Finance Committee on May 1st, 2018

[Ian Russell]

I just wanted to pick up on that comment. I think that, if you just leave it vague and rather open-ended, there's an uncertainty not only for the taxpayer or the tax-filer but also for the administrator of the tax system. This will take a long time to sort out, and the precedents will be probably set by CRA. I don't think that's the way you want to proceed with tax reform at all.

I think you want those who are writing policy, which is Finance, to be working closely with CRA, who's administering it, but putting as much detail and guidance as possible in those rules to, first of all, make it easier and efficient for the tax-filer, but second, to ensure fairness and objectivity. It seems to me that Finance ultimately should have that responsibility, so really they should go back to the drawing board and put a little more detail and rigour around it, certainly before the legislation becomes effective.

[The Chair, Liberal, Wayne Easter]

Just so you know, and I'm sure you do, one of the difficulties for us when we're dealing with legislation, which the budget implementation act is, is that we can't really make recommendations. We're dealing with specific legislation. We can make recommendations on other issues and on pre-budget hearings, etc. I just don't know how we get around this one, but I do like the comments. We'll see what we can do.

Mr. Fergus.

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

Thank you very much, Mr. Chair.

I'd like to thank all the witnesses for coming here today.

I have a question I would like to pose to Ms. Drever and Mr. Macdonald, and hopefully I'll have enough time, Mr. Cunningham, to come back to you on a particular question.

The first question for Mr. Macdonald and Ms. Drever is in regard to what both of you feel. You raised a question in terms of how the government came up with the $50,000 passive income figure: What was it based on? I guess I'm just trying to get my head around perhaps the opposite, or if I could turn that question around a little bit, what would be the public good of a higher limit? Is it only of benefit to individuals? Does it promote economic growth? Does it promote savings among vulnerable people who would not otherwise save? I'm just trying to get my head around that.

Perhaps, Mr. Macdonald, you might want to start.

[David Macdonald]

There's a clear challenge, in that CRA and maybe the people who are using private corporations as a means of savings don't know in advance what they're going to do with that money. Maybe they will use the money to invest in their business and grow the Canadian economy, or maybe they'll use that money as a deferred RSP, which is not how it was intended.

The philosophical question is how you separate out the groups of people. People might be using that money for some productive purpose, or abusing the corporate structure as a means of retirement savings, for instance, or income sprinkling, or income sprinkling combined with passive income for their children's university education, for example.

I think one of the ways you can do that is that this distribution of passive income with this relatively high threshold of $50,000, or say roughly a million dollars in actual holdings in the corporation, eliminates the vast majority of private corporations, so there's a very small number of people who have this amount of money. Moreover, it's not that if you have a million and one dollars it's taken away by the government. You just pay a slightly higher tax rate. If you're saving for a couple of years for a new piece of equipment, or for a construction project, for instance, it's possible you might pay a higher savings rate, but again it's difficult to determine, nor is there any specific...whether it's $55,000 or $45,000.

I think the goal, hopefully, is to eliminate folks who are using private corporations as a means of retirement savings. I think that this obvious red line does that reasonably well but does not unduly punish people who are saving for a couple of extra years for actual investment.

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

Thank you.

Ms. Drever.

[Jennifer Kim Drever]

One thing you could look at is what percentage of that is on the overall value of the business, or the overall income of the business. If $50,000 is a small number in terms of that business, in theory maybe they don't get a small business deduction anyway, but it's something that might be looked at so it's not a one-size-fits-all at the low level.

I am from northern Alberta, and in the Peace country, where I live, we have a very highly oil- and gas-dominated market, as well as agriculture and different things such as that. There are a lot of business that had more than $1 million, let's say, of assets set aside before we had the last recession, in passive assets.

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

You mean income-producing passive investments, right?

[Jennifer Kim Drever]

Those businesses all survived, the ones that had money to stay afloat. Therefore, it comes down to whether it helps the public good. There are people who didn't lose their jobs because their employers kept them on. It comes down to issues with respect to whether $50,000 is the right number.

I agree that it's very tough to say. Is it $55,000, or what is the number?

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

Or $45,000.

[Jennifer Kim Drever]

Is it $45,000? What is the number?

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

Thank you very much.

I have just a very quick question.

Mr. Cunningham, thank you very much for your presentation and taking a look at the smoking rates. I was particularly taken with your analysis as to what the federal excise tax means in terms of places where there are higher numbers of contraband cigarettes.

At the very end, where you talk about the youth smoking rates based on age, has your organization disaggregated that data to look at what the smoking rate is among young women as opposed to young men, among 15- to 19-year-olds?

[Rob Cunningham]

Yes. It's going down among both boys and girls, so the news is good. It's also going down among young adults, both male and female. However, we need to keep at it.

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

Then there is no differential between the two.

[Rob Cunningham]

In recent years, there isn't. If we go back a couple of decades, there has been a change. It was going down among boys but not among girls. In more and more recent years, we've made progress among girls. It was very frustrating previously.

[The Chair, Liberal, Wayne Easter]

Mr. Albas.

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

I want to follow up on what was said earlier about the small business deduction and what level it should be. In your opinion, what should that level be?

[Jennifer Kim Drever]

I don't actually have an opinion on that. It is something that should get looked at as part of comprehensive tax reform. The answers will come out of the committee or the study.

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

Okay.

With regard to the—

Please, Mr. Russell.

[Ian Russell]

It should be higher. As the previous questioner talked about in terms of whether it should be higher or lower, it seems that the $50,000 translates to about $1 million at a return of 5%. For a lot of people, if they're relying on that for retirement, $1 million is still a small number.

First of all, if the corporation is set up for an individual, the $50,000 per year would strike me as being on the low side. For a small business, even a business that qualifies for the small business tax deduction, we talked about oil and gas, but you could talk about agriculture. If you're buying capital equipment, it's quite expensive. In fact, $1 million in equipment is not an unusual number and it could be quite higher for a small business.

My point is that they should be looking at a higher number, and I'd like to know how they actually arrived at the number they ended up with.

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

Should we also be looking at different categories of passive investments? For example, if I invest in a corporate bond that's going into productive enterprise, that's usually being used to capitalize new ventures, new factory expansion, and whatnot. There could be some discussion about whether, outside of an IPO, there is actually value being created for a stock, but to me, something seems to be wrong when we're saying that we're going to tax you higher because you've saved. Savings aren't like you planted it in your backyard or under your bed. It's actually still participating in the economy.

Mr. Russell, do you have any comment?

[Ian Russell]

Yes, I would say we haven't talked about the larger private businesses. To your point, though, I think the tax we end up with, on savings, as you put it, or passive investment, for taking that money out is quite punitive. It is a 75% rate. The argument is the tax deferral argument. I'm not sure that really balances, but what it does do is create a disincentive, and it's a disincentive for those companies affected.

Now Finance talks about the fact that there are only, I think, 2.7% of private companies affected by the rules. However, if you look at those companies—and the Parliamentary Budget Officer did look at those companies—there are a lot within that group. A third of them have capital over $15 million. We know there's about $250 billion in passive money out there, and 88% of that money, or virtually all of it, is going to be among those companies that are caught with the new rules. I think it then turns on the question of the role played by these companies, which are, in effect, carrying large amounts of passive income. If you look at the Parliamentary Budget Officer's analysis, he says that more than half of the companies in that category are either finance and insurance companies or companies managing other businesses, so they're holdcos or real estate.

Those companies that are caught in these rules are playing a very integral role in the small- and medium-sized business sector in Canada by providing financing, merchant banking, taking ownership positions in companies, and it seems to me, they're playing a very critical role in the capital formation process and helping small businesses. Again, we're talking a lot of capital, over $200 billion in capital, so what's going to happen as a consequence of this significant change in the effective tax rate on the dividends? Will these companies reduce that activity and do something else or will they migrate to the U.S. marketplace?

I think those are very legitimate questions to be asking, and I don't believe the analysis has really been carried out.

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

I just want to switch gears here. When we talk about whether CRA can properly analyze a reasonable rate of return for a particular business, are we not setting a dynamic wherein one of two things will happen? People will say it's a grey zone and not take a legitimate deduction even though they are entitled to one, and instead they will just defer it or not take it. Worse than that, are we not creating a dynamic wherein CRA will have to collect loads more information for people who utilize the TOSI rules for their situation, resulting in more litigation? Again, in this situation, reasonableness is something that would be decided by a judge. I just don't think CRA has that expertise, nor does it have the time, by the sounds of it.

Would anyone like to comment on whether or not this is a dynamic we want to introduce in this legislation?

[Jennifer Kim Drever]

We do agree the reasonability is there to complement the bright-line test. We can't legislate every possible scenario, so we do need reasonability there as a last resort. We absolutely do, but I agree we are going to be relying on the courts to determine what is and what is not reasonable because that is a question for the judge.

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

When I talk to small business owners, and they're given the idea, they usually ask, “What will it cost me to go to court? What will it cost me to tie this up?” Oftentimes, even though the entrepreneur may be very upset with the government because they don't think they should have to pay, they'll just do that. Are we not going to see more of those as well?

[Jennifer Kim Drever]

We would see that as well. It is a costly endeavour to go to court, and it is a costly endeavour to have the advisers to help somebody through this. There's probably a large number of businesses that won't even have the advice in the first place on what to do, so—