Finance Committee on Sept. 21st, 2017

[The Chair, Liberal, Wayne Easter]

Mr. Kmiec, we only have about three minutes.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

I'll go back to you, Mr. Alexander. I was looking at the Conference Board of Canada's fall outlook that was put out not too long ago. It has a bunch of details about what the Conference Board predicts will happen to the economy and raises the point of record high consumer debt in Canada. It also says that this debt has been sustaining a lot of the growth that we've been seeing in Canada.

The government is running a huge deficit and has a massive debt that it's servicing every single year. Most of the provinces are in the same boat. We're spending money we don't have.

I'm guilty, just like all our consumers, of running up the debt in my household. I try to do my best to pay it down over time, but I'm also not a massive national economy. I know that it does happen. There is such a thing as debt that you need to have, especially when your wife tells you so.

For a national economy, this is sustaining a lot of the growth we're seeing throughout Canada. I know that back home in my province of Alberta, a lot of families are still hurting from the downturn in the price of oil, which was one portion of it. Then there are also a whole bunch of bad tax decisions and bad decisions on energy policy, and there are the LMRs, the ratings, for small and medium-sized businesses that are in oil and gas back home.

How much risk is there to the national budget that consumer spending will actually deflate or weaken much more than even what you're predicting here? How much of an impact would it have?

[Craig Alexander]

Canadians have increased their leverage substantially in recent years. The debt-to-GDP ratio gets a lot of attention, but it's actually not a very good metric of risk because you're measuring the total stock of debt to the total annual flow of income. It's better to look at debt service burdens.

When you look at the share of income going to service debt, you see that it has increased by about two percentage points. What's holding it down are the interest payments on debt, which have dropped to such low levels because of where interest rates are. That creates the vulnerability. What actually happens when interest rates head higher?

In my former life at the TD bank, we did a lot of stress-testing around the household balance sheets. What I can say is that if interest rates were to rise about two percentage points, probably about 8% to 10% of Canadian households would have a debt service ratio of more than 40% of their income. That's really where the alarm bells go off. This is where you have intense financial pressure.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Mr. Alexander, do you think the government is ready for it if such a scenario were to happen?

[Craig Alexander]

There's a vulnerability of high household debt if the economy suffers a severe shock, such as, for example, if we had an unemployment shock or if the Bank of Canada fell behind the inflation curve and had to really push up interest rates. We have a vulnerability now that the high level of household debt could aggravate the economic cycle and make the next downturn more severe, because there is an imbalance in household finances.

[The Chair, Liberal, Wayne Easter]

We will have to cut it there. Thanks to both of you.

I do have one quick question for you, Mr. Mueller. I went through your three recommendations in terms of retrofitting. What I can't quite understand is how you conceptualize those three recommendations in a budget. It's a great proposal, but how do you do it in a budget? What are you really asking for us to do in the budget? Is it money? Is it programs that would come from other areas or what?

[Thomas Mueller]

I think what we're asking for in the real estate sector, particularly in the building industry.... It is a longer game. It requires constant investment. What we are really asking for, as an example, in funding of the federal government buildings portfolio, is that it will be given consideration, so that the federal government building portfolio can move towards low-carbon or zero-carbon buildings, and so key assets in the federal government building portfolio can be retrofitted. I think that's one consideration.

The other one is that there are existing funds that have already been established, such as the low-carbon economy fund, and particularly the infrastructure bank. Those kinds of mechanisms play a very important role in funding. Money can be directed towards making improvements to either new or existing building construction. The government has a really important role to play there.

It's an ongoing consideration of the building sector and an ongoing investment on the part of the government.

[The Chair, Liberal, Wayne Easter]

Thank you for that bit of clarification.

I'd like to thank all of the witnesses, both for your presentations earlier in August and your testimony today.

We will suspend for five minutes and bring up the next panel.

[The Chair, Liberal, Wayne Easter]

We'll reconvene. Welcome to the witnesses for the pre-budget consultations in advance of the 2018 budget. We thank those who made submissions prior to the middle of August as well, and we thank you for coming today.

Starting with the Association of Consulting Engineering Companies, we have Mr. Gamble, president and CEO. We'll try to keep it to five minutes, please.

[John Gamble, President and Chief Executive Officer, Association of Consulting Engineering Companies - Canada]

Thank you, Chairman, and committee members.

The Association of Consulting Engineering Companies - Canada is the national voice of consulting engineering in Canada. We represent over 400 companies that collectively employ approximately 60,000 Canadians. Our members provide professional engineering and other science-related and project delivery services to both public and private sector clients.

In broad strokes, we certainly applaud and support the federal government's commitment to infrastructure investment. Sufficient, up-to-date, well-maintained infrastructure enhances prosperity, productivity, and competitiveness, as noted by numerous studies cited in our written submission, over a number of years.

We feel a need to really think hard about prioritizing those investments. Some infrastructure investments improve productivity and grow the economy. Other investments in the community social infrastructure enhance quality of life. Both are important. Both are needed, but there needs to be a balancing act, and sufficient priority should be given to core infrastructure that grows the economy, creates jobs, and expands the tax base. This is essential to ensure financial viability and sustainability, and the capacity to deliver social infrastructure in the longer term.

It's a bit of a balancing act, but I would say the recent commitment of $2.1 billion to transportation and trade corridors is a good illustration of that kind of investment.

A lot can be learned from the recent Senate report, “Smarter Planning, Smarter Spending”. The report makes a number of very pragmatic and practical recommendations that are, for the most part, consistent with what ACEC has been recommending for several years. We think it could further improve and strengthen the existing infrastructure program.

I want to take a moment to talk about the Canada infrastructure bank, which has great potential. If successful, it has the opportunity to create funding for large-scale projects that might otherwise be difficult, if not impossible, to find funding for in public dollars alone. However, we note that there is significant private sector capital already available in the Canadian marketplace, and that some provinces and municipalities already have strong borrowing regimes in place. Therefore, clarity on the mandate of the bank is critical to removing uncertainty and earning the confidence of the infrastructure stakeholder community. Otherwise, the creation of the bank may have some unintended consequences for existing institutions and private lenders. The private lenders will also be wanting assurances that the governance of the bank reflects best practices, so that projects will be approved on a merit base and a strong business case.

To encourage active participation from the design and construction sectors, risk must be fairly allocated among all project participants, including the bank and the overall owner of the infrastructure asset, according to each participant's capacity, ability, and contractual authority to manage and mitigate risk. As a centre of excellence, the bank will be expected to promote best practices in procurement and contracting to facilitate the equitable and effective allocation of risk and reward.

I also want to showcase another recent Senate report, “National Corridor: Enhancing and Facilitating Commerce and Internal Trade”. We strongly support this notion of a national corridor to provide a pre-established cross-country network of trade routes to accommodate economic infrastructure such as road, rail, power, pipeline, and communications projects. We need this infrastructure to be competitive and connect our country.

A national corridor would help address social and environmental challenges associated with the planning, development, and implementation of major nation-building infrastructure projects, but in a less costly and more timely manner. A national corridor would require a significantly smaller geographic and environmental footprint than the current fragmented approach to national infrastructure projects.

This idea goes back—and here's your heritage moment—to echo a proposal by General Richard Rohmer back in 1967.

I'll let the rest of our written submission speak for itself, but my members have asked that I raise the proposed changes to the Canadian controlled private corporations taxation regime. I meant to come here to speak mainly about infrastructure, but this has caused quite a reaction in our industry.

We believe that further review and consultation are needed before the federal government implements changes to how corporations are taxed. While these proposals are no doubt well intentioned, in their current form they would nevertheless have a profound and damaging impact on businesses in Canada, an impact we believe was unanticipated by the government. We believe that a more comprehensive review of the Canadian tax system, with meaningful input from the stakeholder community, is necessary to achieve tax fairness while retaining a business climate that rewards entrepreneurship, innovation, and job creation.

Thank you for the opportunity to be here, and I look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Gamble.

We have, from Canada Foundation for Innovation, Ms. O'Reilly Runte, president and CEO; and Mr. Moorman, senior adviser, policy and planning.

Welcome.

[Dr. Roseann O'Reilly Runte, President and Chief Executive Officer, Canada Foundation for Innovation]

Thank you.

Good evening, ladies and gentlemen. Thank you for inviting me to speak about the Canada Foundation for Innovation and how it contributes to making Canadians more productive and Canadian businesses more competitive.

The two questions this committee has posed are crucial to the future of our country, and the two recommendations that we propose for budget 2018 are crucial to ensuring that our future is bright.

First, we recommend increasing support to the federal research funding agencies to improve the research ecosystem. Second, we recommend regularized support for research infrastructure through the Canada Foundation for Innovation. Our recommendations echo those set out by the Government of Canada's Advisory Panel for the Review of Federal Support for Fundamental Science, which was convened to determine how to strengthen the foundations of this country's research and technology. As you know, the report by this panel was released in the spring shortly after the publication of “The Path to Prosperity” report by the Government of Canada's Advisory Council on Economic Growth. These two documents share one common recommendation: that Canadians, particularly young Canadians, need more opportunities to gain modern skills and knowledge to be productive in their workplaces and in their communities.

You may ask, how does support for research funding contribute to this? Let's look back 20 years when the Government of Canada endeavoured to curb the country's brain drain by starting to invest in cutting-edge research tools at universities and colleges right across the country through the Canada Foundation for Innovation. By providing state-of-the-art labs and facilities, Canada turned the situation around. Cumulative investments in infrastructure over the years have allowed Canadian researchers to become global leaders in areas such as regenerative medicine, agrifood, and energy, and now we're looking at quantum computing, artificial intelligence and clean technology.

To advance these areas, however, and to compete globally, Canada needs to sustain a robust ecosystem of research. We can attract and retain the best and brightest minds in the world to think big and to innovate, and it is here that our young people enter some of the best training grounds in the world. They are mentored by the top minds, who transfer insight and critical thinking skills. They get the hands-on advanced technical skills that employers are looking for, and they experience what productive collaborations look like among academic, public and private sectors, both nationally and internationally. These are the capabilities that we need to nurture to help a new generation compete in, and adapt quickly to, an evolving market of jobs. We need to drive increased productivity, business competitiveness and economic growth.

We are not the only nation in the world to realize this, however. Other countries are investing heavily in research to drive their economy. In a world where research talent is more mobile and in higher demand than ever, Canada is engaged in a global race. We are in a position to win. This is Canada's time to lead intellectually in science and technology.

Ultimately, federal measures aimed at making Canadians and Canadian business more productive and competitive come down to investing in the next generation, investing in their minds and in their opportunities, so that they can make positive and meaningful contributions to society.

Ladies and gentlemen, I think we all know that the future of Canada lies in its youth. Canada's ability to attract and retain the brightest minds in the world and provide them with access to cutting-edge research tools, the ones they need to learn, explore, discover, and innovate will pave the way to enhancing our country's future growth and prosperity.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

We'll now turn to the Agriculture and Agri-Food Labour Task Force with Ms. MacDonald-Dewhirst, executive director; and Mark Wales, chair.

Ms. MacDonald-Dewhirst, go ahead.

[Portia MacDonald-Dewhirst, Executive Director, Canadian Agricultural Human Resource Council, Agriculture and Agri-Food Labour Task Force]

Thank you.

Abundant, healthy, safe, and affordable food is available to us in Canada as a result of our world-class food system. It's a system that feeds 36 million Canadians, and as the fifth largest exporter, feeds a multitude of people around the world. It's an important industry to our country, not only for nourishment but also because it employs 2.3 million Canadians and is a leading driver of our provincial and national economies.

Domestic and global demand for the Canada brand is high and there are great expectations for the growth of this industry, as documented by many, including the federal government's budget of 2017, which identified an objective to grow Canada's agrifood exports to $75 billion by 2025. All indications are clear that there's enough demand for Canada's products to achieve this ambitious target; however, the agrifood industry relies on people, farm and food businesses and their workers, to plant, grow, care for animals, harvest, prepare, and package its products. Unfortunately, the business of farm and food production is struggling to find enough workers and its future is in jeopardy.

Our research clarifies that the worker shortage is doubling every 10 years. On-farm job vacancies are exceptionally high, from 7% to 10%, when the national average is only 1.8%. These vacancies are costing the industry billions of dollars each year. The vacancies exist despite extensive efforts by business owners to recruit and attract workers, and are resulting in delays or cancellation of expansion plans by large, growth-oriented agrifood business owners.

[The Chair, Liberal, Wayne Easter]

I don't want to interrupt, but members, the power point presentation is also on your iPads, if you want to pick it up there as well.

Thank you. Go ahead.

[Portia MacDonald-Dewhirst]

Thank you. We've provided some visual aids for you.

To be clear, these shortages are being experienced across all aspects of this industry, even though the industry brings in approximately 45,000 temporary foreign workers each year, workers who secure Canadian jobs.

The inability to fill job vacancies is the industry's top business risk identified by Canada's farm and food producers. Without being able to fill key positions, farmers are choosing to forgo planting all their fields. They are avoiding labour intensive crops. They are unable to fill orders. They aren't able to take advantage of demand opportunities in new markets. They are opting out of expanding operations, choosing to retire early and opting out of the business altogether. Despite high hopes for the industry, sustainability and growth are currently at risk.

I'll turn it over to Mark Wales, who is the co-chair of our labour task force.

[Mark Wales, Chair, Agriculture and Agri-Food Labour Task Force]

Thank you, Portia.

A number of industry leaders have come forward to create Canada's national labour task force. Together with the support of CAHRC, they have researched and documented an agriculture and agrifood workforce action plan. It includes very clear short-, medium-, and long-term solutions to ensure the industry can get ahead of workforce shortages so that it can thrive and grow well into the future. Specifically, it identifies the need to increase the supply of labour and improve the knowledge and the skills of workers.

This plan is supported by 85 leading industry organizations, agrifood companies, and municipal leaders across Canada, as you can see on the slide. The plan, which was referenced in the HUMA committee review, includes recommendations for government to provide funding for industry to address these critical and chronic labour shortages with action items such as a national career awareness initiative and outreach to new immigrants being settled in urban centres so they can better connect with agricultural career opportunities.

Growth for the sector also involves securing international workers when Canadians are not available. The workforce action plan includes a very specific recommendation to improve agricultural components of the temporary foreign worker program into an agriculture and agrifood worker international workforce program with three distinct streams: the seasonal agricultural worker program to remain an identifiable, stand-alone program for seasonal workers and farmers; the agricultural stream; and a new agrifood stream. Both need fixes and both should support an immigration pathway to permanency for farm and food workers. This recommended international workforce program was referenced by the HUMA committee report.

It is also recommended that an interdepartmental advisory council for the industry be developed to support improved labour availability. This council should include Employment and Social Development Canada, Service Canada, the immigration department, and the agriculture department. Many issues affecting the industry are interdepartmental and multi-jurisdictional. Departments must work more closely together and consult more fully with industry stakeholders to find the best methods to meet growing demand and support the sector with its labour requirements.

This truly is an industry with high growth potential. However, achieving that potential and meeting the ambitious export targets set by the federal government will be a challenge. It will require collaboration and strategic action to grow the agri workforce. It is urgent that due focus and attention be given to these activities now. By taking these steps, Canada will be able to secure and grow its position as a world leader in agriculture and food production, and increase the extensive benefits the industry provides to Canadians and to people around the world.

I have one final comment, if I may. I would be remiss in not supporting the first speaker in identifying that the recently announced changes to the small business corporations in the tax act would be devastating to farmers in their current form. We have more than 220,000 farm families across this country who are all middle-class small business owners. We need to have some recognition that these changes are a problem for us. I would applaud the minister today. He did an op-ed in The Western Producer indicating that he's recognized how important agriculture is, and indicating a willingness to revisit the suggested changes. I want to highlight how important those are, because it's a real concern.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Wales.

You might not have been here, but I mentioned earlier that there are consultations until October 2. They're not being implemented into law, but there are consultations and draft proposals.

Thank you for that.

Next we have Mr. Kelly from the Canadian Federation of Independent Business.

[Daniel Kelly, President and Chief Executive Officer, Canadian Federation of Independent Business]

Thank you very much. It's a pleasure to be here. You've been keeping us very busy at the Canadian Federation of Independent Business over the last few months. I also want to say a special thanks to your committee chair, who has recently become a bit of a folk hero on the part of members of CFIB for recent comments he's made in the media.

I was hoping to bring to you a whole series of recommendations for the 2018 budget, but right now we're playing a bit of defence at CFIB and we hope to talk to you a little more about some of the changes that are currently under discussion.

As is noted in my slide deck, the number one issue that small businesses in Canada feel sensitive about is the existing tax burden which they as entrepreneurs have. I've not talked to an entrepreneur who doesn't say that the total amount of taxes they pay is unfairly too high. Yet, it seems as though we're headed down a course where that may become an even higher burden for many of those firms.

We're bringing to you some brand new data, data we just collected at CFIB from our membership, as to the potential effect of the proposed changes, as we know, Chair. We released this just today. Eighty-eight per cent of small businesses in Canada don't believe that the government itself fully understands the potential impact of these changes. Ninety-two per cent of small firms feel as though these changes will bring a great deal of uncertainty to their business lives. Eighty-eight per cent said it will make it more difficult for them to grow. Ninety-five per cent of them say that this will affect middle-class business owners. I have to say that was backed up by a special survey we did of tax professionals. Again, 95% of tax professionals, accountants, and tax lawyers in the country whom we surveyed said that these changes will affect middle-income-earning small business owners. Ninety-four per cent of small business owners oppose the change. I should note that 3% of small businesses in Canada were sympathetic and saw the need for some change. How significant are the proposed changes? Eighty-seven per cent said that they would be significant to their firm, and only 9% said that the changes that are under consideration would not be significant to them.

When we look at some of the specific changes that are under consideration, two-thirds of small firms, members of CFIB, said that they have some form of passive savings in their business. The number one category in that section was property or land that they as a business owned. After that it was shares, often shares in another private business that they may own through their corporation. When we asked business owners about income sharing, or income sprinkling as it is referred to in the discussion document, again, two-thirds of business owners, CFIB members, said that they did some form of sharing of business income with family members in the business. For 57% it was with their spouse. Nineteen per cent said that they shared income with kids—their children who were 25 years or older—and another 15% shared with their children who were between the ages of 18 and 24.

We asked about the consultation process, and 94% of business owners said that they would like to have a full, proper consultation process, as your government is doing with so many other areas of public policy. I do want to remind the committee why we have a lower rate of taxation on small business in the first place. First, it helps account for the overall higher burden of taxation that small firms feel and the higher cost of complying with taxation that small firms feel compared to their larger counterparts. Also, it addresses their more limited access to financing, allowing them to plow those retained earnings back into the business to help it grow for the future.

When looking at tax fairness, many entrepreneurs have reminded us that there are many areas in which they feel the burden is unfairly targeted at them. For example, entrepreneurs pay twice the rate of Canada pension plan premiums as do other Canadians. They pay 1.4 times the rate of employment insurance premiums compared to employees. They pay double to five times more in property taxes, 100% of workers' compensation or WSIB premiums, and 100% of payroll taxes like the employer health tax.

CFIB is part of a 65-member coalition. Sixty-five business associations have come together to call on the government to do a couple of things. Most importantly, we are asking government to take these proposals off the table and to replace them with a bottom-up consultation of business owners and their associations on any gaps in current tax policy.

I want to urge committee members to make sure that you pay close attention to the information that the accounting community is coming forward with. It is absolutely true that at least two of the three changes under consideration would affect business owners with income levels as low as $50,000. It is absolutely untrue that these changes would only affect business owners who have $150,000 or more in income.

Also, these changes would result in higher levels of taxation on entrepreneurs than on other Canadians. This isn't about making business owners even to that of the taxes of other Canadians, but would raise tax in important areas to rates higher than other Canadians pay. The small business corporate tax rate was the number one thing that small business owners said would help them strengthen their business performance. They endorsed the recommendations. All four political parties in the last election campaigned to reduce the small business corporate tax rate to 9%. This is an important measure, and we urge you to get back to that in the 2018 budget.

On some of our other recommendations, we urge you to put in place a strong plan to get the country out of deficit financing. We ask you in a series of recommendations in our package related to the red tape burden focused on small and medium-size firms. Addressing skills and labour shortages is a critical area, and I endorse the comments that were shared from the agricultural community on that front. We've made many recommendations along those lines.

As I wrap up, another idea we want to put in for your consideration is lowering the rate of employment insurance premiums on small firms. We have lobbied for years to make that an equal split between employers and employees. You may be able to do that by lowering the rate on the first $500,000 in payroll, as an example.

In conclusion, we urge you not to proceed with these changes. We in the business community, CFIB specifically, are 100% committed to working with government to shore up any areas in income tax legislation that may need to be shored up. We get that there are businesses that are stretching the definition and we are prepared to help the government in those efforts, but these changes are not the way. We urge you to set them aside and replace this with a proper consultation process including the business community and provincial governments.

Thank you so much.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Kelly.

We'll now turn to the Canadian Union of Public Employees, Mr. Sanger.

Welcome, Toby.

[Toby Sanger, Senior Economist, Canadian Union of Public Employees]

Thank you very much.

On behalf of the 650,000 CUPE members who deliver quality public services in communities across Canada, thank you for the opportunity to present our priorities for the next federal budget. Our written submission addresses the questions that the committee posed about productivity. The main point is that, if we focus on inclusive growth instead of trickle-down growth, productivity growth will follow.

All of us should be glad that our economy has grown at the strongest pace in 15 years and that the jobless rate is the lowest since October 2008, but despite the federal government's positive initiatives to date, the benefits of stronger economic growth are not tangibly being experienced by most working Canadians. Average wage growth is barely 1.5%, no more than inflation.

We're very glad to see provinces committing to a $15 an hour minimum wage. The federal government should do so soon. It should also introduce a modernized fair wage policy and proactive pay equity legislation.

We also need to increase the social wage all Canadians receive through public education, health care, pensions, and other services. Increased investments in the care economy will strengthen inclusive growth and equality.

We outline a number of priorities for these in our submission. I'll just highlight a few here.

On health care, we urge the federal government to introduce a national, pan-Canadian prescription drug program and to significantly expand funding for continuing residential, community, and long-term care. I was glad to hear the Canadian Medical Association put a strong focus on a seniors policy and residential care in their submission.

We also need a significant increase in funding committed for quality public early learning and child care. This would generate hundreds of thousands of jobs, promote women's equality, increase productivity, and could pay for itself in economic and fiscal terms. The IMF recently came out with a report effectively urging Canada to do the same and making the same point, urging that the federal government invest about $8 billion in early learning and child care. Much greater support for child welfare and for child care is particularly important for indigenous children and communities.

We support reducing and ultimately eliminating undergraduate and college tuition fees. Half of the cost could be paid for by eliminating federal education tax credits and loan-based financial assistance.

We also need more support for literacy and essential skills, as Craig Alexander of the Conference Board also mentioned in the previous session.

The federal government has made substantial infrastructure funding commitments in the positive areas of affordable housing, social infrastructure, public transit, and green infrastructure, although a lot of it is back-end loaded. However, privatizing it through the Canada infrastructure bank will be counterproductive and negative for the economy because it will significantly increase costs and user fees for the public.

Turning now to tax fairness, we have called for progressive tax reform for many years. This should be done in a comprehensive way for it to be effective and should involve a comprehensive review of our tax system, as the finance committee had explored before. We and other members of the Canadian Coalition for Tax Fairness support the federal government's proposals to reduce tax avoidance through private corporations, but it should be combined with closing the stock option loophole, further action on tax havens, reducing preferential rates for capital gains, increasing corporate tax rates, and levelling the playing field by taxing foreign e-commerce companies such as Uber, Netflix, and Google on the business that they do in Canada. These will make the tax system fairer, increase equality, generate billions in additional revenues, strengthen the integrity of the tax system, and be good for the economy.

I'm glad that the committee is going to hold special hearings on the proposals for tax planning regarding private corporations. Unfortunately, there's been a lot of misinformation and a certain amount of scaremongering about the effects of these tax changes. It's clearly unfair that some can use private corporations to avoid taxes that other Canadians in similar circumstances pay. These measures predominantly benefit higher incomes, for whom the benefits exceed the cost of tax accountants and lawyers.

At most, the number of families who directly benefit from income sprinkling represent less than 1% of all Canadian families. There will be some evidence coming out on that next week.

Proposed stricter rules regarding intergenerational transfer only apply in specific circumstances used for other forms of tax avoidance. Other mechanisms to pass on their family farms and businesses with preferential tax terms would remain. I can point to the bits in the discussion document that iterate that point.

Proposals regarding passive income seek to equalize effective tax rates between passive income taken out of a corporation and passive income invested by individuals. Passive income kept within a corporation will continue to benefit from preferential tax rates compared with individual investments.

Once again, I'm glad the committee is going to hold hearings. I do agree that it would be good to have a comprehensive review of the tax system, because little bits like this cause problems. I hope you'll also invite some finance officials to your hearings for them to explain some of their proposals.

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

We'll turn to Restaurants Canada, Ms. Reynolds, executive vice-president, government affairs; and Mr. Lefebvre, vice-president, federal and Quebec affairs. Welcome.

[David Lefebvre, Vice-President, Federal and Québec Affairs, Restaurants Canada]

Thank you, Mr. Chair.

Good evening.

I'm pleased that Joyce Reynolds and I will be speaking to you today on behalf of a Canadian industry that amounts to $80 billion.

The restaurant industry, which includes 1.2 million employees, is the fourth largest private employer in the country. Each million invested in our industry generates about 27 jobs. One out of five Canadians aged 15 to 24 works in a restaurant. The restaurant industry, which amounts to 95,000 businesses and 18 million clients a day, maintains personal and direct contact and a special daily connection with Canadians. More than two-thirds of Canada's restaurants are locally owned and operated by independent entrepreneurs. These restaurants are found across the country, both in major centres and remote regions. However, their overall profit margin is only 4.3%.

We're asking the government to help the industry generate more revenue, lower costs and improve its profitability. Our goal is to continue to be an economic driver and an industry that creates jobs. Our recommendations concern these three areas.

We're requesting funding for a culinary tourism strategy, a reduction in interprovincial trade barriers related to alcohol, a cap on credit card fees, a repeal of the escalator excise tax on alcohol implemented in the recent budget, and, lastly, an overall tax reduction for small- and medium-sized businesses.

Our brief also informs you about our budget positions regarding the restrictions in marketing to young people. We believe these restrictions will harm sales to all industry clients and will have negative consequences for community and charitable activities.

[Joyce Reynolds, Executive Vice-President, Government Affairs, Restaurants Canada]

We would be happy to answer questions on any of the recommendations that are in our submission. However, in the brief time that we have today, we want to focus on an issue that wasn't covered in our brief, one that was just beginning to appear on our radar screen when we submitted our brief in early August. It is one that we are hearing about from our members on a daily basis. That, of course, is the proposed business tax rule changes.

The consultation began during the height of the busy summer season for restaurants, and it wasn't until later in the summer that they began to check in with their accountants and tax advisers, to find out what it was really going to mean to their businesses and to their families. That's when we really started getting the calls. The proposals are hugely complex. They would fundamentally change the tax system and are clearly a game-changer for some small businesses in our sector.

Restaurant businesses share many of the characteristics of farm businesses. They operate seven days a week for between 16 and 24 hours a day, and the whole family is usually involved in the business from an early age. As a result, the rules that restrict the sharing of the profits of the business with family members through dividends and trusts, including lifetime capital gains exemptions, are concerning.

We are worried about the confusion and challenges that would result from the interpretation of reasonableness in terms of proving contribution to the business. We particularly object to the more restrictive rules for family members between the ages of 18 and 24 and those 25 and over. Restaurant family members typically continue to work weekends, evenings, and holidays while they are attending school, often taking courses to assist them in furthering the business when they graduate, so we don't think age should be a determinant of a family member's involvement or commitment to a business.

Restaurateurs and farmers also experience similar fluctuations in business because of seasonal ebbs and flows in business cycles. The proposed rules on passive income suggest that opportunities to invest in the growth of the business coincide when extra after-tax dollars are earned. This is typically not the case. Businesses must be able to invest their profits for that inevitable rainy day and for business expansion at the appropriate time.

Something else that differentiates entrepreneurs who operate restaurants from other professionals is that they directly employ a lot of people. You would be hard pressed to find a one person restaurant business that incorporates. Responsibility for payroll contributes significantly to the risks that a small business must take on, a risk that entails mortgaging their family home and assets without a safety net or pension plan to fall back on.

The majority of restaurants operating as corporations have been doing so for their entire business lives, and have arranged their retirement and estate planning around existing rules. It would be unfair to pull the rug out from under them at this point in their lives. At a minimum, the rules must be applied on a go-forward basis with currently owned corporations grandfathered, but that won't address concerns about the willingness of businesses to invest in the future.

As a result, we recommend that the government withdraw its current proposals and engage in a more in-depth examination of the taxation system.

[David Lefebvre]

In conclusion, we have serious reservations about the tax proposals for small businesses and other additional costs imposed on our industry. If we continue to constantly decrease the profitability of an already precarious industry, a number of restaurants and other businesses may go bankrupt or run a serious deficit. However, if we work together, we're sure we can improve the profitability of the food services industry, which represents 4% of Canada's gross domestic product.