Finance Committee on Sept. 28th, 2017

[The Vice-Chair, Conservative, Pierre Poilievre]

That concludes the questioning.

Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chair, and thank you all for the presentations. It's a very interesting discussion today.

The Income Tax Act for sure is very complicated and complex. I'm not a tax expert, and God help you if I try to advise you on how to save money, because I'm not good at that either.

I want to point out, however, that the consultation process is on now, and we want to hear what the public and the experts have to say. We have no legislation on the table yet, but that gives more opportunity for input.

As I'm listening, I'm wondering, because the corporations have to incorporate that set-up and there are a lot of rules around the tax system. I want to ask if someone could tell me what it takes for these corporations to do their taxes at the end of the year. If the system is so complicated, as many have indicated, that you need lawyers, accountants probably. Could somebody tell me what an average corporation pays for an accountant to do taxes?

[Jennifer Kim Drever]

That's actually a very complex question. It depends on the complexity and what is going on in that company. It also depends on what level of financial statements the bank would require.

[Michael McLeod, Liberal, Northwest Territories, NT]

What's the average?

[Jennifer Kim Drever]

For a small business that has “notice to reader” financial statements, I would expect the average to be somewhere between $1,500 to $2,500.

[Michael McLeod, Liberal, Northwest Territories, NT]

How many clients would an accounting firm deal with?

[Jennifer Kim Drever]

It depends on the size of the accounting firm.

[Michael McLeod, Liberal, Northwest Territories, NT]

I'm assuming every corporation has a firm doing its taxes.

[Jennifer Kim Drever]

Every corporation has to file a tax return. That doesn't necessarily mean they have an accountant who does it for them.

[Michael McLeod, Liberal, Northwest Territories, NT]

I think maybe the language is a little too broad in the Income Tax Act, too complicated, and maybe it should be tightened up so it's clearer.

I'm also wondering if all professional corporations are permitted to engage in what is called “income sprinkling”. Is everybody able to do that?

[The Chair, Liberal, Wayne Easter]

Who wants to take that on?

Mr. Burello.

[Eddy Burello]

The answer is no, and there are many reasons for it. Some people don't have multiple family members to sprinkle with, so not all professional corporations can do it. There are definitely restrictions in certain circumstances. There are also provincial rules. Some provincial rules prohibit family members from being part of professional corporations, so there's a regulatory issue in such circumstances that prohibits the sprinkling of income.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you for that. That was puzzling me.

The other thing that is difficult for me to understand is that the passive investment income is intended to help the company, the business, grow, to invest, but now we're seeing it change, and there's an ability to use it as a personal savings account for your retirement savings.

Is that what the initial intention of this legislation was? Is there a comment from anybody around the table?

[Eddy Burello]

I'll jump in on that one. I'm not sure what the intention of the original legislation was.

I would say if there's a concern, as the name implies “passive”, I would tell you that most Canadians don't have passive capital. All capital has been deployed in some fashion one way or another. Some capital is reserved to be put back into their businesses. Other capital is reserved to be put back into the economy in some form of investment.

There is really no such thing as passive investments. I'm not exactly sure what the intent was. That passive investment is currently taxed. It's not like there's no taxation on that investment. I'm not exactly sure how to answer your question, but I would tell you all capital is deployed.

[The Chair, Liberal, Wayne Easter]

And we are going to have to—

[Charles Lammam]

I would like to comment if I can.

[The Chair, Liberal, Wayne Easter]

Okay, Mr. Lammam, if you could fairly quickly.

[Charles Lammam]

There's a broader point that I think is absent from this debate about how the tax changes will affect behaviour, and it's completely missing from the working paper provided by the Department of Finance.

Basically it assumes there will be no behavioural response from any of the proposed tax changes, which is really contradicted by the evidence. Whether we're talking about increasing tax rates on passive investment income, or whether we're talking about increasing tax rates on professionals who are now using strategies to lower their tax burden, the paper doesn't acknowledge that there will be a response. The response can take the form of people working less as a result of the higher taxes that they will pay. It can mean professionals passing on the extra costs in the form of fees to the extent that they can to their consumers, or that there will be less investment taking place, and frankly there will be new and different forms of tax planning in response that work around the rules. We've already heard about that in this discussion.

All of those types of activities are not going to help improve Canada's economy. I think it's a key aspect of this proposed legislation that is completely missing from the debate. We need to understand that these changes will have economic consequences, and it's not in line exactly with what this government wants to do, which is grow the economy.

[The Chair, Liberal, Wayne Easter]

Thank you very much. I expect you will make that comment next week as well on the pre-budget.

Mr. Albas.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Thank you, Mr. Chair.

Thank you to all our witnesses.

I'd like to go first to MNP. Thank you for being here today.

This is a direct quote from a prominent member of the Liberal Party of Canada: ”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.”

First of all, from your opinion, under our current system as it stands without any of these changes in play, is that a possibility?

[Jennifer Kim Drever]

Absolutely not. A corporation earning $250,000 is going to be paying at least a small business deduction rate at the corporate level—at least. Somewhere along the line either Eddy and I are really bad at our jobs and we haven't figured out how to make that math happen yet, or it's not possible.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Okay. Another prominent person within the Liberal Party has said in an op-ed that these changes would not affect people under $150,000, so for passive income investment to provide an advantage over and above what's available to every Canadian through RRSPs and TFSAs, a business owner would need to earn more than $150,000. Is that correct?

[Jennifer Kim Drever]

That isn't actually correct because many businesses that are under $150,000 still compensate their shareholders via dividends versus a salary, and they do that for many reasons. One is cash flow.

One of the things for a lot of these small business—because they may be start-ups or because of different things—is that they don't necessarily want to compensate themselves via a salary. The reason for that is, if you were to take a salary, you could be creating losses in that company that are not good for anything. It also makes the balance sheet look bad, and it makes the income statement look bad for the lenders. A lot of these business owners wouldn't take a salary, so they don't create the RRSP room to start with.

In my experience, I have yet to see a start-up business or a small business making that level of income taking salaries to their shareholders.

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

That's a very good point, because oftentimes, for an RRSP to be an effective strategy, you have to start very early and be consistent with it.

[Jennifer Kim Drever]

You do, and you have to be taking out a significant amount of salary every single year in order to create the earned-income room for the RRSP.