Evidence of meeting #7 for Finance in the 43rd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was interest.
A video is available from Parliament.
Conservative
Philip Lawrence Conservative Northumberland—Peterborough South, ON
To MNP, I take your argument very seriously. It's something that I've heard from tax practitioners in the riding as well. What are the original reasons for treating family succession in this way?
Regional Tax Leader, MNP LLP
When the capital gains exemption was first brought in, there was a worry, I think, that you would extract money in self-dealing transactions with a capital gains exemption.
Conservative
Philip Lawrence Conservative Northumberland—Peterborough South, ON
I know that I've given you no time, but are there safeguards you could suggest that would guard against those fears?
Regional Tax Leader, MNP LLP
There are safeguards one could suggest. Going back to the member from the Bloc, he talked about Quebec having some safeguards. I would just like to mention that the safeguards in Quebec are so prescriptive it's very difficult to even fall into them. We're finding that a lot of families are operating as if they don't even exist, because you need to make sure that....
You know, in family businesses, it just doesn't happen that the parent sells to the child and the parent walks out the next day and never looks back at that business. It's paid over time. The succession happens more slowly. In most businesses it does, and in family businesses it does as well. We need to make sure that there is a true succession where the child is taking over, but it might not happen overnight.
Conservative
Liberal
The Chair Liberal Wayne Easter
While we're on this subject, how does the system that's in place here in Canada on small business succession compare with that of the United States or other countries? What are they doing right that we're doing wrong? Are we on a comparable basis, or are the others so different that they can't be compared?
Regional Tax Leader, MNP LLP
There really are a lot of differences between the two countries. We have a capital gains exemption. They have some gift taxes. They have gift exemptions. There are a lot of differences between the two countries.
It's something we could absolutely look at and bring back to the committee.
Liberal
The Chair Liberal Wayne Easter
Please do, if it's not too difficult.
We have Mr. Cooper first, and then I think Mr. Morantz.
Conservative
Michael Cooper Conservative St. Albert—Edmonton, AB
Yes.
To the MNP witnesses, the U.K. and the U.S. recently made changes with respect to interest deductibility. Could you very briefly comment on those changes? Then I'll reserve the rest of the time for Mr. Morantz.
Regional Tax Leader, MNP LLP
In their tax reform bill in the United States, they took a three-pronged approach. They said they were dropping their corporate tax rate from 35% to 21%. They were having an immediate writeoff of asset acquisitions, with immediate expensing of all assets. They were also having an interest deductibility limitation.
With their limitation, they tied it to revenue. They said that all small businesses are exempt if they earned less than $25 million of revenue. From the Parliamentary Budget Officer's summaries, the businesses in Canada that would be exempt would be far fewer compared to the United States. Based on the Parliamentary Budget Officer's summary, if you have income in excess of $500,000, if you have more than $250,000 of interest, or if you have more than $10 million in capital, in Canada a lot more businesses would get caught by this. In the U.K. they also took a balanced approach. They reduced their corporate rates 9% and brought interest to be in the 30% of earnings before interest, taxes and amortization. They said they were dropping tax rates and limiting interest.
One of the large concerns is that if we just limit interest and we don't drop the tax rates at the same time, we will impact Canada's competitiveness in a negative way.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
I want to talk about this one, too, because I'm concerned about what the broad implications might be of capping a legitimate business expense such as interest. For example, what might be the effect on our financial sector, on our banks, which might see demand for capital decline, on our capital markets and our stock markets, and on the value of the Canada pension plan or other pension plans that are invested in our capital markets?
I can't possibly think of everything while I'm sitting here, but it seems to me that a change like this would have fundamental and broad implications for every single aspect of our society.
Regional Tax Leader, MNP LLP
We agree. It will change whether people take out interest.... We were talking about some of the options, and Am can jump in here too.
When you need to expand the business or you're going for capital, if debt is not one of the options because you're not going to be able to write off the interest, then you start looking at equity. If you start looking at equity, then the other side of it is that there is less tax on the table, because the recipient is not being taxed on the dividend. Whether it's coming from other companies or coming from different sources, there may be no taxes being paid.
It's going to change how businesses operate and what they do. It's going to change whether they.... If we can't adapt to the cost of buying an asset, are we going to buy the asset?
Senior Vice-President, Taxation Services, MNP LLP
Yes. Are they going to expand?
Also, we were thinking of different industries. Auto dealerships came to mind, and home builders—
February 6th, 2020 / 4:50 p.m.
Conservative
Vice-President, Economic and Northern Affairs, Mining Association of Canada
I can tell you that the mining industry is seized with this as well.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
Yes, and so is beer, I think. That's why I want to segue into beer for a second—
Liberal
The Chair Liberal Wayne Easter
We're okay for time.
Did you want to add something there, Mr. Marshall?
Vice-President, Economic and Northern Affairs, Mining Association of Canada
No, I'm just amplifying the concern. We've had members in to talk with officials at Finance about this issue as well.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
Thank you very much.
I want to take this opportunity to segue into beer, because I think this would affect the beer industry as well, which would be sacrilege.
Conservative
Marty Morantz Conservative Charleswood—St. James—Assiniboia—Headingley, MB
I think Mr. Cumming stole my thunder a bit, because I was going to ask why you didn't bring samples.
I didn't realize, though, that the beer industry in Canada was in such dire straits, so this is very good information.
I don't know if I'm just missing it or if it's not here, Mr. Chapman, but would it be possible for you to get...? I'm curious as to what the tax cost of your proposal would be, just so we have a sense of what the impact on the treasury might be if these proposals were implemented.
President, Beer Canada
Yes, I am absolutely happy to share that with the committee after today's meeting. We did a pretty deep dive to make sure this wasn't going to be too costly for the federal government. It's based on the previous year's sales, but I'm happy to share that for you guys to look at, for sure.
Conservative
President, Beer Canada
We estimated that in fiscal year 2019 the federal government collected around $700 million in federal excise on beer. Had our proposed federal excise duty structure been in place, it would have resulted in roughly $4 million less of that $700 million being collected.
Our view would be that over time the loss in revenue would hopefully be mitigated with positive growth in this low- and no-alcohol category. I'm happy to share with you the full—