Good morning.
I'd like to thank the committee for the opportunity to comment on the Department of Finance proposals, and also thank the staff for their last-minute translation of the three tables and charts I'd like to use.
I would like to focus my remarks on two questions. Briefly, is income sprinkling unfair and how can we know? Do we have the evidence that Parliament and the people of Canada need?
You've already heard a lot about unfairness from most of your witnesses. Indeed, I'm impressed that there seems to be almost unanimous agreement that there is an issue of fairness. To reinforce this point, the first table in the handout shows some calculations that were produced by a private sector tax consultancy. These figures compare the income taxes of an individual who receives their income simply as a salary, with an individual who receives exactly the same income but via a private company, and in the same year, pays it out as dividends to a spouse, or in one of the rows shown, to a spouse and two children, none of whom have any other income.
I'm guessing that the first row, at $73,000, was put there because of the claims made by Dan Kelly and the CFIB, and the group with which he's associated, that two-thirds of small businesses have incomes below $73,000. While not stated explicitly, the implication is that this group is going to be hit hard by the proposals.
If we focus on the income sprinkling part of the minister's proposals, a very large portion of these small businesses don't even have CCPCs, so they would be totally unaffected. Even if the small business were incorporated and did income sprinkling, their tax savings would likely be less than the cost of the tax planner's fees.
I'll skip over describing the other numbers. A few minutes ago, Chris Roberts described the figures, the statistics that are shown in the graph, where 90% of individuals, for example, had less than $68,800, and well under 10% were owners. Let me emphasize a point that he made, that some of these middle- and lower-income CCPC owners were likely the spouses and children of the main CCPC owner, so that in terms of their family income, they lived in families with much higher incomes.
In my last set of graphs I've shown the number of CCPCs from 2001 to 2011 in four provinces, for each of three industrial classifications: restaurants, lawyers, and doctors' offices. The number of restaurant CCPCs has been fairly stable, drifting up a bit, while lawyer CCPCs have increased quite steadily over this decade in all four of the provinces shown.
More dramatic though are the number of doctors' office CCPCs in Ontario. In 2005 the Ontario government, as part of its fee negotiations with the Ontario Medical Association, made an obscure change in their corporate law—page 159 of the budget—to enable family members of doctors and dentists to own shares in their private companies. This change may have been well-hidden from the general public, but it must have been of real benefit to doctors and their families' tax positions since the number of their CCPCs increased 10-fold in the following years.
The change in Ontario's corporate law enabled high-income doctors who set up CCPCs to save tens of thousands in income taxes, and likely had virtually no benefit in terms of real economic growth. In the context of what the Canadian Medical Association said, “Ideally, we wouldn't get sick”, so the expenditure or the contribution to GDP is considered by some economists of medical expenses as regrettable. You'd rather not have to clean up pollution. You'd rather not have to fix people who get sick.
Using CCPCs for income sprinkling is unfair, both horizontally between individuals with the same income but able or unable to run this income through a company, and vertically by eroding the progressivity of Canada's income tax system. Rising income inequality has come to prominence over the past few years, with a focus on the income shares of the top 1%. Our analysis suggests that this degree of inequality is worse than the statistics indicate because these statistics fail to account for income received but retained within private companies.
When we pierced the corporate veil and added these hidden incomes to the share of the top 1% in 2011, it increased by one-third and by half for the top one-tenth of 1%.
Let me now turn briefly to my second and last point. The two graphs that I have just shown stop in 2011. When we started our research in 2013, this was the most recent data available. It took us over two years to assemble the data underlying these results. I'm very proud of the fact that our research has allowed us to shine a light, for the first time ever, into this dark corner of Canadian tax policy.
Unfortunately, such new light in the dark corners of the tax system is rare. As the Auditor General concluded in his spring 2015 report, tax-based expenditures “were not systematically evaluated and the information reported did not adequately support parliamentary oversight.”
While Parliament is able to scrutinize every dollar of what I'll call “front-door spending” by the government every year in the main estimates, various backdoor expenditures via tax preferences—or tax-based expenditures, as the AG calls them—are barely scrutinized once, when they are introduced in a budget.
Further—and let me conclude on this point—the analytical capacity of the federal government has been seriously eroded in the past decade. The previous government was notorious for knowing what it wanted to do, regardless of any evidence or analysis, especially when it was contrary. As a result, policy analysis groups within government departments have generally withered. It takes less than a year to destroy one of these groups, but up to a decade to recruit and rebuild. I worry that part of this government's initial communications problems with these finance proposals may be a reflection that, even the Department of Finance, for decades a powerhouse of unrivalled analytical expertise, has experienced some of this erosion as well.
Thank you.
