FINA Testimony, September 2017

by Kevin Milligan

Kevin Milligan
Professor of Economics
Vancouver School of Economics
University of British Columbia

Prepared Comments on Tax Planning for Private Corporations for Standing Committee on Finance
September 26, 2017
Ottawa, ON

I’d like to make two points this morning. First, I want to talk about the goals of this reform package. Second, I will discuss implementation.

A main goal of this reform is to push toward neutrality. A neutral tax system is one where people make the same business decisions in the presence of taxation as they would in a world without taxation. With a neutral tax system, the government has the lightest possible touch on the economy. Business decisions are made on business merits, and not pushed one way or the other by taxes.

The current system falls short of neutrality in many ways. One example is to consider a hard-working unincorporated person: someone with a truck, a hammer, some skills, and a passion for work. We want her to be able to start a business without the costs and hassle of incorporation. By loading tax benefits onto those who organize their businesses as corporations, we lean against people who want to work just as hard for their families, but in an unincorporated business. This has real costs to our economy.

Now, some words on implementation. Many tax practitioners have raised concerns about how some of the proposed tax measures may be implemented. As one example, when dividends are paid to family members, there are concerns about the accounting and keeping of records to support a claim for ‘reasonableness.’ There are many other examples.

In my view, some of these concerns hit the mark and they must be treated seriously. After the consultation period is complete, I think it is important for the Department of Finance and the Minister to provide a wide-ranging and thorough response to these concerns. I’m sure they are now working hard at this important job, and I look forward to hearing their responses.

But, we should not stand frozen from action because of concerns about transitions and implementation. Tax changes always require adjustments. To fret too much about adjustments simply resigns ourselves to the status quo, and Canadians deserve a tax system that works better than the one we have today.

Thank You.