Finance Committee on April 24th, 2018

[Maude Lavoie]

That's correct.

[The Vice-Chair, Conservative, Pierre Poilievre]

Right, and 30 plus 50 is 80.

I understand that a member across the way does not agree that 30 plus 50 is 80, so maybe we went to different math classes in high school or in elementary school. The reality is, that is the margin.

Will this affect someone's access to lower provincial tax rates for small businesses?

[Maude Lavoie]

That's a decision to be made by provincial governments.

[The Vice-Chair, Conservative, Pierre Poilievre]

Okay, but assuming that it doesn't have any change there, at a provincial level, we're already at an 80% marginal tax rate on $1 of passive income over $50 000. Thank you for confirming that.

We had the Parliamentary Budget Officer here. He indicated that the deficit for this fiscal year—of course, this is a budgetary matter, and we are discussing the budget bill—will be $22 billion, not the $18 billion that the government's budget has projected.

Can anyone on the panel today explain the difference?

[Trevor McGowan]

I'm sorry. I think we're here to explain the technical tax changes in parts 1 and 2 and other parts of the bill. I think that falls outside of the area of our expertise.

[The Vice-Chair, Conservative, Pierre Poilievre]

Excellent, all right.

We'll turn the floor over to Mr. Albas.

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

Thank you, Mr. Chair.

I certainly I appreciate that last round. I thought that was a very interesting round.

Quite early in my last intervention, Mr. McGowan made mention of the minister's failed consultation process in regard to small business tax changes or CCPCs.

One of the key goals, or at least the problem that was outlined in that document, was that there were more and more incorporated companies. My understanding is that the Government of Canada has never received so much corporate income tax but that there are more entities. Is that correct?

One of the things they said was that they see it as a growing concern that we have more and more incorporations. That was kind of the rationale for the whole tax fairness argument that they made.

[Maude Lavoie]

There is certainly an increase in the use of CCPCs, as has been observed in the data, very strong growth in recent years.

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

Do you remember any of the data, just so that we can share it with the people at home?

[Maude Lavoie]

It was in the fall update, I believe, but we can definitely provide information.

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

Again, it was cited as one of the concerns that there were more and more incorporations.

The minister has basically surrendered most of the suggestions in that, everything from intergenerational transfers to...to some extent. I just want to point out that the chair asked a lot of good questions about the cost of passive income. I have a lot of concerns in those areas.

By lowering the rate—the small business tax rate that Ms. Dzerowicz was discussing—will we not be encouraging increased incorporations through the implementation of this?

[Maude Lavoie]

I think there are a lot of reasons why CCPCs or entrepreneurs would choose to incorporate. The preferential tax system that applies to corporations is aimed at supporting firms to reinvest in their business and supporting them in raising equity in all this.

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

I've spoken to a number of entrepreneurs in Canada. One of the things I've heard from many of them is that they believe that if you have rates like $50,000....on passive investments before you suddenly pay the much larger tax rate on that $50,001 up, they may end up simply incorporating further companies and seeing those profits go there.

For example, in many successful franchise companies, you have an entrepreneur who will have the trademark, the intellectual property, in a company. Then, they will lease out that intellectual property and return passive investment. Again, by incorporating some of these actions, do you not foresee that there could be a further stimulus to increased incorporation, particularly for those who deal in intangible items in passive investments? Has there been any modelling that you've done?

[Maude Lavoie]

Is your question that the reduction in the small business rate will encourage incorporation, or...?

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

Well, there are multiple factors here. Again, there's a smaller tax rate coupled with the fact that now someone can say, for example, “I'm going to take certain trademarks, certain intellectual properties, and if I hit that threshold of $50,001, then I can simply spin off part of those intellectual properties to another company.” They can begin to do that.

Are we not creating a situation where we're encouraging what the government originally saw as a problem?

[Maude Lavoie]

The $50,000 will have to be shared amongst the associated corporations. It's based on rules that already exist for the small business deduction. In your example, where the entrepreneur would own the other company and just split up its operations to benefit from more of the $50,000, that wouldn't work under the rules that are being proposed.

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

Again, could there be some strategies between shareholders where they bring other people in to share that income so that they pay that lower rate?

[Trevor McGowan]

Perhaps I can build on Maude's comments.

First of all, I don't know that one of the goals was to prevent the proliferation of corporations so much as it was to ensure that when corporations are used, the appropriate tax results occur. You mentioned as well the use of an asset that in one corporation would be actively used in the business, transferred to another corporation, and then used by corporations within a related group in their businesses. One of the key exclusions for this small business deduction or eligibility reduction is that income from active assets are excluded from that, which could include an asset that is used by a related company in its business.

As Maude said, these are supplementary to the existing small business deduction grind that occurs in respect of taxable capital employed in Canada. Those do apply in respect of an associated group of corporations. Just incorporating more companies won't get you out of the rules. I can't say there's no planning out there to try to avoid the rules. There certainly is an incentive to do so. But in general terms, it applies based on a group concept.

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

Has any modelling been done just to see if we're not pushing that—

[The Vice-Chair, Conservative, Pierre Poilievre]

Mr. Albas, we have to go to Mr. Fergus.

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

Fair enough.

Thank you. I appreciate the time.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you very much, Mr. Chair.

My question will be pretty short.

If I understand correctly the worker benefit, Mr. Leblanc, the idea was to have this amount; to have, as you said, a longer phase-out; and to start the phase-out later. The purpose of it—correct me if I'm wrong—is that when you have people of the same income, one receiving benefits and the other one working, the people who are working at a certain level, the working poor, have some disadvantages, and it would be rational for them, rather than seeking work, to seek social benefits just because of the way in which our tax system, benefit system, and all ancillary things work in the whole process. It doesn't work in their favour.

So the idea of having the benefit, or the working income benefit, is that you're allowing them to make the rational choice to choose work. Of course, work has many advantages. There's the possibility of gaining greater income. It's an ennobling activity. It could lead to future growth and future opportunities.

Do I have that right?

[Pierre Leblanc]

That's right. I think that's a fair observation.

I mean, another way to think about it relates to what was said on the issue in a previous round of questions. There are different decisions in relation to work. I think a lot of research has shown that a key decision is just whether or not to be in the workforce. The measure we think of there is sometimes called the “participation” tax rate. Basically, that's the effective tax rate comparing two states of the world: one, I don't work; and two, I work.

Let's say I work 1,500 hours a year at minimum wage. Looking at it the way you just set it up, I would consider how much of those earnings I would be able to keep. A key question there is that even though the Canada workers benefit, as proposed, would be phased out over a longer range, it still could be the question between someone getting some Canada workers benefit and nothing, under the current system.

So there, as they think about that decision and make those calculations—especially as they learn over time, perhaps if they work another year, how the system works—they might think, “Okay: now that I'm working this many hours at minimum wage, I'm getting something from this benefit.” We think that will play some part in their calculations when they make these decisions.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

There's also the added incentive, or the added innovation, which I believe you also testified to today, that now the Canada Revenue Agency will make that calculation automatically for workers. They don't have to go out and fill out schedule 6 to be able to do that, so it makes it a lot easier for them to see the benefit.

[Pierre Leblanc]

That's right, and just to confirm, that element of the proposal is not in this.