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.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
I want to quote someone prominent in the government. The gentleman said this in Kelowna, “Speaking of tax changes, I want to be clear. People who make $50,000 a year should not pay higher taxes than people who make $250,000 a year.”
Mr. Goulet, Mr. Merrigan, I would like to hear your thoughts. Would this scenario happen?
Partner, Poole Althouse, As an Individual
No, but somebody getting stock options of $250,000 would pay the same taxes, or less, as somebody making $125,000. The $50,000-$250,000 is not possible. The only way that would happen is if we compared stock options to CCPC or to an employment income.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
Again, the changes that are presented in the tax planning document do not include that.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
Well, it's.... That comes from two people who are well versed in this.
Mr. Merrigan, you mentioned your personal experience dealing with your legal community in terms of what these tax changes are already doing in Newfoundland. Could you elaborate a little bit more on that?
Partner, Poole Althouse, As an Individual
Sure. I had a client who contacted me in June and wanted me to review a franchise agreement. The intention of the client was to take capital that had accumulated in one business and use it to invest in a franchise. The intention was that the second generation would own the franchise and the capital contribution would come from the parent.
I was contacted in July and asked whether I'd done the review yet. I told the client, no, I hadn't started it yet. They told me not to bother doing it. They'd looked at it, and when they saw the potential consequences of the investment, they didn't see a benefit to their children through investing in this business. They didn't see a benefit to themselves in terms of the return, because it could be treated as passive income. They didn't want me to look at it anymore. They were not investing. I've had other circumstances where people said that in this climate of uncertainty, at this moment, they were not making investment decisions. They were taking very conservative approaches to how they handled their capital.
Accountants are beginning prospective planning on scenarios, but basically, at this point, a certain portion of the capital that normally would be being invested has stopped moving. The investments are just not being made.
Conservative
Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC
We are at the lowest levels of investment in this country since the early eighties. If the government is trying to attract more foreign direct investment to this country.... It was pointed out, by someone who is directly involved with trying to woo international investors, that it is becoming increasingly difficult, because if Canadian entrepreneurs will not invest in their own communities, why would someone else want to?
Do you feel that this is a growing sentiment in Newfoundland and other Atlantic provinces, which will only get worse?
Partner, Poole Althouse, As an Individual
I can't speak to international investment. I don't deal with a lot of international clients coming into Newfoundland. I've probably had two in the last five years. What I can say is that the sense of the local small business community is that they are stopping investments at this point and waiting to see what happens. They are going to wait and see how this unfolds. When this legislation comes into place, they are going to watch and see how it actually works out before they do anything.
Unfortunately, the flow of capital at this point has slowed, and I don't see it speeding up until we have some very clear resolution of this.
Liberal
Liberal
Jennifer O'Connell Liberal Pickering—Uxbridge, ON
Thank you.
First, I want to thank Mr. Macdonald for his study. I referred to it yesterday in some testimony, so thank you. I may not have time to ask you a question, but I wanted to say how much I appreciated having some data to back up and get away from some of the rhetoric and personal stories of “I know a woman in business”. That's some of the testimony we've heard, so I really appreciate this.
Professor Lahey, I really appreciate your testimony. It was almost like a history lesson in terms of where the proposals came from and how they were intended. You've laid out a really interesting approach, but I think there are some misperceptions, or maybe we are hearing what we want to hear. What I am hearing is you saying that the system was being used in a way that really encouraged women to stay home and receive dividends, in terms of part of the family business. I think I wrote down, “Encourage women to leave the more efficient state system and earn income in their own way, in a specific way, with maternity leave, etc.”
Then, I hear comments from Mr. Merrigan saying that women should have the home contributions while the man earns the income, not to encourage breaking up the family unit. I don't think you meant that to be offensive, but I take it as a very offensive kind of approach to women in the workforce.
Professor Lahey, if I understand you correctly, you are saying that the way the system has been, it has actually encouraged the gender gap in income levels, and we shouldn't continue encouraging that gender gap. We shouldn't continue to have men earn the income and women stay home and be sprinkled income. What we should do is acknowledge the fact that the system has been established and there are people who will be affected by it—hence why we are not being retroactive, and that's what the minister has stated—but moving forward, we should not encourage a system where women earn 28% less than men.
Did I clarify the inequality in the current system and why we should not continue to have that, moving forward?
Prof. Kathleen Lahey
Yes, that's true. I think that is a good summary. The fundamental problem that women in Canada face is that they have not been able to close one of the biggest income gaps in the OECD. The biggest barrier really is this insistence that everyone should raise their own children personally and privately and for many years, which always detracts from women's long-term income-earning capacities overall.
When you add into the mix a system that is designed to think of family businesses as replicating and depending upon historical traditional male-female roles in the family, regardless of the gender and sexual orientation of the individuals involved, it incentivizes withdrawal from the support systems that exist.
To give an example, if the retirement income is dividends coming out of the corporation, then the women involved have no entitlement to GIS if there is a low income or to OAS, because their qualification space will be used up by the dividend income, which may not in some situations even be their income. That's the other problem.
The divorce and separation situation is quite different because from an equitable perspective any spouse does accumulate equitable rights in property that is produced in the matrimonial estate. That sits somewhat uncomfortably with what we're talking about here because there are some more traditional sectors of the economy than others. One of them is agriculture; another could be fishing. I think it is important to get the kind of data that is needed to scrutinize this. The data on where women are located in the economy has suffered badly over the last 20 years. It is not what it used to be. It needs to be ramped up and more information on women's economic situation needs to be brought into this discussion.
This can go forward, but it needs to be with a great deal of focus on how people are differently situated. I'm also talking about people who may not be in the highly paid professional careers, who may be more engaged in business because they can't get paid work in the employment sector, and who therefore are de facto running businesses, and may have been talked into forming a corporation because they're thinking they'll do better, but they have to withdraw all they earn because they can't live on their profits.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Thank you all for being here.
Mr. Lovell, I deeply respect the work you do. You'd probably rather be out managing your business than being in front of the Standing Committee on Finance and having to talk to all of us here.
We've heard the government repeatedly say that these changes are not retroactive, and then we've had experts from the Canadian Tax Foundation say the opposite. Their own proposal is retroactive. It's retroactive on estates and on those who are trying to transfer the family farm, especially from one generation to the next.
When you're operating your business, when you're planning for the future, obviously you talk to other farmers in your area, people in the same line of business, families who have been in this business for generations. What are they saying? People in New Brunswick who are in this type of business, planning for the future with their children, with their families, what do they think of these changes?
As an Individual
They are upset. They are scared. There is one farm close to me that is seventh generation. The original land grants were made in 1784. Why would it be cheaper, or why would the government want less taxes on a transfer if he sells it to me, as a non-family member, as compared with his own children taking it over?
When we look at farm transfers, farming is a lifestyle. It's a lifestyle choice. I am an anomaly. I didn't grow up in a farming household. My dad worked at Sears. He's now losing his pension. For me, it's that tie to the land that is so important, because you're not going to get the typical person who didn't grow up farming to come and jump into a farming operation. That's not going to happen. When we start looking at farm operators, the average age of the Canadian farmer is 52 or 55 or something like that, and if we see a slowdown in farm succession, where are we going to be in 10 years when those farmers want to retire and all of a sudden that guy has to pay double the tax? We're either going to see an outside corporation buy it—we've already seen many international farms buying farms on the Prairies—or we're just going to see farmland abandoned.
Just for interest, there are 167 million acres of farmland in Canada and, according to the last census, every one of those acres generated $646 per year. If the average farm size is 728 acres, that means every one of those farms is generating $470,000 of GDP every year. What happens if we start losing them? What is the plan?
In New Brunswick there are 117,000 acres of vacant farmland. When we apply those numbers to it, that means New Brunswick's GDP is short $75.5 million a year because, somewhere in history, those farms have not gone through succession and that land is now sitting there vacant. How is this good for Canadians? How is this good for our society?
I don't understand.
Conservative
Tom Kmiec Conservative Calgary Shepard, AB
Thank you, Mr. Lovell.
Professor Goulet, you said that there would certainly be collateral damage. Could you describe some of this collateral damage?
Prof. Guy Goulet
Thank you for your question.
As I explained, we hear less about the third category of measures because their purpose is to block aggressive tax planning. There is a proposal to amend section 84.1 of the Income Tax Act and to create section 246.1, which is an anti-surplus stripping rule. This will cover aggressive tax planning, regarding which we lost before the courts. When I say “we“, I am talking about the government. I apologize, I still have reflexes that go back to my work at the CRA. However, the scope of these amendments is somewhat broad.
The amendment to section 84.1 is going to eliminate one type of planning that was used, which we called the pipeline type, and which allowed people to avoid double taxation when an entrepreneur died. When a person dies, they are deemed to have disposed of their assets. The deceased shareholder thus has made capital gains on his or her shares, and the shares are passed on to the estate. If you decide to wind up a corporation, you then have a dividend. So there are two potential taxes. There would be ways of correcting that, of refining the act in order to block undesirable transactions, while bringing in measures to avoid the dual taxation of the estate of the deceased.
With regard to proposed section 246.1, this is a very broad rule that would apply as of July 18, 2017, on paid-out dividends. It may be that transactions done before July 18 by a corporation that generated capital gains were a part of tax planning and were done in good faith. However, people are now getting caught for having breached that rule. It might be a good idea to adopt an interim rule to cover those situations.
Liberal
The Chair Liberal Wayne Easter
Thank you both.
We're quite a bit over, Tom, so we'll have the last member for this panel, Mr. Grewal.
September 28th, 2017 / 9:50 a.m.
Liberal
Raj Grewal Liberal Brampton East, ON
Thank you, Mr. Chair. Thank you to the witnesses for attending today, and we thank you so much for your testimony.
I just want to make it very clear that our government recognizes that farms are unique businesses and hold a very special place and all families who farm. As a son of a farmer, whose grandfather was also a farmer back in Punjab, I understand the hard work that it takes to operate a farm. We really will be focusing, and we're taking a lot of feedback from people testifying on farms, to make sure that there are no unintended consequences of the tax proposals. So thank you for your testimony. We really appreciate the feedback.
My questions are to James.
Thank you so much for your testimony today. You focused a lot on income sprinkling and unfairness. I think there are a lot of misconceptions, and I want to highlight the fact that it's a proposal. The purpose of developing good policy is to talk to Canadians and experts, to get their feedback, and then to go back to the table and draft something that achieves the balance of a more level playing field in the Income Tax Act.
Would you not agree that, like Mr. Macdonald said, you'll still be able to sprinkle your income among your family members, as long as you can prove that they contribute to the corporation?
Partner, Poole Althouse, As an Individual
That's a rather unique perspective on a share. I have mutual funds. I have shares in Coca-Cola. I've never set foot on the floor and I'm entitled to a dividend by means of ownership. Where that really meets the ground is when families invest in families' companies.
I have clients who are brothers. These brothers both invested in a company. One of them was very interested in running it, the other not so much. About 10 or 15 years ago one of them ceased to be active in the company. He owns half of it. He draws down the dividends.
Two things are going to happen to them under these TOSI rules, and they're quite concerned about them. The inactive brother has been receiving dividends for the last 10 or 12 years, equivalent to the active brother because they're fifty-fifty shareholders. That history will now be used, under the reasonableness rules, to say he has been unreasonably compensated historically because that's one of the three prongs in the reasonableness test. Second, he's not contributed any labour. Third, the initial capital for both of them was quite modest, so he didn't contribute a lot of capital—certainly no more than the other. He's owned half of this business for a long period of time, and under these new rules he will be taxed as if he were making $220,000 a year on any dividends he takes out, yet nothing will have changed in the business.
If he were an arm's-length shareholder, that would be completely unaffected by these rules. The reality is that families start businesses and they occupy different roles, and they set it up the same way as people at arm's-length. Now, under the proposed TOSI rules, those types of family companies will be treated in a very different fashion. Going forward, families will be discouraged from investing in family businesses by these rules.
Liberal
Raj Grewal Liberal Brampton East, ON
Just to clarify, you're saying that an arm's-length investor would be able to continue as the rules are today, but a related party investor would be subject to the new rules.
Liberal
Raj Grewal Liberal Brampton East, ON
You're saying that there's an unintended consequence of being a related party investor.