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Remarks to the Standing Senate Committee on National Finance regarding proposed changes to the Income Tax Act

Date: October 19, 2017

Publication Type: Submissions

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Macroeconomic and Fiscal
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Remarks delivered by Brian Kingston, Vice President, International and Fiscal Issues


Mr. Chair, committee members, thank you for the invitation to take part in your study on the Minister of Finance’s proposed changes to the Income Tax Act respecting the taxation of private corporations.


The Business Council of Canada represents the chief executives and entrepreneurs of 150 leading Canadian companies, in all sectors and regions of the country. Our member companies employ 1.7 million Canadians, account for more than half the value of the Toronto Stock Exchange, contribute the largest share of federal corporate taxes, and are responsible for most of Canada’s exports, corporate philanthropy, and private-sector investments in research and development.


The Business Council strongly supports efforts to improve the fairness and efficiency of Canada’s tax system. Unfortunately, the measures under consideration would make the tax system even more complicated than it already is.


While we appreciate that the government has been willing to listen to some of the concerns raised by Canadians, the proposed changes continue to have significant unintended consequences that would discourage investment and job creation.


The proposed measures are far too broad and have created significant uncertainty for entrepreneurs, large private corporations and subsidiaries of multinational corporations. Our specific concerns are as follows:

  1. Succession planning – The proposed tax changes would make it impractical, in the event of a death, to transfer a large private family business to the next generation without triggering an external sale. As framed in the consultation paper, a child would be subject to double taxation if he or she: purchases shares from a parent shareholder before the shareholder dies; uses a pipeline plan to receive cash on the parent’s death; or sells to an external party (due to Tax on Split Income).
  1. Passive investment and large private corporations – Large privately held companies have many legitimate reasons for holding passive investments. Examples include:
  • The company wishes to keep liquid resources on hand to seize new business opportunities as they arise;
  • As a diversification strategy, the company invests directly, or through funds, in technology start-ups;
  • Companies in the real estate sector may keep easily liquidated investments on hand to assist with mortgage renewals when credit conditions are unfavourable;
  • Companies that hold passive investments can generally borrow funds at lower interest rates than would otherwise be the case.


If the government discourages such activities, companies will be forced to re-evaluate their diversification strategies. This would have significant implications for some of Canada’s most successful large private corporations and, in many cases, would restrict their ability to invest in innovative start-ups.


Moreover, the compliance burdens associated with the proposal are onerous, complicated and subject to interpretation. (A recent PwC/Business Council survey of 87 large companies found that, on average, they spend $3.73 million and employ 18 full-time professionals to comply with Canadian tax legislation.) Tax fairness will only be achieved by reducing complexity, not further complicating the tax system.


  1. Passive investment and multinational subsidiaries – Applying the proposals to private corporations other than Canadian-controlled private corporations could have serious implications for Canadian subsidiaries of foreign investors. Increasing the tax burden on multinational subsidiaries would erode Canada’s already-weak global tax competitiveness position. Multinational enterprises would be motivated to move operations and investments out of the country, depriving Canada of jobs and growth while doing nothing to promote tax fairness.


Mr. Chair, committee members, the government’s plan to rewrite the tax rules for private corporations will do nothing to help Canada’s tax competitiveness.  In fact, they risk driving investors and entrepreneurs away.


Canada does not have a “highly competitive business environment” as claimed in the consultation paper. In fact, our country’s tax competitiveness is slipping. Canada’s combined federal and provincial corporate tax rate is above the OECD average with the 13th-highest tax burden on investments among the 34 OECD countries.


According to a recent survey of our members, almost two-thirds – 64 per cent – of the sixty-one companies surveyed said that Canada’s investment environment has worsened over the past five years. Only 20 per cent said the investment environment has improved.


Among those who said the investment environment had deteriorated, the most frequently cited reasons were: an uncompetitive tax system; unwieldy and uncertain regulatory processes; and increasing costs of doing business (such as the costs of labour, utilities, and transportation).


To reverse this worrying trend, the Business Council has repeatedly called on the government to adopt a competitiveness agenda that includes simplifying the tax system. Rather than making incremental changes to an already complicated tax system, now is the time for comprehensive review aimed at strengthening fairness and efficiency. To achieve both objectives the government should broaden the tax base and lower rates.


Of equal importance is the need to ensure that the tax system does not favour certain kinds of businesses over others. Lowering the small business tax rate further, as announced on Monday, works against this objective while doing nothing to boost Canadian competitiveness. We need a tax system that rewards the attainment of scale from which our economy benefits, not one that encourages companies to stay small.


I look forward to answering any questions you may have.

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