Thank you very much, Mr. Chairman, committee members. Thank you very much for having us here this morning to provide evidence on the rules proposed on July 18 relating to the taxation of private corporations.
Kim and I are partners at MNP. MNP is the pre-eminent accounting, tax, and consulting firm to family businesses in Canada. We represent 150,000 private enterprises and family businesses, and 16,000 farmers. We're the primary service adviser to over 350 Hutterite colonies in Canada. We've heard from them.
They've clearly said they all agree that a tax reform is required, and fairness in a tax system is an honourable goal. We're not all convinced, though, that the proposed rules of July 18 achieve those objectives. They all concur that tax fairness with the simplicity of a system that can be administered is paramount in tax reform, and that tax reform takes time. Again, the July 18 rules probably don't achieve those two objectives.
Meet my other client, Marie. Marie recently transferred her farm business to her family after 30 years. She is now retired and receiving $40,000 on the redemption of her shares to fund her retirement obligations, taxes being one of those, around $1,000. Under the proposed tax on split income rules, the fact that Marie is no longer active in the business and has limited capital since the redemption means that tax will now become $16,000, a 16-fold increase. Marie doesn't think the July 18 rules are fair. She is not alone.
Our colleagues in Alberta look at the passive income rules as problematic. Our colleagues in Alberta had built up a liquidity chest to help fund the economic downturn they're currently facing. I was recently discussing with Kim, a client in our Calgary office, how, if it wasn't for that holding company, they would not be able to sustain their business operations today and continue to employ Canadians, given the downturn they're facing in Calgary. This is problematic.
The transfer of family businesses is also problematic. Family businesses today will face a bias. They would prefer to sell their businesses to an arm's-length third party because the effective tax rate is 25%. Selling intergenerationally to their family members may cost them twice as much. Tax should not be driving the decision as to who they want to sell their businesses to. If families want to continue their businesses, they should not be penalized by having to pay twice as much.
We all know death and taxes are inevitable. The earnings-stripping rules under sections 84.1 and 246.1 are problematic. You've heard from others, and you'll hear from us as well, that on death, private corporations should not be expected to pay twice as much. This affects all small businesses in Canada, not a niche or a small minority. All businesses, when their owners die owning those shares, will have a significant tax implications that need to be addressed.
We see the July 18 rules as a fundamental change to the taxation of private corporations. We don't disagree that tax reform is required. However, the rules proposed on July 18 are vague, uncertain, and lack predictability. Statutory interpretation requires that legislation be clear, fair, and predictable, so all Canadian taxpayers can plan their affairs accordingly. The proposed legislation is far from that.
We have ample evidence of where the vagueness in the language will cause uncertainty. Today, private corporations and their owners are pausing to understand what it means and how they can go forward. What do we recommend, you may ask?
Number one is, if we're going to undertake tax reform, we need a collaborative consultation period to involve all reasonable stakeholders. Open-minded stakeholders will all agree that tax reform is required in order to impose fairness, simplicity, and a certain level of equity for all Canadian taxpayers alike. The current rules lack those initiatives that we need to seek in the new rules.
I'd ask today that the consultation period be extended to incorporate more of these issues with the existing rules so that we can avoid these unintended consequences for all private corporations in Canada today.
Thank you. We look forward to your questions.