrate to the government that their proposals as originally presented would have unduly harmed family farms.
Thorough consultation prior to the announcement of the initial proposals would have identified the negative consequences to family farms and lessened the public outcry. We believe that this clearly demonstrates the need for better consultation during the drafting of new rules. We also recommend that consultation be undertaken on the remaining proposed changes.
Sweeping tax changes that affect all private corporations will have differential impacts on different types of businesses. Consultation before and during drafting is necessary to identify all probable consequences and to ascertain whether certain sectors will be more heavily affected than others. If we had been consulted prior to the announcement of the initial proposals, we would have been able to alert the government to the problems that the changes related to capital gains would have caused for family farms.
Therefore, we strongly recommend that in the future the government undertake consultations before making proposals such as these. We also recommend that they consult with us as they draft the new rules that will address income sprinkling and passive investment.
We are very pleased to see that the government has recognized the problems associated with its initial proposals on income sprinkling and passive investment and accordingly announced the amendments. That said, we do have some remaining concerns on these points. I would like to outline some of them for you today.
I will begin with the issue of income sprinkling and the method used to determine what constitutes a reasonable contribution by those family members receiving dividends from the corporation. Our primary concerns relate to the compliance burden and costs that would be imposed on the farm in order to maintain records of any and all contributions of family members, and to the subjectivity and individual discretion of the CRA auditors that the proposal would allow for.
The government has amended the initial proposals to broaden the standard beyond reasonableness when compared to non-arm’s-length employees.
They have announced that the new standard will be focused on “meaningful contributions.” We have been promised a simplified test to determine what sort of dividends paid to family would be allowable in relation to them having made a meaningful contribution. However, we do not know yet know what the test will look like or what the parameters of a meaningful contribution will be.
We recommend that rather than trying to determine what a meaningful contribution is when deciding to apply rules for tax on split income, it would be easier to simply design the rules to apply only in situations where it is clear that no contribution has been made. This would lessen the compliance burden on farmers and reduce the level of subjectivity involved in determining whether the dividend should be treated as split income and taxed as such.
We also want to emphasize that the importance of additional activities, such as devoting time to caring for children and managing the family home, should be considered, as well as previous contributions to the corporation by family members when evaluating the appropriateness of a dividend.
Defining or quantifying family member contributions in the context of the family farm is highly problematic. Family farms are complex operations that involve many types of contributions from many family members. Attempting to untangle these and measure the contribution would be difficult, unfair and burdensome. We urge you to consider this and accordingly recommend that these rules apply only to where it is clear that a family member receiving a dividend is making no contribution whatsoever in a direct or indirect way to that corporation.
We also ask that the implementation of income sprinkling rules be postponed to at least January 1, 2019, so that farmers will have adequate time to analyze, understand and prepare for the new rules, which, at this time, are yet to be determined.
Another issue we would like to discuss is passive investments. Again, we were pleased to see the government amend its original proposals on the subject. The decisions to grandfather previous investments and their associated income and allow for $50,000 in investment income per year before applying a higher tax rate are steps in the right direction. However, we would like to point out that the passive investment income may be used by an incorporated farm for many reasons, including paying for future expansions of the operation. As we know, farmland values have risen dramatically in recent years, increasing the cost of acquiring additional land. Therefore, we recommend that a higher tax rate be applied only in cases where income from passive investment is paid in dividends to shareholders who are using them for personal use. If the investment income is remaining in the business, the new rules should not apply.
We are also concerned about the way the rental income from farmland may be treated under the new rules. We strongly recommend that it be considered as active business income, not passive investment income. Farmland rental is a common practice for stabilizing and diversifying the revenue of the operation, and we would not want to see this considered a form of passive investment income.
Finally, we recommend that the government carefully construct the rules for differentiating between grandfathered investments and new ones. If the rules are structured poorly, high administrative and compliance costs could arise for farmers whose corporations have such investments.
We hope that you will carefully consider our remaining concerns surrounding the design and application of the income splitting and passive investment rules. We are generally pleased with the amendments to the original proposals but urge the government to carefully structure the new rules in consultation with the agricultural community before implementing them.
Better consultation prior to and during the drafting of new legislation will help us all avoid situations like the one that arose with the initial proposals. It will provide us with the opportunity to identify our concerns to the government in a constructive manner. We all want to grow the agricultural sector in Canada, but this is only possible when government and farmers communicate and work together. Thank you for your time and your attention.
Senator Marshall: Thank you, Mr. Mazier. As you can appreciate, we have heard from a lot of witnesses this past week. Yesterday we met with — I am trying to get my bearings in comparing your organization to other jurisdictions — the Agricultural Producers Association of Saskatchewan. Would that be a sister organization?
Mr. Mazier: They are the general farm organization for Saskatchewan.
Senator Marshall: You probably answered my question in your opening remarks, but I was busy searching for the name of our witness yesterday. How large are the farms here in Manitoba, and how many are there? Just give me a little bit of background as to where they fit in overall. What are their characteristics? I think that is what I am trying to say.
Mr. Mazier: Very good question; and we are really quite different than Saskatchewan, the sheer scale of Saskatchewan itself. There are 30 million acres seeded in Saskatchewan and 10 million in Manitoba.
Senator Marshall: Okay.
Mr. Mazier: The scale of that alone — we run into the Canadian Shield just north of Winnipeg, and we kind of run up to Swan River on a 45-degree angle to the Saskatchewan border. We have different barriers to the north of us, whereas they can go all the way up to Saskatoon or up to Carrot River quite a bit more north. So they have a lot more plantable areas.
We are a lot more diversified in Manitoba as well. We have much more processing going on for the size of our farming community. We have manufacturers such as MacDon Industries Ltd. in Winnipeg. There are things that are going on here in Manitoba, just for the sheer size of it, that are actually above and beyond. We have a much more vibrant, active supply management in Manitoba, I think, proportionally, which allows for a really good foundation in Manitoba.
Also, we have pork production, two big manufacturers, processors, here: Maple Leaf in Brandon and HyLife, I believe they are called, in Neepawa. I farm out in the Brandon area, which is two hours west of here. We have a tendency to see a lot more mixed farms in Manitoba. We are different entities; there is a lot more mixed agriculture in Manitoba. And the scale is different. We have pothole issues; our land definitely varies a lot more than Saskatchewan — there is nothing there. But we still have farmers buying 80-foot seed drills and 600-horse tractors and things like that. They are in different pockets of the province. Red River Valley, historically, has been pretty flat and drains a lot of water into Lake Winnipeg.
Senator Marshall: Could you give us an idea of some of the challenges that were being faced by your members before the proposals were released? And then after the proposals were released, I am sure that there were some additional challenges. I am just trying to get an understanding of what impact these proposals have had on your members.
Mr. Mazier: Regarding challenges, any time there is a taxation system involved, I think businesses really do like stability and like to know what is coming at them. So, before, what kind of challenges, obviously this passive income; things were set up because the system was there. The biggest challenges were after the announcement of these proposed changes. I think a lot of people were surprised at how it would fundamentally change their businesses.
And there were other changes. One that concerned me the most was when they were targeting 18- to 24-year-olds from a farm going off, and they couldn’t pay them dividend income to, say, go to school. There were some good things in that law that allowed that to happen so they didn’t have to go get a scholarship. Maybe they did contribute while they were growing up on a farm. So the way things were set up before, we were under the assumption it was teaching our children something about the values of working and getting paid. And you could do that right on the farm; you didn’t have to go to the city to work somewhere else. These proposed laws changed all that.
There was lots of outcry from positioning business owners against wage earners. And, of course, farmers are caught right in the middle because we are both; we have family working on our farms because that is the way it is, and that is the way our business model works. So I would think there were more challenges after the proposed changes.
But on the bright side, we all learned a lot about how agriculture works. I think one of the things I could not get over is how a government could propose something like this without realizing the impacts to agriculture. And it was up to our groups, our farm groups, to step up and let it be known that this is how it impacts us.
We all belong to the Canadian Federation of Agriculture, and I believe they put in a submission on our behalf. You know, the thanks goes to them for their coordination, getting in front of the government, making these changes and letting them be heard.
Senator Marshall: We don’t know yet what the exact proposals are; we just have some idea. But Minister Morneau is adamant that there are going to be some changes coming. Although they don’t know exactly what they are going to be, what have your members been doing in anticipation of the changes?
Mr. Mazier: We are working with the Canadian Federation of Agriculture, which is our main lobby group in Ottawa. And they are watching very astutely how this is going to impact farmers. I have to say that the other business community that really stepped up was the accounting community, MNP. I don’t know if I am allowed to mention different businesses and such. That is who I work with, and they did a fantastic job explaining to the business community what these impacts would mean, especially to the agricultural community. They did a fantastic job for us. And, really, a lot of farmers, a lot of business people don’t get into the nuts and bolts of their taxation issues. Unless they are doing succession planning or doing processes that are going to change their business, they don’t really understand the taxation implications of that. They leave that up to the accountant, and they did a very good job, at least here in Manitoba.
Senator Marshall: It impacts not just the farmer but also the partners on the farm.
Mr. Mazier: In my case, I don’t have a corporation, but my brother does, and we share equipment. I asked certain questions, and he said if you are not in the corporation, it doesn’t impact you. But it does because I work with a corporation. So I was getting dragged into that whether I wanted to be or not. It was certain situations that they had no answers for, and everybody was starting to realize that these were far-reaching changes that they had no answer to.
Senator Marshall: Thank you.
Senator Pratte: Thank you, Mr. Mazier. Just earlier this morning, the Minister of Finance of Manitoba was here and distributed to us a document containing certain statistics about small businesses in Manitoba. There is very interesting data in that document, showing, for instance, that the number of incorporated businesses in the farming sector in Manitoba increased considerably from 2006 to today. It also showed an increase in passive investment income earned in Manitoba by private corporations, especially in certain sectors, notably the farming sector, from 2006 to today. I was wondering whether anything specific happened in the farming sector that would explain the increase, the growth in the number of CCPCs, in the incorporated businesses in the farming sector and the increase in passive income from the farming sector from 2006 to today.
Mr. Mazier: Very good question. Yes, there has been a monumental change. I started farming in 1985 with my brother and father. Throughout, to 2001, I actually farmed part-time and worked a full-time job because there was no allowance, no room for me on our farm. My father actually passed away; he had to pass away first for me to be allowed onto the farm because there was only so much land. Meanwhile, I was buying land and trying to get back to do my fair share back on the farm.
If you look back at the 1980s and 1990s in agriculture, they were terrible. And, in fact, if you look back at certain age categories of people, there is basically a generation missing between approximately 1985 and 1995 if you really look back at the demographics of it. That was because there was not much future in agriculture right across Canada. That is why we had business management programs, why the government of the day had different programs. Between trade wars, disasters and U.S. farm bills, a whole bunch of things were going on worldwide, and the value of our commodities were not worth very much. We were hanging on by the skin of our teeth.
So 2006 was a very interesting year that changed probably the rest of the next decade to where we are today. At that point in time — I am going to go bushels per acre here — a bushel of canola was worth $5, maybe $5.50; a bushel of wheat was worth around $2.50. It was like that for the 20 years previous. They went up and down a little bit, but it was pretty depressing. Meanwhile the rest of the world was carrying on. We have not looked back since about 2007 or 2008; there was even a financial crisis in 2008.
Agriculture turned around, and that was a key time when I think everybody realized that we needed some food in the world. Since then, we have not seen canola go below $10, which is basically double the price; our commodities have doubled up.
There is another little factor that is going on as well:We are maturing as an industry. We are getting more money into our industry. Of course, costs are going up as well as the value of what we are growing, and we can do things on a competitive basis. Also the average age of farmers right now is 55 or 56 years old. So there are many farmers across the country looking at succession. What do you do at 55 years old when you have worked all your lifetime? What are your options? That is why I believe you are looking at a substantial number of people planning for the future, for their retirement.
What is the best way of doing that? Selling out, going to someone else? Maybe. Or maybe it is forming a corporation and asking family or your relatives or someone around you how to bring someone in so that the business does survive. And I think the corporations are a tool; going to a corporation is very valuable. For example, my brother farmed right through from when he was 18 years old until now. I didn’t start farming until I was 36 years old. I haven’t incorporated; he has. He did it for various reasons; he was at a different stage of his business life. I think that is why you are seeing a massive change. People are preplanning for this.
Senator Pratte: Thank you. I want to thank you also for providing some suggestions to improve on the changes made by the government. On passive income, you have suggested some modifications. I don’t think you have commented on the $50,000 threshold that the government introduced in mid-October. Do I understand correctly that if the government were to make the changes that you suggest for passive income, for instance, agreeing to consider land rent as active income rather than passive income, and the changes to grandfathering, then a $50,000 threshold would be acceptable, would be sufficient for your organization?
Mr. Mazier: I think we asked for it to increase.
Senator Pratte: I am sorry; maybe I missed that.
Mr. Mazier: Basically what it comes down to is that if the intent of the passive income is to reinvest it back into the farm, then consider it as active income.
Senator Pratte: As active income
Mr. Mazier: That is the intent, whatever the limit, whatever you are doing with that dollar amount. So as soon as you make it passive income, then it is actively passive income. But if you are thinking of retirement, if you are targeting for that, then that is a different kettle of fish.
Senator Pratte: How about income, say, for retirement then; would you consider it active income also?
Mr. Mazier: Depending where you are in your business cycle, and what your intent or your plan is. When you make these business plans, tax planning, there is usually an intent; you are doing it for a certain reason. You can follow it quite well through the taxation applications and stuff like that. So I would think a little bit more definition is needed around what the intent is of that passive income or of that investment. What are you going to do with that money, that extra money that you have? A little bit more definition is needed around that.
Senator Pratte: Thank you.
Senator Neufeld: Thank you, sir, for your presentation. Senator Pratte asked a question about passive income; I want to dig a little deeper. There was no limit on passive income prior to the government announcement. Can you tell me why you would agree that there should be passive income caps of any kind?
Mr. Mazier: Good question. I guess I will go back to my default. If we are going to stand here as a farming community or as business owners and say that I am going to take that money and reinvest it back into the farm, then you better do that. If you are going to take that extra money that you made inside a corporation and this is for retirement, maybe we should consider some kind of income bracket for that that is considered succession planning.
We have to address the whole problem around farmers being around 55 years old in this country. There is going to be a tremendous amount of wealth switched over here in the next decade. So whether you call it passive income or active income, I don’t care. But what are we going to do with the family farm in 10 years’ time?And how are we going to manage that? Are we going to say, “Here, everybody, you know you are going to pay your tax; you have worked all your lifetime for that, and thank you very much”? How are we going to address that? That is what this whole conversation is about. And I think it is missed, especially for a farmer.
There are some family farm corporations that have processing facilities; there is so much you can do with food now at the farm level because of the technology and the science behind things. Before, we would have to ship it off to Toronto or down to Winnipeg or something like that. There are a lot of things we can do right on our farm now because we have water, we have power, because we have a bunch of different things. So our farms change. And should we be allowed to save up for those days to allow that change to happen?I think so, especially if it is on a farm.
Now, if you are talking about passive income and this is just another way of deferring tax because you want to live somewhere down south and stuff like that, that is a different conversation. I think everybody needs to get really in their head what passive income is, and what the intent of that money is. What are you going to do with it as a business?
Senator Neufeld: We have been told by most farmers that pretty well all of their money goes back into their farm. And I would assume if you want to increase doing things on the farm, like you say, guess where your money is going? But I think having an arbitrary limit, whether it is a farm or any other small business, saying we are going to limit that to $50,000 a year limits a whole bunch of things that you talk about being able to do. And on top of that, it is only, what, 71 to 73 per cent tax. Where else in the world do you hear of 73 per cent tax? I don’t hear that, but maybe I am just not listening carefully enough. But I don’t hear that around the world.
So if a farm family, if mom and dad who worked their whole life on the farm are able to transfer it to one of the family members who wants to continue to farm, but they want to retire after working so many years on the farm, should they be held back from actually having a good retirement down south? I mean people who have income trusts can do that; people who have other tax abilities in Canada can do that. What is wrong with the family farm doing it? I guess that would be my question.
Mr. Mazier: Good point. As far as the limits go, I think what is the intent of that investment? To me, saving money for farm expansion or diversification is a totally different reason for saving money versus for retirement. I think it is kind of interesting that no one really thought of it that way. I think, at a farm level, we assume we are putting all of our money back in. The passive income situation, I have been told by the CFA, is really, when you look at it at a very high level right across Canada, not a big issue because we use all of our income that we have to reinvest back into the farm. We just don’t think like that. It doesn’t get out of control on us. But you are right, a limit would limit the things we want to do. So that is why I think the intent has to be a little better defined.
Senator Neufeld: I think I understand. When we were in Saskatchewan, the gentleman told us that the cap probably would be fine for 50 per cent of the farms but not fine for the other 50 per cent. It varies depending on your farm operation or your small-business operation; so, to me, an arbitrary cap that says everyone has to live by this is pretty hard.
Mr. Mazier: Yes.
Senator Neufeld: And I think you said that. I appreciate that. Thank you.
Senator Andreychuk: Can you explain a little more about the rental situation and issues like that? In your opinion, they shouldn’t be classed as passive income. They are really active income because you change, that is, to try and struggle to keep a farm, sometimes it is in a rental situation, particularly with the generations. So now it is passive income; that is where I think the government has been targeting some of the problems.
The other area is education; I find it very curious that everywhere in our society we talk about continuing education, going back and getting some skills. The fact that those kids have left is like any other business that allows people to go away to get more education so that they come back better skilled to do what they are doing. And farming really increased when we started sending all of those kids to vocational agricultural schools. I think that is why they are entrepreneurs today.
Mr. Mazier: I am one of them.
Senator Andreychuk: What I feel is that agriculture really wasn’t looked at at all when these proposals came in, in July. Is that what your membership is saying, that they don’t fit the changes?
Mr. Mazier: Yes. That is riddled right through this. We tried to put it very nicely. As the conversation unfolded during July and August it was quite evident that the finance department really didn’t have an understanding of what the impacts would be to agriculture. Meanwhile, we have an agriculture department and a government saying that they want to grow agriculture. There was not a very clear understanding of what the impacts were of this if you were trying to grow an industry. But, you know, the government changed. I think everybody got educated on this one, and there are things that need to be addressed. I found out that if you are a consultant, you can form a corporation; there are things that individuals can do with our tax laws and make a very good living at that. I never considered that. Being a farmer, I thought you had to have a business, a real live operating business and produce something. But I guess consultants can form corporations.
So things like that happened. But, yes, you are right; we say that, and we hope that moving forward, if there is any type of consultation, we will be there. If the government wants to find out anything about agriculture, we will work more closely with the finance department and get those messages in there.
I did hear at the beginning that even agriculture was surprised by some of these changes, and this isn’t the first time agriculture has been surprised or locked out of the decision of some other agriculture department. So this is just how life happens, and we will move forward from here.
Senator Andreychuk: So you are underscoring that it was a financial department that did something without really contemplating the agriculture side.
Mr. Mazier: Yes.
Senator Andreychuk: And the food chain, food safety, and understanding how business has changed within farming. You pointed out that so much more is being done in Manitoba than was done before. We grew wheat, and the government sent it over somewhere. Now there is a lot more value added, such as sending products out as well.
Mr. Mazier: We are focusing on that, too, sending out a raw product. We still export 80 per cent of our product out of Manitoba. But any time you can value add is beneficial, and people are talking more knowledgeably about this spinoff effect of producing. For example, a farmer produces $1, and then does it multiply by three? What happens if we take that times six? What does Manitoba look like then? I think this particular government is really looking at that and analyzing how we grow agriculture so that we all benefit.
Senator Andreychuk: I remember the discussions in the early 1970s; farms were included because farms were small farms. The debate at that time was whether small farms were viable vis-à-vis large farms. So passing on land to your family was important because you were getting swallowed up; you couldn’t afford the combines, et cetera. So the tax system at that time helped out, and the passive income was just there to let farmers do their farming. So it was just a pot that you used for what you needed, whether it was for a rainy day, whether you were hailed out, or whatever it was.
If there was something left, if we succeeded — if the gods are with us, as we used to say — then you would have something for your retirement. And then you hit that problem of how do you pass it to your own family as opposed to outside, and we are still struggling with that. How do we make that point to the government? Is agriculture so different from other businesses that take money for a rainy day? You can’t define rainy day; it may be retirement, if you are lucky.
Mr. Mazier: It is an oxymoron, actually.
Senator Andreychuk: So you need a fund for whatever crisis you are going to be hit with, and you hope there will be something left to retire on.
It isn’t like an employee who puts so much in every month and has a guarantee. I think the government, if I perceive it correctly, was looking at farming and some other small businesses like an employee where you should be forward planning your retirement right from the day you start your business. How realistic is that? And how do you convince the government that that is not the right kind? You are prepared to risk your retirement to get that business going – and we heard 40 per cent of the businesses fail here.
Mr. Mazier: So the question is what is the message for the government?
Senator Andreychuk: How do you tell the government that it is not a logical progression year by year, that it is almost crisis management?
Mr. Mazier: It can be, but you hope it is not.
Senator Andreychuk: But it is; it is risk. That is what risk is: You don’t know what you are going to face. You have an idea even in farming that you are going to change crops from wheat to canola, that you are going to go into pig farming. How do you factor that in, to get a logical system? In other words, I am looking for what recommendation we could make to the government about how we solve the issue without jeopardizing farming, which is so essential to Canada.
Mr. Mazier: Well, that is a very complex question. Farming is different. I get kind of uneasy at the comparison of a wage earner to a business owner; it kind of makes me feel uncomfortable. I have been both. I totally understand. When I was working off farm, they say all you have invested is your lunch kit. I heard that from fellow neighbors: What kind of interest do you have? And, by the way, that is sometimes what we tell our kids, too: You have no interest in this farm yet; I am the boss. That is the way things happen in life, right?
I have often wondered, looking at a lot of these succession plans, and being a farm leader you have a lot of conversations about farmers. Looking at other businesses, when you enter a business plan, there is usually a plan for an exit. But not in farming, and I don’t know why that is. I think it was just that we developed agriculture in Canada in a pioneering sort of way. My grandparents came over and started a new life in Canada. We have people coming over to Canada right now. Would they consider farming? I don’t know. Maybe we should. We are looking for people to invest in agriculture and in land; maybe that model wasn’t a bad model. I don’t know.
But I think when we look at any business, whether it be a farm, a private retail business or a private corporation, there is usually an exit plan. Publicly traded businesses are totally different animals; but I think, in the business community, maybe we should have that conversation about what the exit is plan for any business. I asked that on a different subject about five years ago now in business school: What is the human resources plan? What is the safety plan for this business? And agriculture safety is really a big deal right now. We are not very safe at all. There was no answer; there is no plan for safety in agriculture, not until recently. But this is the same for the exit plan for a business in Canada, especially for agriculture. It is always assumed you are going to hand it on.
Senator Oh: Thank you, Mr. Mazier. I am going to go straight to the question. What advice would you give to Minister Morneau? We have heard from many witnesses who have told us that the government should abandon the proposals and start a review of the tax reform. So what do you think, and what is your comment?
Mr. Mazier: In my address, I did say consult us, talk to us. Talk to us about changes that the government is actually looking at, and explain why they want to do this kind of stuff. Maybe there is some — I don’t want to say wiggle room — but maybe there are some things that need to be addressed. But don’t come out with a 75 per cent tax. And don’t take away our capital gains, plans that have been made for decades. And don’t say, “Okay, 70 days are up, done; have a nice day.” That is no way to address a financial system in any way, shape or form.
So my advice to them is to come out and talk to us and learn about the implications of these changes and the impact that they are going to have. Let’s work together to end up at a place that we both can compromise on or come to.
Senator Oh: Earlier we heard from the minister, and he said that it was poorly communicated and poorly consulted. He thinks that if the proposal goes ahead, it will add to the complexity of our system. Fundamentally the approach is important, and he took this as ad hoc approach.
Mr. Mazier: Do you mean these amendments?
Senator Oh: Yes, the proposal. This is what the minister said earlier this morning, the provincial minister, to be specific.
Mr. Mazier: Okay. He commented that these were ad hoc?
Senator Oh: An hoc approach on this proposal, yes.
Senator Mockler: Maybe, on this, if you permit me, Mr. Mazier, take notice of what the minister said this morning to answer the committee rather than just making a statement. I would appreciate that so that we can be accurate. We have asked you some very solid questions about recommendations, and we have provided you with the document that the minister left with us this morning. On that particular question from Senator Oh, could you come back to us with your response through the clerk?
Mr. Mazier: What was the question?
Senator Mockler: Senator Oh, do you want to restate it?
Senator Oh: I was just making a comment on what the minister said because you were not here when the Minister of Finance of Manitoba was here earlier. He was commenting about this being an ad hoc sort of proposal, so I just wanted to follow up to see what your comment is.
Senator Mockler: The clerk will provide you with Senator Oh’s question, and then you can come back to the clerk with a response. Do we agree on that?
Mr. Mazier: For sure.
Senator Mockler: Honourable senators, we will be back here at 1 p.m.
(The committee adjourned.)