STANDING COMMITTEE ON FINANCE
COMITÉ PERMANENT DES FINANCES
[Recorded by Electronic Apparatus]
Friday, October 2, 1998
The Chairman (Mr. Maurizio Bevilacqua
(Vaughan—King—Aurora, Lib.)): I'd like to call this
meeting to order and welcome everyone here this
As you know, the finance committee is working on
pre-budget consultations. After listening to Canadians
from coast to coast to coast, we'll be making
recommendations to the minister about what the
priorities and views of Canadians are.
This morning we have the pleasure to have with us
witnesses from the Information Technology Association
of Canada. Dr. Gaylen Duncan is
president and CEO. Anthony R.J. Castell
is vice-president of Taxation Canada,
Nortel. We also have Mr. David Patterson
from the Canadian Advanced Technology
From the Pharmaceutical Manufacturers Association of
Canada we have the Hon. Judith A. Erola. And from
the Canadian Foundation for Innovation we have Dr. Denis
I'd like to welcome you all. You've been here before,
so you know how this committee operates. You have
approximately ten minutes to give us your overview
remarks. Thereafter, we'll engage in a
question and answer session.
We will begin with Dr. Gaylen Duncan.
Dr. Gaylen Duncan (President and Chief Executive
Technology Association of Canada): Thank you very
kindly, Mr. Chairman, hon. members. I want to
thank you for the opportunity to meet with you today to
reinforce the pre-budget report we submitted to
you in late August.
I have with me Mr. Tony Castell, the vice-president,
Taxation Canada for Nortel Networks. He serves
as the chair of the task force that ITAC put together
to prepare the submission.
To begin, let me give you a little background on
our association and on our industry. As you may know,
with its affiliates in every province, represents
some 1,300 companies across the country in the
computing, telecommunications, hardware, software,
services, and new media sectors.
Our members, who range from the very largest and most
well-known corporations in the industry to the smallest and
most dynamic entrepreneurs, represent more than 80% of
the total information and communications technology
sector in this country.
All told, our sector directly employs some 420,000
Canadians, generates some $70 billion in revenues,
spends $3 billion annually in R and D,
and accounts for $21
billion in exports.
None of those figures, of course, take into account
the people who work in information technology in
virtually every other sector of the economy. There is
no Statistics Canada-recognized number, but the rule of
thumb says it's another 400,000 Canadians.
The information and communications technology sector
is a powerful net job creator. A Conference Board of
Canada study last year found that those sectors of the
economy that invested heavily in information technology
created 850,000 jobs between 1986 and 1995, and those
sectors that invested little or no money in information
technology lost 146,000
jobs in the same period.
With such a
track record, we believe this is an industry that is
absolutely critical to the continued economic health of
Canada. I don't think it's bragging to say we are the
face of Canada's future.
I'm pleased to say as well that the federal
government, with its well-developed and very ambitious
connectedness agenda, has made significant strides in
recognizing the strategic importance of our sector to
the Canadian economy. We look forward to continuing to
work with the government to help it meet its objectives
for the benefit of all Canadians and to make Canada a
global leader in the knowledge-based economy. It is in
that very positive context, then, that I make my
comments this morning.
Again, let me begin on a positive note by
congratulating the government on the significant
progress it has made in restoring order to this
country's fiscal house. The challenge now, among many,
is to decide the best use of the resulting however
small or however large fiscal dividend.
For Canada to remain competitive, our focus must be on
two priorities: first, to reduce the overall tax burden
across all three dimensions of personal, corporate, and
consumption taxes; and second, to launch a major
multi-year assault on that millstone of unproductive
interest expenditure called the national debt.
Our submission addresses other issues, from measures
to close the funding gap for small IT businesses, to
the year 2000, to the problems we have with the SR and
ED tax program. I'd be happy to discuss any of these
issues today or at another time, but in the interests
of time let me stick to the overall priorities.
Canada's hard-earned reputation as a good place to
make a career, and as an equally worthy place to
invest, is at risk. Our tax rates are simply not
competitive. A C.D. Howe Institute report
released earlier this year illustrates the disparity
between Canadian and U.S. tax levels. For instance,
Canadian taxes represent 37% of our country's GDP,
while in the United States it's 29%. The maximum
marginal personal tax rate in Canada exceeds 50%. The
maximum in the U.S. is 43%. The top marginal tax rate
is effective in Canada at $63,000. The earnings
threshold in the U.S. is in excess of $375,000
Canadian. Home mortgage interest, home real estate, and
state taxes are deductible in the U.S. Not so in
Canada. Capital gains are taxed at a higher rate in
Canada, at plus or minus 37%, versus the U.S., at plus
or minus 32%. Tax-assisted savings for retirement are
significantly lower in Canada.
It is important to recognize that Canadian
residents do have some advantages. Our investment
expenses are deductible. Gains in our principal
residence are tax exempt. Canada grants tax credits
for domestic dividends and has a lower top-effective
dividend tax rate. Maximum CPP employee deductions
here are significantly less than social security
deductions in the U.S. And Canadians benefit from
comprehensive government health services, as well as
child tax benefits and universal old age pensions.
There are other quality-of-life factors working in
Canada's favour, but the data clearly show that from a
tax perspective it is “advantage U.S.A.”, especially for
younger, married homeowners with higher incomes, for
entrepreneurs, and for skilled professionals. These
are the most mobile workers in the knowledge-based
economy. These are the assets of the knowledge-based
economy. It is not bricks and mortar.
The primary product of knowledge-based industries is
intellectual property, the ideas of people involved in
the industry. The industries and the people they
employ are readily transportable to anywhere in this
country or anywhere around the world. If we do not
make our personal tax system more competitive,
qualified graduates seeking higher-paying jobs will
continue to leave Canada.
Similarly, the corporate tax regime discourages
companies from investing in this country. Between 1985
and 1996, foreign direct investment in Canada more than
doubled to $129 billion U.S. per year. Remember that
each billion dollars creates 45,000 jobs and increases
real GDP by about $4.5 billion over a five-year period.
That's the good news way of presenting that story.
However, the annual growth rate in investment is
slowing, and Canada's share of global foreign
investment has fallen from nearly 9% to 4%.
lost half our world position.
We can no longer look at simply the tax rates of the
U.S. and the other G-7 countries. If we hope to
attract major investments by international players,
particularly in this sector, we must recognize that we
are competing with aggressive economies like India,
Ireland, Malaysia, and Singapore, where the total tax
burden is significantly lower and where generous
investment incentives are readily available. For
instance, in July, India modified its definition of
computer software to include transmission of data
pertaining to information technology, giving the
software sector a 100% deduction on export earnings.
In Ireland, it is reported in Report on Business
Magazine, 1,050 offshore companies enjoy a modest 10%
corporate tax rate guaranteed to the year 2010 and a
generous range of government capital grants,
particularly in the area of R and D.
Given all that as
context, ITAC urges the federal government to do a
number of things.
First and foremost, we want to see you stick to your
commitment to devote half the fiscal surplus to tax
cuts and reductions of the national debt. Canada's
future depends on the availability of a highly
qualified and competitive workforce, with an emphasis
on scientific and technical talent to respond to the
demands of the information society.
We therefore encourage the government to introduce
tax relief for individuals striving to re-skill for the
knowledge-based economy. For instance, the government
should consider providing tax relief, either in the
form of a tax credit or through full income tax
deductibility, for all education costs—books, travel
and so on—in addition to just fees.
The government should consider allowing some form of
tax relief for investment in IT products and services
by individuals. The relief could take a variety of
forms: tax credits for IT purchases by families with
students; depreciation deductions from employment
income; GST waivers; or income tax deductions.
Such relief will improve the IT-skills level among
young Canadians and therefore enhance Canadian
competitiveness over the longer term. It would lower
the barriers faced by those with low incomes, the
potential have nots of the knowledge-based economy, and
it would stimulate the Canadian IT industry, increasing
tax revenues from corporate profits and expanding the
platform for competition in global markets.
Other initiatives could include a tax free way to
reimburse new graduates who have incurred significant
student loans, or incentives for corporate
contributions to educational institutions to include
not only research moneys, as currently exists in the tax
regimes, but also donations to engineering, computer
science, and other faculties.
In terms of making the corporate tax burden more
competitive, the government has a number of paths to
the objective of a fair and more effective tax regime.
They range from simply reducing the corporate tax rate
to allowing one company in a corporate group to use the
losses of another company in the group to reduce
overall tax levels.
We also believe the outdated non-resident withholding
taxes on interest, dividends, and royalties are
significant disincentives to Canada achieving its share
of investment and technology.
The overall approach should be to favour initiatives
that creatively stimulate the economy, whether through
changes to the Income Tax Act to stimulate
employee share ownership plans or through the long
overdue overhaul of the scientific research and
experimental development program.
Other forward-looking strategies could include tax
holidays for young companies in emerging areas such as
new media, and we are anticipating the creation of an
electronic commerce tax regime—hopefully to be
announced next week by Ministers Manley and
Dhaliwal—that enables this powerful new commercial
force to flourish.
The goal, as I said at the outset, is to put tax
dollars to their best use by stimulating an industry
sector that touches every part of society and is the
heart of the knowledge-based economy.
Because IT enables the modern world, it offers the
best hope to maintain Canada's competitiveness and, in
so doing, to provide every Canadian with an opportunity
for a lasting and meaningful job.
Last week, ITAC had the privilege of hosting Prime
Minister Chrétien at a Softworld '98 event in St.
John's, Newfoundland. He unveiled the “Seven Firsts”
strategy for electronic commerce, and I'm happy to
say that strategy reflects much of the input that
industry has made to government over the past year and
The Prime Minister said the
connectedness agenda is about global leadership:
It's about making Canada a natural magnet for
investment, research and development. It's about being
able to say that every lane on the information highway
leads to Canada.
Natural magnet? We couldn't agree more, and we
couldn't be more optimistic that it can happen as long
as we continue to marshal the hard work, innovation, and
collective will that are needed. Proof that the magnet
is not yet in place is our loss of foreign direct
investment—the financial votes of the private sector.
What political party would declare a victory after a
50% cut in the popular vote?
Thank you, Mr. Chairman.
The Chairman: Thank you very much, Dr. Duncan.
We'll now hear from Mr. David Patterson, from the
Canadian Advanced Technology Association Alliance.
Mr. David Patterson (Canadian Advanced Technology
Association Alliance): Thank you, Mr. Chairman, ladies
The Canadian Advanced Technology Association has more
than 1,000 high-tech enterprises among its members.
They are principally in the information and
communications technology sector, but we also have
significant representation from aerospace and the
biotech and medical device industries. The membership
spans the country from coast to coast. Similar to that
of my good friend Mr. Duncan, our membership ranges
from the very largest companies to the very smallest,
including a new sector that we're developing now for
the SOHO sector of enterprise—the small office and
home office businesses. Our membership was polled at
our conference in June on their principal concerns for
the next year. I have attached the list, which covers
a very broad range of issues.
On the matter of the pre-budget consultations,
the primary focus is on the question of personal income
It is not a secret, of course, that tax rates in
Canada are significantly higher than they are in our
neighbour to the south. Because of a broad range
not only of tax rates themselves but other measures in
the American tax system, such as home mortgage interest,
the after-tax earnings in the United States are
significantly higher than they are in Canada for the
same level of income. This is a distinct disadvantage
to the knowledge-based industries, the industries of
the new economy. The capital in the industry is not
financial capital, it's human capital. Human
capital, as we all know, is extraordinarily mobile.
There have been discussions and disputes over the
question of whether there is or is not a brain drain
from a statistical point of view, with some sources
saying the statistics do not indicate there is any
great emigration of skilled talent from Canada.
However, I noted with interest an article in
the Globe and Mail on Monday. It pointed out that
Statistics Canada's estimate of the population was off
by 250,000 because they admit no one tracks
emigration. So they do not in fact know whether
there's a brain drain or not.
Within all of the industries that are represented by
the CATA Alliance, there is a strong
sense that there is a significant brain drain. Many of
the companies can point to examples of losing valuable
staff, very often their best people, because they have
received better offers from the United States. Salary
is a consideration. In some cases, the American
companies are in a position to offer a higher salary,
but taxes are also a significant influence on the
decision. Not only do you get paid more, you get to
keep a far higher percentage of what you're paid for
While we recognize the budget surplus is not
unlimited, we believe there are great pressures on the
government to divide it up in a wide variety of ways.
The first step that should be taken should see the
focus on reduction of the personal income tax rates,
particularly at the higher end, which has borne a much
greater burden of the tax increases.
The other primary focus of our membership, in the
context of the budget consultations, is on research and
development. Our members are significant performers
of research and development. I don't think we have a
single company among our membership that does not do R
and D in Canada or devote a significant percentage of
its resources to the performance of R and D. The
membership therefore urges the government in their budget
considerations to take R and D into account.
The subject of the SR and ED tax credits has been
raised. That has been a very problematic area for the
past two years. A significant amount of effort is now
being put into resolving the problems, particularly as
they relate to research and development in software.
We commend Revenue Canada for the work they have done to
date and we urge them very strongly to continue down this
path so that the problems that have grown up in that program
will be resolved and Canadian companies will be able to
pursue research in Canada to the greatest extent
I will not go through our membership's entire list of
issues about which they are concerned. I have provided
a copy for you. The first item on the agenda for the
membership is the human relations question, including
human resources, developing the maximum number we
possibly can in Canada, retaining all the ones we
develop, and attracting more from overseas.
There are a number of issues we have encouraged in the
educational system. The Government of Ontario has
embarked upon the doubling the pipeline program,
which we recommended to them. The Government of Quebec
has begun to take an interest in a similar initiative.
So there are steps being taken in the educational
system to meet the need for highly skilled,
well-educated people who have the basic training they
require to embark upon a career in any aspect of the
new knowledge economy.
That, of course, relates back to our first
recommendation to the government with respect to this
year's budget, which is that personal income taxes be
If there are any questions, I'll be glad to answer
them on any of the issues our membership has raised.
The Chairman: Thank you very much, Mr. Patterson.
We'll now hear from the Pharmaceutical Manufacturers
Association, the Honourable Judith Erola. Welcome.
Honourable Judith A. Erola (President,
Pharmaceutical Manufacturers Association of Canada):
Good morning, Mr. Chairman and members of the
Before I go into the specifics of our particular
concerns, I would also like to echo some of those that
have been mentioned by the previous speakers, and those
are the issues of retention of employees in Canada and
attracting people into jobs. We educate them, we bring
them through the system, and then they move.
I was at a recent board of directors meeting and there
wasn't a single director there who did not have a child
or children now working in the United States—they were
all Canadians—and we were all very sad about the fact.
I think there has to be a recognition that we are
indeed losing some of our best people in Canada.
I represent the innovative pharmaceutical industry,
with approximately 64 member companies, and we employ
roughly 18,000 people here in Canada. You have copies
of our brief, and I am going to address my concerns to
some very specific areas, including the SR and ED, the
scientific research and experimental tax credit. I'd
also like to mention some of the other issues that are
of concern to us here in Canada regarding the
competitiveness of the drug regulatory review system,
which is probably the slowest in all of the industrial
I must say that last year the industry spent $28
million on cost recovery, and at the end of the year we
discovered there was some $11 million that went into
the consolidated revenue fund and indeed it did not go into the
regulatory approval system to provide the
resources needed to make it a competitive regulatory
We are also concerned that we have a non-competitive
patent term system in the country. There is the
issue of market access through the restrictive
regulations of both the Patented Medicine Prices Review
Board and the provincial governments, just to put
that on the table.
The issue of research is one that concerns us
particularly, as the innovative pharmaceutical industry
in Canada plays an increasingly important role in
overall health care research. Of the almost $2 billion
spent in Canada for health care research in 1997, the
pharmaceutical industry accounted for 42% of that
research. Although the industry currently accounts for
less than 2% of all sales and employment in the
manufacturing sector of the Canadian economy, we
account for more than 10% of the total R and D. That's
the good news.
Although it is often said that Canada has one of the
most generous R and D investment tax credit systems in
the industrialized world, there are several obstacles
specific to our industry—and in conversations with
CATA and some of the industries there is a common
problem there as well—that make Canada a less
attractive place to invest than one might assume.
Current Revenue Canada policies, regulations,
guidelines, and practices are also creating a negative
environment, but I would like to echo the comments
made earlier in saying that the current minister and
people over at Revenue Canada are making every effort
to rectify the situation within the current
constraints. But I think there has to be recognition
from the Ministry of Finance that these problems are
more deep-rooted than just interpretations by Revenue
One of the results of today's audit environment is
that firms, including multinationals, that had used the
tax credit to justify research mandates and highly
technologically risky SR and ED investments in Canada
are expressing reluctance to do so today and are
looking offshore. So we think corrective measures are
Clinical trials, for instance, conducted in Canada are
replicated experiments under protocols to which the
Canadian R and D unit has design input. In addition,
Canadian experiments are directed from within Canada.
Therefore, we recommend that Revenue Canada's
interpretation guidelines be revised to clearly allow
clinical trials partially conducted in Canada to be
fully recognized as eligible for SR and ED tax credits.
Currently they are not.
Phase IV studies are frequently proposed and designed
by academic and research physicians. Support of these
research proposals is vital to maintaining and building
the current medical research capability. Clinical
studies, in general, are mostly to conduct and to learn
about disease states and current practices, and are
vital to the medical system in the country. Therefore,
we also believe that Revenue Canada's interpretation
guidelines be revised to clearly allow phase IV
clinical trials to be fully recognized as eligible for
SR and ED tax credits.
We also echo the concerns you put on the table
earlier. Very often chairs and studies and
universities are looked upon as philanthropic donations
rather than bona fide research expenditures, and we
think that should be clearly understood. Although we
work very closely with the Medical Research Council in
the peer review process and therefore are able to claim
some of them, it's clearly a rather circuitous route to
As a result of basic research conducted in Canada,
several PMAC companies discovered new molecules that
they intend to bring up to commercialization. Companies
must formulate, develop, and package clinical materials
for multi-centred trials conducted in and outside
Canada. Revenue Canada does not recognize the cost of
preparing these clinical supplies in Canada for use
outside Canada as an eligible expense for tax credit.
Furthermore, Revenue Canada has claimed that the
development and preparation of clinical trial supplies
does not constitute R and D, which is a very peculiar
interpretation, I must say.
On the definition of SR and ED, I
would be very happy to table a recent study that was
just conducted here in Canada that clearly supports
our claim that the Canadian Income Tax Act uses the
concept of invention, an extension of science and
technologies, and defines scientific research and
experimental development as:
The systematic investigation or search
carried out in a field of science or technology by
means of experiment or analysis.
work is the use of the result of basic or applied
research for the purpose of creating new, or improving
existing, materials, devices, products or processes.
This is the Canadian definition.
On the other hand, the definition used by the
Organization for Economic Co-operation and Development,
OECD, is not limited to science or engineering. It
includes research in the social sciences, and I think
this is especially important for us as Canadians,
particularly within the medical research field. The
OECD concept is as follows:
Research and experimental development comprise
creative work undertaken on a systematic basis in order
to increase the stock of knowledge, including knowledge
of man, culture, and society, and the use of this stock
of knowledge to devise new applications.
Research and development is a term covering three
activities: basic research, applied research, and
Obviously, the breadth of
the OECD specification permits the inclusion of a
greater number of specific expenditures in research and
development as it focuses broadly on innovation rather
Therefore, the PMAC recommends the income tax research
and development definition be revised to reflect new
realities in not just pharmaceutical research but in
the broad concept of health research. In that way, it
would comply with the OECD definition. I'll be happy
to answer questions.
The Chairman: Thank you very much, Ms. Erola.
Now we will hear from the Canada Foundation for
Innovation, Dr. Denis Gagnon. Welcome.
Dr. Denis Gagnon (Senior Vice-President, Canada Foundation for
Innovation): Thank you, Mr. Chairman. I'm very happy to appear once
again before your committee to present the position of the Canada
Foundation for Innovation. I'm replacing our president, Dr. David
Strangway, who could not be here this morning.
In response to the request from the House of Commons Standing
Committee on Finance, the Canada Foundation for Innovation (CFI) is
pleased to provide the committee members with recommendations to
consider in preparation of the 1999-2000 federal budget.
Like most of the groups and organizations that will be making
presentations to the committee, the CFI's recommendations will be
articulated around two underlying themes: quality of life of
Canadians; and sustainable economic growth for our country.
Overall, Canadians approve of the federal government placing
priority on S&T. Not only are Canadians proud of the achievements
of our research community, but they often turn to researchers to
understand key issues affecting our society. In a survey published
earlier this year, Canadians rated researchers among the most
trustworthy people. While interesting in terms of social
perceptions, these results highlight the concerns that Canadians
have about a number of issues: their health, environment, and
quality of life. In this context, the consultation leading to the
preparation of the next budget offers a unique opportunity to
reflect on science, technology development, and innovation as core
values of an innovative Canada.
Clearly, the federal government's first priority
should be to recognize the importance of scientific
research and technology development as drivers of the
new economy. Canada's research community represents
our most significant asset in becoming more globally
competitive, in training more young Canadians for
research and innovation during careers, and in
transferring knowledge and technology to the private
sector, Canada's largest job provider.
Recommendation 1: Canada's socio-economic development
is directly linked to its ability to innovate and use
science and technology to sustain economic growth and
ensure the well-being of Canadians. As a result, it is
recommended that the next budget adopt science and
technology as Canada's highest priority for a strategy
aimed at ensuring sustained socio-economic development
in the new millennium.
With this mandate focusing on
research infrastructure, the CFI
has been designed to complement the mission of the
federal research granting councils, which support a wide
range of activities from basic research to applied
research in partnership with the private sector and
play an essential role in feeding into Canada's
This innovation chain is based on the investment of
organizations such as the CFI and the federal granting
councils, which provide a healthy environment for
university research. Thanks to their sustained
investment, discoveries and advancements in all fields
and disciplines lead to the establishment of strong
partnerships with the private sector and often result
in the creation of spinoff companies generating
thousands of jobs, not only for highly qualified
personnel but also for a wide range of technical,
administrative, and service personnel.
It is out of such partnerships that Canada's biotech
industry emerged and that our telecommunications and
information technologies industry was able to gain
worldwide recognition for its ingenuity and excellence.
In the 1998-99 budget, the federal government's
decision to increase the funding level of the research
granting councils was a clear signal of the importance
it places on the Canadian research community. It also
signalled the importance of providing adequate support
for the expansion of scientific research and technology
development in Canada.
Despite the government's investments in the CFI and
the federal granting councils, the fact remains that Canada
has fallen behind in recent years in terms of research
capability. The granting councils' budget increase,
for instance, only partially compensates for a
budgetary decline that started in the 1980s. Although
significant, the increase announced in the 1998-99
budget only restores the granting councils' funding to
1995 levels, without offsetting earlier cutbacks and
inflation. Compared to the other developed countries,
I'm afraid to say Canada still underinvests in science
The CFI is not only boosting the capability for
innovative and productive research in many parts of the
country, it is also providing researchers with the
tools to fully realize and develop their talent and
creativity. But this is only the first step. By
successfully achieving its mandate, the foundation will
widen the opportunities available to Canada's research
community and at the same time increase the need for
more research funds for operating support, staff, and
trainees to really take full advantage of these
Recommendation 2: Given the urgent need to
strengthen Canada's investment in all areas of science
and technology, from health and engineering to the
social sciences and the environment, and to help
Canada's research community take full advantage of the
opportunities that will result from the CFI's
investment in new infrastructure, it is recommended
that the federal government increase the base budget of
the university research granting councils to levels
comparable with those of other G-7 countries.
Capital infrastructure for research consists of the essential
equipment, facilities, and installations needed to undertake
scientific investigation and develop advanced technologies. By
investing in infrastructure projects, the CFI and its partners
enable researchers in Canadian institutions to conduct leading-edge
research and undertake programs that would not be otherwise
Without proper infrastructure, Canadian researchers are slowed
down in their programs and activities. With an ill- or under-
equipped research community, Canadians fall behind countries that
place greater emphasis on science and technology. They also run the
risk of missing out on the opportunities of the knowledge-based
Already, institutions are linking infrastructure to their
capacity to conduct innovative research and to provide a
competitive environment for the training of Canadian researchers.
The quality of the infrastructure in our institutions is directly
tied to Canada's capacity to build a truly innovative society. Our
research institutions urgently require the influx of new
infrastructure to support their own strategic development.
In the spring of 1998, the CFI held its first
competition for funding. Almost 800 research
infrastructure projects totalling close to $3 billion
were submitted by Canadian institutions. The CFI's
share of the amount requested would be nearly $1.2
billion. The response from Canadian research
institutions substantially exceeded all projections
and is a clear indication of the seriousness of the
problem for Canada.
Recommendation 3: The CFI is deeply
concerned by the overwhelming need for infrastructure
demonstrated by Canadian research institutions. Given
the importance of providing a competitive environment
for research and of training young Canadians for
research and innovation-driven careers, it is
recommended that the federal government look at ways to
continue addressing the need for capital research
infrastructure in Canadian institutions beyond the
five-year lifespan of the CFI.
When it comes to business and finance, there are no
boundaries. Nothing is more fluid and mobile than
capital. Funds will go wherever the best conditions
exist. In the knowledge-based economy, brain power has
become the new capital. It travels fast and recognizes
those who share the same scientific or economic
interests. If Canadian researchers cannot find at home
the right conditions or resources to fulfil themselves
on personal and professional levels, they will look
elsewhere to find what they need. This is the reality
for researchers and research institutions. In the
knowledge-based economy, this is an inescapable reality
There is no doubt that we still need to do a better
job in attracting more young Canadians to research and
innovation-driven careers. Institutions and granting
agencies, including the CFI, are helping to promote such
career choices to young Canadians. However, Canada's
most serious problem is that it is simply not
competitive in terms of salaries and opportunities. We
must fix one problem. We must ensure that Canada can
retain its talent. Without changes to the personal
circumstances, we can only watch as our brightest
researchers move away because our companies,
universities, hospitals, and research institutions
cannot provide a competitive environment for their
If we cannot keep the best in Canada, how can we
attract the best?
The CFI can play a major role in helping to build a
working environment for exciting innovation. Thanks to
recent CFI investments, universities across Canada are
able to provide state-of-the-art research facilities
and installations to over 400 new faculty members who
are addressing problems in priority areas for
Canadians. Support from the CFI means that these new
faculty members are able to undertake a wide range of
research activities. By helping our institutions to
attract top researchers to new faculty positions, the
CFI is injecting a new dynamism into Canada's research
One thing the foundation cannot fix is the
remuneration the private sector offers to researchers
and the tax burdens that all levels of government
impose on them. If the CFI is to succeed in enhancing
Canadian innovation, it needs the private sector and
government to be much more aggressive in competing for
and retaining the best talent. We need to look at all
the factors that come into play when these bright
Canadians decide to leave our country to pursue their
Recommendation 4: Considering the very competitive
nature of the employment market in the knowledge-based
economy, it is recommended that the federal government
consider introducing measures such as the reduction of
personal income tax levels to help make Canadian industry
and research institutions more attractive to highly
The CFI has conducted a review of
the recent reports analysing key aspects of incentives
to industrial R and D. The CFI agrees with those who
believe that among the factors influencing the
development of knowledge-based industries, there are
three that are dominant: the reputation of local
universities, the workforce, and the overall quality of
Even though they cannot be
considered as prime factors, the R and D tax credit
programs put forward by various levels of government
have an influence on the private sector's decision to
undertake research programs and activities in Canada
rather than in other countries.
The CFI was
established by the federal government to help Canadian
research institutions to strengthen their
infrastructure. Following its established funding
formula, the CFI supports, on average, 40% of the
eligible costs for infrastructure projects. The
remaining 60% must come from partners in the private,
public, or voluntary sectors. The experience of the
first call for proposals has shown that while the
provinces are largely involved in the proposals that
were submitted, the private sector has only a limited
involvement in proposals for research infrastructure.
A study completed by the Association of Universities
and Colleges of Canada, AUCC, revealed that
the federal R and D tax credit program may explain the
situation. According to the AUCC study, the program,
although very generous, makes it less effective for the
private sector to invest in research infrastructure in
universities and research institutions than to support
the operating expenses of specific research projects.
Recommendation 5: Given the need to encourage the
private sector to invest in a full range of research
activities and tools and to further promote the
development of industrial R and D, it is recommended that
the federal government review its R and D tax credit
program to ensure companies that invest in capital
infrastructure are not disadvantaged compared to those
that invest in the operating costs of research. Such
modifications would help strengthen the existing
program and would encourage corporations to increase their
support for scientific research and technology
development in Canadian universities and hospitals.
The CFI is helping to strengthen the partnerships
between research institutions and the private sector by
working with business associations to establish
workshops and conferences on all aspects of the
innovation chain and on its impact on Canada's
competitiveness in the global economy. From the CFI's
perspective, these interactions are the keystone of a
national dialogue on an innovative Canada.
As Canadians are about to embark on a new millennium,
knowledge, research and innovation have become the lifeblood of
economic growth, and the engine of success in the global economy.
In this changing world, Canada's unique challenge is to ensure its
position at the forefront of scientific research and technology
development by ensuring that Canadians have the knowledge and
capacity to innovate.
The rapid emergence of a culture of innovation challenges all
aspects of our lives and leads us to make decisions based on
entirely new conditions. It calls for strategic choices. We no
longer live in a world where traditional relationships based on
social, political and economic factors are enough to define
communities and countries. The challenge for people is to adapt to
these new conditions. But if we succeed, a bright and promising
future awaits Canada. Thank you, Mr. Chairman.
The Chairman: Thank you, Dr. Gagnon.
We'll now go to the question and answer session,
Mr. Nelson Riis (Kamloops, Thompson and Highland
Valleys, NDP): Thank you very much, Mr. Chairman.
This has been a fascinating set of presentations, I
must say. After listening to each of the interveners,
I can't identify anything to criticize at all in terms
of what you say, and you're here representing your
specific sectors while calling for a variety of
I have some general questions that perhaps you could
help not only me with but I think our whole committee.
As Dr. Gagnon just indicated, we're entering a culture
of innovation. You've made the case about how this is
crucial to Canada's future, and I don't think there's
any argument with that.
There seem to be two societies emerging. One
adapts or is able to adapt to this culture of
innovation, is doing relatively well, and is perhaps
attracted to other jurisdictions because of tax rates
and so on. There is also this huge group within Canada
that simply has not been able to access this.
about the people who are perhaps living on the margins
of our society, or people who are out of work or
need retraining, and so on.
Do you have any recommendations, in some of the points
you've made, in terms of how to integrate some of
that part of society into this culture of innovation,
as you describe it? That's one question.
The other question is on the whole issue of reducing
taxes and so on to make it more attractive to people
to stay in Canada. My heart rate started to race a
bit, Dr. Duncan, when you started to refer to India and
Malaysia. Granted, I suppose they probably have better
tax regimes, but I can't imagine there'd be a rush to
live there because you can save on— or perhaps there
will be; people are motivated totally by the bottom
line in their lives.
But my question to you, Dr. Duncan, particularly—and
I appreciate that your presentation was balanced and
that there are some advantages in our tax system and in
our social security system and so on that are
attractive. But as you describe the footloose
industries identified with the IT sector and that the
people can in fact move anywhere, are there not other
aspects of Canadian society that we could strengthen or
emphasize to encourage people to live here?
Judy Erola mentioned sitting around the board table,
and all the fathers were in Canada and all the
sons and daughters were moving elsewhere. What is it
that makes you stay here and your children move
elsewhere? There must be something we can build on
to attract them.
Are there other perhaps less
tangible aspects that we could start emphasizing to encourage
those footloose industries to consider Canada? I
think some of them may be obvious, but I'd like to hear
your view on that.
My third point is that this is unfortunate, in a
sense, because everybody around the table will agree
with what you say, I suspect, to a greater or lesser
degree, and you really agree with each other; you're
sort of saying the same things. If you were here
yesterday, there'd be a different group of people
sitting here, pointing out a completely different part
of Canadian culture—food banks booming, 1.4
million children living in poverty, tens of thousands
of homeless people this winter. And as the news tell
us, we're in an economic meltdown as of this morning.
The stock markets are collapsing all over the place. So
I suspect things are going to get a whole lot worse for
people who are already not in very good shape, and yet
in your presentations—and I understand why—you say
don't spend any more money on health care, or social
services, or the poor, or whatever; give us tax breaks
to keep people in Canada.
I realize you're representing your sector and not
here, as we are, representing society. Would you have
an observation on that? I don't suppose you're as
callous as you seem to be in terms of your
presentation, that you don't care about probably a
quarter or a third of the Canadian population that's
really having difficult times.
I'm not sure who I'm aiming this at, but perhaps
one or more of you could respond to one or more of
I would like to hear from you, Dr. Duncan,
particularly because of the panic you raised in me
when you started saying we have to keep an eye on
what's going on in India and Bangladesh—and I suppose
there are other countries—as an example of what to do.
I don't think you're really saying that, but I begin
to panic when you start to say this rush to the lowest
common denominator is something we should be
Dr. Gaylen Duncan: That's a wide-ranging set of
questions, Mr. Riis. Let me pick off—
Mr. Nelson Riis: I ask those because I don't have
any critical comments to make about your presentations.
I have to agree with everything you say. These
are worthwhile endeavours and something we need to
consider as a country, but around this table there are
other balances, of course. That's what I'm trying to
Dr. Gaylen Duncan: I think I tried to present a
balanced picture overall. The odd thing is, we
didn't get together in advance, so you're getting a
huge cross-spectrum of the Canadian economy saying
something surprisingly consistent.
First off, what I said was tax relief and debt
reduction for 50% of the surplus. That is the
commitment that was in the Liberal Party platform. We
are pointing out that we think that is the commitment
the government should make, and 50% should also go
towards social program relief.
What we're saying is, let us
not lose track of the fact that it has taken us
a very painful number of years to undo the damage done
when the deficit was allowed to rise.
Mr. Nelson Riis: In all fairness, I directed that
question to you because you said your colleagues
do not say that. I'm giving you the easy reaction
Dr. Gaylen Duncan: I'll let them pick up on it.
On the footloose question, yes, I mentioned India, but let's
look more closely at Ireland. The highest
youth unemployment in Europe, the lowest level of
education in a population of all of Europe, and
tremendous social unrest has been replaced by full
employment at the youth level, the highest level of
education in the population in all of Europe, and a demand, a
plea, by the country that Irish people return to the
country to fill the jobs that are there waiting for
Why? Because the government created a very
positive investment environment for the IT sector. It
began with call centres—those are high-tech
environment, low-tech jobs. It started with low-skilled
jobs. It has now moved to become the
programming centre, the gateway to all of Europe.
We're saying Canada is missing out on that. Go down
the list of companies that are identified on the Irish
web page. They're all companies that have plants here
in Canada that have not invested in their plants here
in Canada in the last five years. Why? Because they
found another environment that was better.
We win on the United Nations roll as the best country
to live in. I think we've done a great job on all
the other areas of our quality of life. The thing
we're losing on now is tax, and unfortunately it's not
popular. I understand we're fighting a battle that we
lose daily in the media and in the minds of the general
The tax burden on the people who make the
knowledge-based economy is the tax burden on the
middle- and the high-income earners. That's the group that
is in the knowledge-based economy and that's the
group the general public wants to hammer. What we're
saying is we're voting with our feet.
If we're not doing the voting— all right, I'm a little
old and it's time to settle down. It wasn't just the
husbands, as you said, around that board table; the
wives also have their children outside of this country.
The kids are voting with their feet.
Ms. Judith Erola: I would like to add to the
comments you had been expecting from us. We're
limited only by time. No one here suggested we
shouldn't be spending more on some of these things, and
the issue of health care is one that we are
particularly concerned by.
I think there's a lot of digging your head in the sand
on the health care issue. When you consider the
demographics of the Canadian population and the fact
are an aging population, health care costs are
bound to rise. It doesn't matter what you do. With an
aging population, we are going to see health care costs
rising, and I don't think there is a single government,
federal or provincial, that is recognizing that fact and
putting in place strategies to address these issues.
That's point number one.
How do we enforce Canada as a place to stay, and why do
we stay here? Well, we're Canadians born and bred, I
guess, and we're too old to move. Our children have
choices now, incredible choices. I think if we can
encourage them to stay in this country, if you give
them an even tax break— I have a child whose income
increased by 50% by moving to the United States.
Mr. Nelson Riis: Are those young people leaving
Canada, or is it part of their education to go to some
other jurisdiction for two or three years and then,
hopefully, come back?
Ms. Judith Erola: That's part of it,
but once they've tasted the good life, as they say,
they're very reluctant to come back, if they're there
longer than two or three years. I had hoped that would
happen in my case and I don't think it's going to
happen. There are other factors, such as climate—Canada is a
cold country. If you can function and make a good
living in a part of the world where it's very
But I still believe that if they're given an even
break, they'll choose to stay in Canada, and those
people are going to pay taxes in Canada. This is the
middle to upper income class. It's that class of
people we want to retain so they will pay the taxes,
stay in this country, and make this a culture of
innovation and change. No one is suggesting that it
should be done to rob another sector of the economy. I
think it's to enhance and build up the entire economy.
Mr. David Patterson: As someone who once quit a
job because he didn't want to be transferred to the
United States, I think I can comment a bit on the
attractions of Canada.
I think we're all familiar with them. This is a wonderful
place to live, but there comes a point, particularly
in the minds of the young, the aggressive, where the
trade-off just becomes too large, and it's something we
really need to address.
This is an anecdote. There's a small software company
in Vancouver that is not as small as it used to be.
The attractions of moving to California were always
there, but no one considered them very seriously until
it became a bigger company, and all of a sudden there
were half a dozen people earning more than $100,000 a
year. Then the attractions of California began to be
more manifest, but they were offset by the attractions
of Canada, because the main obstacle at this point to
moving to the United States was the president's wife,
who is an American and doesn't want to move back there.
Something must be done to close the gap or the steady
flow of the best young people will continue.
The Chairman: Dr. Gagnon.
Dr. Denis Gagnon: I would say you had a very
nice way of presenting your point, and it's well taken.
I think you're absolutely right.
It would be terrible on our part at the foundation to
be insensitive to this part of the Canadian population,
and we have to look very carefully in order to bring
them into this new innovation culture.
I guess our presentation was based on one belief, that
Canada cannot be a country that will develop on
commodities any more. Canada will develop, and unless
it's able to become a truly innovative society, it will
probably fade away in some way. This is our belief.
We must really turn Canada's culture into an innovation
culture and make sure we provide our best people with
the tools, equipment, and infrastructure they know to
help turn the country into this. After all, we're
going to fight with the other countries that are
developing quite rapidly, so I guess that's why we've
expressed our views that way.
We believe the next economy for Canada is an
innovation economy, a knowledge-based economy, and we
ought to take decisions that will bring Canada to this
level of development as soon as possible. My hope is
that eventually, if we succeed in doing that, all of
this sector of the population you were talking about
will be involved in some way, so we'll have a different
I know that a lot of people talk about the brain
drain. I've talked about the brain drain. In my view
there is a brain drain. Of course, my views are based
on anecdotal situations that I know of, and there are
many of them. I think I should work sometimes to try
to get this together and demonstrate it clearly.
But when we talk of developing a knowledge-based
economy in Canada and turning Canada into a new culture
for innovation, we must understand what it means for
researchers all across Canada in our research
institutions. We're in the time of genomics now. I
think the most important issue now to be addressed in
science and technology is what we call genomics.
In order to be able to compete, when we talk about
genomics, our Canadian researchers will have to get
everything they need to do it. You ought to talk to
these guys. For them it's important that they're
there, they can do something, and they can help develop
our knowledge about genomics. If they realize they
don't have what's needed to be top researchers in that
specific area of research, they'll go to Boston or San
Francisco. They'll go anywhere where they can find
what they need to develop themselves. That's the
problem. This is what we want to address at CFI and
make sure they will get what they need to be at the
forefront of knowledge. This is why we presented it
The Chairman: Mr. Castell.
Mr. Anthony R.J. Castell (Vice-President, Taxation
Canada, Nortel Networks): Mr. Riis,
I just want to add something to the
discussion on the tax side.
I think the references to places like India, Malaysia,
and so on are really referring to the corporate tax
incentives that those countries offer. That's a
separate issue, in that this could lead to the creation
of jobs in those areas that would otherwise be created
or retained in Canada. That's a separate issue from
the key personal tax issue, which is really Canada and
the U.S. and the retention of people.
Obviously, you're right that tax is not the only
thing. I think there are a lot of advantages in
Canada, but it's front-page news. Every grad looks at
the newspaper and sees they could be paying half as
much tax in the U.S. and earning more money.
Mr. Nelson Riis: You're here.
Mr. Anthony Castell: Exactly, and I think that's
absolutely right. It's a wonderful place.
Mr. Nelson Riis: There's one little
part of the question that was not answered. Can I
It was about the integration of the person who drops
out of high school and comes back again, who very much
would like to be part of this culture of innovation.
That's a huge gap, and quite frankly we can't ignore
this part of our culture.
Do they have a part in this innovation culture, and if
so, what is that interface? Are there things we can do
to integrate this sector of Canadian society into the
Dr. Denis Gagnon: I'll do my best. At a point in
my presentation I said clearly that one of the major
elements of the mandate of the Canada Foundation for
Innovation is to make sure we are in a position to
better train not only highly qualified personnel but
also people in the administration field and technical
field who could really eventually get into this new
way of looking at the Canadian economy.
You're talking about and targeting a very specific
sector of the population, which I hope will be in some
way touched by this change in the culture of the
Canadian population, in the development of science and
technology. I hope, by telling them and showing them
that eventually if they get minimal training they could
be part of this vision, we can influence them not to
quit school too young. I really hope we can influence
them and help them take decisions that most
Canadians will make.
One of the factors in this issue is that we ought to
show our young Canadians that there are ways and
there's a place for them in Canadian society. If they
decide to go on and stay in school and learn to develop
their technical skills and things like that, I hope we
will keep them in school and help them see that
eventually, if there's a place for them in Canadian
society, they'll be there and will work with the
That's a very critical issue. I understand your
point, and I'm not sure we have all the answers for that.
Dr. Gaylen Duncan: I'm not going to say we have
all the answers, but I think there are some points on
the table here that should be picked up. The first was
the point about education, and I think when you started
with the high school dropout reference you identified
the first part of the problem.
We need to do more to explain why and help people stay
in school longer. It is clear from all the statistics
that the greater the education, the lower the
unemployment rate and the higher the average income.
This is not a message that is clearly understood by
the kids in high school, nor is it clearly understood,
unfortunately, by the guidance counsellors. There are
programs we can talk about. The Millennium Scholarship
Endowment Fund is certainly a step in the right
In our submission we talked about other things.
Education tax relief has to be there. For example, why
do we not allow a corporation, when they offer a job to
a recent university graduate, to give them a $5,000
signing bonus that goes to their student loan and is
not a taxable benefit? Boy, that seems to me to be a
great incentive, and it's not a major expenditure.
The second theme is transition from school to work.
We keep talking about the 20,000 jobs vacant in the IT
Those jobs require three attributes generally:
technical skills, which schools can provide;
presentability, which schools should help provide, but
which our entire culture helps provide; and knowledge
of at least one business function, which is a long way
of saying experience. It's real tough to have
experience when you're graduating, so transition
programs— and there have been a number of transition
programs at the federal level, virtually all of which
are losing their funding this year.
The third is access, and “access” here means to the
technologies. There are things that can be done to
lower the cost of acquiring the tools to gain the
technical skills. As a plumber my wrench is tax
deductible. As a carpenter my saw is tax deductible.
As a knowledge-based worker my computer is not. Why?
Ms. Judith Erola: I have just one comment on the
issue of hope and the future. I'll give you one
brief example, if I could.
Mr. Nelson Riis: The tools you use aren't
deductible. It's a different example.
Dr. Gaylen Duncan: No, they are, because he works
it through a corporation, as a knowledge-based
economist at work. Unless I form my own company, I'm a
T-4 income guy and nothing is deductible.
Ms. Judith Erola: On the issue of hope and the
future, I'll use an example of something that happened
in the last three years in Atlantic Canada.
Through the Medical Research Council and our industry
we recognized that not enough was being done in
Atlantic Canada in the area of research and
development, particularly in clinical trials, so
through this partnership we seed, funded to the tune of
approximately $450,000 or $500,000, a clinical trials
unit with Dalhousie University. It's an incredible
Ten years ago when I first visited that area there
wasn't a single thing happening in this area. At a
symposium there earlier this year, there were roughly
200 people in the room, all of whom were involved in
this industry on a technical side. They weren't all
PhDs; they were nurses working in this area,
technicians working in this area. That creation of
jobs has now also created a future for people who
recognize they can stay in Atlantic Canada by following
this course of action. And we're not talking PhDs;
we're talking the kinds of jobs that are replacing the
old commodity jobs Dr. Gagnon referred to.
The Chairman: Thank you, Mrs. Erola.
Mr. Paul Szabo (Mississauga South, Lib.): Thank
you, Mr. Chairman.
Probably the strongest statement I heard from the
entire panel, which perhaps motivates my comments and
question, was from Mrs. Erola. When you gave the
example of someone you know personally who moved to the
United States, and who in your words had an increase in
income of 50%, I don't think there's anybody in this
room who thinks income tax has anything to do with the
Ms. Judith Erola: But income tax is the entire
Mr. Paul Szabo: No. It's the salary.
Ms. Judith Erola: Salary, mortgage
Mr. Paul Szabo: No. Even when you take that
50% increase in compensation, it's not the taxes.
Ms. Judith Erola: No, it's compensation. It's
Mr. Paul Szabo: Dr. Duncan came up with a list,
which included the investment income, the mortgage
interest deductibility, and the dividends break we get.
CPP is less—in fact, payroll taxes are 50% less in
Canada than they are in the U.S. And there's the
health component, which is extremely large, the Canada
tax benefit, the OAS, and the GST.
You left off your list, if you're going to compare it
to the U.S., some of the intangibles: the litigious
society in the U.S., which characterizes its culture;
the comparative crime rates; and the educational
institutions and the cost of education, which is
provincial here in terms of administration and
delivery, but it's still part of the comparative.
Similarly, there are the social services, the capital
gains exemption we enjoy, and RRSP deductions for
high-income earners—because they are deductions,
high-income earners get a better bang for the buck than
low. That's simply because of our graduated tax rates.
Similarly with the child care expense deduction.
We formerly had a $100,000 lifetime capital gain
exemption, which was not progressive from the date it
came in. It was actually retroactive, which means an
awful lot of high-income earners got an immediate
So those are lumpy benefits, which people have got
over time and which don't get worked in or averaged
through. I think if you took them all into
account—and having been a CA for 25 years and done a
lot of U.S. and Canadian returns, I can tell you the
differential in real terms, plus some allowance for the
intangibles, is actually less than 3%.
Last year I think the finance committee received a
comprehensive comparative analysis with the U.S., and it
was not the driving factor. So if we are here a year
from now and we're going to go through this again, I'll
bring my analysis if you bring yours and put it on the
table, and then we'll talk about the tax impact. I
think Mrs. Erola had it right with regard to the
differential between my being in Canada or in the U.S.
It could mean having 50% more income in
my pocket, but it is not driven by income taxes.
Only 10% of Canadians make more than $60,000 a year,
i.e., are in the top tax bracket of Canada. You have
to keep that in focus as we look at tax breaks, and
certainly the government is committed to tax breaks,
but it has to be balanced. It has to be balanced
between the needs of all.
Much of your discussion, though, has been very
effective in terms of investing in R and D in a high-tech
or knowledge-based economy and society, and I don't
think there's anybody in this room that disagrees with
you. We can and do compete very well, but you have to
continue to grow and to invest in it if you are going to
maintain your niche and your appropriate share of the
But we have done some things. The technology
partnerships have been excellent right across the
spectrum of science and R and D initiatives. I think Dr.
Gagnon was bang on. You said in your presentation that
we need salaries and opportunities. The government can
help with the opportunities, but, I'm sorry, the
government cannot drive the car from the back seat.
The R and D, the high-tech industries, are in the front seat
with the steering wheel. You have the ability to
identify, to attract, and to keep good people by
investing—through their compensation programs as one
element. But we all know that for every complex problem
there's a simple solution, and it's wrong. There have to
be a multiplicity of approaches, but the salary is a
major component of it.
Let me give you an example of one country that is
dealing with brain drain: Taiwan. Mr. Riis
knows what Taiwan is doing about brain drain.
They now have, in fact, a brain gain, and it's not
importing people from other countries to fill their
need. They told us they're bringing back the people
they lost. They're doing it because they've
developed scientific research and development parks,
they've provided special housing arrangements—community
centres, rec centres, shopping centres—in a
beautiful setting. I believe they have three already
and one more under construction. The companies lease
the land, build their buildings on it, and the
concentration of brain power within that community
provides tremendous synergies for them. People want to
be part of that because it's a knowledge-based
community as well, and they have had excellent results.
Right now I think Taiwan boasts seven top products
in the world—number one in the world, mostly in the
high-tech semi-conductor area. They have a brain
gain and that brain gain is a combination of a number
of things. It's a partnership between government and
industry to attract people where we can create those
opportunities, but the companies also have to top up
those salaries and compete.
I want somebody to tell me how many people actually
have left Canada for equivalent compensation—if they
had $50,000 Canadian and they went to the U.S. for
effectively the equivalent of $50,000 Canadian. How
many actually left for the same level? I think you're
going to find it's none. You don't go to the U.S. for
the same salary. If you compare the other things, you
just don't leave. The proof of the pudding is to go to
the airports, or go to any border and ask Canadians who
are coming home what their first reaction is.
They're all going to say it's great to be
home, because they've seen what's down there. It's a
different culture totally.
In any event, I want to close off by basically
telling you that I support significant investment in our R and D
sector ever since the whole NAFTA discussion
started, and now that we're well into being a global
player, we have to be there.
We've lost those entry
level jobs for those young people.
The high school dropout rate of
30% in Canada is a significant problem, but you know
what? There's a problem before that. It's not a
problem that developed in high school; it developed a
hell of a lot earlier, and I'm sure you are all
aware of the significant research in terms of early
childhood development impacts on the physical, mental,
and social health outcomes of children.
Maybe part of our brain gain, or reduction of the
brain drain, will be concentrating as well on
investing in developing new brains and young brains, and
making sure a significant component
of our tax dollars don't have to be spent on curative and
remedial problems for young people who have
difficulties, whether they be social, criminal, or
health, but that we are in fact investing in them
early, on a preventative basis.
You all know prevention, the preventative dollar, is a
more effective dollar to spend. It's more
cost-effective, and it's more effective in terms of
generating better outcomes. It's very difficult to
deal with a problem after you have it.
So I ask you in the context of all that, would you
prefer that the government, in terms of
its restricted dollars today in terms of availability
of the fiscal dividend, take an
across-the-board type of tax rate cut? As you
know, that's very expensive and not targeted to your
problem. Therefore, the amount of dollars you're
going to get to deal with it—
Do you think that would
be your preferred route, or do you believe that the
technology partnerships and supporting you in terms of
developing opportunities for our knowledge-based human
resources assets would be preferable?
The Chairman: Who would like to start?
Dr. Gaylen Duncan: I'll step into the maelstrom at
King Chillalonghorn has done a
wonderful thing in Thailand. He has addressed the very
point I tried to make. He recognized that it
wasn't just personal income taxes, it wasn't just the
quality of living in Bangkok or elsewhere in Thailand;
it was the entire environment.
The point I made with regard to taxation
is that the combination of personal, corporate, and
consumption taxes is killing us. People are voting
with their feet.
I don't need studies that compare the numbers. Ms.
Erola's daughter is in the States. Why? The job for
her is in the States. Why?
Foreign direct investment in this country has gone
from 9% of global to 4% of global. Why? If we are so
good, why aren't the dollars flowing in here? Sure
it's $129 billion U.S. last year—that's great—but
it's half of what it should have been; it's half of
jobs there should have been.
I think Dr. Gagnon
pointed out, and I would agree completely, that dollars flow
fastest; people flow next.
The answer is that the dollars have stopped coming in
and the people are starting to go out—the people
in our industries, the high-technology, skilled
industries. Guess what people in the skilled
industries earn? Over $60,000.
Sorry, but that's what we are facing. I don't
disagree that nobody goes to the States for the same
salary they could make here. I don't disagree that
we have a problem in terms of increasing salaries, and
you can hear from my member companies that they are
facing that; they are starting to deal with that. But
when you add that onto all the other expenses of doing
business in this country, we become non-competitive,
and so you face the situation Mr. Patterson had.
At some point you decide to move the company.
It's not a threat. It's happening. It's not easy to
solve. It's going to take many years. I understand
that. The fiscal dividend this year and next year is
not going to be sufficient to address the
building back up of social programs, or dealing with a
debt, or dealing with tax relief, but a concerted
effort over the next five-plus years will start having
That's all we're asking for. Shift your focus from
deficit reduction, which we supported you on heavily
for the last five years, to now saying we have a
three-pronged attack: debt reduction, total tax
reduction, and rebuilding the social programs that make
this the country it is.
Ms. Judith Erola: Well said.
The Chairman: Ms. Bennett.
Ms. Carolyn Bennett (St. Paul's, Lib.): Thank you
Obviously there is a positive role for
government in this buffet of things you have
brought to us.
There was concern this summer over the
problem with the Canadian dollar and whether Canada was
still viewed as a resource-based economy instead of as
a knowledge-based economy. It was felt that recessions
quite often are attitudinal, in terms of people
deciding to stop spending because they're worried.
I would like to know what you think.
Obviously, the tax question is a concern for those of
us who are worried about the health care system. We
also wonder if Canadians are still confident that we
can continue to do well what we're supposed to be able
to do well and which we hold as a badge of honour.
Politically, it's not an easy thing to
lower taxes for the highest income earners. I think
there would be $1.5 billion if we just took the
As a physician and a member of the faculty of the
University of Toronto, I'm aware that some of the
best researchers are being offered Rockefeller grants
of $1 million a year, with no strings attached, to set up
their labs and do whatever they want. How do we
actually compete with that?
I can't see that just lowering income tax will do
I think the Foundation for Innovation has had a
tremendous beginning. I'm not sure what you really
think government should do, but the tax thing just
doesn't seem to be enough. Yet, doubling your
budget, Dr. Gagnon, seems to be a good thing, and
doubling the budget of the MRC in order to reach
the G-7 level would be a good thing. But with this
modest dividend we're going to have, what decisions
would you make in terms of the political hit that comes
from looking after the rich people? I'm just confused
as to what you really would set as your priorities.
Would it be to spend some money for Dr. Gagnon or to
lower taxes? What do we have to do to get the world to
see us as a knowledge-based economy and to start
bringing real investment dollars, which are the private
dollars, into this country?
Dr. Gaylen Duncan: As I recall, Ms. Bennett, you
also asked the toughest question last year.
Certainly in our submission we started off by
referring to a triage, that is, a recognition that debt, tax, and
social programs are all important and that we should set a percentage
target for each. We've suggested that the combination of
debt and tax be 50% and that 50% be for social program
We are not in favour of collecting taxes and giving
them back to selected companies in order to provide
them with specific relief. That is not the route we
want to see taken.
We have put forward a number of
recommendations that talk about improving access both
to education and to technology, including tax relief-type
proposals. We think all of those are affordable in the
current regime and that they send the right kind of signals
to the population. They are consistent with the change
in the culture.
On personal tax relief, I appreciate that's the
subject people are focusing on in the questioning. I
go back to King Chilalonghorn, who got it right. It
was personal, corporate, and consumption tax, and then
he provided incentives to locate in certain
jurisdictions if you brought in certain kinds of jobs.
That's what we're talking about. I don't expect it
to be accomplished in the next budget. I expect
signals to be sent in the next budget that say, this
is the direction we're now going to follow for the next
It was totally unpopular when industry came forward
and said the deficit's out of control, you have to
cut government spending. Think back to the
budget submissions of five, seven, or eight years ago.
Those were totally rejected at the time, and yet
finally, there was a recognition that somebody had to
step in and start dealing with that problem.
totally politically unacceptable to talk about salary
increases for the deputy ministers and the assistant
deputy ministers, so you didn't increase them year
after year after year. Guess what happened?
I'm one of them who left. I flew up here with two
who left. I'll meet later today with another one who
going to claim I was the brightest and the best, but
I'd say collectively the brightest and the best walked
out, until finally we had la relève, a recognition
that something was out of control.
All we're saying here is— it's the same point. I know it's
not politically sexy, but the total tax
regime—personal, corporate, and consumption—has to
start to be addressed.
Ms. Judith Erola: I'd like to add to that a
couple of comments.
I think the tax situation is very difficult,
and it's not going to cure it holus-bolus. It's more
deep-rooted than that.
Dr. Gagnon referred to some of the infrastructure.
One of the problems we have with the SR and EDs is
that overhead costs for research grants cannot be
included. This is silly. If you're trying to rebuild
your universities and put an infrastructure in that
supports it, then you ought to be able to tell industry
you can deduct overhead costs.
A lot of tinkering, much of which is a part of our
recommendations, can make enormous change. It's that
kind of thing we're talking about in our
recommendations. It's essential to understand that some
of this minor tinkering will not be a great drain on
the federal treasury but indeed will bring more
He's made a very good point on the issue of the
people within the system of government. We looked, for
instance, at the drug review system. They are totally
contained by the whole hiring system that is in place.
If you want a first-rate pharmacologist, and Dr. Denis
Gagnon is one, what does a first-rate
not asking for
your salary, Dr. Gagnon, but we would say roughly
$200,000 to $250,000 would be the salary of a first-rate,
qualified pharmacologist at a senior range.
Well, there's no way the federal government can hire
someone with those qualifications. So there
has to be recognition within the internal
infrastructure that change has to be made.
I had a conversation with a deputy minister the other
day who said, “We're trying to find ways to bend the
rules, to get around the rules, to get the right people
in place”, instead of saying change the rules and get it
right in the first place. You have to retain those
people in the civil service. You have to pay them and
you have to make sure that that part of it is right too.
So it's not just one thing; it's a whole series of
Dr. Denis Gagnon: I think I'm going to go back to
pharmacology after hearing about the salaries.
Ms. Judith Erola: He's now an academic,
Dr. Denis Gagnon: I'd just like to say a few words
about what you said.
Most of the Canadian population
would tell you that what they'd like to see from
their government is that it use a balanced approach in
the next budget. I guess I made my point a
little stronger than I thought at the beginning, but
when I say that as a Canadian I'm turned
toward what I call the knowledge-based economy, I
believe this is the only way for Canada to develop and
compete with others. What I'm saying is, why don't we
try to signal that?
You've done it. The federal government has done it by
creating CFI, by increasing, to some extent, the budgets
of the granting councils.
But if we all agree that the
future for Canada is the knowledge-based economy,
why don't you try to take it step by step and try to get
there over a certain period of time.
I will never tell you or ask you to double the budget
of CFI or the Medical Research
Council, or NSERC or the others, but send the signal to
the system that the federal government is aware that the
future for Canada is the knowledge-based economy. We
will go slowly, step by step, but we will get there.
I thought I would also talk about income tax
relief to some extent. I never wanted to target
specifically the best paid among us. I was not
really looking for that.
I was looking for an overview and to try to
relieve taxpayers to some extent so that they
can invest back into the economy. But that's another
Again, I want to make this very
clear. I do think that if there is a common factor for what I call
the brain drain, the taxation level is one of the
factors, but the main one, the big one, the most
important one, is definitely the opportunity for our
people, the researchers, to do what they want to do in
Canada. This is the basic question. If you
talk to these people, they will always tell you they're
moving away to Boston, to San
Francisco, to San Diego, because they have the tools
they need to do what they want to do. And that's it, period.
Ms. Carolyn Bennett: As you know, we have a real interest
in beginning to measure what we're doing in health
care, and some increased accountability.
interested in the OECD definition compared to our own.
If we adopted more of an OECD
approach, do you think some of the
methods in terms of health
care delivery that we are now using but have no
evidence that they work— do you think it would
be easier for the
private sector to help us measure that in terms of
things that have never been proven?
Ms. Judith Erola: Absolutely, and I think it
would also address some of the concerns that were
raised earlier by Mr. Riis. These kinds of studies of
man and culture and innovation are all absolutely
essential studies that have to take place, and I think
it's essential that industry be involved in some of
them, have some input. I don't think it's enough for it to
be a purely academic exercise. It has to be a blend of
both, with input from both. I think some of these studies
are essential to pointing us in the right
direction. I think that this definition,
this clarification, would be very valuable.
The Chairman: Mr. Pratt.
Mr. David Pratt (Nepean—Carleton, Lib.): Thank
you, Mr. Chair.
I'd like to extend my thanks to the witnesses today
for their presentations and their discussion on these
issues. It's been very interesting for me as a member
of Parliament who represents a riding with a high
proportion of high technology and people who are based
in knowledge industries.
During the summer I had the opportunity visit a small
company in my riding, in the Bell's Corners area.
This particular company was little bit different from
some of the others I'd met and talked to over the
last year in that they were repatriating some of their
high-tech employees who had actually come back from the
U.S. In my experience, this is certainly the
exception rather than the rule. I share the
comments that have been made by many of you that the
brain drain is there, it's significant, and it has to be
I think part of the problem is that we don't really
have a firm grasp of the numbers, as was mentioned, and
I think the government has to do more in terms of
trying to identify the magnitude of the problem. But
we really haven't talked about the issue of how we deal
with the problem, both in the short term and in the
long term. I think there's general agreement that
there are things that we can do in the long term that
will reverse the process—that will hopefully reverse
Even as we speak, people are making decisions in
terms of their lives and their families, whether or not
they're going to stay in Canada or move to the places
you mentioned, whether it's Boston, Chicago,
San Francisco, San Diego, Denver, or Seattle—wherever.
Do you think the federal government right now
should be working on a short-term and a long-term
strategy dealing with tax incentives to keep some of
these graduates in Canada so that they can set their
roots down firmly enough that the option of moving to
the States is not something they would
realistically consider? Is that something we
should be doing?
Mrs. Erola, you spoke about tinkering
with the system. Are these the sorts of things—the
tax exempt signing bonus—that we should be looking at very
seriously to try to stem the flow involved in the brain
drain? Let me just throw that out as a first question.
Second, I think we all recognize that there are problems
with programs like the SR and ED tax credit, but we have,
at the same time, great successes with the Technology
Partnerships Canada program
and with IRAP.
One of the problems we face as a government
is that whenever some of these announcements
are made, the opposition members are howling in the
House of Commons about giveaways to corporate Canada.
Do you folks think you could be doing a better job with
the opposition members to convince them that
these are important investments in growth sectors of
the Canadian economy?
The Chairman: Who is going to go first? Ms.
Ms. Judith Erola: Yes, the incentive issue I
agree with. That's what I was referring to in terms of
the tinkering you can do. You can look at some
of the recommendations we've put forward, which are not,
as I said, major drains but in terms of a package will
perhaps be enough to halt the brain drain. I really do
believe that common sense can prevail and that we can put
together something in the short term that would address
the issues that all of us have in common here today.
As to your second question, it's very difficult for
industry to spend a great deal of time educating all
members of Parliament.
Mr. Nelson Riis: Why is that?
Ms. Judith Erola: Well, it's time-consuming.
Mr. Nelson Riis: Is it not that important?
Ms. Judith Erola: Of course it's important.
That's why we're here today.
Mr. Nelson Riis: No, you're here today to talk to
basically— Well, it's a pretty minimalist approach
to education if this is all you're doing.
Ms. Judith Erola: But surely we should have a
roomful here today, Mr. Riis. We look upon this as
education. But industry is spread across the country
or concentrated in some areas.
Mr. Nelson Riis: But you
represent lobby groups basically. You're here
as a lobbyist.
Ms. Judith Erola: Yes, we do. What happens is
that many of our companies are concentrated in certain
parts of the country. They spend a great deal of time
educating their particular member of Parliament because
that's a natural thing to do. But to educate every
member of Parliament I think is difficult. If someone
could suggest a cost-effective methodology other than
the one in which we are indulging today, we'd be very
pleased to do it. On the other hand, Mr. Chairman, we
have sent out information to every member of Parliament
for the past two years.
Mr. Nelson Riis: That isn't the way to communicate
Ms. Judith Erola: That's right, it isn't an
effective way of communicating. So it has to be done I
guess mano a mano, and that is a very difficult thing
for all of us to do.
Dr. Gaylen Duncan: I think your point is dead on.
Associations were created partially to do exactly that.
I choke occasionally on the word “lobby”, but I have no
problem with the word “advocacy”.
Ms. Judith Erola: No. I have no problem with
the word “lobby”.
Dr. Gaylen Duncan: But I think you're absolutely
dead on and we're going to have to do more of it. With
regard to short- and long-term programs, absolutely.
Without using the nickname too broadly, we don't have a
Captain Canada right now. We don't have a Captain
Canada program right now and we need one.
Ms. Judith Erola: Yes, in science and
technology particularly, although in all
fairness I think Mr. Manley has done an exceptional
Dr. Gaylen Duncan: Oh, he's done a superb job.
The Prime Minister's speech in St. John's,
the other day was dead on, but it's the first time I've
heard him talk about science and technology and the
information technology economy. We need more of it.
Yes, short term it would help.
The Chairman: Mr. Riis just has a quick follow-up.
Then we'll go to Mr. Forseth.
Mr. Nelson Riis: It's just a tiny point, and I appreciate
your generosity. I think the point that Mr. Pratt
makes is very important. Whoever's in government
gets informed well, for obvious
reasons. But I think your organizations would do some
wise investment to take the opposition more seriously.
If as Mr. Pratt says we howl about things, perhaps
some of the howling is the result of misinformation,
lack of information.
I think, without being brutal
about it, your effort to inform the opposition is
abysmal. It's virtually non-existent, other
than maybe sending along the odd pamphlet or something
or the odd booklet. So I would really take this more
seriously in terms of broadly based education and
perhaps enhance the quality of debate in the House of
Commons at the same time.
Ms. Judith Erola: Absolutely.
Dr. Gaylen Duncan: If you could make the
donations, the fees the companies pay to us fully
tax deductible, perhaps we'd get the budget to have a
campaign for backbenchers.
No, the point's well taken
and we will respond.
Ms. Judith Erola: We'll be knocking on your
door, Mr. Riis.
Mr. Nelson Riis: I'm just looking for more
work. Thank you.
The Chairman: Okay. Mr. Forseth.
Mr. Paul Forseth (New
Westminster—Coquitlam—Burnaby, Ref.): Thank you very
much. As part of the official opposition, I smile a
little bit to hear Dr. Gaylen Duncan recommending some
of the Reform Party economic policy to this committee.
But as a representative of the
information technology association, it appears that
you're recommending, among other things, a personal
income tax cut. In your brief, you say specifically:
Overall tax levels in Canada must be at
least in line with those of our competitors, if Canadian
industry is to continue to attract and retain
investment capital and skilled personnel.
Canada offers advantages, in terms of quality of life,
which may, in some cases, offset significantly higher
taxes. However, we are now seeing the impact of an
unfavourable investment climate in Canada, vis-à-vis our
That's what you say. Therefore I would like to put
you. What specific personal income tax levels do you
recommend? Maybe you can address the ideas of flatter
taxes, the surtaxes, the level of the basic exemption.
What are your specifics on the personal income tax
issue that relate to the investment climate and
taxes vis-à-vis our competitors?
Dr. Gaylen Duncan: We did not file specific
suggestions on either the personal, the consumption, or
the corporate taxes. What we said was, in all three
areas the levels are too high. Certainly not getting
into a discussion of flat tax or graduated taxes—I
leave that to those who make their living out of the
tax world—what we are saying is, from a business point
of view, whether as a corporate investment in new jobs
or an investment in hiring new people, this whole
environment is too much.
Given the dollars available, we're not expecting
dramatic changes in any one of
the three areas but a signal that says there will be a
consistent campaign to deal with all three areas. A
first step in that campaign is what we're looking for.
I did not put forward any suggestions specifically on
the personal taxes.
Mr. Paul Forseth: Does anyone else want to
Mr. Anthony Castell: I think that's true, because
it's very difficult in a very brief document to look at
all the various analyses. Mr. Szabo has
obviously done his research. It would be interesting,
in terms of education, to share that analysis. If
really everybody, including the newspapers,
thinks there's a huge differential between Canada and the
U.S. but there are facts that say otherwise, then I think
part of the problem is getting that knowledge there.
We need to share that with our employees too.
In terms of the tax cut that is being suggested, I
think that is a short-term fix. We have a number of
problems. To answer Carolyn Bennett's point there, I
think there is no doubt that Canada is recognized as a
world leader in high technology, in that sector. Our
concern is that we are able to maintain that and to
remove some of the barriers to enable us to do that.
I think we regard that what's good for ITAC's
members is good for Canada, and if we can
create an environment that creates and encourages more
jobs, then that's good for Canada as a whole, and
it will, by default, address some of Mr. Riis' concerns over
the social programs.
There are several stages to this. As I say, the tax
cut is really just one element, and it's the most
visible short-term fix there is in the whole process.
We look at this in three stages, really, as
creating the supply of workers for the industry. I
know the provinces, particularly Ontario, are doing a
lot of work in that area, and we've worked with them on
But I think it also goes back to the point that you
have to look further back. You don't just look at
post-secondary; you have to actually get right back
into the primary education, if you like, and create
that interest at that stage. It's almost too late to
create that once someone has dropped out of high
school, although, again, that requires some form of
There are two sides to everything. There's prevention
and cure. We can't do both of everything with just
one budget, but I think having that overall plan
will help us lead towards that. Short-term
fixes are good, because they are visible and we can see
them there and see them working, but we have to work
behind the scenes on the prevention.
The second stage we see is the retention of
the people, and that's the whole problem that has given
rise to the tax cut issue. It's the very visible, very
vocal part of people leaving Canada for the U.S. It's
not a rush to India or anywhere else; it's to the
U.S. If the facts are not as presented, or as
reported generally, then we should make sure that the
correct facts are presented.
But for a young graduate,
our experience is that they look at income tax and see
that it's significantly less, and of course salaries
are significantly higher. It's a package.
Having been able to recruit and retain the people, we
also are looking at how we benefit and how Canada
benefits from the fruits of those Canadian workers'
labours. In our industry a lot of what we do is on the
export side, and again there may be some barriers there
just within the workings of the tax system. So there
are some things that are in place like the tax credit
program, which doesn't necessarily work quite as well
as it should, so a lot of work is being done in that
area. But there may be other areas where improvements
could be made to the tax system to remove some of the
The Chairman: Mr. Patterson.
Mr. David Patterson: The number one issue of
concern to our membership is human resources, and it's
human resources in the broadest possible concept. In
the context of today's meeting on pre-budget
consultations, the natural human resource issue on
which you focus is the tax one, so that is the
one I have listed as the first priority in my
submission. But if you look at the list of concerns
the membership has raised, you will see it's very
broad-ranging indeed. It covers, on the human
resources side, a very wide range of initiatives,
programs the association has put forward in which the
membership participates and in which we seek partners
in the broadest possible spectrum to allow us to
address these problems.
In the context of investment, particularly Canada's
deteriorating position as an attraction to foreign
investment, one aspect that must be kept in mind is
that the attraction of living in Canada vis-à-vis
living in some other country—the fact that in terms of
the UN human development index we are number one—is
actually pretty much an irrelevant issue. The people
who are making the investment decisions are boards of
directors of foreign corporations who are residents of
Tokyo, London, or New York. They're not going to move
to Canada. They will not enjoy the attractive social
environment, the excellent health care, the good
education system. They are concerned only about return
they would garner on their investment. And if tax
rates, regulations, and other difficulties reduce that
return, they will place their investment elsewhere.
It's been clear in the last few years that this has
been happening to us at a very distressing rate.
The Chairman: Thank you.
Ms. Judith Erola: Just as a final comment, our
industry is a research-based industry. We have been
growing research in Canada at a rate of approximately
1% to 2% per year. If you take the OECD definition,
we're close to 17%. But it's an incredibly competitive
The decision to place research in a country takes into
consideration a number of factors. The personal income
tax issue is not as great an issue there, but there are
several. One is the scientific research and
experimental tax credit—do you get a fair break there.
We think it's fairly restrictive in Canada. Secondly,
it's the regulatory environment as well. I think that
is of importance to this particular committee, because
unless we have a regulatory system that is well
financed, has the funds to do the job, it is going to
be one of the major factors that will be placed as a
deterrent in saying whether we're going to do that
research in Canada or not.
The Chairman: Mr. Forseth.
Mr. Paul Forseth: Earlier we heard references to
the phrase “the howls from the opposition”. Sometimes
that develops in reaction to market-distorting, overly
focused industry incentives that are far too narrow,
rather than perhaps an overall climate for growth and a
broadly based tax regime where it can really let the
market work. Historically, governments have been
particularly bad at picking winners.
Each group, each association, whatever their background
is, comes to this committee and argues for the specific
tax incentive or write-down or whatever that's
specifically represented for their group. Now, if a
government were going to accept most or all of what is
recommended at committee, there'd be no taxes collected
in the country; in fact money would be created out of
thin air to give to every group.
Obviously choices have to be made. It's to hear from
you that broader recognition that a regime and an
economic climate must be set, rather than just
specifically lobbying for your particular group— That's
what I want to hear: that long-term advice as to
the general direction in which the government has to
go, rather than just specifically saying your specific
industrial group needs a tax break.
The Chairman: Any comments?
Dr. Gaylen Duncan: I think we have been saying
that, but I would perhaps put a slightly different spin
on what the IT or ICT industry is and perhaps pick on R
and D or scientific research as the theme.
I think what we're saying is that there are some
cross-cutting pieces to the knowledge-based economy
that are not the old traditional verticals. Relief or
money for mining is not the same as relief for R and D.
R and D cuts across everything. It's a terrible word,
but in the ICT sector we're starting to call ourselves
a “vertizontical”. We're not just a vertical. Half
the people working in information technology work in
other sectors of the economy. So what we're saying is
in the knowledge-based economy, not my sector, there's
a need for some recognition that it has not been
treated the same way as the traditional industries that
we developed and nurtured in Canada.
When we start making that shift from nurturing the
dying industries to nurturing the growing industries,
some of Mr. Riis' problems are going to be addressed
in terms of the job creation. They're not all going to
be PhDs in computer science; we also need clerks,
mailroom people, marketing people, accountants.
Ms. Judith Erola: Custodial staff.
Dr. Gaylen Duncan: Custodial staff. So it
permeates the economy.
What we're saying is this engine, which now people
like Minister Manley have begun to recognize, is truly
the engine of growth. Employment in this sector is
growing at six times the rate of employment growth in
the rest of the economy. Recognize it and nurture it.
Don't tax it to death. Nurture it. Give some relief in
the scientific R and D tax credit area. Don't apply it
as a tax loophole, which unfortunately is the mind of
the finance department; apply it as an incentive to the
economy, which I think is now becoming the mind of Mr.
The Chairman: Ms. Leung.
Ms. Sophia Leung (Vancouver Kingsway, Lib.): Thank
you, Mr. Chairman.
I enjoyed all your very eloquent presentations.
I'm from Vancouver, B.C., and as a new MP I heard many
concerns about brain drain, high taxes on business, and
education and science and technology sectors.
I already arranged two roundtable discussions, one
with the Deputy Prime Minister and the second with
Minister Paul Martin. I invited two university
presidents and the chairman of the board of trade, etc.
I want you to know that I heard loud and clear your
concerns. You can say I'm very friendly to you. I
really want to say I deeply share some of your
Every weekend I go back to Vancouver, and while I'm
there I hear the same thing. People ask, can you do
something? So here I am, and I want to reciprocate by
saying I understand and I hear your message.
I'd like to make a point about the fact that the
high-tech industry in B.C. has a lot of vacancies for
high-paid jobs, but we literally cannot find
qualified people. I'd like to ask if you have any
suggestions. Of course we can go back to the same
reasons, but still we have such a vacuum there. We
have the same problem in Ottawa. There's industry here
where you have to find people who are foreign-trained
or whatever. So that's another thing we are facing.
We require such highly trained people, but we
do not have them.
Does anyone want to respond to that?
Dr. Gaylen Duncan: There's a shortage of skilled
people throughout the high-tech sector, not just in
We can say that; you can nod and say yes, you agree.
There are economists in the Department of Finance who
disagree, and they turn to Statistics Canada and ask
where in the labour market information statistics are these
20,000 jobs, for example, which we say are open in just
the software industry. The first thing you could
do as a government is develop labour market information
on the new economy.
Ms. Judith Erola: Information that is current.
Dr. Gaylen Duncan: Current and on the new economy.
We have been working very forcefully with HRD. They
agree completely that there's a total lack of labour
market information, and they commit to do something
about it some time. We have seen nothing.
As industry, we are now being forced to go out and
survey ourselves to get evidence of the number of jobs
in order to come back to tell the government that if
the education systems were graduating people in the
right sets of skills, we would have jobs for them. This
is a very silly onus to put on industry. This is
normally something carried out by government.
If labour market information were to be number one,
the second would be to work with us on programs that
will get those jurisdictions that have control over
education to recognize that their own regimes inhibit people
from getting the skills for the new economy. We've
seen some movement recently in some of the provinces.
But when industry finally understood what the business
case was for not enlarging computing science and
engineering programs, the business community agreed
with the university presidents. If you lose money on
every computing science and engineering student and you
make money on every art student, it's pretty obvious
what you should be marketing. So we've got to change
that formula, and we need leadership from the federal
I appreciate that education is a highly sensitive
provincial jurisdiction, a constitutional issue. A
skilled and employed workforce is a federal problem.
We need some leadership on how we get the educational
system producing people, from primary, as has been
mentioned by a couple of people, right on through. We
don't need to be graduating 100,000 computer science
people, but we need to be graduating many more people
who are computer literate. That's different.
Ms. Judith Erola: Can I just add that there has
been, I think, a cultural divide within academia and
industry in Canada, which is slowly
dissipating. But for many years there were virtually
two solitudes. One certainly did not talk to the other.
The government institutions that have been created,
the partnerships such as the innovation fund, are
disappearing, and I would encourage more of those. As
universities and industry grow closer, there is a
better understanding of that labour market and better
training in that area. Academia is as hard to turn
around as the Ministry of Finance, but it is changing.
I think in British Columbia, to answer your question
particularly, the university, UBC, has been putting
forward a valiant attempt. I believe the new president
and some of the people we're dealing with at UBC are
taking a very close look at it. I encourage that, and
I encourage the Government of Canada to form more of
these private/public sector partnerships, in a
practical sense, and to consult with industry before
they go out to do a partnership. Very often a
partnership is sprung upon industry without enough
input for them to ask, is this going to work, or is it
going to be attractive for industry to participate?
Ms. Sophia Leung: My comment is for Dr. Gagnon. I
believe you have recommendation 5—to try to encourage
the private sector to invest in research. I think your
new president, Dr. Strangway is awfully good. He
has done in Vancouver for UBC, and I'm a UBC
grad— he has attracted multi-millions. So I'm glad you have
him, and I'm sure you will do an even better job of
attracting that. We certainly looking to see what
we can do.
Thank you very much.
Thank you, Mr. Chair.
The Chairman: I just want to thank
the panellists, first of all.
I'll make some comments in reference to what I heard
today. In essence, you really spoke not just about
what we need to do today, but about an overall vision
and certain commitments we need to make.
Quite frankly, I'm very excited. I'm an optimist at
heart in the sense that this debate has been going on
longer than we think. Ten years ago, I was listening
to many of the things that have been mentioned today,
and progress has been made: sector council initiatives,
the work you do, and so many others. Obviously,
something must be working because our economy is really
transforming itself. Job creation in your sector has
Essentially, when we as a nation accepted
globalization as part of our reality, we set some
goals. One of them was that we were going to
concentrate on developing a highly skilled, highly paid
workforce that was going to produce high-value-added
product. To achieve that, of course, you have to
provide people with the technological infrastructure,
the traditional infrastructure, and the tax levels that
will make more sense for certain industries.
Often, it really comes down to choices. You can't do
everything at the same time.
As Mr. Forseth clearly
stated, we need to focus on a long-term plan. In other
ways, we also have to deal with the administration of
government in its present state.
My question relates to an issue that has captured
headlines in the past week. It has to do with
employment insurance premiums. You've come here
advocating personal income tax cuts and tax credits for
your industry. You've come here expressing a concern
you have about brain
drain. Anecdotal or otherwise, it's still an issue you
The government has a choice here to listen to you,
because you're talking about personal income
tax—which, by the way, is not an issue we're very
competitive in. On payroll taxes, we're very
competitive as a country.
So what do we do? Some people advocate that we should
perhaps be using EI funds—which, by the way, are
really general revenue funds—to cut taxes, to do those
sorts of things. What do you think about that?
Dr. Gaylen Duncan: Once more into
Ms. Judith Erola: It's a personal opinion this
time, isn't it?
Dr. Gaylen Duncan: No, I'm still within the ITAC
Let me come at it from the point of view of trying to
explain federal, provincial, and municipal jurisdiction
to average voters. To them, it's all government.
Voters have a real difficulty understanding where the
federal jurisdiction ends and the provincial
jurisdiction begins and when it's provincial delivery
of federal dollars.
To a company, every cheque we send to Ottawa or to a
provincial capital is tax, whether it's EI premiums,
payroll tax, corporate tax, or a remittance of personal
tax. I think the point we've been trying to make is
that, across that whole spectrum, those payments are
too high. Whether we're arguing that we're competitive
on one form of payment but uncompetitive on the other
form of payment, the point is the bottom-line vote.
Dollars are going elsewhere and people are going
Trying to get at your point, send the signal you
will do to taxes what you have done to the deficit. I
don't expect them to go to zero, but state what
percentage of the GDP they will go to. Over time, then
pick off payments you can afford. Begin
lowering them until you do
achieve a lower percentage of the total GDP generated
Understand the choices and understand that it's going
to take time. We said that about the deficit too. We
said it was going to take five to ten years to turn
that particular problem around. It took about four or
five years to get people's attention, and it has taken
us four or five consistent budgets to actually get it
accomplished. But the economy understood that there
was a commitment by a Minister of Finance, by a Prime
Minister, by a cabinet, and by a Parliament that this
was what they were going to work on first.
The Chairman: Dr. Duncan, let me perhaps rephrase
this, because I'm not getting an answer. I understand
that you want to focus on reducing taxes, but my
question was a little bit more specific.
I gather you pay EI premiums, right?
Dr. Gaylen Duncan: Yes.
Ms. Judith Erola: Darn tootin'.
Dr. Gaylen Duncan: Is it specifically what to do
with the surplus?
The Chairman: Specifically, do you want the federal
government to get rid of the 3% income surtax, or do you
want the federal government to reduce your premiums?
Dr. Gaylen Duncan: The EI program was set up as an
insurance program. The money was collected for that
Ms. Judith Erola: And it should be used for that
Dr. Gaylen Duncan: We have a concept when we
collect information. Under the privacy rules,
information collected for one purpose cannot be used
for another purpose without the consent of the person
from whom it was collected. I guess that's where we'd
be with regard to the EI surplus. It's an EI
surplus collected from EI payers. It should be rebated
to EI payers.
The Chairman: I understand what you're saying, but
as you know, there's a sort of phantom account. If
there's a so-called surplus, it goes out to general
Ms. Judith Erola: But the concept of it going into
general revenues is lost on the payer. As a former
small employer, I can say that it's a major part
of a small employer's remittance to the government for
a specific purpose, as Dr. Duncan mentioned. To have
that distorted into some other area would, I think, be
looked on as something of a breach of faith by both
employers and by employees.
The Chairman: Can I ask you a question?
If, in February, Minister Martin comes out with a
budget that essentially says that after he takes care
of the $3 billion contingency reserve fund for the
debt, he will announce a $5 billion EI cut, and that's
it because that's the only money he has, would
the Canadian people be happy with that budget?
Ms. Judith Erola: I can't answer that question.
The Chairman: Let me put it another way. You're
sitting back listening to his speech. He gets up and
says, “Ladies and gentlemen, in my budget, $3 billion
is going to debt and $5 billion will be used to reduce
the EI premiums.” That's the speech. That's the only
room he has to manoeuvre. If your logic about EI
is right, then let's say that's what he's left with.
Dr. Gaylen Duncan: How many personal payments are
there into the EI fund? How many individuals see money
taken off their cheque to go into the EI fund? Is it 8
million people? Then I'd say 8 million people would be
Mr. Paul Szabo: Fourteen million.
Dr. Gaylen Duncan: That's another cut we're hoping
Ms. Judith Erola: Absolutely.
Dr. Gaylen Duncan: I think all of us started off
by saying we're not talking about something that's
politically sexy. Tax relief and EI reductions are not
politically sexy. Jobs are. We're saying jobs will
disappear at a faster rate if we don't start dealing
with the environment in which we do business.
Ms. Judith Erola: And EI is very much a part of
job creation and job retention. When you combine all
of this, it particularly makes a difference in a small
business when you're trying to decide to hire two
people or three people. Mr. Szabo, as an accountant, I
believe you would support that.
As a small employer representing the business industry,
I feel very strongly that the employment insurance fund
should be looked upon as something that should be
retained for the purpose for which it was designed.
The Chairman: But for the people you represent,
the higher-income earners that you're trying to keep in
the country, the EI premium reduction would have
marginal benefits as opposed to a personal income tax
Ms. Judith Erola: It would, but it would have a
great deal of effect on the segment of the population
that Mr. Riis was referring to as well. It's a cascade
Dr. Gaylen Duncan: Mr. Bevilacqua, if that's all
he says, then we would mouth polite words, but not
necessarily very supportive ones. I think the message
we've been trying to deliver is a statement that says
this is now the new target of the government. It will
take us several years to get there. Step one is the
fact that we have an actuarial surplus in the EI
account and are going to bring it back down to zero by
reducing payments over the next number of years. Step
two is to focus on committing x percent of the
ongoing surplus to tax relief every year.
The Chairman: That's quite different from the
statements being made now. You're saying that anything
exceeding $15 billion in this so-called account should
be directed back to employers and employees. If the
case is that we don't know what the surplus is going to
be this year—let's be clear about this—if we are
going to just deal with that particular issue, I submit
to you that the speech will not last very long.
He will say “That $3
billion will go toward the debt, $5 billion toward EI
reduction, and that's my budget speech.”
I'm just saying, and I'm not committing you to
this, that besides the fact that it would be a very short speech,
I don't think too many people would derive hope from
just dealing with one issue on this budget, when we get
people here talking about research and development,
brain drain, health care costs, taking care of our
children, and so on. That's the only point I'm trying to make.
Ms. Judith Erola: Yes. I think there has to be
The Chairman: Okay. So you would like a long-term
Ms. Judith Erola: Absolutely.
The Chairman: You don't want all this money
to go back right away. Okay.
Well, on behalf of the committee, I'd like to thank you
very much. You always provide us with insightful
information and I'm very grateful for that. Thank you.
The meeting is adjourned.
The Chairman: I'd like to call
this meeting to order and welcome everyone back here
this afternoon. We are conducting
pre-budget consultations, during which we're seeking
input from Canadians from coast to coast to coast
in order to find out what in fact the
for the upcoming budget.
As you know, this committee will file a report to
the House of Commons and the Minister of Finance, in
which we will make
recommendations as to which way the
budget should be going according to the views of Canadians.
I would like to take this opportunity to welcome
representatives from the Investment Funds Institute of
Canada and the Canadian Automotive Repair and Service
Institute. Mr. John Mountain, vice-president,
regulation, and Peter Bowen, chair, taxation steering
committee of the Investment Funds Institute of Canada
will begin their presentation.
Mr. Peter Bowen (Chair, Taxation Steering
Committee, Investment Funds Institute of Canada):
Thank you. We're pleased to be here, of course, and
we'd like to thank you for this opportunity to speak to
the committee. We're pleased to note that over the
past year we've had a number of consultations,
meetings, and conversations with representatives of
both the Department of Finance and Revenue Canada, and we
have developed a good relationship with both
We have just two issues we'd like to bring to
this committee's attention. They relate, firstly, to the
foreign property rule, and secondly, to RRSP contribution
limits. Both of these issues are dealt with in the
written submission, the letter dated August 31,
which I believe you have in front of
you. I'll speak briefly to
each issue and then see if there are any questions.
If you want to interrupt me as we proceed, please do
As you know, in their deferred income plans,
the amount of investments Canadians may make outside
Canada is limited to 20% of the total assets, based on cost.
IFIC, the Investment Funds Institute of Canada, is
recommending that this limit be increased from 20% to
30%. The primary reason for this is one of
diversification. Geographically, obviously, but
just as importantly, if not more importantly, by
industry classification, the Canadian market,
represented by the stock exchanges, is
underrepresented in a number of very important
industries. Examples of these are health care,
entertainment, and technology, and of course there are others
as well. If Canadians are better able to
diversify their investments, the result would be
higher returns with less risk. So increasing the
foreign property limit really results in a free lunch
for Canadians, and it will provide an overall benefit to
the average Canadian.
Legitimate concerns have been expressed about the
impact of raising this limit on the Canadian markets,
both the stock markets and the debt markets, including
government debt. A recent study by the Conference
Board of Canada indicated that there was no
negative impact on these markets when the foreign
property limit was raised from 10% to 20% in the early
1990s. It further expects that there would be no
significant negative impact as a result of raising the
limits from 20% to 30%. As an aside, one of the reasons
this would be the case is that
only 24% of liquid
assets held by Canadians are in RRSPs or other deferred
income plans. When you consider the other Canadian
assets held by non-Canadians, you can see that the
impact of raising these limits from 20% to 30% will be
The benefit of this increase will go to average Canadians,
it should be noted. Wealthy Canadians have the ability
to diversify outside of Canada by way of their assets
that are not held in RRSPs. It is the average Canadian
whose bulk of assets is held within RRSPs who will be
primarily impacted by increasing this limit. So it's
not the wealthy that would benefit; it's the average
Turning now to the issue of RRSP contribution limits,
this issue is primarily one of fairness. The increase
in limits that was proposed in 1989 was designed to put
individuals who are dependant on RRSPs on an equal
footing with those who have defined benefit plans. It
was also designed to allow individuals to save
sufficient amounts to be able to retire with a
reasonable standard of living and have a dignified
The increases that were proposed have been derailed
by various budgetary crises and there is an opportunity
now to rectify the current unfairness. As a result,
IFIC is recommending the limit be raised to
$16,500 in 1999 and that it be indexed fully to
inflation thereafter. It is time for the government to
fulfil its recognized commitment to individuals
contributing to RRSPs and defined contribution plans.
This concludes my comments about the issues raised in
the letter. I'd like to thank the committee for the
opportunity to speak about these issues and would
gladly answer any questions at this time.
The Chairman: Thank you very much, Mr. Bowen.
We will now move to Mr. Keith Lancasle of
the Canadian Automotive Repair and
Services Institute. Welcome.
Mr. Keith Lancasle (Spokesperson, Canadian
Automotive Repair and Service Institute): Thank you.
Mr. Chairman, honourable members of the Standing
Committee on Finance, ladies and gentlemen, I too would
like to begin by thanking this committee for the
opportunity to once again take part in this pre-budget
consultation process. By way of introduction, I would
like to offer a few words about the Canadian Automotive
Repair and Service Institute, or CARS, as we call it.
CARS is a federally chartered, private sector,
not-for-profit organization working with and
for the automotive
repair and service industry. Canadian automotive
industry provides employment to over 357,000 people in
a full range of repair and service opportunities for
the approximately 15.8 million Canadian vehicles
operating on our highways. Each year the market impact
to this sector on the economy is in the tens of
billions of dollars. Our industry is therefore one of
the major contributors to the overall health of the
CARS has created a mechanism and a process that brings
together this industry's key stakeholders: the
vehicle manufacturers and importers, the franchise car
dealers, the warehouse distributors and jobbers, the
retail chain stores and specialty repair facilities,
the independent repair and service shops, the
industry employees, and our partners in the community
colleges and private trainers.
Through this working
partnership of the stakeholders, CARS has developed and
implemented effective human resource initiatives
designed to help this most important industry segment
across the country address its key human resources
Perhaps the largest portion of the work we've
done to date through CARS has dealt with automotive
technicians and automotive apprentices, the largest
single occupational area within our industry. Working
as an automotive technician or as an automotive
apprentice today is perhaps one of the more challenging
and diverse occupations within the Canadian labour
market. While technology has done much to increase
the high-tech nature of the profession, it is still an
occupation that has some considerable physical demands.
The profession is, by all accounts, a young person's
game. It is extremely rare to see a technician working
on the bench much past the age of 50.
A recent survey carried out for the CARS
council has found that approximately 47% of the
workforce is over 40 and nearly 15% is already over 50. With
that kind of information, the industry recognizes
it is facing a severe shortage of skilled labour in the
very near future. As those workers already in their
40s begin to approach retirement, at least from
this industry's perspective, we will need to be able to
draw on a pool of potential candidates with the skills
and knowledge needed to properly repair the car of
Our industry has looked to CARS to provide leadership
in this area and to develop programs and solutions to
ensure their future labour market requirements are
met. A good example of such an initiative was our
highly successful youth internship program, the CARS
career choices for youth program. This program was
designed to provide young people seeking to make the
difficult school to work transition with valuable
skills and experience. Through this program, over
1,000 Canadian young people were trained and, perhaps
more importantly, received critical on-the-job
experience that they needed to get a solid start in
their career paths.
In the next few months, CARS will be developing career
information products designed to provide young people
with the background they need to make decisions
relative to a career in our industry. This
information, combined with a higher presence from
industry at the secondary school level, will do much to
encourage young people to plan careers in our
Industry has also taken steps to promote and improve
standards for training at both the entry level and for
the existing workforce, to ensure that the appropriate
skills and knowledge are available to those coming into
the business and to those who have already established
their careers in this industry.
In short, the industry has, through CARS and others,
taken some very clear action to deal with some of its
human resource issues. They're working hard to ensure
they have the right people with the right skills at the
Despite all of this work, there are issues and
challenges outside of this industry's influence that
severely affect our ability to attract and retain
high calibre employees. Perhaps the longest-standing
issue affecting this effort is the matter to which I
would like to speak today. It is an issue that has
been brought forward many times, most recently during
this committee's pre-budget consultations last year.
Apprentices and technicians who work in our industry
face a unique situation within the Canadian labour
market. These men and women are required, as a
condition of their employment, to purchase and maintain
their own sets of tools. Simply put, a technician or
apprentice without a set of tools will be unable to
find or keep a job. Yet the costs of purchasing and
updating these tools are not eligible for deduction as
an employment expense.
We acknowledge that every Canadian employee incurs
some expense associated with their employment. In the
case of technicians and apprentices working in our
industry, it is the amount of the expense that makes
the situation unique and particularly acute.
We should look, first of all, at a young apprentice
entering our industry. It is for these people that the
situation is most critical and perhaps most painful.
According to our most recent data, 31% of apprentices
are investing between $2,500 and $4,000 each year in
their tools, and a further 10% are investing in excess
of $4,000 annually. Over 35% of these people have
already invested in excess of $10,000 in their tools,
at a time when their careers are just getting started.
I would pause to remind you that we are talking about
young apprentices, those who are just looking to get
their start in this industry. The income for these
people is still very modest. Over half of them, 54% in
fact, earn an annual salary of less than $20,000. So
it's the magnitude of that investment, when combined
with a relatively modest income level, that makes the
situation most acute for apprentices.
If we want to look at the impact of this situation on
fully qualified technicians, we still find a very
similar situation. Fully 70% of technicians have
reported an annual investment in updating and upgrading
their tools in excess of $1,000, 27% of technicians
report annual expenditures in excess of $2,500, over
60% of technicians have a total investment in their
tools in excess of $20,000, and we know that 12% of
technicians are reporting investments in excess of
While these individuals are fully qualified and
experienced technicians, their income levels are still
relatively modest, especially when compared to other
skilled trades and occupations. Over 63% of our
technicians are reporting an annual income of less than
$40,000, and it's our understanding that the average
income for the technician field in general is hovering
around the $30,000 mark.
Quite frankly, we know of no other Canadian employees
who must make an investment of this magnitude as a
condition of their employment, while still earning such
a relatively modest income. Yet these Canadians have
been denied a tax deduction that has been provided to
those Canadians working as artists, chain saw
operators, and musicians.
The impact of this situation continues to be a concern
to this industry in both the short and the long terms.
In the short term, the absence of a tax deduction on a
technician's tools has been cited time and again, coast
to coast, as a key contributor to the attrition within
the industry's workforce. More importantly, in the
long term and for the future health of our industry, we
believe it is a systemic barrier and a disincentive to
young people who might otherwise consider this industry
as a career path.
Imagine, if you will, the reaction of a young person
who has decided to pursue a career in this industry as
a technician. You are told you must first purchase a
starter set of tools, just to get that first job, and
you will not receive a tax deduction or any credit for
the cost of the purchase. It's a reality that may well
cause you to rethink that decision.
As I've mentioned earlier, this is not a new issue.
In truth, it has been a concern of those in our
industry for a great many years. The technicians and
apprentices are, in many ways, the backbone of the
automotive repair and service industry in Canada.
Without them, we are unable to provide the level of
service Canadians seek and deserve, and the overall
performance of the industry as a whole suffers.
We are very concerned about our industry's ability to
meet the future demands of consumers and the motoring
public. Will we have enough people with the
appropriate skills and knowledge to meet the demands
not only of changing technology but of the increasing
number of vehicles operating on our highways? As I've
mentioned, as an industry we have taken a number of
positive steps to help secure the future needs relative
to employees. However, the positive impact of the work
we've done will be mitigated and very much reduced if
steps are not taken to address this other issue.
You have asked us, in preparing for our appearance
here today, to provide recommendations relative to
questions of priorities for the fiscal dividend and the
nature of investments and changes to the tax system
that should be contemplated. It remains our position
that an investment in targeted tax relief that will
help Canadians find and keep jobs is perhaps the best
way to ensure a wide range of job opportunities within
the new economy. We would respectfully request,
therefore, that this committee once again incorporate
in their report to the minister and the House a
recommendation that tax relief be provided to those
Canadians who must incur exceptional employment
expenses as a condition of their employment.
Thank you again for the opportunity to be here.
The Chairman: Thank you very much, Mr. Lancasle.
We'll move to the question and answer session.
Mr. Paul Szabo: Thank you very much. I'll quickly
address Mr. Lancasle's comments. I agree totally. As
a chartered accountant I am aware of who gets
deductions and who doesn't. Obviously, you've heard
some of the arguments against and the issue of abuse of
a deduction and the need for capping, but those are
details. Fundamentally, if an employer is not prepared
to provide them, simply because the industry has evolved
on the basis that tools are very personal and giving
someone a standard set will not necessarily give you
the best productivity or quality of work, it makes some
sense to look at it.
I certainly support it, with some controls to ensure
there isn't abuse and that somebody isn't buying tools
for all their family and friends, etc., and getting a
deduction on their tax return. You don't want to put
the sugar on the table, because people are basically
honest, but safeguards are necessary. So I give
you my support.
With regard to the financial arguments from the
Investment Funds Institute of Canada, I can't say I
agree. Notwithstanding that this committee's report
recommended an increase in the foreign content rule,
the fact remains that studies need to be done to see whether
or not there's any economic impact. There are studies
being done to determine whether there's an economic
impact, and they're done because you approach a
threshold at which there could be some economic impact
in terms of the capital markets, etc.
With this matter, no matter how you cut it, it turns
out to be a tax break or a tax concession of sorts. In
some cases where treaty provisions would have different
withholding tax regimes, or no withholding tax, I'd
really like to see more about how to balance the
benefit in a situation where a foreign jurisdiction or
a foreign-based corporation is being invested in.
The more important element that I wouldn't support right
now—and I'll tell you my reasons and hope you'll
respond to them—has to do with increasing the RRSP
limit. The current limit at $13,500 cannot be achieved
by any one unless they are making $75,000 a year.
You'd have to make that much to be able to put in
$13,500. This means that benefit or opportunity is
only available to somewhere around 5% to 6% of all
Canadians. So we're talking about a very narrow band
of people who would benefit from the increased levels.
Second, Mr. Bowen used the right words. He said
“fairness”. As you know, we have a graduated tax
system. Subsequent to adopting a graduate tax rate
system, we also introduced things like an RRSP program.
It's a deduction, and the deduction is worth more to a
high-income earner versus a low-income earner. So if a
high-income earner puts $1,000 away into an RRSP, on
balance they're going to get a tax refund of $500. If
a low-income Canadian puts the same $1,000 away, they
only get a $250 tax refund.
On top of that, because you are eligible to purchase
spousals when you make an RRSP contribution, that
effectively allows for income splitting, which is
probably the only major opportunity Canadians have
for reducing their income tax burden. By purchasing a
spousal, you basically split the income levels. You
can do it 100% if you have a company pension
plan and a little bit of room for RRSPs. It allows
you to get a deduction, for instance, at the highest
rate, split it, and have it come out at the lowest
rate. That effectively provides a windfall on the tax
rate on the way out, which would not be and is not
available to all Canadians, to lower-income earners.
So if you honestly believe fairness and equity
within the tax system is important to promote, then
maybe your recommendation should be that we want
Canadians to provide for their retirement and we want
to make sure the benefit is fair and equitable to
all Canadians. Today, it is absolutely not. So I raise
that with you.
I would support increased contribution levels to RRSPs
where it was demonstrated that the Canadians who were
eligible to purchase RRSPs were bumping the
ceiling and in fact had topped out. In fact, the
figures show now that a large number of
Canadians are not using their full capacity, and
the carry-forward amount continues to grow to
astronomical numbers, as you know.
So as to the appetite for
that, although you use the words “for the average
Canadian”, it is absolutely, totally transparent from
the facts that the average Canadian would not get the
kind of benefit from the changes you're talking
about. In fact, it's really for a narrow band, about
5% of Canadians.
So I understand the mechanics, and I understand the feeling
that all Canadians, even those who make high
incomes, should be able to provide adequately for their
retirement income. But when average Canadians are not
doing it—the appetite hasn't been demonstrated—and the
present income tax treatment of RRSP contributions is
not equitable as between average Canadians and
high-income Canadians, I think it would be a point now
or today that I wouldn't support the changes
you're making for these reasons. I'd be interested
in your feedback.
The Chairman: Mr. Bowen.
Mr. Peter Bowen: If I could speak first to the
issue of foreign property limits and further support
for the impact on the economy, the Conference Board of
Canada has studied this particular issue, as
requested by the Investment Funds Institute of Canada.
I believe a copy of that has been sent to
the committee previously, but we have brought extra
copies and would encourage you to review that.
Further, we do have the example of the increase from
10% to 20% that has already happened, without
significant or perhaps any impact on the economy or the
markets in the early 1990s. Accordingly, it certainly
affects few, and it is supported by at least one major
study that the impact on the economy would not be
Further, in terms of it being a tax concession, my
view is that this is something that only benefits
Canadians, and I don't see the downside to allowing
people to diversify their investments and thereby
achieve higher returns at a lower level of risk.
Perhaps I could ask you to expand on the reason
you view it as a tax concession. It seems to me that
this is just a win situation for the average Canadian.
In terms of the $13,500 limit, I will agree that it is
only the people who earn at least $75,000 who will
benefit from this. However, you already have a situation where those
individuals who are fortunate enough to have a defined benefit
plan are able to take advantage effectively of a higher
tax break, and we are simply asking that individuals be
allowed to be on an equal footing.
This is something that has previously been
recognized by the government itself and is why the limits
were proposed in the first place. That is where the
fairness issue is brought to the fore.
Mr. Paul Szabo: If I may, Mr. Chairman, I just
want to respond to the equal footing argument. I
think in general terms that's laudable, but Mr. Bowen,
you'd understand that compensation for someone in a
particular job is a combination of salary and benefits.
Two identical jobs with the same salary, one
with a pension plan and one without a pension plan,
would not be a competitive situation. Obviously, you
would take the one with the pension plan.
To make up for that, those two companies that are competing
with each other compensate for the differential in
employee benefits, i.e., a pension plan, by grossing up
the salary so that they can, on an economic basis, attract
and keep comparably qualified people. To
take it in isolation and say you want to be just like
people with a pension plan— Quite frankly, you
might be in an identical job but your salary might be
higher to compensate for that, and there are benefits
attached to that salary. It's not as simple as you
The other aspect is to look very clearly at the
differential between the mechanics of a pension plan
and the mechanics of an RRSP. In one instance you own
a life annuity with maybe some survivor benefits. You
don't own capital. In an RRSP you do own capital.
It's interesting that a lot of people come and argue
that they have to put x number of
hundreds of thousands of dollars away to
generate the income stream comparable to a pension
What you're really trying to figure out is how much
you have to accumulate in capital so that on retirement
you can purchase an annuity that would be roughly
equivalent to what you could get had you been in a position
where there was a pension plan. That's the
mathematics. But when the salary differential is
involved, it's not comparing apples to apples if you
just say somebody has a pension fund and you don't.
Your salary levels were different probably for the
best income-earning years of your life.
The Chairman: Okay. Thank you, Mr. Szabo.
We'll go to Ms. Bennett.
Ms. Carolyn Bennett: I apologize that I wasn't
here for the whole of your presentation.
You quote the Conference Board study,
which was January 1998, in terms of the foreign property
rule. I guess with the experience over the summer with the
Canadian dollar and the feeling that people have
retreated to safer places, even some of the
strongest proponents of this last winter were
softening this summer. They were calling
me and saying whatever you do,
Carolyn, make sure they don't increase the foreign
Is that representative, or do you still feel as
strongly about it now as when the Conference Board did its
Mr. Peter Bowen: I think I feel more strongly now.
If you look at the relative performance of
different markets, you do see a diversification effect.
The Canadian dollar has unfortunately weakened quite
substantially. To the extent that individuals have been
able to hold foreign investments, they have accordingly
increased in value in relative dollar terms,
notwithstanding what the market does.
The other point I would make is that if you
look at how the markets have acted over an extended
period of time, you will find it has been
much different from what has
happened over this summer. This involves just a few months
of market action, and over the long term the markets have
acted much more favourably, of course.
Mr. John Mountain (Vice-President, Regulation,
Investment Funds Institute of Canada): If I
may, I would also suggest that the Conference Board's
study suggests that 24% of the investable assets of
Canadians are held within registered accounts. So to
increase the foreign property content from 20% to 30%
would allow an extra 2.4% of those assets to be
potentially invested outside of Canada. This would
seem to be negligible in terms of the value of the
Canadian dollar vis-à-vis other currencies.
Ms. Carolyn Bennett: Mr. Lancasle, do you have
any evidence that if the tools were tax deductible,
people would buy more tools or replace their tools
more often, or is it just that people actually have to
have the state-of-the-art tools anyway?
Mr. Keith Lancasle: The industry is in a situation
now where each year the new models bring new
technology and often new requirements for
different pieces of tools, including in some cases some
hand-held equipment the technicians own.
As to whether the deduction would increase the
purchase of tools, I can't say. My expectation is that
it wouldn't and that people would not increase their
level of purchase.
I think technicians buy what they perceive they need
in order to make most productive use of their time.
Technicians may have two or three
sets of wrenches of different lengths and with different
From a layperson's perspective, your reaction would
be, you have a five-eighths wrench, why do you need
three others? It's simply a case of productivity,
that is, being able to get quicker to that one particular spot on that
one particular car and in such a way become
more productive and earn more money. The space under the hood
of a modern automobile is
considerably more cramped than it was 20 years
ago, and they do need to purchase the tools in order to make
most effective use of the space and time.
So as to your question, I don't see a significant
impact on the level of activity resulting from the
granting of a deduction.
Where we see the impact, frankly, is to some extent on
the attrition rate in the industry, but more
importantly on the young people who are coming in.
If you tell a young apprentice of
23 or 24 years of age who wants
to start a career in this industry that they will get
a job that will pay maybe $20,000 in the first
couple of years but that they will have to spend
$4,000 just to get that starter set of tools, the
reaction of a lot of them is to go the other way. For
those who really love the industry and want to be part
of it, it's a very significant impediment.
We're concerned in the long haul about the ability to
service cars in the future.
We're already seeing skill shortages. We've just
finished a nationwide study of
employers, and without exception, from St. John's,
Newfoundland, to Vancouver, they're telling us the same
thing, that people are lacking skills in diagnostics and
electronics and that they're not able to find people with
the skill sets of knowledge they need. So we're
right on the cusp, frankly, of a very significant
crisis, and we think the granting of this deduction
will do much to help that when combined with the other
efforts that are under way.
Ms. Carolyn Bennett: So it's much more about being able
to fill a gap in this employment area rather than just
the fairness argument.
Mr. Keith Lancasle: It is a fairness
argument, obviously. If I'm an artist, a
musician, or a chainsaw operator, I can deduct the
cost of my “tools”. These are people who earn a
comparable level of income to technicians.
I cannot for the life of me find a Canadian employee
who has to make the kind of investment the technicians
and apprentices have to make. I have yet to see
an example, after almost ten years of
working on this issue. It is a unique
situation in the market. There is no other Canadian
employee who spends that kind of money.
I've asked department officials, who
owns those red tool boxes at the end of the stall where
you get your car serviced? The technician and the
apprentice own that toolbox. It's a
unique situation, unlike any other.
So it is very much a matter of fairness. But it's also
a matter of economic health for an industry
sector and of assisting young people to get that job, to
get that start. Too many
can't get out of the blocks. This is an impediment
that gets in their way.
Ms. Carolyn Bennett: Even as an apprentice, if you
want to apprentice for a job you have to own
your own tools.
Mr. Keith Lancasle: Yes, and it's for the
apprentices that the burden is heaviest. Because
typically, by the time you're a journeyperson
technician, which will take anywhere from four to five
years depending on the province and on your own ability
to complete the course of study and the number of hours
required, it's generally anticipated you will have
acquired your complete set of tools over that four-year
The average journeyperson technician has a tool box
that's probably worth somewhere in the neighbourhood of
$18,000 to $22,000. The math to me says that's
$4,000 to $5,000 per year, at a time when I'm earning a
fraction of a journeyperson's wage. So you're taking
a $20,000 salaried employee and saying spend $4,000
this year. That's 20% of before tax income for a tool
purchase, and you need that to go to work. If the tool
box disappears tonight, I cannot go to work tomorrow.
Ms. Carolyn Bennett: Do people borrow the money?
Mr. Keith Lancasle: They borrow the money from the
bank, if they can; they borrow money from family; they
go on revolving credit terms with the tool
companies—they take any number of ways to finance
Ms. Carolyn Bennett: Can they lease them?
Mr. Keith Lancasle: There's no leasing of tools
that I'm aware of, because they are so portable. I mean
they're portable, but they're not—it's not like a
piece of equipment, but it isn't something you can put
in your back pocket and walk home with. The tool chest
is three feet wide and often six feet high, so it's not
very portable, but it's a very difficult item to trace,
certainly from a leasing perspective. So there's no
leasing that I'm aware of.
Ms. Carolyn Bennett: How are the banks at giving
loans for these things?
Mr. Keith Lancasle: They're probably not all that
helpful. Most of the technicians I know either have
family loans or they simply go on a revolving line of
credit with their tool supplier. You're talking about
someone who probably has a very limited work history,
and to say we're going to take on that kind of
liability that early in their career, the banks—
Ms. Carolyn Bennett: Couldn't they just take the
Mr. Keith Lancasle: Take the tools back?
Ms. Carolyn Bennett: Why wouldn't the tools be
Mr. Keith Lancasle: I can't presume to decide how
the banks would or would not loan money, but my
expectation is they would find a rough road in terms of
getting a bank loan to purchase tools.
Ms. Carolyn Bennett: Okay, thank you.
The Chairman: Ms. Bennett, when you were an
intern, did you have to buy your own tools? You did,
Ms. Carolyn Bennett: Yes.
The Chairman: You were probably making more than
Ms. Carolyn Bennett: I made $8,000 as an intern.
The Chairman: There you go.
Ms. Carolyn Bennett: I needed them as a student.
The Chairman: That's right. I mean that's also the
If you want to become a mechanic—I think that word
doesn't describe it, they're more like technicians now
than mechanics—is that just part of the investment?
It's the same argument we hear from students who want
to obtain a BA or become accountants or lawyers, and
they talk about the high cost of education. But is
that just the price to become a doctor or an accountant
or a lawyer?
Ms. Carolyn Bennett: But I can deduct it.
The Chairman: You can deduct it.
Ms. Carolyn Bennett: Technically—if you're eventually
Mr. Keith Lancasle: I think, with respect, while
many professions make investments at the front end, it
is in fact an investment. If you're an intern you're
looking forward to a career where your income level is
going to be considerably higher than it was when you
were first starting. We're still looking at an average
salary for a technician that's hovering around $30,000.
This is by no means a lucrative profession in the
overall scheme of things. So the investment at the
front end does not necessarily result in a higher
income level at the later date. You have an
ongoing investment as a technician as well, because the
models are changing and the technology is changing. So
there isn't necessarily the payback. That's where I'm
coming from with that.
The Chairman: What if they become self-employed?
Then you can deduct it, right?
Mr. Keith Lancasle: My understanding, because we
have explored this option, if you will, is that Revenue
Canada applies a series of means tests to
self-employment to determine if you are in fact
self-employed. A number of the means tests have to do
with whether the employer dictates the hours of work,
whether the employer dictates which work you will get,
and at what rate you will be compensated.
self-employed person can take or not take work and is
more free to dictate what they will accept as
remuneration for that work, and a self-employed person
is not committed to be at a place of employment within
Technicians would not pass Revenue Canada's definition
of self-employment, based on the discussions we've had
with them up to this point.
The other thing we have to consider, very frankly, is
that we're talking about a not particularly lucrative
profession. Are you going to want to give up the
security of employment, in terms of CPP benefits as an
employee and EI benefits, for a $30,000-a-year
Again, if you're going to become a self-employed
professional and have a professional corporation, as a
lawyer or as a member of the medical profession, you're
looking forward to an income level that is considerably
higher than $30,000 a year. You may be willing to
forgo the security of employment for the risk of the
return of a higher level of compensation.
The Chairman: Thank you.
Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Thank
you, Mr. Chairman.
To follow up on this, my tax consultant here tells me
that the Income Tax Act says all expenses incurred
directly or indirectly to earn income are deductible.
But then it goes on to say that tools are excluded. So
there is an exclusion.
I really don't know how old that section of the Income
Tax Act is, but I think you raise a really interesting
and valid point, and Ms. Bennett has also alluded to
it. In our last budget, which was referred to
as the education budget, certain things were overlooked
or fell through the cracks.
As government, both federally and provincially, we do
support post-secondary education. We support it with
tax dollars, and those who go to colleges and
universities are allowed to deduct tuition from income,
and there are other provisions whereby parents can also
deduct tuition. If you are away from home attending a
post-secondary institution, you can deduct $50 a month,
or whatever it is, from income. There is a
credit— and perhaps I'm using the wrong terms here.
It acknowledges that to obtain that type of education,
there can be a tax incentive to encourage people or to
make it less onerous.
You have raised a point that I believe was also
raised earlier this week by the building trades people,
where sometimes people in the building trades also
need to acquire certain tools that are special to their
occupation, and yet unless you are
self-employed in the true sense of the word,
those are not in any way deductible from income.
I congratulate you for raising that point, because I
think it's something that has been overlooked in terms of
the importance of encouraging people to get into the
trades. Not everybody can go to university, and not
everybody wants to go to university, and this is in fact
post-secondary education in the truest sense of the
word. Yet as government we really do not in any significant
way contribute to that. This is one way we could
do it, particularly for those who are
There's another factor, which you didn't raise but was
raised earlier this week. Maybe it's not a problem in
your sector, but the building trades pointed out that
apprentices from time to time go off to school
for blocks of time, and that pre-April 1996, when an
apprentice left the shop, in your case, and went off to
trade school, you could apply immediately for UI
benefits, as they were then called. Now you
have to wait two weeks before you can apply and there's
a two-week waiting period.
So there has been a significant change for people who
are scraping by on salaries that are not terribly rich
and at the same time are of an age where they often
have dependants in their life—it's quite natural. Is
what they call the block time a problem in your
Mr. Keith Lancasle: The issue is very much a
problem in our industry as well. In almost all
apprenticeship trade areas, people tend to work for a
portion of the year and return to school for an
in-school training portion, which often amounts to six to
eight weeks. One of the reasons it's not raised by our
organization at this table has to do with devolution to
the provinces. With the provinces now assuming a much
larger role in the administration of that training, it
now becomes a provincial issue relative to the funding
of apprenticeship training and the conditions under
which apprentices go to school.
Some of the provinces are looking at alternative forms
of delivery, including day release, where instead of
going to school for eight solid weeks, an apprentice
might go to school Monday afternoons and evenings for
40 weeks and not miss productive time in the shop. So
there are a number of different things that are being
worked on at the provincial level to facilitate this.
It is certainly an issue in our industry—one of many—but
it's really not an issue for this table with the
changes to structure it. That's why it has been
omitted from our presentation.
Mr. Roger Gallaway: But it's an issue in the sense
that the changes to the Employment Insurance Act come
from here and not the provinces. Also, in certain
municipalities there aren't the training facilities, so
these people have to go away for six or eight weeks.
They may have to go to Toronto from somewhere distant,
and there's great cost involved.
Mr. Keith Lancasle: I met with groups of employers
and employees in Timmins and asked where they sent
their people for apprenticeship training. They said
Scarborough and Ottawa, and the cost of it is
astronomical to the employer and the employee. It is
very much an issue. The provinces have to begin to
look at alternative ways to deal with the hard costs
there, outside of just the EI question.
Mr. Roger Gallaway: Thank you. That's all I have.
The Chairman: Thank you, Mr. Gallaway.
Ms. Sophia Leung: Sorry I missed your
presentation. You mentioned RRSP contributions and
that they are still limited. You encouraged more
contributions for retirement—you did not say
specifically, but if I am correct, up to 18% of your
income. What range are you recommending if we increase
Mr. Peter Bowen: Do you mean numerical limits?
Ms. Sophia Leung: Yes.
Mr. Peter Bowen: We are suggesting $16,500. The
reason for that limit is to put those who are saving
for their retirement via RRSPs or defined contribution
plans on an equal footing with those who are saving via
defined benefit plans.
Ms. Sophia Leung: So it is not based on 18% of an
Mr. Peter Bowen: Right. We are not proposing any
change to the 18%.
Ms. Sophia Leung: It is just a flat rate.
Mr. Peter Bowen: We hope the 18% would still be a
Ms. Sophia Leung: So this is addressed to the
Mr. Peter Bowen: That's right. Again, it is an
issue of fairness to put them on an equal footing with
those higher-income earners who have defined benefit
Ms. Sophia Leung: You didn't say how you would
encourage the lower-income group. They still need
Mr. Peter Bowen: We would be more than happy to
see the 18% limit increased for all Canadians. We
would certainly be supportive of that type of increase
to encourage broader-based retirement savings to allow
people to save for their own retirement—absolutely.
Ms. Sophia Leung: Regarding the foreign content,
currently it is 20%. You feel perhaps 30% would be
more of an advantage for the investors. Of course 10%
less investment would go into Canadian content.
Mr. Peter Bowen: That is correct. We believe—and
we have the support of some studies that have indicated
this—that there would be no effect on the economy as a
result of the increase from 20% to 30%. This point
was raised by Ms. Bennett earlier about recent
activity, and perhaps I missed part of the point of
that in terms of the impact on the Canadian dollar.
If you look at the capital flows that have occurred
over the last six months or a year, the capital flows
relating to RRSPs are a negligible proportion of that. I
would certainly argue that the decline in the Canadian
dollar is caused by factors far beyond investments made
by RRSP investors.
Accordingly, the key issue, certainly from our
perspective, on the increase from 20% to 30% is to
allow Canadians to benefit from increased
diversification, lower risk, and higher returns that
would be achieved by such an increase. That would not
have a negative impact on the economy.
Ms. Sophia Leung: Thank you.
The Chairman: Are there any further questions?
On behalf of the committee, I'd like to thank you
very much for your presentation.
You probably recognize that last year your
message came out loud and clear. I also want to
congratulate you for the excellent work you do on
the sectoral council. It's certainly a model that even the
Americans have looked at very carefully as a way to
modernize their industries and their various sectors,
particularly as they relate to job opportunities for
Last year I heard an announcement from Chrysler that
over 1,000 young individuals were able to get some
internship and are now working in the automotive
industry. These types of innovative models are the
ones that will really generate the type of growth that
our community and our economy require.
On behalf of the committee, thank you very much for
your input. As always, it's very helpful.
The meeting is adjourned.