Finance Committee on Sept. 26th, 2017

[The Chair, Liberal, Wayne Easter]

Mr. Lanthier.

[Allan Lanthier]

I believe income splitting and income sprinkling are tax policy issues. There are some very aggressive plans in place with so-called alphabet shares—A, B, C, and D—and one pays dividends to whoever one wants. Whatever is going to secure the best tax result, you pay pay on the A, B, C, or D shares. I think there's a policy issue. The taxation unit in Canada is the individual, not the family unit, but thus far, the government has gone about this in a very ham-handed way.

My personal suggestion for addressing this and addressing 80% of the problem is to extend the existing kiddie tax with no reasonability test to all children up to age 24, and with respect to multiplication of the lifetime capital gains exemption, allow one lifetime capital gains exemption per married couple or common-law partners. I think that's simple, understandable, and addresses 80% of the government's revenue concerns.

I'm opposed to income sprinkling. It's poor tax policy to allow it. I just think there's a much smarter and more sensible way to go about it.

[The Chair, Liberal, Wayne Easter]

Thank you.

I do have one quick question. I'm hearing from some people that we should extend the consultations and from others that we should end the consultations, but I guess in terms of certainty in the economy. We as a committee are holding hearings pre-budget 2018 on competitiveness and productivity.

In terms of overall certainty in the economy—so that there isn't a flight of capital and people aren't making decisions based on the rhetoric that's out there—how important is it that the government bring clarity to this issue and does it quickly? Who wants to answer? This is probably more related to the tax people who are in the system.

Dennis.

[Dennis Howlett]

We certainly support the call for more extensive public consultations on the whole fairness of the tax system, but we would not support the government's not going ahead with the current proposals, because we do think they are a step in the right direction. That being said, we would support the call for a more comprehensive review.

[The Chair, Liberal, Wayne Easter]

Mr. Lanthier, you'll have the last comment.

[Allan Lanthier]

There is significant uncertainty. I get private emails every week saying, “I'm pulling my money out of the country.” These were not National Post or Globe and Mail op-eds. These are private emails in which people are silently saying that they can't put up with the uncertainty.

I don't agree with what was said before about having almost a royal commission on taxation. We don't need a royal commission on taxation. We can address the policy issues that have been tabled here—on all three fronts, I think—with simple and sensible approaches. They're not the approaches that have been set out by the government.

I do think we need an independent review, but there has been discussion here, Mr. Chair, about involving what I'll call the business lobbyist group and this group and that group. We need the Minister of Finance to establish a committee, set out clear terms of reference, and have that committee meet with no political influence—no Department of Finance influence or Revenue Canada influence—like the Mintz committee, on which I was proud to serve in the late 1990s, free from political or Department of Finance influence. The Department of Finance folks—and I have many friends there—will not like it, but that's the only way to get a dispassionate discussion.

Thank you.

[The Chair, Liberal, Wayne Easter]

I want to thank each and every witness, and members as well, for keeping relatively on target on the issue. It is an important issue, and we covered its breadth. I think it was a really good discussion on the points that are in the discussion paper.

Thanks to all of you. We will suspend for about three minutes while the next panel comes up.

[The Chair, Liberal, Wayne Easter]

We'll call the meeting to order. Just for the record, pursuant to Standing Order 108(2), we're doing a study of tax planning using private corporations.

Witnesses, just so you're aware, the minutes from this committee and any paperwork, etc., that you give us will be passed on to the minister's office as part of the consultations on document that is out there on tax planning using private corporations. That information will go, without recommendations from this committee, to the minister. With that, we will start.

Welcome to all of you. Thank you for putting your thoughts together on quite short notice, in many cases. We really do appreciate you appearing today.

We'll start with Mr. Weissman, who is a chartered professional accountant.

Welcome. The floor is yours.

[Peter Weissman, Chartered Professional Accountant, Trust and Estate Practitioner, As an Individual]

Thank you for inviting me to this session. I really appreciate the opportunity to express not just my views but the views of many tax people out there.

Earlier, I was in the gallery listening. I just kept shaking my head and saying, “Wow.” Why are we here? Is this really necessary?

It will be—I hate to say it—30 years next month that I have practised in tax, and I've never seen such outrage and anxiety, not just in the business community but in the tax community as well, about items that in my opinion are quite simple to address, and you'll hear why.

We have proposals that were released in the middle of July with a 75-day consultation period. The website says submissions are due no later than midnight on Friday, September 29, but we've been told submissions are due October 2. Yesterday at the Canada Tax Foundation conference there was some inconsistency. Maybe we could get some clarity. I don't have a submission for you today because of short notice, but I would like to give you one.

I think we all need to take a step back. It's important because, in my opinion, you can't pick solutions without knowing what the problems are, and no one can see the forest for the trees in this case.

I do think that the government's policies and objectives in terms of income splitting with respect to corporate deferral are valid policy objectives. I think they're in line with the election platform that they ran on. I think they are achievable objectives in a much simpler manner than is proposed now. I'll give you some suggestions. I'll throw a lifeline out there and say that if you want to end this, if we want to salvage what's going on now and actually move ahead with objectives in the economy and reduce uncertainty for businesses, here are some ideas.

Again, I think the policy intent is fundamentally sound and in line with the election platform. However, I think the proposals—not “I think”, but “I know”—go way beyond that. I'm speaking to you as someone who has been in the trenches for 30 years dealing with tax legislation and tax changes. I started in tax when tax reform came around in 1987. I've seen the capital gains exemption eliminated on capital gains on property. I've seen it restricted. I've seen the kiddie tax brought in to deal with income splitting and income sprinkling—a term that has now been coined—so I have ideas.

Before I forget to get this out there, there are no ifs, ands, or buts: these rules, most of them, are absolutely retroactive. It's not true to tell the Canadian people that these rules are just for going forward. As we heard earlier, tax attributes of the shares that you own in your family business that were created 10 years ago because of transactions last year or 20 years ago impact the calculation of the tax that will be calculated under these rules. While they may say it's for transactions after July 18, these rules are retroactive, because there's no grandfathering and there's no transition.

It's like telling someone that they have their house and they've accumulated all that growth tax free, but we're changing the rules. Their house is going to be taxable, but on the go-forward, only if they sell it from then on. If they sold it before this was announced, okay, they're fine. That's retroactive tax planning, and that's what some of these rules do to businesses.

What I'd like to say in the brief time I have is that I think income splitting is a valid policy target. I know that reasonability is not the way to go. Uncertainty and subjectivity in the tax code is a recipe for litigation and for costs, and for unhappy taxpayers who don't have the funds to litigate. As much as possible, you have to take judgment out of the Income Tax Act. We need objectivity.

The reasonability test on dividends just can't be determined. Reasonability on salary is hard enough, but at least there are ways to do a functional analysis. You can't do that with dividends.

I've heard one example of extending the kiddie tax to age 24 as maybe a compromise of how to deal with curtailing income splitting. How about figuring it out this way? If someone spends more than x number of hours per year in the business, the rules will apply or won't apply. This kind of rule is actually used in the disability tax credit area, an area that I was involved in many years ago in terms of advising. With respect to life-sustaining therapy, we couldn't define what that meant, so the rule was put in that if you spend more than 14 hours per week on life-sustaining therapy, you're eligible for the DTC. Something like that could be used, as opposed to a reasonability test.

When it comes to corporate deferral, I just shake my head. Why are we talking about passive income and taxing passive income? You're getting people up to 70% and penalizing people for earning passive income in a corporation. The reason is that there's this corporate deferral because my corporate rate is lower than my personal rate. This has been dealt with. I'm just shocked that we get these proposals about passive income.

We have personal service business rules in the act. A long time ago, athletes and entertainers would incorporate themselves. A hockey player who was working for a hockey team would incorporate and say to pay his company, because he was going to get corporate rates instead of employment rates. The government brought in the personal service business rules and said that if you don't employ more than five full-time employees, you don't get the small business rate. They got rid of the small business deduction for incorporated athletes.

More recently, it was used for computer programmers and other professionals who incorporated to get access to the corporate rates. Computer programmers fall under the personal service business regime if they are incorporated, and there is now a surtax on personal service businesses. That surtax brings up the corporate rate without increasing corporate rates on everyone, which I don't think is what the government wants to do. The surtax increases the effective rate, reduces the deferral, and can be targeted at the people I think the government is really trying to target. I'm one of them. I'm throwing myself on my sword here.

If you want to stop people like me from incorporating just to get the benefits of the low corporate rate, stop me from doing it. Tell me that if I incorporate I'm going to have a surtax, but don't tell me that you need to affect all the family businesses across Canada.

These proposals could stop there because I think those are the government's policy objectives, but they go way beyond. The anti-surplus stripping rules in proposed section 246.1, which we won't get into, are so ripe with ambiguity and uncertainty that they are impossible to plan for.

Finally, because I imagine I'm running out of time—

[The Chair, Liberal, Wayne Easter]

Go ahead.

[Peter Weissman]

—these rules as proposed will make a family decide to sell their business to an outsider instead of passing it on to the next generation. There are no ifs, ands, or buts about that either. These rules say that if you sell to a family member, you're going to be taxed at dividend rates of 45%, but if you sell to an outsider.... That's obviously not right.

The last thing is, who you are going to sell to? Private businesses are not going to be interested in buying new private businesses or existing private businesses, because they're going to be looking to get out of the private business world with these rules. Who's going to buy? Public companies and foreign corporations are going to be buying up Canadian family businesses if these proposals go ahead as proposed.

My last comment is that I really think a collaborative effort would go a long way to resolving these issues, because there are people like me in the profession who are level-headed, understand the policy objectives, and have experience. If we sat down in a room with Finance and whoever the right people are—the economists—I think we could hammer out proposals that would be acceptable to everyone in this room and, more importantly, to Canadians.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Weissman.

I'd like to clear up what I think is the confusion on the dates. The end of consultations with the Department of Finance is Monday, October 2. They don't have midnight on it, but usually it is midnight. Our deadline for submissions to this committee, the finance committee, is September 29 at midnight, which is Friday, the reason being that we want to pass that information on to the Department of Finance on Monday morning or Monday during the day.

The firm deadline for Finance is October 2, which is Monday. We may have confused it a little with our separate deadline, but we had to do that in order to get the information there.

We're turning to Ms. Workun, who is appearing as an individual.

Welcome.

[Denise Workun, As an Individual]

Thank you.

I also very much appreciate the opportunity to appear before you today and share my thoughts. I'm someone who was raised in Alberta, and I have lived in Quebec for 25 years. I'm a lawyer who has practised human rights and employment law in Ontario for close to 30 years now. I'll make it very clear: I don't practise tax law, so I am by no means a tax expert, unlike my colleague here to my right. I also want to make it clear that these are my personal views.

I was prompted to engage myself in this tax debate on a more public level, in response to an email that I received from the president of the Canadian Bar Association a couple of weeks ago—three weeks ago, perhaps—basically encouraging members of the CBA such as me to write to their MPs in opposition to these tax reforms, and also informing us as members that the CBA was going to take a public position in opposition to these tax reforms. That got my attention, and I immediately responded to the CBA president, as well as copying my MP, to ensure that it was known that the CBA does not speak for me. I'm a lawyer, and I very much support the tax reforms that are currently being proposed.

I think it's important to speak up, and so that's what I've done. I'm joined in that by a number of physicians as well, many of whom are young female doctors who, I'm sure you are aware, have published a very public and articulate letter that similarly supports the tax reforms being proposed, and also states publicly that they are not in agreement with the position being taken by their professional representative in that situation, the CMA. The author of that letter—I heard her being interviewed on The Current a couple of weeks ago—is a very articulate young woman who is currently on maternity leave.

My starting premise is that it's a good thing to build a society in Canada where we all have access to a solid education, health care, housing, safe and vibrant communities, recreation and sports opportunities, and a clean environment. Perhaps it's misguided on my part to believe that the revenues generated by these tax reforms will funnel down toward the collective good, but certainly that's my hope.

The bottom line for me is that it obviously requires tax revenues to sustain and improve the public institutions and social programs that Canadians, I think in general, support. My view is that the most effective and just means to generate those revenues is through a fair, transparent, and actually progressive tax system. To me it doesn't make sense that those individuals most financially and otherwise privileged in Canadian society—including me—who've had access to publicly subsidized post-secondary education, are further advantaged by the tax system.

I do, however, think that tax reform should be comprehensive, and in that regard I think we need to start with the private corporations, as the government is currently doing, but I also think we need to revisit those other aspects of the tax system that are similarly regressive, for example, income splitting of pensions. There has been some criticism, I think justifiable criticism, by small businesses saying that, look, recipients of federal government pensions, for example, are entitled to split those pension incomes. I agree. That's not consistent in terms of giving, effectively, an income splitting benefit to pension recipients.

Turning to RRSPs, why should it be that the more money I make, the greater access I have to RRSP contributions? It's up to a maximum cap, I appreciate, but it is fundamentally based on a percentage of income up to a cap.

Why should it be that someone like me, who can most afford to send my kids to university and pay for them, has access to government grants through an RESP system, whereas others earning family incomes of $49,000, the average in Canada, are barely able to pay their mortgages or rent, let alone put monies into an RESP to help fund their kids' education with the support of government grants? The tuition rates are going up because we're lacking public resources to adequately fund those public post-secondary institutions.

The last couple of comments I'd make relate to gender. I've heard a lot of spin around the subject of gender and that these tax reforms are somehow damaging to women. I don't buy that for a moment.

I don't have the data to prove it, but I think somewhere the government could improve upon coming up with data that answers the question of whether this tax reform is going to disproportionately adversely impact women. My intuitive sense is that women, single mothers in particular, who I believe are disproportionately represented in terms of the poverty figures in this country, will be the beneficiaries of added tax revenue, assuming, of course, that those revenues are used to fund social programs and public institutions on which these women and their children rely.

Finally, in response to a comment that was made earlier that I heard in the gallery about the risk that small business people are taking, I appreciate that risk, the theory being that you need to save within a corporation and your business so you can fund the years that are not so great. As a lawyer who works daily with employees who have been laid off from their jobs, many of whom don't have pensions or benefits once their employment is terminated, I can say that those individuals are left with having to rely on their personal savings, just like everybody else, to fund them through difficult times. They also work very hard for the money they save.

As I say, I feel there should be a more level and equitable treatment of all working people in Canada. Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Denise.

We will turn to Terry Soloman, who is partner of tax services with the MRSB group.

Welcome, Terry. The floor is yours.

[Terry Soloman, Partner, Tax Services, MRSB Group]

Good morning, Mr. Chair and committee members. Thank you for the opportunity to speak here today.

My name is Terry Soloman and I have practised public accounting in Charlottetown, P.E.I., for the past 27 years.

I can say without a doubt that these proposals are very damaging to the small business clients I represent, as well as to small business across Canada. I don't think it's an overstatement to say that these are the most significant tax changes that have been put forward since the royal commission in the early 1970s. I really feel that changes of this magnitude need to be done with genuine stakeholder engagement.

The proposals, as well, were accompanied by rhetoric such as “closing loopholes” and “using corporate structures to avoid paying their share of tax”. Frankly, members of the business community find this type of communication offensive and are made to feel as though they're being some sort of tax cheats even though they are complying with the laws of the land. I believe the business sector needs to be encouraged, because when they have success, it creates jobs in their community.

I am going to talk about a few specific concerns I have with the proposals in the time I have this morning.

First of all, my main concern is that the proposals actually miss their stated target of targeting the wealthier sector of society. I believe there will be a flight of capital from Canada. I believe these changes will impact recruitment and retention of skilled labour such as physicians and others.

The proposals with respect to income splitting will actually disproportionately impact the middle class more than the upper class. These proposals devalue the real contribution a spouse makes to a family business, whether that contribution is direct or indirect, whether they're actually going to the business every day, or whether they're supporting the other spouse in order for the business to maximize its profit and the amount of tax it will generate for governments.

I have already provided my written submission to Finance. In it I note that even a family with $70,000 in annual income could be faced with a 30% to 40% tax increase if these proposals go through. We're not talking about the high-end income; we're really talking very much about your neighbours, small business owners in Canada.

The discussion paper that was issued by the department compares a business person with an employee and how much income tax each of them would pay. It contains an overly simplistic analysis. There are many factors to consider other than the pure upfront tax calculation.

My second concern is with the significant uncertainly around the new reasonableness test. This test will give the Canada Revenue Agency the power to unilaterally determine the value of certain adults' contribution to a business. This test will be very subjective and fact-based. This is a significant new burden on small businesses, which are not even going to have tracked the information that would be needed to defend themselves. It will be the subject, I am quite confident, of much new litigation and disagreement.

Just as one example, is a wage that's paid in Prince Edward Island for a service different from a wage paid in Ontario? How is CRA—and I almost feel bad for them—going to actually administer this test in reality?

I would say that in my view, the most egregious proposal relates to the taxation of passive income. Passive corporate income is already taxed between 50% and 55% in Canada. It depends on the province. In fact, it's taxed at a higher rate than most personal rates. Without question, there is a tax deferral on the initial capital that the passive income may have generated, if that capital came from a small business deduction. However, that is not a loophole. That was something that government intended to give small business access to capital for either future expansion or for working capital during slower periods. These proposals will eliminate the long-standing concept of tax integration in Canada, at least on the payment of some dividends. The effect of this for a P.E.I. corporation is a passive tax rate that could reach 74.55% and would have a similar result in other provinces.

This is clearly unacceptable and I'm hopeful the government would not have intended this tax result.

Holding companies are also used as a vehicle to accumulate funds for retirement, in lieu of an RRSP. Funds accumulated are similar, in some ways, to an employee who has a registered pension. However, employee and employer contributions to a pension and the income realized bear no tax whatsoever until withdrawn, which could be many decades later. Conversely, the business owner who uses a holding company for investment has already paid a tax of between 15% and 30% on the initial capital and an annual tax of 50% on the earnings that are realized.

For all these reasons, I would strongly recommend that the proposed changes for passive investment be abandoned entirely.

A fourth concern I have relates to some of the proposed changes to section 84.1. While I do agree that some changes here are required to address certain planning that was happening, the proposed changes, as currently worded, lead to double, and even triple, taxation and will negatively impact estates and common post-mortem techniques, some of which were already in progress at the time of the announcement.

Government has recognized that section 84.1 does impede succession planning for family business and, as part of this consultation process, I encourage them to also deal with that and not just have that in the discussion paper and not actually deal with it.

[The Chair, Liberal, Wayne Easter]

Terry, could you sum up fairly quickly.

[Terry Soloman]

Sure.

I also wanted to address, as I believe it's been mentioned already, that these proposals do have retroactive application. Taxpayers are entitled to structure their business affairs with certainty. Many of these structures have been in place for many years with the full blessing of the Canada Revenue Agency and the courts. I don't believe that it is fair to fundamentally change the system. People should have no doubt that it is being fundamentally changed here.

For the reasons outlined above, I believe the proposals, as presented, are deeply flawed and should be set aside. However, I do support a review of the current corporate tax system in Canada with a view to modernization of the system. This would best be done through a royal commission on tax reform with a mandate to look at all of the issues that are being raised through this consultation process and come up with a reasonable compromise.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, Terry.

We'll be turning to Ms. Dutt, a family physician, who is speaking as an individual. Welcome.

[Dr. Monika Dutt, Family Physician, As an Individual]

Thank you.

I've been up since three o'clock. I took the flight out of Cape Breton this morning, one which Ms. Raitt might have taken in the past, so it's been a long morning so far.

I could just say ditto to what Denise said, but I will read what I have here.

I am a family physician from Cape Breton, Nova Scotia. I am the daughter of a small business owner. I am here to speak to the content of a letter that was signed by close to 500 physicians and medical students across the country. The letter's signatories and I are in favour of the proposed federal tax changes for Canadian-controlled private corporations, or CCPCs. The reason we are in favour is that we support greater equity amongst Canadians.

Let me say first that this is not unequivocal support. It is regretful that the federal government has not closed the tax loophole of being able to be paid the stock options used by CEOs and other high-income Canadians. Given that Canada's top CEOs earn 193 times what the average worker earns, it is imperative that the government keep its election promise. As well, various other policies that can be implemented, as was mentioned particularly in the last session, should also be considered.

Cape Breton is a beautiful island with rolling hills and exquisite ocean views. That's the image you tend to see in tourist brochures. In contrast to those scenes, one third of our children on the island under age six live in poverty. There is a first nation just down the road from me, and they cannot drink, cook with, or bathe in their water. A patient I had in clinic yesterday holds three minimum wage jobs, barely sleeps, and is struggling to take care of her daughter as a single parent.

In contrast, the vast majority of physicians remain amongst the top 1% to 5% income earners in Canada. We as doctors recognize that adequate tax revenues are needed to fund such social programs as affordable housing, social assistance, legal aid, hopefully one day national pharmacare, and the health care system itself. These programs directly impact the health of our patients. We believe it is important for us to contribute to their sustainability through an adequate tax base. We do ask that any tax revenue that is gained through these tax changes go to funding policies and programs needed to ensure the health of our patients.

Now, physicians are in a unique situation of being publicly funded but mostly self-employed, often running practices with varying amounts of overhead. Many physicians do have legitimate concerns about their work situations, including a lack of extended health benefits, parental leave, or pensions. We have long training periods, incur significant student debt, enter the workforce late, and have high rates of burnout. However, we feel that these issues are best addressed at their root, with the best of all available policy solutions, and not in inherently unstable ways such as through our tax system, which is constantly evolving.

It is important to note, however, that the methods that have been primarily used by some doctors—lower tax rates on passive investment income through a corporation and income sprinkling—are legal, and were in fact encouraged by several provinces in lieu of fee increases as part of negotiations, despite federal jurisdiction over relevant tax policy. We know that these benefits are advantageous, as was pointed out earlier, primarily for certain incorporated doctors with specific family situations and those who earn enough to supersede traditional saving vehicles available to all Canadians. This seems unfair to single parent physicians, of whom I am one, and those with young children or those who are unincorporated. It also seems unfair that these benefits are not available to Canadians with similar incomes who cannot incorporate. It is also worth remembering that only 60% of physicians are incorporated, and this option has only been available in some places in the past decade or so.

That said, the changes we are supporting cannot be made without a transition plan, nor in isolation, but rather as part of a comprehensive review of tax policy with a view to equity. As such, we call on the federal government to do four things.

One, implement proposed reforms to CCPCs as a first step in a comprehensive reassessment of tax policy in Canada, especially mechanisms that disproportionately benefit large corporations and the wealthiest Canadians.

Two, outline a clear transition plan for savings held in medical professional corporations. Physicians who have used these methods under existing agreements to prepare for retirement should not be unfairly penalized.

Three, work with the provinces and territories to review options for access to extended health benefits, parental leave, and pension plans for all Canadians, as well as payment reform options that would be available to all physicians and address these important aspects.

Four, work with provinces and territories to tackle the issue of increasing medical student debt, namely, by lowering tuition for incoming students and implementing forgiveness programs for existing debt.

I realize that the federal tax changes go far beyond the concerns of physicians, but this is the world that I know, so it's the one I'm speaking to. What I feel and what many physicians across the country feel is that an equitable tax system is a goal that we can support and can pay into.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, Ms. Dutt.

We turn to Mr. Paquet, appearing as an individual.

[Dr. Alain Paquet, Full Professor, School of Management, Economics Department, Université du Québec à Montréal, As an Individual]

Thank you very much Mr. Chair.

I also thank the members of the committee for giving me the opportunity to speak with them and the other witnesses on this important review of tax planning through the use of private corporations.

I am an economist and professor of economics at the Université du Québec in Montreal. I have worked at the university since 1988, with the exception of a nine-year period during which my class was bigger and less disciplined, and I was the one taking the exams; I was a member of the National Assembly. I occupied different positions there, but whatever position I was in, I acted as the premier's senior economic advisor, and was one of the senior drafters who contributed to preparing the government's economic program between 2003 and 2012. I also had the opportunity of being the chair of the Public Finance Committee for seven years. And so this to me is like a homecoming, but on the other side of the table and in another of the country's parliaments. For a few years I was also minister delegate for Finances, the equivalent of the Minister of State for Finance at the federal level.

And so I was often privy to matters related to the budget. I knew both the theoretical and empirical aspects as a professor and researcher, and the practical aspect, since I dealt with budget preparation and the issues the various persons concerned had to debate. Ultimately, when we talk about taxation, we are talking about its impact on the economy and on the people who participate in the creation of wealth and the distribution of that wealth.

In that context my preliminary remarks will bear on a certain number of principles. I will probably have the opportunity to talk about them more in detail in the subsequent discussion.

The last broad tax reform in Canada goes back to 1971, following the 1966 Carter report. In many regards our current fiscal system is based on that. There have been a few ad hoc important changes made. Among others, the very good economic reform of putting in place the GST, and the improvements that followed.

Other elements were introduced following the report tabled by Jack Mintz in 1997. This allowed businesses to benefit from a tax reduction, which was necessary at the time, in addition to improving the neutrality of the taxation system, a principle I will get back to.

However, the economy has changed in the meantime. For instance, the service sector is increasingly important within our economy. This does not mean that we should sacrifice other aspects of the economy; however, we have to take economic reality into account as a whole, and ensure that taxation really attains its goals. These goals are established and analyzed in particular from the perspective of fairness and efficiency. These two principles are the subject of a public debate that is sometimes very rapid, unfortunately. The newspapers have a tendency to systematically present those elements as being opposed to each other, but that is not always necessarily so.

In the context of the elements of reform and the principles behind them that are being put forward by the Department of Finance, the Minister of Finance, and the government, it is clear that in some regards, one of the elements identified does pose a fairness or non-neutrality problem. In fact, we may encourage businesses or entrepreneurs to incorporate in order to benefit from the tax system in a legal way, insofar as the current laws and regulations apply. However, we have to pay the costs, deploy resources and find ways of reducing taxes, not only to improve the growth of businesses but also for fiscal reasons, quite simply.

In my opinion, you should not do indirectly what could better be done in a direct manner. As to whether taxation is too high or too low, that can be debated. There are in fact several debates on that topic, and several positions, and I would be happy to contribute to that debate myself. One thing is certain, we have to make sure that taxation does not become excessive. To meet that objective, we encourage very careful planning. This is done in particular through income distribution by incorporation. People resort to this not to become entrepreneurs but for taxation purposes. Passive investment portfolios can also be used, but these do not allow the corporation to grow and to prepare for the future. In my opinion, certain elements could be improved in various ways. We could encourage income distribution through capital gains in order reduce taxation.

Neutrality means ensuring that comparable situations are treated in the same way. We should aim to improve that neutrality, which is in my opinion an important principle. In principle, the proposals which have been made are a step in the right direction.

That said, we have to avoid what may appear to be exceptions—the point is not to provide for all possible scenarios—where the same income might be imposed in different ways, as well as cases where there would be retroactive taxation. Such situations need to be avoided, both in economic theory and economic practice.

There are also issues related to transferring businesses. That is one concern that was submitted to me. Some work needs to be done in that regard, and we will have an opportunity to discuss it further. When I was with the Quebec government, I examined that issue. There were epic debates with government taxation experts. These were not partisan debates, but the taxation people wanted to avoid creating precedents when some problems could be solved.

Comprehensive tax reform that would take all of the principles into account would be desirable. That does not mean, however, that there aren't specific aspects that could be better calibrated to eliminate the unfairness that exists in the current system.

In conclusion, may I repeat that the point is not to jeopardize the tax competitiveness of Canadian businesses. That being said, there is certainly cause for concern regarding what is looming, that is to say the measures the American Congress will be taking in the next weeks or months, whatever form they take.

We must certainly maintain the principle of tax competitiveness, but we have to do it the right way. That does not mean that we should allow unfairness in taxation, as we see now in certain cases.

In conclusion, I'd like to refer you to a few words from a recent article entitled “Les enjeux d'efficience et la fiscalité”—efficiency and taxation issues—which I penned with a colleague. Without aiming for perfection, and while taking into account imponderables and democratic requirements, with leadership and education, we can do better.

Today's hearings and the work that must be done should not be rushed, but this process should not lead to inaction either.

[The Chair, Liberal, Wayne Easter]

Thank you very much to all the witnesses.

In order to get eight people on, we'll have to hold people to about four minutes each. Please keep your questions short and snappy, and your responses also.

We'll start with Mr. Fergus.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Firstly, I would like to thank all of the witnesses who are here.

My first question is addressed to all of the witnesses, and I would like them to answer in 10 seconds, if possible.

Does the current system provide advantages to the owners of Canadian private businesses that are not offered to salaried workers and the owners of non-incorporated small businesses?

[Dr. Alain Paquet]

Unfortunately, that is sometimes the case. There are reasons why corporate and personal taxation must be different. Businesses aren't up in the air somewhere, they belong to individuals who can be taxed. So there must be differences.

That said, when the system encourages people to incorporate for taxation purposes and not for entrepreneurial purposes, the objective that was sought is not being attained.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Dr. Dutt.