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

11 a.m.

President, Unifor

Jerry Dias

I do not agree with tax havens at all. I mean, take a look at the Panama Papers and follow that whole stream. I paid $53,000 in taxes last year. I don't quarrel with that at all. I'm not looking for a mechanism with which to reduce it. I enjoy the social programs here, as does every other Canadian. I want to make sure we have enough money for infrastructure spending to create jobs.

Look, I believe in tax fairness, period.

11 a.m.

NDP

Alexandre Boulerice NDP Rosemont—La Petite-Patrie, QC

Thank you, Mr. Dias.

Mr. Kelly, in the Liberal Party's 2015 electoral platform, the Liberal Party stated that it wanted to “conduct an overdue and wide-ranging review of the over $100 billion in increasingly complex tax expenditures that now exist”.

I agree with the Coalition for Small Business Tax Fairness on the fact that that consultation was too short, aside from having been conducted in the middle of summer, and that it only covered part of the reality, whereas we were promised a wide-ranging review.

I agree with your last recommendation. If a tax reform is to be conducted, should we not review all tax measures, rather than targeting only one economic sector? In your opinion, should we not also review all of the regulations, not only the ones that apply to small businesses, but also to multinationals, large companies, CEOs, as well as the tax agreements we have with certain tax havens?

11 a.m.

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

Daniel Kelly

Yes. In fact that has been our exact recommendation.

Look, I get and respect that there are challenges. There are situations, including the situations affecting Canadian-controlled private corporations, where a government may need to tighten some of the rules. We've never suggested that this is unfair. We didn't freak out, in fact, when the government first talked about making some changes to that. Neither did we reject out of hand the proposals when they first came out—until we studied the potential impact of these changes on the broader business community. We are 100% on board with working with government to ensure that all parts of the Income Tax Act are tightened to ensure that abuses are not allowed, including those aspects for Canadian-controlled private corporations. We just feel that this is the wrong way to do it, with tight consultation....

I want to say one thing that I didn't get to say before. The letter we're sending to you as parliamentarians tomorrow has detailed analysis by almost every accounting agency in the country to outline the concerns that we are expressing, to prove to you that these changes have a much broader impact than the government, I believe, thinks. We're hoping that you'll pay close attention to that when it's delivered tomorrow.

11 a.m.

Liberal

The Chair Liberal Wayne Easter

Thank you very much. We look forward to that analysis.

Ms. O'Connell.

11 a.m.

Liberal

Jennifer O'Connell Liberal Pickering—Uxbridge, ON

Thank you, Mr. Chair.

Thanks to all of you for being here. I could ask each and every one of you a question, but I have limited time so I'm going to start with Mr. Bonnett or Mr. Ross.

First, let me thank you for the recommendations you put on the record. Those constructive recommendations are actually helpful, because this is a consultation period to make sure there aren't unintended consequences.

In terms of my colleague's earlier question about the advantages and inequities, I want to ask a question. Even amongst incorporated farmers, let's say.... I had my first job when I was 16. It was not in a small business, but the idea is that a lot of young people work when they're 16 or 17. In an incorporated small business with a child of that age whose parents own a farm, say, those parents would not be able to sprinkle income. In comparison, a farm maybe right next door with children who are 21 and working in the business has a very clear advantage of being able to sprinkle income.

Both are legitimately working on the farm, but one has a sprinkling advantage that the other doesn't. Can you not acknowledge the fact that even within incorporated businesses this arbitrary age for sprinkling creates some inequality that should at least be reviewed and determined?

11 a.m.

President, Canadian Federation of Agriculture

Ron Bonnett

I think what I would say is that there are inconsistencies in the tax law. In our presentation, we talked about having a thorough review. I think what's unfortunate is that these proposals came down in July and there wasn't really time to analyze them. That's why we agree with the coalition for small businesses. If we're going to look at tax changes, we really have to look at them thoroughly and do some analytical work.

I mentioned that we're having a study of our own done with the agricultural community. When you change one piece of tax code, quite often it will end up bumping something down the road someplace. That's why you can't have a major tax policy change like this one take place over a very short period of time. It has to be almost a discussion paper that is engaging with the small business community to just take a look at some of the inconsistencies that exist, as opposed to the inequities.

Scott.

11:05 a.m.

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

Scott Ross

I would say that I think in regard to the example you use, where a farm child is actually working on the farm, the discrepancy you note between the two I don't think in reality would actually take place. If someone is legitimately working on a farm, we would hope that even under the reasonableness test.... I think there are a number of elements of that test that are currently quite vague and that we have very significant concerns with, but under any sort of reasonableness test, we would hope that anyone legitimately working in a farm business is able to receive income for the work they're undertaking, regardless of whether they're a child of the farm family or a salaried employee.

11:05 a.m.

Liberal

Jennifer O'Connell Liberal Pickering—Uxbridge, ON

Right, but as it exists now, you can't sprinkle other than for a specific age group, so there's legitimate reasonableness in terms of paying someone, but in terms of the sprinkling, there's an age limitation. I appreciate the comments in terms of an overall review, but I have to move on only because I have limited time. Thank you.

Mr. Milligan, I was interested in your comments that were reported in the media. In particular, Global News wrote about your comments in terms of the 73% number. In the Conservatives' internal briefing that was released by VICE News, they talk about really focusing on the 73%. They say not to hung up on the wealthy individuals, because that's not the message they want to attack the Liberals on.

It was interesting, because you were asked, I'm assuming, in this media report, to comment on the 73% number. What's reported is that you clarified that there would be only a very specific case or cases that would actually equate to 73%. That's certainly the messaging they want to counter: to not focus on wealthy individuals but the middle class. Can you comment on that 73% number and the scenarios that it really matters in?

11:05 a.m.

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

Kevin Milligan

Sure. Thank you for the question. I am an academic, so I'm going to start at the principles, but then I'll get into the specific example.

The principle here again is one of neutrality. We want a tax system that doesn't either favour or disfavour saving inside the companies. What this means is that we have to compare the taxation of savings inside a company with savings outside a company.

Right now, because of that small business deduction, there is an advantage for saving inside the firm. What the proposals do is try to peel back that advantage by imposing an extra tax inside the firm. That's what it does to balance the saving inside and outside the firm.

Now, to do that, one has to impose this extra tax inside the firm, and this is where you get numbers like the one that you suggested for particular circumstances. For example, if you're a high-bracket Ontario taxpayer who already has $220,000 of other income, your extra tax that you would pay, should you flow through your passive income, would be in the range you've suggested, but that's not something that's universal.

I can take another example, which would be that of someone who's making $50,000 as a small business person and immediately flows it through to their pocket, because they're not saving big pots of money: they're trying to feed their family. That person faces a tax rate of about 30%, whether it's taken through dividends or through employment. That's the kind of thing that I think matters to most small business people.

In thinking about what is the taxation of a big portfolio of hundreds of thousands of dollars of assets, we have to get that right. We don't want to do that unfairly, but I don't think that's the main focus for most business people.

11:05 a.m.

Liberal

The Chair Liberal Wayne Easter

Mr. Albas.

11:05 a.m.

Conservative

Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC

Thank you, Mr. Chair.

Thank you to all of our witnesses. We certainly appreciate your input on this important measure.

I'm going to start with you, Mr. Milligan, since we're both British Columbians and proud to say that. I would like to go back to your example of a woman with a truck and some tools getting out there. I haven't been in construction, but I've been in the industry, where you start off as a sole proprietor. Then you find a partner. In British Columbia, it's six months, and you're considered common law.

Let's say your common-law partner has a condo. You are liable not just for what you do on the job, but also, you can be sued if you drop a hammer on someone, and suddenly your partner's assets come into play. That's something that employees don't have to consider. Is that correct?

11:10 a.m.

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

Kevin Milligan

It's most likely correct. I'm not an expert in law, but I don't expect that the liability would lie on an employee in such a situation.

11:10 a.m.

Conservative

Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC

Okay. Let's say that five years into it she doesn't have a spouse or whatnot, but she does have a child. She's been putting aside money for her child's RRSP. Again, she drops a hammer at work and gets personally sued, and suddenly that RRSP can actually be taken away through a court process. Is that the same kind of thing? Would that happen to a salaried employee?

11:10 a.m.

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

Kevin Milligan

Again, for a salaried employee, I'm not an expert in the law, but it's my view that a salaried employee would face different legal obligations than an employer.

11:10 a.m.

Conservative

Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC

Again, she decides that she's going to expand her business and hire someone, who then drops a hammer on someone. Because now she's vicariously liable for that, her house can be seized in a lawsuit. Is that the same as it would be for someone if they were simply an employee?

11:10 a.m.

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

Kevin Milligan

Again, these are special legal distinctions between those who are incorporated and those who aren't, and those who are employees and those who aren't. Those are clear distinctions.

11:10 a.m.

Conservative

Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC

While I totally understand your argument on tax neutrality, you also have to acknowledge that the entrepreneur is working within a business reality. Again, the reason why more and more people are incorporating may be for the simple reason that they want to protect assets because they want to look after their family.

I also wanted to talk to you a bit about.... I have to thank you for your work on Twitter. I think it's wonderful that we have many economists who broadly put out their work on Twitter and make themselves available. I appreciate your doing that.

You've talked about the difference between salaried employees able to save for their retirement versus an incorporated company. First of all, most small business owners I know say that their business is their pension. Most small businesses—and I'm sure Mr. Kelly could say this—fail within the first five years, probably 95% plus of them. Would you say that's probably true, Mr. Milligan?

11:10 a.m.

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

Kevin Milligan

That number sounds reasonable. Again, I have to defer to Mr. Kelly.

11:10 a.m.

Conservative

Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC

Okay.

Also, when someone signs up as a salaried employee, they usually agree to a certain salary, and they can actually plan to set aside money using the tax system.

I know that from the perspective of a small business owner.... It could be that something goes wrong with their equipment and suddenly what money they thought would go towards saving for something, such as their retirement, isn't there. In fact, again, after 10 years, I think that even then we still have close to 80% or so of small businesses failing.

Do you see how difficult it is for someone who works every day in their small business and is trying to make it when they see you put that out? Not wrongly, but again, in terms of saying $50,000 on this side when you're a salaried person versus when you do it in your business, you cannot say it's the same and look at how much more they have, because they are subject to so many more risks than a regular salaried employee. Do you see that there's a disconnect between the logic...?

Now, I agree from one perspective. The academic vision I understand, where you're saying it, but they are subject to completely different circumstances. Do you understand that?

11:10 a.m.

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

Kevin Milligan

There certainly are different circumstances.

11:10 a.m.

Conservative

Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC

Thank you.

I'd like to go over to Mr. Kelly in regard to angel investment. I spoke to a person who is retired and has a holding company. He spends the majority of his time finding small start-up tech companies where he can put his money.

He can put it into all sorts of different things, but he says, “Dan, if I don't have complete certainty...”. He gives some mentoring, but that may not be considered an active investment, so suddenly he's looking at putting money into Walmart and other publicly traded companies and then receiving a dividend where he knows 100% what his return is going to be.

Do you think this will have a negative effect on start-up capital for entrepreneurs?

11:10 a.m.

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

Daniel Kelly

We do, and that's certainly one of the examples we brought forward to you on behalf of the coalition. Small businesses already start from a disadvantage when they are seeking financing. One of the reasons the small business corporate tax rate was created in the first place was to allow small firms to invest their own retained earnings back into their businesses, but the other benefit of this, of course, is that with respect to the passive income rule, the income that is saved in a business can be used to invest in other businesses, and that can be an incredibly powerful and valuable thing.

Governments have all sorts of supports, including labour-sponsored venture capital funds and other ways. The government is spending tons of time and money trying to find ways to support the business community. What businesses love is having other business owners invest in them, and the passive income rules can certainly help them do that.

11:15 a.m.

Liberal

The Chair Liberal Wayne Easter

Thanks to all of you.

We will turn now to Mr. Grewal.

11:15 a.m.

Liberal

Raj Grewal Liberal Brampton East, ON

Thank you, Mr. Chair.

Thank you to the witnesses for coming today. I really appreciate it.

To try to summarize a lot of your comments, there is a lot of passion and emotion about the proposed tax changes, and I really want to highlight the word “proposed” and put an emphasis on the ongoing consultation. I think we're missing something, which is that, in my humble opinion, this is how democracy in policy works best: something was proposed and now we're getting feedback from Canadians across this country on how we can change it.

Ron and Scott, thank you so much for comments on really making sure that there are no unintended consequences and that there are appropriate transitional rules. We don't want to put any businesses in a position where.... These things happen so quickly—and I do want to highlight the fact that the tax changes are going forward and are not retroactive—but you don't want any unintended consequences, because people do work really hard, especially on the family farm.

Mr. Milligan, I really appreciated your comment that it should be neutral in terms of your decision-making. Why should somebody benefit from a lower tax percentage when they incorporate for the sole benefit of having that lower tax threshold? Can you comment on that and why that's not fair for all Canadians?

I will give you an example. I used to be a corporate lawyer for a big firm on Bay Street, and partners were able to take advantage of incorporation, whereas a seven-, eight-, nine-, or ten-year associate was still a salaried employee.

11:15 a.m.

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

Kevin Milligan

I would push back against the notion that we know that a certain number of people are incorporating solely for the tax benefit and bring it back to the previous member's question. When you are thinking about that decision to incorporate or not, there are definitely legal issues involved. There are a lot of business decisions involved. There are a lot of non-tax reasons for you to want to incorporate: to protect yourself legally or to encourage bank financing. There are a lot of good reasons to incorporate. There is no problem with incorporation. The issue is whether the tax system ought to be pushing people into incorporation or not.

When we're thinking about those tax benefits, what's important to think about here is that for some of the tax benefits that are on the table—I'm thinking of the income sprinkling as an example—this isn't something that pays you more because you have better ideas. It doesn't pay you more because you work harder or because you invest more in your company. It pays you more because you happen to have a certain family type.

If we want to have a tax system that encourages growth and investment, we can do a heck of a lot better than just handing out tax benefits to essentially random families. We can do better than that, and I think that's what we should aim for with the tax reforms.