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.