Thank you, Mr. Chairman and committee members. I applaud your committee's commitment to finding ways to keep Canada competitive and prosperous in a changing world, and it is exactly competitiveness that I am here to speak to you about today.
Many of you may know that the Canadian Automobile Dealers Association represents over 3,000 active small and medium-sized businesses. Our members employ over 145,000 Canadians in every province, city, and town in the country. Canadian automobile dealers are in touch with the pulse of the nation. We are among the first to know when the mood in the country is buoyant and confident or when there is uncertainty or concern about the state of the Canadian economy. In that regard, CAD is constantly canvassing members to determine the areas where improvements can be made. While trade and regulatory reforms are frequently mentioned, the number one area where dealers need reform is in Canada's taxation policies.
Our written submission makes it clear that our industry was pleased with the many measures contained in the May 2006 federal budget. I invite you to review these comments in detail--they were handed out at the outset.
While we appreciate that the budget was focused on the five priorities highlighted in the 2005-06 election campaign, we believe the next budget should focus on specific tax policies that are currently restraining productivity as well as addressing inherent issues of fairness in the system.
Allow me to outline these priorities for you: one, establish fairness in the access to the small business deduction for automobile dealers; two, further reduce corporate income tax rates; three, establish equitable tax treatment on the sale of used vehicles; four, reduce capital gains taxes on the sale or transfer of dealerships under specific circumstances; and five, we would offer to work with CRA to improve the professionalism and efficiency of audits.
While our written submission deals with these items in great detail, I will highlight only two of these priorities during today's presentation.
The first deals with establishing fairness in the access to the small business deduction for automobile dealers. Most automobile dealers are small businesses run by entrepreneurs and family members. The small business deduction, or SBD, is a vital component to a reinvestment strategy. The SBD helps to defer income tax until such time as an owner withdraws profits. Unfortunately, the level of the SBD is inadequate to meet the requirements of most auto dealers. Not only is the deduction inadequate, but access is frequently and unfairly denied to auto dealers.
Automobile dealers begin to lose access to the SBD once their accumulated taxable capital exceeds $10 million and is completely eliminated at the $15 million threshold. This is unfair to capital-intensive industries like automobile dealerships. Other less capital-intensive businesses of similar size and profits enjoy far greater access to the SBD. Two issues compound the problem in the manner that capital is computed. First, a corporation's capital is defined to include all forms of indebtedness, including the lien notes, which is the method by which automobile dealers finance inventory. Most retailers finance the acquisition of their inventory through trade accounts payable, which are not included in the definition of capital. This discrimination against auto dealers is an unwarranted and unjustified tax penalty.
Second, capital includes assets or investments of other corporations with whom the dealer is associated. In these circumstances, the capital of different businesses is aggregated, which, if certain thresholds are met, will result in the loss of the SBD.
To alleviate this situation, CAD proposes the following options: one, eliminate the “grind” on the SBD for private business; two, redefine taxable capital to exclude lien notes--this unintended imposition has already been remedied in some of the provinces that levy taxes based on business capital; three, allow more flexibility in the definition of associated corporations for purposes of allocating the SBD; and four, increase the SBD to $1 million.
In closing, Mr. Chairman, I would like to highlight the issue of equitable treatment on the sale of used vehicles. There is an inherent and illogical inequity in the tax system as it pertains to the private sale versus dealer sale of used vehicles. Currently, dealers are required to charge GST on all vehicles sold while private individuals can sell GST exempt. Dealers can partially reduce the inequity on the trade-in of a used vehicle by charging GST only on the net difference. However, if a dealer buys a used car from an individual for resale, the full amount applies. If the individual sells the car to another individual, no GST applies.
There are a number of different approaches that would achieve a more equitable treatment in the sale of used cars involving automobile dealers versus individuals. One would be to eliminate GST on the sale of all used vehicles, whether they are sold by an individual or a business. Second, require that GST be applied on the sale of all used vehicles. This would require an administrative arrangement with provincial authorities so that GST could be applied at the time of transfer. The tax could be applied on the basis of a predetermined book value or the system for notional input tax credit to dealers could be restored.
Thank you very much, Mr. Chairman, for your time.