Thank you, Mr. Chair, and members of the finance committee for the opportunity to speak about Canadian business productivity and competitiveness. I'd also like to thank the advisers in the business community who share their concerns with me.
Today, I will focus my time on the passive income investment proposal, which the Department of Finance has indicated is a 2018 budget issue. We have seen very strong objections from experts and business owners regarding this proposal. Many see the Canadian dream being extinguished and understand the potential ramifications to the Canadian economy.
These proposals have the government penalizing entrepreneurs who have become successful, and raising the ladder so that others have to overcome more significant burdens to achieve success. Recent and future entrepreneurs can now expect tax rates of over 70% on passive income. The modern entrepreneur is mobile, especially at a time when fewer people than ever can afford to purchase real estate. Why should they choose Canada as a place to grow a business, if business success is demonized as cheating instead of lionized as an example to follow?
The government's communications have created a threatening environment of uncertainty. As such, many businesses are actively exploring other jurisdictions. My network has shared with me that billions of dollars of capital has fled the country or never reached it. Investors and business owners are rightfully concerned that their lifetime of hard work could be confiscated by this government with each new surprise announcement.
Grandfathering the passive income of successful corporations stacks the deck against young entrepreneurs, albeit at a competitive disadvantage to older corporations that are unable to grow as quickly due to a much higher tax burden. I don't believe in retroactive taxation, but the grandfathering of existing wealth is creating a two-tier investment tax system.
Consider a private company with 400 employees. The $50,000 income limit proposal is completely inadequate. If this company can only save around $1 million, in a downturn, the reserves could be eliminated overnight. What is the impact of not being able to cover payroll? Budgeting necessitates saving and growing capital for future contingencies, capital purchases, and other competitive measures. The federal government cannot decide the capital needs of a business.
The Department of Finance reported that there are $200 billion to $300 billion of passive investment in private corporations. How much capital is in public corporations and foreign-owned corporations operating in Canada? Why are public corporations paying a tax rate, averaging only 28%, but private corporations and their shareholders get wrung? If fairness is the prime objective, this tax gap on equivalent income directly hurts the credibility of the proposal.
To be clear, money inside a corporation is rarely dead, unless it's stuck in a mattress. It provides capital that other productive businesses can receive access to. Basic macroeconomics aside, money inside an RRSP, TFSA, pension plan, or non-registered account could also be called dead money. The distinction is nonsensical.
Capital within corporations provides direct support to the economy by purchasing government debt, public corporate debt and equity, and investment in other private companies and ventures. The rate of growth in corporately held passive investments allocates capital with reasonable efficiency. Government intervention can only distort this market. Canadian taxation of investment in private corporations already exceeds that of our top trading partners. This plan to increase taxes makes Canadians less competitive.
I cannot sufficiently emphasize that a cap of $50,000 will be a compliance nightmare, due to complexity, difficulty, and uncertainty. There isn't enough time for the details, but this message is coming from every tax expert I've spoken to across the country. There are ordinary situations in which compliance will be nearly impossible, or at best, create a huge economic cost.
It's unfair to apply the rules to larger businesses and their investments just because of their size. Changes in taxes change behaviours. The passive income proposals are changing behaviour to a level I have never seen and the behaviour change is largely to exit Canada.
Here are representative stories that I've been told. My top 10 clients asked me to do an impact analysis of removing themselves, their capital, and their business from Canada. I can't even estimate the direct and indirect job losses. We've had three high-tech software clients, who are all under the age of 35, already starting to sever their ties. Others have simply asked why they should bother investing at all. Foreign investors who told me that they were planning on investing big in Canada have completely changed their minds.
I am working with a foreign client who has shifted from investing $30 million in Canada to the U.S. Doctors are exploring options to work internationally and are rearranging their affairs. Two or three from our office alone have left. These are actual conversations with real people who create jobs in Canada and generate a significant amount of GDP.
I can assure you that these conversations are happening across Canada in huge numbers. At an event I attended last night, successful entrepreneurs asked me if I could assist with their exit planning from Canada. The government must appreciate the cause and effect.
A productive and efficient tax system must be more than fair, which is a subjective term. It should grow the economy, which allows governments to collect and spend some share of it.
I've seen nothing to demonstrate positive impacts on the economy. I think it is irresponsible that an economic study has not been completed. The federal government is asking millions of Canadians to trust its pliable definition of fairness as it casually creates economic harm.
I would estimate that hundreds of thousands of hours have been spent by some of the most productive members of our country responding to this legislation. This includes writing submissions, public articles, webinars, speeches, and more. How much of a hit do the proposals already have on our GDP? If the government wants to help businesses and investment communities and pinch the capital flight, I would recommend to end the uncertainty and completely withdraw the passive income proposals to restore business and investor confidence.
I could speak for hours about the passive income issues and show mathematical models demonstrating serious flaws in the proposal. I'm happy to continue the conversation.
Thank you. I'm available for any questions.