Finance Committee on Sept. 26th, 2017

[Raj Grewal, Liberal, Brampton East, ON]

Thank you.

Mr. Kelly, it feels as though you're part of the family these days because you come to the committee so much. We're happy to have you here again. Thank you for the deck on business fairness.

One of the things you spoke about was income sprinkling and the reasonableness test and the concerns around that, but would you not agree that there should be some contribution to the corporation in order to earn an income from it?

[Daniel Kelly]

Well, look, there are two things on that front. One, I think, is the challenge of determining for the CRA what is an appropriate contribution for the test that might be used, the reasonableness test. To be fair, there is a reasonableness test now that the CRA does implement.

[Raj Grewal, Liberal, Brampton East, ON]

In the Income Tax Act, yes.

[Daniel Kelly]

The challenge we have is twofold.

One is that the additional measures that the proposals are intending to bring we think are going to eliminate or reduce the amount of opportunities for younger people to get involved, even in a small way, in the family business. We do worry about that from a succession perspective, because you do want the entrepreneur to involve that next generation.

I was just in Winnipeg and met with a business owner who runs a successful trucking company. He said that he has had so many offers from private equity businesses to buy his business, but he knows the minute that he does that the jobs in Winnipeg and Manitoba are going to dry up, and they're going to be moved elsewhere. He's resisting that and wants to make sure that he can pass on that business to the next generation, so I do think that we don't want to discourage that kind of activity, and much of this does.

On the rules around income sprinkling, I also want to make the point that specifically with respect to dividends we want to make sure that government doesn't get to decide who owns the business. I understand what you're talking about with respect to income. That's why we already have the reasonableness test for income at the CRA, but applying this to dividends means that government is going to be able to determine essentially who owns the business. That is a concern for younger people. It's also a concern for us for female entrepreneurs. Two-thirds of business owners are owned by—

[Raj Grewal, Liberal, Brampton East, ON]

I'm sorry, Mr. Kelly, but I think you're—

[The Chair, Liberal, Wayne Easter]

I'm sorry, Raj. You're already out of time.

Mr. Kmiec.

Go ahead, Tom.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Thank you, Mr. Chair.

Thanks to all of you for coming in and providing us your expert testimony.

I want to talk about retroactivity. Some of it is related to succession planning, so I'm glad that we were leaning in that direction. There's a lot of misinformation about it. Some of it is due to the government side. Minister Morneau has said these will not be retroactive, but the way I read proposed section 246.1 on CDAs, it will become retroactive. In fact, even well-known tax specialists and tax accountants have been writing and saying that if you inherit a family business you could pay tax on it, on gains that your predecessor made. Retroactive double taxation is the effect of some of the rules and proposals that have been made.

I see Mr. Kelly already pointing to Mr. Wonfor, who wants to comment on this, but I want to talk about this retroactivity and about the double and sometimes triple taxation on income already earned. If you want to talk about neutrality, it's patently unfair to double-tax someone as that's making its way intergenerationally.

Maybe we'll start with Mr. Wonfor, but I'd like to hear from Mr. Lanthier on that as well.

[John Wonfor]

I'm happy to speak for a minute.

With respect to the surplus stripping changes that are proposed by the government, there definitely is retroactivity built into those rules. The Department of Finance is receiving a lot of representations on that.

They say that the changes in section 84.1 only apply to dispositions on or after July 18, but that's not true, because you have to look back at all the transactions in determining whether you have a section 84.1 problem. You have to go back and look at all the transactions all the way back to when it was first enacted, I believe in 1984, and that can create some situations where you thought you had proceeds that you could extract because capital gains had already been paid, but now you're going to be forced to pay tax at a dividend rate if you extract those funds out of a company.

It's the same thing with the changes in proposed section 246.1. It talks about the amounts “received” or “receivable on or after [the] Announcement Date”. If you have a transaction that triggered tax beforehand, that triggered a capital gain before the announcement date, but you did not receive the funds until on or after the announcement date, there are problems with the planning right now. We don't believe it's fair. We respect the government's right to change their tax policy in respect to this area, but it should be going forward, not being retroactive—

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Mr. Wonfor, I'm sorry to interrupt you, but basically what Minister Morneau said when he said it was not retroactive, that's false?

[John Wonfor]

For capital gains stripping, yes, absolutely, we don't agree with that.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Okay.

[The Chair, Liberal, Wayne Easter]

Mr. Lanthier.

[Allan Lanthier]

In fact, I have just a brief technical correction. On the changes to section 84.1 and their impact on intergenerational transfers, the coming into force of the draft legislation specifically says that they apply to any dispositions, whether before or after July 18. The law is that the new rules apply to any disposition whether before or after July 18, so they're absolutely retroactive.

For someone who maybe passed away a year ago and whose advisers had post-mortem planning in effect to avoid the double or triple taxation, I can't think.... I was going to say that they're murdered by these proposals, which is a bad turn of phrase in the context of post-mortem planning, but yes, they can face tax rates of up to 90% and 92%. Those are the proposals with respect to section 84.1 that the government has put out for consultation.

[The Chair, Liberal, Wayne Easter]

You have a minute, Tom.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Just on the CRA, one of the things we hear from people who are proponents of some of these changes is that there's a reasonableness test now and there will be a sign. I have slide deck presentations from different tax accountants who've said basically it's going to ask the CRA to make a judgment call on whether a person's passive income, whether that's the TOSI rules or income sprinkling, is reasonable or not.

Based on my experience of the CRA for the past two years as an elected official, there's a complete lack of accountability for mistakes made by the CRA. I'd like to hear both from Scott and from Ron on the farm side about the impact of the compliance portion with the CRA, but I also would like to hear from the coalition against these tax changes, because what the government is basically going to be doing is giving a whole bunch of latitude to an agency and organization with a track record of making mistakes and crippling businesses.

[The Chair, Liberal, Wayne Easter]

Ron, do you want to start?

[Ron Bonnett]

I think one of the concerns we have is that even if you do have a definition of the reasonableness test, that is subject to interpretation, and when you get to CRA officials, individual CRA people may make different adjustments. I had the same thing happen on an HST case. I had to take it to two or three people before it was resolved.

I think being very specific and very clear, as well as having training for CRA officials to interpret what is meant.... This creates a lot of concern for the farm community, I think, because we don't know how it's going to be judged until we file those returns.

[The Chair, Liberal, Wayne Easter]

Mr. Kelly, do you have anything to add on that, very quickly? Or Mr. Wonfor?

[John Wonfor]

I'll make one quick comment with respect to that question. Absolutely, the professional community and the business community are concerned with the reasonableness test. The Department of Finance has set out a few principles, but is now basically I think going to leave it up to the CRA to administer it.

I know from talking to certain senior CRA officials that they're not very happy with that, because they don't know how to administer a reasonableness test. I agree with you that there have been challenges in the past, and there will be challenges going forward with respect to this. You can expect a lot of tax litigation.

[The Chair, Liberal, Wayne Easter]

Thank you.

The last questioner for this panel is Mr. Sorbara.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

Thank you, Mr. Chair.

Thank you to everyone who's come here today and has provided some good stuff to think about.

I've sat down with a number of tax experts over the last couple of weeks. I spent half of my Labour Day going over all the proposals in the consultation paper. I understand that tax fairness is important and how we need to get it right. I think the spirit of tax fairness and the road we're on the right path.

We need to ensure our tax system has the right incentives in place to encourage capital formation and to encourage small businesses to grow, not to just stay at the 15% level but to move up to the 26% level on taxation, which is a good thing, because it shows that businesses are succeeding. We also need to ensure that we have the right proposals in place.

I've looked at this consultation paper as being in two buckets in terms of—I think someone alluded to this—the professionals and what I would deem as the small businesses like your manufacture and your engineering firm. We don't want to impede the second bucket from doing what they're doing. They're doing things very well in Canada. We have a growth rate of 3.2% this year, the best in the G7. We've created hundreds of thousands of jobs, and I attribute that to a lot of SMEs investing in their businesses and hiring Canadians.

In looking at the buckets, two of them, I think, do have merit. One is extending the income sprinkling not just to include income, because that's already covered, but to also include dividends, because if someone is working for an organization or farm, they can still work for them and they'll still be paid. Now, there's some clarification needed around “reasonableness” and “continuous” and words like that, and on the conversion of dividends to capital gains, and the multiplication of lifetime capital gains exemption. There are some things there that do have a lot of merit in the initial set.

On passive income, obviously a lot of questions need to be answered. I represent an area where we have 13,000 private businesses. York region is very dynamic. There's a lot of growth is going on, driven by private business. I know that we're consulting. I'm consulting. I speak to business owners every day. I know that our government's consulting. I encourage everyone to submit a brief by October 2.

Mr. Kelly, don't you agree there is merit in those first two measures, on examining them in the spirit of tax fairness, which we really need to do?

[Daniel Kelly]

We've said right from the beginning that we are on board to work with government on any necessary tightening of tax rules to ensure that there aren't abuses by business owners. I do wish to defend, though, the so-called income sprinkling.

One of the things that is very difficult for government to determine—and you know this from your riding, from the business owners you're talking to—is that there is a formal role, with a desk at a job and a specific title that a person might have, but there are also a lot of informal roles that business owners play, either as a shareholder or as somebody who does work in the business.

The reason we call them mom-and-pop shops is that mom and pop both have a stake in the business, and what these changes are proposed is making some pretty radical changes to that. At a minimum, it's going to create about a decade of uncertainty for business owners at a time when I just don't feel we can afford it.

[Francesco Sorbara, Liberal, Vaughan—Woodbridge, ON]

I heard this yesterday from one of our presenters. Thank you to everyone, because I appreciate it when people avoid using the rhetoric versus what is really the meat of the issue. Again, we need to look at tax fairness. We need to look at tax fairness for all Canadians.

We've done this on tax avoidance. As a government, we've put in hundreds of millions of dollars to ensure that all Canadians are paying their fair share of taxes, to ensure those services that Canadians depend on day in, day out are available to Canadians, and that people have confidence in our tax system. We've done that. I applaud our government for doing that. I'm proud to be part of a government that's doing that.

On the tax fairness side, again, there are measures there that we need to look at, such as, for example, extending on income sprinkling, because if your son or daughter is still involved in the business.... Again, what are we talking about? We're talking about moving the age limit from 18 to 24, where arguably you could see that the uptake is in reference to a lot of parents paying their kids—and paying them in a tax-advantaged way—to go to university. Going to university is a great thing, but a lot of businesses are using that loophole or tax advantage situation to fund someone's endeavour whereas other folks can't fund that endeavour on that basis. I think there's a real chance for us to do this right, to consult with businesses.

Look, in B.C., 25 years ago, I was awarded an entrepreneur of the year award by Grace McCarthy. I love entrepreneurs, but—

[The Chair, Liberal, Wayne Easter]

Do you have any thoughts on that question? We do have to go to the next panel.

Ron.

[Ron Bonnett]

I have a quick comment. I hear the word “loopholes” a lot, but it's really using tax-planning tools. One of the things that gets lost in this discussion is the fact that businesses and farmers need certainty in their business and tax planning. I think that's one of the things that has really brought a lot of people to the forefront. I've had farmers come to me and say, “Look, we've spent $40,000 over the last two years setting up our organization so it transfers to the next generation, and now we don't know if we're going to have to go and spend another $20,000 to do it the same.”

That's why we need long-term policy in place. Business has to be engaged in that discussion so at least there's certainty for planning in moving ahead.