Finance Committee on May 1st, 2018

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Is your firm getting ready, on behalf of your clients, to take it to the tax court? Depending on the assessor you get, the auditor who looks at the file on the receiving end at CRA, the decision could be a or b, but the difference between the two might come very much down to the wire. You could really go either way and could require a judgment at some point to deem whether or not it is reasonable. Is your firm getting ready now for that potential case in which some of your clients will be forced to appeal their tax bills?

[Jennifer Kim Drever]

I think there are some reasonability issues elsewhere, but in this, for the most part, it's a purely mathematical question. There are formulas. It's just a matter of complying with the calculations and administering it and tracking it on a go-forward basis. I would be hard-pressed to determine what we actually would do, because we haven't even seen what the forms would look like or how the CRA would request that we track this.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Mr. Bartlett, you mentioned that from an economic point of view—not political or anything else but economic—the best thing to do is to have a very broad base of taxation, and I'm paraphrasing here, with as few exceptions as possible to make it broad, easy to manage, and easy to apply so that there are no distortions in the system.

But we have a situation in which for the past almost 20 years, physicians especially—because I have a hospital in my riding and I have a lot of general practitioners and also a lot of clinics surrounding it—have been encouraged by their provincial body to professionally incorporate, and that's not unique to Alberta but is in many places. They are service businesses. There are very few people looking to buy into a practice like that, so they were encouraged by governments—provincial governments—to do so to take advantage of the tax structure. So what do we do for them?

What do you say to those who took advantage of a tax structure, because the provincial governments were telling them to do so and the federal government wasn't opposed to it, to doctors, to GPs, who are now finding themselves facing, in some cases, pretty high new taxes?

[Randall Bartlett]

I think in that case specifically, the tax system was sufficiently flawed in terms of how it was structured at the time and how it was laid out. I don't think we should perpetuate a system that's not particularly neutral because that is what happened in the past. I think what needs to be done is that any tax changes should be well telegraphed and gradually implemented so that individuals are able to change their business structure so as to not be immediately subject to significant and higher taxes. I think perpetuating a system that's broken is not necessarily the answer either.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Can I ask you, then, about the concept of grandfathering? A lot of these people have made retirement decisions based on this model. I know a lot of guys who've done this. They have two or three kids at home. Sometimes their spouses gave up their careers so their wives could pursue their medical practices. Some of them were specialists in a clinic. That gentleman can't return to work very easily, but they've made retirement decisions as a couple, put in 20 or 25 years, and now the tax system is changing and some of them are being caught in this now. What do you say to them?

We often talk here about public sector workers and not changing their pensions on them, especially retirees living on a fixed income. What do you say to those people? Because what you're proposing—yes, we could telegraph to them, we have iPhones nowadays, we could probably do it faster, but they're still stuck in a situation where they're facing a whole bunch of new taxes, and they don't have a way out. There's no easy way to restructure their business.

[Randall Bartlett]

I think that speaks to the need for gradual implementation of tax changes, and that stakeholders are consulted in that process as well. I don't know the numbers on just how many businesses are part of this. What is, say, the level of passive income that's part of this? Do we continue to maintain a structure for businesses that exist today in perpetuity—not perpetuity, but for a long period of time so as to allow them to maintain the structure?

Say you have a young doctor today who has their business structured this way and isn't retiring for 20 years, are they grandfathered in because it's the existing tax structure today? I don't know if that's necessarily the intent of the previous tax legislation itself and whether or not that's going to be fair to someone who's entering the field a year from now. I think we need to make sure that it's gradual. We need to take stakeholders into account, but I don't think we should avoid reforming the tax system for the better overall.

[The Chair, Liberal, Wayne Easter]

Thank you, all. We're well over.

Mr. Dusseault.

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

Thank you, Mr. Chair.

I would like to thank all of you for being with us today.

My first question is for Mr. Macdonald from the Canadian Centre for Policy Alternatives.

In February, the Minister of Finance made a budget statement, which dealt with pay equity. When you read Bill C-74, were you disappointed that there was no pay equity legislation.

[David Macdonald]

I think, broadly, the gender analysis of the budget was a positive move forward. The fact that the legislation on equal pay isn't out yet, I think hopefully it will come.

For instance when we look at some things like employment insurance not going all the way toward what we see in the Quebec-style model, that was a bit disappointing, but I think there was good movement there. There's certainly a lot more to be done. If anything, I think this budget was constrained by the electoral cycle, which I'm sure everyone's very much aware of. We might see some of the bigger proposals in next year's budget, which would be a pre-election budget.

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

We hope so.

I'll move on to another topic. You didn't mention it in your presentation, but did you analyze the new formula for the Canada pension plan? Does this formula take into account the years a person spent raising a child or years when a person with a disability did not work? The old plan excluded those years while the new plan provides for a drop-in mechanism. According to this mechanism, instead of excluding the years during which these people did not work, they are allocated an amount corresponding to the average of the previous five years.

Have you analyzed this matter? Several witnesses hadn't done a formal analysis to clearly determine that one formula is better than the other. Have you analyzed this matter from your side?

[David Macdonald]

It's an interesting question, and the fact that you would get a different drop-out provision for the CPP expansion versus the base CPP will almost certainly have some impact, particularly for those who are dropping out due to disability provisions, which only provides you with 70% of average income for the previous five years, as opposed to the child drop-out provision, which is 100% for the previous five years. It's not clear at this point what type of impact that will have. It will almost certainly have a gendered impact because it's more likely to be women who take those types of provisions than men, but at this point, it's not clear.

It seems that expediency, in getting the legislation passed as opposed to going back to the provinces and renegotiating it, was an impetus for changing the provisions as those weren't correctly ironed out in the first place, but we'll likely look at it over the summer and see whether there is an impact on people's retirement savings.

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

Is the drop-in amount part of the agreement with the provinces?

[David Macdonald]

Exactly. It appears that the averaging approach, as opposed to the drop-out provision, allowed the federal government to move forward with the legislation without having to go back to the provinces and renegotiate. Hopefully the impact is not particularly large. At this point, it's not entirely clear what the impact will be, but we're going to study that over the summer.

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

Okay.

I'm going to move on to another topic, corporate tax, as a number of witnesses have talked about it.

Just yesterday, a witness from Canadians for Tax Fairness said that in terms of passive income, $50,000 was too high a threshold. Today, we're hearing that this threshold may be too low. So I was wondering if some of you could comment on a $50,000 passive income. How much should the investment be to generate $50,000? Do you think that's an appropriate threshold?

I would like to hear from any of you having an opinion on that.

[Jennifer Kim Drever]

In the budget documents, they are using a 5% rate of return, which means $1 million of passive assets earning that $50,000 of passive income. I would agree that it probably is too low, the reason being that there are a lot of businesses that need passive assets in order to weather the economic storms. They need to save money so that when there's a downturn, they spend that money to keep their employees hired, to expand, or just to stay afloat, so $1 million of passive assets is probably not enough for a lot of those active businesses.

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

I'd like your opinion on another issue.

I am referring again to testimony yesterday from the vice-president of a chartered professional accounting firm, who said that an exemption for spouses could be interesting.

So I'm coming back to the issue of income distribution. He proposed that spouses be completely excluded from the income distribution rules. I'm wondering if any of you have any ideas on that or have figures on the number of companies involved. If spouses are excluded, to what extent would this reduce the number of businesses affected by these changes?

I don't know if any of you have an opinion on this.

[Ian Russell]

I think it would partly depend on the case.

In very small businesses, the spouse plays an integral role. There should be room in the legislation to allow for income splitting with the spouse, and for that matter, for other small-business related members or third parties to share in the income—in other words, participate in dividends. What it really turns on is the contribution of those entities into the business.

I think the legislation should have a flexibility to accommodate more than just the principal owner, and it should settle on a mechanism that is clear and simple for people to follow.

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

Okay.

[The Chair, Liberal, Wayne Easter]

Do you have a quick one?

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

I was wondering if anyone else had an opinion. Perhaps Ms. Drever could give us hers on spousal exclusion in the issue of income distribution.

[Jennifer Kim Drever]

In the reasonability test, we have to look right now at the relative value of each of the spouses' work. It does make it difficult at times to put a value on what one spouse does versus another. If there was an exemption, it would remove that. We wouldn't have this concept of someone's work being less valuable in the business than another person's work because of what it is.

[The Chair, Liberal, Wayne Easter]

Thank you.

Just before I turn to Mr. McLeod, I have a question on the comprehensive tax reform review that I think Ms. Drever mentioned. It's been mentioned before.

How would you see that taking place? Would it be with a royal commission, a group of experts, or what? This committee, in fact in our previous pre-budget consultations, recommended comprehensive tax reform, so I don't think you'll find much disagreement on this committee.

How would you put that together, if I can put it that way? How would you first start it? Eventually it'll get to a parliamentary committee, but what's the start?

That's for Ian or Kim, or both.

[Jennifer Kim Drever]

We do not think a royal commission is necessary, but we do think we should have a committee created—of stakeholders, of finance, of experts, and of parliamentarians—where they all work together to get a desired result. What we are looking for is predictability, certainty, and fairness. We don't know what would come out of this committee, but we do know that we need to look at taxation overall.

Right now in Canada, we have essentially a set of rules that was created back in 1972. The Canadian economy was completely different then. We had different types of businesses. We had different factors. Things change. Times change. Think of it like a tire: when we get a hole in the tire, we put a patch on it. Successive governments have done the same thing. We have patched that tire so many times that we're now patching the patches. There comes a time when we just need to get a new tire, and that's what we are proposing.

[The Chair, Liberal, Wayne Easter]

I like that: “patching the patches”.

Ian.

[Ian Russell]

I guess I would start with the fact that it should be driven by the mandate. Then you would consider who would be involved. I think the mandate, to echo what Kim said, should be comprehensive and broadly based. It should deal with income. It should deal with expenditures. We're looking at the expenditure tax and at income taxes.

As was said, we have a patchwork quilt here that's 40 or 50 years old. I think the mandate should be broadly based. It should be objective in the sense that it could be a royal commission, but I don't think it necessarily has to be run by Parliament. In fact, I think it would be better if it weren't, but Parliament would feed into that process. It would seem to me that it would be critical, in order to execute the mandate, to have a cross-section of expertise from all aspects of the economy and the public.

I guess if you're looking at something to model it on, you could be looking at how reform took place in the U.S. recently. You could also look for ideas from the Carter commission back in 1972 and the Porter royal commission, which was on the financial structure in Canada as opposed to tax. I think there are some interesting models there.

I do commend the committee for going down that road, because I think ultimately that's what's needed in the country.