Finance Committee on Sept. 26th, 2017

[Terry Soloman]

I would concur as well. I do believe that if there is going to be some sort of income sprinkling rule put into the legislation, it needs to be a bright-line test. It should not be a reasonability test.

Also, I believe that a spouse needs to be viewed differently than other family members are. I really do believe that spouses should be looked at as a family unit. In that situation, I do not believe that tax on split income rules should apply. But we're getting into specifics on that....

I do believe that it should be bright-line test.

[Dr. Monika Dutt]

I'm not a tax policy expert, but my understanding is that part of a comprehensive review should be looking at whether we're taxing individuals versus families and, in looking at that question, doing it in a way that doesn't disproportionately have negative impacts on, say, single parents or others who wouldn't be able to access the same kinds of tax reduction benefits.

[Dr. Alain Paquet]

Yes, I think it would be possible to do that.

We need to avoid ambiguous scenarios where people would again try to directly or indirectly bypass the system. There would have to be guidelines, since the objective is to have a lower tax rate for businesses than for individuals. The entrepreneurs have to face risks that a salaried employee does not face. As such, it is not better or worse in either case. We need all of these people in our economy.

I would like to go back to a question you raised earlier concerning the risks and the synchronization businesses must aim for, i.e. the chronology that demands that a business have funds to meet opportunities that may arise. There too, it's conceivable that there be some way of defining a criterion, such as a percentage—the base of which remains to be determined—of revenue that could be compared to a passive investment, one that would be well framed and would allow the business to take advantage of positive growth opportunities.

However, things would not be as they are now, where even if its objectives do not guarantee its growth nor align well with some situations, a business can still indirectly benefit from lower taxes through incorporation.

[The Chair, Liberal, Wayne Easter]

I'm sorry, but we're going to have to cut it there on that round of questioning. We're into four minutes.

Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, Mr. Chair.

Mr. Soloman, you mentioned this in your opening remarks, and then on that last question you went further in terms of saying that spouses should be seen as a family unit. You talked in your opening statement about sprinkling of income for those who legitimately work in the business and then even for those who don't. I assume you're referring again to the spouse as that unit.

I have two questions.

One, how could you justify building into a system a benefit for married individuals and leaving out single individuals who would not have that benefit?

Two, if you're referring to the idea that a small business owner, for example, works really hard and their spouse might have to take care of the kids or do something in addition to allow that small business owner to do what they do and put in the hours they put in—because I've heard that argument—I would draw the comparison to not only a doctor, but a firefighter or a paramedic who may have to get up in the middle of the night for a greater community service, but doesn't actually have the ability to sprinkle income to, let's say, a family member or a spouse, in order to be able to do the job and to do the things they do in that position.

Could you elaborate on how you would justify spouses being a family unit despite the inequality in that couple of examples that I've provided?

[The Chair, Liberal, Wayne Easter]

Terry, go ahead.

[Terry Soloman]

I guess with respect to your question, as I mentioned in my opening comments, the spouse does contribute to the earnings of the business whether they're directly or indirectly involved. That should establish an entitlement to receive income and not pay tax at the very highest rate simply because they're someone's spouse.

If someone is an employee, you have to do a comparison, and there's been much debate about the other factors involved with these proposals. That's why we need to have a more comprehensive review of the system.

Although I'm not a lawyer, I do know that in the case of family law, a husband and wife are seen to have equal entitlement to the family assets. While I'm mixing tax law with family law, there is a similar theory, in that both spouses are contributing to the economic growth of the family unit.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you.

My next question is for Ms. Dutt.

Again I'm referring to what was reported in the media as some internal documents on messaging from the Conservative Party. In it they asked what Trudeau's taxes will mean. One of the things said that if you need a family doctor, it will be harder to find one as a result of these tax implications.

As a doctor and someone from Atlantic Canada, we've talked about the challenges for the medical profession in terms that it might be different than in other provinces. For example, in Ontario, we have other challenges in health care. Could you speak to whether you think that finding a family doctor will be directly correlated to these tax changes, or do you think there are perhaps systemic issues in terms of the medical care across the country that might be leading to some of the access issues?

[Dr. Monika Dutt]

I could say two things.

It's been painted as a for or against, and doctors divided, but in the end I often find with physician colleagues who may adamantly oppose the tax changes that we come to agreement. We know that there are problems in the system that we need to deal with. That's often the common place.

We may differ on how to address tax policy, but I fully support my colleagues who work incredibly hard and work long hours. I want to say that.

I think one issue that comes up in this discussion, which isn't going to be solved by tax policy, is the differential in physician earnings between different specialities. Family doctors, emergency physicians, pediatricians are some examples of lower-earning physicians on the spectrum. They are also often the ones who may have higher overhead. A physician who is running their own one-person family doctor practice may be using more of the income they have to run that practice.

Whether we're going to lose physicians, again, I don't know that we have the evidence from the past to say that we will. I will say that there may be differential impacts on some physicians, especially those who may be using these tax incentives to support their businesses rather than as their own savings.

[The Chair, Liberal, Wayne Easter]

Thank you both.

Mr. Poilievre.

[Pierre Poilievre, Conservative, Carleton, ON]

I'll start with a quick correction.

It has been said that small businesses have a lower tax rate on their passive income. In fact, they pay a higher tax rate on their passive income under the present rules.

Moving on to Ms. O'Connell's remarks, she was commenting on this inequality that she sees in retired business owners sharing their income with their spouses, as though they are the only ones who are able to do that. We have something called pension splitting in this country. For small business owners, with the income, the dividends they take out of the business that they have built throughout their lives, that is their pension.

We public servants all get a public pension, and we are allowed to split that pension. The Prime Minister will be able to split his government pension with his spouse for the express and sole purpose of lowering his tax burden.

Do you think that's fair?

[The Chair, Liberal, Wayne Easter]

Who wants to answer this?

[Denise Workun]

I'll answer that.

I did proactively address that issue in my opening comments. I think that's absolutely not fair, and that should be changed as well.

[The Chair, Liberal, Wayne Easter]

Mr. Paquet.

[Dr. Alain Paquet]

On the point raised by the honourable member, the difference is that a small business owner or a bigger business owner who are incorporated would be able to compound that interest for a longer time, without paying taxes, than the retiree who has been a salaried worker for all his life. So all of the interest payments, the compounding of interest, will give him a higher return.

[Pierre Poilievre, Conservative, Carleton, ON]

I'm aware of that, sir.

[Dr. Alain Paquet]

It's important to point out.

[Pierre Poilievre, Conservative, Carleton, ON]

I'm aware of that but what was stated on the panel by one of the witnesses is that passive income is taxed at a lower rate within a private corporation. That in fact is not true. It is taxed at a higher rate within a private corporation. That is the correction I was making.

Does anybody else want to comment? I want to state clearly that I support pension splitting. I was part of the government that brought it in, but the government is taking away pension splitting for small business owners. Do you think it's consistent that members of the government bench will be able to split their pensions with their spouses when they're taking away that opportunity from small business owners?

[The Chair, Liberal, Wayne Easter]

Mr. Weissman and then Mr. Soloman.

[Peter Weissman]

I think it is fair given the context that there is pension splitting to employees. I think that income sprinkling is a form of income sharing among business owners. I do think if there's going to be fairness in the system, the two should be allowed.

[Pierre Poilievre, Conservative, Carleton, ON]

Just to clarify, under the government's proposal, there is one way that the retired couple could continue to split their income, in fact, would be required to split their income, and that is if they get a divorce, in which case the Divorce Act would require that they divide up their assets and therefore their income.

The Liberals will allow it for people who have a company or a government pension. They will require it for divorced couples but they will ban small business owners from dividing up their effective pension assets for the purposes of minimizing their tax bill.

[The Chair, Liberal, Wayne Easter]

I remind you, Pierre, this is a proposal. It is not the Liberals that are doing anything as yet. There's a proposal that there are consultations on, so let's not forget that.

Mr. Soloman, did you want to answer?

[Terry Soloman]

I just want to make a couple of brief comments on that issue.

I have heard some suggest that while a business owner could contribute to an RRSP, they would then be able to income split as well. That is a fair comment. However, I'm going back to that family that makes $50,000 to $100,000 a year. They're trying to grow their business. They just do not have the excess cash to be able to fund their RRSP at least in the early years. Many businesses actually refer to their business as their retirement plan. It is their RRSP.

I just don't think you can look at a pension that's built up over many years and compare it to a business and say that one should be income split and one should not. I think the two are hard to compare. I don't believe that the private sector business owner in many cases has enough time to build a pension that would be equivalent to a defined benefit pension that maybe a public sector employee would be entitled to.

[The Chair, Liberal, Wayne Easter]

Okay, thank you.

Mr. Sorbara. We're going to cut back. We need three questioners. You're only going to get three minutes, so be snappy, no speeches.

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

Okay.

Thank you, Mr. Chair.

Thank you everyone for being here today.

I want to go to Mr. Weissman first.

I've met with many of your colleagues in the tax industry to go over these proposals and better understand how we can make the system better, how we can improve tax fairness, tax efficiency. Are there issues in the spirit of what we put forward in the consultation paper that may address some of the issues in terms of tax fairness?