Good morning. I have some prepared notes, which, I hope, you have in front of you.
Thank you for the opportunity to appear before the committee to discuss this important topic. As I understand the mandate, the committee is to identify areas for legislative and regulatory modernization and improved international co-operation with the goal of identifying areas for improved efficiency to reduce costs to regulated parties, support international alignment and trade, and create flexible pathways for innovative products and processes to come to market while protecting the health and safety of Canadians. That's a pretty ambitious mandate in my view.
For the benefit of the committee, my name is Kim Moody. I'm a CPA and one of the directors of Moodys Gartner Tax Law, a tax law firm that services successful entrepreneurs, with an emphasis on Canada-U.S. tax issues for private businesses. I have a long history of serving in leadership positions for the Canadian tax profession. Our firm has had extensive experience in how regulation or tax law hampers or, at a minimum, increases the burden of doing business in Canada.
From a high level, private business owners or their investors seek the following pillars when deciding how and where to invest their capital—these are well-known principles, so I won't go into a lot of detail—which include, predictability, easy access to capital, good labour markets, low red tape, and a good tax system. I'll say more on a good tax system in a minute.
I will focus the bulk of my comments on what I know best, which is tax, but before I digress into my tax commentary, I will say that regardless of what I know best, I believe it is fair to say that amongst all the pillars that I've mentioned—predictability, easy access to capital, good labour markets, low “red tape”, and a good tax system—the common thread is that private business owners/investors seek fairness, consistency and simplicity amongst all the pillars. I also believe it is fair to say that the current regulatory regime and environment covering such pillars does not wholly meet those objectives. I also believe it is important for regulations to be agile to respond to environments that can quickly change.
I'll digress outside of my expertise for one minute.
Let's consider Alberta's current labour laws. Recent amendments to provincial law have made it much more difficult for small businesses with 19 or more employees to comply. For example, our firm with approximately 40 employees has had to, in order to comply with the new laws, retain expensive labour lawyers and consultants to help us build a new workplace occupational health and safety manual. I just received a draft of it the other day, and reading it makes me almost throw up. There's a rule for most common-sense things. For example, if one of my employees rents a car during the course of their employment duties, there is a paragraph on how they should familiarize themselves with the car before driving away. If they have an accident, there's a paragraph instructing them to call 911. There is another paragraph instructing my employees to ensure that they have a valid driver's licence. All of this stuff is common sense, but given the “nanny state” environment where I live, rules replace common sense.
There are significant punishments to me as the employer if such rules are not written down or if I can't produce such a manual. And to make it worse, such labour laws are not consistent with those in the various other provinces in which we do business and which make no obvious attempt to try to coordinate such laws and regulations. How much has our firm paid so far to comply with these new labour laws? It's well in excess of $25,000 and growing. That's a very significant sum of money for a small firm like ours. Will there be a good return on my investment? Nope. I'm very confident that these new laws, which are applied with a one-size-fits-all approach, will have a negligible impact on improving labour conditions for my employees, but our firm bears the brunt of the cost and the risks. At the very minimum, it would be great if Canada's provinces tried to coordinate labour laws so as to ensure easy compliance by private business employers.
I'll go back to my area, tax. Albert Einstein was correct when he stated that there's nothing more complex than the income tax. Canada's income tax statute, the Income Tax Act, is by far the largest and most complex statute in Canada. And it continues to become even more complex with numerous yearly additions that add to the patchwork quilt that is our act.
Committee members, if any of you have never picked up the act and tried to make sense of even a few pages, I would encourage you to do so. I'm confident you'll find the Income Tax Act almost as incomprehensible as most people find it. And if you find it is incomprehensible, how do you think private business owners find it? Most are intimidated by income tax law and the required compliance. Accordingly, they need to hire expensive advisers like our firm to ensure compliance.
While that might be good for our firm's business, it is not good for our country as a whole. Private business owners should expect their country's income tax laws and related regulations to be understandable and easy to comply with.
You want a recent example? Consider the new income splitting rules as set out in section 120.4 of the act. These new rules were introduced as part of the embarrassing attempt by our current government to reform the taxation of private corporations on July 18, 2017. The first version of the rules was incomprehensible. The second and third versions were just as incomprehensible. Ultimately, the new law is incomprehensible for the average private business owner and their advisers. Unfortunately, private business owners and their accountants will require income tax specialists, such as our firm, to help them apply these new rules, thus increasing compliance costs. Recent other amendments are also incomprehensible and have wide application, such as the taxation of restrictive covenant receipts, the application of the small business deduction, intercorporate cash movements and others.
The joint committee on taxation of the Canadian Bar Association and Chartered Professional Accountants of Canada wrote the following in its March 8, 2018, submission to the Department of Finance about the new income splitting rules that I just referred to:
There is a time and place for complexity. Rules likely to apply primarily to multinational corporations, who can be expected to have access to sophisticated advisors can reasonably be complex and involved where necessary for their purpose. The TOSI [income splitting] rules apply in a context that could not be more different. Every single...resident in Canada who receives or realizes an amount derived from a private corporation, partnership or trust will need to understand these rules in order to comply with the law.
I agree with this quote. I was the co-chair of the joint committee at the time of the March 8 submission and one of the signatories to the submission.
What can be done about this? In closing, I have two simple but rather ambitious suggestions.
One, introduce an office of tax simplification. In the U.K. it was recognized long ago their income tax legislation administration had become very complex. Accordingly, this office gives independent advice to the government on simplifying the U.K. tax system. I would suggest, like many others, it is time for Canada to do the same as the U.K. as long as this office is independent and free of political interference.
Two, undertake comprehensive tax review and reform. The last time Canada had comprehensive review and reform was the Royal Commission on Taxation, which released its landmark six-volume report in 1966—before I was born—after approximately four years of study. Such recommendations were studied and debated for a lengthy period of time following its release and was the impetus of many foundational changes introduced in 1972. While limited studies have since been done, nothing comprehensive like the Carter commission has been undertaken since.
Since I'm running short of time, I'll quickly go ahead. Since 1972 our Income Tax Act has become a patchwork quilt of changes built on 1972 tax reform. However a patchwork quilt can quickly become busy and complex, and it's time to construct a fresh quilt built off a comprehensive study.
I strongly disagree with some academics who suggest a continued patchwork quilt approach, with studies to provide limited tweaks as the way to proceed. I encourage such academics to spend a few days in my office or in the shoes of entrepreneurs who struggle with the current patchwork quilt approach. The last thing we need is a patchwork quilt, which was put through a light laundry cycle that will only make the quilt appear a bit cleaner for a short period of time. It's time to retire our current quilt and construct a new one with no patches.
Thank you for inviting me. I'm happy to take questions.