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Response to my September Submission to Finance

February 23, 2018

 

 

In September, I made a submission to the Department of Finance concerning Finance Minister Morneau’s proposed tax changes.  I sent a copy to all Members of Parliament and the Senate.

 

On February 21st,  after 5 months, I received an email from Chrystia Freeland’s office responding to my September submission to Finance.

 

I have copied and pasted below.

Minister Freeland,

 

I have read almost identical comments from other Liberal members who clearly have no real concept of the complexity and unfairness of the tax changes.

 

Having worked exclusively in this field for 40 years, and having lived through the havoc from Prime Minister Pierre Trudeau, I would be pleased to actually discuss this with you, rather than receiving canned Liberal party rhetoric.

 

Please see my comments below

 

 

Dear Mr. Rotenberg,

 

Thank you for sharing your thoughts and insights with me regarding our government’s tax reform proposals. I am deeply appreciative of your civic engagement and the important feedback you have  provided to me and to our government. Although our consultations at this step in the tax reform process have ended, I have thoroughly reviewed my team’s reports on all feedback from our community – both in-person and online – and I will continue to listen closely as we move forward with this process.

 

 

We made a promise to middle class Canadians that we would lower their taxes and ensure a more equitable tax system. One of our first acts in government was a middle class tax cut, and now I am delighted to report that we are moving forward on our election pledge to lower the small business tax rate to 9% from 10.5% by 2019.

The Fraser Institute reports that by 2019 92.2% of ALL Canadians will be paying more tax.

 

The reduction in corporate taxes were already implemented by the Harper government then repealed by your government and then re-instated.  What you fail to state is that while “cutting” the corporate rate, you have increased the personal rate on dividends received from private companies – quite apart from the ridiculous income splitting rules.

 

We have announced the next steps in our government’s tax fairness plan after consulting broadly with Canadians. I know that Minister Morneau takes both the complexity of this tax reform proposal and the clear feedback from Canadians about the speed of reform very seriously. Our government will continue to listen to feedback from Canadians as we work to develop the details of the proposed legislation to be tabled in the coming weeks.

We had 75 days for “consultation” on the most massive tax reform in 40 years.  The Senate Standing Committee on National Finance, along with every tax professional and business group in the country has pointed out the folly of these changes, especially in light of a tax reduction in the US.  Every tax professional I know has been consulted by business clients assessing the consequences of moving their businesses, or at least commencing any new businesses, outside of Canada.

 

Your finance  minister, in his hearing before the Commons Committee, stated that the $50,000 level of investment income which would continue to be taxed under existing rules was selected because “it will be easy to track”.  I have personally identified no less than 13 separate income and capital accounts that will have to be tracked to determine how income will be taxed, so I don’t believe that the finance minister does appreciate the complexity.

 

It has been estimated by experts formerly from Department of Finance, that the passive income investment rules will require 100 pages of legislation.

 

 

Based on feedback from Canadians, our government will not be moving forward on any measures in this proposal that could have affected the transfer of a family business from one generation to the next. Instead, our updated proposals include a simplified plan to limit income sprinkling that supports contributing family members and owners who invest in growth, create jobs, strengthen entrepreneurship, and advance our economy.

But neither have you done anything to alleviate the problem of inter-generational transfers.  You simply have not made it even more restrictive.  To sell shares of a business corporation to one’s children if they have a value of $835,000, will cost $378,500 more in tax than a sale to an outside party.

 

On the sale of a farm property, if it has a value of $1,000,000, it will cost $453,000 more in tax to sell to one’s children than to an outside party.

 

There is nothing simplified in the income sprinkling rules.  There is too much subjectivity left to the determination of over-worked and under-trained CRA auditors.  These rules will tie up the appeals system for the next 15 years until a decision is made by the Supreme Court of Canada.  The current and immediate past Chief Justices of the Tax Court have both stated that the Court is already over-burdened and does not have the capacity to handle the increased litigation that these rules will generate.

 

We are also moving forward with measures to limit tax deferral opportunities related to passive investments while maintaining current policies on active investments, such as venture capital. Today somewhere between $200 and $300 billion dollars in assets are being held in the passive investment accounts of just 2% of all private corporations, and the total is growing by as much as $16 billion dollars – or about 5% – every year. We will create a $50,000 threshold on passive investment income annually – equivalent to a 5% return on $1 million in savings – while lowering the small business rate and allowing for enough flexibility to ensure that small business owners can continue to actively invest in their businesses and save for new equipment, parental leave, or retirement.

See my comment above concerning both the lower corporate rate, with its corresponding personal rate increase, and the $50,000 threshold.

 

As a result of your proposals, a public company will pay approximately 26.5% (in Ontario) on its investment income, while a CCPC will pay approximately 50.17%.

 

I am grateful for your engagement during this important process and as our government works through legislative details with tax experts. I hope you will share further feedback on our updated proposals once Minister Morneau tables his legislation in the coming weeks. Thank you again for reaching out to me with your thoughts and concerns. Please write to me anytime if you have additional questions or comments about this or any other government initiative.

Again, if you are truly interested in a meaningful discussion rather than simply re-iterating the Liberal party line, I would be pleased to meet with you at your convenience.

 

 

Warm Regards,

 

Hon. Chrystia Freeland

 

Member of Parliament for University—Rosedale

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