Finance Committee on May 1st, 2018

[The Chair, Liberal, Wayne Easter]

David, go ahead.

[David Macdonald]

I certainly think that the panel of academics that was put together last fall to look at tax expenditures in particular was a good starting point. It's unfortunate that no public report came as a result of that.

Certainly, an in-depth examination of tax expenditures is a great starting point when it comes to tax reform—i.e., whether these tax expenditures are fulfilling the purpose they are supposedly fulfilling, who benefits from them, and what their implications are for horizontal and vertical inequality. That is to some degree examined, but I think it deserves much more fulsome examination. Frankly, many of those tax expenditures are much more unequal than the passive income and income sprinkling proposals that are incorporated in this budget, and they're worth a lot more.

[The Chair, Liberal, Wayne Easter]

Okay. Thank you to all.

Mr. McLeod.

[Michael McLeod, Liberal, Northwest Territories, NT]

Thank you, Mr. Chair, and thank you to all the presenters here today.

I'm especially happy to see the Canadian Cancer Society here, talking about some of the concerns we have around smoking. In our country, we still have large populations in different regions where there are a lot of smokers. Wherever there are a lot of smokers, there are high rates of lung cancer. In the Northwest Territories, Nunavut, Yukon, and all areas of the north, we still have a high number of smokers. I've raised the concern on the floor of the House of Commons about this issue and asked what can we do about it. We really have to get it under control. I've sat through presentations in my riding with people from health, with the charts on the wall. Smoking and lung cancer is double or triple what everything else is that is a cause of cancer.

It was interesting to hear that you are looking at the issue of raising the cost of cigarettes as a detriment to smoking. I'm not sure if I totally agree with that, so maybe you could explain it to me, because, as I said, I'm from the Northwest Territories where a carton of cigarettes is $161.20 today. I don't see anyone quitting smoking because of that. Maybe you could just tell me what information you have, what research shows that this works.

[Rob Cunningham]

There are extensive studies that show that higher prices decrease consumption. I think the prices in Northwest Territories vary by community. In some cases, they may be lower than that. Your health minister recently stated in the legislative assembly that he wants Northwest Territories to have the highest tobacco taxes in Canada. That used to be the case. Manitoba is the current leader. He's going to urge the minister of finance to try to ameliorate that.

Teenagers are especially price sensitive because they have less money, and they're not yet addicted, and it would go down more if we didn't have nicotine addiction. However, it clearly works, and we have seen some decrease in smoking among indigenous youth, especially off reserve, but it's still way too high. In Northwest Territories there is not the same lower tax rate on reserves that we see in provinces.

It is a tremendous concern. Had the tax rates not been there, smoking rates would be even higher.

[Michael McLeod, Liberal, Northwest Territories, NT]

I spent 12 years with the Government of Northwest Territories, in the capacity of cabinet minister, and I think every budget we increased the prices of cigarettes. I'm not sure if it's really doing what we intended it to do. I still live in a small aboriginal community. I'm probably one of the few MPs who does, and the smoking rates are still really high. Whatever we can do to lower that we should really work hard at it. I think the Government of Northwest Territories is also of the same mindset.

We had talked about plain packaging of cigarettes, and I thought it was a really good idea. I support it. However, we had people presenting as witnesses who were concerned about the issue of plain packaging because they felt it would drive people to start buying black market cigarettes, and that would probably make them easier to get. Anyone could get it, because the guys who are selling them don't care who they're selling to, whether it's children, teens, or adults. Do you think we should be concerned about that issue?

[Rob Cunningham]

No, plain packaging is extremely important. The tobacco industry argues that plain packaging will cause contraband, but they always make that argument. They did it for larger health warnings on packages. They made the argument for retail display bans. However, we have actually seen a decrease in contraband volumes. I can leave this with the committee. It is their own statements. It was much higher, for example, in 2009, with British American Tobacco and Philip Morris.

The Australian government was the first country to implement plain packaging. They said there has not been an increase in contraband. In fact there was a report by KPMG. They had to write a letter to the British health minister to disagree with how the tobacco industry was referring to KPMG's own report and they said that report could not be cited to say that plain packaging increased contraband in Australia.

In terms of counterfeiting, making it look like a package from the Australian market, they actually said they didn't find any counterfeit package intended to look like a package from Australia. There were some counterfeit Marlboros that looked like Marlboros from a different country, but they're obviously different.

The tobacco industry claims have not materialized in Australia.

[Michael McLeod, Liberal, Northwest Territories, NT]

My next set of questions is for the Canadian Child Care Federation. I and most of my constituents, I think, were very happy to see the increases in the Canada child benefit funding. It has gone a long way in helping the families and helping a lot of the communities that are facing challenges in being able to afford to raise their children.

You said that the agreement with indigenous governments was something you see as favourable, but do you think that we're going far enough in terms of child care benefits?

[Don Giesbrecht]

The Canada child benefit is certainly, as I said, very progressive, and it's certainly helping a very targeted population of Canadian families in supporting their day-to-day expenses, without a doubt.

The other piece of that, of course, is around the affordability of child care, and we have to be really careful not to confuse the two. The two are separate issues. Absolutely, the Canada child benefit helps to pay for, again, those day-to-day expenses, which, for the majority of Canadian families, include child care, but that does not solve the holistic and systemic issues of child care.

We are in a historic time where we have the federal government back at the table providing policy and financial leadership on the funding of child care specifically. We just need to do more of that.

[Michael McLeod, Liberal, Northwest Territories, NT]

I'm glad that you said that, because in my riding—and I've heard from other professionals also—they are suggesting that maybe we could go further. I represent communities, and I represent large aboriginal populations, and we are still plagued with many issues across the board.

Many people feel that we should be looking at putting in a program to help us deal with young women who are pregnant to provide help and advice through to the birth of their children with nutrition programs and early childhood programs. The reason for that is that we still have many, many issues that challenge our people. We have addictions. We have residential school fallout. We have trauma issues that don't allow for the best conditions for raising children in some of the communities, and there's a lot of despair in our communities, including suicide.

They're saying a long-term strategy that would help right from the time the young women become pregnant to when their children are three or four years old, a holistic approach, would be something that would serve us better, especially in indigenous communities.

Have you heard that?

[Don Giesbrecht]

Yes, absolutely. It's very interesting when you hear from other nations around this world that take that holistic view, where it starts with prenatal and goes on until your very last breath. Canada falls very short on a lot of those measures, so, without a doubt, looking at the well-being of mothers and of prenatal children, and then, obviously, of postnatal children, through a variety of services, community-based services—of the parents' choosing, which is also very important to this conversation—would be very welcome in this country, and I think it would benefit all communities.

[The Chair, Liberal, Wayne Easter]

Thank you all.

Mr. Kmiec, we are on five-minute rounds.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Thank you, Mr. Chair. I'm just going to split maybe two minutes of my time with Mr. Albas.

I want to go back to Ms. Drever on the TOSI rules. The rules use the term “business”, and the definition of “business” in the act is quite broad. It's very inclusive as a terminology, which means that you'll have to go back to the common law definition. If you get caught by these rules, these new rules, it's a very expensive tax bill.

In your view, your professional opinion, will you advise your clients to err on the side of caution, especially if they're a service company, as much as possible? It seems to me that one of the things the government should have done, especially in proposed subsection 248(1), is to provide a very clear definition of “business” that would clarify what business is for TOSI rules versus what is not business for TOSI rules.

[Jennifer Kim Drever]

That would be a great idea, or as part of comprehensive tax reform, we could deal with those kinds of issues. There is a lot of ambiguity in those TOSI rules as they are written around excluded shares, and there's also the question of why the service company is exempted. Why is there going to be TOSI on service companies, but there is not going to be TOSI if you own more than 10% votes and value for other industries?

It's going to impact a large portion of Canadian private business.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

You mentioned excluded shares, and I was going to go there next. The new version three rules proposed in this budget on TOSI are still hostile to multi-tiered corporate structures and trusts that hold shares of the corporation. The only reason I can see for doing that is to try to capture as many service companies as possible that may have a varying structure. Some farmers will be affected by this as well, pretty deeply, as they try to transition it to their kids. Is that the case, then?

[Jennifer Kim Drever]

With the test on excluded shares, you have to hold more than 10% of the votes and value directly, so shares held through a family trust would not meet the TOSI exceptions.

Yes, it would impact more businesses than just services, and then just PCs, but those businesses impacted have different structures in place, like the family trust, which are used for estate and succession planning purposes.

[Tom Kmiec, Conservative, Calgary Shepard, AB]

Thank you.

I'll pass the rest of my time to Mr. Albas.

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

Thank you very much, first of all, Mr. Chair, for the floor, but also to our witnesses today. I'm going to continue to talk a bit about the passive income.

Ms. Drever, in regard to the passive income, I've met with real estate developers in my region of the Okanagan. Obviously they're quite concerned because they're being hit with a speculation tax provincially. At the same time, mortgage rules have come in over the last year or two coupled with passive investments. Oftentimes they will store their money in passive income holdings, waiting for the chance to build, because it can sometimes take two or three years for them to get approvals municipally.

Are we disincentivizing businesses from holding savings? Do you think that's a good thing? What are some of the other impacts we're going to have? To me it makes no sense that they get the small business deduction when they're building because they won't have savings.

[Jennifer Kim Drever]

The way this has been drafted does impact your small business deduction. One reason we did like this better than what we had discussed last fall and last summer was that we're not looking at a 73%-plus permanent tax rate on passive income anymore. That is a good thing that we're not looking at that.

With respect to the loss of the small business deduction in the years that you are waiting to build, that is the consequence of how it is drafted right now. As far as whether that is fair or not, that's something for the committee to decide.

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

Do we want to encourage savings and investment? I guess some people might say, “We want to encourage certain types of investments and whatnot”, but to me the one-size-fits-all nature means that many people will find other ways and probably invest in other areas.

[Jennifer Kim Drever]

I would agree with that. The one-size-fits-all is less of a one-size-fits-all today than what we saw last October when we were discussing how these changes were going to be. The reason I say it is less than one-size-fits-all is that the small business deduction is a per-year deduction, so it might impact you one year and not another. That's going to your point, though, that there is a consequence for when you're saving money to hold....

I don't have a really good answer for you, unfortunately.

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

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Albas. It was good to end on such a good question too.

On this business of reasonability test, I think your example in here is a very valid one. I don't have the answer for this either. Sometimes the intent of the legislation and everything that Finance may intend to do isn't always interpreted the same way by CRA. I think all of us around this table have had experiences with that.

Can anything be done in terms of direction around a reasonability test or whatever to ensure that people who really shouldn't be caught in the loop are not?

[Jennifer Kim Drever]

We're not asking to get rid of the reasonability test. I want to be clear that we believe that reasonability tests exist to help complement the bright-line tests that are in the legislation. You do need it. We would like the CRA and Finance to work together on what they would consider to be reasonable. That would provide some certainty and clarity for taxpayers, for the Canadians this is impacting.

[The Chair, Liberal, Wayne Easter]

The reasonability test is, I think, extremely important. I think you made a valid point there in terms of working together.

Did you want to come in, Ian?