I'd like to thank the committee for the opportunity to speak to you today.
My area of practice is corporate commercial, and my clientele is primarily small business, so while I'm applying some of my knowledge to these matters, I'm also hoping today to pass along the concerns of my clients, the real people on the ground who are going to be affected by these changes and who have studied this intently because it impacts them.
I would like to put three propositions before the committee.
First, that income splitting, as it is currently structured, is fair and puts self-employed people in the position to achieve the same economic circumstances as a similarly compensated employed person. Second, the proposed changes will harm family businesses in particular. Third, these changes will harm the most productive job-producing sectors of our economy.
Dealing with the first point that income splitting is fair, the Department of Finance proposal provides an example of an income-splitting individual named Jonah, who has a company, and an employed person by the name of Susan, who has a job. A nice chart shows their economic circumstances, but leaves out taxable and untaxable benefits that Susan is provided by law. The payroll burden or the employer contributions to those benefits amounts to 15% to 18% of the value of her income, which she receives on top of her taxable income in the way of medical, dental, disability, vacation, and pension.
These numbers are conspicuously absent from the Department of Finance chart. I provided you a brief that adds them back in. As compared to the 15% tax avoidance that our Jonah might achieve, Susan's 15% to 18% in benefits is substantial and puts them, at the end of the day, in the same position in terms of disposable income, which I think is a true measure of fairness that ought to be applied.
This is to be contrasted to the circumstances of an employee who is compensated by way of stock options. For amusement's sake, let's call that employee Bill. Bill would pay lower taxes on employment income than either Susan or Jonah, currently in the nature of approximately 26%, so the current system treats Susan and Jonah fairly. If you alter it so that Jonah cannot income split, Jonah's real, after-tax disposable income will drop 15% to 18% and put him substantially behind Susan. Of course, our fictional Bill will be far ahead of both of them at the same income level because we treat stock options as a capital gain.
If you really wish to seek fairness in the tax system, you need to leave income splitting or, and this is the political thing nobody will touch, you need to look at taxing tax-free benefits, which I don't think will go over well. You would also need to deal with the fact that people compensated by stock options receive a substantial benefit, which I have read is in the order of $840 million a year from the treasury.
The second point I would like to make is that with respect to family business. The mechanism by which income splitting is being ended is by amending the definition of the tax on split income, or TOSI. This is being done in a way that punishes related parties. They will be taxed at 52%. This ignores the reality that when small businesses start, their primary capital investors are friends and family. When you go to a friend or a family member and ask them to invest in your business, they anticipate they have a fifty-fifty risk—50% of small businesses will fold in the first year. The upside for them is that if the business succeeds and they have a share in it, despite the fact that they're not working in the business, they will be able to receive substantial compensation.
The proposed rules, if the person is related to you and does not work in the business, will cap what they can gain and will punitively tax them at 52%. When you go to a family member, you will be saying to them you would like them to invest in a new business you're starting. There's a fifty-fifty chance they'll lose everything and they may not get anything in the way of compensation.
If you drill down on the rules on loans, what CRA looks at as a reasonable return on investment is 1%. The proposition for a family member to invest in your new business would be, you have a fifty-fifty chance of losing everything, and you can get a 1% per annum return on that investment.
What's going to happen ultimately is that families will not make rational choices to invest in the business. They will make the rational choice to invest with other people, and many small businesses will simply never come into existence. If you look at the most successful businesses in the Canadian economy, half of them are family businesses. The Irvings, the Reitmans, and the McCains were businesses that were all started by families with shareholders that are family members, and they drive our economy forward at the highest end.
That brings me to my third point. The most productive job-producing portion of our economy is small business. According to StatsCan's 2015 numbers, 70% of private sector jobs are small businesses with between one and 99 employees. They are the drivers of the economy. The intent of these changes is to go to the top third, the $73,000 and above bracket in small businesses. That is what is driving your private jobs, to the tune of 70%.
The people affected, as I understand it, are approximately 90% of those 70% of jobs. If you impact these people—as one person put it, collateral damage—the collateral damage will be across 60% to 70% of the job-producing economy. When you make things difficult for small business, you make things difficult for Canada.
The way to end income sprinkling amongst a select few is through the definition of TOSI. Changing the definition of TOSI in this fashion has enormous consequences, from the intended recipients of the $500,000 professional right down to the family farm. In the way of productive suggestions, you need to stop looking at the change of the definition of TOSI as a way to do this. If you're targeting at a very narrow, small, and specific demographic of the CCPC, you need to specify them by income band, and if need be by profession. You will need to be very specific and you will need detailed regulations.
Frankly, the consequences of this approach, whatever its intended target is, will be massive and devastating to the small business community and the Canadian economy will suffer.