Evidence of meeting #106 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was businesses.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

Ron Bonnett  President, Canadian Federation of Agriculture
Scott Ross  Director of Business Risk Management and Farm Policy, Canadian Federation of Agriculture
Dennis Howlett  Executive Director, Canadians for Tax Fairness
Daniel Kelly  President and Chief Executive Officer, Canadian Federation of Independent Business, Coalition for Small Business Tax Fairness
John Wonfor  National Tax Office Leader, BDO Canada, Coalition for Small Business Tax Fairness
Jerry Dias  President, Unifor
Kevin Milligan  Professor of Economics, University of British Columbia, As an Individual
Allan Lanthier  Retired Partner of Ernst & Young and Former Chair of Canadian Tax Foundation, As an Individual
Peter Weissman  Chartered Professional Accountant, Trust and Estate Practitioner, As an Individual
Denise Workun  As an Individual
Terry Soloman  Partner, Tax Services, MRSB Group
Monika Dutt  Family Physician, As an Individual
Alain Paquet  Full Professor, School of Management, Economics Department, Université du Québec à Montréal, As an Individual

10:10 a.m.


The Chair Liberal Wayne Easter

If we could come to order, first, on behalf of the committee, my apologies to the witnesses. We had an informal meeting with the Finnish finance committee, and we went a little longer than we thought we would. My apologies for having you stand around outside for a while.

In this session, pursuant to Standing Order 108(2), the committee will do a study of tax planning using private corporations. This will be contributions to the Department of Finance's consultations.

Just to inform you, because the consultations end on October 2, it was decided that we would do hearings with 24 witnesses, I believe it is, and the minister. The minutes, the submissions, and everything you present to us today will be forwarded to the Department of Finance and the minister, without recommendations from this committee. It's to add to the process of consultations.

I thank those who were able to submit briefs. They are on members' iPads. I thank each and every one of you for the fairly quick—super-quick—notice that you've had to prepare and come before the committee.

To start, if we could hold the opening statements to about five minutes, it would be helpful.

Starting with the Canadian Federation of Agriculture, we have Mr. Bonnett, who is the president, and Mr. Ross, who is the director of business risk management and farm policy.

Ron, the floor is yours.

10:10 a.m.

Ron Bonnett President, Canadian Federation of Agriculture

Thank you, Mr. Chair and committee members, for the opportunity to share our perspectives on the proposed changes on tax planning using private corporations.

Through its member organizations, the Canadian Federation of Agriculture represents nearly 200,000 farm families from coast to coast. In my eight years as CFA president, it's hard to recall an issue that has evoked so much concern from farmers across Canada. Farmers have concerns with the breadth of the proposals, the limited consultation occurring during harvest, and the immediacy of their coming into force.

The CFA maintains significant concerns with the lack of time to provide feedback on such broad reforms to tax policy. We would be pleased to work with government on improving tax fairness, but such objectives can only be truly achieved through a comprehensive review of Canada's Income Tax Act that engages the broader business community. As such, we have signed on to the Coalition for Small Business Tax Fairness to advocate for a more deliberate and comprehensive process that proactively engages with Canada's small business community.

Today we'll focus our comments on farm sector impacts, but we believe a broader review is still required to address the concerns of the entire small business community.

We were pleased to see Minister Morneau and Minister MacAulay publicly state that Canada's family farms and legitimate farm practices are not the focus of these changes. Despite these assurances, farmers could be hit with unintended consequences, given the tight timeline before final legislation is to be introduced.

Canadian agriculture is evolving at rapid pace. Approximately 25% of family farms are now incorporated, while farms continue to increase in size and complexity. The average age of farmers is now over 55. Succession planning can take years, and many plans will become unusable as a result of these changes, leaving farmers having spent tens of thousands of dollars with little to show for it. The current proposals require significant amendment if legitimate practices are to remain unaffected.

I will now pass it over to our policy director, Scott Ross, to lay out a few of our specific concerns.

10:10 a.m.

Scott Ross Director of Business Risk Management and Farm Policy, Canadian Federation of Agriculture

Thank you, Ron.

I'm going to stress that, due to the timeline, our assessment is not yet complete. We continue to hear of new issues and have come together with other farm groups to commission a more detailed analysis of the farm-specific impacts, but this won't be available until October 2. Preliminary results indicate additional tax liabilities well in excess of $1 million on a typical family farm over a 20-year period.

On income sprinkling, we note a few key concerns. Farm families live where they work, and contributions to the farm come about in numerous direct and indirect ways, to which a one-size-fits-all reasonableness test will not do justice. Family farm transfers can take place over decades, with farm children often holding interests in the farm while pursuing an education or working off farm to build skills and diversify revenue. The strict reasonableness test for those between the ages of 18 and 24 creates particular challenges on this front.

Family farms also have access to the farm rollover provisions, which allow for transactions below fair market value. The vagueness in the current proposals creates uncertainty for any assets currently transferred in this manner.

On passive investments, the question remains as to how rented farmland and AgriInvest funds will be treated. Broader concerns persist about farmers' plans for retirement and future investment. The latter would directly undermine the industry's capacity to meet the ambitious growth targets for agrifood exports set in budget 2017.

Finally, changes to the capital gains treatment create undue complications for intergenerational farm transfers. Changes to prevent converting income to capital gains would reinforce inequities the CFA has long noted, which discourage selling family farms to family members. Limitations on access to the capital gains threaten long-term succession plans put in place under the current tax regime, creating additional complexity and costs.

The 2018 special election is also fraught, creating unmanageable tax liabilities through alternative minimum tax treatment and a series of potential tax traps.

Each of these concerns speaks to the potential for significant unintended consequences.

I'll now pass this back to Ron to lay out CFA's views on the path forward.

10:15 a.m.

President, Canadian Federation of Agriculture

Ron Bonnett

In our meetings with Finance, the Prime Minister's Office, and the agriculture minister, it was noted that family farms are not a target of these changes, but we are struck by the magnitude of the changes required and the time available to make those corrections.

We have two recommendations to address the concerns of the farm sector.

The first is that Finance Canada commit to a clear process with farm stakeholders to address these concerns, focusing on, first, exempting legitimate farm income from the new income sprinkling rules because they cannot be applied fairly in the context of a family farm; and, second, exempting qualified farm property because the new rules are detrimental to farm transfers and are inconsistent with current farm transfer tax rules. Finance Canada must extend this arrangement over 2018 to ensure that any unintended or unforeseen consequences following the new legislation can be immediately addressed.

Second, the implementation of these proposals must be delayed until no earlier than 2019, and any transitional rules must be further refined to avoid unintended consequences.

I thank you and look forward to your questions.

10:15 a.m.


The Chair Liberal Wayne Easter

Thank you very much, Ron. We look forward to that study. I know that a number of farm groups are doing it.

From Canadians for Tax Fairness, we have Mr. Howlett, the executive director.

Dennis, the floor is yours.

10:15 a.m.

Dennis Howlett Executive Director, Canadians for Tax Fairness

Thank you for the opportunity to speak to this issue.

One of the challenges with tax policy is that the wealthy have the most to lose or gain, so they are the most vocal. When governments listen only to them, we end up with a whole lot of tax cuts or a tax policy that exacerbates a growing income inequality.

When governments offer tax cuts or close tax loopholes, it's not likely to make much difference in what middle-income and lower-income Canadians pay in taxes. As a result, ordinary Canadians don't speak up, and we've seen the progressivity of our taxes eroded by more and more tax cuts and loopholes that primarily benefit the rich. A recent study by the Canadian Centre for Policy Alternatives found that, on average, the richest 10% get a discount of more than $20,000 a year on their taxes from tax loopholes. That's an increase of $6,000 since 1992.

However, middle- and lower-income Canadians are affected when governments don't have enough revenue to properly fund programs such as child care, public transit, or public services. For example, the Liberal government did introduce day care funding in the 2017 budget, but it was $7.5 billion over 11 years, which the IMF has said is totally inadequate. They are saying that $8 billion a year is what's needed and that the investment would be recovered in increased taxes and a higher labour force participation rate.

Canadians for Tax Fairness has been calling on the government to conduct a public consultation on tax expenditures—what we call “tax loopholes”—and close those that are unfair or ineffective. We welcome the proposed measures to curb the use of private corporations to reduce taxes as a step toward tax fairness, but we urge the government to follow up with closing other unfair and ineffective tax loopholes, such as the stock option deduction, the capital gains exemption, and the business entertainment tax deduction, just to name a few.

We have exposed wealthy individuals using tax offshore accounts and tax havens to evade taxes, and we call for government action to tackle tax havens. We're pleased that some steps have been taken in that regard, but we have never accused those who use private corporations to reduce their taxes of being “tax cheats”. What they do is legal, but that's the problem. Their legal tax avoidance is just as big a problem in terms of loss of government revenue as the illegal tax evasion. It is the government's responsibility to reform laws that do not serve the public good or that are allowing a few wealthy individuals to pay less than their fair share of taxes.

At the root of this issue is inequality. Our tax system has become less progressive over the past several decades and has been a major contributor to growing inequality. The International Monetary Fund and the OECD have determined that the current level of inequality in Canada is negatively impacting our economy. It is slowing down our economic growth. Data shows that inequality also undermines everyone's well-being, including population health outcomes, even for the rich.

Stagnant incomes of middle- and lower-income Canadians reduce the consumer demand for goods and services that business depends on. In fact, the Canadian Federation of Independent Business survey of its members in 2015 found that the main factor limiting the ability of small businesses to increase sales or production was insufficient domestic demand. Their biggest problem is not the tax rate, but the lack of purchasing power of Canadians. They would benefit from government policies to boost aggregate demand, such as raising minimum wages, investing in day care, and investment in other social and physical infrastructure.

Our tax system is also one of the best tools that could be used to help reduce inequality by raising revenue that will enable governments to invest in programs that will help reduce inequality and also curb unfair and ineffective tax expenditures that exacerbate income inequality.

The research clearly shows that the wealthy are far more likely than middle- or low-income Canadians to own a private corporation, and the wealthy are far more likely to take advantage of these tax loopholes. Fewer than 10% of those with incomes under $51,000 have a significant interest in a private company. For the top one-percenters, about 50% own a significant interest in a private company. For the top 0.01%, the number rises dramatically to almost 80%.

This isn't just a small business issue. Two-thirds of Canadian small business owners are earning less than $73,000. For them, this tax loophole really doesn't provide much benefit at all. It's not much help for start-up businesses, because they don't make much money in the initial years. Also, small businesses have other options to save for retirement. The RRSPs and the tax-free savings accounts are already benefiting from very generous government subsidies.

10:20 a.m.


The Chair Liberal Wayne Easter

We're a fair bit over. Could you wrap up fairly quickly?

10:20 a.m.

Executive Director, Canadians for Tax Fairness

Dennis Howlett

My point is that this is an important step forward in tax fairness and it should not harm job creation or the economy as a whole.

Thank you.

10:20 a.m.


The Chair Liberal Wayne Easter

Thank you very much, Dennis.

We'll turn to the Coalition for Small Business Tax Fairness, with Mr. Kelly, president and CEO of the Canadian Federation of Independent Business—I believe we saw you just the other day—and Mr. Wonfor, national tax office leader, BDO Canada.

The floor is yours.

10:20 a.m.

Daniel Kelly President and Chief Executive Officer, Canadian Federation of Independent Business, Coalition for Small Business Tax Fairness

Thanks very much. John and I will share the presentation.

I did wear a different suit this week, Chair, just to try to throw you off, but it didn't work.

I am here today not in my capacity as head of the Canadian Federation of Independent Business, but as a member of the Coalition for Small Business Tax Fairness. This coalition started less than a month ago with 35 business associations coming together to raise their concerns over these issues and now has grown to over 70 business associations across the country, representing hundreds of thousands of Canadian employers and millions of Canadian employees.

The coalition members are listed in the deck that I presented to you and include members from construction, agriculture, professional services, retail, and restaurants. All of those groups came together to try to express concerns to government about these proposed changes.

By way of background, I'm very pleased to hear that those who are in favour of this legislation—government—and those who are opposed have agreed that the vast majority of small firms have fairly modest levels of income. Two-thirds have under $73,000 in income. I'm very pleased that we're not getting into a debate over that.

Our point has been that business owners at all levels of income potentially will be affected by at least one of the three measures in this package, including those who are earning well below $150,000 per year, a number that was put out by the minister.

Many of these businesses, if not most, will also find that their tax burden will increase. That's something that I think we need to make sure government knows. For for the majority of business owners, their overall aggregate level of taxation that they will pay as a result of these changes will be higher in the future, obviously meaning less money for the other things that we may view as important.

Also, through these changes, there many examples, which the coalition is illustrating, of where Canadian business owners will pay higher rates of taxation than other taxpayers at similar levels of income. This isn't just about making small business owners pay the same. In many cases, we find that business owners will pay more. Of that, there seems to be no question. All of the reviews by tax professionals have suggested that there are many examples where business owners will pay more than other taxpayers at similar levels of income.

On income sprinkling, this has the potential of affecting all taxpayers at almost all levels of income. Really, at the income level of about $50,000, business owners will start to be affected by these changes.

We are also deeply concerned about the lack of clarity of the enhanced reasonableness test that will be used by the Canada Revenue Agency.

With respect to passive income rules, many businesses do have requirements to retain earnings in the corporation or policies that limit the amount that can be distributed to their shareholders. Many businesses incur losses in their start-up years that the shareholders just can't use to offset against personal income. We also want to note that successful businesses, particularly in the high-tech sector, use these retained profits in the corporations to invest in other start-up businesses, so that source of financing for other businesses, we worry, will start to dry up.

While some have suggested that an enhanced use of RRSPs or TFSAs may be a solution for business owners, there are the practical limitations of this. Your policies will encourage business owners to take more money out of their businesses, leaving less money in their businesses to protect them against economic downturns or problems in the business, or to invest in future business opportunities.

I'm going to turn things over to John to take it from here.

10:25 a.m.

John Wonfor National Tax Office Leader, BDO Canada, Coalition for Small Business Tax Fairness

Thank you very much for this opportunity.

Dan has asked me to speak to two slides here. The first slide is comparing the tax on passive income between the current and the proposed rules. I want to make a couple of points with respect to that.

There's no question that the proposals will substantially increase the tax on passive income earned inside a private corporation where the source of the funds benefited from a tax deferral that the corporation offers. Basically, what the proposals will be doing is trying to tax back, to claw back, the advantages of that deferral. The tax rates on this slide, I think, are not in dispute. A lot of tax professionals have gone through them. There are substantial—

10:25 a.m.


The Chair Liberal Wayne Easter

Excuse me. I have to interrupt for a second. We will soon start to run out of time. People do have the slide. It's page 8. People have been given a copy.

Go ahead.

10:25 a.m.

National Tax Office Leader, BDO Canada, Coalition for Small Business Tax Fairness

John Wonfor

Thank you, Mr. Chair.

I don't think the tax rates on this slide are in dispute. They show the substantial increase in the tax costs for these types of passive income.

I think the question here, the policy question that really needs to be examined, is whether a deferral is appropriate tax policy for Canadian private businesses. We believe there are good reasons for why this is appropriate tax policy. Dan has already alluded to some. I want to add two points to that.

I think a source of savings inside a corporation ensures a pool of capital available to invest in the business. Those types of substantial investments can happen only every few years, particularly for a smaller business. I think it's very important that they're able to save these funds to have access to that.

Second, these types of savings can help businesses through years in which income fluctuates or through economic downturns. We had a lot of clients in our firm—for example, those in Alberta—who, during the recent economic downturns, used their savings in private corporations to maintain employment levels in the Alberta market, where larger corporations had a lot more layoffs than the private business sector did.

Moving on to slide 9, I have a couple of comments with respect to the impact of the changes to intergenerational transfers. I have a couple of comments with respect to the impact of the changes intergenerational transfers. I want to make a couple of points to help you understand that the tax cost of intergenerational transfers will increase, and increase substantially, under these proposals. They're going to increase for a number of reasons. You can see that this slide talks about the tax cost increasing by as much as 70%. Let me explain that for a minute.

Many intergenerational transfers are structured so that parents pay capital gains tax on the sale of shares to their children, even forgoing the capital gains exemption, the ability to claim that exemption, and allowing the children to use the future profits of that business to pay back the parents. The changes are effectively going to change the tax cost on that type of planning from a capital gains rate of approximately 27% to the tax rate that applies to dividends, which is 45%. Do the math. It's about a 70% increase.

By selling to an arm's-length party, the business owner would only have to pay tax at a capital gain rate of 27%, and if they added a capital gains exemption there, they could lower that rate even further. There's a bias now being created towards an arm's-length sale of the family business over intergenerational transfer.

In the interests of time, I'm going to stop right there, but we do have other examples to show how the answer is even worse if the new rules for splitting income apply.

10:30 a.m.


The Chair Liberal Wayne Easter

Very quickly, go ahead, Dan.

10:30 a.m.

President and Chief Executive Officer, Canadian Federation of Independent Business, Coalition for Small Business Tax Fairness

Daniel Kelly

To conclude, tomorrow we're sending a letter to all MPs on behalf of the coalition. It is directed to the Minister of Finance. The purpose of the letter is to challenge the assumptions and the justification being used for these particular changes.

It is highlighting—and showing the evidence from almost all private sector tax professionals—that business owners will pay more as a result of these changes, that in many cases they'll pay more than will other personal taxpayers, and that this will disproportionately affect women. Finally, it will ensure that the changes are focused on middle-income small business taxpayers, not just those at the high end.

Thank you.

10:30 a.m.


The Chair Liberal Wayne Easter

Thanks to both of you.

We turn now to Unifor president Jerry Dias and Ms. Tiessen, national representative, research department.

10:30 a.m.

Jerry Dias President, Unifor

Good morning. My name is Jerry Dias. I am the national president of Unifor, Canada's largest union in the private sector.

We represent over 315,000 working people from coast to coast to coast. Our members work in every sector of the economy and are represented at every income level. Our members pay their taxes and contribute in multiple ways to building a society that we want to live in every single day.

On behalf of our members, their families, and their communities, I am pleased to provide our views on the fair taxation of income of CCPC owners in Canada.

Unifor advocates for and supports a progressive tax structure that ensures our governments at all levels have the revenue necessary to provide high-quality, efficient, and effective public services. That tax structure also needs to acknowledge the income and wealth inequality present in our society today and ask those who earn more to pay more.

Taxes pay for the basic services that we rely on every day, from health care to infrastructure and to addressing some of the most pressing needs of today, including poverty elimination, reconciliation, and leadership on the environment. The issue we're discussing today is an inequity in our tax system that allows some people to opt out of paying their fair share of the revenue governments need to pay for those services.

The Government of Canada is proposing to close some tax loopholes that allow incorporated small business owners to avoid paying the same amount of tax on their income as an earner who works for employment income and makes the same amount of money. Sixty per cent of the top 0.1% of income earners in Canada own shares in a CCPC. Only 5% of middle-income families do the same. That means that 60% of those who earn the highest incomes in Canada have the ability to opt out of our progressive tax system through these loopholes, while the rest of us have been paying our fair share all along.

Most small business owners do not benefit from these loopholes either. A business owner has to have a very high income and a particular family structure in order to accrue significant benefits from the loopholes that are being discussed, but two-thirds of small business owners make less than $73,000 a year. Most small business owners do not earn enough money to exploit the loopholes.

Unifor supports the government's initiative to increase fairness in the income tax system by closing unfair tax loopholes: loopholes that are currently available to high-income earners who have incorporated a small business, but not available to people who work for a salary or wages, both high- and low-earning. The result of exploiting these loopholes means that some earners have higher disposable income or a larger investment portfolio than others simply because of the structure of their business.

The loopholes under scrutiny today have meant that two earners with similar incomes, and in a similar family structure, one with a CCPC and one without, will pay two very different effective tax rates. Those differing effective tax rates result in two very different levels of disposable income today, and two very different levels of savings in the future.

We know that the tax benefits of these loopholes accrue to the highest-earning CCPC owners. Furthermore, the research from virtually every economist and policy expert who has weighed in on this subject has found that the benefits of the tax loopholes only accrue once a CCPC owner's income has surpassed a certain level. Income splitting, for example, does not provide a significant benefit to anyone making less than $90,000.

Business associations and other advocacy groups have tried to paint the proposed changes as a tax grab on the middle class. This is not the case. The tax changes will lead to more high-income earners paying the same tax rate as their salaried and wage-earning peers. Where this issue does affect the middle class is in ensuring that income earners in the same income decile before tax are in the same income bracket after tax.

Business associations and other advocacy groups have tried to paint the proposed changes as a drag on investment, innovation, and entrepreneurship. The reality is that these tax loopholes have very little to do with innovation or business investment. Governments can and should develop systems that support innovation and business investment, but the current system is one that incentivizes neither.

This proposal is about protecting the integrity of Canada's progressive tax system. Canadians believe in paying their fair share of taxes. While there is more to be done, this is certainly a step in the right direction.

Thank you.

10:35 a.m.


The Chair Liberal Wayne Easter

Thank you very much, Jerry.

Mr. Milligan, professor of economics at the University of British Columbia, the floor is yours.

10:35 a.m.

Kevin Milligan Professor of Economics, University of British Columbia, As an Individual

Thank you very much, Chair, and thank you, members, for convening the meeting.

I'd like to make two quick points this morning. The first one is about the goals of the reform, and the second one is about the implementation of the reform.

As I see it, the main goal of the reform is to push towards neutrality of the tax system. A neutral tax system is one in which business decisions are made based on business merits and not pushed one way or the other by the tax system. That's a free market principle, and I think it's a good one.

The current tax system fails neutrality in a number of ways. Let me give you an example of the way our system fails neutrality right now. Imagine someone who has some skills, a hammer, and a truck, and she wants to start a business for herself. She talks to her friend who's an accountant and who says that it doesn't make sense for what she's doing to incorporate. For business reasons, her friend says, she doesn't need to do that at the income level she has at the time.

The problem is that she has to compete out there with people who are incorporated and who get a whole bunch of tax benefits that she, as an unincorporated person, does not get. What this does is create a barrier to starting up a business. There are a lot of businesses out there, a lot of people with a whole bunch of entrepreneurial spirit, who are not incorporated. They're equally hard-working, care equally about their families, and equally help out the economy. We want to make sure that the balance between incorporated and non-incorporated business is there. That's what I mean by neutrality.

The second point is about the implementation of these reforms. Many tax practitioners have raised a number of concerns about things such as succession planning, intercorporate holdings, and also the exact transition rules for the passive income measures. In these complaints that we've heard, or these suggestions that we've heard, there are a lot of interesting and useful suggestions. What I hope we see is that the finance minister and the Department of Finance, after October 2, are able to respond seriously and thoughtfully to the concerns that have been raised.

I do think these things should be taken seriously; however, I don't think we should stand frozen in inaction because of fear of some transition costs. Tax changes always require transitions. They always require some disruption. I'm pretty sure that in 2019 members from parties around the room here are going to have some tax proposals they want to bring forward, and every single one of those tax proposals will involve some transition and some changes.

What I think is the right way forward is to balance off the cost of those transitions and the complexity that might arise with the benefits you get from pushing towards a goal that we think is important. That's the way I think we can build a better tax system for Canada.

10:40 a.m.


The Chair Liberal Wayne Easter

Thank you very much, Mr. Milligan.

We welcome Mr. Lanthier, who is a retired partner of Ernst & Young and former chair of the Canadian Tax Foundation, testifying as an individual.

10:40 a.m.

Allan Lanthier Retired Partner of Ernst & Young and Former Chair of Canadian Tax Foundation, As an Individual

Thank you, Mr. Chair.

I'd like to thank you and the other committee members for inviting me to appear today to address this important issue.

I'll restrict my opening statement to certain aspects of the passive income proposal. The proposal is contentious and would result in significant harm to our Canadian economy, and therefore to the middle class, which depends on that economy.

A Canadian-controlled private corporation, or CCPC, is, as you know, taxed at preferential rates on business income. The government is concerned that a CCPC that acquires portfolio investments therefore has a deferral advantage that is not available to individuals.

The government’s concern has merit. Investment income of private corporations increased from $9 billion in 2002 to $27 billion in 2015. The government’s proposal would tax the investment income of a CCPC at a non-refundable rate of 50%, equal to the assumed highest personal tax rate for individuals, the so-called one-percenters. Then there would be a second tax when the corporation pays dividends to its owner. The result would be a combined tax on investment income of more than 70% for business owners in the highest rate bracket.

The impact on middle-class business owners would be even worse. While middle-class owners are not the real target, by using a non-refundable corporate rate of 50%, the proposal would severely overtax every business owner in this country who is in a rate bracket below the top rate. For example, a middle-class owner who is in the 30% bracket would suffer a combined rate of 59%, not 30%. That's a 75% increase over existing law. Canada already imposes an immediate tax of 50% on the type of income we're talking about here. That is more than enough. There are about 200 countries in world. There is only one country in the world that has a corporate tax rate above 50%.

Still, the amount of investment income of private corporations is increasing. Why is that? Outside of the professional sector, there is no reason to believe that businesses are incorporating for tax advantages. A business incorporates for a number of non-tax reasons, and none of these have changed in the last 50 years.

Professional income is quite different. Many high-rate doctors, lawyers, and accountants, including many partners of large national legal and accounting firms, are incorporating solely for tax benefits. This is certainly the major cause of the recent increase in the amount of investment income earned by private corporations.

I therefore suggest a different approach: the introduction of a special refundable tax for professional income of a CCPC for most medical doctors, lawyers, and accountants. This tax would be similar to the tax that was enacted in 1979 and repealed in 1984 for mechanical reasons, not tax policy reasons. The tax would not apply to any other industry sectors, so it would address the government’s concern but avoid most of the economic damage that applies under the current proposal. It would be simple and understandable, and the revenue from the tax could be easily and accurately tracked. All additional tax revenue from incorporated medical doctors should be earmarked for health care funding, and the balance for debt reduction.

Mr. Chair, I am a retired accountant. I have no clients. I hold no interests in private corporations or in any trusts. I have no dog in this fight. I simply want to see tax changes that address tax policy concerns, but that do so in a sensible and thoughtful manner, and that strike an appropriate balance between tax revenue for the government and the inevitable damage to our economy that any additional taxes cause. As part of this process, we also need a comprehensive review and reform of the taxation of private corporations.

Thank you, Mr. Chair.

10:45 a.m.


The Chair Liberal Wayne Easter

Thank you very much.

Thanks to all our presenters. There is no question that we have the full width of the debate, and I thank everyone for their directness.

We'll go to five-minute rounds so that we can get more people on and more questions, starting with Mr. Fergus.

10:45 a.m.


Greg Fergus Liberal Hull—Aylmer, QC

I thank all of the witnesses very much for their presentations. I learned a lot from them.

One of the privileges members of Parliament have is that they can learn things about topics they never examined before.

I am the son of immigrants. When my father arrived in Canada, he worked, and my mother stayed at home. My father always received a salary, so his income tax returns were not complicated. I also earned a salary during all of my career, and so my tax returns were not complicated either.

Since this summer I have had the opportunity of learning a lot about the private companies controlled by Canadians.

I have a very specific and quick question for all of you. I'd appreciate it if you could keep your comments to 15 seconds in terms of an answer. It's a pretty direct question.

Does the current tax system offer tax advantages to Canadian-controlled private corporations that are not available to salaried workers, to salaried men and women like me?

Mr. Lanthier.

10:45 a.m.

Retired Partner of Ernst & Young and Former Chair of Canadian Tax Foundation, As an Individual

Allan Lanthier

Mr. Chair, I thank the member for his question.

Salaried employees are absolutely taxed differently than owners of small business. I think the only policy issue here is whether individuals incorporate solely or primarily for tax purposes.

10:45 a.m.


Greg Fergus Liberal Hull—Aylmer, QC

I got that. I just want to know what the current system is. I'm trying to get my head around it.

Mr. Milligan.