Finance Committee on April 30th, 2018

[Hassan Yussuff]

That would be one way to do it. As you know, this issue arose after the finance ministers had met in 2016 and agreed to the enhancement.

Over time, when the government finally tabled the legislation for the enhancement, we were able to determine that the drop-out period, both for women's child-rearing years and disability, had not been included in the provisions. Once the finance department was alerted, the government did work with the provinces, because you needed to have their agreement on how to deal with this anomaly.

They came up with a new proposal called drop-in, and not drop-out, but we are still slightly skeptical that it will provide the same benefit of the drop-out provision under the current CPP provision. We don't know that, and I don't want to say definitively that they didn't get it right, but there is a need to do modelling to determine whether it will have the same impact as the drop-out provision has had in the current CPP.

The worry, of course, is that you don't want women who are rearing children to be disadvantaged by no fault of their own. We did end the discrimination of the previous CPP, and it was a good thing for us to do. We also did it for disability.

Going forward, it is very important to do modelling to show how the new provisions would impact this particular drop-in provision, because there is an expectation on the part women and those who may be affected by disability that they're not going to be disadvantaged.

If the modelling were to show there's a problem, we would have to figure out how we can discuss this with the provinces to get it addressed. Had we agreed to keep the old model, it would have been much easier in the end, but as you know, this is a benefit that will take effect starting next year.

They're hoping, based on the increase in the rate that the worker and employer would be paying, that there's enough flexibility to cover the drop-in period. We're not certain of that at the CLC, and that's why we've raised this issue.

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

Thank you for those clarifications. We are going to try to obtain this model or this calculation before we make a decision and vote on the provisions of Bill C-74. I don't know if the Department of Finance would be able to help us with this.

My next question is for Ms. Gibson from Canadians for Tax Fairness.

You talked about passive income. You made it clear that in order to get $50,000 of passive income, you had to have investments of about $1 million. You have given us some figures, but I would like to know if you have a little more detail on this issue. For example, how many companies in Canada have an annual passive income greater than $50,000 and would be affected by this measure? I don't know if you have those numbers, but it would be interesting to know how much of an impact this measure would have and how many companies would be affected.

[Diana Gibson]

Thank you for your question.

The numbers are quite small. My understanding is that 3% of businesses, about 750,000, are impacted, so it's relatively small. Because the threshold is quite high, it is quite out of reach for most small businesses. The broader issue is that the bulk of businesses are only earning $73,000 and under. That's the median: half are earning less than that, and half more. If you have a median income at that rate, and this passive investment is only for past investment—it doesn't apply to active income—you need a business with that income for that passive investment threshold to be meeting this criterion

So it's relatively small number of the businesses that are accessing the passive investment threshold. Canadians for Tax Fairness feels that the threshold could better serve Canadians if it were lower, at around $25,000, more on par with RRSP deductions. We would like to see that tightened up, because the data shows very clearly among small business owners, the bulk of it is in the hands of 10% of the top 1% of earners. This needs to be closed up to make it fairer.

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

Thank you.

I would like to ask a tax question on the distribution of income that will take effect retroactively—we hope everyone knows about it. When we study legislation, it isn't every day that we're asked to adopt them retroactively.

How aware do you think taxpayers are that they will have to comply with these rules if the bill is passed as is? At the moment, the bill hasn't been passed yet.

How informed do you think companies are about the new rules? Do you think they will be able to adapt to it? If the bill is passed in June, do you think they will have had the time to adapt in six months?

[Bruce Ball]

Thanks for the question—

[Diana Gibson]

Because it's focused on passive investment, not active investment, the measures have been restructured to address some of those issues around its being retroactive. I can't speak to how or where businesses are and how well they can respond, but the majority of small businesses will not be impacted by these changes. The ones that are going to be impacted are particularly wealthy and well-advantaged businesses and individuals.

The concern is really more about how we make sure that this is structured in a way that's fairer, and not about the impact that it's going to have. That has already been mitigated by the restructuring of these proposals. It's a very small portion of fairly privileged businesses.

[The Chair, Liberal, Wayne Easter]

I believe Mr. Ball wanted in as well.

Go ahead.

[Bruce Ball]

Thank you.

I actually have to disagree a little about who's affected.

The way the rules are drafted, everyone is affected. Then you have to figure out whether you get an exception or not. Any family-owned business that pays a dividend to a family member is affected by the rules. The issue is, are you eligible for an exception, or is the dividend reasonable? One of our big concerns is its complexity. One of the joint committee's observations was that it was drafted from the point of view that everybody is in unless you can find an exception. That was one of the joint committee's major concerns, and mine as well.

I think the other aspect you hit on was, how much do people understand, and the natural follow-up of whether or not they will follow the rules. That's the concern about complex tax rules— whether people will comply. First, will they understand them, and then will they actually comply with them? That's our concern about the tax on split income. It is very complex. I think it is broad in terms of who it applies to. Then you have to find an exception or you have to meet the reasonability test.

[The Chair, Liberal, Wayne Easter]

Thank you, all.

Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chairman.

Thank you to the presenters today.

I want to ask a question of the Canadian Labour Congress. On your 2017 wish list on your site of what you wanted to see in the budget, I was very pleasantly surprised to see that you had a bullet in there for indigenous justice and reconciliation. When I looked for it in 2018, I couldn't find it. It seems to have faded, unless it's buried in there someplace. Why would the Canadian Labour Congress include murdered and missing women and those issues in their list of what they wanted to see funded in the budget?

[Hassan Yussuff]

Well, it's for many reasons. First, we want an equal society for all, not just for our members. Our members also include a lot of aboriginal first nation members across this country. They are part of our labour movement—and, equally so, whatever issues they bring to us. You would be surprised at the debate we had on all these issues at our most recent convention a year ago. As a matter of fact, at the CLC convention, going back a long time, the missing and murdered aboriginal inquiry has been a mainstream topic. We were debating this at our conventions. It's probably one of the loudest issues that we took on, for the simple reason that we need to have answers to these complex questions: what happened, and how can we improve the justice system in this country?

Of course, in the commitment that the Prime Minister made to how we are going to reconcile our relationship with first nations, it has to start with economic and social justice. Without that, we're never going to reconcile anything. If we were giving first nation people their due with regard to how we develop resources in this country—whether it's on drinking water or housing or education—we would not be in the kind of conditions we're in today. I think, as an organization, we always see this as fundamental to the work that we do, and fundamentally about what kind of Canada we want to live in. That's very fundamental for us.

We have a very broad membership right across this country. There is an expectation that we don't simply advocate for our self-interest; we advocate for all Canadians. First nations are right there at the top of our mind as we work to make this country a better place for all Canadians.

[Michael McLeod, Liberal, Northwest Territories, NT]

Well, I'm certainly happy to see that that discussion has taken place within your organization. I totally agree that if we're going to talk about reconciliation, economic reconciliation has to be part of that.

I have another question regarding some of your positions on the financing of infrastructure. You prefer public financing versus the P3 type of financing. In the Northwest Territories, we've used the latter on a couple of occasions now. We are facing a huge infrastructure deficit and it's the only mechanism that we have at our disposal. It's worked quite well. We are looking at building a road to the community of Whati. That will open up the opportunity for a gold mine.

Why shouldn't we have all the players sharing in a bit of the risk versus just trying to get the government to pay for all of it?

[Hassan Yussuff]

There are some differences in our movement on this. It's not uniform.

[Robert Blakely]

Even here.

[Voices]

Oh, oh!

[Hassan Yussuff]

Yes. Even my good friend beside me here. We're not monolithic.

Most of our evidence has been based on all of the studies that have looked at the P3 experience and the cost of it over the long term. While there may be a short-term gain by getting others to be partners, what we have determined is that in the long term, the administration of a project costs more in the end after it's been built by a public-private partnership. We have looked at this. We can provide you with those studies to document this, but again, our movement is not monolithic on this question. We have differences of opinion. We respect those differences of opinion.

Certainly, as the president of the congress, I'm here to tell you that that's been our view to a large extent. Of course, my colleagues in the building trades will tell you that they are always partnering when there is an opportunity to build in this country. If they are asked to partner, they will partner without any hesitation. They build good union-made projects in this country that serve a lifetime. If they think there is an opportunity, they will take advantage of it.

I will let my buddy speak for himself in the building trades.

[Michael McLeod, Liberal, Northwest Territories, NT]

I do have a separate question if I have some time left.

We certainly are looking at creative ways of getting financing. When we saw the infrastructure bank concept come forward, we were quite excited by it. I think it's going to help us.

I do have a question for the building trades. I see that in your priorities you mentioned the indigenous population. We have a huge unemployment issue in our communities right across the west and into the north. We probably have more than 150,000 indigenous people sitting in their communities without jobs, and we still have the problem that a lot of the indigenous people don't migrate to where the work is. Up to now we haven't found solutions. What do you think should be included in that strategy to change that?

[Robert Blakely]

You know, you really make a good point. We had successes with things like the Alliance pipeline. We got a crew of people. We got them up to speed. They were working. Everything was great. Then the job ended. We had another job down the road, and people didn't want to go . We hadn't thought it through.

Look at something like the proposed energy east pipeline, with 165 pumping stations along the way. It's a megaproject in and of itself, with a pumping station every 50 miles. We could have developed, in communities along the right of way, a couple of electricians, a couple of steamfitters, a millwright or two, a carpenter, a labourer, a painter—people who would be required, for the life of that facility, to service it. They could have been home every night, because it's 50 miles to one station and 50 miles to the other. We missed the boat when energy east failed. There are a number of projects like that.

Look at the Nalcor facility at Muskrat Falls. We have a workforce building it there. We've been bringing in a fair number of indigenous people, but we haven't gotten enough of them into apprenticeable trades yet. That job will go live in two and a half years. When it does, they're going to need a workforce there. Who better to be the workforce than the people who live there?

We have to look differently at how we try to engage indigenous people. It needs to be on their terms and on their ground. I mentioned the lnnu-IBEW legacy project, which is going on in Newfoundland and Labrador now and which is trying to make certain that when the construction is done at Muskrat Falls, and the construction hopefully goes on at Gull Island, the people who live there will be front and centre in doing the work and having careers.

[The Chair, Liberal, Wayne Easter]

Thank you to all.

Mr. Albas.

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

Thank you, Mr. Chair.

I want to thank all of our witnesses who are here today for the work they do for their organizations and for helping Canadians through helping this committee.

I'll start with you, Mr. Ball. Most of the presentation I saw here today was based more on the competitiveness. If there's time, I'd like to address that.

You wrote, or perhaps it was a group effort, in regard to some concerns over the overly broad provisions in relation to TOSI—for example, how there may be cases where someone inadvertently.... You do the raise the point, I think, in the letter I'm speaking to, that unless someone has access to sophisticated advice, these rules may or may not apply. People who maybe have traditionally used the tax on split income rules may be ineligible because of the overly broad provisions. But there might be cases like the example in here, the hairdresser for whom 10.1% of her business is retail, selling shampoo and supplies and whatnot. She may be considered an excluded business versus someone who isn't. Again, if you have two hairdressers competing side by side or across from each other, that gives one an advantage that the other one doesn't have.

Could you maybe speak a little bit in regard to the differences and how the some of the lack of definitions in these amendments may lead to some unforeseen consequences?

[Bruce Ball]

Sure.

Maybe I can just expand a bit on the example. One of the exceptions is a 10% test. There are parts to this, but if you own more than 10% in votes and value, then you're not subject to the rules. The problem is that the rule doesn't apply where more than 90% of the income is from services. We did feel that was overly broad. We know that there are certain service businesses, perhaps, where the family members aren't that involved, but there are lots where they could be.

We really think the rules should be clearer. That's part of the reason why we think they should still be deferred for a bit and thought about some more, because we do think it's possible to take some of that uncertainty out of it. That would be one situation. One of the other exceptions is when you work 20 hours a week. A concern of the joint committee is that if the corporation has two businesses, that 20-hour rule is in relation to each individual business of the corporation. We thought that rule could use some more work too.

It's just very complicated, I think, and there are still some details that I think need to be considered some more.

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

You've also given the example of the letter that talks about a family business that deals in raw land that may be excluded from this. But someone who does work to add value to that land, to prepare it and whatnot, would not qualify. Are there other provisions where there may be a step...where you have an uneven playing field because of these differences?

[Bruce Ball]

I think the issue you're alluding to is whether a business is being run or not. That's one of the other things that falls into this 90% test, and there are some other crossover rules that are very technical and depend on whether you're running a business or not. The issue with that is that whether you were running a business or not was largely irrelevant in the tax system for the smaller businesses, because there were specific rules that brought in certain passive income unless you had more than five employees. That test was very black and white. Again, now we're looking at a test in which you have to figure out whether there's a business or not. We're not sure that owners and their tax advisors have the knowledge to determine, because it's grey sometimes, whether a business is actually being carried on in terms of that passive income.

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

I also have to say that the CFIB has asked about a transition year, because of the documentation that's going to be required for this; CRA is not going to make these decisions lightly without asking for documentation. Given the fact that these rules took effect January 1 of this year, there may be people who are working in the business more than 20 hours, but it isn't being documented because that's the way they've always done it, so I think there are certainly some concerns there.

Switching gears, in regard to the passive investment, obviously making the change to where a company, if they're bringing in a certain amount, no longer gets the small-business deduction on the first $500,000.... Where you have cases of intellectual property...and I've been speaking to people who are involved in creating franchises in which they hold that intellectual property in a separate corporation from the operating part. They've raised concerns that they are going to be subject to a higher level of tax, and instead, I guess they may look at holding some of those intellectual properties in places such as the United States.

Is there also concern that some of this may be pushing some of our intellectual property away? Many politicians from many different political stripes are worried that we don't seem to retain our intellectual property and grow it here in Canada as much as we could.

[Bruce Ball]

That's a difficult question to answer, and there are two layers to it. One is how the intellectual property is being used. If it's being used internally to generate business income, I'm not sure if there's an immediate concern or not. But if you sell some intellectual property and have a taxable capital gain over $50,000, that will impact the ability to access the small-business deduction. I think it makes the most sense to review all this in a tax review and look at the system as a whole. That's our problem with the rules as they've been set up. It's really to deal with the complexity and the interaction and whether everything has been considered and it makes sense overall.