432-00057 (Business and trade)

The Government of Canada thanks the petitioners for sharing their views on supporting small business owners during the COVID-19 pandemic. The Government acknowledges the challenges and costs of hiring and training new employees, and recognizes that the public health measures to prevent the spread of COVID-19 have affected small businesses.

The Employment Insurance (EI) program is funded through the collection of EI premiums paid by workers and employers. EI premiums generally increase when there are more people making claims for benefits, such as during the current pandemic, in order to keep the EI Operating Account in balance.

The Government of Canada announced that the EI premium rate will be frozen for two years at the 2020 rate to further support Canadian employers and workers. By keeping the EI premium rate at its lowest level since 1980, the Government is supporting Canada’s economic recovery. The premium rate freeze will be especially beneficial to small businesses by ensuring EI premiums remain low and stable in the current economic conditions.

The Government of Canada will also be crediting the EI Operating Account for the costs associated with the EI emergency response benefit, from the Consolidated Revenue Fund. According to the EI Senior Actuary, the EI expenses related to the EI emergency response benefits were projected to be $37.7 billion. The Government’s decision to offset these costs to the EI Account is also particularly beneficial to small businesses as it ensures EI premiums rates will remain lower over a longer period of time.

Once again, the Government of Canada wishes to thank the petitioners. Their views will be taken into consideration in the Government’s ongoing efforts to respond to the COVID-19 pandemic and improve the EI program.

The Government of Canada recognizes the importance of addressing the regulatory burden faced by small businesses. Over the last few years, the Government has undertaken initiatives to reshape the regulatory system in Canada and improve the environment in which small businesses operate. The Government is implementing several initiatives to simplify regulations, eliminate regulatory barriers, and encourage innovation. For example, the Government has launched a legislated review of the Red Tape Reduction Act. A public consultation was undertaken in 2019 and the Government is currently studying input received from Canadians on the Act, its design and implementation, and recommendations for improvement. This review will evaluate how the one-for-one rule has performed in addressing unnecessary administrative burden on businesses, and it should identify potential improvements to further benefit the Canadian economy. This is one of the initiatives that will help Canadian businesses to grow, while continuing to protect Canadians’ health, safety, security, social and economic well-being and the environment.

The Department of Finance response to parts 3, 4, 6 and 7 follows:

Part 3

Pricing pollution is generally viewed as one of the most economically efficient ways to send a price signal to companies, investors, and consumers to make more environmentally sustainable choices to reduce greenhouse gas emissions. It is central to our country’s plan to meet and exceed our emissions reduction targets, grow the economy and build resilience to a changing climate. Canada’s climate plan gives provinces the flexibility to design a pricing system that meets their unique needs while ensuring all systems are stringent, fair, and efficient.

The federal pollution pricing backstop system (“the backstop”) has two components: a regulatory charge on fossil fuels and a regulatory system for large industry, known as the output-based pricing system (“OBPS”).  One or both components apply in provinces and territories that request the backstop or that do not have systems that meet the federal stringency requirements. The federal fuel charge applies, as of April 1, 2019, in Ontario, Manitoba and Saskatchewan; as of July 1, 2019, in Yukon and Nunavut; and as of January 1, 2020 in Alberta. The federal output-based pricing system applies, as of January 1, 2019 in Ontario, New Brunswick, Prince Edward Island, Manitoba and partially in Saskatchewan, and, as of July 1, 2019, in Yukon and Nunavut.

The direct proceeds from the federal pollution pricing system remain in the province or territory of origin. In Prince Edward Island, Yukon and Nunavut, the direct proceeds from the federal system are returned directly to the governments of these jurisdictions. In Ontario, Manitoba, Saskatchewan, and Alberta, our Government is returning the bulk of the direct proceeds from the fuel charge directly to individuals and families, through tax-free Climate Action Incentive payments. In provinces where Climate Action Incentive payments are available, they are funded from the direct proceeds of the federal pollution pricing system in that province. Our Government is returning the remainder of the fuel charge proceeds to support small- and medium sized businesses, municipalities, universities, colleges, schools, hospitals, non profits and Indigenous communities in those jurisdictions.

As part of the Pan-Canadian Framework, governments are committed to reviewing the approach to pricing pollution by early 2022.

Part 4

Shareholders of corporations have expressed concerns that they cannot benefit from the lifetime capital gains exemption (LCGE) in certain circumstances when they sell their shares to a purchaser corporation owned by their adult children because of section 84.1 of the Income Tax Act. In contrast, those shareholders can benefit from the LCGE on a genuine sale to an arm’s length purchaser corporation.

Section 84.1 can operate to recharacterize capital gains as taxable dividends. Section 84.1 ensures that, in certain circumstances, individuals cannot receive the equivalent of a dividend in the form of a lower-taxed capital gain when they sell to non-arm’s length persons.

The government is exploring the possibility of providing relief from section 84.1 for genuine intergenerational share transfers in certain circumstances, particularly as it relates to farming and fishing businesses, while ensuring appropriate measures are put in place to protect the integrity of the Canadian tax system. 

Part 6

Measures to limit income sprinkling, a tax planning strategy where high-income individuals can divert corporate income to family members who are subject to lower personal tax rates or who may not be taxable, were first announced in 2017 and came into effect to apply to the 2018 and subsequent taxation years.

The tax on split income (TOSI) rules are intended to be flexible enough to recognize the direct contributions of family members, including spouses, to the success of a family business.  For example, the test for determining whether an individual’s income derived from a business is reasonable takes into account a number of factors, including the individual’s labour and capital contributions and risks assumed in support of the business.  The Government has provided certainty by providing clear, bright-line exemptions from the application of the TOSI and through the release of the Canada Revenue Agency’s guidance concerning the application of the rules.  More information can be found on the Government of Canada website at: 

https://www.canada.ca/en/revenue-agency/programs/about-canada-revenue-agency-cra/federal-government-budgets/income-sprinkling.html

The TOSI rules provide certainty that the rules will not apply to individuals who make a meaningful contribution to the business.  Those who legitimately distribute income in recognition of family members’ meaningful contributions to a business can continue to do so.  In addition, special rules apply in respect of a deceased individual, so that the surviving spouse can continue to benefit from the contributions made by the deceased individual to the business.

Part 7

The government will preserve Canada’s fiscal advantage and continue to be guided by values of sustainability and prudence.  When COVID-19 hit, Canada had the lowest net- debt-to-GDP ratio in the G-7. Today, following our country’s most aggressive burst of emergency spending since the Second World War, Canada is still expected to have the lowest net debt-to-GDP ratio in the G7. 

In the short term, the government will do whatever it takes, using whatever fiscal firepower is needed to support people and businesses during the pandemic. The best way to keep the economy strong is to keep Canadians healthy. The next priority will be to build back better, with a sustainable approach for future generations. As the government builds a plan for stimulus and recovery, this must be done responsibly. In the longer term, the government will focus on targeted investments to strengthen the middle class, build resiliency, and generate growth.

This fall, the government will release an update to Canada’s COVID-19 Economic Response Plan. This will outline the government’s economic and fiscal position, provide fiscal projections, and set out new measures to implement this Throne Speech.