C-29 (Small Business Deduction)
Honourable senators, I rise today to speak to Bill C-29, and specifically its provision to effectively limit access by group medical structures to the small-business deduction.
In this regard, I will focus on what it is hoped has been an unintended consequence of this measure on the medical profession, and in particular, its impact in respect of altering the means of application of this deduction by group medical structures engaged in research and education in teaching hospitals and universities.
As clearly defined by the myriad number of medical professionals from whom many of us have heard on this matter:
Group medical structures have an important role in health care today. They are prevalent within Canada's academic health science centres and amongst certain medical specialties. Group medical structures are essential for educating and training medical students and residents in teaching hospitals, as well as for conducting and funding medical research.
The proposed measure will be one of general application and thus will treat all small businesses uniformly with respect to the application of taxes.
In other all-too-familiar words from this government, it seems a small business is a small business is a small business. As Minister Morneau frequently asserted, "To be clear, what we are doing with respect to small businesses is clarifying that one small business gets one small-business deduction, simply put."
But for doctors who are part of group medical structures working in university-sponsored academic hospitals, these are not your average small businesses — not by any means — and impacting their good works will have potentially disastrous consequences for health care in Canada.
Honourable senators, I do not claim to be an expert in tax matters, nor do I claim to have a depth and breadth in medical matters that will enable me to adroitly convey the very significant impact this change in the tax regime will have on university- sponsored academic hospitals from a practitioner's perspective. But I do have some experience in the workings of teaching and research hospitals.
Time and time again I have witnessed the profound dedication their doctors bring to their work — all the while knowing they are sacrificing higher remuneration for the greater good of service delivery in a culture of care, the ability to teach and mentor better-trained physicians, and undertaking groundbreaking and often life-saving research.
It's most appropriate that I let the doctors' words speak volumes about the need to re-examine this punitive tax change.
Dr. Juan Carlos Monge is a staff cardiologist at St. Michael's Hospital in Toronto and an associate professor at the University of Toronto. He shared his thoughts on the impact of this unintended consequence on his hospital:
It is beyond comprehension that academic physicians who have taken the initiative for the last several decades to pool [their] own earnings to fund what government doesn't fund are now being penalized by a measure that — although not clearly directed at academic medical groups — nevertheless threatens our very existence and our ability to support research, advanced medical education and super-specialized clinical care.
So what's the nature of the impact of such a group medical structure?
In the context of St. Michael's Hospital, the partnership is formed by 150 physicians from the Department of Medicine. In this year alone, it has allocated $8.5 million of the doctors' own earnings to support teaching and research at St. Michael's Hospital.
Make no mistake, if this legislation remains as it is, the group would be forced to disband, as there is no legal structure under which it could otherwise function and do what it currently does.
Dr. Monge further asserts that any proposed solution around cost-sharing arrangements is neither adequate nor sufficient. He says:
We need to pool and redistribute resources to support our academic mission — [which] is not the purpose of a cost- sharing arrangement, a financial arrangement which merely allows the distribution of the cost of doing business among the members of a group, something that falls very short of what we need to do and have been doing in some cases for almost 50 years.
Dr. Barry Rubin is a professor of surgery at University of Toronto; he is also Chair and Program Medical Director at the Peter Munk Cardiac Centre, and Chair of Mount Sinai Hospital University Health Network.
Dr. Rubin appeared just days ago at your Standing Senate Committee on National Finance and delivered a concise description of the problem this supposedly unintended consequence lays at the feet of the medical community. I seek your indulgence, as I will quote him at length:
Canada is a world leader in medical education, innovation and research. Problem-based learning, the most effective method for teaching students, and competency- based assessment, a process for evaluating medical training, were largely developed in Canada and are now practised around the world.
Canadian researchers are among the most quoted in scientific publications, and innovation developed by Canadian doctors ensures the ongoing evolution of our health care system. For example, Canadian doctors were the first to develop the pacemaker, the first to do a single lung transplantation and currently lead development of no- incision heart valve repair. We're also working on innovative approaches to use stem cells to treat arthritis and diabetes and cure these diseases, and to develop drugs to minimize brain damage after stroke.
It's important to appreciate that the vast majority of medical teaching and research in Canada is done in teaching hospitals. It is also a fact that teaching and research activities are compensated far more poorly than the provision of clinical care, which involves seeing patients, doing operations and many other things.
So the question arises: How does our health care system actually pay doctors to teach and do research. . .?
The answer is by forming practice plans, where groups of doctors in teaching hospitals come together and pool their income. Practice plans typically include 20 to 100 and in my centre 360 doctors that work together, and these have been in place in Canada for the last 30 to 40 years .
Through these practice plans, doctors who make relatively more money providing clinical care actually transfer some of that income to the doctors that make less money doing teaching and research . . . .
This social enterprise is not designed to enrich the partners in the practice plan; it is designed to appropriately compensate doctors for the clinical work as well as the medical education and research that they do.
In Canada, two-thirds of the support for research that is carried out by doctors in teaching hospitals is generated by redistributing the clinical income earned by some of these doctors.
In addition, two-thirds of the 30,000 doctors that practice in Ontario were trained at a teaching hospital in Ontario, a pattern that holds true across Canada.
Under the 2016 federal budget, if practice plans continue to redistribute funds to support innovation, teaching and research, incorporated members of those practice plans will have to share the small business deduction.
Doctors in teaching hospitals recognize that alternate structures for their practice plans, such as cost-sharing associations, will have to be considered, because remaining as partnerships would financially penalize doctors that already transfer money to their colleagues to support teaching and research.
The core issue with forming a new structure such as a cost-sharing association, which was an option proposed by Minister Morneau, is that practice plans will no longer have a viable mechanism to redistribute pooled clinical income that is required to support innovation, teaching and research.
That is what led 2,000 doctors from across Canada to write to the Ministry of Finance and express concern about the 2016 federal budget. Currently, 50 practice plans in Ontario's 16 teaching hospitals are in the process of considering structures other than partnerships, in direct response to the changes contemplated in Bill C-29.
If practice plans are not able to pay doctors to teach, who will train our future doctors?
Who will do the research and lead the innovation that is needed to develop the new treatments and prevention strategies that are required to care for Canada's growing and aging population?
Limiting the ability of groups of doctors to access the small business deduction has the potential to inadvertently destroy the fundamental mechanism that practice plans in teaching hospitals across Canada have used to support medical innovation, teaching and research for decades — the redistribution of income earned by doctors for doing clinical work.
This has the potential to destabilize the foundation of the health care system that Canada is so widely known and respected for, and will impact our ability to lead medical innovation. In the final analysis, impairing the ability of doctors in teaching hospitals to innovate, educate and do research will have a lasting negative impact on the residents and citizens of Canada that we care for.
So let's look again at the depth and breadth of the issue of the small business deduction from the perspective of these doctors.
Physicians form group medical partnerships or group medical corporations to pool revenue so that they can redistribute from higher earners to lower earners to support medical research, teaching and specialized clinical services.
Physicians in academic health science centres fund two thirds of medical teaching and research from their own clinical earnings — that is to say out of their own pockets — because they are able to pool their earnings.
Physicians all operate a small professional business and as such are eligible for the small business deduction — in Ontario, at the combined federal and provincial tax business rate of 15 per cent.
Under the proposed rules, physicians in group medical corporations and group medical partnerships will not have access to the small business deduction. Thus in Ontario they will be faced with a combined federal and provincial general corporate tax rate of 26.5 per cent, while physicians in the community in cost-sharing arrangements — that is, where there is no need to pool income to transfer earnings to lower earners — will continue to have access to the small business deduction of 15 per cent.
Research by the Canadian Medical Association indicates that the group medical partnerships and group medical corporations will, if this measure passes, dissolve, thereby eliminating the ability to pool income. This in turn will mean a loss in funding that physicians are providing from their own earnings to support medical teaching, research and specialized services — thus constituting loss of money for research, teaching and specialized medical care and no additional tax revenue — making this proposed change nothing but illogical in the case of the medical community I am describing today.
I came across something of note while preparing my remarks that I believe is also noteworthy. Teresa Boyle wrote a story for the Toronto Star in May of 2012 entitled "How Ontario's doctors get paid." At that time, the report noted that Ontario was spending $11 billion a year on physicians. The report noted that the province also spent $1 billion on what it terms "alternative payment programs." It stated that these "programs are intended to encourage physicians to provide academic services such as teaching and research, work in underserviced areas and coordinate medical services." Thus, it seems such arrangements are in fact encouraged, at least by the Province of Ontario. This would appear, then, to work at cross purposes with the federal government's proposed changes to the tax regime that this bill enables.
In this regard, and in recognition of the similar sums from other academic hospitals that would be lost, to permit such a consequence is at the very least illogical and at best irresponsible — certainly not without undertaking greater consultation with the provinces and analyses of their funding formulae.
So, we have examined the matter from a medical perspective. Let us now hear the argument from a tax law point of view.
Kim Moody is Director, Canadian Tax Advisory, with Moodys Gartner Tax Law and a co-chair of the Joint Committee on Taxation for the Canadian Bankers Association and Chartered Professional Accountants Association. He, too, appeared as an individual before your Standing Senate Committee on National Finance and spoke to the proposed changes to the small business deduction.
As a recognized expert in this field, permit me to share his opinions of the efficacy of these changes:
With respect to the small business deductions, I appreciate the underlying policy intent of trying to restrict access to the small business deduction to situations where its usage was not originally intended and to insist on the principle of one business, one small business deduction. That makes perfect sense. I have been a strong vocal and written critic of so-called planning that inappropriately multiplies access to the small business deduction.
However, the proposals released by the Department of Finance and currently in Bill C-29 go far beyond simple targeting. The proposals are very far-reaching and apply to many routine situations where, in my opinion, they should not.
Unfortunately, I will skip a few things. Mr. Moody further said:
Overall, the existing small business deduction rules are complex, currently. However, the amendments make such rules horrifically complex. As a tax practitioner, I expect complexity, and frankly I relish it. I like complexity, but I also need to reconcile this complexity with practical realities. As mentioned, I've been studying tax for over 20 years. This new proposed legislation, without a doubt, is within the top five in terms of complexity.
Given his views, Mr. Moody offered opinions to the committee for remedy of this situation:
. . . ideally, the new small business deduction rules would be given a complete rethink. There are a number of different ways that the new rules could be redrafted in order to effectuate the purpose of this legislation . . . .
. . . if a rethink is not in order, I believe some of the unintended consequences should be targeted and excluded from their application. I recognize that better targeted legislation might create more exceptions with one of those exceptions being the sectors and structures hit with those restrictions inappropriately.
Honourable senators, I think I will go directly to my amendment. I think you have the gist of what Mr. Moody was trying to say, namely that this tax is so complex in the way it's been structured that the most efficient way of dealing with the doctors would be to remove clause 44 completely and have a rethink and try and exclude doctors, researchers and medical teaching and come back again with another bill. This is what I'm trying to propose, senators, and I hope you will give it due consideration because it will really affect research and medical teaching in this country.
Motion in Amendment
Honourable senators, therefore, I move:
That Bill C-29, as amended, be not now read a third time, but that it be further amended, on pages 50 to 60, by deleting clause 44.