Finance Committee on Feb. 14th, 2022

[Some hon. members]

Agreed.

[The Chair, Liberal, Peter Fonseca]

Clerk, do we have the resources available? Okay. That's terrific.

I'm going to move to our witnesses right now. We'll start with Mr. Brian Arnold, professor emeritus.

[Professor Brian J. Arnold, Professor Emeritus, As an Individual]

Thank you, Mr. Chair.

Happy Valentine's Day, everyone, although what I have to talk about, tax avoidance and the general anti-avoidance rule, have very little to do with love and romance.

At the outset I would like to emphasize that I am appearing here on my own behalf. I have no special interest that I represent, and as a result I'd like to share with you a little bit about my background and experience with respect to tax.

I taught at a Canadian law school for 28 years. Since that time I have taught at various law schools around the world, including Harvard Law School and New York University School of Law. I have practised on a part-time basis for 35 years with two major Toronto law firms. I was a consultant to the Department of Finance on the drafting and design of the general anti-avoidance rule back in 1986-87. I've been a consultant to the OECD, the United Nations and a number of governments with respect to tax avoidance.

I'm sure I don't have to tell the members of this committee that tax avoidance is a serious problem for our tax system. It deprives the government of much-needed revenue. It exacerbates inequality, because only corporations and the wealthy are able to take advantage of tax avoidance. As a result, others must pay more. It also imposes huge costs on the tax system—costs for the CRA, the Department of Finance and for the courts. Finally, it undermines public confidence in the tax system generally.

The general anti-avoidance rule plays a critical role in preventing and controlling abusive tax avoidance. It's a relatively simple rule. It basically says that tax benefits from transactions that have as their principal purpose tax avoidance can be denied if those transactions misuse or abuse provisions of the Income Tax Act. The purpose of that rule is to deter abusive tax avoidance. However, the GAAR is over 30 years old and is showing its age, so its effectiveness in controlling tax avoidance has been diminished. It needs a significant overhaul.

The government, the Department of Finance, announced a public consultation on the GAAR in its November fall economic statement of 2020. It's now fourteen and a half months later, and we still don't have that GAAR consultation launched. I don't understand that. Further, I don't understand why a public consultation is necessary with respect to the GAAR. The general anti-avoidance rule's flaws are well known to those in the tax community, and in my view, the Department of Finance should simply get on with it.

I'd make two recommendations in general to this committee. The first one is it recommend to the government that the Department of Finance cancel its GAAR consultation and simply move to amend the GAAR to make it more effective. As I say, those flaws are well known, and I would be happy to provide the committee with a list of the flaws.

If the Department of Finance insists on going ahead with its consultation, then I would suggest the committee recommend that it do so immediately.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Arnold.

We do have next on our list Carol Anne Hilton. I think we're working to get her IT together so that she can come on.

We're going to move to MNP LLP for five minutes, please.

[Amanjit Lidder, Senior Vice President and Partner, Tax Services, MNP LLP]

Thank you, Mr. Chair and honourable members, for the invitation to share our thoughts with you today in advance of budget 2022.

As you said, my name is Am Lidder. I'm the senior vice president of tax at MNP, and I'm joined today by my colleague Kim Drever. As the largest professional services firm headquartered in Canada, we proudly serve over 280,000 clients, and we've worked side by side with Canadian businesses for over 60 years in 125 communities of all sizes across the country.

It's with the experience of our clients in mind that we provided the committee a copy of “Unleashing Canada's Potential”. In this document that was shared with you is a summary of policy considerations that we've developed by canvassing our national network of professionals.

Over the last two years, our partners have had hundreds of thousands of conversations with Canadians about their lives and businesses, and supported them as they navigated the impacts of the pandemic, as well as managed through wildfires, floods, labour challenges and supply chain disruptions. Whether it's a blueberry farm in the Fraser Valley, a flower shop in Brandon or a fabrication shop in Halifax, each of our clients has been impacted in some way.

Our submission provides several policy considerations along three key themes that we believe, when addressed, can bolster Canada's economic standing and ensure that we build a resilient and sustainable economy. These three themes are building Canadian confidence, fostering innovation and achieving Canadian excellence.

While there are many potential topics contained within those themes, our remarks today will focus on one specific challenge for Canadian farm, fishing and private businesses, which is making sure that family businesses stay family businesses.

Previously, a long-standing rule in the Income Tax Act treated intergenerational transfers of a business as a dividend, rather than a capital gain. Bill C-208 changed that rule to allow access to the lifetime capital gains exemption, and provided positive changes around the division of a family business among siblings. Although our time today focuses on the transition aspect of Bill C-208, we believe that the ability to divide a family business amongst siblings granted in the legislation is necessary and that it should be maintained.

Because of how our tax rules are currently structured, transitioning a farm, fishing or small business from a mother or father to their children or grandchildren has been punitive, compared to selling that same business to a third party. The introduction of Bill C-208 provided for the intergenerational transfer of certain family businesses to receive the same tax treatment as businesses sold to a third party. Bill C-208 represents a significant positive change to support family business succession in Canada.

Prior to this bill passing, when a business owner sold or transferred their shares of their business to either their adult child or grandchild, they were taxed at an average dividend rate of up to 46%. However, if that same business was instead sold to a non-family member, the seller would be taxed at the lower capital gains rate of up to 26% and they would be able to use their capital gains exemption to reduce their tax.

We believe families should not be disincentivized from selling their businesses within their family due to tax policy. Bill C-208 represents a good start to addressing the disadvantage families face.

On July 19, the Government of Canada suggested that amendments would be forthcoming in the fall of 2021. However, businesses have yet to see this draft legislation. In the press release, the Government of Canada laid out four potential hallmarks to define a bona fide succession, and we agree that the tax treatment outlined in Bill C-208 ought to be used in the process of a true business transition.

It's important to remember that no two family business transitions are the same, and overly prescriptive hallmarks have the potential to create different barriers that hinder the succession of family businesses. For example, in the sale of a business to a third party, the Government of Canada does not limit the involvement of the seller in the future activities of the business following the sale. However, the government has indicated that they would limit the level of ownership and involvement that a parent can maintain after the transfer. In our experience, it's common in the succession of many businesses for the seller to remain engaged for a transition period, though the length and nature of that transition period should be driven by what is best for the business and not mandated by tax law.

As the Government of Canada contemplates amendments, we would encourage intergenerational transfers to be broadened to include, for example, the sale of businesses between siblings. In addition, the capital gains treatment on the sale of shares should be maintained where the lifetime capital gains exemption is not available.

Also, Bill C-208 restricts the use of the capital gains exemption for capital-intensive businesses like farming or manufacturing. The taxable capital limit was introduced in 1989 and has not been adjusted nor kept pace with inflation.

We welcome any questions you might have related to what we have provided in our submission or presented today.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Lidder.

We are moving to Moodys Private Client LLP. We have Kim Moody with us.

[Kim G. C. Moody, Chief Executive Officer, Moodys Private Client LLP]

Thank you, Mr. Chair.

It's a pleasure to be here today. Happy Valentine's Day. I hope each of you can share a romantic day with someone special. Like the pre-eminent Professor Arnold, who I'm certainly not in the same league as, what I'm going to talk about today is not very romantic.

Notwithstanding not being in the same league as Professor Arnold, I do have a long history in the tax profession. I'll tell you a bit about myself. I'm former chair of the Canadian Tax Foundation, former co-chair of the Joint Committee on Taxation with the Canadian Bar Association and CPA Canada, and chair of the Society of Trust and Estate Practitioners. I'm also the co-host of Canadian Tax Matters, Canada's leading platform for learning about trending tax issues.

I'm going to keep my remarks rather short today because we're limited to five minutes. I have given each of the members a complete copy of my remarks. I encourage you to look at them for more completeness.

I would like to comment on two things, which are our country's out-of-control spending and deficits, and some suggested tax matters for consideration.

To be clear, I'm not an economist, but you do not need to be highly educated to figure out that you cannot endlessly spend more than you make—whether you're an individual, a business, non-profit, charity, or government—unless you subscribe to the notion that a government can create more money without consequence. This theory has been coined the modern monetary theory of economics. The fact that there are consequences to indefinitely spending more than you make does not change if you cloak the spending in revised phraseology such as “investment”.

With the current state of our country's deficits and debt, with no visible signs of a plan to rein it in, coupled with inflation at 30-year highs nearing 5%, Canada has a serious problem. Too many dollars chasing too few goods results in demand-pull inflation. We're seeing pressures as a result of that.

In the last six years, and particularly in the last two years, we've seen tremendous government spending. In his February 11, 2022, piece entitled “Modern Monetary Trauma”, Douglas Porter, chief economist for BMO, stated the following about the U.S. situation, which is similar to Canada's, but of course not identical. He wrote that, “the massive stimulus package...of early 2021 was a clear case of overkill for an economy already bouncing back. The combination of super-loose monetary and fiscal policy was essentially a de facto experiment of [Modern Monetary Theory]. Well, the results are now in—CPI at 40-year high—and MMT has failed its first test in spectacular fashion.” I totally agree.

Canada has much to learn from this experience. In my opinion, it starts with reining in spending. This is the season where there is no shortage of people asking the government to pump money into their pet projects or preferred areas—in these pre-budget consultation committee meetings in particular. I believe the government needs to rein in spending and tighten up its monetary policies for the benefit of all Canadians. Such loose policies and the lack of a visible plan are contributing to tremendous inflationary pressures, including housing prices. Of course, these pressures negatively impact all Canadians. Frankly, positive, concrete action is needed now.

I'll move on to tax, which is an area that I am much more astute in. I'll keep my comments brief here. In my notes, I've indicated six areas that I think the government should focus on. Some of them are positive, some of them...take a pause.

The first is to not move forward on an anti-flipping housing tax. Overly simplified, the current Income Tax Act has all the tools to attack traders in real estate who try to utilize the principal residence exemption to shelter their profits. With the Canada Revenue Agency making the disclosure of the utilization of the principal residence exemption mandatory on personal income tax returns from 2016 forward, this also gave CRA the tools to identify and audit inappropriate claims. To introduce another tax that arbitrarily denies the utilization of an exemption if a property is sold within 12 months of its acquisition, with limited exceptions, will simply introduce unnecessary complexity. I'm confident that the introduction of this measure will result in no meaningful reduction of PRE claims, and it should be abandoned.

Second is to not increase personal tax rates. I note that the 2021 Liberal election policy platform did not contain an explicit proposal to increase the rates. However, with the need for revenues, I'm concerned that the government may view the so-called “wealthy” as an easy target to pay just a little bit more. Such tax increases would cause even more capital to flee Canada—we're seeing a lot of that through our office—and discourage the best and brightest from staying in or coming to Canada. With skilled labour at a premium, this needs to be avoided.

Number three, do not increase the capital gains inclusion rate. Again, the 2021 Liberal election policy platform did not contain explicit comments regarding this, but previous minister mandate letters mentioned tax expenditure reviews to ensure that the wealthy do not benefit from tax breaks. With the 50% capital gains inclusion rate being a large tax expenditure, many are concerned that this rate could increase in the budget. Such an increase would be devastating to the investment community and the ability for our country to attract capital. Don't do it.

Number four—

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Moody. We are at about five and a half minutes now.

[Kim G. C. Moody]

Okay, thank you.

[The Chair, Liberal, Peter Fonseca]

We are moving now to News Media Canada, and we have Jamie Irving and Paul Deegan.

[Jamie Irving, Chair, News Media Canada]

Good afternoon, everyone. Thank you for letting us appear today.

On behalf of News Media Canada, our member publishers, and the 3,000 journalists we employ, who inform Canadians across the country every day, we are pleased to participate in the pre-budget consultations in advance of the 2022 budget.

Canada's news publishers are facing an existential threat, with Google and Facebook now taking about 90% of online ad revenue. To put this in context, after peaking at $4.6 billion in 2008, newspaper industry revenues have fallen off a cliff. We now stand as an industry below $1.5 billion. During that same time, Google and Facebook have seen their combined Canadian revenues grow from a little over a billion dollars a year to over $8 billion last year.

There's a direct link between the decline in the newspaper ad revenue and Google and Facebook exerting a firm grip on the online advertising system, a system where these monopolies have their thumb on the scale. According to a group of state attorneys general, led by Texas, the CEOs of Google and Facebook personally oversaw an illegal 2018 deal that advantaged them in ad auctions. These behemoths enjoy all of the benefits of being publishers without any of the obligations. They spread a few crumbs around, but they don't employ a single journalist in Canada.

Since 2013, we have lost 300 trusted news titles in Canada, and COVID has made the secular decline even worse. Ad revenue was down 35% in 2020, and more than 40 newspapers have closed permanently since the start of the pandemic.

As titles disappear, news deserts are created. Across Canadian journalism 1,300 jobs have been cut permanently since the beginning of the pandemic. There's no silver bullet to solve this problem, but I'll turn it over to my colleague, Paul Deegan, who will outline one important step that you, as parliamentarians, can take right now to stop the bleeding and put us on a more stable commercial footing.

[Paul Deegan, President and Chief Executive Officer, News Media Canada]

Thank you, Mr. Irving.

During the 2021 federal election campaign, the Prime Minister promised within the first hundred days to introduce an act that would require digital platforms earning revenue from publishing news to share part of their earnings with Canadian media. The act was based on the Australian model.

The Australian model is simple, and it doesn't involve taxpayer money. It allows news publishers to negotiate collectively with big-tech platforms and services to receive reasonable compensation for the content our Canadian journalists produce. If negotiations don't lead to a fair settlement, it goes to baseball-style, final-offer arbitration.

In Australia, the initial reaction from Google was to threaten that it would stop making searches available in that country. Meta, or Facebook, actually restricted people in news organizations from posting, sharing or viewing Australian news content on Facebook. The Australian Prime Minister, Scott Morrison, fired back. He said, “We will not be intimidated by BigTech seeking to pressure our Parliament as it votes on our important News Media Bargaining Code,” and, “Facebook's actions to unfriend Australia today, cutting off essential information services on health and emergency services, were as arrogant as they were disappointing.”

The Australian code today is in place, and it's working for publishers large and small. To give you a sense of context, so far, more than 30 agreements have been reached, including Country Press Australia, which represents about 180 smaller, independent and regional titles. Public reports suggest that in total these deals with Meta and Google—

[The Chair, Liberal, Peter Fonseca]

Mr. Deegan, I apologize for interrupting, but you're going to have to move your mike closer up to your nose level. There's some popping and some sounds making it difficult for our interpreters.

Thank you.

[Paul Deegan]

Thank you.

We expect our government to introduce legislation very soon. With all political parties in agreement on the overall direction, we are asking you to work with your colleagues in Parliament to ensure it receives royal assent by the end of June.

Thank you.

[The Chair, Liberal, Peter Fonseca]

Thank you, Mr. Deegan.

We are now moving to Réseau FADOQ, for up to five minutes.

[Gisèle Tassé-Goodman, President, Provincial Secretariat, Réseau FADOQ]

Thank you, Mr. Chair.

Thank you, ladies and gentlemen, for having invited me to this committee meeting.

My name is Gisèle Tassé-Goodman, and I am the President of Réseau FADOQ. With me are Chief Executive Danis Prud'homme and Philippe Poirier-Monette, special advisor to Réseau FADOQ.

Réseau FADOQ is a 550 000-member seniors organization that represents people aged 50 years and over. In all of our political advocacy, we strive to improve seniors' quality of life. We are therefore pleased to be here today to present our organization's budget priorities.

Above all else, we want to review the various measures that the federal government promised in the last election campaign, during which the federal government promised to increase the guaranteed income supplement by $500 per year for people over 65 who live alone and by $750 for spouses. It also promised to introduce a tax credit for career extension. There was also a proposal to alter the Canadian credit for family caregivers to make it refundable.

These three important measures in the 2021 election platform had been advocated by Réseau FADOQ. Our organization was therefore very pleased that the federal government had opted to implement these measures. Now, the time has come to stop talking and take action. For Réseau FADOQ, it is clear that these measures must be in the next federal budget. They are commitments that were solemnly made on behalf of seniors in Canada.

We would also like to take this opportunity today to discuss a decision made by the government, one that many seniors find it difficult to accept. In the last federal budget, the government decided to exclude people from 65 to 74 years of age from receiving the 10% old age security increase, which will now be only for those aged 75 and older. This subdivision within the population eligible for old age security sets a dangerous precedent.

Let's be clear. Any form of enhancement is welcome, but Réseau FADOQ believes that people aged 65 to 74 should also benefit. Age is only a number, and we have found as many instances of financial distress among people aged 65 to 74 as among those who are 75 and over. The government should therefore review this proposal to avoid creating two classes of seniors.

As the President of Réseau FADOQ, I need to address the subject of long-term residential and care facilities. Many seniors suffered from an inadequate health system during the COVID‑19 pandemic. The provinces have been inadequately financed by the federal government in the field of health care. It's true that there was additional funding during the current crisis, and in the last federal budget. But this assistance is neither recurring nor proportionate.

Health care funding for the provinces and territories accounts for 40% of their budget, and the Canadian government funds only 22% of these expenditures. According to the Conference Board, the federal share of health care funding will fall below 20% by 2026.

In order to make up for underfunding in recent years, Réseau FADOQ asks that the federal government index the Canada Health Transfer by 6% annually, which was the level prior to 2017. It is also important that the transfer factor in the impact of population aging in the provinces and territories.

Thank you to the members of the committee for your attention.

Mr. Prud'homme will answer your questions.

[The Chair, Liberal, Peter Fonseca]

Thank you, Ms. Tassé-Goodman.

Members, I'll look to the clerk. I don't think that we were able to get Carol Anne Hilton on. No, her IT is just not working.

Looking at the time, we have a significant amount of time for all the parties. Each party will have between seven and eight minutes for questions for the first round.

We will start with the Conservatives and Mr. McLean.

[Greg McLean, Conservative, Calgary Centre, AB]

Thank you, Mr. Chair.

Thank you to the witnesses who've taken time to come here and present to us today. We really appreciate all the input you've given.

I'm going to concentrate my questions on Mr. Moody.

Mr. Moody, in the last two years, the Canadian government has added $560 billion of debt to the Canadian balance sheet, and $170 billion of that had nothing to do with COVID. They're trying to base the justification of this on the 50% debt-to-GDP ratio. I'd like you to comment on that.

I'd also like to note that it's up from 30% that was justifiable before the pandemic, and now it's at 50%, and they want to keep it there as if it's a measure to be considered without even considering provincial debt, personal debt or corporate debt as part of that equation.

Can you quickly comment on that metric, please?

[Kim G. C. Moody]

Thank you, Mr. McLean.

As I said in my opening remarks, I'm by no means an economist, so from a common-sense perspective, I'll give you my two cents.

It's a bit scary in terms of how high that is and how quickly it rose to that level. It then raises the obvious question of how we are going to get it down and how we're going to rein that in. This is where taxation becomes an issue, and I worry about measures in the future.

[Greg McLean, Conservative, Calgary Centre, AB]

Okay, thank you.

You talked about the monetary stimulation that the government has gone through that is putting the fiscal debt back onto the balance sheet of the Bank of Canada. We're now at $1.1 trillion debt in this country, and almost half of it is held on the balance sheet of the Bank of Canada, that is, $500 billion.

Can you describe for us what you think the effect of rising interest rates will be once we come off this 0.25% low-end interest rate?

[Kim G. C. Moody]

From a common-sense perspective, I think it's going to exacerbate an already real problem.

The average Canadian can't afford a house. I look at my kids; they're at the age when it would be great if they could afford a house. With prices rising like crazy, they just can't afford it, and with interest rates rising even further, it will put it even further out of reach. Groceries—

[Greg McLean, Conservative, Calgary Centre, AB]

Yes, thank you for that.

That's exactly right. The interest rates are going to have to rise, and it's going to be borne on the backs of Canadians.

One thing I really want to get to, Mr. Moody, is capital flows.

You're in the tax business, and you've seen money flow out of Canada. The money is no longer flowing into Canada, because we have hobbled all our industries as far as development goes.

Can you talk about those personal tax rates and how much more money is going to flow out of Canada if we continue on the path the government is on?

[Kim G. C. Moody]

It would be incredible. There are already a tremendous number of job creators who are spooked by what's to come. Our office—and I know MNP and others—has been tremendously busy working on people leaving Canada who Statistics Canada, frankly, hasn't reported on yet. When they finally do catch up, I think it will be scary in terms of how much outflow there's been, and I think it will continue.

[Greg McLean, Conservative, Calgary Centre, AB]

This government has put a number of punitive regulatory measures on the development of Canada's resource industry, particularly in oil and gas but other resource industries as well. That has led to an actual increase in the proportion of balance of trade represented by resource.

Despite the fact that we continue to receive a gross discount for our natural resources on the world stage, what do you think would be a good way of overcoming this discount we receive and having some better balance of trade outcomes with other countries?

[Kim G. C. Moody]

I would respectfully suggest that a lot of the moves that have been done in the past few years be revisited and looked at to encourage capital investment into Canada for exploration and production at a very high level. That's what I would recommend.