Finance Committee on Oct. 3rd, 2017

[Sean Wallace, Director, Board Representative, Economic Development of Tisdale, Saskatchewan Economic Development Association]

Good morning, Mr. Chair, and committee members. My name is Sean Wallace. I'm the economic development director for the town of Tisdale, a small agricultural community located in the northeast region of the province. I'm here representing the Saskatchewan Economic Development Association, SEDA. My comments this morning pertain to productivity and competitiveness in rural economies.

SEDA's membership includes a large cohort of economic developers, with a majority serving in small rural communities with populations under 10,000. Many of these communities are reliant on agriculture and resource development. The majority of businesses located in these communities service these sectors.

Rural Saskatchewan has many of the same core issues as does any small community in rural Canada when it comes to productivity and competitiveness. The ability to attract investment, mitigation of population decline and shifts, access to health care and education, aging and inadequate infrastructure, lack of transportation options, and opportunities for youth are usual themes. Rural communities also tend to have higher rates of poverty, unemployment, and underemployment. Of course, there are exceptions, and these exceptions are the communities that have taken advantage of their unique economies.

Unfortunately, when developing strategies and policies around productiveness and competitiveness, a single national strategy would be largely ineffective because they tend to be generic and focus on large population centres. What works in cities doesn't necessarily work in rural communities. Rural Canada can be complex when it comes to local economies, labour market participation, access to services, transportation, etc., and we require different strategies to address these complexities.

In terms of what would make Canadians more productive in rural Canada and the measures the federal government can take, I believe developing a modern strategy on rural economic development with the participation of provincial organizations like SEDA and rural economic developers would be a positive first step.

In terms of the federal measures that would make Canadian businesses more productive and competitive from a rural perspective, funding for innovation, encouraging careers in agriculture through education and training, and preserving tax incentives for farm operations and rural businesses to support the agriculture industry will help grow and maintain rural economies.

Last, I would be remiss if I did not mention taxes. We know that small business is the backbone of our economy, but in rural Canada, small business is our lifeblood, and a competitive tax regime is critical. Higher taxes mean higher prices for goods and services, which directly impacts our ability to compete.

The government's proposed tax changes would have a disproportionate impact on the agricultural industry. As far as small businesses go, a farmer is much more likely to rely on contributions from all family members. A farm is much more likely to stay within a family for multiple generations relative to other small businesses, and income splitting rules will cause uncertainty as to the tax compliance in these situations, and an increased risk of higher tax costs for family farms.

The proposed tax changes will drastically increase costs of inter vivos and will force families to wait until the parents' passing to transfer farm ownership to the child. They will greatly increase the costs of this transition. In either case, it will decrease the likelihood of a family farm staying within the family.

Also, economic development in rural communities is heavily dependent on private investment, and that is a fact. Rural communities are less likely to attract investment from public companies and foreign investors than urban centres. By removing these incentives from private corporations, and in turn giving the advantage to public companies and foreign investors, it disproportionately impacts rural communities. Much of this private investment comes from business owners in the community with excess incomes who use it to invest in new ventures, often in the form of passive investments that create employment. By taxing these investments at punitive rates, and encouraging the individuals to instead withdraw cash and invest in RRSPs, the ability for this capital to be reinvested in the community will be effectively eliminated. This will have a devastating impact on the economic growth in rural communities. I might say, it might also have a devastating effect on those who practise my profession in rural communities.

Mr. Chair and committee members, thank you for inviting me here today. I appreciate the opportunity to speak.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Wallace.

I might mention to witnesses that the committee did hold hearings for two days last week on the tax issue specifically. Many of those witnesses said much along the same lines as what we're hearing here on the tax issue. We've forwarded that information to the minister's part of the consultations without recommendation from us.

Next is Thomson Jaspar and Associates. Welcome, Mr. Gorniak and Mr. Turnquist.

[Michael Gorniak, Partner, Thomson Jaspar and Associates]

Thank you, Mr. Chair.

I want to start by agreeing with the previous comments by the witnesses regarding the private corporation proposed tax changes.

Thomson Jaspar and Associates is a mid-sized CPA firm in Saskatoon. We deal exclusively with small businesses, including farmers and professionals, providing services and advice to 1,200 private corporations.

We believe major modifications to the proposed private corporation income tax measures released on July 18, 2017 need to be implemented to ensure that Canadian small businesses do not suffer employee retraction and losses in productivity. Small businesses are a driving force behind innovation. The proposed changes remove the incentive to pursue small business, which will have a drastically negative impact on competitiveness in our global economy.

Our submission—and I apologize, we were invited to the committee on Friday—includes a copy of the letter we have written to the Department of Finance in response to the proposed small business corporation income tax changes and three examples that illustrate the negative impact the proposed tax changes will have on small business owners, physicians, and start-up companies. As well, we offer our firm's proposal, which I would like to outline now.

We believe income splitting should be allowed for private corporations to recognize that family capital is at risk and that family members contribute in non-measurable ways toward the success of a business. We also believe that all families across Canada should be entitled to a form of income sprinkling. Therefore, we propose the reintroduction of a modified version of the family tax cut, enabling all Canadians to benefit from income sprinkling.

To make up for the lost revenue of our proposed measure, we would suggest eliminating most stock option deduction benefits. We realize that stock options are a legitimate form of compensation in the high-tech start-up sector. The stock option benefit in this sector could be maintained while eliminating it for Bay Street corporate executives, the true 1% of high-income earning Canadians that the proposed tax measures are intended to target.

To prevent the conversion of dividends to capital gains, we propose a simpler alternative to the draft legislation accompanying the discussion paper. A different system could be adopted whereby long-term capital gains, for example, on assets held for five years or longer, are taxed at the current 50% inclusion rate, but short-term capital gains, held for less than five years, would be taxed at a higher inclusion rate of 75%. If this were to be implemented, the personal income tax rates on dividends and short-term capital gains would be comparable, eliminating any benefit from converting dividends to capital gains.

We believe these suggestions would provide three benefits. The first would be increased revenue for the treasury. Taxpayers had been expecting such an increase in the last federal budget and we believe were prepared to accept such an increase. The draft legislation in this area would not be needed, and therefore simplification of the Income Tax Act would be the second benefit.

The third benefit would be the elimination of the unintended income tax consequences that the draft legislation has on farm and family business succession planning. It has been well documented that the draft legislation would negatively impact succession planning, because the income tax resulting from a sale to a third party would be more favourable than if the farm or business were sold to a family members. Our proposal eliminates the need for the draft legislation in this area, and therefore eliminates this major area of concern amongst income tax practitioners.

Thank you very much for your time.

[The Chair, Liberal, Wayne Easter]

Thank you very much.

I thank all the witnesses for their presentations.

Mr. McLeod, you're first on the list.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chairman.

Thank you to everybody for coming to present to us in the pre-budget consultation process.

First, I wanted to thank Mr. Gorniak for his recommendations. I think they're very constructive when it comes to looking at the tax discussions and the changes that are being proposed. You're one of the few witnesses who have come forward and offered solutions rather than criticizing what's going on.

I was really surprised at the North Saskatoon Business Association which came out with the first recommendation involving aboriginal people. Being an aboriginal, I certainly recognize some of the challenges that you're up against. One is getting aboriginal people involved and working in the industry. I have four large mines in my riding and they've done really well in tracking aboriginal people, but some organizations are suggesting there are probably well over 150,000 unemployed aboriginal people. We really have a challenge in trying to get aboriginal people to migrate where the jobs and activities are.

Other committees have recommended better wraparound services focusing on mobility issues, some of the literacy challenges the indigenous people have, better training, and transition housing. I wonder if you could talk about the needs in that whole area and the requirements that would help us move forward on that front.

[Keith Moen]

Sure, I'd be happy to and will defer to my colleague, Brenda Wasylow, if need be, if she has comments as well.

We're thinking in terms of education and training, provided that the work readiness is there. As we've evolved technologically, we see many people working off their phones, from their home offices, their laptops. There's absolutely no reason, aside from the work readiness training and education component, that the same scenario could not be replicated in first nations.

That's the vision we see and that's where we think there is opportunity for inclusion among first nations and indigenous people. Again, it's a multi-generational thing. We don't think that will happen next year or the next decade, but nonetheless, as I said, it's the first step we would like to see. Of course that would require infrastructure, which is expensive, as you know, and opportunity as well.

That's it for my comments.

Brenda, do you have anything to add?

[The Chair, Liberal, Wayne Easter]

Ms. Wasylow.

[Brenda Wasylow, Past Chair, North Saskatoon Business Association]

I am a partner in an aboriginal majority-owned company, so we're hitting some of these things head-on.

I don't want to take a lot of time, but I want to share a story about a trip to China. We were looking at potentially working with a company overseas. One of the things they addressed right away was, “You don't have to hire. You don't have to expand. Just bring your work to China, and we'll do it here for you.” That was really disconcerting from a perspective of being an aboriginally controlled company, because there are tremendous resources here of people who are unemployed in this province.

I appreciate some of the comments coming from the polytechnics side of it, because if businesses were being asked to invest dollars to try to bring education and that next step in work readiness skills to the aboriginal community.... I think we need to do a lot more in that area. I appreciate those wraparound services. We're trying to make use of them, but it really is about bringing sustainable education to those aboriginal communities and then helping them transition into our workplace, not just as labourers, but as a highly skilled, highly valuable workforce in our country. We need some investment in education and support services to be able to do that.

[Michael McLeod, Liberal, Northwest Territories, NT]

I'm glad you mentioned the infrastructure piece, because that's so important in the area that I represent. We'll never get investment if we don't improve our transportation infrastructure.

Mr. Wallace, I want to quickly ask you a few things. I was really glad to hear some of the comments you made about the area that you worked in. For a while, I thought you were talking about the Northwest Territories or the whole north, because we seem to share a lot of the issues that you flagged.

One of the things I've really worked hard on bringing to the government's attention is the idea of rural and remote communities, areas that are challenged by some of the programs we've seen announced historically where there's money announced, but it's based on per capita. It doesn't reflect some of the challenges we have in terms of remoteness and the high costs in the different parts of this country we live in. We also seem to have the challenge of trying to get flexibility from the money that is announced.

Could you talk about some of the benefits that we'd see if we had base-plus funding and flexibility in some of the funding programs we have coming forward?

[Sean Wallace]

You are totally right. I did spend some time about two hours north of Yellowknife in Kugluktuk working closely with the mining industry up there, and indigenous employment was one of our big things there as well.

You're right. Everything is more expensive in rural Canada. Gas is more expensive, and you have to travel longer distances to go to work. Recently, the federal government did a federal poverty study on tackling poverty together. Another connection between you and me is that Yellowknife, I believe, was a city involved in that study, as was Tisdale, as a rural community.

The government needs to take a bit more time to figure out what the issues are in rural Canada because they're completely different from what urban centres face. It's hard to find health care professionals, and it's hard to attract people to rural areas. If organizations like SEDA had some funding and support from the government, we could probably do a better job figuring out how to get better labour market participation in the north.

[The Chair, Liberal, Wayne Easter]

We'll have to leave it there.

Mr. Albas.

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

I want to thank the whole panel today for a very educational, wonderful session. You've done a very good job today as far as soliciting good feedback.

I'd like to start with Mr. Pitka of Ag-West Bio.

To comment, sir, you're totally right when it comes to the demographic challenges we have. Obviously, the previous government sought to extend old age security benefits in recognition of those things. Obviously, the government had a mandate to roll those back. This is not a problem that is going away, and good on you, sir, for presenting some suggestions.

Mr. Engel, thank you for your submission today. Certainly, if we want to have safe installations, I think you raise a very good point, but it also maintains the integrity of the tax system, because often, the professionals you're using bill and pay GST, etc., so it's a very good suggestion.

To Polytechnics Canada, last night, just so you know, I drove by the local institute here quite late, and they all looked like they were working, just burning the midnight oil. I appreciate what you guys do.

My real concern has to do with small business taxation, and I'd like to ask a few different people about it.

First of all, when it comes to passive investments and how the government, in its proposal, has said that it wants to steer people to active investment, my understanding is that companies, if they have active investments, they make them. It's already in their benefit, in terms of depreciation, to make those capital investments for production and all those other reasons.

If the government goes ahead with these rules, I'm worried about the undercapitalization of businesses. I'm worried about some businesses rolling to cash and then having inflation burn, because the government is basically making it very prohibitive. I'm also worried about the role of financial intermediaries. For example, we like to link savers with people who can borrow, whether we're talking about the bond market, whether we're talking about new issuance of stock, etc. I'm worried about the corrosion of the fiscal framework, so to speak, between financial intermediaries.

Do you have anything to contribute in terms of those concerns?

I'll start with Mr. Gorniak, please.

[Michael Gorniak]

We have those same concerns. The current taxation system allows for small business owners to accumulate assets and save during the good times, then bank that war chest, so to speak, so that when the bad times come, they can handle the downturns. I have a very good example. I have a client in the construction industry. Three and four years ago they were making $300,000 to $400,000 a year. Last year they lost $50,000. This year they broke even. They've utilized assets that were previously saved in the corporation so as not to have to lay off employees during the slow economic times. They've done a clawback on wages but they haven't had layoffs. From that perspective, it's very important that we take a good look at passive investments.

We have to look at the situation with regard to.... I'm sorry. I'm going to let my colleague take over here. I'm drawing a blank. I apologize.

[The Chair, Liberal, Wayne Easter]

That happens to us, too.

[Voices]

Oh, oh!

[Braden Turnquist, Partner, Thomson Jaspar and Associates]

What I was going to touch on is your point about the utilization of financial intermediaries and that role that might happen. Right now, you talk about a company that might have built up that war chest. If these proposed tax changes go through, there's less incentive to keep that, and you lose on the inflation side. Where we may be in a few years is that you'd have companies that would have to utilize that to take on those opportunities, or suffer those down times. Business is already risky and I think taking on more debt adds another level of risk. I'm not sure the intent is to push businesses that way.

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

I'd like to ask Mr. Hopkins, Mr. Moen, or anyone else who would like to, to talk about the passive investment side and what that could mean.

[John Hopkins]

I talked to chambers of commerce across the country recently, and this is probably the most egregious change. This could have huge impacts. It's hard to put a dollar value, but some of them I've seen are $3 billion. That's a $3-billion tax change in 75 days.

To come back to something else quickly, what we really need is a new plan. Perhaps, as Mr. Easter talked about previously, it's a white paper where we actually get some tax professionals in the room to talk about what we are really trying to do, and have an open, transparent consultative process.

On passive income, we have a lot of concerns. To echo what's already been said, what are you going to do during the down times if you don't have the money to keep your staff? Well, you're going to lay off more people. What about plans to acquire different businesses? How is that going to work?

How is it fair? I'm not an accountant, so these guys are probably way better at this than I am, but this is the scenario that was run by me. If I have a private corporation and I buy an apartment building, I'm going to be taxed at a much higher rate, but if I have 10 people and we join together and form a public company, there are different rules. Why are we not talking about the whole piece as opposed to just attacking private corporations? That's really what it is. It's an attack on private corporations. That's the way it's being seen from coast to coast to coast.

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

Mr. Moen, do you want to add anything?

[Keith Moen]

I agree with the comments so far of all the other witnesses, but I would add that notwithstanding the ability to withstand the down times, in the good times, companies, especially small and medium-sized enterprises, tend to look at their own companies as essentially family members. You want your family to grow and prosper, and that's what businesses do as well, so they'll reinvest that money. It's not like they're going to be keeping that passive money dormant for a long period of time. If they feel there's an actual need, as Mr. Hopkins alluded to, to purchase another business and employ more people, they will. If there are options to invest in further infrastructure to improve productivity, make technological advancements, or employ more people, they will. There is no downside to having a passive investment remain as passive.

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

Perhaps someone wants to throw a hand up and make a quick comment on this. Obviously, rentals are an issue in many parts of the country. Many rentals are owned by CCPCs, Canadian-controlled private corporations. Do you believe this is going to have an impact on the incentives for people to build housing stock?

[John Hopkins]

Not only is it housing stock, but your comments drew me to the farm right away. What's the retirement plan for a lot of people who own farmland, who farm? I've worked all my life, for 30, 40 years, because you're not usually going to get a pension out of it. The pension is that I'm going to rent out my land, and now it's going to change.

[The Chair, Liberal, Wayne Easter]

We're a little over.

People may want to put their earphones on. I expect that Pierre will talk in our other official language, French.

Pierre, the floor is yours for seven minutes.

[Pierre-Luc Dusseault, NDP, Sherbrooke, QC]

Thank you, Mr. Chair.

My first question is for Mr. Engel and it is on insulating ventilation, heating, and cooling systems. I believe firmly in the potential of these measures for reducing greenhouse gas emissions and energy efficiency. I didn't see anything in the brief about this, but maybe that's because I didn't read the whole thing.

What can the federal government do to help in the transition in existing buildings, whether residential, commercial, or government—and I suppose it might be easier for a government—and ensure that new buildings are better insulated?

Should there be a tax credit program? What measures should be taken?

[Vince Engel]

That's a great question, thank you.

We have been pushing for insulation energy audits in federal buildings. It takes a very short time for a qualified person to go in and take a look around the mechanical room in a building like this and very quickly identify insulation deficiencies that are costing money. It's a simple matter, really. It could be a checklist that's provided to building managers to go and take a quick look at their insulation. If they see some of the red flags, they can have an expert appraiser come in and do an audit.

I have a couple of examples of audits that we've done. We did one at the London courthouse. The Ontario government gave us a building and let us go in, and we did a quick audit. It was a fairly new building but, all the same, we found mechanical insulation upgrades that would save $10,000 to $14,000 a year in that building. The cost of installing the insulation would be estimated between $6,000 and $9,000, depending on the contractor and the cost of the materials. It works out to a payback of nine months. At the same time, we reduce greenhouse gases by about 61 tonnes a year from that one building. We save a lot of money and energy.

That's one of the things the federal government could do. The tax credit is also a great idea for building owners who want to put in the small initial investment of doing an audit on their mechanical insulation and then doing some repairs and replacing of missing or damaged insulation. If there is some kind of a tax credit incentive for that, we think that would be another big step.