Evidence of meeting #109 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was system.

A video is available from Parliament.

On the agenda

MPs speaking

Also speaking

David Macdonald  Economist, National Office, Canadian Centre for Policy Alternatives
Stéphane Poitras  Associate Professor, School of Rehabilitation Sciences, Faculty of Health Sciences, University of Ottawa
Andrew Lovell  As an Individual
Guy Goulet  Professor of Taxation, Université du Québec en Outaouais
James Merrigan  Partner, Poole Althouse, As an Individual
Kathleen Lahey  Professor, Faculty of Law, Queen's University, As an Individual
Gary Sands  Chair, Small Business Coalition, and Senior Vice-President, Canadian Federation of Independent Grocers
Chris Roberts  Director, Social and Economic Policy, Canadian Labour Congress
Laurent Marcoux  President, Canadian Medical Association
Charles Lammam  Director, Fiscal Studies, Fraser Institute
Jennifer Kim Drever  Partner, Peace Region Tax Leader, MNP LLP
Eddy Burello  Partner, MNP LLP
Michael Wolfson  Professor, University of Ottawa, As an Individual
John Feeley  Vice-President, Member Relevance, Canadian Medical Association

10:05 a.m.


The Chair Liberal Wayne Easter

We'll do a pretty hard stop at about 11:25, if we could, because the minister will be on at 11:30.

Just for the record, pursuant to Standing Order 108(2), the committee is doing a study of tax planning using private corporations, and what is presented before this committee during this panel will be forwarded as part of the consultations by the Department of Finance on the tax planning issue.

Welcome to the witnesses, and thank you for coming, many of you on short notice. We'll start with the Canadian Federation of Independent Grocers, Mr. Sands, senior vice-president.

Go ahead, Gary, and welcome.

10:05 a.m.

Gary Sands Chair, Small Business Coalition, and Senior Vice-President, Canadian Federation of Independent Grocers

Thank you, Mr. Chair.

Good morning. I want to thank the committee for the invitation to appear today and participate in the discussion as part of the consultation on the government's current review of tax planning using private corporations.

While I am the senior vice-president of the Canadian Federation of Independent Grocers, I am speaking today in my capacity as chair of the Small Business Matters coalition, a group of trade associations covering a wide variety of sectors. The cumulative number of businesses we represent is about 180,000. In terms of a coalition size, we are now the largest in Canada.

Over the last few weeks, there's been a lot of sound and fury coming forth from various quarters on the proposal about the issue we are discussing today and how the current system may not be working for the purposes intended.

Our coalition was aware that, in the last federal election, the Liberal Party had declared in its policy platform that, if elected, they would move to reduce the current small business tax rate to 9% but wanted to “ensure that Canadian-Controlled Private Corporation (CCPC) status is not used to reduce personal income tax obligations for high-income earners rather than supporting small businesses.”

During the course of the last election campaign, our coalition supported that plank. I believe that was reiterated in the Minister of Small Business's mandate letter that was publicly released.

I went through the media clippings before I came here today, and I can't recall seeing any outrage or anything like the sound and fury that we're seeing today. But as we said to the minister, we reiterated our support for the principle behind that review, a review aimed, as we understand, at exploring ways to ensure there was fairness and more transparency in the current system, and that it is being utilized by genuine small businesses for the purposes intended.

We also said to this minister, to this committee, and to previous ministers, as did others in the business community, that we need more fairness and transparency in the payment system in this country that is currently allowing small businesses to be put at a competitive disadvantage by unacceptably high credit card interchange fees amounting in the billions of dollars. The concept that you could push forward support for these principles in one area but not in another leaves me personally perplexed.

I'm not saying, and our coalition is not saying, that some changes cannot be made to proposals that were outlined in the consultation document. I expect changes will be made by the government based on the input they've received. The government has made clear to us that they are listening during the consultation period, and we have yet to see any legislation on the most contentious piece, passive income, nor any definitive statements of finality by the government as to how they intend to proceed.

When this occurs, we will make our views known, but in the context of this review, let's apply that principle of fairness and transparency to income sprinkling as an example. This is an extremely important measure that exists to compensate family members making a reasonable contribution to the business, and we look forward to working with the government on defining that term. But income sprinkling should not be used as a means by which self-employed, high-income professionals avoid tax by sprinkling income among family members with no reasonable connection to the business.

I know people who take advantage of this tax planning strategy, but with all respect, as I have said to them, the money that is going to them, our coalition believes, should instead be used to help further reduce the small business tax rate. Notwithstanding that Canada has the lowest small business tax rate in the G7, our small businesses have unique cost challenges. While investing in the bricks and mortar of their businesses, hiring local, buying local, and being the backbone of communities across this country, our members cope with skyrocketing energy costs, higher credit card fees for small businesses as opposed to large corporate chains, the growth of online shopping, and in some provinces, whopping minimum wage increases and a myriad of various and increasing fees, charges, and premiums.

All of these costs and more have a disproportionately deeper impact on small business. All too often this context is forgotten when governments examine the small business tax rate. All three levels of government must do more to be cognizant of the cumulative impact of these costs, no matter what level of government is responsible.

At the same time, the business community must be consistent when it pushes government for more fairness and transparency in other areas. We must ensure that the tax system is one that continues to support small businesses' ability to invest, hire more people, source Canadian products, and to expand. If the review that has been undertaken allows Canada to build on that, this is something, again, our coalition supports.

If there is one message I would leave with this committee today, it is to convey to them that, no, the entire small business community is not lighting their hair on fire over this consultation. Our members understand the principles that are being discussed in this review. We feel we are being listened to, and thanks to the openness that we have personally encountered with Minister Chagger and Minister Morneau and others, and how they've dealt with us—and that's all I can speak to—we're confident that the government will take action to ensure there are no unintended consequences to these proposals.

And yes, I want to repeat that we want to see a further reduction in the small business tax rate.

Thank you.

10:15 a.m.


The Chair Liberal Wayne Easter

Thank you, Mr. Sands.

Just for committee's information, on the witness list is the Dairy Farmers of Canada. The individual representing them, Mr. Dykstra, was to be on a flight out of Toronto that got cancelled. We do have their brief and it will be translated and presented to committee members.

The representative, Mr. Lammam, from the Fraser Institute, who's in Vancouver, was supposed to be on video conference but that didn't work, so he is listening and will present by teleconference.

We'll turn to Mr. Roberts with the Canadian Labour Congress.

The floor is yours, Mr. Roberts.

10:15 a.m.

Chris Roberts Director, Social and Economic Policy, Canadian Labour Congress

Thank you, Chair.

Good morning, committee members. Thank you very much for the opportunity to appear before you today. I'm here on behalf of the Canadian Labour Congress.

The CLC is Canada's largest labour central. It's the voice on national issues for 3.3 million working people in Canada and brings together national and international unions, provincial and territorial federations of labour, and more than 100 district labour councils from coast to coast to coast.

I am the director of the social and economic policy department of the CLC, but I'm not a tax expert. I'm here this morning to convey the CLC's support for the government's steps to address tax planning through Canadian-controlled private corporations.

The CLC welcomes the federal government's plan to close tax loopholes for very high income earners. In our view, this tax proposal is an important first step towards bringing greater fairness to Canada's tax system. Current tax rules surrounding CCPCs make it possible for someone earning $300,000 to save more on their taxes than the average Canadian worker makes in a year, and that is fundamentally unfair. There is strong evidence that the benefits of preferential tax treatment for CCPCs accrue disproportionately to a select group of high-income families.

According to the Department of Finance, two-thirds of the top 0.01% of income earners own a CCPC. Published research by Professor Michael Wolfson found that more than 70% of those in the top 0.01% with incomes over $2.3 million owned a CCPC, and nearly half of individuals in the top 1% did. These numbers compare with fewer than 5% of tax filers in the bottom 50% of the income ladder owning a private company of this sort. Those are 2011 figures. Among the bottom 90% of income earners, fewer than 10% had a CCPC. Moreover, a portion of these individuals who owned shares in a CCPC would be low-earning spouses of high-income earners and therefore be from high income-earning families.

I want to stress that these tax planning opportunities are generally not available to working people. To incorporate is a complex undertaking entailing not insignificant costs, particularly when multiple CCPCs are formed by a single individual. The ability to benefit disproportionately from the tax advantages of incorporation increases at higher income levels.

The number of CCPCs has increased by 600,000 in the last decade and a half, a 50% jump. This kind of tax planning is costing the federal government approximately $500 million a year or more.

Taxes pay for the vital services that we all rely on, from physical security and food safety to health care and education and disaster relief. Canadians expect everyone to pay their fair share. Our tax system currently generously rewards those who take on business risk. Canada has the lowest small business tax rate in the G7 and is described by KPMG as being the most tax-competitive country for business globally. Preferential tax treatment for CCPCs allows individuals to reinvest in their businesses at a reduced rate of taxation, and business owners are able to claim tax deductions on their business expenses.

We therefore support the government's steps to address tax planning through private corporations, but in our view reforms can't end here. After a decade and a half of aggressive corporate income tax cuts at the federal and provincial levels and increasingly favourable terms for small businesses, we need to ensure that top owners and corporations pay their fair share too, which means a more aggressive clampdown on tax havens and corporate tax dodging.

This would include eliminating regressive and ineffective tax loopholes by cancelling the stock option deduction; cancelling the flow-through shares deduction; fully including capital gains in taxable income; taxing foreign e-commerce companies to level the playing field for Canadian providers; increasing taxes on banks and financial institutions, which have received windfall profits from corporate income tax cuts over the last decade and a half; and introducing wealth taxes and making income taxes more progressive.

In closing, we hope that the 2018 budget and the government's legislative proposals coming out of this consultation will take on some of the most regressive, wasteful tax breaks as well as tax planning opportunities through private corporations, tax favours whose benefits go disproportionately to a small group of high-income earners and are beyond the reach of the vast majority of wage and salary earners in this country.

Thank you very much.

10:20 a.m.


The Chair Liberal Wayne Easter

Thank you very much, Mr. Roberts.

Turning then to the Canadian Medical Association, we have Mr. Marcoux, president, and Mr. Feeley, vice-president of member relevance.

Welcome. The floor is yours.

10:20 a.m.

Dr. Laurent Marcoux President, Canadian Medical Association

Thank you, Mr. Chairman.

The CMA and our 85,000 members are proud to empower and engage with our patients, and to provide the highest quality of health care for Canadians.

Like many other organizations representing small businesses in Canada, the CMA remains seriously concerned about the magnitude of the proposed amendments and the time frame for a detailed evaluation of the impact of the proposals. We believe that 75 days for consultation is not enough, given the scope of the proposed changes to a structure that has existed for 45 years.

I would like to address three major issues that set out the unexpected consequences of the tax proposal as presented.

First of all, what happened to promoting the health of the economy?

You heard from the Coalition for Small Business Tax Fairness that small and medium businesses are the economic drivers of Canada. This description also applies to doctors' offices because they generate significant economic activities, while providing essential medical care to the communities that make up our great country.

It is becoming imperative to maintain the conditions needed to support the continued success of doctors' offices when the growth of the economy and the delivery of essential services are taken into account.

Here are some facts about it. In 2016, for instance, the gross domestic product generated directly by doctors' offices in Canada reached $22.3 billion. Medical professionals paid $6.2 billion in salaries and employed 137,000 people. Doctors' offices have generated $643 million in tax revenue for government coffers.

The tax proposals under review require doctors whose practices are incorporated, like any entrepreneur, to adjust their business models. These adjustments will have unexpected consequences by bringing about a decrease in the economic footprint of doctors' offices and by potentially limiting services to Canadians.

Second, why is incorporation logical for so many doctors in Canada?

The majority of doctors, or 66%, for a total of 54,000 doctors, own and operate a private company that is the structure that supports the viability of their practice by providing access to working capital. Doctors rely on working capital to invest in their practice, which includes the purchase of equipment, modernization of examination rooms, implementation of electronic medical records, and many other clinical investments. Working capital is also essential when physicians seek to provide more services to meet the growing health care needs of the community.

The structure may also make funds available to compensate for maternity leaves, sick leaves, parental leaves and employee turnover, as well as to save for retirement.

As a legitimate business organization for doctors that has been endorsed and encouraged by successive governments, incorporation has well-established risks and benefits.

Lastly, why is it necessary to make the right decision at this point? That's the last and most important question.

Doctors' offices play an essential role by giving Canadians access to medical care across our vast country. Any change to the current tax system may have unexpected consequences by forcing owners of doctors' offices to decrease their activities and by stifling the expansion of the most needed medical services.

We have an opportunity to get this right, and Canadians want us to. The proposals announced in July have far-reaching implications and unintended consequences. As a result, we strongly urge the government to undertake a comprehensive review of the tax system, with fairness as the principle driver of change. A fair tax system accommodates taxpayers who assume different levels of risk, and is flexible enough to allow small business owners, including physicians who operate medical practices, to manage in various circumstances.

Finally, fairness also dictates that if self-funded safety net provisions are eliminated or significantly adjusted in the new tax regime, other vehicles must cover planned and unplanned events. In our submission to the government, the CMA will ask that the proposal be suspended to allow for a complete review of a tax system that engages all Canadians and considers the unique aspects of all sectors.

I would be happy to answer any questions you may have.

Thank you.

10:25 a.m.


The Chair Liberal Wayne Easter

Thank you very much, Mr. Marcoux.

Now we have the Fraser Institute by teleconference.

Mr. Lammam, the floor is yours.

10:25 a.m.

Charles Lammam Director, Fiscal Studies, Fraser Institute

Thank you, Mr. Chairman and committee members, for the opportunity to offer my thoughts on the federal government's proposed tax changes affecting private corporations. I hope you find my comments helpful and informative as you deliberate on this important public policy issue.

I'm the director of fiscal studies at the Fraser Institute, an independent, non-partisan economic policy think tank. The institute's mission is to measure the impact of government policies and to broadly communicate to Canadians how those policies affect their lives and the lives of future generations. My comments today reflect my own opinions and observations. They do not, necessarily, reflect the views of other staff, affiliated researchers, or our board of directors.

Since the committee has already heard much about the technical aspects of the government's proposed changes, I will focus my remarks on points that I think have not received sufficient attention in the public debate.

First, I want to commend the government for undertaking a review of the tax code. Canada's personal income tax system has become increasingly complex and uncompetitive over the years, so the goal of reform is a positive one. In fact, the Fraser Institute has published studies on both the growth in tax complexity and the opportunity for the federal government to dramatically simplify the tax system while fostering economic growth. This was largely a response to the previous government's tax changes, which tended to increase the system's complexity with no material improvement in efficiency. As part of the current review, the government has correctly identified problems with our tax system, including a proliferation of so-called boutique tax credits, which are economically ineffective tax breaks for certain groups and individuals. In addition, it has identified tax planning through the use of private corporations as another problem area.

However, the policies implemented to date by the current federal government, including the elimination of several tax credits, along with the proposed changes to the taxation of private corporations, are best described as a piecemeal approach that falls well short of the type of comprehensive tax reform that Canada now needs. This is a lost opportunity.

A major shortcoming of the government's approach to these tax changes is how it plans to use the expected revenues from eliminating preferential tax measures. The standard approach to tax reform, as was the case with Canada's major personal income tax reform in 1987, is to use the revenues from eliminating preferential tax measures to reduce marginal tax rates broadly. In doing so, the government would eliminate special preferences for certain groups while reducing tax rates for everyone, thus improving the economic environment for workers, business owners, entrepreneurs, and investors. Instead, the federal government plans to retain all the new revenues. This is actually a trend with the current government, as it has eliminated a number of tax credits and other special privileges embedded in the tax system without using the resulting revenues to cut rates broadly by an equivalent value.

When it comes to the proposed tax changes to private corporations, it's important to understand why anybody pursues tax planning through such vehicles in the first place, since doing so comes at a significant cost. Business owners, including professionals, must spend significant amounts of money on accountants and lawyers in order to use these options in the tax code. The reason these expenses make sense is that the costs are less than the benefits they gain by lowering their effective tax rates critically. The tax savings are a result of large gaps between different levels and types of income.

For instance, a professional can shift income to a spouse with lower earnings or perhaps a dependent child with no income. If the professional can do so, the gains from the lower tax rates can be significant. Let's assume a doctor being taxed at the top federal rate of 33% can shift income to a spouse who only works part time and pays income taxes at the lowest federal rate of 15%. That's an over 50% reduction in the marginal tax rate by shifting income from one spouse to another. The gain is even larger if the income is shifted to a dependent child with no income.

These tax differences are the reason why people pursue the strategies in question. If the government reduced the gaps between tax rates, it would reduce the incentives, i.e., the benefits, of such tax planning in the first place. Instead, the current government has made this gap larger by increasing the top federal tax rate from 29% to 33%.

By making the tax gap larger, the federal government, along with several provinces, inadvertently increased the incentive for eligible professionals and business owners to use these strategies. Introducing new rules alone to eliminate or mitigate the use of these strategies, as the federal government now proposes to do, will not solve the underlying problem. They will simply incentivize accountants and lawyers to figure out new ways to get around the new rules for their clients. The solution is to concurrently eliminate, or at least meaningfully reduce, the tax rate differentials that exist in the system. Doing so will reduce the incentive for tax planning in the first place.

I have just two final points.

A risk inherent in the government's proposal is the potential to make the tax system more complicated without solving the fundamental problem. There will remain an incentive for Canadians to incur the cost of hiring accountants to help them tax plan, but the administrative and compliance costs will increase as the Canada Revenue Agency plays a greater role in enforcing the proposed new rules.

Finally, my last point relates to the negative signals the government is sending entrepreneurs and investors in its public communications regarding the proposed changes to small business taxation. For instance, on a nationally televised interview, the finance minister used the phrase “going after” to describe his government's approach to extracting more taxes from incorporated professionals and wealthy people. This language signals to the world that Canada is an unfriendly place to do business, which undermines our country's ability to attract investment, which is a key ingredient for economic growth and innovation. Fortunately, we've seen positive tax reform from past federal Liberal governments, whether that's forging a technical committee on business taxation and implementing many of the committee's recommendations, or expanding RRSP contribution room, or lowering the inclusion rate for capital gains taxation. Indeed, pro-growth tax reform is a non-partisan issue.

Thank you, and that concludes my initial remarks.

10:35 a.m.


The Chair Liberal Wayne Easter

Thank you very much, Mr. Lammam. I gather we'll see you in person next week at pre-budget consultations in Vancouver.

Turning to MNP, we have Mr. Burello, partner, and Ms. Drever, partner and Peace region tax leader.

Does that mean you're from the Peace River area?

10:35 a.m.

Jennifer Kim Drever Partner, Peace Region Tax Leader, MNP LLP

I'm from Grande Prairie.

10:35 a.m.


The Chair Liberal Wayne Easter

That's a great part of the country. It has the deepest topsoil, and very productive topsoil. I've been up there a lot.

Go ahead, Mr. Burello.

10:35 a.m.

Eddy Burello Partner, MNP LLP

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.

10:40 a.m.


The Chair Liberal Wayne Easter

Thank you very much, Mr. Burello.

As I pointed out before, it's legislation proposed on July 18, not legislation.

We're turning to Mr. Wolfson, professor, University of Ottawa, as an individual.

10:40 a.m.

Professor Michael Wolfson Professor, University of Ottawa, As an Individual

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.

10:45 a.m.


The Chair Liberal Wayne Easter

Thank you very much and I thank all the witnesses for their presentations—many on quite short notice.

Before we go to questions, for committee members, we have to deal with one technical issue. The normal policy of the committee is that nothing is distributed unless it's in both official languages. On this set of hearings, we have agreed that we will distribute the submissions to the minister's office in their original language. They have the capability of translating them there.

In terms of the committee members themselves though, is there a desire to distribute the briefs, so that they have them in their submissions to committee members as they come in or does the original rule stand? The minutes of the meetings are certainly translated. They'll be translated and come out. Are there any thoughts on that matter? If not, we will hold the submissions and they will be distributed to members when they are translated.

Yes, Mr. Boulerice.

10:45 a.m.


Alexandre Boulerice NDP Rosemont—La Petite-Patrie, QC

I think the current rules should remain and that the documents must be translated before they are distributed.

10:45 a.m.


The Chair Liberal Wayne Easter

That's fine. That's what we will do. I just wanted to clarify that matter because there are some questions on it.

We'll be turning to questions then. We'll go to solid five-minute rounds.

Go ahead, Mr. Grewal.

10:50 a.m.


Raj Grewal Liberal Brampton East, ON

Thank you, Mr. Chair, and thank you to the witnesses for coming today.

I want to start off with Mr. Sands. We've heard a lot of feedback on the tax proposals, whether in the riding or here in Ottawa in the finance committee. It's actually great to see so many people come out and share their thoughts. I've mentioned this before and I'll mention it again. This is a great way to engage Canadians in developing better policy.

Some things that I think everybody can probably agree on is that the Income Tax Act needs to be more simple, more clear, and more predictable, so that we don't need lawyers or accountants to be hired anymore. If you are living in Canada, you should be able to understand the Income Tax Act. That's a really good take-away.

One thing I really appreciated from your testimony was that you gave a pretty good proposal on income sprinkling. You said that, if there is no reasonable contribution to the corporation, you shouldn't be able to sprinkle the income. I think a lot of Canadians would agree with that statement. You also emphasized that, just because we're changing that rule, it shouldn't mean we shouldn't help small businesses in another way, which is to reduce the small business tax rate. Can you comment further on why you think that's really sound policy?

September 28th, 2017 / 10:50 a.m.

Chair, Small Business Coalition, and Senior Vice-President, Canadian Federation of Independent Grocers

Gary Sands

I want to reiterate, too, that the comments I am making today are based on the direct input we're getting from our various coalition members, notwithstanding what you're hearing in the media. I don't come here and stick my neck out that far. We're representing what we hear from our members, which are genuine small businesses in a variety of sectors.

The reason we favoured this from the outset, when the party that's now the government enunciated or outlined it in its election platform, is that we represent genuine small businesses and we want to see more fairness and transparency. We have advocated for that in a number of areas, and I'm not coming back to this committee in a few months to talk about credit card fees, for example, and look you in the eye and say we want more fairness and transparency and have you say, “A few months ago you said....” I struggle with that.

I am trying to reiterate that the comments I am making are based on actual feedback from genuine small business members, and the context is a continuing frustration for us, whether we're talking about the minimum wage in Ontario.... Maybe I could use that to emphasize my point. We don't want to get into a debate about the pros and cons of a 32% increase in the minimum wage in Ontario. What we always try to do is to look at the context that small business is facing right now.

We deal with a myriad of bylaws, confusing and contradictory holiday shopping, yet we have to compete with the e-commerce online, taxes—

10:50 a.m.


Raj Grewal Liberal Brampton East, ON

Mr. Sands, I really appreciate it, but I only have five minutes.

10:50 a.m.

Chair, Small Business Coalition, and Senior Vice-President, Canadian Federation of Independent Grocers

Gary Sands

I'm sorry.

10:50 a.m.


Raj Grewal Liberal Brampton East, ON

The question was specifically on income sprinkling and why you think that reducing the small business tax rate is more sound policy.

10:50 a.m.

Chair, Small Business Coalition, and Senior Vice-President, Canadian Federation of Independent Grocers

Gary Sands

It's that it will benefit everyone. It will be more fair. It will be more transparent, and that's the feedback we got from our members. They want fairness. They want transparency. It's exactly what you just said. Whether it is a credit card statement or the Income Tax Act, they don't want to have to hire a lawyer to understand it.

10:50 a.m.


Raj Grewal Liberal Brampton East, ON

Sounds good. Thank you, Mr. Sands.

Mr. Marcoux from the CMA, thank you for your testimony. I want to know how many of your members are incorporated.

10:50 a.m.

President, Canadian Medical Association

Dr. Laurent Marcoux

I told you it is 54,000.