Proceedings of the Standing Senate Committee on
National Finance
Issue No. 50 - Evidence - November 21, 2017 (afternoon meeting)
HALIFAX, Tuesday, November 21, 2017
The Standing Senate Committee on National Finance met this day at 1:03 p.m. to study the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: Welcome to this meeting of the Standing Senate Committee on National Finance.
My name is Percy Mockler, a senator from New Brunswick and chair of the committee. At this time I would like to ask senators to introduce themselves, starting by my left, please.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Neufeld: Richard Neufeld, British Columbia.
Senator Oh: Victor Oh, Ontario.
Senator Cools: Anne Cools, Toronto, Ontario.
Senator Andreychuk: Raynell Andreychuk, Saskatchewan.
The Chair: We also have at the table the clerk of the committee, Ms. Gaëtane Lemay, and the chief analyst of the committee, Sylvain Fleury.
Today, here in Halifax, Nova Scotia, our committee continues its special study on the proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved, changes that the Minister of Finance proposed during the summer of 2017.
The committee received an order of reference on September 26, 2017. Permit me to share with you the mandate we received from the Senate of Canada: that the Standing Senate Committee on National Finance be authorized 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 investments inside a private corporation and converting income into capital gains; and that the committee take particular note of the impact of the government’s proposed changes on incorporated small businesses and professionals, economic growth and government finances, the fairness of the taxation and different types of income and other related matters.
To the witnesses, we want to share with you that the committee will submit its final report to the Senate no later than December 15, 2017, and will retain all powers necessary to publicize its findings for 180 days after presenting the final report.
Today we have a panel of three witnesses. On behalf of the Standing Senate Committee of National Finance, thank you for accepting our invitation. We are looking forward to your comments, your opinions and your recommendations.
We have with us, from Doctors Nova Scotia, Dr. Maria Alexiadis, Family Doctor and Past President; from the Cape Breton Medical Staff Association, Dr. Craig Stone, Physician; and from Maritime Resident Doctors, Dr. Caitlin Lees, Chair.
We ask them to make your presentations, starting with Dr. Alexiadis, to be followed by Dr. Stone and Dr. Lees.
Dr. Maria Alexiadis, Family Doctor, Past President, Doctors Nova Scotia: Good afternoon and welcome to Nova Scotia.
My name is Maria Alexiadis. I am a family physician and Past President of Doctors Nova Scotia. As the professional association for the province’s doctors, Doctors Nova Scotia represents 3,500 practising physicians, residents, medical students and retired physicians.
On July 18, Minister Morneau announced proposed changes to how private corporations are taxed. Although the proposed changes have since been amended, removing some of the tax saving and deferral benefits currently available to the 75 per cent of Nova Scotian physicians who are incorporated will have serious, unintended consequences.
Nova Scotia’s doctors were allowed to incorporate by the provincial government in 1996. The Minister of Health at the time stated:
There are certain physicians who, when looking across Canada at opportunities, may well find that incorporation is one of the pluses that might lead them to make a decision to come and remain in Nova Scotia. We would like to provide some stability in terms of business practices and stability in terms of competitive advantage.
Incorporation was provided to physicians in lieu of competitive compensation to aid recruitment and retention. Ironically, our province is in exactly the same spot it was in the mid-1990s.
Today, Nova Scotians pay the highest personal taxes in the country, and Nova Scotian physicians are paid among the lowest in the country. More than 110,000 Nova Scotians don’t have a family doctor. We regularly hear news stories about people who don’t have access to primary care, patients calling doctors’ offices begging to be part of their practice. The Nova Scotia Physician Resource Plan identifies the need to recruit more than 1,000 family physicians and specialists to the province in the next 10 years.
In a province facing significant financial challenges, where physicians are paid well below the national average, it is difficult to compete with other provinces. Physicians can choose to practise elsewhere if the effects of the proposed tax changes are not mitigated.
Physicians largely use their corporations for family planning and retirement purposes. We do not have sick leave, pensions or other benefits that employees enjoy. In rural Nova Scotia, where a physician’s highly trained spouse is unable to find work, the ability to defer or sprinkle income to a family member is a benefit that makes it easier for physicians to choose to practise in rural areas.
Doctors Nova Scotia surveyed physicians to determine how the original proposed tax changes will impact them. Some 52 per cent of 864 respondents indicated that they are considering to moving to another jurisdiction if the proposed changes are enacted. Another 43 per cent would consider reducing the number of hours they dedicate to their practice or professional activities, and 42 per cent would consider changing their practice profile.
The impact of the proposed tax changes is compounded by the current practice environment in Nova Scotia. Burnout, inferior compensation and the proposed tax changes could result in physicians leaving the province, working fewer hours or retiring early, all of which impact negatively patient care.
We view the benefits of incorporation as one component of a physician’s total compensation package. A change to any component of the compensation package, which has existed for more than 20 years, will impact the capacity of physicians to practise.
Physicians are unable to mitigate income losses. We cannot raise our rates. They are set by the provinces. We cannot increase our billings. We are already working at maximum capacity.
Physicians who cannot accept the tax changes will likely move to either a jurisdiction where compensation is higher or retire early. The result: fewer physicians to care for Nova Scotians.
We urge the federal government to give serious consideration to the unintended impacts of the proposed changes. Physicians come to Nova Scotia because they want to care for Nova Scotians. They want to live in Nova Scotia. However, we must all do what is best for our families. We are fearful the changes will cause physicians to leave our province, and this will ultimately be harmful to our patients. Thank you.
Dr. Craig Stone, Physician, President, Cape Breton Medical Staff Association: I am President of the Cape Breton Medical Staff Association. Cape Breton is that great big island about four hours away from here.
The association was created in June 2016 and its mandate is to advocate for the physicians of Cape Breton and for the greater Cape Breton medical community. The association has been vocal in the media in its role as advocate. Its voice has been heard in printed, electronic, voice and video media, and by the Government of Nova Scotia, the opposition parties and by the entire province.
My face and those of my colleagues are all over the Internet. Our message has always been the same: Recruitment and retention of physicians to Cape Breton is of paramount importance, as is maintenance of services locally on the island.
We have lost services critical to the community, vascular surgery and thoracics to name two. Cape Breton is short of psychiatrists, infectious disease specialists, family practitioners and others. We have many citizens without a family doctor. Statistics Canada estimates 90,000 to 100,000 Nova Scotians to be without a family doctor.
At the next meeting of the association I shall be resigning as president. I no longer have the personal strength to advocate for my community and the physicians who serve it. We are entering the Valley of Shadow of the great game changer, and the results might be catastrophic to the community, to my colleagues, to my family and to me.
“What is the great game changer,” you ask? It is the proposed changes to professional incorporations. I am certain that Mr. Morneau has not heard of this great game changer, but it has the power to reverse any of the health care gains the association has been fighting for these last two years. It will affect Cape Breton, the province of Nova Scotia, and most likely any underserviced part of Canada.
The current government is playing populist politics at its best, playing one group, the salaried, against the other, the incorporated, with the latter labelled tax cheats and income sprinklers. With the backlash against the reforms and in the light of revelations of family fortunes, a French villa and possible conflicts of interest by the PM and the Minister of Finance, the populist divisions continue, only in this case the incorporated are being split from within.
One announcement was made that farmers would not be affected. Then real small business would not be affected. Oh, now only new money and investments will be affected going forward. In October Canadians saw a financial dance of the seven veils.
Moreover, this pitting of one group against another reveals that the federal government is guilty of the one thing Prime Minister Trudeau said in his 2016 Christmas message to Canada that he would never do. He said he would never govern by division. I believe he is.
For certain, you have already heard that incorporation was given to physicians in lieu of rate increases. In the 1990s Nova Scotia, the then current Liberal government of Mr. John Savage, made huge cuts to public finances to balance the provincial budget. Salaried workers were given a week off without pay. Doctors had their billings capped. It was presumed that doctors would not stop services when their cap was reached. Unfortunately many did. Those who did left the province temporarily to work as a locum. Some left permanently, going to other provinces or to the United States of America.
The budget changes were made after the Liberals took over in 1993 and inherited a $471 million deficit. Austerity was the rule of the day. In 1995-96 and 1996-97 there was a net decline in physician numbers, minus 3.1 per cent and minus 3.8 per cent respectively. It rose to normal historic levels in 1997-98, plus 2.7 per cent.
What changed in 1997? The thing that changed was that in 1995-96 the Nova Scotia House of Assembly passed an act to permit physicians to incorporate for the purpose of carrying on the practice of medicine. Why was this act passed? The hansard of the fifty-sixth General Assembly of Friday, January 5, 1996, explains why:
. . . is very simply that we want to provide a competitive edge, if you would, in attracting, both recruiting and retaining physicians, particularly specialists in this province.
Those are the words of the Honourable Dr. Ron Stewart, the then Minister of Health.
I have you given you the reason why Nova Scotia permitted incorporation: recruitment and retention of physicians. We are not tax dodgers using loopholes to avoid our fair share of taxes. Incorporation was given to physicians to make a relatively poorly paid situation more attractive for retention and recruitment.
Physicians have endured vilification by provincial governments and now it appears we are the targets of the federal government. Others practise income splitting, but the government cries out that professionals such as physicians practise income sprinkling with negative connotations, as if our wives, husbands, and children have no part in the professional practice of medicine and are therefore not to be beneficiaries of the family business. Again, I refer to the same hansard:
Very often families are involved in the practice, relatives, husbands, perhaps participate in their wives’ practices or vice-versa wives participate in the husbands’ practices in a salaried way, in a way that would be a family business and so, in rural and smaller towns, this may well help. . . .
. . . We would say that the arrangements for the practice of medicine, particularly, in rural areas may well benefit from this.
Again, those are the words of the Honourable Dr. Ron Stewart, Minister of Health.
Under current rules I can give my son a dividend from my incorporation. The corporate tax is already paid and the personal tax is paid at my son’s own rate. As for dividing income with other family members, the corporate tax is already paid and the recipient pays the tax at her marginal rate.
If, as Trudeau and Morneau imply, my family has no right to my income, well, under the current rules existing for the past 20-plus years, I have not had a need to buy RESPs for my children. Now with the rule changes, I cannot issue dividends to my children to fund their university education. The rug has been pulled out from beneath my feet at this stage in my career. With no RESPs or income splitting, what am I to do now?
As for Mrs. Stone, my wife, not being eligible for any income from the family incorporation, why does she automatically get 50 per cent in the event we divorce? She may have funded my medical education. She certainly sees the state I am in when I return home after 36-hour shift. She certainly misses me when I am away 60 hours to 80 hours per week. She pays the price of my job as well as I do.
I do not have a family fortune. I do not have stock options to rely upon, like some current government members in Ottawa. I do not have a pension, EI benefits or workers compensation. I may have some Doctors Nova Scotia maternity/paternity benefits and some dental plan, all taxable, but that is unlikely.
Firstly, the maternity benefits will not pay office expenses in many cases. Secondly, the entire benefits scheme in Nova Scotia might be withdrawn by the provincial government. That is one of the reasons why Doctors Nova Scotia has issued an intent to litigate against the Government of Nova Scotia.
The medicare rates in Nova Scotia have not kept up with inflation since 1974. Doctors are paid in units. The unit value in 1974 was $1.08. In 2017 it is $2.44. According to the Bank of Canada interest calculator it should be $5.08, not $2.44. Nova Scotia has the highest marginal tax in Canada at 54 per cent, the fifth highest small business provincial tax rate at 13.5 per cent, and the highest sales tax rate in Canada at 15 per cent, as in the rest of Atlantic Canada. Nova Scotia physicians are among the most poorly paid in Canada.
Morneau has been talking a lot about passive investments. In the same way that a salaried employee makes tax-free contributions to a group or government pension plan, which are then invested tax free to be taxed on withdrawal, I use my company to prepare for my retirement. Outlawing or putting limits on investment income is as offensive to me as it would be to the government worker or supermarket worker working down the road.
Morneau calls my corporate money and investments dead money. Once again, I am being disparaged. It might be dead to him because he cannot spend it. It is not dead to me or my family who need it for adversity or for retirement. It is not dead money to the Canadian businesses in which I have invested.
Aside from retirement, corporate investments of medical earnings serve to top up poor medicare earnings. Remember that the doctor works for the government store. He cannot increase prices to match expenses and he in incapable of working longer hours. The only way to increase income is to invest. The earnings are taxable corporately at the corporate rate and then taxable at the personal rate once they leave the corporation.
At this point no one — not an accountant, a financial adviser, not even a fortune teller — can advise incorporated physicians on what to do. Here it is now, almost the end of the tax year, and I still do not know how to arrange my affairs. Maybe, sir, that is the plan. How cynical: a summer announcement when no one is listening and fall implementation when it’s too late to do anything about it. One thing is sure, though: the accounting bills will see a jump in the new year.
In this time of uncertainty some things are probably certain. Physicians will react to economic stresses. This is natural as money provides for personal and family security and well-being. If I am not well then I have nothing to offer my patients.
A physician’s reaction might take one of four forms, generally speaking. He will work less. He will change jobs, going from private practice to salaried job with benefits. He will retire now and avoid punishing tax changes later. It may be 74 per cent. I don’t know. Or, she will relocate. Number four already happened in Nova Scotia in 1995-96. Only this time it might become a Canada-wide exodus to another country. Many U.S. states recognize Canadian education and qualifications.The famous green card specifically mentions physicians within the physician national interest waiver.
To summarize, I am grateful, senators and staff, for the opportunity to address this committee. It is an honour for me to appear before you today representing the 250 doctors of Cape Breton. The opportunity gives you and my fellow Canadians insight into why my colleagues and I are fearful for our futures. It serves to explain what is going through my mind as I decide what is best for my family and me.
It is also an apology to the Cape Breton Medical Staff Association for my upcoming resignation as its president. I apologize to the people of Cape Breton for what I fear will be a worsening of the medical system. The great game changer sir is too massive and a terrible beast for me to oppose. I fear that loyal citizens are being encouraged to leave their country, to consider the promise of life, liberty, and the pursuit of happiness, over peace, order, and good government.
I beg this committee, ladies and gentlemen, to seriously consider my words today. The association and I are fearful of an uncertain future. Thank you for your time.
Dr. Caitlin Lees, Chair, Maritime Resident Doctors: Good afternoon, and thank you for the opportunity to speak on behalf of Maritime Resident Physicians.
My name is Dr. Caitlin Lees. I am a third-year internal medicine and clinician investigator resident at Dalhousie University. As President of Maritime Resident Doctors, I represent nearly 600 resident physicians in Nova Scotia, New Brunswick and Prince Edward Island.
The vast majority of resident physicians in the Maritime provinces are opposed to the tax changes proposed by the Honourable Minister of Finance on July 18, 2017. A recent poll of our membership, with an approximate 50 per cent response rate, demonstrated that over 85 per cent oppose changes to the current passive income system and a further 75 per cent oppose changes to income splitting.
While Mr. Morneau has proposed amendments to his initial draft, we remain very concerned about the impact of these proposed changes on our physician workforce and mostly importantly on our patients.
As resident physicians we are doctors who have completed our medical degrees but are pursuing further training in a medical specialty such as family medicine, psychiatry, surgery or radiology among many others. Specialty training programs can take between two years and seven years to complete.
As future small business owners we make financial investments to our business. Prior to entering into practice the average Maritime resident will have invested approximately $73,000 into tuition fees alone, in addition to four years of living expenses only while studying medicine. Many of my colleagues have debt loads of well over $200,000.
Once practising independently resident physicians become independent small business owners, employing nurses, administrative assistants and other health professionals.
As young physicians about to enter the workforce substantial debt loads and family planning are significant factors in where we choose to work. As future small business owners we will not share the same benefits as employees, such as pensions, parental leave, sick leave or vacation pay. For young physicians, in particular, parental leave is an important consideration.
Since 1995, as we have already heard, tax planning measures for private corporations have legitimately and appropriately used strategies to mitigate the personal risk and financial sacrifices associated with entrepreneurship. In particular, these measures are relied upon to fund parental or sick leave while managing significant debt loads, as well as fund retirement.
We have substantial concerns about how these proposed tax changes will impact the recruitment and retention of young physicians in the Maritime provinces. While the proposed tax changes are federal tax changes we anticipate an inordinate impact on our provinces. As provinces where recruitment and retention of physicians is already an issue of great concern, again as you have already heard, a negative tax environment creates an even greater deterrent to practising in our provinces where physicians are so badly needed.
By way of a personal example, I will be finishing residency in two years. Like many of my colleagues I am currently considering where I will practise. To practise in Nova Scotia I already face a $100,000 pay cut when compared to other provinces. Should these tax changes come into effect, and in light of my debt load, it may no longer be practical for me to remain in my home province. The United States, the United Kingdom or even other provinces where pay is higher will all be more viable options. Nova Scotians could lose yet another physician and the health care access they deserve.
Most importantly, I am just one resident physician among nearly 600 who is now reconsidering where I will be able to practise in light of the proposed tax changes. When viewed on that scale the potential impact of these changes is staggering.
In summary, we have substantial concerns about the impact of these proposed tax changes; concerns that young physicians in an effort to mitigate the impact of these tax changes on their financial well-being will increasingly choose to practise elsewhere; and concerns that this would lead to an exacerbation of the current difficulties faced by Nova Scotians in attempting to access health care, which would be simply unacceptable. This is a very real and serious potential impact of the proposed tax changes. I ask that this Senate committee give these issues adequate consideration before moving forward. Thank you.
The Chair: Thank you, doctors.
Senator Marshall: Thank you very much for your excellent presentations. We were in Western Canada the week before last and we heard from physicians out there. We heard from physicians in Ontario, and yesterday we heard from a physician in Newfoundland and Labrador. They are all telling us similar things.
I am from Newfoundland and I feel like in the Atlantic provinces the problems seem to be a bit more intense than they are in other jurisdictions. I think Dr. Stone went back to the 1990s, but you talk about what has been happening over the last 20 years. It seems as though something is happening to our doctors. It is not as attractive as it used to be. It is almost like doctors now are public servants but they do not have the benefits of public servants. It is really concerning when I think about what is happening in Newfoundland and I am hearing a similar story from you. It is almost frightening.
When we were out west last week in the provinces we visited, I was asking the physicians to tell us about their medical school and how many physicians they were training and how many they were retaining. I know for the Prairie provinces my recollection is that they were saying they retained 50 per cent of the doctors that they train and the other 50 per cent are foreign born and are mobile.
What is happening here in Nova Scotia? You have one medical school at Dalhousie. What are your statistics showing? You have a shortage of doctors. We are all aware of that because we all read the news. What is happening? How many doctors are trained each year and how many are you retaining? Would you know how many doctors are coming from other jurisdictions, from other countries?
I am trying to set the stage. You provided much information but I wanted the stage to be set a bit more broadly.
Dr. Alexiadis: I will start. I will get you that information. I do not know the exact numbers.
Senator Marshall: Okay, but your gut feel.
Dr. Alexiadis: My gut feel is that we have about 100 physicians that start in first year medical school, but the medical student who starts has had at least four years of university, if not more, because a lot of them come with degrees as well.
Senator Marshall: That’s right, yes.
Dr. Alexiadis: That is another four years. After that you decide whether you want to be a family doctor or whether you want to do a speciality and a fellowship. You are looking at between 12 and 15 years of training.
The reason why I am bringing that up is because of the age of physicians when they are ready to practise. When you are looking at physician shortages, yes, there are the ones that are coming in. Nova Scotia is having problems with retaining some of those new students and new grads just like Dr. Lees talked about because what they are doing is they are leaving.
Senator Marshall: Yes, and there are 100 of them.
Dr. Alexiadis: There are 100 of them, and they are leaving. They want to stay in Nova Scotia but they are leaving because of their debt loads and their salaries.
I was at a meeting where there was a person who wanted to come and practise dermatology in Halifax, but Ontario offered them $400,000 and they said, “Sorry, but we are going there even though my family is here.” Those are the kinds of decisions that are happening. We are not recruiting the new doctors and keeping them here.
What about the ones that are staying? You heard very eloquently from Dr. Stone that there is a lot who are frustrated. I go to meetings now where I see doctors who used to work here that have moved to Alberta or have moved to B.C. That is a surprise to me, but in Nova Scotia over 50 per cent of the doctors are over 50 years of age.
Senator Marshall: How many of the new ones do you think you retain? You have 100 coming out a year. Do you think you are keeping 50 for a couple of years?
Dr. Lees: I can speak to this a bit. Again, I do not have the exact numbers. I could get them to you. We did a survey of our membership last year.
Senator Marshall: If you are talking to your colleagues you must have an idea of who is interested in leaving.
Dr. Lees: A lot of people who train here want to stay here. They train in New Brunswick, Nova Scotia and P.E.I. because they want to stay here. Unfortunately, when it comes to recruitment either it is often not financially feasible or we have some issues with communication between our health authority and government. It is just not set up well for them to be able to do so.
I know in an anesthesia program over the last four years they have had four graduates and none of them have stayed. The vice president of Maritime Resident Doctors has had issues with recruitment as well.
Senator Marshall: Where are they going? I am thinking about the tax changes and what you are talking about. You have a lot of physicians going to other provinces because the salaries are higher. They will have to cope with these tax changes too, right?
I am very concerned if we lose our doctors. Our health care system is fragile enough. We do not need to lose doctors. If the doctors are moving to other jurisdictions and the Western provinces are saying that, will doctors be more mobile to the States?
I am just trying to get a handle on it. With these proposed tax changes, doctors cannot be looking at moving next door to New Brunswick. They must be looking somewhere else.
Dr. Lees: I can speak to that. I am a Canadian with dual citizenship in the United Kingdom. Again, I would very much like to stay in Nova Scotia, but it is certainly feasible for me to go to another country.
I know that these tax changes are country wide. There is already pay disparity between here and other provinces. Should these tax changes come into effect, to move to another province where I do not take a pay cut to work there would mitigate the impact of the tax changes if I wanted to stay in Canada.
Senator Marshall: Yes, I see what you mean. I have asked my last question of other doctors. I worked with the Department of Health in Newfoundland for a while. All these things have been happening to physicians over the past 20 years. The physicians do not like it. They say, “We will move to another jurisdiction.”
Do you think that threat will materialize? Most times the physicians will sort of cope with whatever changes are coming and stay put. Is this the straw that broke the camel’s back or is this another threat that will not to materialize?
Dr. Lees: For new physicians, I would like to say that we are young. We are mobile and we will move. It is not an empty threat.
Senator Marshall: What about the doctors that have been here for a while?
Dr. Alexiadis: We had a rally. We invited any doctor that wanted to come in on a Saturday morning. With a week’s notice, we had 400 doctors come in from across the provinces to this rally to talk about these tax changes. In the room was all age groups but there are a lot that are ready to retire. We are talking about a province that has physician shortages.
Senator Marshall: Significant physician shortages.
Dr. Alexiadis: Over 50 per cent of its doctors are 50 and looking at retirement. They are looking at saying maybe they will just work until December or work until August. Then they do not have to work anymore because at the end their tax bill will be the same.
Senator Marshall: It is not worth their while.
Dr. Alexiadis: It is not worth their while. Interestingly, in that big meeting everyone was talking. When you said “the straw that broke the camel’s back,” those were similar words to those of one of our doctors. I think she said, “The straw that broke health care back.” The whole purpose was in the moment when she said that she talked about the impact and how these tax changes would affect patient care. In the room of 400 doctors we all joined our souls. It was like one continuous thought.
That is the real reason we are upset. The doctors that are here want to stay here. They want to practise here. They love their practices. They love their patients. They also have families and lives to lead, so you have to choose your family. The doctors want to stay here. These tax changes will make them think twice about what they will do, when they will finish, and how they will change the way they practise.
The Chair: Dr. Stone, do you want to make a few comments?
Dr. Stone: Senator Marshall, I do not think this is a threat. Dalhousie University puts out maybe 100 doctors a year. Those doctors go all across the country and all around the world for training opportunities. Then they want to come back.
You said Newfoundland has a problem. Atlantic Canada has a problem, and the reason is that we have a shrinking tax base. All our young people are gone. They have gone to Alberta to work on the prairies or to Ontario. Our tax base is small.
What is left behind are the same people who are sick and ill and need medical care. The people that stay behind and the doctors that stay behind can be overwhelmed. Practices that have five, six or seven people only have two or three doctors.
Governments could not afford to pay us more so they gave us incorporation. Overworked doctors, an overburdened health care system, patients who are increasingly demanding and limited resources are all bad things. You can’t increase my pay to compensate so you have given me incorporation. You take that away. Yes, I want to help people, but there are ways for me to help people rather than work 60 hours to 80 hours a week and deal with sickness and stuff.
Senator Marshall: Yes, I agree.
Dr. Stone: It is the straw. It is not a choice. It is not a threat. It is an imperative.
This happened before. It happened in 1995, 1996 and 1997 in Nova Scotia and it happened in Ontario in the mid-1990s at the same time as the federal government was reducing transfer payments. It is not a threat. It is an imperative. I have to look after my family, my own health, and whatnot.
It is not a threat. I don’t want to think about having to move away. I don’t. I didn’t like moving away from Newfoundland. The farthest west I came is here. I don’t want to move again, not at my stage in the game. It breaks my heart. It is not a threat.
Senator Marshall: It is a concern.
Senator Eaton: Thank you very much for those presentations. We heard very much the same thing in Ontario: medical student debt, the cost of opening a practice, putting aside for maternity care if you are a woman, pension, and buying new equipment, especially if you live in an isolated area and you want a new EKG machine. Your concerns are being felt across the country and rightly so.
Just to follow up a bit on what Senator Marshall was asking, have we ever kept or does the Canadian Medical Association or your specific medical associations keep data on how many doctors have left Canada already and are practising in the U.K., the United States or elsewhere?
Dr. Alexiadis: I would expect that probably CIHI collects that kind of information or somewhere it is collected. We don’t have it for you here today. If that is something you would like us to chase down, we can do that.
Senator Eaton: I would, and it would be handy to know if you had it specifically too for Nova Scotia.
Do you know of doctors that are planning to leave? Yes, you have heard a lot and you have among the young. Are there tax incentives we don’t know about? Canada is full of very isolated areas. Most people live in rural and I understand in this province most of the population is rural. Are there tax incentives for you to practise in a rural or isolated area?
Dr. Alexiadis: No, there are not. Basically the incorporation is that tax incentive because we have the small business tax, the small business credits and the passive income that we can keep in our corporations. I guess that would be the incentive.
On the ability to do the sprinkling, as I said in my speech, there are people who come to the rural communities that they have a spouse that has a particular speciality and is not even a physician.
Senator Eaton: She can do the books. She can be a receptionist.
Dr. Alexiadis: Exactly, but maybe they have other jobs that are of higher earning in other centres. If you want to go to a rural community how are you to then pay them for their losses to come to the rural community? Income sharing is something that actually helps that as well. The physician making the decision to come to the rural community is recognizing that can also happen and help to decrease your tax bill.
Senator Eaton: I appreciated, Dr. Stone, what you said about the fact that your fees are capped but you don’t get any benefits. If you were to work directly for the province your benefits would be assured. It is not equal terrain for you, is it really? It is not as if you could charge what you want for a service.
Dr. Stone: I could not charge what I want for a service and that is the simple fact of it.
You asked me just now about the numbers. CIHI hospital information numbers in the 1990s did not go back that far. However, we use the medicare doctor identity numbers.
Senator Eaton: Yes.
Dr. Stone: I have them from 1992 to 1999. I have all those numbers right here and I can print them off for you. Basically, the doctor numbers grew anywhere from 3.8 per cent to 2.1 per cent, until that period of financial austerity in which case they dropped 3 per cent or whatever.
Senator Eaton: Yes, we heard that from the head of the Canadian Medical Association. He said there was a flight of doctors which reduced the number of doctors per Canadians considerably.
Dr. Stone: I have the numbers here for the decade of 1990. I have them right here. I can print them for you.
Senator Eaton: Thank you. That would be very helpful. Are there any more numbers as to how many of your colleagues have left the province? If you were to start tracking that, it would be helpful to us.
The Chair: In order to follow up on the questions from Senator Eaton, please send any additional information you want to share to the clerk.
Senator Andreychuk: I have a comment. I know that universities keep and track where their alumni go. I think that might be another source, Dr. Lees, that you can look at to see where your residents go. We are doing a better job of tracking our graduates from universities.
I asked some questions of the minister or some of the financial officials when this proposal came through. It appears that most people have continuous conversations with the taxation department, at least professional organizations, but they are of a broad, general nature. When these came out July 18, they blindsided everyone. That is what we have been told. It was the language used that was most offensive and grabbed everyone’s attention.
When the financial officials came before us, I asked if they consulted with the Ministry of Health when it came to the doctors, and the answer was no at that time. Since then I have informally and formally asked whether the Minister of Agriculture was consulted. It appears not.
It would appear that this was a financial issue, looked at strictly on a money basis within the department. We are not quite sure as to why they put them forward because we have received about three reasons why. It was fairness between employees and companies. We then heard that it was inappropriate benefits, loopholes, et cetera. We have received some answers as to why they did it but they were all financial.
You are talking to us, the Senate, which is good, but have you talked to the Minister of Health? Have you said that there will be a repercussion across Canada to a medical system when all of us are aging, needing you more and specialities are becoming very, very expensive? The cost of one piece of equipment now is unbelievable.
Another question is on the cost we may gain. If we do, it will be offset by a horrific problem in the health system. I come from Saskatchewan where we recruit doctors and have recruited doctors from around the world. We give them incentives to go into rural areas. We find that those incentives are not good enough. They want to go to a more urban centre, et cetera. It is a massive cost on the health side, not to mention Aboriginal health which is a huge one in my province.
You have been bringing us the financial issues and the consequences, but you made a compelling case that you care about your patients. That caught my attention. You are doing this obviously for yourself, but you care about the communities and you care about your profession. Should the target not be talking to the Prime Minister, the Ministry of Health and to the provincial departments all about the transfer payments? To me it is a huge health issue and social issue.
I have to disclose my conflict of interest. I am a family court judge and the psychiatrist was the best resource I had. The social worker was the best resource I had, et cetera. While we are focusing here on finance the repercussions are not financial. The repercussions are social. Could you respond to that?
Dr. Alexiadis: I would like to say hear, hear. All your comments are exactly right. If you are talking about the federal Minister of Health and the Minister of Health in Nova Scotia, I think everyone was a bit shocked in Nova Scotia. As physicians we were talking to ministries, saying, “Don’t you realize that the implications of what happens federally will become a problem for the provinces?”
At first it was slow to percolate through. There was a writing campaign throughout the whole of Canada that was fostered through Doctors Nova Scotia that supported it. Also CMA supported it. We all sent letters and notifications to all our members of parliament explaining that doctors want to pay their fair share of taxes. To understand how physicians got the ability to incorporate, it was part of a compensation package to make us have competitive compensation. Compared to not having the provinces pay but getting some tax incentives, the incorporation allowed us to save some of the tax to plan for our futures.
That was probably the biggest shock that this came out of the finance world versus through the Ministry of Health. That conversation has to happen and I think that is an important place to go. I really appreciate your comments, and I make you an honorary physician today.
Dr. Stone: Senator Andreychuk, as president of the association, either myself or my delegates have spoken to the Nova Scotia Minister of Health and other groups have spoken to the minister. The message was reached to the premier, Mr. McNeil. He referred to it, I believe, in a CBC interview as its going to have a catastrophic effect on health care in Nova Scotia Mr. McNeil also went so far as to voice his concerns in a one-to-one meeting with Mr. Morneau when he was here last fall.
The message is out there. The provincial government of Nova Scotia, anyway, knows what this will do. That is all I have to say on that.
Senator Andreychuk: You are without a contract now with the provincial government since 2013. Am I correct?
Dr. Alexiadis: No, we have a contract.
Senator Andreychuk: You now have now a contract. Some provinces are still in negotiations.
Dr. Lees: Thank you for getting to the heart of the matter, which is really that it is about patients. If physicians leave the province we are leaving patients, many of whom do not have a family physician. It is quite distressing and sad the stories that are coming out in the news about patients who need a physician and cannot access health care that they deserve and have a right to access.
In terms of reaching out to the Minister of Health, we have done so. Maritime Resident Doctors has. We have also spoken with our provincial Minister of Health. We are trying. I think catastrophic impact would describe the potential impact of this quite well.
Senator Neufeld: Thanks to all three of you for some very good presentations. I appreciate that very much. It is similar to what we are hearing across the country from the West to the East. The federal government should be starting to catch on to that there is a problem. Hopefully they do. I hope they do.
Dr. Alexiadis, you talked about most of your doctors being over 50 and intending on retiring. When do most doctors retire? I guess they are all a bit different, but what is the average age that they actually retire?
Dr. Alexiadis: When I first started to practise I went to a financial planner and I said, “Can I retire when I am 55?” He started to laugh at me. That is not the age. We have practising physicians of 75. There is a physician who is not incorporated, who is a surgeon and who actually does surgical assists. We like what we do, but we want to have an environment that is respecting of us and not hostile to us to do it.
If you have a very happy workforce in the health care sector, meaning the physicians, they will practise longer. If they are unhappy, they will think about closing shop earlier. That is probably the best number I could give you.
Senator Neufeld: I think I heard you say, Dr. Lees, that you have met with the Minister of Health federally?
Dr. Lees: Not federally. Just provincially.
Senator Neufeld: Have any of your organizations met with the federal Minister of Health? Have you attempted to? Have they responded in the positive?
Dr. Alexiadis: My other representative is through the Canadian Medical Association. I am sure they have had those conversations. They do that on behalf of all doctors in Canada. I am sure that our president has had conversations with the Minister of Health.
I don’t know the details of what has been happening because right now it is all in the finance area where the decisions are being made. The more it can be put forward that it needs to reach that table is important.
Senator Neufeld: I am wondering what kind of feedback you are getting from the Minister of Health. That minister sits at the same table as the federal Minister of Finance. I would be interested to know what kind of contact there has been and what the response has been from the federal Minister of Health to what is taking place across Canada.
My other question is about your MPs from this area. Have you had success in sitting down with those MPs and stating your case? What kind of response are you getting there?
Dr. Stone: Senator Neufeld, I don’t have the minutes of my last association meeting, but at our last meeting we made a resolution to protest the tax changes. I believe a copy of that letter went to the Prime Minister. It went to the Minister of Finance. It may have gone to the federal Minister of Health. I just cannot recall right now, but I do know copies of those letters went to our local MPs. In fact, I met with the local MP for Sydney—Victoria, the Honourable Mark Eyking. He heard me out but again there was no response for or against the changes.
Senator Neufeld: They just heard you out and said, “Fine, thank you. Next.”
Dr. Stone: We got the message out, sir, but I don’t recall any emails coming back from Ottawa. When I contacted Mr. Eyking, he did give me time out of his busy day but he was non-committal. He did hear me out and I am grateful for that.
Senator Neufeld: Out of the proposed changes, because there is a number of them, which ones would you like to not have happen?
Dr. Lees: I think for younger physicians changes to passive income is one of the scariest proposals, particularly because this is used to fund parental leave and to help pay down debt and continue to pay for overhead while on parental leave. For us that is a huge issue in terms of family planning. Certainly for retirement that is also very important. We are a little younger in terms of our population, so there are different priorities.
Dr. Stone: For me, passive investment and investment income are really important. I have about 10 years left. Maybe longer, maybe less, God willing. I have two children approaching university age. I have not RESPs or any such thing. I was relying on what the law was to give me: the ability to issue dividends to my children to fund their university. Now it is being taken away. The carpet is pulled out from under my feet. Those two items will really affect me personally.
Dr. Alexiadis: I say none. I want no changes. The reason why I say that is simply that it is part of our compensation package. If you take away one or the other, you will disadvantage someone. In the end, when I am looking at trying to keep our doctors here, attracting doctors here and keeping our health care at the top number that we need, changing any one thing could have an effect.
Therefore, for me, all three should be maintained.
Senator Neufeld: All three should be. That is consistent, folks, to what we are hearing across the country. This cherry-picking part of the tax system is affecting not just doctors but generally the whole small business world of Canada-controlled corporations. It is affecting some worse than others but it is having a huge negative effect.
For your information, we had the Minister of Finance at a committee meeting similar to this one. When we talked about passive income the Minister of Finance told the committee that the government recognized the need to retain funds within a corporation for business purposes. I think we can kind of agree to that, but the Minister of Finance said that it wanted to discourage using private corporations to save for retirement.
I find it unbelievable, when you have a small business, your own business, that you cannot save your money for retirement. To me that is completely wrong, as is someone from government saying, “I know how to spend your money better.” The government does not know how to spend your money better, guaranteed.
Senator Oh: Thank you, doctors, for your wonderful presentations. From the West Coast to the East Coast, all medical practitioners have voiced their concerns.
You had a rally where over 400 doctors showed up. You guys care about these tax changes and care about your patients. It shows that these tax changes will be an overburden on the Canadian health care system. Do you agree that it will affect doctor/patient care?
Do you also believe that these proposed tax changes will create more gender inequalities? If so, can you specify the issues? Would you highlight them?
Dr. Alexiadis: You are saying gender inequalities. You are probably aware that the number of woman in medicine is increasing to the point where now medical classes are almost fifty-fifty. Being a female in practice now for 28 years, I have seen it change for the better. Still there are some gender inequalities, but it is for the better.
The problem is that as you have more physicians that are female, you are looking at physicians that also want to have a family. It is not just a profession. It is also a life. Part of your life includes being a physician and part of your life includes being a mother and being able to plan for having time off.
Doctors in Nova Scotia do not get more than 17 weeks of maternity leave, which is not a lot, especially now when they are saying maybe it is 18 months for the rest of Canada. Having those corporations to be able to put passive income is very important.
The other piece that has nothing to do with gender inequality is also about health issues. I had some personal health issues. I think you have in our submission that I am a breast cancer survivor. I had to take six months off in order to get my treatment. During that time I had four staff. I had a whole office to keep running as I am away. If I did not have the benefit of having those monies in my corporation I could not keep that going. For me that is a personal face to how these things will change.
At the rally that you mentioned physicians were coming up and telling us their stories. They were ill. They had strokes and heart attacks. Someone with Crohn’s disease has to go one day every week to get IVs so they can go back to treat their patients for the rest of the week.
These are the things that we don’t enjoy as employees do. We don’t have a medical plan. Having the ability to still keep our small businesses going because we are small business owners, the freedom of having that corporation, is a significant help to us to keep practising. It is not just the fact of retirement. It is the fact of having a life, being able to raise a family, sending them to university, as well as having any adversity happening to your family.
Therefore there is also a personal face in these tax changes. It is not just about money. It is also about a life.
Dr. Lees: I know many young female physicians. When the proposed tax changes first came out many of us felt as though we were being asked to choose between our career and having a family. When we graduate the debt load we have is often over $200,000. To embark on a career, to have to pay those overhead costs, and then to try to fund your own parental leave during that time, without the current tax strategies we are able to use, would make it very difficult, if not impossible, to take time away to have a family. There is a lot of fear and anxiety around that right now.
Senator Oh: I have a quick question. How many hours per day does a doctor work?
Dr. Lees: While in residency with our current contract we are capped at 90 hours a week.
Dr. Stone: If you look at the written submissions I gave, there is a couple of typos because I wrote that after being on call for 24 hours.
Senator Oh: Wow.
Dr. Stone: I would have been on call 36 hours, except I cancelled the remaining day because I was sick as a dog. For me 60 hours to 80 hours a week is normal. If I take time off, surgery gets cancelled and patients suffer.
Dr. Alexiadis: I would say a minimum of 60, but in addition to my clinical work I do a family practice. I also work with young people with schizophrenia so I do work in psychiatry. It is at least 60 hours.
Then there is all the paperwork that has to get done. I do have a love of protecting. I love the profession, so I also want to advocate for the profession both for my patients and for my colleagues. I do a lot of committee work that also takes my time.
Senator Cools: I would like to thank the three physicians for what I thought was stunning and excellent testimony. For many years I have always had a real soft spot and a place in my heart for doctors. It is the story of my life in a way. I was a young girl and for the first several years at university I used to work in a biochemistry lab at a big hospital. I saw those doctors running to save lives.
We would take in a patient and realize it was a rupturing appendix. You would see them running and pushing the stretcher. I have seen that endless times. You become aware of the challenges that those people meet, handle and deal with every day.
My personal opinion is that the practice of medicine is a vocation, not just a profession. It is a profession plus. I want to make a suggestion. We should set aside in our report a special section on doctors, physicians, and the state of medicine at this time in history. We would do our report and the country a good service if we could replicate and present as much of what they have said as is possible within our report.
If the committee is agreeable, we should go ahead and do that. I think it is needed and it is necessary. Doctors have not been getting a fair shake in the last many years, but that is another story. This is a report. We have to report to the Senate what we saw and what we heard. I think we should deal with it that way, if it the committee is agreeable. Thank you.
The Chair: Thank you, Senator Cools.
To the three doctors, the chair will permit each of you 30 seconds each to make one recommendation individually as to what you would like to see in our report that will be tabled to the Senate of Canada on December 15.
Dr. Alexiadis: My one recommendation is to recognize how incorporation became part of the compensation package for physicians and that changing it will affect patient care. All physicians who practise medicine do it because they want to practise good medicine to keep their patients healthy.
Dr. Stone: Saving a life, Senator Cools, provides me more satisfaction than any money could provide. Unfortunately, when things go bad, no amount of money can compensate me.
Since you are asking what I want, Senator Mockler, don’t change the rules at all. Leave things as they are.
Dr. Lees: Many of the most profound and meaningful experiences I have had in my life, and I know that I am young, have all been with patients. I am incredibly grateful to have been given the opportunity to be a physician.
I want to be a physician here in Nova Scotia. I am concerned that I will not be able to because it will no longer be financially feasible for me to do so. I would ask that these changes do not go ahead so that we can preserve health care in the Maritimes.
The Chair: Doctors, thank you very much. You have certainly been informative, enlightening and even, I could say from my part, educational.
Senators, we will now welcome our second panel. From the Atlantic Provinces Economic Council, Finn Poschmann, President and Chief Executive Officer; from Dalhousie University, IWK Health Centre, Dr. Pierre Schmit, Associate Professor, Radiology and Pediatric; from Flaim Wolsey Hall, Chartered Professional Accountants, Don Wolsey, Partner; and from Halifax-Dartmouth & District Labour Council, Suzanne MacNeil, President.
Thank you very much, witnesses, for accepting our invitation to be here to share your comments and opinions. I will ask you to stay within the five minutes allotted by the clerk, following which we will move to questions.
Before we table our report to the Senate on December 15, do not hesitate to contact us if you wish to add something.
Mr. Poschmann, the floor is yours.
Finn Poschmann, President and Chief Executive Officer, Atlantic Provinces Economic Council: In view of the time, I am drawing lines through sentences and paragraphs.
Thank you, Mr. Chair and the committee, for your invitation to be here on an issue profoundly important to me and the region. I represent APEC, an independent think tank and charity. I don’t speak for any government and I don’t necessarily represent the views of my board or members, for which they may be very thankful.
We are here discussing proposed changes to the taxation of private corporations as proposed by the current government in July 2017. Since significantly revised, I will limit my comments to the version of the proposal we expect may be proceeded with at this time.
The initial proposals arose for a good reason. After decades of cuts to the general corporate tax rate, alongside in my view some unnecessary federal and provincial cuts to the small business rate, we have a huge gap between the tax rates on small business income held within the corporation and employment income earned by most other people.
That gap motivated a lot of tax planning which is great for the people involved, including the tax profession, tax accountants, lawyers and many of my friends, but not so much for the rest of the economy.
Tax planning is not a terrible useful social activity. In this context we should wonder why a hypothetical Dr. Able, who has incorporated her practice, gets terrifically better tax treatment than her neighbour, Dr. Baker, with an identical practice that has not incorporated. Of course Dr. Baker could incorporate but that should make us wonder about the purpose of the corporate forum, the way we’ve designed it.
Notwithstanding some solid grounds for change, there were big flaws in the government’s approach as suggested by an explosion of outrage as you have heard here at this committee at length. Among the flaws, to my mind, was an emotional plea for tax fairness wrapped in a middle class cloak. To me that smacks of some ugly class warfare.
Fairness is a desirable characteristic of a tax system but it’s also very difficult to define. The October fiscal update from the Department of Finance referred to fair and fairness dozens of times but repetition doesn’t give a word a lot more meaning or instil a lot more logic to a given proposal. The announcement was entitled “Doubling Down on Progress for the Middle Class.” Not only are the definitions of middle class and progress moving targets, but not every tax measure needs to be dressed up in progressive language.
The details of the proposal are such as they were and are. The big jolts are the income sprinkling measures and those aimed at passive investment earned within the corporate forum. These are still on the table.
The government had objected to income splitting among family members who had little direct or reasonable connection to the firm’s business activities because you divide up income specifically to reduce the family tax bill and not for other business reasons. Among the obvious problems with the word reasonable is the sea of litigation that will inevitably follow in trying to define it. Finance has since sought to clarify it by adding the word meaningful, but we will still need detailed legislation and regulation to sort out exactly what it does mean. This is with reference to income sprinkling.
The initial proposals also aim at passive income earned within the corporation. For some business owners passive investments are their retirement savings plans or provisions for long-term leave or illness, as we just heard from Doctors Nova Scotia and others. For them the appropriate axis of comparison is savings within a registered savings plan or a tax-free savings account for which the effective tax rate numbers are similar. For many business owners an RSP or an RRSP is not a good option. They may not have enough earned income to having meaningful contribution room. Funds may end up being needed within the business to ride out a down market or to fund new opportunities. The RSP is just wrong for that.
What this points up is that the reform proposals would have been better set within a broader tax system review and still could be. Obviously salaried folks can’t build savings as readily or to the same extent as business owners. Perhaps we ought to look at how savings are taxed for salary earners.
Why do we limit RSP contribution room to 18 per cent of earned income and not some other number? Why is there an earned income requirement at all for RSPs? We don’t have it for tax-free savings accounts, TFSAs. Why not have a simple and generous lifetime contribution limit that only some of us would feel binding? When we withdraw funds from an RSP, why don’t we get the contribution room back the way we do with a TFSA?
In a liberalized system salaried earners would be on a more even footing with people who own businesses and business owners would have plausible alternatives to saving passively within the corporation.
For the moment we have a $50,000 limit on passive investment income before facing an additional tax. That strikes me as a bit low. In the absence of a broader review, we’re in an odd and haphazard place. As I said at the outset and in line with the government’s objectives we had a large gap between a small business and the personal income tax rate. For the moment our current solution is to make that gap bigger, so clearly we needed a bigger rethink.
The last review, just of the business income tax system, was in 1997-98. There were major federal tax changes on the personal side, other than the creation of TFSAs. They’re back from the 1980s, 1990s and earlier. I think long-term thinking still could be done. A proper review could happen. We could use broader, more careful thinking about how we tax and spend and to have a measured approach to reform.
With that, Mr. Chairman, I believe my time is up. Thank you.
The Chair: Thank you, Mr. Poschmann.
Dr. Schmit, please.
[Translation]
Dr. Pierre Schmit, Associate Professor, Radiology and Pediatrics, Dalhousie University — IWK Health Centre, as an individual: Good afternoon. I would first like to thank you for this opportunity to discuss the Canadian government’s proposed tax changes affecting personal corporations and passive investments. My name is Pierre Schmit. I am a physician and radiologist. I am originally from France, and a landed immigrant in Canada, for a little over two years. I am a Canadian citizen. I am speaking on my own behalf, but I am sure that many of my points could have been presented by any of my colleagues.
It has been repeatedly said that the 75-day consultation was extremely short, and could not provide a valid assessment of the consequences of this proposed reform, which are going to deeply affect small businesses, their owners and the social fabric of our province and country.
My first reaction when I heard about the reform was to the rhetoric used, and to those who used it; the words that stood out were “fairness,” “loopholes,” “tax cheats” and “income sprinkling.”
[English]
Fairness refers to a condition free from bias or injustice; loophole refers to an opportunity to evade a law —
[Translation]
— with an extremely negative connotation. Canadian linguistic duality demands that I refer to the words used in their original language.
This consultation nevertheless brought to light the fact that Minister Morneau has no intention of being fair, as, on the one hand, the proposed reform does not impact the stock option system which benefits the minister himself and his personal friends and family. On the other hand, this reform does not provide physicians with health or employment benefits, maternity leave, or CPP, which can only be acquired by paying double the amount paid by any other Canadian.
The minister used the loopholes very well for himself, however, by keeping control of his own Morneau Shepell stocks through an ad hoc corporation — even if this was done with the approval of the House Ethics Commissioner — a corporation which was registered in another province than Ontario to take advantage of lower taxes.
In addition, somewhere he “forgot” to declare an estate corporation through which he owns a mansion in Oppède-le-Vieux in the Lubéron. This oversight only cost him $200. This fine is less than a slap on the wrist when compared to the average value of properties in the Lubéron. The omission may have been in good faith; I don’t know if this makes the minister a tax cheat.
Finally, he has a very good understanding of the concept of income sprinkling, considering the fact that Morneau Shepell pays Bill Morneau’s father, the founder of the company, $100,000 per year for fulfilling the duties of honorary member of the board of directors. He has an elastic understanding of what constitutes a conflict of interest when he states that there is none, considering the fact that Morneau Shepell sells personal retirement insurance products, which would surely become a valid alternative to the passive investments made by the individual corporations.
These are certainly ad hominem attacks, similar to the ones I and many others endured when we were called tax cheats simply for following the legal advice of our accountants and lawyers, advice which was in no way illegal.
Of all the impacts these proposed tax changes may have, I foresee two major ones. The first one would be the loss of trust that entrepreneurs will have in the legislative and executive systems of Canada, because these changes would be retroactive in nature, which is their worst defect, and would make any retirement income planning or any financial planning of any kind futile. I decided to incorporate my medical practice 10 years ago in order to build savings for my retirement, and this has also been the case for farmers, restaurant owners, retailers, et cetera. This possibility was given to physicians as compensation, although this was not spelled out in those terms, for the fact that medical service fees were not increased.
From one day to the next, if the proposed tax changes are implemented, my savings would vanish, and once these changes become law, nothing would prohibit this or any other government from tweaking and adjusting and readjusting it. This is the reason why the $50,000 annual income limit on passive investment income that the government pulled out of its hat is by no means protective in any way.
The second impact would very likely be a brain drain to other countries that are more understanding and kinder to small business owners and physicians. Farmers are attached to the land they cultivate, and restaurant owners to their restaurants. If I were a young Canadian medical graduate today, I would not hesitate. I would have passed the Canadian and U.S. exams during my training, and I would not hesitate. Another perverse effect is that it is very likely that the attraction of the Atlantic provinces for physicians, dentists, and immigrant businessmen would fade away. This will result in a decreasing number of small and medium businesses, and in a rapidly progressing medical desertification, with less revenue for the provinces, and less access to health care professionals, although these provinces have the oldest population in Canada and are in need of revenue and health services.
We can conclude that none of the long-term consequences of this proposed tax reform were studied, and I am sure they go far beyond the short-term vision that only considers the next two years; and we are not even certain that the actual budget will be balanced in those years. This was evident during the recent appearance of Minister Morneau before the House of Commons Standing Committee on Finance.
Once again, I thank you for your time and your attention. I would be delighted to answer your questions.
I apologize if the names and titles of individuals or committees were not exactly accurate. I meant no disrespect to these individuals or committees.
The Chair: Thank you very much, Dr. Schmit.
[English]
The chair will now recognize Mr. Wolsey.
Don Wolsey, Partner, Flaim Wolsey Hall, Chartered Professional Accountants: Thank you very much for the opportunity to speak to you today concerning the proposed tax changes impacting private corporations.
My name is Don Wolsey and I’m here today with my business partners, Don Flaim and David Hall, who are sitting behind me. Together we operate the firm, Flaim Wolsey Hall, Chartered Professional Accountants.
Our clientele includes many private corporations that we assist with their accounting and income tax planning needs. We have clients in many industries but physicians comprise 70 per cent of our overall client base.
The proposed changes are meant to create jobs, grow the economy and strengthen communities. We want to focus our remarks today on the community aspect of the tax changes, particularly on the health care system. We feel that the conversation we’ve been having with more than 400 of our physician clients across Atlantic Canada allows us to offer you a perspective to the committee on the negative effects of the post-tax changes to the health care systems of the Atlantic provinces.
A recent release by Stats Canada shows that there are now more than 5.9 million seniors in Canada, but compared to other regions in Canada a larger percentage of the population is found in Atlantic Canada. As the population ages, increased demands will be placed on the health care system and on the physicians who are key to its operation.
The health care systems in Atlantic Canada are already strained by the combination of increasing demand caused by an aging population and a physician group that is itself aging with many planned retirements in the next decade.
This situation is compounded by tax changes that decrease the ability of the Atlantic provinces to attract and retain physicians. We can easily see the system becoming overwhelmed as a result.
Physician compensation has developed over many years considering current tax rules that permit income sharing and long-term savings using corporate structures. The tax rules are a key element in the current compensation system for most physicians. Abruptly changing these rules will impact physicians during all stages of their careers, ranging from students who are considering medicine, to retired physicians. While most students considering medicine do so out of the desire to help patients, many will be forced to consider the affordability of becoming a doctor.
Have we given consideration to the number of people who will be deterred by the prospect of repaying an average student debt of $200,000 to $250,000 from a family medicine practitioner’s income averaging $180,000? For those who are now graduation and starting their careers, where will they choose to establish their practices? It will likely be a location that will allow them to repay their debt, establish a home for family and begin saving for the future. These goals are impacted by a physician’s after-tax cash flow and may necessitate that person moving to another jurisdiction to allow these goals to be achieved.
For the 75 per cent of physicians who have incorporated their practices and are using their corporate structures as intended, many will reconsider how they practise and make changes to deal with the potential 10 per cent to 15 per cent decrease in their after-tax household incomes. This is especially worrisome for Atlantic Canada whose physicians are among the lowest paid and highest taxed in the country.
Retired doctors who play it by the rules by saving for retirement using the professional corporations and plan to be able to income split with a spouse are placed at a distinct disadvantage compared to other retirees who are able to split income from RSPs and RRIF withdrawals and through pension payments.
Since the rules have changed after the fact for these retirees, they cannot adequately plan for them and they may find themselves short of funds during retirement.
By September we were so concerned by the conversations we were having with our clients about the impacts on the health care system that we conducted a physicians’ survey. The survey was meant to determine physicians’ views on proposed tax changes and unintended consequences. We polled 1,450 physicians across Canada. The responses from that group are in orange, of which 277 were from Atlantic Canada, and those responses are in blue. As detailed on page 4 of the survey physicians across the country are likely to reconsider how they practise or even contemplate relocating to other jurisdictions.
Although the numbers from the survey speak for themselves, I would like to provide further examples from my own practice. Prior to last year our firm has never had a physician client emigrating from Canada to another country. However, during the past 12 months we’ve had three clients who have left Canada. We’ve had many conversations with our clients since the July 18 announcement about relocating to other jurisdictions with higher remuneration and lower income tax rates.
It is early days yet, but as a firm we have five more physician clients who have confirmed that they will be emigrating from Canada and a further eight who are moving to other provinces outside Atlantic Canada. Those are the ones that we know about. There will likely be more.
I recently spoke with an anesthesiologist who lives in a rural area of Atlantic Canada. For the doctor, his wife and two young kids the proposed tax changes were the last straw. While he regrets that he will be leaving his parents and his home town behind, he has cited the benefit of fewer working hours and high end compensation as the reason for his move to the United States.
The survey results combined with our firsthand experiences are clear. There will be an outward migration of physicians from Atlantic Canada. This loss of physicians will exacerbate a shortage of doctors, increase wait times and risk patient outcomes in Atlantic Canada.
The current proposals represent the most significant changes to Canadian tax law in the past 45 years and are not mere tweaks. The 75-day consultation period cannot possibly be adequate to consider the broad ranging impacts on the economy and health care system.
Given the scope of the changes the government should withdraw all proposed tax measures and undertake a meaningful, comprehensive tax review with all stakeholders to ensure that the changes to tax law meet stated objectives and avoid unintended consequences.
If the government proceeds with proposed tax measures, more work needs to be done to deal with the many concerns that were not addressed by the announcements made during the week of October 16.
In our paper we have ended with five recommendations. As soon as the federal government adopts these changes, we feel it will go a long way in making these proposals workable and fair for all Canadians. Notwithstanding, we believe it is a patchwork job that increased the complexity of the Income Tax Act. We also believe it is time to replace the old tire with the new one, rather than adding patches on top of patches.
As such, we still contend that all proposed measures should be withdrawn in the meantime until a more meaningful comprehensive tax review is completed. We would be pleased to answer any questions you have.
The Chair: Thank you.
For the record, Ms. MacNeil, am I right in saying that you represent the Halifax-Dartmouth & District Labour Council and are a member of the Canadian Labour Congress?
Suzanne MacNeil, President, Halifax-Dartmouth & District Labour Council: That is correct. As you said, I come here in my capacity as President of the Halifax-Dartmouth & District Labour Council. We stand with the united position of Canada’s unions as represent through our federal counterpart, the Canadian Labour Congress.
Here in Halifax, the labour council represents about 24,000 unionized workers and about every sector of the economy. These members also reflect a diversity of incomes earned, everything from just above minimum wage to much better compensated for the work that is done.
We stand with 3.5 million workers across the country in every community to say that we support a number of the recommendations of the policy changes put forward by the government.
When it comes to providing the vital services that we all rely on as Canadians, everything from physical security and food safety to health care, education and disaster relief, Canadians expect everybody to pay their fair share. Critically important for maintaining the fiscal capacity and political support needed to pay for these services is a system that is built on tax fairness, a tax system that recognizes the varying levels of ability to pay taxes, that aims at reducing inequalities in our country, that doesn’t worsen inequalities by disproportionately rewarding the wealthiest and that isn’t so unnecessary complex and riddled with loopholes that high earners are able to gain from the tax rules at the expense of the public.
As our Department of Finance writes, closing tax loopholes, cracking down on tax evasion and ensuring tax fairness are essential to preserving the ability of the government to maintain its role in funding health care, housing, child benefits, the Coast Guard, and a number of other essential services and programs on which Canadians rely.
Since 2000 tax changes in Canada have brought vast benefits to corporations, small businesses, high earners and the wealthy. The federal corporate tax income rate was slashed in half after the year 2000 from 29.12 per cent to 15 per cent today. Provincial and territorial governments followed suit and reduced their corporate income tax rates as well. As a consequence, Canada’s corporate income tax rate fell to the second lowest in the G7 and 12.2 percentage points below the official rate in the United States.
The federal small business tax rate has also been reduced from 13.12 per cent in 2000 to 10.5 per cent in 2016. The amount of income eligible for the lower small business tax rate has also been increased from $200,000 in 2003 to today’s level of $500,000. The lifetime capital exemption has also been raised and indexed to inflation. Provinces and territories have also reduced their small business tax rate alongside the federal government.
The theory here was that lower tax rates for corporations allow them to retain more earnings which can then be reinvested to support growth and job creation. Lower corporate taxes encourage new capital investment in better machinery and more efficient technology that make workers more productive. In doing so, it leads to economic growth, more jobs and high wages. That was the theory, anyway.
In actual fact, economic growth over the last decade has been sluggish, primarily held back by persistently low business investment even outside of the sectors of oil and gas. The employment rate has been slow to recover. Wages are stagnant. Historically bad labour productivity in growth in Canada has been abysmal.
By any measure, corporate income tax failed to achieve the rationale given in terms of a payoff in economic and employment growth. In the meantime, federal tax revenues as a share of GDP have fallen to the lowest level in 50 years.
Since 2000 federal government spending on programs and services as a share of the economy has fallen below the historical norms an average of 13.2 per cent of GDP versus 16.4 per cent in the previous 35 years.
We appreciate in the labour movement that the government has taken some positive steps to improve tax fairness and to reduce the opportunity for unfair advantage in the tax system. The federal government added a further top tax bracket of 33 per cent on incomes above $200,000; closed a number of loopholes and boosted the ability of the Canada Revenue Agency to crack down on wealthy and high income earners evading taxes through offshore tax havens. Budget 2016 committed to reviewing our increasingly complex federal tax expenditures, over 90 per cent of which disproportionately benefit high earners.
Budget 2017 then signalled that the government would address tax planning by owners of Canadian-controlled private corporations that can and do deliver unfair tax advantages to high income earners. This step is really important in terms of reducing income inequality as well as gender inequality since high income earners are more likely to be men. There are a number of further steps that we in the labour movement recommend, but it’s all in the document so I will cut it off there.
The Chair: Ms. MacNeil and to the other witnesses, your documents have been registered with the committee as official documents.
Senator Eaton: Most of the people we’ve heard here, out west and in our 12 hours of hearings in Ottawa, consider themselves middle class. They’re small business owners. They’re doctors. They’re farmers.
What interested me about your presentation, Mr. Poschmann, is that you said a yawning gap that’s emerged between tax rates on small business income held within a corporation and employment income earned by most other people. You don’t talk about most employed people, labour union people and certainly civil servants having their benefits guaranteed. Whether it’s maternity leave, pension benefits or sickness benefits, they’re guaranteed.
Most small income people or middle class people who are self-employed don’t get benefits and take a risk. You don’t seem to worry about that in your presentation.
You admit in your presentation that for some business owners passive investments are for retirement savings plans, provisions for long-term health, leave or illness, and for them the more appropriate axis of comparison is savings within a registered savings plan. We know that you can’t withdraw money if you have a downturn or a sickness and you need it. You can’t withdraw without a penalty.
I wanted to ask you, Ms. MacNeil, about one of your paragraphs where you talk about employment growth having been sluggish, the employment rate having been slow to recover; wages are stagnant, historically bad labour productivity in Canada has been abysmal and by any measure corporate income tax failed to achieve the rationale given in terms of a payoff in economic and employment growth.
Now something I think we are all concerned about, and this is non-partisan, is what would you recommend, both Mr. Poschmann and Ms. MacNeil, to encourage growth? How do you think the present government can encourage growth, higher productivity, create more jobs, encourage Canada to take advantage of CETA and hopefully if we go into the TPP, and discourage doctors from fleeing across the border?
You both seem to support these tax measures, so can I hear from either one of you?
Mr. Poschmann: I’m not sure I conveyed my thinking entirely accurately, or it seems not so because while I agree with some of the parts of the motivation for the changes I don’t think that the proposed changes are appropriate.
As to how to compensate for risk, I think that is very important. That’s why, for instance, in western economies we allow the corporate forum with limited liability. In Canada and in the provinces we have a small business deduction that allows a substantially reduced corporate tax rate for small businesses. Those are good things. The issue that has arisen is that because of the gap between small business tax rate for income held within the corporate and the top marginal personal income tax rate in Canada in many provinces we have created these incentives for not very productive tax planning.
There are ways to address that and part of the mechanism could include shrinking the gap between those two rates. Because we do want to recognize risk and we do want to recognize growth, building a small business is very difficult and hard work indeed. Then it’s appropriate to have a preferred rate and a small business deduction.
When it comes to some of the issues that the prior panel raised, it is relevant that one of the things the federal government did at the beginning of 2016 was increase the top federal rate by four percentage points. Meanwhile, Nova Scotia, New Brunswick, Quebec and Ontario have very high top marginal tax rates. Yes, that will affect medical professionals and, as Mr. Wolsey mentioned, their thinking about which country they want to live in. The provincial tax rate differences will affect, on the margin, some of their decisions about which province they want to work in.
The proposed changes do not help matters, but there is a reason for the proposed changes. How we deal with them and whether the proposals presented to us today are appropriate is a different question. I don’t think federally we’ve got it right.
Ms. MacNeil: It’s a pretty big question and honestly it crosses so many different policy areas that we could be here for a long time discussing them, but I’ll plug a couple of different ideas.
I would urge folks to look at jurisdictions that have implemented living wage policies such as in the case of municipalities and provinces that are prepared to do a $15 minimum wage, and on the federal level a federal minimum wage for federally regulated industries.
Senator Eaton: How does that apply to independent small businesses?
Ms. MacNeil: That’s where I was going. In terms of encouraging growth, higher productivity and more jobs there does seem to be a virtuous cycle when we start putting money in the pockets of lower income earners. These are the people that spend the money in their communities on services and goods. I would urge you to look at the work of the Better Way Alliance in Ontario, a coalition of small business owners that have spoken out in favour of changes that would put more money in the pockets of those workers.
As for small business owners, in particular some of the physicians that have presented today, I would urge folks to take a look at how we fund the education that physicians have to take. I would urge folks to look at different policy solutions that are not about the tax code. A number of the problems that have been listed are genuine, certainly, but these should not be solved at the expense of undermining a progressive tax system.
Senator Eaton: Unfortunately we are dealing with the tax code. We are not dealing with minimum wage. We are not dealing with guaranteed income. We are not dealing with education costs. We are dealing with proposed loopholes to income tax.
As you seem to be against them, how do you propose that we grow, expand and create more jobs with these tax loopholes?
Ms. MacNeil: Yes, and I would argue that we need to actually stop looking at the tax system as a policy panacea for the problems that I listed.
Senator Eaton: Thank you.
The Chair: Mr. Wolsey and Dr. Schmit, do you have any comments on the question from Senator Eaton?
Dr. Schmit: When it comes to physician education, as physicians we are obliged to have a certain amount of continual education hours per year. They are mandatory and for which we are paying from our own pocket. We are also paying by being out of the business we are doing. This means there is no income and we are paying for it. It is something which happens every year and there is no escape route or loophole to escape that.
This is something that is very personal and ongoing.
Senator Andreychuk: I will not address my questions to Dr. Schmit or Mr. Wolsey because I think your positions are clear. I will continue to read them. They do follow what we’ve heard from physicians and small businesses elsewhere.
Some people asked why we have traveled, and we’ve said that we are hearing a similar message across Canada in the context of regions. That’s very important. While you may be a physician in one place, you have the same skills but the environment is different. The expectations are different. The problems are different.
I come from Saskatchewan so I know what medical problems are there: rural, Aboriginal and northern. It is very difficult. We have the highest HIV rates at the moment. That has an impact. The basic message for physicians has been clear.
Mr. Poschmann and Ms. MacNeil, what I hear both of you saying in different ways is that we need changes. I think everyone has agreed with that. We’re not as productive as we should be. We’re not being as competitive as we should. We hear of ministers going around the world and saying that small business and medium size business are the backbone of our country. They produce the jobs, not big industries or big corporations.
The civil service could be another way but that hasn’t been the way that most Canadians want to go. We want a valuable civil service but we don’t want it to be the only source. We have an innovation minister. We have an industry minister. They’re all saying that we have to become more competitive and stronger.
Am I right that what you’re saying is this piece alone isn’t very helpful: We need to stand back and ask, “What will make Canada productive?” What will produce jobs? We need to look at the tax system totally because the tax system we have was one I grew up with when we had landlines, when the most sophisticated IT service we had was an electric typewriter, and when the tax system started.
We’ve been cobbling, patchworking and band-aiding. What we really need to do is stand back and take a look at the incentives and the needs of the government. How do we grow the economy? How do we make jobs more secure, et cetera? Are we really talking about tax reform, standing back and doing a proper tax reform?
Mr. Poschmann: A short answer is yes, that’s the theme. I would like to see a broader tax review for some of the reasons I mentioned. To choose one of them, for instance an expanded RSP, is great for many salaried people but not everyone. It is not ideal for small business owners. Other tools or different tools are needed to better meet their needs. One of them, for example, would be potentially hugely expanded contribution capacity to TFSAs. That would allow you to accumulate tax recognized savings to fund maternity, education or whatever. It’s quite neutral. People can make their own allocations as they see appropriate.
Tax recognized savings, as we have them even with our ESPs, simply are nowhere near the scale needed to adequately fund high level graduate education, for instance. More tools are needed.
As to the productivity side, Ms. MacNeil from the labour council, listed a lot of changes that we’ve made federally since the turn of the century. It’s quite a list and an indictment. I think it’s absolutely correct. However, I feel that most of the changes were good things across a number of governments.
During the same period, in particular, we have made our corporate income tax system or kept it quite competitive. Notwithstanding slow productivity growth, we’ve generally had positive real income growth over the course of the century. We’ve had positive but low labour productivity growth. This was in the face of just huge pressure owing to globalization across sectors, changes in supply chains, different ways in which we source inputs to the productive process, shifting away from the goods sector to service sector, output and employment. Canada overall has done pretty well globally, given all these rather huge pressures.
Can I promise or say that further reductions in the federal corporate general income tax rate would improve investment in machinery, equipment and productivity? No, I can’t claim that with certainty. Could I claim that raising the general corporate income tax rate would improve investment in machinery and equipment and productivity? No, I don’t think so. There are a lot of other issues at hand. To my mind, that bolsters the case for a broader tax system review.
Ms. MacNeil: Yes, I would very much like to see further steps taken. A broad review of our taxation system would be welcomed by the labour council and by the Canadian Labour Congress, but I’m wondering if I can ask you to reiterate the question.
Senator Andreychuk: Basically what I am saying is that you’ve raised a lot of problems and put your own point of view on them, but Senator Eaton pointed out we’re here looking at what has caused such a vitriolic reaction from the people who are being targeted. That’s not very constructive in a society. We want to bring society together and work toward the same goal.
We’re not sure whether the targeted changes will produce anything constructive. We see what’s happening and the unrest and the uncertainty that it’s causing. Some witnesses before us have said maybe we should step back and really look at a tax system that is probably outdated and band-aided.
Wouldn’t it be better to put us all at the table to look to the future? Do you think that is a good approach?
Ms. MacNeil: I’ll start with the principle in saying I believe in a system that has us pay what we can each afford to pay, certainly. Those who have been privileged under the system have a high enough income level that they can take advantage of some of those privileges and loopholes. They will certainly not be happy when those things are taken away.
Is there a change that will make absolutely everybody happy? I mean maybe not, but I appreciate that there have been some proposals taken that are pretty bold. I would argue that some of them don’t necessarily go far enough. There are some changes that the labour movement and I would agree are important but aren’t necessarily on the table.
In summary, I very much support the principle of a solidaristic progressive taxation system, and I will continue to defend that.
Senator Andreychuk: I won’t pursue it because we haven’t heard anyone say they’re not against a progressive system. We’re having a problem with defining terms like fairness and fair share, those kinds of terms. We’re hearing that it will get more complicated. It will be more costly to interpret the rules. I don’t think we are against a progressive system.
Mr. Poschmann, I have one further question. We raised the top corporate rate. It was supposed to produce income for the government, and I understand it didn’t. It didn’t reach their targets at all.
Is this the way to go, to look at those that can pay more at the top? It was politically favourable but it didn’t produce the income.
Mr. Poschmann: If I hear you correctly I believe you’re referring to events that straddled the election when the federal government reversed, proposed or declined by half a percentage point the general corporate rate.
Senator Andreychuk: Right.
Mr. Poschmann: The evidence is extremely mixed. Over time we have a lot of data across countries that refers to or attempts to analyze the impact of changes, particularly in the corporation income tax rate, on what happens to output, income, employment, growth and so on. I have read hundreds of papers on this topic. I have commissioned them, reviewed, revised and advised on them. The answer is pretty much a mixed bag, but in part that is because a lot of things are going on at the same time.
The composition of the economy is changing. The role of intellectual property, or more broadly intangible assets in the composition of the asset base of the firm, has changed hugely in the past couple of decades. There are a lot of moving pieces.
Governments and government policy is not necessarily good at producing growth but we’re pretty good at stalling it out. That’s something that I’d like to emphasize.
Another point, if I may, going back to an earlier comment with respect to some of the vitriol that has emerged in the context of this tax policy discussion, if you provoke class warfare there is a small possibility that is what you get.
Senator Neufeld: Thank you very much to all four of you for your presentations. Many of my questions have been asked and answered, but I get from each one of you that you would recommend holding off on any changes and doing a review of the whole tax system. What we’re facing today and have been for quite a while is a whole change in global economy, in trade and all kinds of things between countries from the last time the tax system was reviewed.
Would you agree with me that we should say whoa to the government instead of doing it in the dark of night in July, saying you’re going to put it in by the next year and not giving all the information? Instead of a kind of a 50,000-foot level to get everybody worrying and actually changing how they invest and what they do, do you think that it would be the right thing to do?
Mr. Poschmann: In order to give other participants time to speak, I’ll keep my answer to yes.
Dr. Schmit: It’s a mixed feeling because frequently the government will say that they are changing that first and will take care of the rest later, and in fact the later part never comes.
I would say yes, please hold on but hold on for everything. If you want to make a reform, if you want to change the taxes, change everything at the same time, every single tax.
Mr. Wolsey: For me, an overwhelming yes. The last time the tax system was been changed was in 1972. Business has changed and the act needs to be. There has been a series of patches put on patches, as I said earlier. It’s time to go back and start all over, to see what should be changed, to see what the policy is behind it, and to change the act so that there is not unintended income tax consequences.
Ms. MacNeil: No, absolutely not. While I would welcome further steps taken in addition to these, we should not delay in implementing these particular changes. When it comes to the three ways that CCPCs are used to avoid higher levels of taxation, specifically the income sprinkling, the ability to exploit capital gains and passive investing, these particular items cost Canadians $500 million a year in forgone tax revenue. That is something we cannot delay on implementing.
I do believe that a number of stakeholders would want to see this delayed, but I would recommend pursuing these changes without delay.
Senator Neufeld: Thank you. I appreciate those responses. Further to Ms. MacNeil, about leaving the changes that are in place, $250 million is a lot of money to me. I don’t disagree. That’s what the government thinks they’ll get out of what they call income sprinkling. I think it’s income sharing but income sprinkling.
In a $300 billion budget, $250 million is not a very big part of it. That’s the estimated revenue. That is not the estimated cost of actually collecting that revenue. You can reduce that from $250 million down significantly because I think the government would be able to go out and hire a bunch more people to actually figure out how to collect the $250 million.
I don’t know how you feel about that comparison of $250 million compared to a $300 billion budget, to cherry-pick just a few things out of the whole tax code that has not been changed for decades. Is it the proper thing to do? I just want to get your feeling on that.
Ms. MacNeil: Certainly any change that is brought forward does have a front end cost with implementation but we’re also looking at the effects of changes over the years. I do believe that as a few first steps. The longer we delay this, the same argument can get brought up year after year.
Senator Neufeld: I hadn’t heard the argument until last July. That’s the interesting thing for me. That’s when the argument came out from the government all of a sudden in July saying that they were to make these changes to certain parts of the Income Tax Act and used all kinds of negative language until they found out that maybe that wasn’t the smartest thing to say or to do.
Anyhow, I think I have the answers to the questions that I had. I think other questions were asked prior to mine.
Senator Oh: Thank you, witnesses. This tax reform was introduced in the summer, in early July. By September the government was to go ahead with tax reform. Some 22,000 or more submissions were submitted by Canadians that tell you there is much concern about this tax reform, and the government is going to put it through.
In less than three months, including summer holiday of some of the ministers, including lots of civil servants being away from Ottawa and on holidays, who has gone through 22,000 or more submissions? Is that fair? They are the voice of Canadians, hardworking Canadians from farmers to doctors to small business owners?
What has happened? Do you think it’s fair to ram this through under tax reform without a proper, comprehensive study?
Mr. Poschmann: The timeline and the timing were very short for potentially significant changes. That said, I’ve seen worse, but let me answer in another way by way of an example.
In the spring 2007 budget then Finance Minister James M. Flaherty introduced an international tax proposal that was greeted with some shock by the business community. It turned out that the impact seemed to be far larger and more painful than the finance department had imagined at the time. To paraphrase, the prime minister said to the finance minister, “You’ve got a problem. Do you want to fix it?”
He appointed an international tax review panel on which I served. We worked for months and came up with a set of trade-offs, some tightening the tax system and some liberalizing. We thought it was a fair set of trade-offs. They were relatively and easily legislatable. Over the course of a few budgets, including straddling an election when we didn’t know what the outcome would be, we got those pieces in place. It can be done.
Dr. Schmit: It was quite a shock to learn the way we learned of the changes. What I hear from the other witnesses is that he was participating in a process to try to correct something. It is always better to try to think forward than to try to correct, do something and after try to patch.
Mr. Wolsey: Since July 18 I have heard there have been 21,000 submissions. Members of my firm and I have submitted about a half dozen of those. Since that time, on October 16, two of the four tax proposals were supposed to be implemented. Actually one was actually implemented on July 18 to pass the conversion of income to capital gains. The government did a 180 on it and reversed that.
We need sober second thought. If we want to do tax reform, I’m all for that. Let’s think about it. Let’s do it intelligently. Let’s not try to fix one problem perceived but only to create five more, which is exactly what we’re doing.
With the sheer number of submissions by Canadians across Canada, to me it’s overwhelmingly clear that something is not right. Have we ever heard in our lifetime how many times for something the government has done there has been that much pushback? I can’t remember it. I’m 48. Not in my lifetime, not that I know of anyway. Maybe in earlier years but I’m not sure.
I really think there should be some tax reform. I agree but let’s start back at the drawing board.
Ms. MacNeil: No, I would say that the 3.5 million union members across the country, as represented by the Labour Congress, and I have been lobbying and advocating for tax fairness changes such as these for a long time. The timeline does seem appropriate to us.
Senator Oh: When the Income Tax Act first came out there were six pages. Now there are over 3,000 pages. We went across the country and all Canadians agreed that it has been over 40 years since the Carter commission reviewed the Income Tax Act.
People agree that at this time there could be a review of the Income Tax Act but the thing is that it’s not a makeshift operation for three months. People want a fair tax base for all Canadians. We have a lot of hardworking farmers and small businesses. Those are the biggest employee/employer, job and investment creators, and they are honest. Hardworking people agree that they also pay their fair tax.
We still have a lot of rich people in Canada that have accounts set up somewhere else. We should go after that 1 per cent or more. You will get more money out from 200 and some million, as my fellow senators say, by the time you deduct all the costs.
I want your comments on whatever I said, please.
The Chair: Are there any comments from the panel? If not, that was a good comment, Senator Oh.
Senator Eaton: I’d like you to say yes, you agree with it or no, you don’t. When Minister Morneau has come before us, he has constantly talked about tax fairness. This is all about tax fairness. I was wondering if in the country we should be concentrating on equal opportunity but perhaps not equal outcome. Do we really think there will ever be an equal outcome or should we really concentrate our money, our energy and our time on equal opportunity?
Mr. Poschmann: Fairness is a dangerous or difficult thing to handle, especially when we convert it to what economists call vertical equity. It’s not necessary clear how one implements that in anything other than some sort of political accommodation which is what the process is for. There is not much guidance on that front in economics or public finance.
Senator Eaton: Should the tax system create equal opportunity or should it create equal outcomes or can it actually create equal outcomes?
Mr. Poschmann: The short answer is no, the tax system can’t because in response to a given set of conditions people will always make decisions about whether and how they consume, save or spend, and that will change what they have available for saving, investment or consumption a day, a week or a month later.
No, we can’t guarantee equal outcomes, but we can come up with a neutral starting basis.
Dr. Schmit: I did not know what was the meaning of fairness. I looked in a dictionary and read that fairness refers to a condition free from bias or injustice.
One of the questions is regarding what is justice and what is a bias? I think I can understand bias. From my scientific background as an observer, I am introducing bias into the experiment. I have a bias in my presentation because I will be impacted by the changes.
As was mentioned by one of the senators, you have to put things in perspective if you are going after me for a certain amount of money.
Senator Eaton: I just want a yes or no. Do you think the tax system is there to create fairness or to create equal opportunity?
Dr. Schmit: It is there to make people think there is fairness.
Mr. Wolsey: The federal government is confusing equal versus fair. I think there is a very big difference between those two. In the July 18 proposal they compared two neighbours, one being self-employed and incorporated, and the other being an employee. They were saying they had the exact same amount of income so they should pay the exact same amount of tax. I don’t believe that’s fair.
It may be equal, meaning the same outcome, but it’s not fair for that same outcome to occur simply because the person who is a small business owner is taking on risk that an employee is not. The employee shows up for work every day. They have to do their job and they no doubt will get paid their paycheque at the end of next week. As a small business owner, income fluctuates. There could be a downturn. They could have losses. The whole family is at risk. Some families put up their homes.
The whole argument of equal versus fair is the foundation of why these proposed tax changes are wrong. Hopefully through real consultation that will get corrected.
Ms. MacNeil: I would like to say that the issue of opportunity versus equality is not solely a tax issue. It goes beyond the tax system and into other policy areas for sure.
Our ability to deal with those areas of justice and equality of opportunity depend on there being a robust and fair tax system. For example, outcomes could include things like pay equity and the fact that Canadian women make, on average, 80 per cent.
Senator Andreychuk: That is not the question.
Ms. MacNeil: Yes, but it does relate to it. I will say that to start to address that we can do things like close the tax loopholes for the wealthy and make the system fairer.
Senator Andreychuk: I’ll make a short comment. I think it was Lewis Carroll who said, “Words mean exactly what I intend them to mean; nothing more, nothing less.”
I struggle with what is fairness, what is justice, what is middle class, and all of those terms that have been bandied around. I talk to people who make a certain amount of money and they think the middle class. The next person says, “I’m not middle class.” They may be lower middle class, upper middle class or may not even be there, yet they’re making the same income.
It’s a very personal judgment call. What concerns me is that we’re moving it into a CRA officer making a judgment about what is fair. It is in a social context rather than in a tax context because you’re evaluating families and contributions. If any of you have an answer that you want to add, we’d appreciate it in writing.
Ms. MacNeil, I guess you live here in Nova Scotia, right?
Ms. MacNeil: I do, yes.
Senator Andreychuk: I want to make sure we get some Atlantic. We’ve heard overwhelming testimony of what it will do to the medical system. I think your membership would be as worried about losing doctors and having access in an aging population. I’ve had conversation with the Canadian Labour Congress in Ottawa. They are concerned about those things, but I would like it from the Nova Scotia perspective if you have a paragraph that you want to add on the consequences to your membership, should there be declining number of medical capabilities and how that may affect you and your workers. I don’t think we have time for the answers today.
The Chair: No, but I would ask, if you have an answer or comment, please do it in writing through the clerk.
Before we conclude, I would be remiss to honourable senators from Atlantic Canada if I did not to bring to their attention that I personally recognize the quality of work the Atlantic Provinces Economic Council does for Atlantic Canada. If you haven’t seen their magazine, I call it a quality magazine that refreshes our minds on the challenges as we go forward.
Mr. Poschmann, to your board of directors, as chair and as a senator from New Brunswick, I am very satisfied with the quality of the work that you produce.
To honourable senators and to all the other witnesses, thank you very much. It was very informative. It was of quality and it will be certainly a part of going forward with our report to the Senate of Canada.
(The committee adjourned.)