Good morning, and thank you very much for the opportunity to speak with you today.
Nancy and I will be a tag team this morning with our comments for the chair and the honourable members, so thank you very much.
As mentioned earlier, the St. John's Board of Trade did a pre-budget submission in August. I believe you have received a copy of it, but the proposed changes announced in July have overshadowed all sorts of discussions around budget 2018.
The St. John's Board of Trade has been in existence for over 40 years, and never have we seen such outcry from our members. We are receiving daily phone calls in terms of the implications and ramifications of these proposed changes for our members' businesses. The reason is that these changes are so broad, so far-reaching, and have so many unintended consequences.
Honourable members, there is likely not a restaurant or a fish plant or any business that does not have family members working in the business, and almost every single business in Newfoundland and Labrador has the goal of financial stability, with savings of passive income to help through difficult times. In fact, they have been encouraged by their financial professionals to save for these rainy days. It is as though the finance department crafted tax measures that would affect the maximum number of businesses in the most complicated manner, yet has not identified the true revenue that would come from this measure. The amount quoted with respect to income sprinkling is $250 million, but there has been no real communication of what the total tax impact is going to be on the economy or on small businesses.
Here is what our members are worried about. Business owners generally spend their life savings in their businesses. They don't have separate retirement accounts. They don't have that luxury. They accumulate these surplus funds so that they can use them to get through economic downturns or use them for capital investment. We've spoken to one owner who is in the construction business, who says that he needs passive income to grow his business and to weather through these cycles of upturns and downturns. This new proposed tax change is attacking this very measure for him.
If government hits investment income—in Newfoundland and Labrador, that's a 73.88% tax hit—business owners will not have the incentive to retain those investments in their businesses for growth. They'd be better off taking the money out and into their own pockets. This means less investment, fewer jobs, and less of a cushion to make it through the downturn. That means less productivity.
There is a Bank of Canada study called “Productivity in Canada: Does Firm Size Matter?” They say that half the productivity gap between companies in the United States and in Canada is because the companies in Canada are smaller. Smaller companies have less to invest in capital, less to invest in skills. These proposed tax measures are going to cause even less money to be retained for these initiatives.
Imagine a venture capitalist who specializes in green technologies. She takes an equity position in businesses to help those companies grow and to try to start commercialization of environmental technology. These investments are passive investments. If they are taxed at 73.88%, there is going to be very little to help with this initiative.
Try to imagine explaining all of this to foreign investors who want to come into our country and into our province. The apportionment method of taxing passive income allocates income to three pools, a pool for shareholders and pools that you have to keep track of. This complexity is absolutely mind-boggling for professionals who deal in this on a daily basis. Imagine trying to explain this to individuals who are not Canadian and not from this country, but who we want to come in to invest and help us grow. They're not going to come here. They're going to go to the United States or other areas.
What happens as a result of these tax measures? We have fewer jobs. We have less investment. We have less of a cushion to get us through economic downturns, less venture capital, and less foreign investment.
When we point this out, government has said repeatedly, “This is not our intention. It's really about the high-income earners.” I'm confused, because whatever the intention may be, the real consequences of what are proposed through these tax changes will be on small businesses and on the Canadian economy, and it will be negative. Ask any financial accountant professional in the country and they will tell you the same thing.
Ladies and gentlemen, the St. John's Board of Trade has been around for many years, and we have seen some bad ideas. This unequivocally is the worst. That's why we're urging the government to put these changes on hold, take these proposals off the table, launch meaningful consultations with the business community, and address the shortcomings in the tax policy without unfairly hurting unintended victims.