Canada: The Second Anniversary Of The Disastrous Canadian Private Corporation Tax Proposals

Last Updated: July 23 2019
Article by Kim G.C. Moody

Today is the second anniversary of the disastrous rollout of the July 18, 2017, Canadian private corporation tax proposals. Tax professionals, academics, economists and bureaucrats would be hard-pressed to recall another historical Canadian tax event that had such a polarizing and divisive impact on the Canadian tax community. Frankly, the whole experience was an embarrassment and a lesson in how not to make significant changes to Canadian tax legislation and policy.

I documented my thoughts about the whole experience on the first anniversary last year. Readers can have a peek at those thoughts here, and I wholly stand-by such comments.

Now that it's two years in, I'll again use this day to provide some quick follow-up comments and suggestions for future process and policy directions.

What Went Wrong?

In my opinion, the Minister of Finance and the Department of Finance should still be asking "what went wrong," but by now the answers should be obvious. Overall, the divisive tone, the class warfare rhetoric, the misleading statements released in the 2017 Budget that stated the Department of Finance would be "consulting" on certain private corporation issues – but instead released detailed draft legislation on two of the three items that it wished to "consult" on (in my opinion such a release was disingenuous and lead to the strong impression that the Department was not interested in an actual consultation) – and the timing of the release (in the middle of summer) were all apparent things that went wrong. Hopefully, there were clear lessons learned from the above that won't happen again anytime soon.

What Should Have Happened?

There is no doubt that some of the issues the Department of Finance wanted to "consult" on are valid policy issues that are worthy of consideration and change. For example, is it appropriate to income split with family members? That's debatable and ultimately depends on your point of view. I have some strong opinions on this issue, but there are valid contrary views (many of which I don't agree with, but that, of course, does not diminish their validity). Accordingly, a genuine consultation would involve real stakeholder input in advance of the release of draft legislation. For example, wouldn't it make sense to gather a group of practitioners, academics, bureaucrats, economists and other interested parties to debate relevant issues in a respectful forum and land on a set of proposals that is well thought out and mindful of stakeholder input? Yes. And that is what should have happened.

Tax Policy Development Should Be More Transparent and Less Political

In Canada, the development of tax policy falls within the sole purview of The Department of Finance. Such a process is a bit of a mystery and not transparent. In my opinion, this needs to change. Canadians would benefit from a more transparent process which would increase awareness of the importance of specific issues, and provide interested stakeholders with an opportunity for early input. This process would compare favourably to the current system which involves the Department developing policies internally, asking for input after these policies are 90%+ developed and primarily using this input to check for technical errors/issues.

In addition, many of the limited reviews of certain issues – some involving the Canada Revenue Agency – include an "expert panel" composed of individuals who are appointed to explore the relevant issue(s) and make recommendations. While there is no doubt that most appointed individuals are well qualified and generous in providing their time and expertise, the simple fact remains that the appointment process is not transparent. In some cases, these panels appear stacked with academics or people that are sympathetic to the ideology of the ruling government. In my opinion, Canada would benefit greatly from a less partisan process where interested and qualified parties could apply to be involved, with selection removed from the Minister's office. While all interested parties would not be entitled to be part of such a panel, a more transparent process could undoubtedly help diminish the view that ideology or politics might have an inappropriate influence on these panels.

Is There Any Follow-Up That Should Happen From the July 18, 2017 Proposals?

Yes. Ignoring changes that should be made to the horrible tax on split income legislation and passive investment proposals that ultimately got passed into law, two clear follow-ups need action.

The first is the inter-generational transfer issue that has been a problem since the mid-1980s. This issue manifests when, say, "Dad" wishes to transfer his business to a related person – say his Daughter. If Dad sells his shares of "Opco" to his Daughter's holding company and claims his available capital gains deduction, such a capital gain would be re-characterized as a taxable dividend, thus preventing Dad from claiming the capital gains deduction. However, if Dad sold his shares to "BigCo" – a company that is unrelated to him – he would be able to claim the capital gains deduction and thus get a tax-preferred result. That is unfair, but ultimately, this is a complicated issue to resolve. Enabling Dad to claim his capital gains deduction when selling his shares to his Daughter's holding company could lead to manufactured transactions that enable Dad to strip assets out of Opco either tax-free or at cheaper capital gains rates, instead of being taxed as a taxable dividend.

The Department of Finance acknowledged such issues when it released the July 18, 2017 proposals and asked for stakeholder input. Since that time, the Department continues to acknowledge that this issue is on their work pile. In the 2019 Federal Budget documents, it stated the following:

The government will continue its outreach to farmers, fishers and other business owners throughout 2019 to develop new proposals to better accommodate intergenerational transfers of businesses while protecting the integrity and fairness of the tax system.

Since the July 18, 2017, invitation by the Department to provide input, there have been numerous parties that have provided comments. In addition, the Department – as recently as last summer – engaged in a limited city "listening tour" to seek input. In my opinion, the time for consultation on this issue has passed, and action is needed. One of the best submissions on this topic was made by the Conference for Advanced Life Underwriting to The Department of Finance on September 29, 2017. The submission was well researched and thoughtful. It provided great material to engage in a meaningful discussion and advancement on this topic. Interested readers can review this submission here.

The second follow-up that needs to happen is comprehensive tax review/reform. Regular readers of our blogs will know that we have long been calling for this; however, our current government has stated that comprehensive tax review is not a priority. Rather than belabour this point, I will state that – like the Senate Standing Committee on National Finance in its December 2017 report, and CPA Canada in its recent report – Canadians deserve and need a modernized tax system designed after a thorough and comprehensive review.

In the meantime, happy anniversary – but forgive me if I don't send flowers!

Moodys Gartner Tax Law is only about tax. It is not an add-on service, it is our singular focus. Our Canadian and US lawyers and Chartered Accountants work together to develop effective tax strategies that get results, for individuals and corporate clients with interests in Canada, the US or both. Our strengths lie in Canadian and US cross-border tax advisory services, estateplanning, and tax litigation/dispute resolution. We identify areas of risk and opportunity, and create plans that yield the right balance of protection, optimization and compliance for each of our clients' special circumstances.

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