Thank you, Mr. Chair.
The Canadian Chamber of Commerce provided a pre-budget submission with recommendations on productivity. However, the critical issue, really the only issue our members are worried about for budget 2018, is the finance department's proposed tax changes.
The Canadian Chamber of Commerce has been around for many years and we have never seen a reaction like this from our membership. On an almost daily basis we get phone calls and emails from members saying, “Why isn't the chamber doing more to oppose the tax change?” and “Why haven't you condemned the proposals more forcefully?” We think it's because the changes are so broad, so far-reaching, and with so many unintended consequences.
Ladies and gentlemen, there is not a restaurant or a farm in the country that does not have family members working there, and every single business in Canada has passive income, unless the business is on the brink of bankruptcy and has no cash whatsoever. It is as though the finance department crafted tax measures that would affect the maximum number of businesses in the most complicated manner, only to collect a modest amount of revenue.
Here is what we are really worried about. Small business owners generally invest their life savings in the business. They don't often have a separate retirement account. They accumulate the surplus of funds that can be used to get them through economic downturns or for capital investment. As one owner told us, “I keep most of the earnings in the company, because we're trying to grow, and in construction we go through tough cycles when business dries up“.
If the government hits investment income with a 73% effective tax rate, business owners won't have any incentive to keep surplus assets in the business. In fact, most will be better off taking their money out of the business. For us, this means fewer jobs, less investment, less of a cushion to make it through a downturn, and less productivity.
The Bank of Canada has a study from a couple of years ago called “Productivity in Canada: Does Firm Size Matter?” It indicated that half the productivity gap between manufacturing companies in the United States and Canada is because companies in Canada are smaller, and smaller companies invest less in capital and skills. A tax on passive income would lessen the amount of money they have to invest and would cause an even greater gap.
Next, imagine a venture capitalist who specializes in green technologies. That capitalist takes equity positions in risky start-up companies that are trying to commercialize environmental technologies, but some of those investments—in fact, many of those investments—could be considered passive income according to the definition, so the capitalist could be hit with a 60% or 70% tax on some of those investments.
Finally, imagine trying to explain all of this to a foreign investor. I would refer the committee to page 53 of the finance submission that talks about the apportionment method of taxing passive income where we allocate income into three pools, plus a pool for shareholder contributions in order to attribute varying after-tax rates. This is the simplest method, according to the document. The complexity is mind-boggling, and we're concerned that investors would go to the United States before they would get to the fourth paragraph.
The challenge we have is fewer jobs, less investment, less of a cushion to get us through an economic downturn, less venture capital, and less foreign investment. When business owners and the accounting firms point this out, the government says, “Oh no, that's not the intention; this is really targeted at high-income earners”, and we hear that. Whatever the intention may be, it has real consequences for small business and the Canadian economy. We would urge you to ask any accountant in the country.
Ladies and gentlemen, the Canadian Chamber of Commerce, as I said, has been around for many years and we have heard some ideas that are problematic, but we think this one is a doozy.
Thank you very much. I'll be happy to answer any questions.