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THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
WINNIPEG, Thursday, November 9, 2017
The Standing Senate Committee on National Finance met this dayat9a.m.to study the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations and the tax planning strategies involved.
Senator Mockler:Honourable senators, I welcome you to this meeting of the Standing Senate Committee on National Finance. I see we do have a quorum, I declare the meeting in session.
This morning we have the pleasure, and the honour to receive the Minister of Finance of Manitoba. Minister, thank you very much for accepting our invitation. And since we are in Manitoba, Winnipeg, I could, I will be introducing you formally, to make your presentation, but, you could welcome the committee here in Manitoba.
Hon. Cameron Friesen, Minister of Finance, Government of Manitoba: Good morning everyone, and I am very happy to be here with you, the weather is not cooperating, so there will be no joking about that. We usually have a lovely warm November, we are not having that this time around. I know you have been busy in your travels for the purposes of this meeting, and we welcome the opportunity to be able to feed into this, this worthy enterprise, and provide a Manitoba perspective, that you can consider. So welcome everyone, thank you for being here today.
Senator Mockler: Thank you Minister, my name is Percy Mockler, senator from New Brunswick. At this time, I would ask the senators to introduce themselves.
Senator Pratte: Senator Andre Pratte from Quebec.
Senator Oh: Senator Oh from Ontario.
Senator Andreychuk: Raynell Andreychuk from Saskatchewan.
Senator Marshall: Elizabeth Marshall from Newfoundland and Labrador.
Senator Neufeld: Richard Neufeld, British Columbia.
Senator Cools: Anne Cools, Toronto, Ontario.
Senator Mockler: Thank you. The Standing Senate Committee on National Finance was authorized by the Senate of Canada to examine, and report on the Minister of Finance's proposed changes to the Income Tax Act respecting the taxation of private corporation, and the tax planning strategies involved. In particular, Income sprinkling, two, holding passive investment inside a private corporation, and converting income into capital gains.
That the committee is authorized into, from our Order of Reference, the committee take particular note of the impact of the Government's proposed changes on incorporated small businesses and professionals, economic growth, and government finances, the fairness of the taxation of different types of income, and other related matters.
The committee will submit its report to the Senate of Canada, no later than December 15, 2017, and retain all powers necessary to publicize its findings for 180 days after presenting the final report.
Minister, before that, in Ottawa we held 13 public meetings, we heard from over 60 witnesses, and we received more than 30 written submissions. There is a lot of interest for this study, and the committee felt more consultation was needed.
Therefore, we decided to crisscross Canada, and this is our first trip in Canada, the Western trip, and we will follow-up, in two weeks with the Atlantic trip.
Over the course of the day, Minister, we will have before us people who requested to appear, or people whose names were submitted by parliamentarians, and also from the public at large.
To the Minister of Finance for Manitoba, I would just like to do a, if you permit me, Minister, to call you Cameron.
Cameron was born and raised in Morden, Manitoba. After graduation, he earned a degree in Music, from the Canadian Mennonite University, and the University of British Columbia. Cameron returned to the Province and earned his Education
Degree at the University of Manitoba. And, on this, Minister, please make your presentation, and following your presentation, the senators, will be asking questions.
Mr. Friesen: Thank you, Mr. Chair. It is a great honour to be with you here today, it is an exciting time for Manitoba. We are a new government. And as some of you might know, we were elected in 2016, in the spring just over 18 months ago. And we have been working hard in Manitoba to restore fiscal stability, after inheriting an almost billion dollar deficit, and a net debt that had doubled in the course of six fiscal years.
We have had challenges in front line services, the quality of those services, so, we are working hard, and making progress on behalf of all Manitobans. We have had, among the lowest unemployment rate in Canada. I just saw new statistics yesterday showing we have added 14,600 new full-time jobs from last October to this October.
We continue to have the lowest household per capita debt of any Canadian province. Our housing starts and commercial real estate demand are at an all time high. We are seeing record levels of private investment, and as I referenced, we have made some progress on behalf of Manitobans in reducing our deficit. We released the public accounts for the previous fiscal year at the end of September, and showed a $147,000,000 reduction in the deficit, so we are heading in the right direction.
The approach that we have taken, we call it a balanced, and moderate approach. We are demonstrating our commitment to small business with efforts to reduce red tape, through our Bill 22 Regulatory Accountability Act. We are focused on affordability. We are focused on keeping taxes low. We have indexed the tax brackets. We have indexed the basic personal amount that provides, will provide$35,000,000, in tax relief to Manitobans by the year 2020.
Immediately, by increasing the basic personal exemption, we remove over 2200 people from the tax rolls, and we are reviewing Manitoba's tax credits. We have over 30 credits in this province, with a value of over $600,000,000. And we are working towards what we have described as a coherent, and comprehensible tax system, that meets key policy objectives, and focuses on simplicity, andtransparency. We are saying here that we are well on our way to becoming Canada's most improved province.
The Liberal, Federal Liberal's plan to change the way that small businesses are taxed threatens a major economic engine for the Manitoba economy. The federal proposal seems to ignore the millions of middle class Canadians, who are utilizing legitimately, long standing tax-planning rules for their businesses.
The rhetoric that we have heard from the federal government has not been helpful in this conversation. Hard working law-abiding business owners have felt stigmatized. They have been described as tax cheats, despite the fact that they are in compliance with long standing tax laws. Tax laws that have been in place in this country, as you all know, since the last comprehensive tax reform initiative in the early 1970s.
In this province I have heard from small business owners, farmers, municipal officials, and other professionals. They share a concern about the negative impact that these changes, if implemented, will have on their businesses, and on the people that they employ. Let's be clear, these changes will have the most impact on lower, to middle class business owners. Not the truly wealthy citizens of Canada,who are a small percentage of taxpayers. And they have a greater ability to defray high tax than the average income Canadian.
According to Statistics Canada, what this means for us is the following: Manitoba has approximately 120,00 small businesses employing 77 percent of our total work force. Additionally, we have approximately 21,000 micro businesses, employing between one, and four employees. Those operate primarily in the sectors of construction, agriculture, transportation, professional and scientific services, and health care.
We have left you with a package, and, in that package, later on, if you see it, you will see that in this province as other provinces, we have seen a significant growth in incorporation rates in this province from just around 16,000 only a few years ago, to now 24,000. And there are reasons for that that we will discuss. It is these business owners we have heard from expressing concerns that the federal tax measures are targeting private corporations.
We know in this province, that 56,000 small corporations in this province would be subject to the conditions under the Federal Liberal tax proposals. 25,000 of those are taxable in any given year. And, 25,000 individual Manitobans andtaxpayers, claimed taxable dividends from small businesses, that includes both the principals of corporations, and shareholders sharing in the income of that, of those corporations.
We believe that the proposed changes to tax treatment of small business discourage hope, and penalize ambition. We believe that these changes were poorly conceived, they have been poorly communicated. And they were poorly accommodating the consultation period, with an only 75-day comment period taking place over the middle of a Canadian summer.
Terry Fehr is the president of Meadowlark Honey Limited hi is a small business in the province. He wrote to me to advocate on behalf of small business owners. He cited he would now be paying over 50 percent of his total income in taxes. He noted that some businesses will pay much higher rates under the federal proposals. Tax policy analysts and economists have stated once you get to that 50 percent of income going to the government in taxes it becomes counterproductive to the economy, it becomes counterproductive to revenue.
One Manitoba farmer, Amanda Layton, asked me to oppose Minister Morneau's tax changes so that she would be able to hand her farm onto the next generation.
Her comment was the federal government should be comprehensively reforming the tax system to support the family farm rather than dismantle it. I heard from one family physician about the reductions in clinical hours, and administrative staff that she would be forced to make in her practice if these tax measures are implemented. I will speak about that further later.
It is completely contrary to the promises made by the Federal Liberals in the last federal election on what they described would be measures to support the middle class, and a commitment to lowering taxation, these proposals do not accomplish that policy goal. If the First Minister, and Finance Minister's proposals are implemented, business owners will be forced to change the way they do business. They may decide to get out of business all together, they may move their business to another jurisdiction, or they may simply stop making the significant investments within their business to grow it, taking more of a caretaker approach. And we all understand the negative effect on our economy that that would have.
The Manitoba Chamber of Commerce stated that these changes would reduce economic growth, and job creation in the Province of Manitoba. There is another side to these changes, too, and that is it becomes harder for provinces like
Manitoba, who have done so much to recruit, and keep doctors, and nurses to continue to guarantee that provision of health service in our communities. We have made investments, we know that these changes will make it more difficult and, will add layers of cost for a province, or whole new approaches would be necessary. And, we could go backwards very quickly from the important, and significant gains that we have made thus far.
I have received numerous letters from those in the health care system, about the impact these changes will have on services to patients. I received a letter from an anesthesiologist who told me the sacrifices he made over the years to become a professional. How he has dedicated to serving his patients without breaks, and the kind of benefits other workers take for granted. He said he was sickened to hear that the federal government described him as a tax cheat when he is paying more in tax than other colleagues through his corporation. And I know this is a theme you have heard in other discussions.
He said the effect of these changes would be that he would cut his practice by 20 percent, which would affect wait times. He is seriously considering job opportunities in the United States, Australia, and New Zealand, and he has heard
from physician colleagues who will also reduce hours worked. That we know, will increase our health care costs in the province, at a time when Manitoba has been clear that the federal government is backing away from what we have described as an appropriate level of health funding in the province through the Canada Health Accord. In short, these proposed changes would cause business owners to take fewer risks, create fewer jobs, and contribute less to the growth and success of our economy.
Let me walk you through the changes from the Manitoba perspective, first on income sharing, Canadian small businesses have a long standing history of using tax planning approaches like the sharing of income amongst family members, through private corporations. This has enabled entrepreneurs, and small businesses to grow their enterprise. It has been successful in Canada, this has been successful in Manitoba. We know that marital partners share in the risk of the enterprise. We know that marital partners put their personal assets at risk. We also know that that degree of risk is not always readily verifiable, or visible, shall I say to those peering into the enterprise.
This goes to a concern around administrative complexity. In a bold departurefrom current conventions, the way we structure the rules around the sharing of income presents many, many challenges. They raise fundamental questions about how you measure the value of these contributions, those contributions being labour, risk, capital investment. I have heard from experts who are clear that even though the federal government has said that they value keeping it simple, these proposals will be administratively difficult, and will add complexity to our tax system.
There is sufficient ambiguity even now, on what is called the reasonable test for sharing of income, for dividends and capital gains, and that will create further administrative complexity for business, for the CRA, for the appeals process, for the courts. I would say that there must be a measure of the necessity for practicality. Practicality must be figured in when it comes to trying to design a test of reasonableness. It has been related to me from experts who work with these issues every day in the professional community, that we are inviting exasperation on the part of those who work within our system. Our system is based on trust. It is based on a broad based buy-in to the rules.
I sense through the anecdotal evidence that I received, through the letters thatarrived at my office, that these changes would invite a response of simply saying, I have always approached the rules this way, I don't understand how to additionally quantify this contribution of another person within my organization. I will continue to do this as a business, as usual approach. If there is a problem, someone will signal it to me. I suggest to the members of this group, that that is not a path that we as Canadians want to depart on.
Additionally, the set of proposals have the potential to affect all private corporations with family members, and shareholders, regardless of income level. The presentation that I am leaving with you on page 7, there is a graph that shows that over 10,000 Manitobans are of modest income levels, under $85,000 a year, receiving dividends. And, slightly fewer Manitobans over the $85,000 income level are also receiving dividend impact. It shows that these changes in tax treatment will impact many Manitobans, not only at a high level of income, but at a moderate level of income.
It comes down to a principal concern around how to quantify, as I said, investment of a significant other, of a spouse, of a marital partner, in the enterprise. We know the background, we know the collapsing of the kiddie tax provisions thatwere done in the 1990s. We know that there is a desire to raise the threshold now once again. But in particular, when it comes to a spousal contribution, within this framework on the first proposal, it is exceptionally difficult to quantify that nonoperational commitment, and contribution that that spouse makes. How do you quantify the dialogue that goes on between those individuals within that small corporation, when it goes to a decision to additionally invest, to take on debt, to make the next investment, to build, to put capital at work, to hire. I suggest to the panel that a test administratively would be difficult, it would be costly. And in many respects, I think it would be a solution in search of a problem.
Going on we are agreed in this province, that it does create that compliance burden on a small business. We know that what it means is uncertainty will proceed among tax planners, advisors, but as I said exasperation will proceed amongst small business, farmers, families, and others.
On the second proposal, passive income. Passive income, is important for a small corporation. We know that passive investment is used to support business during economic downturns, by allowing them to build up capital, and use that in a time when they are facing a slow down. But let's not forget that it is alsonecessary to be able to, to incrementally invest. To save up for the right time to make that investment. And, of course, it is also there as an important way to save up for retirement. Because, these individuals within a corporation do not have access to other conventional methods to prepare for retirement, that others without a small business corporate structure will have.