An Urgent Call for Tax Competitiveness & Affordability in Budget 2020

MNP Pre-Budget Submission

Submitted by: Am Lidder, SVP Tax Services

MNP LLP Friday, August 2, 2019

Who We Are

MNP LLP (MNP) is a leading national accounting, tax and business consulting firm in Canada. MNP proudly serves and responds to the needs of our clients, which include more than 180,000 businesses and 19,000 farms throughout Canada.

An Urgent Call for Tax Competitiveness and Affordability

In a globally competitive environment, Canada must continually adapt to maintain a competitive edge.

Our recommendations highlight five vital points from MNP’s 10 Point Action Plan for Canada to stay ahead:

Recommendation 1: Succession of the Family Business – The Government should amend and/or expand the existing provisions of the Income Tax Act (ITA) to allow families to engage in a bona fide succession and transition of existing businesses.

Recommendation 2: Housing Affordability – The Government should implement incentives to enable parents to assist their children in purchasing homes without negative tax consequences.

Recommendation 3: Education Affordability – The Government should remove the $5,000 annual cap on tuition transfers to parents and provide for the introduction of grants or additional credits for students enrolled in targeted areas of investment.

Recommendation 4: Corporate Tax Rate Reduction – The Government should lower the combined corporate tax to a more competitive rate of 20%.

Recommendation 5: Reduce Uncertainty, Red Tape and Bureaucracy – The Government needs to simplify tax for entrepreneurs and small business.

1. Succession of the Family Business

Recommendation: We recommend the Government amend and/or expand the existing provisions of the ITA to allow families access to the lifetime capital gain exemption when engaging in bona fide succession and transition of existing businesses. In addition, individuals should be able to preserve capital gains treatment when transitioning their ownership interests to family members where full succession is gradual.

This will allow business owners and purchasing family members to be in the same position as they would be if selling to/purchasing from a third party. Amendments to this specific provision cannot be considered in isolation - other provisions such as Section 55 of the ITA must also be considered to avoid any unintended consequences.

MNP is eager to help the Department of Finance with a review of the family succession provisions, and we are encouraged this is a priority for the Government.

2. Make Home Ownership More Affordable for Younger Canadians

Recommendation: Enable parents to assist their children in purchasing homes without negative tax consequences. We recommend the government:

• Expand the Home Buyer’s Plan (HBP) and RRSP rules: Under the current
• system, parents cannot access registered funds without significant tax consequences (i.e. income tax, OAS claw back, loss of RRSP room). Consideration can be given to allow parents to help their children with a down payment on their first home in a tax efficient manner. This payment could be included as an extension of the child’s HBP within the parent’s RRSP.
• Adjust the HBP limit to reflect housing market price differentials (i.e. tied to a percentage of the average price of homes in the city in which the home is being purchased).
• Simplify the related party mortgage rules: Consider simplifying mortgage insurance and related party mortgages specifically tied to the purchase of a home. Currently, related party mortgages held within a registered vehicle are required to be insured by the CMHC or an approved private insurer, the cost of which can be as high as 6.6% of the total debt. Consider the following: i.
  • i. Eliminate the insurance requirement on related party mortgages held in registered retirement savings vehicles;
  • ii. Set the minimum interest rate at the prescribed rate (currently 2%), adjusted every five years; and
  • iii. Exempt related party mortgages held by corporations, subject to a family income test on the borrower.

3. Make Education More Affordable

Recommendation: Remove the $5,000 annual cap on tuition transfers to parents and provide for the introduction of grants or additional credits for students enrolled in targeted areas of investment.

The $5,000 annual cap on tuition transfers to a parent has not increased since 1997, even though the cost of a post-secondary education has skyrocketed. We suggest the annual $5,000 cap be eliminated and any amount not required by the child be transferred to the supporting parent to reflect the economic reality of education costs. Additionally, the introduction of grants or credits for students enrolled in targeted areas of investment is a win-win scenario for both the Government and Canadians.

4. Reduce Corporate Tax Rates

Recommendation: Lower the combined corporate tax rate to a more competitive rate of 20%.

Canada’s combined federal and provincial corporate income tax rate is amongst the highest in the OECD1. Many companies are moving their service or financial operations across the border in light of more favourable tax rates and incentives. From a small business perspective, high corporate tax rates also affect entrepreneurs and business owners who are more mobile and therefore more sensitive to corporate and personal tax stimulus.

Our recommendation to reduce corporate tax rates will prompt an increase in capital investment and innovation in Canada, thus creating employment and increasing the overall tax base. It will also help protect Canadian entrepreneurs and small business (i.e. fewer than 50 employees) who contribute on average 30% to national GDP2.

1 OECD (2019), Tax Database, OECD Publishing: Table II.1. Statutory Corporate Income Tax Rate.

2 Innovation, Science and Economic Development Canada, “Key Small Business Statistics,” June 2016 (page 30).

5. Reduce Uncertainty, Red Tape and Bureaucracy

Recommendation: Reduce uncertainty, red tape and bureaucracy, in aspects of tax compliance for entrepreneurs and small business. This would lead to simplification of the tax legislation.

Over the past five years there have been significant changes to many important tax issues facing business owners and consumers, leaving many in a state of uncertainty and confusion. We need to ensure that tax compliance remains simple and straightforward for all Canadians.

Some examples of added complexity include: the new reporting rules for the disposition of a principle residence, small business deduction reform, Section 55 reform impacting private corporations and the recently legislated Tax on Split Income rules which cost entrepreneurs time and money in legal and accounting fees to support something as simple as a dividend payment.

Budget 2020 Must Address Tax Competitiveness

Budget 2020 must include measures to ensure Canada remains competitive in the global marketplace while at the same time ensuring Canada is an affordable country to live. The Government needs to ensure that tax policy and legislation promotes and protects Canadian entrepreneurs, small business and individual taxpayers.

Time is of the essence. We cannot afford to miss this opportunity. We strongly encourage Parliamentarians to embrace tax competitiveness as a signature theme of Budget 2020.

Thank you. Merci.

Contact:

Am Lidder, CPA,

Senior Vice President, Tax Services

MNP LLP

Tel: 778.571.3535

Email: [email protected]