STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Friday, October 2, 1998

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call this meeting to order and welcome everyone here this morning.

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 Association Alliance. 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 Gagnon.

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 Officer, Information 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, ITAC, 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.

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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%. We have lost half our world position.

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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 a half.

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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. Welcome.

Mr. David Patterson (Canadian Advanced Technology Association Alliance): Thank you, Mr. Chairman, ladies and gentlemen.

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 taxation. 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 your efforts.

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.

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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 possible.

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 reduced.

If there are any questions, I'll be glad to answer them on any of the issues our membership has raised.

Thank you.

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 committee.

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 world.

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 review system.

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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 Canada.

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 urgently needed.

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 do this.

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. Developmental 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.

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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 experimental development.

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 than invention.

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.

[Translation]

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.

[English]

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.

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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 innovation chain. 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 and technology.

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 opportunities.

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.

[Translation]

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 possible.

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 economy.

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.

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[English]

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 for Canada.

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 employees. 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 community.

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 careers elsewhere.

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 qualified personnel.

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 life. 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.

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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 CFI's 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.

[Translation]

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.

[English]

We'll now go to the question and answer session, beginning with Mr. Riis.

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 changes.

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 being 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. I'm talking 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.

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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 those points.

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 concerned about.

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 say.

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 first.

• 0955

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 them. 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 public.

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 that we 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 attractive—

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.

• 1000

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 Canada.

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 that way.

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.

• 1005

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 repeat it? 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 innovation culture?

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 others.

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 direction.

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 sector. 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.

• 1010

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 success story.

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. Szabo.

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 50% increase.

Ms. Judith Erola: But income tax is the entire infrastructure.

Mr. Paul Szabo: No. It's the salary.

Ms. Judith Erola: Salary, mortgage deductibility—

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 a combination.

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 windfall.

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%.

• 1015

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 pie.

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.

• 1020

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 the beginning.

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 what the 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 an impact.

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 very much.

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.

• 1025

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 surtaxes off.

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 that.

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 relief.

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 two years.

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.

It was 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 left. I'm not 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.

• 1030

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 dollars in.

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 pharmacologist— I'm 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 things.

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, actually.

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 thing.

• 1035

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.

I was 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 dealt with.

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 the process.

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.

• 1040

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. Erola.

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 with them.

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 job.

Dr. Gaylen Duncan: Oh, he's done a superb job. The Prime Minister's speech in St. John's, Newfoundland, 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.

• 1045

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.

You say:

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 competitors.

That's what you say. Therefore I would like to put this to 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 comment?

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 that.

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 short-term fix.

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.

• 1050

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 barriers.

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. Erola.

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 environment.

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.

• 1055

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. Dhaliwal.

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 concerns.

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.

• 1100

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 information technology.

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 government.

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.

• 1105

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 gone up.

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 spoke about.

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 the breach.

Ms. Judith Erola: It's a personal opinion this time, isn't it?

Dr. Gaylen Duncan: No, I'm still within the ITAC policy.

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 elsewhere.

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 through taxation.

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?

• 1110

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 purpose.

Ms. Judith Erola: And it should be used for that purpose.

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 revenues.

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 happy.

Mr. Paul Szabo: Fourteen million.

Dr. Gaylen Duncan: That's another cut we're hoping for.

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 cut.

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 effect.

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.”

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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 a balance.

The Chairman: Okay. So you would like a long-term target.

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.

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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 priorities are 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 organizations.

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 so.

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 insignificant.

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 Canadian.

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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 retirement.

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 Canadian economy.

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 challenges.

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 tomorrow.

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.

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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.

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 right time.

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 $50,000. 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.

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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. Szabo.

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.

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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 significant.

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.

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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 paint it.

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 plan.

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 property percentage.

Is that representative, or do you still feel as strongly about it now as when the Conference Board did its study?

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.

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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 small, 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 shanks. 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.

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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 period.

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 these purchases.

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 tools back?

Mr. Keith Lancasle: Take the tools back?

Ms. Carolyn Bennett: Why wouldn't the tools be collateral themselves?

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, right?

Ms. Carolyn Bennett: Yes.

The Chairman: You were probably making more than $20,000.

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 point.

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 self-employed, right?

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. A truly 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 specified hours.

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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 position?

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. Gallaway.

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 apprentices.

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 business?

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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. Leung.

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 the limits?

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 individual's income?

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 restraining limit.

Ms. Sophia Leung: So this is addressed to the higher-income group.

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 plans.

Ms. Sophia Leung: You didn't say how you would encourage the lower-income group. They still need retirement savings.

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.

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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 young people.

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.