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.