Finance Committee on Sept. 27th, 2017

[Tom Kmiec, Conservative, Calgary Shepard, AB]

I'm going to start my questions with Mr. Richard and Mr. Chamberlain.

In your pre-budget submission, recommendation number four deals with work to eliminate transfer mispricing. You mention the dollar figures involved and the potential tax revenue that could be generated for the government. It's interesting to see the comparison between the small business tax changes being proposed by the government and the opportunity the government would have to actually go after a real tax loophole, as opposed to a tax law as it is.

On this issue of international subsidiaries being used.... I mean, Morneau Shepell opened an office in the Bahamas. I have a news release here. They did it for their so-called international pension consulting business, which could easily been done out of their offices, obviously, in Toronto. With a phone and an international airport right nearby, you could just as easily go and do your business in South America.

In your proposal, you make a recommendation that this should be where the government focuses its time in order to generate more revenue in terms of “fairness”. Why do you think the government has chosen instead to go after small business owners with very limited means and typically no accounting services because they can't afford fancy lawyers? In your proposal, you even identified the Bahamas, which is where Morneau Shepell opened its subsidiary, and the numbers we're talking about are far bigger than what these small business tax changes are proposing.

[Scott Chamberlain, Director of Labour Relations, General Counsel, Association of Canadian Financial Officers]

Thank you for that question. When you look at the quantum, you're quite right. With the income splitting, it's about $280 million in projected savings with the stock options, which we mentioned earlier subject to a conversation with Mr. Sorbara about public versus private. It looks to be about $560 million to $1 billion in potential savings. With the transfer pricing, it dwarfs both of those, with $7 billion to $8 billion in potential savings, dealing with the very simple premise that economic activity should be taxed where it occurs, which is not what's happening globally right now.

Partially, your answer is probably that the third and bigger item isn't completely within the control of the Canadian government alone. It's an international problem. There is a blueprint for dealing with this, a partial blueprint that this committee put together in October and that the government responded to in February in terms of the CRA's efforts to combat tax evasion.

To be fair, we support modernizing income splitting because, by and large, the bulk of that $280 million benefits lawyers, doctors, and accountants—like me, a lawyer, and the accountant beside me—and not the middle class. About 3% of that benefits them. By and large, it's a very small percentage of money that could be saved. These other items are much more significant.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Can you explain what types of companies take advantage of transfer pricing typically, and what's their size?

[Scott Chamberlain]

I'm sorry. Could you repeat that?

[Tom Kmiec, Conservative, Calgary Shepard, AB]

What types of companies take advantage of transfer pricing and what's their size? What kinds of business lines are they in, typically?

[Scott Chamberlain]

Certainly, it could be a large.... I'll give you an example of a large coffee company that might have its copyright for its well-known brand symbol reside in Luxembourg. What happens is that they notionally on paper transfer goods to that country and tax them in that country at a much lower rate than where the consumption and the production actually occur. Also, they ascribe the bulk of their profits to the royalties associated with that brand, that symbol that's owned in Luxembourg. Mostly, we're talking about very large companies.

I'll give you another example. I can't remember the exact island, but there's a British island that is notionally the biggest exporter of bananas in the world, and there's never a banana on this island. The goods are notionally transferred through this island. They are priced and taxed there, and even the economic activity occurs elsewhere. Essentially, if we're transfer pricing, we're allowing economic activity that occurs in this country to be taxed elsewhere and not go into public revenue.

[The Chair, Liberal, Wayne Easter]

I'll let you have a very short question.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

The companies that do take advantage of this are obviously publicly listed companies. The biggest coffee company in the world is Starbucks. I'm guessing that's the one you were trying to imply without naming them, so I'm just going to name them. I'm guessing that it's publicly listed companies that typically take advantage of this.

[Scott Chamberlain]

Sure. I guess parliamentary privilege extends to witnesses, so that would be Starbucks I was referring to, yes. Google, Amazon, the largest companies... but it's not only the large companies. Anyone who deals in goods can take advantage of transfer, such as banana companies and that sort of thing. As I said, the amount of money we're talking about is $7 million to $8 million. It's a large amount of untaxed revenue.

[The Chair, Liberal, Wayne Easter]

We'll have to move to the next questioner.

Mr. Fergus, you have five minutes.

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

Thank you very much, Mr. Chair.

I would like to thank all the witnesses for their very interesting testimony. I am very grateful to those who have travelled from outside the city to testify here, in Ottawa.

My first question is for Mr. Shack.

Mr. Shack, I am very interested in your submission on behalf of the Centre for Israel and Jewish Affairs. The question I would like to ask you has to do with security infrastructure. You acknowledged that the budget increase was very important for ensuring the safety of places of worship. You also recommended that we should be flexible about the program and go beyond the 50/50 formula. Could you expand on that and give us a specific case that demonstrates the importance of that flexibility?

[Noah Shack]

The fifty-fifty formula is something we definitely support in general terms. It's important that security infrastructure isn't just a government handout but a partnership of the institution, the community, and the government.

At the same time, a number of institutions, some of them, in our experience, synagogues and schools, would love to be able to apply and participate in the program. They've come to us and have spoken to us about wanting to be able to engage with the process, but unfortunately they're just not in a position to put up their half. I'm not aware of specific examples beyond our community, but I'm sure there are some.

Whenever that 50% requirement constitutes a barrier to accessing a program that's designed to help vulnerable people, I think there should be a consideration in place to extend to them some sort of relief in this regard if they can demonstrate, by providing financial statements, that there is a definitive financial hardship. Most of them are charities, so there's a lot of documentation in that regard. Whether it's getting rid of their 50% or asking them to contribute a smaller amount, that would go a long way towards opening up the program and enabling them to participate.

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

Is your community interested in having more flexibility? For instance, would a deadline extension enable you to collect 50% of the funds?

[Noah Shack]

Again, that's an interesting idea that might work for some institutions. For others, it may not be a function of time; it may take too long for them to raise the kind of money that would be required for the project. At a certain point, these security measures that are needed are not being put in place, and if it takes a number of years for them to gather the resources sufficient to participate, I think that would be too long. It wouldn't actually help them.

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

The second thing I would like to address with you is the charity donations. You would like even the small amounts to be subject to 33% tax credit.

I personally became very involved in the Liberal Party. As far as charitable donations are concerned, I always thought it was important to encourage Canadians to give larger amounts, which would allow them to take advantage of the maximum tax credit, set at 33% . I thought that was the idea. We want to provide incentives to Canadians. Instead of making a $150 donation, a person could give an extra $50 and take advantage of a more attractive credit.

If we were to give the maximum credit for small amounts, don't you think it could have a negative effect and encourage people not to give the maximum amount?

[Noah Shack]

No. I think our intention with this is very much along the lines of what you have suggested. The idea of extending a 33% tax credit for charitable giving to people who aren't earning over $200,000 potentially would incentivize them to give more. If that benchmark for where the 33% would kick in is $200 or $1,000, that's something that can be discussed and considered in terms of how much it would cost and what the government could entertain. The idea very much is to create that incentive and to encourage people, to say that if they give that extra amount, they will be able to receive that top benefit. Right now, it's a little bit askew.

Of course, we're happy that the top givers, the people who earn over $200,000, are able to receive that 33%. They are often the ones on whom charities rely most heavily, but not exclusively.

[The Chair, Liberal, Wayne Easter]

Thanks to both of you.

Before I turn to Mr. Kmiec for the last question, I have two. One is for the Association of Canadian Financial Officers.

You talk in your brief about how maybe the federal government could be more productive by using people within its own employ who are professionals, and thus save money, rather than going to outside consultants. Do you have any cost figures or any figures on what amount of savings the federal government would gain by doing that?

[Dany Richard]

I can tell you, as a chartered professional accountant myself, with 10 years' experience in the public service, that too often we'll deal with outside resources, and when these contracts come back, we have to review them, correct them, and say, “You might want to revise this.” Why? It's because we have the experience; we're there. In terms of the dollar figure, they're spending $8 billion on these outside contracts. How much of that could be done in-house?

We all agree that if there's a lack of capacity, there might be a need for a portion of that, but for the most part throughout my career, every time I've see one of these reports I've said, “This is something that could have been done better in-house at a lesser cost.”

[The Chair, Liberal, Wayne Easter]

Did you say $8 billion?

[Dany Richard]

Yes, $8 billion.

[The Chair, Liberal, Wayne Easter]

Okay. That's good to know.

Mr. Levin, with regard to your presentation, I know you dealt mainly with “tax planning using private corporations”. I think your comments are important. Right at the moment, one of the difficulties for us as the finance committee is that we're doing pre-budget consultations, which this panel is doing this afternoon. We're also studying tax planning using private corporations. We had a hearing on that yesterday morning, and we'll have one tomorrow morning.

In terms of this presentation, I would suggest to you, and to others who may care to, that on the finance committee's website under “tax planning using private corporations”, there is a place to make submissions, and maybe you should submit this there as well. What comes in on that consultation will go to the minister's portfolio for the consultations that he's doing, which will end on October 2. It's just a suggestion so your remarks aren't lost and so they go, perhaps, to where they're better slated to get your point across.

[Larry Levin]

Thank you.

[The Chair, Liberal, Wayne Easter]

We have Mr. Albas now, instead of Mr. Kmiec.

Mr. Albas, you have about three minutes.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

I'd like to go to the Canadian Dental Association. Obviously, there are different standards in every province. My understanding is that, in British Columbia, the Health Professions Act only allows other dentists and family members to hold shares in a company. One of your members told me about not being able to sell shares to non-dentists to raise capital and about having to borrow to finance the dental practice. Are there similar limitations, as far as these practices go, across the country?

[Kevin Desjardins, Director, Public Affairs, Canadian Dental Association]

I think that within most of the health professions acts across the country, this is the limitation that's put on: a dental corporation can only be owned by a dentist. That is the reality, and it certainly narrows the market of who would want to buy that corporation at some point. Certainly, as you indicated, the dentist can't sell shares in it.

Borrowing is one way to access capital. The other way is, frankly, to save within the corporation to be able to access that capital on an ongoing basis.