Finance Committee on Sept. 28th, 2017

[The Chair, Liberal, Wayne Easter]

I call this meeting to order.

Pursuant to Standing Order 108(2), this meeting continues our study of tax planning using private corporations. This study will provide contributions from this committee to the Department of Finance’s consultations.

I want to welcome the witnesses here this morning. I know a number of you had a fairly short time to prepare and make arrangements to get to Ottawa. This is an important issue, and I want to sincerely thank you for making the effort to come and state your point of view on this important issue.

We'll start with the Canadian Centre for Policy Alternatives.

Mr. Macdonald.

[David Macdonald, Economist, National Office, Canadian Centre for Policy Alternatives]

Thank you very much, Mr. Chair.

I'd like to thank the committee for the invitation to attend this morning.

Of the three measures proposed, given the time, I'd like to constrain my comments to the income sprinkling portion, although I'm happy to respond in the question period to questions on the other issues. I'll also refer you to my recent report “Splitting the Difference: Who really benefits from small business income splitting?” It contains more detailed analysis than I'll present verbally today.

Data in that report and presented here today utilizes Statistics Canada's tax modelling software to determine statistically accurate impacts of small business income splitting.

What's immediately clear is how concentrated the benefits of income sprinkling are among Canada's richest families. The top 20% of families receive 91% of the tax benefit from the income sprinkling of CCPC dividends. The top 5% of families, making over $216,000 a year, get half of the benefits. The bottom 70%, including essentially all middle-income families making under $100,000 a year in combined pre-tax income, share only 3% of the benefits of small business income splitting. The households that benefit the most are almost exclusively male headed.

Despite all the fuss, the benefits are incredibly narrow, even among families receiving CCPC dividends. Of the 904,000 economic families receiving such dividends, 13% could be using income splitting, although assuming that all CCPC dividends wouldn't pass the reasonableness test, clearly representing an upper bound. Put another way, at least 87% of small business families don't benefit from income splitting.

Further refinement reveals that only about 5% of small business families are actively using income splitting. They would likely fail the reasonableness test and, therefore, be impacted. This represents only 0.3% of all Canadian families.

The federal annual cost that I've estimated in 2017 is $280 million, with a provincial cost of $110 million, for small business income splitting. Interestingly, the average tax benefit is lower than recent rhetoric would suggest, even for families in the top 1%, making over $416,000. The average benefit is only $10,000 for those receiving a net benefit.

Professionals are far more likely to be using this tax strategy, statistically. Most likely to benefit are families with a household head in health care. This group is going to contain doctors and lawyers, where 26% of families are receiving a benefit of over $1,000 from small business income splitting. The second most likely group is a broad grouping of professionals, including lawyers and accountants. The third is a grouping of real estate and insurance salespeople; these types of businesses are not generally thought of as traditional small businesses. In fact, the agriculture category, which would contain family farms, and the accommodations and food services category, which would contain things like family restaurants, are about 2.5 times less likely to see a net benefit from small business income splitting compared with families with a head in health care.

Given the concentrated nature of benefit by professionals and in high-income families, I'd encourage this committee to continue on its path to close income sprinkling for CCPC dividends. That being said, I'd also encourage this committee to consider bigger fish when it comes to tax expenditures, including the stock option deduction and things like the capital gains inclusion rate. Hopefully, these can be part of a larger public discussion on reviewing tax expenditures.

Thank you. I look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you.

We'll now turn to the University of Ottawa.

Mr. Poitras, I think you were notified yesterday at four o'clock.

[Professor Stéphane Poitras, Associate Professor, School of Rehabilitation Sciences, Faculty of Health Sciences, University of Ottawa]

Yes.

[The Chair, Liberal, Wayne Easter]

That's really....

[Prof. Stéphane Poitras]

That's part of the professor's job: to be quick.

Firstly, I'd like to thank the Standing Committee on Finance for its invitation.

Since 2007, I have been a professor at the University of Ottawa School of Rehabilitation. My training and my field of research are in the organization of care, particularly as it relates to musculoskeletal disorders.

I am going to discuss the bill from the angle of doctors' practices, as that is the only perspective I can really speak to.

Health care expenditure data published by the Canadian Institute for Health Information show that in 2014, the most recent year for which data is available, physicians accounted for 21.4%, or $32.5 billion, of all public health spending. However, that amount underestimates the total public financial resources allocated to doctors, since there were also funds allocated to doctors in the funding of hospitals and other establishments, for a total of $73.3 billion, or 48.4% of public expenditures. Unfortunately, the institute does not specify how much of the funding given to hospitals and other institutions went to physicians.

Be that as it may, one single profession accounts for one of the highest expenditure items, raking in about a quarter of total public spending on health in Canada. And that percentage has in fact been increasing constantly since 2005.

May I remind the committee that in Ontario, for instance, there are 26 regulated health care professions. In several provinces, doctors may also incorporate. The effect of that is to reduce their tax rate considerably, of course, and there are corporate tax deductions. Moreover, by declaring a smaller annual salary, incorporated physicians gain access to numerous generous benefits generally given to the lower-income middle class, such as more generous family allowances, subsidized day care, student bursaries for family members, a lower threshold for medical cost credits, and so on.

Their incorporation has consequences not only for federal and provincial finances, but also municipal ones. I'll give you a somewhat anecdotal example, but it will give you some idea: where I live, a doctor who declares an annual income of less than $40,000 can by presenting his tax assessment obtain a municipal services access card for half the going rate.

It is estimated that approximately 60% of physicians are currently incorporated, although rates have greatly increased these past years. Since incorporation demands a yearly investment of time and money, this indicates that incorporation provides clear tax advantages.

Lower corporate tax rates were brought in mainly to foster job creation in competitive sectors. However, the medical profession is more akin to a monopoly, given the highly regulated and controlled offer of services. As opposed to other employment sectors, doctors run few risks, since they can count on a constant, highly solvent single-payer source of income, the government.

The few jobs created in physicians' offices are essentially a transposition of jobs that would be in the hospitals if doctors' offices did not exist. One can thus question the real net job creation derived from the incorporation of physicians.

The amounts that would be recovered though fairer taxation could be reinvested into initiatives aimed at fostering the health of the Canadian population.

The health care system is but one of the 12 recognized factors that determine health. The funds could be reinvested into other health determinants, for instance a subsidized day care network, which is an early childhood development determinant, or improvements to public transit, which is a determinant of air quality and the physical environment, or a public pharmacare system.

Once again, I thank the committee for its invitation. I will be pleased to answer your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Poitras.

Mr. Lovell, you are on video conference. I failed to introduce you at the beginning. Maybe we can turn to you now.

Welcome. I know you're at the apple harvest and a number of other things, so you're pretty pleased not to have to fly to Ottawa. The floor is yours.

[Andrew Lovell, As an Individual]

Thank you very much, Wayne. It's great to see a Maritimer up there. It's a nice friendly face. We are in the middle of harvest but it's great to be here all the same.

Thank you, Mr. Chair and committee members, for the opportunity to share my thoughts on the proposed tax plan to use in private corporations. I am speaking to you today as an individual apple producer from New Brunswick and not as a representative of any farm organization. My farm is River View Orchards. I'm a first generation farmer and the 2016 Canadian Outstanding Young Farmer Award recipient. My wife and I have two children, a son who is 12 and a daughter who is five.

I want to start off by saying that there are nearly 200,000 farms across Canada, almost entirely small businesses. They contribute a little over $108 billion a year to Canada's GDP and employ approximately 2.2 million Canadians. Canadian agriculture has been a resilient economic driver for years in Canada. This government acknowledges its immense potential but doesn't seem to acknowledge the contribution that farmers make to our economy, food security, and climate change.

I appreciate the comments made recently by Mr. Morneau and Mr. MacAulay noting that farmers aren't the intended targets of these proposed changes, but it doesn't seem to be clear. Unless these proposals are dramatically reformed they will negatively impact family farms across Canada and we will see a decline in the number of farms in our country, adding to our unemployment rate and a decrease in GDP. Both of these will require more tax increases to the middle class to compensate for the increased expense of lost jobs and the lost revenue from the GDP.

On that note I want to share some thoughts on the fact that these proposals were released on July 18 with a 75-day consultation window during harvest when most farmers don't have time to sit down and review tax changes with their accountants. I hardly have time to spend with my family sometimes. For many farmers it was weeks before the potential consequences for farmers started to become clear and I'm still hearing of new ways they could affect my business. Since that time, I don't think I've had a conversation with another farmer where this issue hasn't come up.

While the target may be a select group of wealthy individuals, the current proposals don't line up with that mark. To give you a sense of what I mean I'll lay out a few potential issues.

There's income sprinkling. Family farming isn't a nine-to-five job. Families live on their farms and work takes place at all hours of the day with family members contributing in countless ways. There aren't any punched cards here. I understand the intent is to account for those contributions but the intent and the reality of the test are very different things. How can any test truly account for all the ways in which family members help out on the farm, not to mention the subjectivity introduced through the CRA? Farming is definitely a family affair. Making decisions to invest in the future requires capital and certainty. Even playing by the book, the vagueness and uncertainty this test introduces creates new risks and questions I need to consider. It leaves me wondering if it is worth it to expand or to even keep going.

The strict test applied to 18- to 24-year-olds further complicates this. Farm children don't take the ownership of farms in a vacuum. My son Robert has been involved in the operation from a young age and he's 12 today. Even when he goes away for school as he gets older or works off farm, I know he's still going to come home and contribute to the farm that he loves. In fact, he already grows his own strawberries and gourds, which he sells himself. Will these contributions pass the CRA test?

If Robert were to have shares in my farm corporation would any dividends he received be reasonable? I ask about him, alone, for now because my daughter is still a little young to work, although she certainly keeps her mother and I working. These questions affect my ability to plan for the future.

Then there are the changes to the capital gains exemption and the treatment of capital gains. The new limitations on access to the capital gains exemption also complicate passing farms from one generation to the next. I need to plan succession. I have to do this in advance to ensure my farm stays within my family. How is doubling my tax fair if I want to pass the farm on to my children?

Farming is capital intensive and my business is my retirement savings plan. Passing along the farm is already complicated and this just limits the options I have to make it work for both parties. When you factor in the proposed changes on converting income to capital gains that incentivize selling the farm outside the farm, difficult financial decisions must be made as to whether to maintain the family farm, take on punitive tax liability, or simply sell to a stranger.

These aren't decisions that farmers or parents should have to make. Farming is part of our heritage. Traditions would direct us, as farmers, to pass the farm to our children. Are my children valued less today than they were 100 years ago? I don't think so.

On passive investment income, investments are held within corporations for a variety of reasons. They can help manage income declines or ensure you have capital gain to invest when the opportunity arises. Passive investments are already taxed at 50%, and I've seen tax rates of over 70% identified with these proposals. Again, this raises new questions around how to plan for the future.

Farming already faces volatility from weather, diseases, pests, and the market, just to name a few. Canada's tax policy should be not about introducing new barriers, but about managing risk and growing my business. This year, we had a drought in New Brunswick. I am facing huge crop losses. How do I plan for Mother Nature?

I'd like to speak a little about my thoughts on potential solutions.

First and foremost, farmers across Canada have no issue with ensuring that everyone pays their fair share, or with government addressing abuses in the tax system. In fact, when we look at dollars generated on farms, they are probably multiplied five or six times inside our economy. However, changes extend far beyond tax avoidance among wealthy Canadians. They impact all private corporations. Some of the capital gains changes would even affect qualified farm property residing outside of corporations. It's not just incorporated farms that are affected.

I appreciate Mr. Morneau's comments when he said that he wanted to see family farms succeed, and that family farms weren't the intended target of these changes. There is a wide gap between that intent and the reality of what the current proposals would do to farms and other small businesses. While these may be unintended consequences, they are not minor, and they would have an impact on farms across Canada unless significant changes are made. This means exempting farm income from income sprinkling proposals, exempting farm property from the new capital gains rules, and working to find a way to truly differentiate real intergenerational transfers.

Farm groups across Canada are ready to work on solutions, but timelines are a concern. I suggest taking a step back and considering removing all farms from this proposal so they don't end up as collateral damage.

With that, I would like to thank you for your time. I welcome any questions you might have.

[The Chair, Liberal, Wayne Easter]

Thank you, Andrew, and thank you for your time and that heartfelt presentation.

Mr. Goulet.

[Professor Guy Goulet, Professor of Taxation, Université du Québec en Outaouais]

Good morning.

Mr. Chair and members of the committee, thank you for the invitation to come to address you here.

I have been a professor of taxation at the Université du Québec in the Outaouais since May 1, 2015. My interests and field of research are mainly in the area of aggressive tax planning, whether by SMEs or others.

Before joining the Université du Québec in 2015, I worked in the income tax area for over 25 years, about half of that time being spent at the Canada Revenue Agency. When I began at the agency, I worked as a tax avoidance auditor. Afterwards, I worked at the agency, here in Ottawa, for the Income Tax Rulings Directorate.

Before joining the agency, I worked for a little over 10 years for a tax accounting firm. My clients were SMEs for the most part. And so I worked in tax planning for SMEs.

In short, I have worked in taxation since 1990.

There is no doubt that the proposed reform will be changing the tax planning landscape for SMEs. That is why I am here. I like putting things in layman's terms, I like to understand the rules and explain them. That is what I have been doing in the media since July 18. On several occasions I have had the opportunity of commenting on the file, or rather of explaining the rules and helping people to understand the tax policy.

It must be said from the outset that tax planning, either through income splitting or passive investments, that is to say the first two categories of measures, was legitimate and acceptable in tax policy. It was a change in tax policy. The fact that people used it does not mean that it was a loophole.

The third category of measures involves the conversion of dividends into capital gains. These are very specific measures that are intended to plug holes, if you will. There are tools in the act, but the government did not have much success regarding certain transactions. Tax planners were very creative in finding ways to bypass the law. That is why certain more specific tools were created, in order to prevent the possibility of tax avoidance.

My specialty is tax avoidance. Although I understand the overall system well, I have a few comments or reservations as to the last category of measures, that have to do with tax avoidance. Measures have been proposed that will certainly solve the problems, but may cause collateral damage in the case of legitimate transactions. This is going to cause some uncertainty.

This week, the Department of Finance held an information day with some tax specialists' associations. They were told that the purpose of these new measures was to counter tax avoidance transactions, but the fact remains that this is creating some uncertainty.

I am not here to lobby nor to exert pressure for either side. I am at your disposal to answer questions or comment the proposed measures in a general way.

Thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Goulet.

We'll turn to Mr. Merrigan, who is a partner with Poole Althouse in Newfoundland. The floor is yours.

[James Merrigan, Partner, Poole Althouse, As an Individual]

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.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Merrigan.

You did mention that you had developed a new chart to show a different comparative with finance. I haven't seen that. Make sure the clerk gets a copy so committee members can get a copy of that. Thanks.

[James Merrigan]

Mr. Easter, I did provide it to the clerk.

[The Chair, Liberal, Wayne Easter]

Okay, she has it.

[James Merrigan]

Unfortunately, given the time frame, she was unable to get it through translation. I'm advised the committee will have it shortly.

[The Chair, Liberal, Wayne Easter]

That will be dandy. Thank you.

Turning to the last panellist, we have Ms. Lahey, professor, faculty of law, Queen's University. Welcome.

[Professor Kathleen Lahey, Professor, Faculty of Law, Queen's University, As an Individual]

Thank you very much for giving me this opportunity to speak to the proposed changes that are being considered by the government in relation to the small business corporations sector.

I'd like to approach this issue from a slightly different perspective, which is to stand back and say that the changes being considered have become necessary, or some response has become necessary, because Canada has for decades maintained what is called the Canadian corporate income tax integration system, a very unique approach that is not used in quite the same way in many other countries. The goal of this is to receive a steady stream of revenue from corporations, but at the same time to integrate those corporate earnings as if the corporation were not really a separate legal person, by giving dividend tax credits when there are distributions out of the corporations.

This was devised by the Carter commission when it was sitting. It was hammered out into its original form through a great deal of careful, technical development that had, as its goal, ensuring that at the end of the process—regardless of whether there was corporate integration or not—capital gains, employment income, unincorporated business income, and dividends would all be taxed more or less equally so that the goal of equity would be promoted as the dominant goal of the Canadian income tax system.

Unfortunately, because tax is such a politicized area of policy-making, the technicalities required to construct that system in the first place formed easy targets over the decades. Most particularly, with the global, and I dare say Canadian-led move to cut all tax rates, high personal income tax rates and corporate income tax rates gained momentum. This put this integration system under a great deal of stress. The small business corporation rules, which were a unique deviation from the corporate income tax integration system, became particularly vulnerable.

Now, the small business rules have a different policy objective than the integration rules. They were carved out of the integration rules for the specific purpose of showing that governments supported small business corporations and gave them lower tax rates at the corporate level so that they could accumulate after-tax profits more quickly, and therefore, have a supply of after-tax retained earnings that they could invest in research, development, innovation, capital investment, and expansion, and hopefully graduate out of the small business category.

The problem is that as the small business corporate tax rates themselves began to fall, suddenly the financial planning and financial advising community realized that it had become tax inefficient for small business corporations to continue paying people in the family salaries that were held against the standard of reasonableness under the Income Tax Act. They began encouraging people to stop paying themselves salaries, which meant that they stopped accumulating employment insurance, Canada pension plan, registered pension plan, registered retirement savings plan benefits, and other kinds of benefits that corporations can provide. They began to move toward receiving dividend income as a predominant source of income, which was not taxable, which did not produce employment insurance coverage, which did not produce CPP and RRSP coverage.

This sector has become vulnerable as the result of the combined effect of the government focus for over 25 years on cutting all tax rates, creating inequalities between the personal tax rates and the corporate income tax rates, which are at really very low levels not just in Canada but Canada is in the forefront, and creating a class of entrepreneurs who are now, in a sense, being held hostage to the tax planning that they invested in. That is, if they can't continue to receive tax-exempt dividends and split them, they will not be able to then recoup the lost income security benefits that they would have otherwise been accumulating over the past several decades.

I would classify this as a crisis.

It is a crisis in particular for the many family members who have participated in this whole process. I'm talking about women, because it has been women who have been used as conduits for dividends in order to get the family income flow up to the level at which it could sustain the cost of living for the family. All of which meant that the purpose of small business corporations had become to maintain a low-tax lifestyle for that sector and no longer focused on gaining after-tax income in order to begin accumulating, growing, and innovating.

The impact on women, I think, is measurable and significant. In 2007, 20% of all small business owners were women. By 2014, that number had fallen to 15%. That's a significant shift, and this was during a period of time in which the government of the day had put a high priority on trying to get women to become more engaged in entrepreneurial activities and to accept the fact that public sector employment, and employment generally, was not going to be as readily available to women as it had been in the past.

Women are particularly affected. It has been statistically difficult to tease out exactly what that profile looks like. If you take single women as the example, only 20% of all dividends in the country go to single women, but married women are almost fifty-fifty. It's not just the people at the very highest income levels. I think there is a pervasive impact here that is creating an incentive for women to withdraw from what could be income-secure employment insurance, Canada pension plan, retirement, etc., security systems, including maternity leave and so on, and to be induced into putting their efforts into family-managed businesses that have a very different ability to provide income security as compared with the state systems that are much more efficient at that.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Ms. Lahey. I thank all the witnesses for their presentations.

Mr. Fergus.

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

Thank you, Mr. Chair.

First, I want to thank all of the witnesses for being here.

As the chair said, I have a five minutes in total to ask questions and hear replies, and so I ask you to be very brief if possible.

I am going to put the same question to the six witnesses who are here, and it is relatively simple. Then I will have a second question.

Do you think that the current tax system provides the owners of privately-held Canadian corporations with tax advantages that are not available to unincorporated businesses or wage-earners?

Ms. Lahey, what is your opinion on this matter?

[Prof. Kathleen Lahey]

Yes, most definitely there are advantages, but what has to be recognized is that the advantages are not gender equal, and they're not equal by age, either. This is a system that is actually contributing to the growing income inequality between women and men on an after-tax basis in Canada. Canada has a very low rate of redistribution when it comes to getting women out of that low-income category.

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

Thank you very much.

Mr. Merrigan, what do you think?

[James Merrigan]

I would say that there are advantages, but there are countervailing benefits that people in corporations lack. Much like the comments of my colleague, we're 20 years into this system. The last major change was in 1999. People have spent 20 years investing in the system, in the Canadian-controlled private corporation. The retirement plan is generally to put money into the company and then to draw that down as dividend income upon retirement.

She is correct that women will be benefiting from that, and that with this change, they could have spent their last 20 years differently. Unfortunately, they can't go back. These changes that will end income splitting will deprive women of pensions that they had counted on as the capital accumulated within the company. With the change in the TOSI rules, this will negatively impact women. There is, in this proposal, no way to unwind that, which is what makes it so dangerous.

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

What would be your answer Mr. Goulet?

[Prof. Guy Goulet]

The answer is yes, there are tax advantages to incorporation. Mostly, it allows you to defer income tax, since you pay a lower corporate tax rate, which can be between 14.5% and 22%, or 26%, depending on the criteria. By comparison, an individual is taxed according to a progressive rate which can reach its maximum around $200,000. This can vary by province, but that rate can reach 53%. So there is an advantage to deferring the second part of your tax till later.

The other advantage of the current system is that it allows you to allocate your income among several people, which is impossible to do as an individual or even as an entrepreneur. An individual entrepreneur can without any problem pay salaries, but he cannot divide up the surplus. The corporate vehicle makes that possible.

The Supreme Court recognized income splitting in a few cases, such as in the McClurg and Neuman cases, and so this is legal. The only thing needed to receive a dividend is to be a shareholder. The Supreme Court ruled that it was not necessary that there be a contribution to the business.

And so a wage earner who earns $200,000 a year has no opportunity to split his income, as opposed to an incorporated entrepreneur who may do so.

That is my answer.