Canada: KASB Statement On Tax Policy To The Senate Committee

The following statement was made to the Senate Committee on National Finance on behalf of the Kingston Advocacy for Small Business (KASB) on Nov. 1, 2017. Collins Barrow SEO LLP partner Karen Sands is a KASB member.

  • Thank you Mr. Chairman and Honourable Members of the Senate Committee for having Kingston Advocacy for Small Business or KASB to be a witness. We are truly grateful for you forming a Committee in respect of this important national issue.  I, Jason Skilnick, and Karen Sands are proud to represent our Kingston and area group.

To understand the value of our views, it is important to know who KASB is.

  • KASB is a group of 59 Kingston and area accountants, lawyers and academics that formed in response to the July 18th proposed tax changes. Our group did not exist previously in any form and we are not political. 

The first matter we would like to discuss is tax uncertainty

  • We appreciate the statements made by Finance the week of October 16th; however, there are still many questions we have.
  • For example, Finance stated that it "will not be moving forward with measures relating to the conversion of income into capital gains." This would seem to be a very positive development; however, Finance has noted that it will continue to develop proposals "...while protecting the fairness of the tax system." Such latter statements create continued uncertainty.

Family succession plans have been on hold since July 18th and Canadians need this clarified immediately. 

  • Also, Table 8 from the July 18th discussion paper shows that Finance is proposing to eliminate the capital dividend account. KASB and others have been watching closely for clarification from Finance regarding the capital dividend account, but there was noticeably no statement made. KASB believes that CDA is critical for tax integration to work and should not be eliminated.

Next we will address Passive Income

The week of October 16th, Finance announced a new framework for passive income earned inside a CCPC. 

  • KASB believes that this framework for passive income would create a two-tiered tax system in Canada and favours those who hold existing wealth over those who are trying to accumulate wealth, including young entrepreneurs. I asked about 70 Queen's business students last week what they thought of this system and it took them about 2 minutes to realize that this type of system was biased against them and there was utter disbelief that this is being proposed given the broad statements from the Department of Finance and the government about creating tax fairness.
  • We have many questions about this framework and the various pools of retained earnings that would have to be tracked under such a system. The framework that Finance has laid out would be very complex and costly for Canadians.
  • KASB believes that passive income tax policy cannot be designed simply by looking at Canadian trends like an increase in the number of private corporations in Canada and the dollar value of investments that they hold. 
  • In today's global economy where capital, certain business industries and future businesses are mobile, Canada needs to consider how competitive our tax system is for passive income relative to other tax regimes. 
  • For example, we understand that UK companies generally pay tax on passive income at 19%. Further, in the U.S. it is believed that their Federal government will release draft legislation later this week that would see the Federal c-corporation tax rate reduced to 20%, which would apply to passive investment income. One U.S. CPA we spoke with yesterday said "it would be disastrous for Canada to increase its passive income tax rate to 50% on a permanent basis while the U.S. is lowering its tax rate."
  • We believe the flaw is in comparing CCPCs and their shareholders to other Canadian individuals.  This thinking results in the CCPCs and shareholders being disadvantaged compared to public companies and their shareholders as well as Canadian companies that are owned by non-residents.  Our private corporations in Canada are competing in many cases with these companies and we should not disadvantage them through our tax system. 
  • We have performed analysis that shows CCPCs would be at a disadvantage to public Co's and non-resident owned Canadian companies under the proposed framework.
    1. We have performed numerical analysis that we would be pleased to take you through that shows that currently a CCPC and its shareholder pays approximately the same total tax as that of a public company and its shareholder; however, under the proposed laws, the CCPC and its shareholder will pay more tax. (Tab 1) 
    2. Also currently, a CCPC subject to the top rate corporate tax pays more tax than a public company on its investment income (i.e. 50.17% vs 26.5%), but when one factors in the refundable tax mechanism, in the end, the CCPC is not worse off. Under the proposed system, this is a permanent difference of 24% at the corporate level and 20% when you work through to the shareholder. 
  • KASB believes that the policy results that would arise are inappropriate, and should be abandoned. We have already heard that entrepreneurs are planning or are in the process of moving all or part of their operations out of Canada. We have further been told that existing entrepreneurs would not have left their corporate jobs to start their existing businesses in the proposed tax environment.

The final topic we would like to address is tax on split income (or TOSI)

  • KASB does believe that some of the policy objectives have merit; however, the draft legislation is quite simply, not workable. The rules are incredibly complex and would be costly for taxpayers to comply with. While Finance has indicated the intention to simplify the proposals and stated the proposals will only apply to family members who do NOT make a "meaningful contribution." Such language is not conducive to simplicity. 
  • One reason the rules are not workable is because there is an inherent conflict between corporate law and TOSI, such that succession plans and family-held companies, are negatively impacted.

In the interest of time, we would refer you to our written submission for our comments on TOSI and note that many of our concerns have not yet been addressed by Finance such as:

  •  
    • The proposals are retroactive in impact and unwind years of retirement planning
    • The proposals penalize lower income Canadians more than those already in the top tax bracket and
    • TOSI could recharacterize capital gains resulting from a sale of shares as dividend proceeds
  • In this respect, Finance stated it will not apply TOSI when the lifetime capital gains exemption is claimed; however, no clarification was given in respect of capital gains that do not qualify for this exemption or are in excess of this exemption.

Overall,

  • Finance has identified what seems to be the issue of the unequal distribution of wealth in Canada; however, KASB respectfully states that there are two fundamental flaws in their approach to deal with this matter:

First, Finance is trying to use 'income tools' to deal with wealth. Such a tool is imprecise, which is why practitioners are identifying so many unintended consequences. To be clear, we are not stating that a wealth tool should be used, as such a tool would likely be disastrous in the context of the current global tax system. 

Secondly, Finance is citing the CCPC as the reason for this inequality of wealth. Clearly from the data provided by Finance, the majority of CCPCs do not have significant wealth. Further, much wealth has been already moved abroad or is not corporately held. We understand that tax avoidance is 100 times greater for offshore wealth as compared to domestic. Continued focus on offshore tax avoidance by Finance and the CRA is useful to enhancing the integrity to our tax system. We also encourage focusing CRA resources on existing domestic non-compliance.

In conclusion, KASB is asking for a comprehensive review of our tax system.

However, if for whatever reason a comprehensive review is not possible, then we have two important asks of the Department of Finance:

We ask that no new law be effective until January 1st, 2019. 

Second, we ask of the Department of Finance that before any revised legislation is released, Finance will correspond with members of the tax community, like the Joint Committee, so that many unintended consequences can be identified pre-emptively and much of the confusion from this past summer can be avoided. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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