Evidence of meeting #62 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was clause.

A recording is available from Parliament.

On the agenda

MPs speaking

Also speaking

Trevor McGowan  Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance
Glenn Campbell  Director, Financial Institutions, Financial Sector Policy Branch, Department of Finance
Jean-François Girard  Senior Project Leader, Financial Sector Policy Branch, Department of Finance
Eleanor Ryan  Senior Chief, Financial Institutions Division, Financial Sector Policy Branch, Department of Finance
Clerk of the Committee  Ms. Suzie Cadieux

4:50 p.m.

Liberal

The Chair Liberal Wayne Easter

Mr. McGowan, go ahead.

4:50 p.m.

Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Trevor McGowan

We received a number of submissions from the Canadian Medical Association and the Canadian Association of Radiologists, and looked at the testimony before the committee.

A few points probably warrant further mention. Obviously from their perspective, it affects doctors, but it is a provision of general application. The small business deduction is available regardless of what business you're in.

As was said earlier, these measures would follow the existing policy where there's one business and one business limit of up to $500,000 that applies to partnerships as well in this context. The rules are called the specified partnership limit rules, and they provide that when you have a partnership with a number of corporate partners, that one limit is shared among the partners. These rules are currently in the act, and the amendments in Bill C-29 are an extension of that policy.

I mentioned as well that it's a provision of general application. As we've heard, it applies to doctors, and it would also apply to lawyers, accountants, dentists, engineers, architects, or any group that could organize themselves into one of these structures. It is not a provision aimed solely at the medical community. It is reinforcing the integrity of the small business deduction rules and the $500,000 limit, and it does not look at what type of business is being carried on.

I know a number of comments were based on numbers. They mention certain numbers. The Department of Finance had others. I believe we have our costing measures, our numbers that we provided in the last hearing. But one thing that had been mentioned I heard earlier was the $32,000 number. I can explain briefly where that came from, but in doing so, I would have to provide a little context into how these rules work, and the sort of planning that is going on.

If an individual earns income directly, they pay taxes at the normal marginal rates, as was said, often around 50%. I think the top marginal rate in the relevant example provided was an Ontario individual, so that would be, I think, 53.53%. If you earn income through a corporation, there's corporate tax. The general corporate tax rate is 15%, and the small business deduction rate is 10.5%. That's federally, obviously. There are provincial taxes on top of that, but I don't want to list them all. We're not neglecting them, but it does make it higher.

Due to the corporate shareholder integration mechanisms in the Income Tax Act, if you earn income in a corporation and then pay it out in the same year, you generally pay the same combined corporate and individual tax rates as if you earned them directly. In the $32,000 case, that was $500,000 of income from Dr. M., and so if they earned it directly or through a corporation, we'd have roughly the same amount of tax in Ontario.

The benefit sought to be obtained is when funds can be retained in the corporation, so there's a lower corporate tax rate, 15% federally, as opposed to a top federal rate of 33%, assuming Bill C-2 is passed, so that's a significant difference.

To the extent those funds are not needed for personal costs of living, maxing out your RRSPs or whatever, to the extent that those funds are available to be left in the corporation and invested, then that presents a deferral benefit if they're not taken out in that year. In the case provided, I think some $214,000 was left in the corporation and the difference between the small business rate and the general corporate rate was calculated at about $32,000, but those are the funds available to be invested and to get the benefit of the one-year deferral, you can invest those funds at around a 5% rate of return, and that might give you, I think, about $1,500 over a year. I think there were comments on that. Then that $1,500 would be taxed, so the actual benefit would be even lower. That's just by way of explaining the differences in the numbers.

It looks at the benefit, at where you take the computation. Do you look at the dollars available to be retained in the corporation or do you look at the actual value of the deferral benefit?

I hope that provides some more context into where some of these numbers are coming from and the planning itself. It really involves the ability of particularly professionals, such as lawyers and so on, to leave their excess funds in their corporations and to invest them to earn an enhanced yield. If you're earning income directly and you're a top-rate taxpayer, taxed at 53% in Ontario, and then you earn $100—your last $100 subject to the top rate—you'd have $46 or $47 available to invest. If you earn it in a corporation and the corporation pays tax at 20%, say, you'd have $80 to invest. That's a good head start.

That's the benefit of the deferral, and that, of course, is not being touched, the general difference between the general corporate rate and the personal rate. It just provides some context into the nature of the benefit and the differences in the numbers.

To kind of tie it all together, those benefits will continue. What will be preserved is the general policy underlying the small business limit, which is to say that one business, either a sole business in a corporation or a partnership, has one $500,000 deduction, and that can't be, to use our phrase, just multiplied. If you have one partnership, you have one $500,000 limit; if you have 10 partners, that could be $5 million or $5.5 million; 100 partners would be $50 million, and so on.

I understand there were questions about the use of the word “multiplication” as well. That's the sense in which the term was used in the Department of Finance documents.

5 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you very much, Mr. McGowan. Thank you for going through the testimony so thoroughly in order to give us some answers.

You have a supplementary question, Mr. Caron.

5 p.m.

NDP

Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC

Thank you.

Has the department identified the kinds of reactions that can be expected?

If doctors or other professionals enter into partnerships, they obviously did an analysis and concluded that doing so was the more beneficial or appropriate way to go. Since the deduction for small businesses has been eliminated, I was wondering whether an evaluation had been done with a view to restructuring those partnerships.

Will another type of structure be created, or are all those professionals expected to go back to being sole practitioners?

5 p.m.

Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Trevor McGowan

The department did look at the effects and, of course, we had a consultation period, starting with when the budget was tabled, and again looking at the revised draft legislation that was released in July. We heard a number of comments from a number of affected stakeholders.

I know I mentioned this before, but it's worth reiterating. These are amendments of general application. They apply regardless of the industry. If there's, for example, a law firm carrying on business through a partnership, as many do, setting aside sole practitioners, one would expect that law firm to continue, to perhaps stop using this particular tax planning strategy to the extent they were using it before to multiply access to the small business deduction. Of course, in that case, I've worked at firms where there are over 100 partners, and I would not expect them to stop carrying on business in a partnership.

Of course, what we've heard a lot of today is from the medical community. I would say we heard, in the course of our consultations, that it seems that it's not universal that these types of arrangements are done through what would legally be considered to be a partnership. There's been a bit of, I won't say confusion, but different uses of terminology. For example, we've heard a number say that we have this partnership but it's not profit-oriented.

Well, the definition of a partnership is something that is carried on, a business that's carried on, in common with a view to a profit, and so there have been some difficulties. We have heard, though, that some operate through, not joint ventures, but co-ownership types of structures. I don't know the extent to which there could be a migration to that. We have definitely heard, in our submissions, and I think that you've received the same ones, that there would be difficulty, or reluctance, to move to those in the teaching hospitals or research community. But it is something we looked at.

As I said, there are still a number of tax benefits to be obtained when you look at the differences, for example, between earning directly versus earning through a corporation, even when that corporation is a member of a partnership and does not have access to the complete small business deduction. In addition, you have, as we worked through the numbers, the $32,000 number. When you work through it, it's actually much smaller than that. The value of the deferral is the $32,000 available to be invested. But if you paid that out in a year, it would be worth nothing. The next year, it might be worth, I think, around $1,500.

So, on the impacts, of course, we can't tell what will happen. You can't predict the future. We did not anticipate massive changes. That wasn't the intention.

As I said, many industries, and lawyers are the paradigm example, will continue to operate through a partnership, without any question.

Based on what we've heard, and continue to hear, although obviously concerns have been expressed, it's not clear to us that all the partnerships either will cease to be carried on or cannot be reorganized.

5:05 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you, Mr. McGowan.

We will turn to Mr. Liepert.

I know we had passed a motion that the chair may limit debate in each clause to a maximum of five minutes per party, but I think we're going through a lot of clauses where there isn't going to be controversy, so, I think we'll go through the full discussion on this one, if people have questions. This is one of the big clauses of controversy in the bill, so we'll continue the discussion for a while.

Mr. Liepert.

5:05 p.m.

Conservative

Ron Liepert Conservative Calgary Signal Hill, AB

Thank you, Mr. Chair. I know there are a few members of the committee who are anxious to shut this down in a hurry, as we did Bill C-26, but I think this is so important that I thank you for making this exception.

Mr. McGowan, it was obvious when the minister was here that he was, I would say, unaware of this or certainly wasn't well briefed on it. I'm not going to try to speculate why, but I can tell you that our inboxes are full. We had two very impressive presentations before this committee last week, which fell on deaf ears.

With all due respect, and with all due respect to many of my lawyer friends, I don't think a partnership of lawyers who may practise in different areas of law is in any way similar when compared with what we're talking about: these medical structures, which are designed not as tax dodges, but are designed to recruit some of the best minds in the world to come to Canada. They're also designed, if we were listening to the testimony, in such a way that many of these partners perform work that is not necessarily billed, because we're talking about a publicly paid billing system. It would seem to me that for you to compare dentist and lawyer partnerships with this particular type of partnership is blatantly unfair.

I think the finance department—which this obviously originated in, because the minister certainly didn't originate it—is taking a pretty bull-headed approach to something that I think is plain wrong. You, as a finance department official, are not going to pay the price, but my Liberal colleagues across the way are going to pay the price at the ballot box next time, because what you are doing here is, in my view, taking away something that in our country we've been trying to encourage our health care professionals to do: to work more as teams.

This is going to break them up. You're going to have a whole bunch of individual practitioners or smaller partnerships. Finance will get no more money at the end, as pointed out to the minister earlier by my colleague. It seems that all we're hearing is that this seems to be falling on deaf ears, and I'm saddened by that.

5:05 p.m.

Liberal

The Chair Liberal Wayne Easter

Are there any questions for the officials?

Mr. Deltell.

5:05 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

Gentlemen, welcome. I appreciate your answer. It's a very detailed answer.

I have two points I'd like to make, but I think my colleague Mr. Caron brought up the first.

Did you fully assess the potential impact of these provisions on the medical community?

Members of the community who appeared before the committee were rather scathing in their criticism. Unfortunately, nothing good can be expected going forward.

You mentioned various fields of activity, essentially the liberal professions. I'd like to know whether you assessed the impact these provisions could have on the medical community, specifically, all over the country.

5:10 p.m.

Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Trevor McGowan

I should say by way of background that I made a comparison using lawyers as an example purely because that's the background I came from and am familiar with. I was certainly not suggesting that any of these partnerships, be it a law firm or a medical association, would be established as a tax dodge.

In terms of the study of the impact specifically upon the medical community, I can say unequivocally that the Department of Finance has received a number of submissions since the tabling of the budget in, I believe, March, from the medical community outlining its members' concerns. We have had numerous consultations. We've received numerous submissions and have gone through them, and this is something we have been looking at. These submissions have been made public. We've received them and have been analyzing them absolutely over the last while, in addition to analyzing the general impact that the measure would have overall, because, as I said, it's not simply—

November 28th, 2016 / 5:10 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

I understand well that you have received a lot of concerns, but before tabling this, you didn't evaluate the impact on the medical field. Am I correct?

5:10 p.m.

Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Trevor McGowan

No, we did. As I said, this was a general measure that applies, and we costed it. We determined the financial impact across all sectors of the economy, and we did due diligence to the extent possible across all sectors. My point was simply to have something public to point to, because of course our advice to the minister is not public, but we can certainly point to that and say that in the public domain we've had several consultations. We've just received a number of consultation documents. We've been working through them and working with stakeholders.

5:10 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

As you know, in Quebec there have been some special evaluations of this issue. Especially with the physicians, it's not an easy task and then you have very different issues. Is this clause applied differently in the province of Quebec?

5:10 p.m.

Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Trevor McGowan

The measures in the bill apply without regard to the province in which the business is carried on.

5:10 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

Do you have any indication that in Quebec we will see more or less of an impact than in other provinces?

5:10 p.m.

Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Trevor McGowan

I remember seeing a breakdown by province, but I believe that was in the CMA's submission in my package, and I think they had Ontario being the largest one. I'm afraid I don't have—

5:10 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

Are you talking about CMA?

5:10 p.m.

Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Trevor McGowan

We, of course, received their submission and heard their testimony.

5:10 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

So, as far as you are concerned, there will be no difference between a Quebec doctor and doctors in the rest of Canada? It's the same thing from coast to coast to coast and in Quebec there is nothing special.

5:10 p.m.

Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Trevor McGowan

There's nothing in the rules that applies in a special way for a particular province or any particular class of business. The rules essentially provide that the small business limit of a partnership would be shared among not just its partners but also sufficiently connected corporations providing services to the partnership as well, without regard to the jurisdiction of residence of the partners or the business.

5:15 p.m.

Conservative

Gérard Deltell Conservative Louis-Saint-Laurent, QC

Thank you so much, Mr. McGowan.

5:15 p.m.

Liberal

The Chair Liberal Wayne Easter

Thank you very much, Mr. Deltell and Mr. McGowan.

Mr. Albas.

5:15 p.m.

Conservative

Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC

Thank you again, Mr. McGowan, for what you do and also for your answers today. I may not like them, but I do appreciate your presenting the case.

The last time l asked you whether you had spoken to any provinces, you said you had been studying the issue and that you had received the CMA's submission. Have you made any outreach to provinces that this will be an issue for?

5:15 p.m.

Acting Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance

Trevor McGowan

I believe my answer the last time was that I was unaware of that, and I checked with my colleagues who had spoken with provincial regulators, so thank you for asking. I did go back and check and they had spoken with representatives of provinces, and in particular, Ontario.

5:15 p.m.

Conservative

Dan Albas Conservative Central Okanagan—Similkameen—Nicola, BC

Was there any feedback from those provinces or do you not want to share that?