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.