Proceedings of the Standing Senate Committee on
National Finance
Issue No. 66 - Evidence - May 8, 2018 (morning)
OTTAWA, Tuesday, May 8, 2018
The Standing Senate Committee on National Finance, to which was referred Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018 and other measures, met this day at 9:33 a.m. in order to continue its study of the entire subject matter of this bill.
Senator Percy Mockler (Chair) in the chair.
[Translation]
The Chair: Honourable senators, welcome to this meeting of the Standing Senate Committee on National Finance.
[English]
My name is Percy Mockler, senator from New Brunswick and chair of the committee.
I want to welcome officially, as a permanent member of the Finance Committee, Senator Deacon.
Senator Deacon, we will start with you to introduce yourself.
Senator Deacon: Marty Deacon, Ontario.
[Translation]
Senator Pratte: André Pratte from Quebec.
[English]
Senator Jaffer: Mobina Jaffer, British Columbia.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
Senator Andreychuk: Raynell Andreychuk, Saskatchewan.
Senator Neufeld: Richard Neufeld, B.C.
[Translation]
The Chair: This morning, we are continuing our study on the subject matter of Bill C-74, which we began last week.
[English]
Bill C-74, An Act to implement certain provisions of the budget tabled in Parliament on February 27, 2018, and other measures, is what we call the budget implementation act, or BIA.
Today, we discuss the effects of the changes proposed to the taxation of private corporations from the business perspective. The first hour, we will have the following witnesses: Mr. Trevin S. Stratton, Chief Economist, Canadian Chamber of Commerce.
Mr. Stratton, thank you for accepting our invitation for us to receive your opinions, your comments and your recommendations.
Joining us from Toronto, by video conference, we have Mr. Dan Kelly, President and Chief Executive Officer of the Canadian Federation of Independent Business.
We are ready for your opening remarks, Mr. Stratton, to be followed by Mr. Kelly. Following the two presentations, we will have questions from the senators.
[Translation]
Mr. Stratton, the floor is yours.
Trevin S. Stratton, Chief Economist, The Canadian Chamber of Commerce: Thank you very much, Senator Mockler and members of the committee. It is a great pleasure for me to join you today.
[English]
On behalf of the Canadian Chamber of Commerce, I want to thank the committee for the commendable work done during the cross-country hearings on this topic last fall. We enthusiastically agree with the recommendations made in the resulting report.
You may recall that the Canadian chamber had, to put it mildly, a difference of opinion with the government, when it decided to make changes to the tax treatment of Canadian-controlled private corporations last year.
Many of the 200,000 businesses across the chamber network are small- or medium-sized businesses, and, for them, these proposed changes were the number one issue.
To its credit, the government listened to the concerns the chamber and its members raised. The changes announced in Budget 2018 are an improvement. We welcome the reduction in the SME tax rate, more details on the process for family members to demonstrate that they are meaningfully contributing to a business and paid for doing so, and the $50,000 annual passive investment threshold. We are also happy that new rules around the family members splitting the Lifetime Capital Gains Exemption will not be created.
Our members remain concerned about the added red tape and uncertainty surrounding the reasonableness test for income splitting. We do not believe this reflects the many formal and informal ways family members contribute to a business. We are also concerned that the new rules on passive investment income will not allow for the grandfathering of past investments.
While the chamber is glad to see that some of the original proposals have been modified, we feel they miss the forest for the trees. These changes should never have been put forward in the first place.
The government needs to focus on the big picture. How do these tax changes grow Canada’s economy? How do they make Canadian small businesses more competitive? In spite of the considerable debate surrounding these changes, we have not found satisfactory answers to these questions.
It has been 40 years of cutting and pasting since the last comprehensive review of Canada’s tax system. The changes currently proposed, even as modified, not only penalize many small businesses but further complicate our already complex, anti-competitive tax regime. Tacking on these changes will result in small-business owners having less time and money to invest in growth, innovation and job creation. This is particularly troubling and urgent in light of the recent tax reforms introduced in other countries.
These are innovative times in tax policy around the world. The current U.S. administration has created an attractive environment for businesses looking to expand or invest by dramatically reducing business taxes and taking steps to cut red tape. France and the United Kingdom have also explored major tax reforms in recent years. In comparison, Canada has become a less competitive tax destination to locate or expand a small business. Our economy does not exist in a vacuum. A relative loss of tax competitiveness to other countries will impair our ability to attract and retain investment around the world.
Imagine how much more competitive we would be if we could do a better job of sustaining and scaling-up small businesses into larger, globally competitive enterprises. But many small companies struggle to grow, and Canada has few truly global players.
For the G7 as a whole, small and medium enterprises account for half of gross domestic product. In Canada, they contribute less than a third. Our record in scaling-up start-ups into sustainable firms and in growing our small- and medium-sized businesses into larger global companies has to improve. Improving or, where necessary, reforming the tax system will support the growth of small businesses and promote investment in innovation and capital. Exploring modern tax policy solutions, such as improving the efficiency of the tax system or allowing businesses to fully expense the cost of business property, can help put Canadian small businesses on an equal footing with their global competitors.
Canada can and should create an internationally competitive system of small business taxation that rewards entrepreneurship, encourages businesses to invest in the technologies, skills and capacity they need to grow, and attracts capital and highly qualified people from around the world. This will require a tax system that prioritizes growth, investment and small business competitiveness over complexity and red tape. In focusing on the tax changes in Budget 2018, we are missing an opportunity to create this type of tax system.
The Canadian Chamber of Commerce supports a comprehensive review of Canada’s taxing statutes guided by the principles of simplification, modernization and reducing compliance costs.
Thank you for the opportunity to meet with you this morning. I look forward to our discussion.
Dan Kelly, President and Chief Executive Officer, Canadian Federation of Independent Business: Senators, I’m here to ask for some additional help on behalf of Canada’s small- and medium-sized business community. As you may know, CFIB represents 110,000 small- and medium-sized business firms across Canada, all of them independently owned and operated Canadian-based companies.
We were very grateful to the Senate Finance Committee for your series of recommendations when you studied the bill. In fact, the only study that the small firms had confidence in during the round of changes that have been ongoing has been the work that the Senate Finance Committee undertook.
As I’ve said to many of you individually, we’re incredibly grateful for the recommendations you made. You listened to the small- and medium-sized business community, and while government has taken some steps to address the measures, I certainly agree with the chamber’s point of view that much more is needed before this is settled.
We need some additional help though. I did want to share with you, and I believe it was passed around, some new data that we’ve collected from small- and medium-sized business owners about the size and scope of the small business tax changes and their remaining concerns. About 40 per cent of our members have some form of passive investments in their business, and about 44 per cent of them do split income with family members in their firms.
On the income sprinkling rules, we do note that the changes are already in effect. The government has moved ahead to implement them, despite the fact that the legislation is still before you at this very moment.
We note that while there were some modifications made to these provisions on income sprinkling or income splitting, the government’s plan has largely gone ahead. The final details were provided less than three weeks prior to the implementation, leaving virtually no time for any business owner in Canada to get this right.
I argue that there isn’t a single business owner in Canada that understands these rules. Even tax professionals are telling us they are struggling to understand the new rules. The CRA, for goodness sake, is not able to interpret some of these new rules and regulations, and yet they have taken legal effect. I believe in two to three years from now, when the audits start of small- and medium-sized firms, many will fail the audit and face large penalties and interest for doing things that they thought were okay.
We need your help on this front. My quick recommendation to you is to use whatever formal and informal influence individual and collective groups of senators have to try to get the government, at the very least, to ensure that the effective implementation of these new rules is moved from January 1, 2018 to January 1, 2019, giving small businesses some time and a bit of hope to implement this properly and protect themselves on the audit.
The second major subject that I wanted to share with you was with respect to the passive investment rules. Yes, government has moved forward and has created, I think, a better plan than their original proposal back in July, the unworkable proposal, but I did want to note that these rules are still incredibly onerous.
Essentially the new passive investment rules, as you probably know, have moved from becoming a higher rate of taxation on passive investment income itself to essentially using those passive investments as a test to determine whether or not a firm is eligible for the small business corporate tax rate altogether.
This is certainly a better system than existed in the past, but it has created a whole new series of losers. The losers now are businesses who felt, based on the comments of Minister Morneau, that they were going to be grandfathered, that their past passive investments would not haunt them and require them to pay higher taxes. Unfortunately, what is happening now is that if you have over $150,000 a year in passive investment income, you will lose access to the small business corporate tax rate and be considered a large corporation from a tax perspective going forward.
That is deeply worrisome. We are hearing from small- and medium-sized firms across the country that thought they were entirely safe because they had past passive investments. The minister made clear that your past legal decisions were not going to cause you trouble going forward, and now that concept of grandfathering is effectively eliminated in this new package.
A member of ours in Newfoundland and Labrador who has some quick-service franchise restaurants says he uses passive investments to save for those major renovations that are required every five years by his franchise holders. What has happened now is that the money he is saving will mean that he is going to pay $80,000 a year in higher income taxes on his active business income on a go-forward basis. We regard this as deeply unfair.
Business owners have built these passive investment pools based on the current set of assumptions and now the whole thing has been changed. While this is an improved set of policies with respect to passive investments, there is a new group of losers that is created, and there is very little ability for a small firm to do anything about it.
Our recommendations seem to be very consistent with the Senate Finance Committee’s recommendations. Again, we’re grateful to you for hearing out the business community during the fall of last year, and we urge you to take whatever steps you can, senators, to influence the government, either through formal or informal means, to find solutions to these remaining problems.
Thank you very much.
The Chair: Thank you, Mr. Kelly.
I would like the three senators who just came in to introduce themselves.
Senator Oh: Victor Oh, Ontario.
[Translation]
Senator Moncion: Lucie Moncion from Ontario.
[English]
Senator Cools: Senator Cools from Toronto, Ontario.
The Chair: Now we will proceed with first recognizing Senator Marshall, to be followed by Senator Pratte.
Senator Marshall: I want to talk about the changes to passive investment income. There are two changes: the business limit and the refundability of taxes. The government’s budget document shows that that’s going to take $3.3 billion out the pockets of small businesses over the next five years.
In explaining the changes, the minister said that fewer than 3 per cent of the CCPCs will be affected, which is approximately 50,000 private corporations, and more than 90 per cent of the tax revenues from the two measures will be generated from corporations whose owners’ household income is in the top 1 per cent of the income distribution. It says owners below the top 1 per cent threshold whose corporations are affected by the measures would nevertheless typically have significant accumulated wealth. So it seems that the government is targeting individuals and small businesses who they think are earning too much or have accumulated too much wealth.
The people that I’m speaking to are not in the top 1 per cent, and based on what I know, they don’t have significant accumulated wealth.
What are you hearing from your members? Who exactly is impacted by these two changes? That’s what I would like to know.
Mr. Stratton: Absolutely. I think there is a bit of a discrepancy between what the Parliamentary Budget Officer is saying in terms of the amount of revenue that is going to be collected and what the Department of Finance is saying.
In terms of our membership, we have heard from a number of small business members who are farmers and who don’t have a large amount of accumulated wealth. They are really concerned about the impacts of these changes on the sustainability of their businesses.
In any context, these changes would have negative impacts on small businesses, but I think there are two other factors, or two variables, in terms of this particular context that are very important.
If these changes took place in 1998 or 2008, they would have had a negative impact. These changes are taking place in 2018, and this is a time period when a lot of changes are happening in the global economy. There is a lot of focus on innovation, on the speed of change, and how that is impacting business. A lot of small businesses need some accumulated capital in order to be able to invest in skills retraining or in new technologies, and $50,000, in terms of a threshold, might not be enough for them.
The second factor is the international factor. If Canada were making these changes while other countries were not making any changes, it would still have a negative impact. While Canada is doing this, other countries are perhaps creating a more hospitable tax regime for small businesses and we’re losing relative competitiveness to them, or it’s exacerbating the issue. These factors together are concerning for a number of our members.
Senator Marshall: Some of the small business owners I’ve been speaking to say they might as well give up their businesses. Others are looking at selling to larger corporations. Are you hearing that from your members? What are business owners contemplating?
Mr. Stratton: Yes. They are contemplating those two things.
They are also contemplating moving to a friendlier tax jurisdiction. If they are on the border of Canada and the U.S. and they see the tax changes taking place in the U.S., they might consider moving there; or if they are investing in expansion, they might consider expanding to the U.S. instead of within Canada.
Senator Marshall: Mr. Kelly?
Mr. Kelly: We did poll our members on this very subject, senator. As I said at the outset, 38 per cent of small- and medium-sized firms, our 110,000 CFIB members, do have some form of passive investment. The government, to its credit, is exempting many of them as a result of including that $50,000 threshold, but if you look in the package you have, on slide 13, there is data that breaks down the amount of passive investment income that our members employ. Of those that do have passive investment income, nearly 25 per cent may be affected by the new rules. That means that they have over $50,000.
We, at the time, had found that 21 per cent had between $50,000 and $250,000 a year, and 3.7 of our members had more than $250,000 per year in passive investment income to the firm. This suggests to us and was consistent with our view, which has been borne true of the income sprinkling rules, that the government is dramatically low-balling the numbers to suggest a more modest impact than in fact is the case.
We are really worried about this. The Parliamentary Budget Officer has estimated on the income splitting side that the measures that the government has employed will bring in between two and three times more revenue than the Department of Finance has in fact estimated. We’ve never believed that 3 per cent figure for a minute, and that remains our concern. This is going to affect a broad cross-section of small- and medium-sized firms.
Remember, as my colleague from the chamber just noted, passive investment income is not just money that is set aside for the future benefit of the business owner. It is used often by businesses for real and important business reasons. There are a bunch of our members in Alberta right now who are darn lucky that they had some passive investment income to ride out the turbulent economic times. Otherwise their employees would be unemployed if they hadn’t had that other form of income to support themselves while their main business income is modest or non-existent.
Senator Marshall: I represent Newfoundland and Labrador, and I have spoken to a lot of small business owners. I ask them what the impact will be on the proposed tax changes. A lot of them say they don’t know.
I notice that on the chart you just referred to, where you’re saying that 25 per cent falls above the $50,000 threshold, don’t forget that 4 per cent don’t know and almost 10 per cent prefer not to answer.
I have another concern, and I’ll give you an example. I met with two individuals who own campgrounds. These are small businesses. People go there with their recreational vehicles in the summer. They indicated to me that all of their income will be considered passive income.
I’m not sure who will be caught up in this, but I agree with you. I think that it is going to be much broader than the government is saying.
Senator Pratte: You both expressed your concern about the fact that past passive investments would not be grandfathered. Obviously that seems to be the case, but I’m perplexed. In Budget 2018, the government repeated its commitment that “Passive investments already made by private corporations’ owners, including the future income earned from such investments, are protected.” So they repeated this principle, and apparently they’re not following up on that. Did you have any contact with Finance to try to explain this discrepancy?
Mr. Kelly: Let me help a little bit on that front, senator.
This is parsing of words in the extreme, I believe, on the part of the federal government. It is true that a legitimate case can be made that grandfathering is essentially no longer necessary or provided because they have completely changed the way that the passive investment rules will affect small- and medium-sized firms. The previous proposal, the one announced in July and amended in October, was that if you had passive investment income, about $50,000, that income stream would be taxed at a higher amount on a go-forward basis, but your previous passive investments that generate income would be protected. What they’re saying now is that the passive investments you built in your business are not going to be taxed any differently going forward than they were in the past. So they are correct to say that either grandfathering is provided or is effectively no longer necessary, because they’re not changing the tax treatment of the passive investments themselves.
What they’re doing now is using the amount of passive investment income you have to determine whether or not you’re eligible for the lower rate of taxation, the small business deduction, on your active business income going forward. That means if you have over $150,000 in past passive investment income, that income will not be touched or treated any differently. What it will mean is that, if you’re a dry cleaner, your dry-cleaning income will be taxed at the large corporation rate, or your restaurant’s income will be taxed at the large corporation rate. As a result of that, for the taxpayer, it doesn’t feel like there is any grandfathering at all.
In the example I gave you of the quick-service restaurant in Newfoundland and Labrador, if he is paying $80,000 a year more on his active business income as a result of his passive investments being used as a test, that doesn’t feel like grandfathering in any way, shape or form.
Senator Pratte: Thank you for this.
Mr. Stratton, you suggested we look at the larger picture, and you mentioned the international environment and U.S. tax reform. The government has expressed a view that before moving on that front, they should wait a little while and see exactly how this U.S. tax reform is implemented and the effects of it.
Do you have any suggestions as to how the federal government should react or what kinds of changes it should envisage to react to the reform that has been adopted by our neighbours to the south?
Mr. Stratton: Absolutely. I think numbers are coming out now that earnings for U.S. companies are up over 3 per cent this past year, and I believe that could help our competitiveness.
In terms of suggestions, I would say there are three areas. Number one is having a more competitive tax rate. Our tax rate used to be very competitive previously, but now that other countries either have reduced or are considering reducing theirs, we’re losing competitiveness.
On top of that is the administrative burden of the tax rules and statutes that are in place. We’ve been cutting and pasting different statutes for the past 40 years. A number of countries are looking to streamline their tax system. That could be potentially revenue neutral, so it wouldn’t necessarily negatively impact our fiscal position as well.
Then, as I mentioned in my opening remarks, there’s the possibility of being able to write off capital investments immediately, within a year. Right now, within Canada, we have depreciation over two years in only a certain number of sectors, and that includes inventory in the U.S. that they recently enacted.
Senator Pratte: Do you agree as to the most recent changes for income sprinkling and passive investment, that at least these changes have made it much simpler? Complexity was one of the most important criticisms made of these changes. Certainly, it would be much simpler for small business owners to apply these changes than it was before.
Mr. Stratton: I would agree with that. I believe that the new changes in the 2018 Budget are an improvement over the previous proposals last year, and our members do appreciate that. At the chamber, we appreciate that as well.
There is not enough clarity in terms of how CRA might apply the new rules. We’ll probably find that out over the next year or two. That uncertainty has an impact on business planning for a lot of our members. But we do welcome the improvements in the 2018 Budget.
Mr. Kelly: I do agree that the passive investment proposals are a significant improvement from an administrative perspective. The previous proposal was going to have accountants and bookkeepers having to track multiple investment streams and the timing of those streams. It was to be a nightmare, and the new proposal is much cleaner, albeit unfair for a new group, as I cited.
I will say, though, that there has been very limited progress in the simplicity respecting the income splitting rules. The government, in December, proposed what they referred to as “bright-line tests.” I have to tell you that these bright-line tests are incredibly hazy from where I’m sitting. The CRA is not even able now to answer basic questions. For example, none of the bright-line tests are to apply if you are a service business. You still have to go through these additional tests that are being required with respect to the reasonableness of the dividends or the salaries that you are paying, and the government can’t even tell us which businesses are service businesses. We have asked this repeatedly of Finance and the CRA, with no answer whatsoever. They say that’s still evolving. That’s little comfort to a small business owner in the service sector. Say you’re a restaurant. Are you in the service business or in the goods-providing business? If you’re now not sure whether or not you’re going to have to go about these tests, God help you.
The Parliamentary Budget Officer said that they were unable to determine who these rules were going to apply to and how. Think about some of the tests that they’re using with respect to going backwards to see the amount of time that an adult child or a spouse is working in the business to determine whether or not that’s fair. Some of those are to track the number of hours that the business owner’s spouse has played in the business over the last five years.
I have to tell you that we have 110,000 members, and I have not talked to one business owner that has their spouse clocking in and recording the number of hours that they spend in their partner’s business. That just doesn’t happen, and, if it is to happen, it is deeply unfair to have this going forward immediately with no time for the business owner to adjust.
Senator Andreychuk: I want to follow up on the notion of services. We can’t get a definitive definition, and the accountants don’t know and the businesses don’t know. You said that, going forward, there are still no answers. But it is really a question of going backwards because they are taking effect in January. So what are the businesses doing? Are they making a guess, or are they immobilized? Because businesses I talk to are scared.
Mr. Kelly: There is a deep fear on the part of business owners with respect to the Canada Revenue Agency, and that hasn’t gone away. In fact, there have been so many mini scandals related to the Canada Revenue Agency recently that in fact the fear factor is going up, not down. Then, when you add to that new finance rules that the CRA is not even able to interpret and provide clarity on, that adds to the stress that the average business owner faces on a day-to-day basis.
These are big, big changes. These rules now applying to the dividend treatment have the government deciding who is an effective owner of the business or not.
Senator, given that this question is coming from you, one of the other things we’re asking the government to do — and we have just made an access-to-information request on this — is to determine whether or not this was analyzed from a gender-specific lens. Seventy per cent of the shares of businesses are owned by men. If this means that from a CRA perspective only one owner for the business is going to be allowed, the majority of the people who are going to lose out as a result of these changes are women, meaning that they are not going to be able to take a salary or dividends from the business in the way that they have in the past. I’m not sure how that fits in with the government’s stated goals.
Senator Andreychuk: Last week, I asked that question: Have these changes been screened through a gender lens, and how would they affect especially women in small business? We were told that perhaps 68 per cent of women involved in these small businesses would be affected. Do you think that is a fair figure?
Mr. Kelly: I think that that sounds exactly right because, as I said a second ago, 70 per cent of the shares of businesses are owned by men. Therefore, if their spouse is no longer deemed to be a beneficiary of the business, either through income or dividends, that sounds about right to me.
Senator Andreychuk: All of the small businesses I know start with an idea and then start with risk: “I think I’m going to try it.” Then, there’s a family discussion, and then, “Can we pull it off?” Then there’s a mortgage, and the wife has to sign on if she was looking after the family. Women have been evolving. They want to start their own businesses and they go through the same risk factor.
It seemed from the changes that some of them were better, but the one that troubles me most is that we’re still saying, on income sprinkling, “hours per week.” That’s not the way those businesses operate. They run from crisis to crisis and who’s available to pitch in. So the value is not hours. That sounds like an employee base, not a business base. You wait on different decisions at different times, different activities, to make it work. If you go back to hours, they’re not going to make it.
How do we get across to the government that that’s not the way to do income sprinkling in small business? It’s not fair to family units. It’s certainly not fair in agriculture.
Mr. Stratton: I would add that it’s also not how a lot of small businesses work either.
The number of hours that you contribute toward your business is not necessarily hard and fast. If, for instance, it is a situation of spouses, perhaps the father taking care of children might allow the wife to work more hours on that business. How do you figure out how those hours work, and do they fit into that red-line situation? That’s something we’ve heard from our members, small businesses in particular.
Mr. Kelly: Building on that, senator, to be fair to the government, there are a variety of tests, not just hours-based tests. There are also tests related to the amount of risk that is taken on in the business.
I think the fundamental point you are making is incredibly valid, which is that there is a misunderstanding, I think, on the part of the Department of Finance and certainly at the political level of how small- and medium-sized businesses work. Small firms are, by their very nature, much more informal than larger firms. There aren’t the same systems in tracking. If you go in, as I do every day, and visit these business owners, they’ve got a rusty filing cabinet at the top of the business somewhere in which they are throwing every receipt and piece of paper that they possibly can, hoping that the CRA is not going to be knocking on their door any time soon, until they can have their accountant or bookkeeper help to sort out some of this. Small and medium-sized firms across Canada are working incredibly hard just to keep the lights on.
One of the data points I didn’t share with you that surprised me is that two thirds of the small business owners in Canada told us that the tax changes the government proposed have prompted them to consider whether or not they wish to continue to do business in Canada at all. That was really surprising. I’m not suggesting that two thirds of business owners are going to flee the country, but it tells me that there is a degree of anger on the part of business owners that this has created, a degree of upset that has not gone away yet.
Yes, the tax changes have improved significantly on some fronts. For example, dropping the tax changes related to capital gains was a good idea. But I think the government has underappreciated just how business owners are feeling about these changes, how negatively they saw them, and how they felt under attack and still feel unsupported by their government.
Mr. Stratton: If I can add to those comments, this increased administrative burden on small businesses or family businesses is going to disproportionately affect small businesses, at least in terms of competitiveness compared to large corporations. Large corporations have staff and they have capital to be able to spend on the administrative burden even though it is burdensome, while for small businesses, family businesses, their time and capital is already pretty tightly allocated.
Senator Andreychuk: Thank you.
Senator Jaffer: I also have many questions but something you said, Mr. Stratton, reminded me that small businesses are also competing against big businesses. More and more, big businesses want to devour them. This is another threat, besides leaving the country and everything else. Their biggest competitor many times is the bigger business because they are able to be more competitive than small business, so that doesn’t help them either.
Mr. Stratton: Absolutely. Small businesses might decide to sell their business to a larger corporation because of that.
I was talking about relative loss of competitiveness including tax competitiveness, and it also makes us less competitive in terms of mergers and acquisitions in an international context.
Senator Jaffer: One thing that bothers me is that three years down the line, there is the test of reasonableness. You may have seen a definition, but I have not seen it. They are taking into account risk and capital. We know the CRA will decide what is reasonable. What kind of advice can you give clients? What is reasonable? What you think is reasonable today might not be three years down the line when books are being audited.
Mr. Kelly: Building on your instincts related to your previous question, senator, you would be sad to note that these changes that have been made on the passive investment side do not apply to large corporations. Large corporations also have passive investment income streams, and they are unaffected by these changes; yet, private small businesses who struggle to compete with their larger counterparts are going to be affected by these changes. This is even more unfair, giving more advantages to the large than to the small.
With respect to your question on audits of small firms based on the income sprinkling or income splitting rules, this is a deep fear on the part of small- and medium-sized firms. As I noted before, much of the paperwork and the justification to determine whether or not you are going to be fine is actually not created, generated or kept by small business owners at this moment.
Right now in Canada, over the first half of 2018, we have business owners paying salaries and dividends based on the way they did this in the past, and, in a couple of years, that will be found to be outside of the audit rules. They are going to then be levied higher tax rates as well as penalties and interest.
That’s why we have made the request and are imploring the Standing Senate Committee on National Finance to use whatever means it possibly can to influence the government to, at the very minimum, provide small business with another year to implement these new rules.
We would like to see a full exemption for spouses. We don’t believe it’s possible for government to determine a fine line between the role of a spouse. Yes, they have made a case about adult children, perhaps university age. We are prepared to understand that there are challenges there. But at the very least, we want full exemption for the business owner’s spouse, and we would like to see the implementation of these rules delayed until January 1, 2019.
Mr. Stratton: I am not a tax practitioner, so when our members approach us with these problems, unfortunately we can’t give them advice on how to deal with it.
I can tell you that when our members come to us, they are expressing sincere concern about the lack of clarity in terms of how these rules will to be applied. It makes it very difficult for them to plan for the next year, to plan investments, to plan hiring or job training. That has certainly been communicated to us.
And I agree with Mr. Kelly. We hear our members’ concerns and we try to advocate on their behalf with different committees.
Senator Deacon: Good morning and thank you both for being here with us today.
I’m listening and also learning a great deal at the same time. We have those generic pieces of fear. It is a fear of change, fear of understanding, fear of complexity and the unknown consequences of some of these decisions. Perhaps we have a positive where some of these changes might force some accountability, and some pieces that small businesses perhaps don’t have as priorities as they do business from day-to-day because of the rusty file cabinet or the kinds of operations they are running that maybe need to be beefed up.
When I listen today, I can’t help looking from the lens of women, of those young adults who are getting started, our Indigenous populations and our millennials. I mentor start-up businesses, and I have had conversations with those groups about coming up with ideas, not a lot of infrastructure and leadership, but great ideas. A lot of them are millennials.
If the one-year extension is not allowed, which I hear clearly, what is the biggest risk? You have said many things, but I’m trying to understand, from the people you serve, what is the thing that keeps you awake at night should this be a January 2018 reality?
Mr. Kelly: January 1, 2018, relates to the income sprinkling or income splitting rules. The other passive rules go into effect for the 2019 tax year, so there is a bit of time there to restructure businesses.
I think this goes back to the comment that Mr. Stratton made a minute ago, and that is the divergence of the tax treatment of small private companies in Canada and the United States.
Many of our members have some operations on both sides of the border. Does that incent a Canadian company to look at expansion in the United States where they are moving in a different direction? There are lots of things happening in the United States that I’m not suggesting Canada follow whatsoever. However, on this front, the welcome mat seems to be in the process of being laid out for businesses in the U.S., and right now for small firms, the government’s intention is to dramatically increase the tax burden on them.
The changes, even in the 2018 Budget — and we believe that is a big low ball — on an annual basis, there is $1 billion a year more in taxes coming from Canada’s small- and medium-sized business community than in the past; $1 billion more out of small- and medium-sized firms.
When you think about your own backyard, the area of Canada you represent, you know how hard-working these small business owners are. You know how many hours they are putting in every day and how much they are doing for their local community, supporting every community group and organization that comes forward and asks for support. They are helping to grow their employees, and we have the government now asking them to pay additional $1 billion a year at minimum, which is estimated by the Parliamentary Budget Officer to be potentially two or three times that amount.
Mr. Stratton: I would add that in terms of risks and the changes that are taking place — and I touched on it a bit in my opening remarks — the economy is changing. You mentioned millennials and startups, and I mentioned innovation and technology. While other countries are creating tax regimes that are encouraging people to start businesses and be able to scale up from start-up, because they will have more capital available to invest in the things they need, we are nudging small businesses in almost the opposite direction in terms of garnering at least a $1 billion more in revenue from them.
Senator Oh: Thank you, witnesses. Part of my question has been asked by Senator Jaffer.
I’m a senator who promotes international trade and investment. You have a large number of small, medium and large companies in your organizations. Our country’s policy doesn’t seem to place a high priority on the export competitiveness of companies. Exports are important because our domestic market is so small. A lot of medium or large companies want to do well, and they need to export. Does Bill C-74 help corporations that need to export? Can you comment on that?
Mr. Kelly: Quickly, senator, your instincts are absolutely right in that I believe the budget implementation bill will significantly hurt exported-related businesses.
We have to remind ourselves why there is a lower rate of taxation on small business in the first place. The whole principle is that small firms have a more difficult time accessing finance, and as a result of the lowest corporate income tax rate, they are able to reinvest the savings to help grow the business.
Passive investment rules are exactly that: They help businesses save for larger investments, because the business owner knows he or she may not be able to get a big bank loan to buy the piece of equipment they need to help access the export market. They save for several years to have the money to use to get a larger bank loan or reinvest directly in their company.
Export-related businesses are just one example of firms that we believe will be set back as a result of the new passive investment rules the government has proposed.
Mr. Stratton: Small and medium enterprises represent 98 per cent of our firms in Canada and 71 per cent of private sector employment. They only represent 25 per cent of goods and services exports.
In terms of being able to scale up those smaller businesses for them to be globally competitive, we need to have a more competitive tax system compared to other countries.
Senator Neufeld: I understand that a few of the changes made were positive from what we started with last summer but still not very positive.
My inclination is always that government should make changes that encourage more investment instead of taking more money out of what you already have. It’s called growing the pie.
Using that analogy, are there any changes made by government on the recent small-business tax issues that encourage people to create new business, or are the changes we see only to increase government revenue?
Mr. Kelly: In their original package in July, they floated the concept of allowing business owners to sell their businesses to family members without getting a huge tax hit. Right now it is cheaper for a Canadian company to sell their business to a multinational corporation or to someone they don’t know than it is to sell it to their own children.
The government contemplated making changes to make that simpler. To be fair to the current government, Liberal MP Emmanuel Dubourg put forward a private member’s bill during the last Parliament when the Tories were in power to do just that. We supported that Liberal private member’s bill at the time.
Unfortunately, that didn’t make this package of final changes, but if the government were to adopt that one, and there were rumours that they might, that would be positive from our perspective.
Everything else in this package, unfortunately, is a negative for businesses, growth and the Canadian economy.
Mr. Stratton: We would also welcome the change Mr. Kelly was just speaking about. Otherwise, none of the changes in the 2018 Budget, compared to what was previously proposed, would be helpful in terms of setting up a business.
Senator Neufeld: You are confirming to me, then, that had the present Liberal government followed one of their own member’s adjustments, that may have helped men and women in Canada to create new businesses. However, there is nothing in these changes that encourages people to actually invest in and start a business; this is all about government revenue. You have both confirmed that with me, and that’s pretty sad.
Senator Cools: I would like to thank both of you for your time and for your clarity of mind. That’s always a good thing in an exchange.
We all believe that we have a duty to pay taxes as good citizens. We also believe — I believe it, anyway — that the business of government’s taxing of their citizenry is something of a sacred trust never to be violated, and this has been reflected in our constitutional practices for many years. There are very tough constitutional controls respecting what we call bills for appropriating parts of the public revenue and taxes. The custom is that they must originate in the House of Commons by motion of a minister; in other words, a member of Her Majesty’s cabinet.
In today’s community, everything is changing and very few people know these principles anymore. They probably have never even heard these terms. But do you have any idea as to the limits on what governments can do in respect of taxing, or does government have absolute licence to go as far as it wants, when it wants?
Mr. Stratton: Senator Cools, that’s what we’re trying to do. Changes were proposed. You heard loud and clear from our membership and the membership of CFIB about how those were impacting small businesses. We are happy to see that improvements were made, and it’s part of the democratic and parliamentary process that it happened.
We are not going to stop there, of course. We think there are a lot of aspects that can be improved upon still.
We also take a view of the larger picture of tax reform in general. Our current system, because it is losing competitiveness over time, needs to be improved. It’s an area that we have heard from our members about and that we are going forward with. Hopefully, Parliament picks it up.
Mr. Kelly: I have to tell you that I have been doing this for 24 years at CFIB. In one role or another, I’ve been working with governments of all political stripes at the provincial and federal levels.
I have never seen small business owners as angry as they were over the course of the summer of 2017. That has begun to abate a bit because the government has, to its credit, softened some of the changes. They did reinstate their own promise to reduce the small business corporate tax rate to 9 per cent, which they themselves had cancelled in their first budget.
I’m very proud of the fact that the small business owners, who are busy people and not inclined to scream and yell, were doing just that over the course of the fall. It is a sign that some of our democratic principles are alive and well.
Our last hope here is that the Senate will take another step to try to influence this bill to make further improvements to it. To the government’s credit, it has improved from its original package. But I cannot tell you today that this is now addressed and is viewed by the small business community as a fair set of policies. It’s just not. Our work continues federally, and we’re increasingly focusing on the provincial governments who have the option of mimicking these changes or not.
The Chair: Mr. Stratton and Mr. Kelly, thank you for sharing your opinions and comments with us.
For the second part of our meeting, we wanted to get the views of large national associations on Bill C-74 and the changes proposed to the taxation of private corporations under the BIA.
It’s an honour to recognize and say thank you to the following groups: from the Canadian Federation of Agriculture, Mr. Ron Bonnett, President; and Mr. Scott Ross, Assistant Executive Director.
From the Chartered Professional Accountants of Canada, or CPA, we have Bruce Ball, Vice President, Taxation.
Finally, from the Ontario Medical Association, we have Dr. Nadia Alam, President.
Thank you all for being here. We will begin with Mr. Bonnett.
Ron Bonnett, President, Canadian Federation of Agriculture: Thank you, senators, for giving us the opportunity to speak on the tax measures included in Bill C-74.
Before I get started, I want to give you a brief introduction to the Canadian Federation of Agriculture. We represent farmers all across Canada through our provincial members and commodity organizations, and I would say we represent about 200,000 farmers across the country.
One of the things I would say at the outset regarding the introduction of the tax measures last summer, I don’t know when I’ve seen a response from the farm community as strong as what there was on the tax changes. A lot of it was because they were busy working in their fields and all of a sudden they realized there were changes coming that would really have an impact moving forward.
I would also say that there has been considerable progress made since these tax proposals were first announced in July 2017.
The Canadian Federation of Agriculture and others — the Canadian Federation of Independent Business, the Chamber of Commerce, chartered accountants, the medical association — gathered together through the summer and fall and worked with Finance Canada to address a raft of unintended consequences, particularly for farm succession. We are pleased to see revisions that address a number of these concerns, in particular the decision not to move ahead with proposals regarding the conversion of income to capital gains. While the proposed legislation still needs improvement in a number of areas, we believe it has been significantly improved.
Reductions in the small the business tax rate and global competitiveness are a couple of things that need to be addressed. I’d like to acknowledge our support for a reduced small business tax rate as a valuable contribution to farm competitiveness. However, it’s important to note that Canadian farms operate in a global marketplace. And while we applaud the reduced tax rate, our largest trading partner just undertook sweeping tax reforms that will have dramatic implications for the competitiveness of Canadian agriculture. Canada remains the number one export market for U.S. agricultural products, with total U.S.-Canadian agriculture and agri-food trade exceeding $47 billion annually.
Canadian farmers are also facing unprecedented new costs to increase minimum wages, carbon taxes and high energy costs, among others. Together these place a burden on the competitiveness of Canadian businesses.
Canada needs to consider immediate comprehensive reforms that respond to those changes to help achieve the government’s $75 billion agri-food export target for 2025. While it isn’t necessary in this venue to delve into the potential reforms, the CFA would be pleased to discuss them further at the committee members’ convenience.
With respect to income sprinkling, we’re pleased to see that many of the concerns voiced by farmers were acknowledged through a more targeted approach. The measures introduced to exclude amounts from a tax on split income, such as for capital gains from the sale of qualified farm and fishing property, represent important steps in the right direction.
This measure, among others, will help farms maintain needed flexibility in succession planning. The average Canadian farmer is now over 55 years old and our tax system must do better in facilitating intergenerational transfers. However, it needs to be stressed there are so many specific exclusions that the complexity of these rules pose real difficulties for business owners given the January 1, 2018, implementation date.
For example, the reasonableness test looks closely at prior labour contributions. While we believe most farm family members will be able to meet this requirement, the information required to demonstrate these contributions is unclear. Anyone who has worked on a family farm would know that there is no clock to punch.
Many farm businesses also utilize family trusts for a number of succession and business planning reasons. This ownership structure does not provide beneficiaries with the 10 per cent value or voting share required for an exclusion, potentially requiring changes to the ownership structure of these arrangements as well as their succession plans. For these reasons, we strongly recommend the bill be amended to delay the effective implementation date to January 1, 2019, providing much-needed time to speak with advisers and plan accordingly.
Finally, on income splitting, we’re pleased to see exclusions made available for spouses of partners over 65 years old to help manage retirement income. The husbands and wives of farmers contribute to operations through a myriad of roles that are not easily documented. For this reason, we continue to believe a full spousal exemption is needed to avoid compliance issues and grant farm businesses confidence they can adequately compensate both partners for their contribution to the business.
On passive investment income, we’re also pleased to see a more targeted approach. However, we are concerned that the earlier commitment to grandfathering existing assets was not maintained. While our preliminary analysis suggests the majority of farms will not be directly impacted, the treatment of farmland rental income could create challenges in certain cases, particularly for retiring farms, depending on how that farmland related to their former business. For farmers reaching retirement, these case-specific considerations could very well add complexity and additional costs to the succession and retirement plans. There are also likely to be indirect costs to the tax burden this would place on other businesses.
Farmers are price takers with tight margins, leaving us vulnerable to any new costs throughout the system. However, it’s inappropriate to levy punitive taxes against investments that were accrued legally under the current regime and play an important role for businesses looking at future expansion, risk mitigation and technology adaptation.
All of these are critical to growth in the sector, which extends well beyond the farm gate. CFA would be pleased to work with Finance Canada in developing a solution that maintains simplicity but still provides relief from income derived from existing assets.
Finally, the $50,000 threshold needs to be adjusted over time for inflation to ensure that it remains responsive to business realities and rising costs. Without this measure, farms will be increasingly affected by this limit in the future as they continue to increase in size and sophistication.
Again, I wish to thank the committee members for their time and I look forward to any questions you might have. Thank you.
Bruce Ball, Vice President, Taxation, Chartered Professional Accountants of Canada: Thank you, Mr. Chair and members of the committee. My name is Bruce Ball, and I am the Vice President of Tax at Chartered Professional Accountants of Canada, known as CPA Canada.
CPA Canada is one of the largest national accounting organizations in the world, representing more than 210,000 members. Created through the unification of three legacy designations, CPA Canada is celebrating five years of serving the profession, advocating for the public interest, and supporting the setting of accounting, auditing and assurance standards.
Before I talk about Bill C-74, I did want to acknowledge the excellent work that the committee has done specifically in relation to the December 2017 report entitled Fair, Simple and Competitive Taxation: The Way Forward for Canada. As this committee recognizes, taxation is an essential matter to every Canadian. CPA Canada applauds your commitment to good tax policy and fully supports the recommendations that you put forward in the report.
It is from this perspective — the importance of good public policy and acting on behalf of the public interest — that CPA Canada speaks to the tax measures proposed in the budget implementation act. My comments will focus on three important points: the outstanding issues that remain with the private corporation tax measures; the impact of the recent U.S. tax changes on Canada’s competitiveness; and the need to review Canada’s tax system to address these and other matters related to competitiveness, simplicity, fairness and efficiency.
On the private corporation tax measures, as you are well aware, the finance minister’s initial proposals to change the tax provisions for Canadian-controlled private corporations were met with considerable criticism. The minister and his department have listened and acted. The provisions laid out in Budget 2018 and Bill C-74 are much improved.
However, there are still aspects that need further improvement. In particular, the new legislation around the tax on split income continues to be complex, difficult to read and interpret, and challenging for business owners and practitioners to apply in practice. A general exemption for spouses would go a long way toward simplifying the measures and is highly recommended by us.
The Joint Committee on Taxation of the Canadian Bar Association and CPA Canada has also made suggestions to further clarify the rules that should be considered. This was in a submission made about two months ago. The joint committee’s suggestions are rather technical, so I won’t go into the details here, but I would be happy to address them during questions.
Though not yet legislated, the changes to the split income tax are set to take effect January 1, 2018. We, apparently along with others this morning, are also suggesting to defer the changes to January 2019. I’ve heard people say to further understand them, but I also believe they can be improved as well. I think further refinements can be made to the legislation to make it clearer.
In terms of competitiveness, on the matter of the U.S. tax reforms, no matter what we may think of them, they are a game changer for Canada. Budget 2018 announced that Finance Canada would conduct a detailed analysis of the U.S. federal tax reforms, and this is good news, but the process must have a sense of urgency to it. Canada’s competitiveness does depend on it.
In the most recent CPA Canada Business Monitor survey, two thirds of Canadian business leaders report that Canada is now a less competitive place to invest and do business versus the U.S. compared to one year ago. It’s true that competitiveness can be affected by a number of different factors. However, there is no question that the tax system as a whole is fundamental to creating a competitive tax environment. And there can be no doubt that the U.S. tax reform proposals represent a real threat to Canada’s tax advantage.
This brings me to my final point, a comprehensive tax review. To ensure that Canada has the most competitive, fair, simple and efficient tax system possible, it’s time for a comprehensive review of the system led by an independent expert panel. You may have heard me make this argument before, but each time I appear before a parliamentary committee, it seems that the rationale for the review becomes stronger and more urgent based on how things continue to evolve.
Tax reform will involve broad consultation and it will involve looking at the tax system more holistically, not just from the perspective of business competitiveness. But the process will be worth it. It will lead to a better, more long-term approach to fixing Canada’s tax problems.
While the U.S. changes demonstrate the need to address Canada’s tax system, the controversy around the proposed CCPC changes also illustrates why a holistic approach is needed and is preferable to incremental changes. The Advisory Council on Economic Growth has also recommended addressing competitiveness challenges in Canada’s tax system. If we want a tax system that fosters our long-term competitiveness, supports inclusive growth and benefits all Canadians, then a review of the entire Canadian system is the first crucial step.
Thank you very much for the opportunity to appear this morning, and I look forward to taking your questions.
Dr. Nadia Alam, President, Ontario Medical Association: My name is Dr. Nadia Alam, and I am President of the Ontario Medical Association. I am also a family doctor and anesthetist in Georgetown, Ontario.
The Ontario Medical Association is proud to have partnered with other independent businesses, professionals and taxpayers to form the Coalition for Small Business Tax Fairness. Together, we employ millions of Canadians across all sectors of the economy and all regions of the country. Together, we have raised awareness about the impact of these changes on the small business community. In our case, this impact will also extend to our ability to provide care to our patients.
It’s important to note that these changes will disproportionately impact women physicians who use the measures to save for maternity leave, child care and other financial planning initiatives. I am sure all parliamentarians will agree that women should not have to choose between having a family and being able to actually practise as a physician in Canada.
Doctors are a small business. On average, each physician employs four full-time staff, generates about $205,000 in GDP and over $50,000 in tax revenues from spending on practice overhead for all levels of government: municipal, provincial and federal. To do so, two thirds of Ontario’s physicians have incorporated their practices as medicine professional corporations, or MPCs.
In 2000, the Ontario government finally recognized physicians as small businesses and granted us and other professions the ability to earn professional income through a corporation. Five years later, the Ontario government amended the Ontario Business Corporations Act to expand the list of eligible shareholders of MPCs to include close family members so that we, too, could adopt widely accepted small business tax planning strategies.
In Ontario we are already dealing with government decisions that don’t start by assessing the impact on patient care. We saw the impact of this kind of short-sighted decision making in the 1990s. One in twelve family doctors in Ontario left, leaving 1.2 million patients without a family doctor. That’s one in four Ontarians. These patients ended up in emergency departments and walk-in clinics for care that was better provided by family doctors.
Research shows that for patients with chronic diseases like diabetes, heart disease, high blood pressure, and so on, regular care by a family doctor can make such a difference that it negates the effect of one entire disease. It negates the health impact and financial impact of one entire disease.
As of 2017, Ontario has approximately 2.4 million residents who are 65 years and older. By 2041, that number will double. As people age, they accrue more chronic diseases. We cannot afford another doctor shortage. All levels of government can ensure policies and actions that not only retain doctors but also attract new ones.
The tax system you create will have a material impact on a physician’s ability to make their office viable, and physicians need a well-functioning office to care for patients and their families. Given the significance of these changes, we recommend the government go no further until a full economic impact assessment is done, as has been advocated by others at the table today.
Now, about passive investment, there has been some progress since the original proposals were introduced last summer. For that, I am thankful. However, physicians remain concerned about aspects of the new passive investment income rules. We hope you will address these before this legislation becomes law.
Physicians use their MPCs to operate and expand their business practices through all stages of their careers. A threshold like the one proposed will certainly have a negative impact on this. Corporations often require several years of savings to fund future growth and change in a physician’s practice for maternity leave, sick leave, educational leave, retirement planning, large-scale purchases of expensive equipment for radiology or ophthalmology that can cost several hundreds of thousands of dollars and upgrading basic medical equipment. Even a simple examination table in my office can cost anywhere from a couple of thousand dollars to $15,000. Installation and maintenance of an electronic medical record system: This year our server broke and we had to shell out $16,000 unexpectedly to fund a replacement server to keep our electronic medical records going.
These purchases allow us to improve the care we provide to our patients, and these proposals put that ability at risk. The taxation of passive corporate income above an unrealistic threshold that has not even been indexed to inflation could threaten all of this. Under the new rules, unspent corporate income would be taxed at a higher rate even though this unspent business income is earmarked for future use in operating a doctor’s office.
Good patient care needs a well-run physician office, so we strongly urge the committee to consider removing the proposed changes to passive investment rules. If determined to proceed, we recommend ensuring that past passive investments are excluded when determining eligibility for the small business deduction going forward.
We also suggest indexing the $50,000 and $150,000 exemption limits to inflation to prevent small businesses from being subject to bracket creep on the taxation of their passive investment income in future years.
For income splitting, the consultation document released last summer included an example of Jonah and Susan to illustrate the federal government’s proposed tax reform. The document compared income tax paid by a salaried employee to that paid by a business owner who earns income through a private corporation.
This comparison is flawed. There are fundamental differences between a salaried employee and a person who operates their own business. This comparison ignores the risk associated with starting and operating a business. For physicians and their families, these risks include incurring and personally guaranteeing debt for start-up, staff recruitment, provision of staff benefits, rent, equipment, overhead costs and government control over income.
Employed individuals face none of these risks. More, they have benefits and pensions subsidized by their employers. Even more, they have financial protection under employment law and the Employment Insurance Act. A self-employed small business owner has none of this.
Despite the government’s efforts to respond to the small business community’s concerns, the issue has not gone away. We believe it is critical that the committee consider amendments to income splitting rules. After reviewing the Parliamentary Budget Officer’s recent report, it is even clearer that government agencies and taxpayers continue to struggle to understand the scope of these new rules. The PBO report also reveals the potential tax increase to small businesses families may be considerably higher than government estimates.
We recommend the committee consider postponing these changes until — wait for it — January 1, 2019, at the earliest. If the decision is to proceed, we urge the committee to consider, at minimum, full exemption for spousal income splitting and dividends from the new income splitting rules.
Thank you for your time and I’m happy to take your questions.
Senator Marshall: Thank all of you for your presentations. My first question is directed to Mr. Ball because of his position as vice-president of taxation with CPA Canada.
CPA Canada has a lot of members who are providing tax advice, and we heard previous witnesses that the rules are confusing and complex. Even the with the six examples that Mr. Morneau included in his budget document, the new rules don’t apply to five of them. There is one where the new rules apply and it’s a very simplistic example.
What is CPA Canada doing to help the members who are providing taxation services? Witnesses have said that they’ve been making contact with the Canada Revenue Agency, with the Department of Finance, and they’re not very confident about the information they’re getting. But CPA Canada must be providing some sort of advice to its members. I’d be interested in hearing what exactly CPA Canada is doing for its members.
Mr. Ball: The main thing we’ve done is education for members. We have done two webinars, and the provincial CPA associations are starting to roll out some courses around the changes as well now that it’s kind of settled — a more current view, I guess. Part of the issue is it kept changing. I think we ended up having — actually, we did three webinars, now that I think about it. The last two were reacting to just the changes that happened since the first one.
I did want to point out, though, that the complexity is two pieces. It’s the actual nature of the rules themselves but also the part about trying to figure out what is reasonable.
The concepts in theory kind of make sense, I suppose, in figuring out what someone is worth, but when you try to put that into practice, it’s very difficult. In the prior session somebody mentioned if the CRA would be putting out examples and whether specific rules apply. The problem is that it’s a case-by-case situation, so you have to look at everybody’s contribution if you don’t fall into one of the exceptions.
The other big piece is that the exceptions generally won’t help you, or at least the 10 per cent test won’t help you if you’re running a service business. Then you’re into record keeping around time and that sort of thing. I agree with comments made previously that most of these small businesses don’t keep those kinds of time records.
Senator Marshall: You’re saying that you had two or three webinars. Would CPA Canada be putting out publications? Do they do that type of outreach for its members?
Mr. Ball: We did publications around the joint committee, because I think that actually helped identify the concerns. The joint committee made three separate submissions on three of the initial areas, and CPA Canada did a submission as well. We’ve been focusing more, in terms of knowledge transfer, on the webinars rather than doing publications.
The other thing we have been asking, and will ask again in a meeting coming soon, is what the CRA’s plans are to provide guidance to people. They have provided some but it’s at a fairly high level, and there are a lot of individual issues to deal with. For example, if you are in the farming business and you rent farmland to someone else, that’s one of the things that’s halfway between passive and active. How will that be treated? There are a lot of unanswered questions.
Senator Marshall: That’s what other witnesses have said.
You are saying there are over 200,000 members in CPA Canada. How many of those are providing tax advice? You do have tax specialists and then you have some people providing general tax advice. Would you have any idea as to the total number of the 200,000 who provide tax advice?
Mr. Ball: Not off the top of my head.
One thing I would point out is that of the CPA members who are helping people with their taxes, the majority would not be tax specialists. One of the joint committee’s main observations was that these rules are drafted in a very complicated way, yet they have to be interpreted by businesses and practitioners who are not tax specialists. This is a concern. Even the tax specialists and the members have to bone up to find out how all the rules work. It’s very complicated.
Senator Marshall: Dr. Alam, you indicated a specific number of doctors and physicians who have left. Could you give us the number again, and do you know where they have gone?
Dr. Alam: The example I gave was from the 1990s, when government pushed through policies without actually listening to front-line concerns about those policies.
We don’t want to go back to those days. Those days are feared, and that was only in the recent past. In the 1990s, one in 12 family doctors left Ontario because of government policies and because the provincial government at that time pushed through policies that made it very difficult to keep clinics open and running well.
Senator Martin: Do you know where they went? Would they have retired or gone to other provinces or other countries? Quite often when government proposes a change, physicians will say, “We are going to leave or retire,” but the threat sometimes doesn’t materialize. I’m trying to get a handle on where they would have gone.
Dr. Alam: That’s a great question. They actually went to different provinces, but some of them did leave the country as well. Some went to the States. It was all three, but mostly to other provinces at that time.
Senator Marshall: Thank you.
Senator Pratte: Mr. Ball, you and other organizations recommend that there be a general exception for spouses for income sprinkling. If the government were to do that, there wouldn’t be much left in that reform. There are adult children, but still, in most cases spouses are concerned, so there wouldn’t be much left of this change if the government adopted a general exception for spouses.
Mr. Ball: It’s hard to generalize, but in a very general sense I think the issue between spouses and other adult children is there is a much, much higher chance that the spouse has more involvement in the business than an adult child going to university or something like that. That was the thing that the Department of Finance would cite: that, through various means, you are allocating income to someone who might have no involvement in the business at all.
When we start breaking down the exemptions and thinking about reality, you have an exemption for 65 and over and one for a spouse who earns more than 10 per cent. Spouses probably have a lot more involvement. The way things work between spouses, there might be other opportunities to share income, like spousal RRSPs.
It seemed to us that once you started looking through everything, perhaps it really wouldn’t be as expensive as one might think to do an exemption for spouses. There probably is a way for a lot of spouses to not be subject to the rules, and a specific exemption would be much simpler.
Senator Pratte: The other idea that has been expressed by all of you and others is that of delaying implementation for a year as far as income sprinkling is concerned. My concern is that even after another year there might still be people who would wish for other changes to be made.
I’m thinking, for instance, of the fact that according to these proposals, TOSI would apply to most service industries and professional businesses. Therefore, even if over the additional year the government managed to simplify or clarify the reasonableness test, most service industries and professional businesses would wish to not be automatically included in the TOSI tax and people would then ask us to delay for another year.
My concern is that I’m not sure we’re going to gain much if we adopted this idea of an additional year.
Mr. Ball: I’m not sure we really had the opportunity to sit down with the Finance people and go through it in detail in terms of other ways to deal with it and have a true consultation. I’m not sure that ever happened. The consultation was the proposals coming out and then people were reacting to them.
I think there is an opportunity if both sides sat down in good faith to hash out the issues so that we can have a simpler set of rules. If we reduced the complexity by 50 per cent, that would be a huge step forward because there is going to be a lot of work around trying to comply with it.
Mr. Bonnett: On the point of delaying for a year, there has to be the understanding that Finance puts out the rules and then we go to the tax advisers who actually give advice. They will have to get clarity on what kind of advice they are going to give to farmers or other small businesses.
There is a whole delay process in making this work. To have the implementation date where it is, when we have tax advisers who aren’t even sure they have all the right information, it could leave you in a state that they are giving advice for this tax year, but if you get an audit in two or three years, you will realize you did it wrong.
It would provide clarity to everyone along the way. Yes, there will still likely be outstanding issues but at least you would have some knowledge around the changes going ahead so the tax advisers could give proper advice to the businesses and farmers who are filing their tax returns.
Dr. Alam: The delay would help physicians not just in understanding the rules but particularly in being able to change the way they have set up all these tax planning strategies and corporations.
For example, income splitting becomes really important for physicians who are sole income earners for their families, such as those whose spouses are lawyers or other professionals and end up moving to a rural or an underserviced area where their partners or spouses cannot find work. Income splitting becomes a big deal in that instance in continuing to maintain an appropriate lifestyle and still run the business.
A friend of mine is a sub-specialist in downtown Toronto. She is a single mom of two and works in a genetics and metabolic disease clinic and serves patients from Ontario as well as Quebec and Manitoba, all the way to the Maritimes and Newfoundland. With having these tax changes come through so suddenly and without a bit of a delay, she has had to make significant changes in her clinic. She has shut down part of her clinic and has moved into a separate income stream working for a pharmaceutical company and becoming more of a salaried employee.
All of these changes have huge impacts and unintended consequences that have not really been addressed. I agree with my colleagues here: There has not been time for consultation or time to look at what these potential economic impacts are going to be, not just in terms of the economy but in the provision of medical care in underserviced specialties and underserviced areas.
Senator Neufeld: Thank you, folks, for being here today to make presentations and answer questions .
The changes that are happening with our major trading partner in the U.S. — reduction in taxes, reduction in red tape — encourage businesses, encourage development, encourage employment, all of those things that any country should want. In fact, doctors may leave, as we’ve heard, to go to jurisdictions south of the border that may be a lot friendlier to them as far as taxes go. So I’m looking at the bigger picture.
I will ask the same question I asked the last panel. Are there any changes that have been made by government in these small and medium business tax changes that would encourage someone to become a farmer, not just take it as a pass-down type thing but to become a new farmer? Are there any changes that have been done that would encourage someone to want to actually go into farming or into the medical profession, to be a doctor and work in underserviced areas? I come from an underserviced area. You don’t get an appointment with a doctor for six weeks or so, and for people with heart problems, that’s not fun. Is there anything here, or is this just about collecting more money from the pot that you already have? Is that what it’s all about?
To Mr. Ball, have you noticed any upswing, that people are encouraged about setting up businesses in Canada over this last while? All three of you could you answer that.
Mr. Ball: I can’t answer that. I don’t have enough direct contact, I guess.
To answer the question, though, there was a reduction in the small business rate in the bill, but other than that, though, no, I agree that there was nothing in the package that would benefit businesses.
I do share your concerns around the U.S., though. In addition to the corporate changes, the other thing is the personal tax. That’s a significant issue, especially with doctors. It can be significantly cheaper to be in the U.S., and I think that has to be looked at as well.
Mr. Bonnett: Some of the changes that were made on the capital gains were good. I think that was a really big one for the farm community, when we did some of the analysis. The fact that they backed off and changed that, I think, has given a bit of confidence back.
To go back to your question on spurring investment, it’s not just about tax policy. We are going through an after-discussion right now. That could have huge negative impact on investment in Canada. Signing trade deals, whether it be the new Trans Pacific Partnership or CETA, things like that really spur investment on the agriculture side because you look at opening up markets.
I think tax policy is one component of a number of things that can impact the decision. I mentioned carbon taxes in the presentation. I made a presentation to a Senate committee last week on the whole carbon issue and what that is going to do, and, again, it goes back to competitiveness.
Calls were made earlier today, and you did as well, for a comprehensive review of tax policy. You almost have to take a look at tax policy at the federal, provincial and municipal levels and see what the overall impact is and have a review of it, an analysis, to see if things can be done to spur investment.
Scott Ross, Assistant Executive Director, Business Risk Management and Farm Policy, Canadian Federation of Agriculture: I would like to echo the comments from the previous session in regard to some of the commitments that were announced in the fall regarding levelling the playing field between family business transactions and those that would involve third parties or arm’s-length third parties. There were some commitments, in the initial proposals, that didn’t end up making it through to the actual implementation side of things, and we do have, certainly, a lot interest in seeing further discussion on that point. But, in the actual bill itself, outside of the small business tax rate reduction, we don’t see anything that would really spur investment in the small business community.
Dr. Alam: For me, when I got into medicine, I did not think about money at all. That was not the reason I went into medicine. It truly felt like a calling, and it still does, a calling not just for me but for my husband and for my kids, who sacrifice quite a bit of time with me so that I can serve patients.
The money part of it, though, does matter because I need to be able to pay my secretaries. I need to be able to pay for my equipment. I need to be able to keep my office running. So, while it’s not the driving force for me to have gone into medicine, it lets me do my job. It lets me serve my calling.
I think people will still want to be doctors. The question becomes: Will they be able to remain doctors? I already know of family doctors who started practice and then, six months later, had to stop because they could not keep their clinic going, even though were working 12- to 14-hour days, and their fiancée would turn and say, “When will our time come? I’ve been waiting this long. When will our time come?”
I also know of family physicians, new graduates, who already have an exit strategy in place. They are going to work in walk-in clinics, make enough money to pay off their medical-student debt, which can often be about $200,000, and then get out of medicine.
My concern is about retaining physicians as well. I think people will still go into medicine because it is a calling, but it’s whether or not they’ll stay, keep clinics open, keep working in underserviced communities and keep providing the care Ontarians need.
I’m not sure if you know that the Ontario government has put through a bunch of changes lately, for the last four or five years, that have dropped physician income already by 30 per cent. That’s in Ontario. Other governments are looking at doing the same. These tax changes will make a bigger difference on income. Again, that income is not the driving factor for why we’re in medicine, but it helps keep the clinic running.
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Senator Moncion: What are the financial impacts for companies in agriculture, for example? We hear a lot of opinions and I would like to know which of them are backed up by figures.
For example, Mr. Ball, you probably prepare income statements for your clients. Have you taken a dozen or so clients and compared the 2017 tax situation with the new 2018 rules, so that you can illustrate the financial impact on those companies?
Mr. Bonnett, have you done any calculations? You talked about the financial impact. We always look at the big picture, but I would like to see real cases, more specific ones. I do not need to know the names of the companies or the doctors, but I would like to hear about real cases, where we can compare the before and after situation and assess how big the financial impact is.
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Mr. Ball: I think one the biggest issues in this entire discussion has been the lack of information in terms of trying to figure out the impact. The government did quote some figures. It was difficult. I don’t think any backup was provided in terms of how they got them.
I know the Parliamentary Budget Office had difficulty trying to model and discover what would happen. I think one of issues is that there is a lack of information.
Most of what I hear is anecdotal. Again, its 50,000 corporations, according to the government, but, based on what you hear, it does seem like it’s more. I can’t put a hard and fast number to it, but I hear of situations arising. I wonder if the government can even know that it’s going to be an issue, like farmers renting farmland, a business perhaps owning a business building. They use, say, 40 per cent of it for themselves and rent out 60 per cent of it. I don’t think all of these nuances are considered when we look at this $50,000 rule. Part of the problem is that we don’t know exactly how it’s going to impact businesses, and that’s why we should defer and make sure we understand everything.
Mr. Ross: It is hard on a systemic level to understand the consequences because of that lack of information, farmland rental income being a major point of concern for our sector in particular.
One specific example I can give, though, is some of the consequences regarding the changes in treatment around family trusts, which are a common element of agricultural business plans and also succession plans. Anyone who has put a family trust in place with these new rules coming into effect is having to go back and immediately re-analyze that process. In many instances it takes over a decade from start to finish. The immediate financial cost of restructuring that plan can be in excess of $40,000 or $50,000 on an individual farming operation. It is anecdotal information, certainly, but I think to Bruce’s point earlier, it’s very difficult for us to understand the consequences on a holistic level because there are so many questions as to the nuts and bolts of how this will apply on individual farms.
Mr. Bonnett: We actually grouped together with a number of other farm organizations when there was discussion around changes to capital gains. One of the things we realized fairly quickly is in doing the analysis it can get very complex because there are different types of farms, different commodities of production, and to get a one-word answer on what the impact will be is very difficult.
I think it was the previous panel that referred to having some economic impact analysis done before the rules were introduced. I think that’s one of the things that could be done, because quite often when you change something here, something else over there changes. To do that is complex. It’s not as simple as doing one analysis, and we found when we went through the studies on specifically the treatment of capital gains. So with income sprinkling and passive investment, it likely would be the same type of thing. Depending on the type of operation you are dealing with, it might have a different impact and to quantify it might be difficult.
One thing Scott referred to that you can quantify very quickly is when farmers have to pay tax advisers. You can get a big bill quickly just to change your structure to cope with the changes coming through — not that we don’t mind paying you.
Dr. Alam: As my colleagues have said, there has been such uncertainty about the final shape these rules will take, what their actual impact will be, that it is tough to give you the numbers you are seeking. I applaud you for wanting numbers, because you have to make rational and thoughtful decisions based on data.
I can tell you that is this environment of uncertainty has made it very difficult for physicians, as for other small businesses, to even start clinics or businesses in Ontario, and that’s worrying.
Ontario has only just begun recovering from the exodus of physicians in the 1990s. This uncertainty and this environment has made it much more difficult to continue recovering from that. While I hope to never see it again, it has happened in the past. It’s hard to say it will never happen again.
The Chair: Thank you.
Senator Andreychuk: Anecdotally, even when rules in the Income Tax Act appear to be clear, they are still interpreted by CRA, and so we have just added another layer of uncertainty, if I understand what you are saying.
Dr. Alam, we’ve heard from physicians the first time around and this time around, and I asked one of the Finance people that came before us whether there were consultations between the ministry of finance and the ministry of health, and I was told there were not.
Have you gone to the Minister of Health? To me, I hear that health is the most important thing; we have an aging population, et cetera. And here Finance is doing things that are going to dramatically affect our care of Canadians. Have you talked to the ministry of health and made the same sort of submissions you are making to us and saying, “Are you aware of what your other ministry is doing and what the consequences are going to be for doctors but also for all the patients?”
Dr. Alam: We have spoken to them. We are at loggerheads a bit with our provincial government and ministry of health at the moment. It is a matter that will end up going to arbitration because we are not meeting in the middle on this. Because of the profound impacts it is going to have not just in terms of starting a business and running a physician’s office but also mat leave, retirement planning, educational leaves, unexpected sick leaves where you have to fund another physician to take care of your practice while you’re recovering yourself, patient care will be impacted in so many profound ways with these changes.
I’m all for tax reform. I’ll say that up front. Our tax system is outdated, and I applaud you for wanting to look at it, but again I would do so slowly, carefully, methodically and not just look at one particular section but look at the whole. Look at where you want to go and then create the structure in a step-by-step iterative consultative fashion to get there.
The Chair: To the witnesses, thank you very much for sharing your opinions, comments and recommendations.
Honourable senators, our next meeting with panellists is at 1:30 this afternoon in room 257, East Block, and the subject matter will be Bill C-74, the framework for cannabis products and excise tax.
(The committee adjourned.)