CHG Mid-Summer Hill Update – July 2017

The House may be risen for the summer, but the Government of Canada and politics across the country remain busy. The Capital Hill Group is pleased to present you with an update on some of the more notable recent announcements and happenings that could impact you and your business.

CONTENTS

Morneau Proposes Closing Tax Loopholes
Finance Minister announces consultations to tackle “income sprinkling” and professional individuals who incorporate business

NAFTA Update
A look at the key players and their positions as the United States rolls out its objectives for NAFTA re-negotiation

New Government in British Columbia
The left coast goes to the left as an NDP minority government supported by the Green Party takes power

Government of Canada developments in IT Procurement and Digital Government
Shared Services Canada looks to de-centralize, new Canadian Digital Service Launched 

Andrew Scheer unveils first look at Conservative Caucus team
New Conservative leader rolls out key spokespersons

Canada’s Premiers Wrap-Up Annual Meeting
First Ministers’ talk trade, marijuana, infrastructure and more
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Morneau proposes closing tax loopholes


Finance Minister Bill Morneau, flanked by Parliamentary Secretary Ginette Petitpas Taylor and Deputy Minister of Finance Paul Rochon makes an announcement on closing tax loopholes in Ottawa, July 18

Earlier this week, Finance Minister Bill Morneau announced the Government of Canada would be seeking to close a number of tax loopholes he claimed allowed wealthier Canadians to avoid paying their fair share of taxes.

The highlight of the targeted changes included so-called “income sprinkling”, where business owners can distribute their income among family members who earn less for tax-savings purposes, even if those relatives are not involved in the business. Under the current system, the government report presents the hypothetical comparison of two wealthy Canadians who both earn $220,000. One of them, an employee, pays $79,000 in annual taxes. The other, who owns a private corporation, pays $44,000. By using “income sprinkling”, the corporate owner can receive a $35,000 tax break via the owner paying lower small-business tax rates and “sprinkles” a portion of the profits to a spouse and two children through low-tax dividends. However, the Minister also noted that new legislation would also include “reasonableness” test to determine just how much work a family member actually does at a business, and if they can really lay claim to profits. The Department of Finance estimates 50,000 Canadian families are using sprinkling strategies. It also says the federal government could save $250 million a year by closing that loophole.

Other loopholes the draft legislation announced by Morneau would seek to close are passive investment income, and capital gains. Through passive income earned through a small-business corporation, individuals can put money in a business — investing in stocks, real estate or other financial products — and pay lower corporate taxes on income earned from those investments for a prolonged period of time, which allows for significant tax deferral advantages. The Department makes the case that some individuals are gaining an unfair benefit by retaining passive investments in a corporation, taking advantage of the fact that corporate income tax rates are much lower than personal tax rates for higher-income individuals. This core of this problem is that the business owners are simply sitting on the funds they put into the corporation passively, rather than actively making investments to grow the business. The third focus, capital gains, argues that converting a private corporation’s regular income into capital gains can also provide an unfair opportunity to reduce income taxes, by taking advantage of the lower tax rates on capital gains. Income is normally paid out of a private corporation in the form of salaries or dividends to the principals of the corporation, who are taxed at their respective personal income tax rates. However, if these forms of income are converted to capital gains, this can result in a significantly lower tax rate, providing an unfair tax advantage. Only 50 per cent of capital gains are taxed at a person’s federal tax rate, with dividends face higher taxes. In was also announced that measures to crack down on this creative tax planning will be included in future legislation, but will be retroactively applied as of July 18th.

The government will be launching a 75-day public consultation period to allow stakeholders to examine and weigh in on the three proposals, with legislation expected soon after.

Opposition reaction to the announcements was mixed, with NDP MP and economist Erin Weir “applauding Morneau’s move” but would go further, “[supporting] further boosting the capital gains inclusion rate to 75 per cent from 50 per cent, which would bring the tax rate closer to that paid by wage and salary earners..and also lower the small business deduction threshold”, while Conservative Finance critic Gérard Deltell said the Official Opposition would review the moves, but cautioned ‘”we won’t treat small-business owners like liars, or as people who want to dodge responsibility. We don’t want to penalize small-business owners too much.”

NAFTA Update

US OBJECTIVES (Released July 17, 2017)

The United States Trade Representative (USTR) Robert Lighthizer released a comprehensive summary of American NAFTA renegotiation objectives on Monday. Overall, the objectives contained few surprises. Consistent with expectations, the document contained many objectives consistent with the Trans-Pacific Partnership (TPP). Specifically, the USTR listed provisions related to state-owned enterprises; labour and the environment; small- and medium-sized enterprises; and digital trade that were similar to the corresponding chapters of the TPP.

While these objectives can be considered relatively safe and unlikely to significantly stall negotiations, the USTR’s summary document also names objectives that are more controversial. Crucially, U.S. negotiators want to remove Chapter 19 of NAFTA, the dispute settlement chapter. During the original negotiations, Canada refused to sign unless Chapter 19 was included, and it is expected that Canadian negotiators will be unwilling to delete it.

Another controversial U.S. objective relates to government procurement. They want to increase U.S. access to Canadian and Mexican procurement opportunities while maintaining or even enhancing restrictions on U.S. procurement opportunities. Lighthizer hopes to exclude subnational groups from NAFTA government procurement negotiations, differing from the approach taken by Canada and the European Union in their free trade agreement (CETA) concluded this year.

The U.S. document also expresses objectives related to rules of origin: the U.S. wants to strengthen rules of origin provisions and incentivize U.S. production. Beyond the above, Lighthizer mentioned specific U.S. concerns with Canadian dairy, wine, and grain in his speech. These contentious topics are likely to stall negotiations, especially considering Canada’s commitment to protecting dairy supply management.

The U.S. also wants to set a minimum de minimis shipment value that is comparable to the U.S. de minimis value of $800; update intellectual property protections; and increase regulatory compatibility between countries. These aspects are appealing to some Canadian stakeholders but threaten others, like the manufacturing sector.

The Canadian government is not required to release its own list of objectives, but the Conservatives and NDP are urging the Liberal government to lay out their objectives. Regardless, the opposition in Canada is pressing the government to do so. In response, the House Committee on International Trade will meet in Friday, July 21, to decide whether and how to move forward.”

Renegotiation Timeline:

New Government in British Columbia

The 36th Premier of the Province of BC, NDP John Horgan, was sworn in along with 22 Ministers.  It is not known how long the Horgan government will survive as the numbers are very tight – anyone away from the Legislature who misses a confidence vote could trigger the downfall of the new NDP government.  Standings in the Legislature:  NDP 41, Greens 4 and Liberals 43 = total 87.

The NDP Premier, the first since 2001, named some seasoned MLAs and rookie one to his gender-balanced cabinet.  In the days leading up to the swearing in, over 120 pink slips were given to Liberal appointed staffers and a number of veteran Deputy Ministers were also let go.  In their place the NDP will/have named replacements, several from the outside and Premier Horgan has brought in several trusted supporters to manage his office.

Premier Horgan’s Cabinet
Carole James, Finance and deputy premier
Adrian Dix, Health
Rob Fleming, Education
David Eby, Attorney General
Mike Farnworth, Public Safety and Solicitor General
Harry Bains, Labour
George Heyman, Environment
Claire Trevena, Transportation and Infrastructure
Lana Popham, Agriculture
Katrine Conroy, Children & Family Development
Judy Darcy, Mental Health and Addictions
Melanie Mark, Advanced Education and Skills Training
Selina Robinson, Municipal Affairs and Housing
Michelle Mungall, Energy, Mines & Petroleum Resources
Doug Donaldson, Forests, Lands, Natural Resource Operations and Rural Development
Katrina Chen, Minister of State for Childcare
Jinny Sims, Citizens’ Services
Scott Fraser,  Indigenous Relations and Reconciliation
Bruce Ralston, Jobs, Trade and Technology
George Chow, Minister of State for Trade
Shane Simpson, Social Development and Poverty Reduction
Lisa Beare, Tourism, Arts and Culture

Mandate letters are still being developed and staff changes are still being finalized, but if you would like more information on a specific file or issue regarding British Columbia, please contact your consultant.

Government of Canada developments in IT Procurement and Digital Government

Following changes to Shared Services Canada’s mandate in the 2017 budget implementation bill, the beleaguered agency has begun discussions with other departments and agencies regarding the transfer of some responsibilities and procurement for federal information technology systems back to individual departments and agencies.

The Budget Implementation Bill reduced SSC’s authority in consolidating IT systems and permitted organizations to opt out of using the agency in “exceptional circumstances.” It also restored the ability of individual departments to purchase software and digital hardware themselves, instead of conducting all business through the agency.

The decision to grant the authorization for a department to procure outside of SSC’s authority has been left to the minister responsible for SSC, Procurement and Public Services Minister Judy Foote.

The government also announced this week the launch of the Canadian Digital Service, which will be responsible for improving the government’s digital services. The service at the moment consists of 14 tech-savvy government workers who will be housed within Treasury Board, working with a $25.5 budget over three years. According to Scott Brison, President of the Treasury Board, “CDS will be a partner to departments in delivering measurably improved services. We are rethinking the service design and delivery process from the user’s perspective, and engaging users every step of the way. We’re going to grow digital capacity across government, amplify and replicate pockets of innovation, and solve common problems. We’re adopting proven (though sometimes new-to-government) technologies and ways of working and we will scale what works.”

Andrew Scheer unveils first look at Conservative Caucus team

Today Andrew Scheer, Leader of the Official Opposition and the Conservative Party of Canada, named the lead members of his Conservative Caucus team:

  • Deputy Leader of the Official Opposition: Hon. Lisa Raitt (Milton, ON)
  • Quebec Political Lieutenant: Alain Rayes (Richmond—Arthabaska, QC)
  • House Leader of the Official Opposition: Hon. Candice Bergen (Portage—Lisgar, MB)
  • Chief Opposition Whip: Mark Strahl (Chiliwack—Hope, BC)
  • Deputy House Leader of the Official Opposition: Chris Warkentin (Grande Prairie—Mackenzie, AB)

Before the House returns on September Scheer will name his full Conservative caucus team with critics

Canada’s Premiers Wrap-Up Annual Meeting

This year’s Meeting of Canada’s Premiers concluded Wednesday after covering a wide range of issues. The results of their discussions were released in three separate publications. Important conclusions include:

  • Commitment by the provinces and territories to remain closely involved in NAFTA negotiations
  • Support for a China-Canada Free Trade Agreement and interest in actively participating in negotiations
  • Continued support for Canada’s Energy Strategy
  • Seven recommendations regarding federal infrastructure funding
  • Establishment of a working group on cannabis legalization to study common considerations and best practices (report to be released November 1)
  • Emphasis of provincial and territorial concerns for meeting the July 2018 federal legalization deadline
  • Continued support for reducing drug prices and discussing a national pharmacare plan
  • Interest in developing new strategies for health procurement, potentially like the Pan-Canadian Pharmaceutical Alliance (pCPA)

British Columbia’s new Premier, John Horgan, did not attend. Next year’s summer meeting will be held in St. Andrews, New Brunswick from July 18-20.

Council of the Federation Publications:
Canada-U.S. Relations (NAFTA and Softwood Lumber)
http://canadaspremiers.ca/en/latest-news/85-2017/551-premiers-collaborate-to-strengthen-canada-u-s-relations

Jobs and Economic Growth (Trade with China, Energy, Environment, and others)
http://canadaspremiers.ca/en/latest-news/85-2017/555-premiers-continue-to-focus-on-jobs-and-economic-growth

Justice and Social Issues (Cannabis, Health, and others)
http://canadaspremiers.ca/en/latest-news/85-2017/557-premiers-highlight-key-justice-and-social-issues