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.