Thank you for inviting me to this session. I really appreciate the opportunity to express not just my views but the views of many tax people out there.
Earlier, I was in the gallery listening. I just kept shaking my head and saying, “Wow.” Why are we here? Is this really necessary?
It will be—I hate to say it—30 years next month that I have practised in tax, and I've never seen such outrage and anxiety, not just in the business community but in the tax community as well, about items that in my opinion are quite simple to address, and you'll hear why.
We have proposals that were released in the middle of July with a 75-day consultation period. The website says submissions are due no later than midnight on Friday, September 29, but we've been told submissions are due October 2. Yesterday at the Canada Tax Foundation conference there was some inconsistency. Maybe we could get some clarity. I don't have a submission for you today because of short notice, but I would like to give you one.
I think we all need to take a step back. It's important because, in my opinion, you can't pick solutions without knowing what the problems are, and no one can see the forest for the trees in this case.
I do think that the government's policies and objectives in terms of income splitting with respect to corporate deferral are valid policy objectives. I think they're in line with the election platform that they ran on. I think they are achievable objectives in a much simpler manner than is proposed now. I'll give you some suggestions. I'll throw a lifeline out there and say that if you want to end this, if we want to salvage what's going on now and actually move ahead with objectives in the economy and reduce uncertainty for businesses, here are some ideas.
Again, I think the policy intent is fundamentally sound and in line with the election platform. However, I think the proposals—not “I think”, but “I know”—go way beyond that. I'm speaking to you as someone who has been in the trenches for 30 years dealing with tax legislation and tax changes. I started in tax when tax reform came around in 1987. I've seen the capital gains exemption eliminated on capital gains on property. I've seen it restricted. I've seen the kiddie tax brought in to deal with income splitting and income sprinkling—a term that has now been coined—so I have ideas.
Before I forget to get this out there, there are no ifs, ands, or buts: these rules, most of them, are absolutely retroactive. It's not true to tell the Canadian people that these rules are just for going forward. As we heard earlier, tax attributes of the shares that you own in your family business that were created 10 years ago because of transactions last year or 20 years ago impact the calculation of the tax that will be calculated under these rules. While they may say it's for transactions after July 18, these rules are retroactive, because there's no grandfathering and there's no transition.
It's like telling someone that they have their house and they've accumulated all that growth tax free, but we're changing the rules. Their house is going to be taxable, but on the go-forward, only if they sell it from then on. If they sold it before this was announced, okay, they're fine. That's retroactive tax planning, and that's what some of these rules do to businesses.
What I'd like to say in the brief time I have is that I think income splitting is a valid policy target. I know that reasonability is not the way to go. Uncertainty and subjectivity in the tax code is a recipe for litigation and for costs, and for unhappy taxpayers who don't have the funds to litigate. As much as possible, you have to take judgment out of the Income Tax Act. We need objectivity.
The reasonability test on dividends just can't be determined. Reasonability on salary is hard enough, but at least there are ways to do a functional analysis. You can't do that with dividends.
I've heard one example of extending the kiddie tax to age 24 as maybe a compromise of how to deal with curtailing income splitting. How about figuring it out this way? If someone spends more than x number of hours per year in the business, the rules will apply or won't apply. This kind of rule is actually used in the disability tax credit area, an area that I was involved in many years ago in terms of advising. With respect to life-sustaining therapy, we couldn't define what that meant, so the rule was put in that if you spend more than 14 hours per week on life-sustaining therapy, you're eligible for the DTC. Something like that could be used, as opposed to a reasonability test.
When it comes to corporate deferral, I just shake my head. Why are we talking about passive income and taxing passive income? You're getting people up to 70% and penalizing people for earning passive income in a corporation. The reason is that there's this corporate deferral because my corporate rate is lower than my personal rate. This has been dealt with. I'm just shocked that we get these proposals about passive income.
We have personal service business rules in the act. A long time ago, athletes and entertainers would incorporate themselves. A hockey player who was working for a hockey team would incorporate and say to pay his company, because he was going to get corporate rates instead of employment rates. The government brought in the personal service business rules and said that if you don't employ more than five full-time employees, you don't get the small business rate. They got rid of the small business deduction for incorporated athletes.
More recently, it was used for computer programmers and other professionals who incorporated to get access to the corporate rates. Computer programmers fall under the personal service business regime if they are incorporated, and there is now a surtax on personal service businesses. That surtax brings up the corporate rate without increasing corporate rates on everyone, which I don't think is what the government wants to do. The surtax increases the effective rate, reduces the deferral, and can be targeted at the people I think the government is really trying to target. I'm one of them. I'm throwing myself on my sword here.
If you want to stop people like me from incorporating just to get the benefits of the low corporate rate, stop me from doing it. Tell me that if I incorporate I'm going to have a surtax, but don't tell me that you need to affect all the family businesses across Canada.
These proposals could stop there because I think those are the government's policy objectives, but they go way beyond. The anti-surplus stripping rules in proposed section 246.1, which we won't get into, are so ripe with ambiguity and uncertainty that they are impossible to plan for.
Finally, because I imagine I'm running out of time—