Proceedings of the Standing Senate Committee on
National Finance
Issue No. 48 - Evidence - November 9, 2017 (afternoon meeting)
WINNIPEG, Thursday, November 9, 2017
The Standing Senate Committee on National Finance met this day at 1:06 p.m. to study the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved.
[English]
Senator Mockler: Honourable senators, I see we have a quorum, so we will start the meeting. Our witness is Dr. Aaron Chiu, President of Doctors Manitoba.
Doctor, thank you for accepting our invitation to share with us your comments, your views of Doctors Manitoba. The process is that you will make your presentation, and it will be followed by questions from the senators. Thank you very much again, and I will ask you now to make your presentation.
Dr. Aaron Chiu, President, Doctors Manitoba: Thank you, Mr. Chairperson, and thank you to the honourable members of the standing committee of the Senate for inviting us to speak with you today.
In recognition of our patients, colleagues, co-workers and friends who are indigenous, I would like to begin by acknowledging that we are in Treaty 1 territory and that the land on which we gather today is the traditional territory of the Anishinaabeg, Cree, Oji-Cree, Dakota and Dene peoples and the homeland of the Metis Nation.
In respecting the treaties that were made in these territories, we acknowledge the harms and mistakes of the past and dedicate ourselves to move forward in partnership with indigenous communities in a spirit of reconciliation and collaboration.
As you heard, my name is Aaron Chiu. I am a neonatal intensive care specialist at the Health Sciences Centre and St. Boniface Hospital, and the president of Doctors Manitoba, whose members include all physicians in Manitoba, as well as resident physicians and medical students. Our organization is opposed to the tax reform proposal presented by the Government of Canada on July 18 and amended the week of October 16.
These changes, if enacted, will destabilize medical practices and physician resources across Manitoba. Physicians are a highly mobile workforce. Physician retention and recruitment continues to be a major challenge in our province. In 2015, Manitoba was the province with the third-lowest number of physicians per capita. And already there is concern amongst our members around the provincial Bill 28 that precludes good faith negotiation and arbitration with our provincial government when our Master Agreement expires in 2019.
Nearly 70 per cent of physicians in Manitoba are incorporated. The combination of no increase in fees yet increasing costs of running a medical practice, along with the proposed federal changes to small-business tax, will result in an exodus of generalist and specialist physicians from Manitoba.
Most worrisome will be the effect on our rural communities. The Association of Manitoba Municipalities concluded that over 90 per cent of its municipalities have a physician shortage. These tax changes will make it even more difficult for our rural communities to recruit and retain physicians.
As small-business owners, physicians do not have benefits afforded to salaried employees, including pension and sick leave benefits. Passive income within small-business incorporation allows physicians to save for retirement, to have a contingency fund in the event of illness, and to fund maternity or paternity leave. In response to the growing concerns, the Government of Canada has proposed not to make retroactive any changes that affect passive income within small-business corporations. These changes will benefit those of us, like myself, practising today. But the restriction on passive income will significantly impact current and future medical students and residents.
The educational debt incurred to become a physician is high. Even though the tuition at our provincial medical school is amongst the lowest in Canada, the combined cost of an undergraduate degree followed by a medical degree results in a typical debt load of over $100,000 upon graduation. It takes 10 years of postgraduate education to become a family physician and a minimum of 12 to 14 years to become a specialist. Physicians do not start an independent practice until they are 30 years of age. This high student debt load and the longer medical training means shorter years of practice and shorter years of income for future generations. For our current and future students and residents, this will result in greater difficulty paying off their student debt and saving for retirement.
I am proud to say our medical school is ensuring enrolment reflects the diversity of Manitoba’s population. Our students come from a wide variety of backgrounds, with older students, indigenous students, and individuals from disadvantaged socio-economic backgrounds now commonplace. As a result, our students now also accrue far greater personal debt than average. This extremely high student debt is worrisome and is a contributing cause to the high rate of physician stress and burnout. Without the opportunity of passive income within a medical corporation, new physicians will have limited means to save for retirement, for contingency funds in the event of illness, or for maternity or paternity leave.
Our members are committed to tax fairness. However, a 75-day consultation period during the summer on the most significant changes affecting small-business tax in 45 years is insufficient and simply not fair. These proposed changes will adversely affect the small-business owners who are our patients, the physicians who are small-business owners, and our communities.
We thank you, the members of the Senate, for the opportunity to voice our concerns, and we urge the government to continue listening and consulting with small-business owners across Canada. Let us work together to find a fair solution.
Thank you.
Senator Marshall: Thank you, Dr. Chiu, for being here. I know there are some statistics regarding the growth in the number of incorporated businesses by physicians over the last 10 years, so I am not going to ask you a question on that because I am hoping one of my colleagues will.
I am more interested in background information with regard to physicians. I was interested in your medical school. You mentioned a medical school. So I am wondering how many medical schools you have. I am interested in your physicians per capita. You mentioned that earlier in your opening remarks, so I am trying to get a handle on really the retention of physicians that you are training, where your physicians are coming from, and where they are going to. So probably you can start off by telling us how many medical schools you have.
Dr. Chiu: The province of Manitoba has one medical school, and our yearly enrollment is approximately 110.
Senator Marshall: Are you retaining them? What is the profile of your physicians? Are you retaining the majority of the physicians?
Dr. Chiu: It varies because many students go elsewhere for training; they tend to train for residency elsewhere, and some come back. But depending on what they train into, that dictates where they can practise. Certain specialties have a very small number of positions elsewhere, so oftentimes it is not a matter of coming back to the province where you started but going where there is a position available.
The fortunate part is that those physicians who do train here in medical school, the overwhelming number of them stay here for residency; and because they stay here for residency, they have a tendency to stay here to practise. Now our smaller communities, including our rural communities, do have an ongoing problem trying to recruit physicians, Canadian physicians, to stay. But our efforts to have distributed education, to have trainees go to these smaller communities and build a tie as they are training there, have been successful in ensuring some do stay there.
Senator Marshall: Would you be able to tell us — I don’t know if you have the statistics on it or if you generally have a feeling for physicians who are trained at your medical school — what percentage would stay here in the province? Would it be 50 per cent? Yesterday, in Saskatchewan, I think we heard the number was around 50 per cent.
Dr. Chiu: It would be similar to Saskatchewan: slightly above 50 per cent with more in certain specialties than in other specialties.
Senator Marshall: So where do the other 50 per cent go? You have 50 per cent here; you keep 50. Where are the other 50 per cent?
Dr. Chiu: We also get some from other provinces who move here as well.
They have the tendency to go wherever their jobs allow them. They are licensed to go anywhere in Canada, and oftentimes the draw is to go to a larger centre, whether that is B.C. or Ontario. Some students are residents of other provinces and come here to train, and they go back to the province in which they are a resident. Others go abroad because their calling has taken them to a specialty that allows them to go abroad to train and continue to work, whether in Europe, Australia or the U.S.
Senator Marshall: When you talk about the physicians who are going abroad, we have heard from other physicians that these tax changes may encourage physicians now to move abroad. And the country usually cited is the U.S. So have you seen any signs in the past of a large number of physicians moving to the U.S.? There have been other initiatives aimed at physicians; governments have aimed various initiatives at physicians that they are unhappy about, and there is sometimes a threat that they are going to move to the U.S. So, have you in the past seen a movement to the U.S.?
Dr. Chiu: We have. Our province, as part of negotiations in the past, made it very difficult for physicians with our Master Agreement. So when there was a significant difficulty with contract negotiations, we ended up having a net exodus of physicians. Roughly about 6 per cent left the province, and it took a while for us to get back to a net gain. Even now, sometimes nearly as many as we retain leave. Sometimes, we actually have a net number, a net loss of physicians from the province. So, we have seen this before.
Senator Marshall: My last question is on what you are hearing from physicians in response to the tax proposals that are on the table now. Are you hearing about them moving to the States or scaling back their practices? What sorts of things are you hearing from physicians? That is my last question. Thank you.
Dr. Chiu: We are hearing multiple messages. The biggest concern is they really don’t know what is happening. They really don’t know how the changes are going to be enacted and what is going to happen. So they are at a loss in terms of how to respond to this. Some have said they are going to retire early. Others have started looking for positions elsewhere. But the recommendation has been to hold tight until we know what is going on. That has just overall increased anxiety for our students and residents whom we want to retain; it is disheartening. Just the sense that the province, through Bill 28 in terms of negotiations of the Master Agreement, has made them feel that they are not wanted within the province. And now with the proposed tax changes not being made retroactive for them but being made retroactive perhaps for those in practice, they are wondering, “Well, it is the same, we are going to eat our young, why are we doing this?” It may be that the grass is greener somewhere else outside of the country.
Senator Marshall: Thank you.
Senator Pratte: Thank you for being here. The government presents this as an issue of fairness between different kinds of taxpayers, and I am trying to understand your point of view. I understand the particular circumstances of a medical doctor, and you do mention that the doctors don’t have access to a pension fund and so on, which is true, but of course many Canadians don’t have access to a pension fund either. It is a minority; unionized workers mostly would have access to a pension fund. And those Canadians don’t have access to the Canadian-controlled private corporation, CCPC, structure either.
Also, if we compare doctors to other small businesses, doctors have a guaranteed source of revenue, and they don’t have the same kinds of risk other small-business owners would have. So I guess the government’s point of view would be that, in the case of doctors, maybe the CCPC structure is used strictly for retirement reasons. And to use the CCPC structure for fiscal reasons only and for retirement purposes, maybe that structure is not used for the reason the structure was invented for, if I might say that. Would you comment on this, please?
Dr. Chiu: That is a very good question, senator. Physicians come in different stripes. So we do have members who are salaried physicians who do have benefits. The overwhelming majority of our physicians do not. The majority of physicians who work in private practice own their practice, which includes renting out a space, hiring a staff, paying for the overhead. So they actually do run a small business, and they need to be able to reinvest in their business to keep it going. So their practice does require them to ensure that they have some funds available within the corporation for them to invest. And part of that would require them to put monies away for a contingency or for retirement; that is readily true.
For other physicians and in other jurisdictions, the role of incorporation was recommended, as a part of negotiations, instead of salary increases. So this was something that was proposed by the provincial government. And in the other jurisdictions this was readily picked up as a means to save and as a means to ensure that they retire. So you are correct in that sense. But the overwhelming majority of family physicians and generalists who are in private practice function as a small business: they have to have an office; they have to have a staff; and they have to have a means to pay for that.
Senator Pratte: The government introduced, in mid-October, changes to both the income sprinkling and the passive income measures. On passive income, they introduced a threshold of $50,000, which at 5 per cent means capital invested of $1 million. That, I guess, is a lot of money for most people. Is that threshold sufficient, in your mind, and if not, would an increased threshold be satisfactory? And, if not, would an alternative method of calculating some kind of threshold be better?
Dr. Chiu: I applaud the government for being able to listen to what the concerns are and for coming up with the suggested change. What I am uncertain about, in terms of the threshold, is whether that actually will be a benefit to individuals. I am uncertain what the impact will be for those in practice and whether they need to have sufficient capital in their corporation to be able to have an ongoing practice. Whether the investment with a threshold of $50,000 is a reasonable thing to do, I do not know. And I suspect many of our members don’t know and really don’t understand the rules that are being applied and what it would mean for their ongoing practice.
So I would suggest that if is something that we do going forward, we look at how it is actually going to impact not just medical corporations but other corporations as well and whether this is a reasonable level of threshold.
Senator Pratte: One last point if I might, Mr. Chair. On income sprinkling, we have heard from many witnesses, especially farmers, that the government will have difficulty measuring the contribution, especially of the spouse, in cases where the spouse takes care of the children, for instance. The argument there is that taking care of the children is really part of the business, especially in the case of a farm being the business. I am not sure if I see the parallel in the case of doctors. I know taking care of children, obviously, is part of it. But you would see that even in a case of an employee of a company who could work very long hours and have a spouse take care of the children and yet not benefit, not be able to share his or her salary with the spouse. So, is income sharing or income sprinkling really justified in the case of physicians?
Dr. Chiu: That is a really great question. I see physicians, when they are a couple, when one partner is in medicine, the other partner is investing within that partner’s future career. As you have heard, it takes a long time for a physician to graduate and practise. When they have a partner, that means the other partner is providing financial stability for them to continue. That would mean that they are investing in that career right from the start. I know that when partners do divorce, and they separate the earnings from it, the non-physician partner gets a lifelong component of that physician partner’s earnings as if there is a sharing of the risk of becoming a physician, as if they own a component or a part of that medical corporation. So I look at it as the other partner having invested into the medical practice, and, as such, they should receive some component from that practice.
Senator Pratte: Thank you.
Senator Neufeld: Thank you, doctor, for being here. I appreciate you taking time out of your busy schedule to answer some questions and make a presentation.
Some of my questions about passive income have been asked already, so I am not going to pursue that. I don’t know what year it was that Manitoba encouraged doctors to incorporate as a form of, I guess, remuneration. But prior to that, what did doctors do? How did doctors, if they weren’t incorporated before, plan for the equipment they needed in their offices? How did they plan for all of those things, for retirement and all of those things that now we say you have to be incorporated to be able to plan for those kind of things? Help me a little bit.
Dr. Chiu: Thank you, Senator Neufeld. We did it the same way other small businesses did. We took out loans, asked for help from family members, and raised cash by any other means there is. It is, it was, it remains a business. They ran a business, and they had to either go into debt or borrow to invest back into their professional business. With small-business incorporation, they are running it as a corporation like any other small business that is there. So it really isn’t much different than any other small business in how they were able to maintain it and run it and invest into it.
Senator Neufeld: Okay, so prior to Manitoba encouraging doctors to become incorporated, doctors borrowed from family, from friends, I don’t know, angel investors, whatever, to be able to run their practices. But once the doctors were able to incorporate, all of that went away, and you are okay. I am struggling a little bit with that analogy. Maybe I didn’t ask the question properly the first time.
Dr. Chiu: Instead of the individual physicians taking the risk of running the practice, that risk is now within the medical corporation. So the medical corporation is a separate entity on its own. And the physician is now an employee of the corporation and, as well, a shareholder of the corporation. So it is very similar to any other small business from an individual to now a corporation.
Senator Neufeld: One other question: Is the $50,000 cap sufficient?
Dr. Chiu: I don’t know. I don’t know what that $50,000 is going to look like with regards to passive investment. I have heard from the other senator that, at 5 per cent earnings, that would mean you have $1 million in there. That depends on what the practice looks like. Some practices are much bigger and require much more cash flow, and investment income is part of that cash flow. Others may require very little cash, and it may end up being an investment vehicle for retirement for other needs for it. But, I don’t know if it is going to be a one-size-fits-all answer.
Senator Neufeld: Thank you. That is basically what we have heard from almost everyone who has come to testify. The $50,000 cap was pulled out of the air, because nobody knows where that number came from other than the finance minister decided one day to say, “Hey, it is going to be a $50,000 cap.” But you are consistent with what other small-business owners or farmers have been saying to us, that it all depends on what is happening with the company, the incorporation, and how big it is or how small it is. So would you agree then that putting a cap on it just really complicates the process a whole bunch rather than actually fixing some foreseen problem? It will probably create larger problems than what we have now; would that be correct?
Dr. Chiu: I am not a CPA.
Senator Neufeld: Neither am I.
Dr. Chiu: I am really not sure of the tax implications and how this is going to be managed. I just know that with that $50,000, although it sounds fantastic, my colleagues tell me they don’t even know whether it is reasonable; and whether it is a large practice or a small practice, there doesn’t seem to be a magic number below which or above which it makes sense.
Senator Neufeld: Thank you very much.
Senator Andreychuk: I want to pursue the point of being incorporated or not incorporated. As I understand the medical profession, you can’t devolve in any way your responsibility as a physician. That is regulated and controlled, and you have to have that covered. What incorporation did was allow the risks of running a business to be part of a way of lending, getting money, et cetera. Am I correct on that? So you when you talked about debt, borrowing to get you through school is one thing — you know, you took longer maybe than I did going through law. But where was the debt coming from when you were going to go to a business, rent an office, buy a building, what have you? You would go to lending institutions if you didn’t have family that could support you. Is that the difference between before and after, that you were a better risk if you were incorporated for the business part of it?
Dr. Chiu: Yes. For the business component of it, because a corporation is a separate entity, loaners look at that as a corporate entity. And you are correct, as well, with regards to the debt. I was referring to student debt, which is considered consumer debt and is not tax deductible. But, when you start in practice, and you need debt to start a practice, that could be something that your corporation can hold; and there are tax benefits associated with this.
The senator is correct with regards to medical liability. I am incorporated. Although I am incorporated, I am medically liable as an individual for anything that I do. The corporation is really only the aspect of the business of the profession, the business of running a medical practice. But it does not remove me from any liability for what I do. And in order for me to practise as a corporation, I have to have approval from my college to make sure that I am in good standing, that I am not doing anything silly with this, and that I am allowed, on a yearly assessment basis, to continue to practise and continue to have a medical corporation.
Senator Andreychuk: The minister and officials have come before us recently, and statements were made that this structure and this passive tax, as it is being called, should not be used for retirement purposes. If the government was to restrict your capability of utilizing that money, either on a progressive basis or, you know, when you have run out of everything else and you are going to retire — you might pull it out that way — if it weren’t allowed in the passive category, where would your retirement be coming from?
Dr. Chiu: We invest in RSPs, like anybody else. So the portion where I have a salary, I get to put into an RSP; but where I am not making a salary, I don’t have RSP room. As a result, I have no means to have a tax-deferred component of my retirement. So those who use the medical incorporation have a tax deferral within the corporation for their retirement. We still get taxed on that component that remains in the corporation, and we get taxed when we take it out. We are talking about the taxation while the funds remain in the corporation, and the change that they are proposing is affecting that.
But, really, if I were to take money from the corporation, the combined corporate tax, and the personal tax, it is exactly identical. It is just a matter of leaving the funds in the medical corporation for contingencies. If I get sick, I am not going to get a salary; I am not going to get any benefits. But having that there allows me to build something in the event that I get sick or when I retire; having it there allows me to build some funds for retirement. But it will get taxed once I take it out — and get taxed at roughly the same tax rate as if I took it out as a dividend, or if I took it out as a salary.
Senator Andreychuk: Coming from Saskatchewan, I am very, very concerned about health care in rural areas. Every doctor who comes to a small community is really the lifeblood of that community as we age and as our services are being consolidated because of the specialties now. So we are airlifting people to the nearest point. But that lifeblood is that doctor there that hires nurses, hires caregivers, that keeps the nursing homes going, et cetera. So do you see a family unit being essential in one of these one-doctor towns, or even two doctors, where they have a case load? It is very much like the old-fashioned doctors.
Dr. Chiu: I see many physicians who move to a small town move as a unit with their family, and their spouse is part of that practice in some form, whether it is somebody who is a business manager for their office or does everything in the small, one-physician office; or often, as well, two physicians start a practice together who happen to be spouses. So I see that whole family as a combination of everything that is there.
And, as we talked about, medical incorporation is a business where the spouse invests in the physician for their career. That investment does not end when you are in practice; that investment continues. Whether that is monetary or sweat equity, that is a component that the spouse has provided. So I see that there is benefit to having the spouse get some means of financial benefit from the medical corporation as well.
Senator Andreychuk: Thank you.
Senator Oh: Thank you, Dr. Chiu, for being here.
My question concerns comments made by the minister about his commitment to complete a gender impact assessment. We have heard from many witnesses, including doctors such as yourself, about how those proposals will affect their families. Yesterday, we were told about rural doctors in Saskatchewan and how many of their spouses sacrificed their careers so that they could care for people in rural areas. Is this a problem prevalent in Manitoba? And what about the young doctors who have children — do they have access to licensed daycares so that they can provide health care services?
Dr. Chiu: Thank you, Senator Oh. The rural physician colleagues that I know personally do feel quite strongly that their spouse, that is, their significant other, has made a major contribution to their medical practice and that it is only fair for their spouse to continue receiving benefits from the medical corporation because of that investment that is there. So I concur with what you have heard in Saskatchewan as well.
With regard to subsidized daycare for physicians, I am not able to answer that. There is such a wide variety of physicians and physician practices that, when children are involved, there are so many differences with regards to how children are being looked after, so I am not able to answer that.
Senator Oh: So would the proposed tax changes now force the husband, for example, to pay a salary to his wife because his wife stays at home to help out, to look after the kids? Would that be fair?
Dr. Chiu: If you were to speak with my wife, she would say, yes, that’s for sure, and I think most spouses would feel the same way. But I am not sure whether that is something that our society has looked upon, not only for physicians but also for other people who are working, whether spouses stay home to look after the home and look after the children. I am not sure that is something that we have, as a society, agreed upon, never mind for physicians as well.
Senator Oh: I think that if your wife stays at home to help the kids and take care of the home, then she plays an important role behind your back.
Dr. Chiu: We share; my wife is a family physician, so we took equal partnership in looking after the household, cleaning dishes, doing laundry and changing diapers.
Senator Neufeld: I have a quick question, doctor. You said that you fund your RRSP the same as anyone else would. Can you tell me, or do you have an idea of what percentage of doctors do invest in RRSPs as opposed to passive income to fund retirement? Is there some number that you could give us there or an idea?
Dr. Chiu: I cannot. And a lot of that relates to tax advice that is given to the physician and the way their practice is structured. These tax rules are much more complex than we physicians can understand. We rely on our tax advisors. So, for some, they invest evenly in RSPs, and whatever they cannot invest in RSPs to meet their retirement requirement, they try to invest within the corporation. For others, it is exclusively within the corporation and not in the RSP on the advice of their accountants and financial advisors.
Senator Neufeld: Thank you.
Senator Mockler: Thank you, Dr. Chiu. You have been very informative; you have been enlightening to many of our thoughts, and you have made some recommendations and made your views known. If, as we go forward, before the Standing Senate Committee on National Finance tables its report on December 15, you feel that you want to add to the study, please do so through the clerk.
Honourable senators, please bear with me for less than one minute. As this is the end of our Western trip and the first week of hearings, on behalf of the senators, I would like to take a minute to thank the people in this room who are working behind the scenes to enable us to complete our job.
It is a process that Canadians were waiting for. We do take the opportunity, the senators and the committee, to thank the two clerks present here, Joëlle and Gaëtane, and the team back in Ottawa who support our ongoing daily activity in consulting Canadians. We also want to thank the two analysts, the interpreters, the stenographers, the logistics staff, the support staff from our own personal offices, the technical technicians, and the communications staff; thank you to those people.
The next meeting, honourable senators, crossing Canada, will be the Atlantic trip. That is in the week of November 19 to 24. Our first hearings will be held in St. John’s, Newfoundland and Labrador.
(The committee adjourned.)