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.
10:45 a.m.
Professor of Economics, University of British Columbia, As an Individual
Yes, I think it's a good question. I think there are clear advantages for those who incorporate.
I think the right comparison is not necessarily to think about a regular salaried worker versus a small business person, but again, within the business sector, those who are incorporated versus those who aren't. Within the medical sector, 40% of doctors who are not incorporated. Think of them, who trained just as hard as everyone else, and compare them to those who are incorporated.
10:45 a.m.
President, Unifor
The answer is yes. The bottom line is that we have a structure in place where doctors, based on a tax loophole, pay less than registered nurses.
10:45 a.m.
Liberal
10:45 a.m.
Voices
Oh, oh!
10:45 a.m.
National Tax Office Leader, BDO Canada, Coalition for Small Business Tax Fairness
Yes, there are some tax advantages with respect to Canadian-controlled private corporations. I think the key here, though, is that we're in favour of a comprehensive tax reform to determine what is the right tax policy to support Canadian businesses, to be fair and also to get tax simplification—
10:45 a.m.
Liberal
10:45 a.m.
Liberal
10:45 a.m.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
I'm sorry, Mr. Chair. I'm just concerned about the time I have left. I want to make sure—
10:45 a.m.
Liberal
The Chair Liberal Wayne Easter
I know. You asked all of them to answer and they'll answer.
Mr. Howlett.
10:45 a.m.
Executive Director, Canadians for Tax Fairness
Yes, there are big advantages.
Even going beyond what already exists for small businesses, Canadian taxpayers are already subsidizing the lower small business tax rate by $3.6 billion. Above that, there are additional benefits—probably about $1 billion—that go just to the private corporations.
10:50 a.m.
President, Canadian Federation of Agriculture
I think the question should be about the balance of what a salaried employee gets and what a business owner gets. If you're working for a salary, you'll have benefits and a pension plan. You'll have an employer who takes care of all the risk. If you're a small business owner, you have a number of risks that you have to deal with. Even more importantly, as a farmer, you have weather risks that other groups don't have to contend with. You also have to make sure you have the investment income and the ability to create those jobs.
I think it's very difficult to compare a salaried worker to a small business person, because there's a different scenario. Before I started farming, I worked for a large corporation and everything was covered. I didn't lose any sleep at night. Working as a farmer, you're losing sleep, you're worried about employees, you have a number of things you have to manage, and some of these tax policies give us tools that we can use.
10:50 a.m.
Liberal
The Chair Liberal Wayne Easter
You can have a very quick question, 30 seconds at the most, and a 30-second answer.
10:50 a.m.
Liberal
Greg Fergus Liberal Hull—Aylmer, QC
First of all, thanks very much to all of you for answering that question.
I think generally there's a consensus that there is a tax advantage that is offered to an incorporated versus non-incorporated person. I do appreciate that. I also appreciate the particular case of farmers, who are concerned not just about that but also all the other factors that go into being a successful farmer, which we all need.
I don't have enough time to go on. Thanks to all of you for answering my questions.
September 26th, 2017 / 10:50 a.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
Well, the answer is that there is no advantage to incorporation in a tax sense, because of course all income earned within a corporation is taxed at exactly the same rate as it is in the hands of a salaried employee, just at a different time. Small businesses pay 15% up front, and then they pay the balance of their tax owing on distribution.
So no, there is not an advantage. There is a different circumstance in that salaried employees don't need to keep capital in a particular enterprise, because their enterprise is their employer, which is separate from their own holdings.
My question is for Dr. Milligan, an economist for whom I have great respect.
I do want to politely challenge one of your assertions. You said that we need a neutral tax system. I think most people agree that we need more neutrality. These changes are being sold as though they are turning our tax system more into Switzerland—neutral—but there are examples of the contrary.
The passive income measure will mean that a business will pay higher taxes when investing in another business's operations than it pays when investing in its own. This is a bias further compounded by the fact that publicly traded companies will not face these higher tax rates on passive income held within the corporation, nor will their shareholders.
Finally, amendments to section 84.1 and the creation of proposed section 246.1 would make a family farm or a family business pay higher taxes to sell its enterprise to the children rather than to a stranger.
These are examples of where these proposals would seem to render the tax system less neutral, rather than more neutral. How would you respond to those matters?
10:50 a.m.
Professor of Economics, University of British Columbia, As an Individual
I thank the member for the question. There are a couple of things.
First, I think it's great that we can agree on the principle of neutrality as being an important goal to strive for. I think that is the right goal for our tax system: to make sure that it encourages growth and also is fair to all Canadians. I think it is a good goal. It's good to identify places where the system is not currently neutral. We could have a very long discussion about all the ways that's true.
The member has identified some important issues that may be challenges with the current proposal, those being the intercorporate holdings, the secession planning, and other elements that may lead to situations in which people in seemingly similar circumstances face different tax situations. These are some of the concerns that I hope are addressed after October 2, when we hear the response from the Minister of Finance. I encourage the member to continue those questions when we see that response.
The second point I'd like to make is about the small business deduction. I have raised that because it's kind of the core of the non-neutrality that we've have introduced, which is that we have a different tax rate for some kinds of businesses than for other businesses. One way we could get got rid of that would be to remove the small business deduction entirely.
Now, that might be something a lot of people would have a challenge with. Back in 1971-72 when this was first introduced, that was the exact nature of the discussion. We were going to have a small business deduction because we liked to encourage growth in small businesses. The challenge we faced, though, is how to make sure we focus those efforts on these small businesses to grow their businesses and the economy, and not use it as a place to accumulate savings away from taxation.
10:55 a.m.
Conservative
Pierre Poilievre Conservative Carleton, ON
Mr. Chair, I thank the good gentleman for his comments on the small business deduction. My question, though, was related to the new biases and the new inconsistencies that are now created by this tax change.
I want to give the Coalition for Small Business Tax Fairness a chance to comment on this, because, again, the academic or esoteric argument in favour of this proposal is that it's going to create more neutrality, but I've have just given three precise examples of where the system will in fact become less neutral and more biased, and where different taxpayers of the same income level will be taxed at greater disparities than they are right now.
Can you comment on that, Mr. Kelly or Mr. Wonfor?
10:55 a.m.
President and Chief Executive Officer, Canadian Federation of Independent Business, Coalition for Small Business Tax Fairness
Yes. I think that's certainly the case. We are deeply worried that this is going to create a whole...it is mixing up the Canadian tax system for businesses and turning it on its head after about 40 years, with very limited.... I appreciate that there is some consultation, but it's very limited consultation for the size and scope of the changes that are being proposed.
I have to say that there are some, particularly in the academic community and many in government, who seem to think or feel that they can divine which businesses are going to be the ones that are going to be successful or grow rapidly, and that we should shower them with support. I get and appreciate the intention and the goals they have. Many in government have said that they want to support small business, but just in different ways: by picking those small businesses that are going to be successful and helping them grow the economy. It's just that there's zero track record of any government agency or academic set of criteria that will help governments or others do that.
Our view is that the only way we can do that is by truly being neutral and ensuring that there are broad-based supports like the ones that currently exist and, of course, the additional supports that were promised by the government: to reduce the small business rate to 9%.
10:55 a.m.
NDP
Alexandre Boulerice NDP Rosemont—La Petite-Patrie, QC
Thank you, Mr. Chair.
I also thank all of the witnesses for having enlightened us on this topic and having provided us with more information. Although the information provided by witnesses is sometimes contradictory, I expect that their research was well done. It will be up to us to sort it all out.
May I remind you that during the last election campaign, the current Prime Minister made a rather unusual statement. In his opinion, many people were creating small and medium businesses in order to avoid paying their fair share of tax. We could say that the Prime Minister was speaking from experience, since that is something he did himself on several occasions. Indeed, he created four numbered companies in order to reduce his income tax rate. His comment poisoned the atmosphere to some degree. Still today, many SME owners consider that this does not correspond to their reality.
The Liberals had also promised to reduce the income tax rate for small and medium businesses from 11% to 9%. This was not done, however. In the 2015 Liberal platform, no mention was made about targeting small and medium businesses in particular. However, the Liberals said that they wanted to eliminate the tax loophole that benefits CEOs and allows them to save about $800 million, money we lose which could allow us to improve social programs or our infrastructures.
Mr. Dias, earlier you said that you were in favour of reducing tax unfairness between salaried workers and small businesses that can choose to incorporate. However, you also said that we could do more than that.
In your opinion, does doing more mean that we should target the tax loopholes that benefit CEOs, as well as the proliferation of agreements with tax havens?