The Chair (Mr. James Rajotte (Edmonton—Leduc, CPC)):
I call this meeting to order.
This is meeting number 50 of the Standing Committee on Finance. Our orders of the day are pursuant to Standing Order 83.1, continuing with pre-budget consultations 2014.
I want to thank our guests very much for coming in this afternoon. Colleagues, we have two panels before us on the pre-budget consultations.
In the first panel we have, from Queen's University, Professor Arthur Cockfield. Welcome back to the committee. Also back to the committee we have Professor Mike Moffat from the Ivey Business School. From Credit Union Central of Canada, we have the CEO of Conexus Credit Union, Mr. Eric Dillon. Welcome. From Imagine Canada, we have the president and CEO, Mr. Bruce MacDonald. From the Investment Funds Institute of Canada, we have the director of policy and research, Mr. Jon Cockerline.
Welcome to all of you. Thank you so much for being with us. You each have five minutes maximum for your opening statement, and then we'll go to questions from members.
We'll begin with Professor Cockfield, please.
Professor Arthur Cockfield (Professor, Faculty of Law, Queen's University, As an Individual):
Mr. Chair, ladies and gentlemen.
Thank you again for the privilege to appear before you.
The last time I spoke before this committee was during the FATCA hearings, which were quite contentious. Of course, the budget is very important to all Canadians, but I suspect it might be a little bit less contentious today. Again, thank you.
In my brief comments I thought I would emphasize what I consider to be the academic tax consensus surrounding how one should form a budget. None of this will surprise you. You need a broad base, fewer loopholes.
Today I have come from my Queen's law class. It ended at one o'clock. I taught them a little bit about the 1987 budget of Michael Wilson, the former finance minister. I teach that as the high-water mark of my generation in terms of achieving a fair budget which both brings in revenues and drives the economy forward. As a very broad generality then, one should try to broaden the tax base, reduce shelters, reduce loopholes, and potentially even bring down rates at the same time.
I know this would be a very ambitious agenda that's not going to be implemented within the next budget, so my main recommendation today would be, within this budget, to appoint an independent expert panel to provide advice on the short-term and long-term options to streamline our current tax system. The problem is that since that 1987 budget, almost 40 years have passed and the amount of tax provisions have ballooned to a significant extent.
In the United Kingdom, they have a permanent independent tax simplification office. If we could allocate moneys and budgetary amounts toward that sort of independent expert panel, I think you would see a lot of good come out of it.
I recently participated in an expert panel at the Mowat Centre of the University of Toronto. This was a project directed by Matthew Mendelsohn, and it involved two years of analyses concerning how to modernize our corporate income tax system. A report was recently co-authored on this topic by my colleague Robin Boadway at Queen's, as well as his co-author Jean-François Tremblay.
Through that process one could see, because it was an independent panel, an awful lot of thought put into the long term. I think that's what Canada's tax system needs, this long-term independent perspective.
I have two specific recommendations.
I have previously testified on several different occasions about the problem of offshore tax evasion. I think you're all familiar with the 2013 data leak obtained by the International Consortium of Investigative Journalists. They partnered with the CBC, which retained me. It showed that there are thousands of Canadians maintaining offshore accounts. There was clear illegal activity taking place. I've also consulted with the Auditor General more recently on this file.
There are a lot of revenues, in my opinion, to be found in the offshore world. I should note, of course, that much of this activity is legal, but much of it is not. To the extent the government could invest funds in tracking down these offshore tax cheats, for every dollar you put into that system, I suspect you'd see a significant return.
This brings me to the final thing I'd like to mention. Again, I've just talked about the need to broaden the tax base, but I'd also highlight what I thought was a very reasonable reform effort back in 2007, when this government introduced the working income tax benefit, the late Jim Flaherty's WITB. It was based on the Americans' earned income tax credit. It's generally available to working families with a low income. It gives them a refundable tax credit. This has turned out to be a powerful weapon to fight poverty in our country. To the extent the government would see fit to extend these benefits and enlarge them, in my opinion this would be a worthwhile reform effort.
Thank you, sir.
Mr. Mike Moffat (Assistant Professor, Ivey Business School, As an Individual):
Thank you for having me here today.
My name is Mike Moffat. I'm a business owner, a chief economist with the Mowat Centre, and an assistant professor at the Ivey Business School in London, Ontario. Those are a lot of hats, but I'm here representing my own views.
I'm here today to talk about tax policies and regulatory burdens. I share the views of my University of Calgary colleague, Jack Mintz, who has called for tax simplification, stating in the National Post that the tax system has gone off the rails.
Before he enacted the Tax Reform Act of 1986, Ronald Reagan described the tax code as being complicated, unfair, and cluttered with gobbledygook and loopholes. The same criticisms can be applied to the Canadian tax system, which is in dire need of reform.
Let's start with income tax. The current system is riddled with a variety of tax expenditures. The system, while well intentioned, has Canadians overpaying tax each month, then has some of that money returned to them if they remember to save a receipt and fill out the correct box on their tax form. This places a burden on families, lengthens tax forms, and requires the government to police credit claims.
This added complexity could be justified if the credits increased the use of public transit or got more kids playing sports, but research in the Canadian Tax Journal shows that the children's fitness tax credit largely pays families for what they were planning on doing anyway.
We can greatly reduce regulatory burdens on Canadians by ridding ourselves of many of these tax expenditures and use the savings to either lower income tax rates or by strengthening the universal child care benefit or HST rebate programs and allow families to decide how to spend their hard-earned dollars.
Much can be done to reduce the regulatory burden the tax system places on Canadian businesses. The tariff system is a prime example. During the so-called iPod tax debate, government departments were divided on whether televisions and MP3 players were considered computer parts for tax purposes, with the CBSA and the Department of Finance providing opposing answers to Canadian businesses. If the government cannot decipher the tariff code, what hope do Canadian businesses have?
This government has eliminated tariffs on many items, and I commend them for doing so, but much more can be done at little cost to the treasury. One such example is propylene copolymers that are used as an input by plastics, foams, and auto parts manufacturers in southwestern Ontario. There is a 2% tariff rate on imports of this chemical unless it is from a country that Canada has a free trade agreement with, such as the United States, in which goods come in tariff-free.
In 2012 the WTO estimates that the government collected only $360,000 in tax revenue on over $485 million in imports for an effective tax rate of 0.08%.
The customs tariff is littered with items from grape crushers to storage heating radiators where tariffs generate almost no revenue, but impose significant regulatory burdens. In a recent paper, the Canadian Council of Chief Executives detailed the expenses companies face in importing goods at preferential tariff rates. Firms must keep detailed records for several years and ensure their imports meet the rule-of-origin requirements in order to claim a preferential rate. These rules are not simple or trivial. The NAFTA rules-of-origin regulations alone are 556 pages long.
A study by Keck and Lendle found that many companies find it cheaper to avoid these regulatory costs and simply pay the higher rate, bypassing the benefits of Canada's free trade agreements. Due to the high fixed costs involved in tracking and claiming preferential tariffs, small and medium-size enterprises are less likely to take advantage of free trade deals.
To summarize, large portions of the tariff code impose significant regulatory burdens and discriminate against small and medium-size businesses while generating very little revenue for the government.
My primary recommendation is to set a zero MFN rate on tariff items with very low effective rates as it would provide substantial benefits at minimal cost.
I could talk for hours on these issues and I suspect many in this room feel that I already have, so I look forward to your questions.
Mr. Eric Dillon (Chief Executive Officer, Conexus Credit Union, Credit Union Central of Canada):
Thank you, Mr. Chair and the committee, for this opportunity to share with you the credit union's systems recommendations for your pre-budget consultation process.
I am especially grateful that you have done something different this year by asking to hear from on the ground practitioners like me. This shift feels right to me, because one of the things we do at Conexus Credit Union where I'm the CEO is to always ask how we can do things differently. This approach has helped us to grow, to become Saskatchewan's largest credit union and one of the 10 largest in the country.
With that in mind, I, too, want to do things a bit differently today. Instead of telling you about the credit union system in great detail, I want to jump straight to what you in Ottawa refer to as our ask. As I discuss our proposal, I'll weave in facts about our system.
What are we asking for? Quite simply, credit unions are calling on the federal government to create a capital growth tax credit. It would be calculated at 5% of the growth in year-over-year retained earnings. If a credit union were to increase its retained earnings by $1 million, it would save $50,000 on its tax bill. It's that simple.
I'm sure you're accustomed to receiving requests that probably sound a lot like mine do. Your default response is probably to ask why the federal government would create a special tax measure for credit unions. My answer is that we're not asking for special treatment; we're asking for fair treatment that recognizes credit unions are structured very differently than charter banks. Both operate in the same sector. Both offer similar banking services. Both are required to hold large amounts of capital and both are well-regulated and prudent, but that's where the similarities end.
We're cooperatives. They're joint stock corporations. They're regulated federally. We're regulated provincially. They're small in number and operate across the country and are internationally active around the world. We have 320 credit unions operating within provincial boundaries and serving communities.
These differences show up in ways that are relevant to the question of how we should be taxed. We give back proportionately more to our communities than they do—on average, 4.5% of pre-tax profits across our system versus 1% for charter banks. In my particular credit union, last year it was 5.8% of pre-tax profits, and most recently, a $1 million contribution to a new children's hospital in Saskatchewan, the first in our province.
Because we're cooperatives and not pressured to generate short-term results, we tend to stay invested in our communities even when competitors chase more profitable opportunities elsewhere. In fact, the credit union system today operates 380 branches in communities where there is no other physical banking presence.
These differences show up in other ways. CFIB data shows that credit unions, including Desjardins, have the second highest share of small business lending in this country at 18.6%. In my province of Saskatchewan, the credit union system provides just over half of all small business loans. We have been able to achieve that kind of success because the CFIB says we dominate the banks in providing exceptional service to the small business market. How? The CFIB would say that small businesses value our ability to offer financing at low fees with high-quality account managers. Our people understand small business. They know this sector is vital to a growing Canadian economy, the local economy, both in good times and in bad.
The data also tells another important story. On average, almost 80% of our credit union equity is made up of retained earnings versus only 45% for charter banks. In my credit union, that number is virtually 100%. The composition of our capital tells a story of a sector that grows its business in an organic way, at a speed that's profitable, sustainable, and prudent.
Our tax proposal recognizes this fact about credit unions. It also recognizes that we do not issue shares on publicly traded markets to support our growth. Because of that, our cost of capital is higher than that of the banks, whose shareholders can benefit from the 50% capital gains exemption and tax-incentivized savings plans, such as RRSPs, RRIFs, and the like.
At the same time, our calculations suggest that if the federal government does not act on our proposal, my credit union could potentially pay a higher effective tax rate than the banks by 2017. Obviously we think the tax system should strive for fairness and a competitive balance among organizational forums, especially when regulators, provincial, federal, and other, are demanding that financial services companies build and hold more capital.
Mr. Bruce MacDonald (President and Chief Executive Officer, Imagine Canada):
Thank you, Mr. Chair.
My thanks to the committee for inviting me to testify before you today.
As you know, Imagine Canada is the national umbrella organization for the charitable sector in Canada.
As committee members, you are well aware of the contributions made by charitable organizations in areas as diverse as education, arts and culture, amateur sport, youth services, international development, the environment, health care and religion.
You know from experience the contribution made by charitable organizations in your constituencies to the quality of life; they make Canadian communities pleasant places to live, work and invest.
What is less well known is that charities together with public benefit non-profits generate more than 8% of GDP and employ two million people every day in Canada. We're one of the fastest growing sectors, yet we're reaching a point where demand for what we do is outstripping our financial capacity to deliver. As we work to strengthen the financial footing of charities, we welcome the opportunity to partner with the federal government to unleash the tools through taxation and regulatory reform that will allow charities to meet demand.
Our first recommendation is the stretch tax credit for charitable giving, to help Canadians increase their donation over time and make giving a lifelong habit. Unlike some tax credits that reward people for what they are already doing, the stretch only triggers a government investment if and when Canadians change their behaviour by increasing their giving over the previous year.
This committee has heard a great deal of support for the stretch during the incentives for charitable giving hearings, and you recommended it for serious consideration once the books were balanced. The government took note, and in addition to announcing the super credit in budget 2013, also made the following commitment:
||...the Government will work with the charitable sector, including Imagine Canada, to encourage more donations by a greater number of Canadians....
The first-time donor’s super credit was an encouraging start. Now it's time to finish the job by helping more Canadians to do more.
What would the stretch mean? It would mean more dollars for the widest array of good causes, more investment in every community, and broad-based tax relief. It would mean that donations that have stagnated would begin to grow again, as more than half of donors say they would increase their giving if there were better tax incentives. What better investment could we make as we approach the 150th anniversary of Canada than to give Canadians from all walks of life and all means the tools to better invest in their own communities and in the causes that make a profound difference in their quality of life.
This fall we asked charities across the country to connect with their members of Parliament, as they are best placed to let you know what the stretch would mean for their organizations and their own communities. In only the first six weeks of the campaign, over 150 MPs have received letters, e-mails, phone calls, and visits from local charities, and we're just getting started. We hope we can count on all committee members to strongly endorse the stretch in your pre-budget report.
Our other two recommendations this year deal with regulatory issues and also get at the heart of charities' financial resources and sustainability.
The first of these is merchant fees on credit card transactions. Last year's budget signalled the federal government's concerns about these fees, which are disproportionately high in Canada. Proposed legislation in the Senate would, among other things, eliminate these fees for registered charities. Merchant fees have a real and significant impact on charities' bottom lines. They divert millions of dollars that could otherwise be invested in responding to the growing demand for charity services.
We understand that regulation is a last resort, and we recognize that a voluntary arrangement may prove preferable. Either way, charities must be invited to the table and benefit significantly from much-needed reforms.
Finally, we hope to see some explanations and possible changes in terms of the regulatory and administrative obstacles that limit the access of charitable organizations to federal services that provide advice to companies when they are seeking new sources of revenue. This is particularly important because governments are looking for new forms of social financing and entrepreneurship in order to fund vital initiatives that involve charitable organizations. The economic contribution of charitable organizations in Canada is huge already; giving them access to those tools would allow even more growth.
Thank you very much.
Dr. Jon Cockerline (Director, Policy and Research, Investment Funds Institute of Canada):
Thank you, Mr. Chair and members of this committee, for this opportunity to provide the views of members of the Investment Funds Institute of Canada, IFIC, at this meeting.
IFIC is the voice of Canada’s investment funds industry. By connecting Canada’s savers to Canada’s economy, our industry contributes significantly to Canadian economic growth and job creation.
In my remarks today, I will focus on recommendations related to three areas: registered plan reforms in support of retirement savings, GST/HST reform, and equitable taxation for mutual fund corporations. Also, I'll be pleased to respond to committee questions on any of the recommendations provided in our formal brief of August 6, 2014.
IFIC has consistently supported the government’s efforts to offer Canadians more ways to save for their retirements and other financial needs. Our industry has been an important contributor, for example, to the success of RRSPs, RESPs, RDSPs, and TFSAs, to name a few, and we have supported new savings programs, such as PRPPs, as a matter of good public policy, even though our members are not positioned to participate directly in the manufacture of these plans.
While GRRSPs, group registered retirement savings plans, fulfill the same goal as PRPPs, and that is, long-term savings through a workplace plan, they are not accorded similar tax and regulatory treatment. Such differences unnecessarily disadvantage GRRSPs, which are an accessible and efficient option within the retirement savings landscape. To ensure that GRRSPs continue to fulfill this role, we ask that that they be accorded the same treatment as that of PRPPs with respect to payroll tax exemptions, auto enrolment, and the locking in of employer contributions.
During the 2011 federal election, Prime Minister Harper announced his intention to increase the annual individual TFSA contribution limit to $10,000 after the budget returned to balance. We agree that increasing the TFSA contribution limit would improve the options and flexibility available to Canadians for saving and investing. We ask the government to consider raising the TFSA contribution limit to $10,000 annually.
A recent report published by the C.D. Howe Institute highlighted the impact of mandatory minimum withdrawal rules for registered retirement income funds, RRIFs. As the report notes, these rules have not kept pace with gains in Canadian life expectancy, and as such, can increasingly cause seniors to outlive their savings under the current withdrawal rates. We ask the government to consider increasing the mandatory age for initial RRIF withdrawals and/or reducing the minimum drawdown amounts in order to mitigate the risk that seniors outlive their savings.
Since its inception in 1991, the GST has applied four to five times more heavily to the value of services provided to mutual and other funds than to the equivalent value of services provided to non-fund investment products. For the majority of mutual fund investors, the GST/HST on the management expense ratio is a tax on retirement savings. Today, almost 57% of assets under management in Canadian mutual funds are held in registered plans by investors saving for retirement. We ask the government to consider applying GST more fairly to fund products in order to relieve the tax burden on Canadians who are saving for their retirement.
When calculating their taxable corporate income, most corporations in Canada are entitled to apply the 13% general rate reduction to income that is not eligible for another corporate tax reduction. Mutual fund corporations, however, are not allowed to apply this reduction because two of the principal forms of mutual fund corporation income—capital gains and dividends—are already subject to tax reductions. Yet mutual fund corporations may earn income from sources other than dividends and capital gains, such as interest income or income from foreign sources. To rectify this imbalance, we request that Canadian mutual fund corporations be entitled to apply the general rate reduction to all eligible income.
Mr. Chair, that concludes my opening comments. I would be pleased to answer your committee’s questions.
Mr. Mike Moffat:
I think the first example was the whole iPod tax debate. We have these items, and the question became whether a television or an MP3 player is a piece of consumer electronics or is considered a computer part, which comes under a special tariff treatment. Depending upon what the answer is, there is a different tariff rate, and nobody was really quite sure.
There really doesn't seem to be any logical reason we should be putting tariffs on televisions and MP3 players in the first place. There's no domestic Canadian industry to protect there. That's one about tariff codes.
You have tariffs as well whereby there might be a 1% or 2% MFN rate placed on international imports and a 0% tariff rate for U.S. imports. For reasons of geography, basically everybody is importing from the U.S. anyway, but to get that 0% rate, you're having to go through all of this paperwork.
What you could instead do for everything from grape crushers to storage heating radiators to chemicals such as propylene polymers is reduce the MFN rate to zero. It wouldn't really change where we're importing from at all, and wouldn't change the amount of government revenue, because we're not collecting much revenue on these in the first place, and would save the government and businesses a lot of headaches.
In terms of paying more at the local credit union the first thing I would offer.... Certainly for small business, that wasn't the result of the CFIB survey. Credit unions are very competitive on prices, and I would argue that goes beyond small business into the retail markets as well.
With respect to the comments about the FCC mandate, other crown corporations active in financial services act in a complementary role to the private markets, where there's an adequate supply of funding available. I would argue that there are banks and credit unions ready, willing and able to serve the agricultural market. Certainly in my credit union's case, we have a 75-year history of serving that market exceptionally well.
I think what we're asking is for FCC's mandate to be more complementary, the way other organizations, such as Business Development Bank, EDC, and others, are.
Mr. Eric Dillon:
Thanks for the question.
The first thing I would offer is that if you take a five-year period, that number would be somewhere between $42 million and $83 million. It was $42 million in the most recent fiscal year.
The credit union business model forces us to capitalize ourselves solely through retained earnings. On the one hand, we have international regulators, federal regulators, provincial regulators, and others asking us to build capital—we understand the reasons why—and at the same time reducing our ability to build capital by taxing the only source that credit unions have to generate capital.
To answer your question, if $42 million less is available to credit unions in terms of capital, at the standard multiplier we used earlier, that would be about half a billion dollars not available to communities across this country for small business and consumer finance.
Mr. Mike Moffat:
Thank you for that question.
I have some grave concerns about how that system was set up. It wasn't really creating a family tax system as we see in other countries. Instead, it's taking the individual taxes that we have and sort of jury-rigging a family tax credit on top of that. In the way it was structured really, almost all of the benefits went to high-income people like me, quite frankly, so I am talking against my own economic interest here. I think there's a general philosophy that any income tax change that benefits Mike Moffat is probably bad for the country because I'm one of the last people who needs help.
Again, I do think there is a way to structure this through a family tax system. This is one area where I would agree with Mr. Mintz, who generally supports income splitting. His statement was that, “simply allowing income splitting will do little for middle-income families, and equalizing the after-tax market income between single- and dual-earner families would ignore differences in time allocation between families”.
I would agree with that statement.
Prof. Arthur Cockfield:
To my knowledge, most at least similarly situated countries, like the United States, and even England or the United Kingdom, with its permanent tax simplification office have yet to achieve any major victories in this area. From a political perspective, it's obviously very difficult to get rid of perks, whether they're introduced by the current government or by former governments.
South of the border, one good example is the mortgage interest deduction available to taxpayers. You have to be an itemized tax return filer to be eligible, but virtually every economist or tax law professor who has looked at this deduction would say that it makes no sense, yet it persists over time. Many Canadian taxpayers, I suspect, would want a similar benefit.
I'm hoping that the U.K. efforts, which are fairly novel and fairly recent, will bear fruit in the future, but the key, I think, is to appoint an independent panel to investigate this over a period of years, versus the advisory panel's work, which was completed all in one year. I had to file my report on tax simplification within six months, I think, after I received my instructions, and it was simply insufficient time to really take a close look.
The only way to get any traction, in my opinion, would be to appoint this independent body. That way it insulates the government from a political critique if it's perceived that this body is to be unbiased or non-partisan. But yes, I don't think most countries have had any luck toward any significant or material tax simplification, to my knowledge.
Mr. Eric Dillon:
That's not correct. What happens is that the retained earnings of the credit union are left for the credit union to use. Certainly the board directs those activities, but it does put a bit of governor on how quickly, given that there's only one source for equity in a credit union model, which is retained earnings, and it really comes from the earnings of the credit union year over year.
That's really the challenge we have, whereas if you go back to the global financial crisis, when the banks needed more capital, they were immediately able to access capital markets and meet that need. For credit unions our capital grows. In our case, at my credit union, that's over 75 years. We now manage about $300 million of equity on behalf of our members, but it's the only source we have.
Again, on what we're asking for, for those credit unions that are well managed, well run, and able to actually grow capital, that that be reflected in tax policy.
Mr. Guy Caron:
Okay. Thank you very much.
Now I would like to talk to Mr. Cockfield and Mr. Moffat.
I think that this has already been discussed, but I would like to deal with the issue of simplifying the system.
Not too long ago, the Income Tax Act was 2,300 pages long. Then 900 pages of recommendations from the Canada Revenue Agency were added, making a total of about 3,000 pages. If I am not mistaken, the first Income Tax Act had a dozen or so pages. So it has expanded very quickly.
Let me start with you, Mr. Moffat.
One of the things you mentioned was a variety of tax credits, boutique tax credits, as my colleague called them. It is more than that. If we are talking about simplification, given that the Income Tax Act is 3,000 pages long, it is not just a question of tax credits. There is something much broader, related to the complexity of the tax system. I do not wish to diminish your proposal, but do you not feel that any correction to the act that your proposal would make would be only a minor one?
Mr. Murray Rankin (Victoria, NDP):
I want to build on what Mr. Van Kesteren has been talking about.
In particular, Professor Cockfield, you've written about corporate tax reform. Just now you talked about consumption tax. Initially you suggested that maybe if we had a British approach, an independent panel, we might finally get on with tax simplification, and fixing what Professor Moffat called gobbledygook and tax loopholes, citing Ronald Reagan.
Even the accountants have told us the same thing every year, and nothing gets done. I'm very skeptical about it. The government likes boutique tax credits because it gets to buy votes with that. I don't think it's a partisan thing; it has been around for years. Now it's on the corporate side, which, let's face it, is where a lot of the complexity of the Tax Act comes from. Drafters need to put these complicated rules down in black and white. That's the system we have, and it makes a lot of lawyers and accountants rich in doing so, which isn't necessarily a bad thing.
My point is, how can we possibly reform the corporate tax system?
To get to the question, Professor Cockfield, you've written that Canada's current corporate tax system is failing on a number of fronts. It discourages investment, hampers innovation and productivity by taxing the normal rate of capital, and increases the rate of bankruptcy, etc. etc.; it's very inefficient.
What is the alternative for the corporate side to simplify the Tax Act?
Thank you very much, Mr. Adler.
I'm going to take the final round as the chair.
I want to start off on the subject of tariffs.
Mr. Moffat, you raised the subject of tariffs. In the 2010 budget the government, with respect to tariff reductions on manufacturing inputs, machinery, and equipment, eliminated 1,500 tariffs between 2010 and 2015. I think that's what you were commending in your opening remarks. It has since moved to eliminate some of the tariffs on the retail side.
With respect to tariff reductions, what should we be looking at as a committee in terms of a priority going forward?
I appreciate that. Thank you for that.
On the second item, I just want to move to Professor Cockfield on the issue of the advisory panel.
I was a little surprised, and I don't know if I heard you correctly saying that the government has not acted on the recommendations. The government as I see here has acted on a whole series of recommendations from that panel, so perhaps I can share this with you and we can have a conversation about that off-line or by e-mail. The government has taken a number of steps to implement the panel recommendations. I just wanted to point that out for your benefit and for colleagues' benefit.
I like what you said about simplifying the taxes. I also like what you said about simplifying measures such as the working income tax benefit, which you supported, and the universal child care benefit. There's a way to do that. I'll add on to that point by asking if there is a way to simplify, some people call them boutique tax credits, things this government introduced, for instance, the registered disability savings plan, which makes a big difference for families who have a family member with a disability. It makes a big difference for them. Former governments have introduced RRSPs, RESPs, and you now have pooled registered pension plans and tax-free savings accounts.
I certainly take the point that a lot of middle-class Canadians look at these credits and get somewhat confused. Is there a way perhaps for the government to look at simplifying them all? They all serve a definite purpose, though: RDSPs are for persons with disabilities, and RESPs are for families who obviously want to have kids go to post-secondary institutions. Is there a way we can simplify or group some of these measures together so it's easier for Canadians to deal with?
Prof. Arthur Cockfield:
Yes. I have a very quick response to your point about the advisory panel. I may have misspoken, but I meant to suggest the tax simplification proposals of the advisory panel have yet to be implemented. There were a number of recommendations implemented, but they had a couple of dozen recommendations, and the government, to my knowledge, hasn't implemented all of them.
With respect to your other issue, you're absolutely correct that most credits serve different purposes, but I'm speaking more directly to, and I think there are at least four, the universal child care benefit, the child tax credit, the WITB which I mentioned, and I think one other. They directly try to help low-income families. Those are the ones that could be rationalized and simplified and made more accessible to Canadians.
Another point is that many low-income families don't file returns. They don't get the GST/HST refundable tax credit, for instance. The IRS at one point—and it's persisting to this day—started what's called the VTA program, the volunteer tax assistance program. That was an institutional mechanism. I used to be a faculty director of one of these VTA programs, where it would take volunteer law students and they would process returns for low-income Americans, in this case. We don't have anything like that, and that's a real problem because so many vulnerable Canadians simply don't have the wherewithal to file a return; hence they don't get at least the refundable tax benefits that they otherwise would be entitled to. They typically don't pay any income tax; hence they don't file a return, and they may or may not be aware that they're entitled to these benefits.
Again, rationalize the ones targeting low-income Canadians, and maybe also promote some institutional support through the CRA.
If I can ask our guests and colleagues to take their seats, please.
We are resuming meeting No. 50 of the Standing Committee on Finance, continuing our discussions on the pre-budget consultations, 2014.
I want to thank all of our guests on our second panel for being here.
We have Ms. Brigitte Alepin with us again. Welcome.
We have Jennifer Robson, assistant professor from Carleton University. Welcome.
We have two professors from Carleton. We have Professor Frances Woolley. Welcome to the committee as well.
For the Conference for Advanced Life Underwriting we have Mr. Clay Gillespie. Welcome.
And from the Institute of Marriage and Family Canada we have the executive director, Ms. Andrea Mrozek.
Thank you all for being with us today.
You will each have up to five minutes for an opening statement.
Ms. Alepin, you can begin your presentation. You have five minutes.
Ms. Brigitte Alepin (Tax Expert, Agora Fiscalité, As an Individual):
Ladies and gentlemen of the Parliament of Canada, distinguished members of the Standing Committee on Finance, Ms. Gilliland, Ms. Lafrance, thank you for this invitation.
I have been invited to participate in the pre-budget consultations on how to improve Canada's taxation system. I am going to limit myself to two proposals that I feel are the most important.
The first deals with private charitable foundations. I know that you have in your iPads a table on private charitable foundations. Could you please refer to it, because it briefly sums up what I am going to tell you about private charitable foundations.
The table shows the example of a private charitable foundation whose founder makes an initial donation of $100 million. In the first year, the founder receives a tax credit of $50 million. I am talking simply about private charitable foundations. For the foundation's entire life, there is taxable income, but it is not taxed because of its status. If you make a donation of $100 million, you can estimate the income to be about $5 million annually.
Under current rules, the tax system requires a private foundation to spend only $3.5 million annually on charitable purposes, that is, 3.5% of the capital after expenses. In real life, the amount is often well under 3.5%. In our example, we will say $3.5 million.
I would like to use the table to draw your attention to the fact that the tax deal that Canadian taxpayers have with private foundations does not serve Canadians well. We just have to look at the initial tax saving, $50 million in this case. If a foundation pays no tax on a hypothetical income of $5 million and it spends only $3.5 million per year, it could take for ever for the deal to benefit Canadians. Canadians gain nothing from a system like that. This is the most important point, given that we are looking for money to balance the country's books.
With private foundations, the deal is clearly a bad one for the country's coffers. If you have followed the table, you can see that easily. Private charitable foundations are also an affront to democracy. Why? Because the law allows the deal since foundations are allowed to last for ever. For reasons beyond me, major founders want to have perpetual foundations. Perpetual foundations are an affront to democracy because, over time, they become more powerful than international organizations or governments elected to take care of public matters. The best example of this I can give is the Bill and Melinda Gates Foundation in the United States. It has assets of up to $33 billion, while the World Health Organization's assets are only $1.5 billion.
I would like to bring up one more quick point. There is a fear that competition over taxation between countries and companies may become destructive. There is the also the danger of what is called “the race to the bottom”. I have been looking at that issue for a number of years. I conducted a research project for Harvard University on how to adapt our tax systems to globalization.
I feel that the best way to help my country prepare for the looming threat of the race to the bottom is to organize a major conference that I am calling the TAXCoop Conference. That is what we are doing in Quebec at the moment.
In the context of the pre-budget consultations, I would like to propose working with the Canadian government to organize a conference like that. The Government of Canada still has a good reputation on taxes internationally and I would be proud to be able to contribute.
Professor Jennifer Robson (Assistant Professor, Kroeger College, Carleton University, As an Individual):
Thank you, Mr. Chair and members of the committee, for your invitation.
I am an assistant professor of political management at Kroeger College, Carleton University. My remarks today reflect my views based on my research on social policy and household financial behaviour.
I'm going to touch on two areas of my research very briefly, household savings and financial literacy, and I'll make a very brief nod to the topic of income splitting. What binds this list of topics together really is a central message to you that our personal income tax system is a powerful but incredibly complicated tool for achieving policy aims. Getting it right is really hard.
The system sometimes leads to some surprising and bizarre outcomes, even some outcomes that are hidden right in plain sight. The system is confusing even to experts, and there's clearly more work to be done to ensure that Canadian taxpayers can navigate it to comply with the rules and to access the benefits that are triggered by a tax return.
Finally, any structural changes must be viewed with caution to make sure that we're clear on the policy aim and that we're choosing the best instrument rather than just the best strategic politics.
I'll say more, briefly, on each of these points.
First, and surprising, our income tax system now includes, by my count, four different registered instruments, RRSPs, RESPs, RDSPs, TFSAs, all designed to help working-age adults save up money for various purposes. We should add to this list, by the way, the total exemption of equity in primary residences. It's now the single largest asset held by the majority of working-age Canadians.
When home equity is included, fully half, more than 50%, of the assets owned by the wealthiest households in Canada are now largely sheltered from taxation in this array of registered instruments. This preferential tax treatment no doubt generates important benefits, but it comes at significant fiscal cost. In fact, the total cost of expenditures on these forms of household savings is of an order of magnitude of about 5% of federal budgetary spending.
The overwhelming majority of that tax expenditure is flowing to the already comfortable and the reasonably well off. It seems a bizarre way to run progressive taxation. If we want to help Canadians save and build productive assets we can and should be doing far more for the small savers and low- and modest-wealth households.
On the second point, the need for navigation, two-thirds of Canadian tax filers now rely on a paid tax preparer to file their return. The available research suggests that while paying for tax filing services leads to higher refunds, it also leads to more errors. The government has already taken some steps in addressing this that I think are quite laudable. The CRA is making progress in developing a regulatory framework for the for-profit tax filing services. The financial literacy leader will be coming forward next year with her national strategy on financial literacy, but we already know, of course, that financial literacy is not a magic bullet for tax compliance, for accessing benefits, or for insuring household financial security.
I hope that you'll also consider ways to support the capacity of the hundreds of non-profit and volunteer tax filing services in this country. These are groups like Entraide budgétaire here in Ottawa. They are part of the Financial Literacy Action Network Ottawa. Last year Entraide budgétaire filed tax returns for 2,200 low-income Ottawans. Through those tax returns they were able to access $1.3 million in benefits like the working income tax benefit, the child tax benefit, and the guaranteed income supplement. In fact, CRA now administers 42 different federal benefits and monitors compliance of another 85 provincial benefits, all through the tax system.
Groups like Entraide budgétaire are doing yeomen's work in helping low-income Canadians file their returns. I think CRA is right to leave the non-profit and voluntary tax filing services out of their new regulatory framework, but if we care about compliance, about accuracy, and most of all, about getting tax refunds and benefits into the hands of Canadians, then we also need to ensure that non-profit tax preparers also have the capacity to keep up with demand.
Those benefits, by the way, that are accessed through the tax system are usually based on family rather than on individual income so that we target scarce public dollars to the households that need them most, which brings me to my final point about making structural changes.
There has been debate again about whether we should also base taxation on family rather than on individual income. Others on the panel have spoken and will be speaking to this point in depth. I'll just say very briefly that I would welcome the chance to say more on this during the question period. For now, I would like to note that if the policy goal is to provide support to families with children—families which, by the way, come in all kinds of shapes and sizes—then there are many other more efficient and effective options available to you. As proposed, income splitting will do quite a lot for single-earner couple families who are already comfortable, and essentially nothing for the many single-earner couple households who are already in the lowest tax bracket, all the while taking billions out of the fiscal framework.
Whatever the government decides to do in the next budget, a fundamental shift in our tax regime like changing the basis of taxation should not be done lightly, quietly, or without widespread agreement that the costs are acceptable to the Canadian public as a whole.
I would say that administrative intricacies matter to implementation and need to be thought through and fully explored ahead of time.
Fuzzy promises that end up in practices benefiting a very few families who need little help will, I would say, not make for either good policy or politics.
Thank you very much for your time.
Dr. Frances Woolley (Professor, Associate Dean, Carleton University, As an Individual):
Thank you, Mr. Chair and members of the committee, for inviting me to speak to you today.
The first message for you is don't cut taxes. Although the federal budget is close to balance, the federal government still has substantial debt. Moreover, there are serious fiscal challenges on the horizon. Provincial finances, particularly those of Ontario and Quebec, are in poor shape. The population is aging. More income is coming from capital, and capital income is hard to tax. There are other threats, like international tax planning, which also could potentially erode the tax base.
So the first message is don't cut taxes.
The second message is if the federal government does wish to deliver tax relief, it should look to increasing efficiency, or equity, or both. Income splitting does neither.
Generally speaking, the most efficient tax system is one with a broad tax base and a low tax rate. Income splitting reduces efficiency because it raises the effective marginal tax rate faced by secondary earners, by which I mean the lower-earning of the two spouses. If an at-home spouse decides to enter the labour force, some of the tax savings achieved by income splitting will be lost. The loss of tax savings raises the at-home spouse's effective marginal tax rate. Yes, it reduces the primary earner's marginal tax rate, but primary earners tend to have inelastic labour supplies. What that means is basically they work regardless.
Income splitting reduces the marginal tax rates of people who aren't very sensitive to tax changes—that's the primary breadwinner—and it increases the marginal tax rates of people who are sensitive to changes in tax rates, and that's secondary earners. Basically, income splitting has efficiency costs.
Income splitting also doesn't increase equity. Most of the benefits go to higher-income families. It doesn't recognize the work-related expenses borne by a two-earner household and it ignores the value of household production. At a given money income, a dual-earner family has a lower standard of living than a family with an at-home spouse. I oppose income splitting precisely because I believe household production is valuable.
Caring for the kids at home doesn't necessarily mean mom at home, dad at work anymore. Canada's parks are filled with grandparents pushing strollers. Families juggle schedules so that one parent can be home with the kids at all times. The at-home parent at playgroup is likely working nights or weekends to pay the mortgage.
Income splitting is a bad idea. But if the federal government is looking to cut taxes, more support for families with children is a good idea.
In the 1960s, my mother's family allowance cheque paid for a week's groceries. In 2011, the median Canadian two-parent family had an income of just over $90,000. Their Canada child tax benefit probably doesn't come close to paying for a week's groceries.
The Harper government has already gone some way to providing greater tax recognition for the costs of children through the introduction of the universal child care benefit and through the introduction of the non-refundable child amount credit. I support both those policies, but they're overlaid upon a CCTB system that has good things, but also bad things.
First, because the CCTB is clawed back as the family's net income increases, it doesn't provide generous support for a typical two-parent family in one of Canada's major cities. Basically, if you're a two-parent family in Vancouver or Toronto and you're earning enough to pay a mortgage, you're probably going to get very little support through the Canada child tax benefit.
Secondly, CCTB clawbacks increase the marginal tax rates faced by parents of children. As I said, efficiency up, marginal tax rates down.
Third, the CCTB is based on net family income. The income calculation is the same for a two-parent or a one-parent family. This can create a non-trivial marriage penalty for low-income individuals.
Basically, the best way to support families with children is to give money to families with children. I would advocate doing so through a new program that combines the best features of the CCTB and UCCB and supported Canadian families.
Thank you for your time.
Mr. Clay Gillespie (Member, Board of Directors, Conference for Advanced Life Underwriting):
Thank you, Mr. Chair and committee members, for the opportunity to appear before you today.
My name is Clay Gillespie. I'm currently a member of the CALU board of directors. CALU and our sister organization Advocis represent approximately 11,000 insurance and financial advisers who in turn provide financial advice to millions of Canadians.
Joining me today is CALU's president, Kevin Wark. I may call on him to answer some of your more detailed questions relating to our long-term capital proposal.
CALU is advancing two recommendations that we believe will improve Canada's taxation regime and perhaps more importantly will assist Canadians as they retire and enter their ever-extending retirement years. The boomer generation has had and will continue to have a significant socio-economic impact in Canada. Notably, the first boomers turned 65 years of age in 2011. Over the next 20 years this group will expand the number of Canadians above the age of 65 to 23% of the population.
As Canadians retire and age, two of their greatest concerns are receiving quality health care and the possibility of outliving their personal savings. CALU's two proposals are focused on encouraging Canadians to be more financially self-sufficient during their retirement years and thereby reducing their reliance on public programs and institutions for support.
Our first proposal relates to the registered retirement income funds, or RRIFs. Owners of RRSPs are required to either annuitize or transfer the funds into a RRIF by the end of the year in which they turn 71. If a RRIF is selected, a minimum amount must be withdrawn on an annual basis. For example, at age 71, 7.38% of the RRIF balance must be withdrawn; this increases to 20% by age 94.
The RRIF minimum formula was put in place in the early 1990s, when long-term interest rates were in the range of 8% and average life expectancy was approximately 80 years. Since then, interest rates have declined dramatically, while life expectancies continue to increase.
Insurance companies have recognized these dramatic changes in the pricing of annuities. For example, in 1992 a 71-year-old male with $100,000 in an RRSP could purchase a life annuity and receive $10,000 a year, guaranteed to age 90. Today, the same person would only receive $6,000 a year in annuity payments, a 40% decrease; however, the RRIF minimum formula remains unchanged.
CALU is therefore recommending that the RRIF minimum rules be modified to help Canadians retain more of their savings and protect them from longevity risk.
I would now like to turn to our second recommendation. As noted, a significant portion of the Canadian population is moving into their retirement years. As this group ages, the likelihood of their requiring long-term care increases exponentially.
The C.D. Howe Institute recently released a report that estimates that the total cost of long-term care will more than double, to $140 billion, over the next 20 years. The logical question to ask is, who will bear this additional cost? The C.D. Howe report concluded that the provinces will need to shift more of the cost to those who can afford to pay. This will be an additional financial burden during retirement that most Canadians are not currently planning for.
We believe that long-term care insurance can play an important role in helping address this funding gap. Long-term care insurance provides a cash allowance to individuals who are unable to perform certain activities of daily living, such as bathing and eating. Greater ownership of this type of insurance coverage is critical to help manage private costs associated with long-term care services.
CALU believes that the time to deal with this issue is now. Further, we believe that the federal government needs to take a leadership position in preparing Canadians for what lies ahead. How? By educating Canadians about their financial obligations relating to long-term care services, by working with the provinces to develop a more unified approach to determine who qualifies for subsidized access, and by ensuring that the tax rules encourage more Canadians to own individual long-term care insurance.
I thank you for your time and attention. We would be pleased to respond to any questions you might have in relation to our submission.
Ms. Andrea Mrozek (Executive Director, Institute of Marriage and Family Canada):
Thank you, Mr. Chair, for the opportunity to take part in the 2014 pre-budget consultation process.
My name is Andrea Mrozek. I'm the executive director of the Institute of Marriage and Family Canada. In 2016 we will celebrate 10 years of creating, compiling, and respectfully presenting research, with an eye to helping families flourish so that Canada will likewise flourish.
Sadly, Canadian families are struggling today. Canadians have about a 40% chance of divorce before their 30th wedding anniversary. We see increasing rates of single-parent families who are more likely to be poor. We see increasing rates of common-law families, which are unions that are more likely to break up. We see a decreasing marriage rate and a birth rate that is below replacement, so we have reason for concern. Behind those family statistics of course is a great deal of emotional pain for people. We examine this research with an eye to diminishing suffering. Tax reform is one way to help families. Our research leads us to recommend the following.
Firstly, eradicate an existing inequality by introducing family taxation, also known as income splitting. Income splitting establishes horizontal equity or tax fairness among families. It ensures that families who look the same and make the same amount of money are also taxed the same, regardless of how they earn that money. Families balance budgets not as individuals but together. Sharing is a good thing and is a hallmark of strong families. It is to be encouraged by tax policy
A healthy majority of Canadians, from every political party, recognize the current unfairness. For instance, 65% of Conservative supporters, 55% of New Democrat supporters, and 54% of Liberal supporters all agree that income splitting makes sense. It is sanctioned by the pre-eminent Canadian economist, Dr. Jack Mintz, and it has been enacted without controversy in an array of countries like the Czech Republic, Germany, and France.
Certainly, the main reason to establish income splitting is for tax fairness. Still, almost half of all Canadian families with children under 18 right now would receive a tax cut. For example, if it were implemented only federally, a secondary school teacher in Manitoba would save 28% on his or her tax bill. For a further example, an accountant in Saskatchewan would save 25% with income splitting. I believe we cannot look down upon those savings for average, middle-income Canadians, which would only increase if income splitting were offered provincially.
Secondly, we recommend increasing the money parents receive directly, whether through the UCCB, the CCTB, or another vehicle. While we would prefer that the tax code be used to leave money in the hands of parents in the first place, a second consideration would be to increase the universal child care benefit, increase the child care tax benefit, or take other measures. We believe that money in a parent's pocket or in a family's pocket is what allows them to make the best choices according to their family's diverse and specific needs.
Finally, we do recommend against the use of tax dollars to create a national day care program. And it is with regret that I realize this comes about two weeks too late for the honourable members of the New Democratic Party. State-funded day care, we believe, is extraordinarily expensive to do well. The costs go only one way—up—as we have seen in Quebec. Neither does state-funded day care account for different family situations across the country. It doesn't help people who do shifts. Some families go to extraordinary lengths to tag-team care between parents. If national day care begins, those families may find other benefits cancelled to pay for the one program that they do not choose to use.
Importantly, across partly lines, across gender, and across income levels, 76% of Canadians believe that the best place for a child under six is at home with a parent.
It is our concern that national day care might become a national boondoggle as the federal government struggles to provide that which we believe ought to be the purview of sources closer to home.
We have a number of resources available on income splitting and day care, and I would be very happy to take questions afterwards.
Thank you very much.
Mr. Nathan Cullen:
Thank you, Mr. Chair.
Thank you to all our witnesses for being here today.
I'm going to focus a bit on income splitting, because it seemed to touch a number of the pieces of testimony from our witnesses today.
The PBO recently indicated that they anticipate the next federal budget to be in the order of somewhere around $10 billion, and that seems to be in line with many other estimates that we see. Income splitting, if we believe in the one taxpayer model, which we all do and the current government does as well, will be in the order of a $5-billion program, give or take, between the feds and the provinces.
What was interesting in the PBO report was that the actual surplus—that is, not one-time assets that are being sold, or taking from the EI fund. I'm not sure what Mr. Adler called it....
What did the Liberals do?
Mr. Gerald Keddy:
Thank you, Mr. Chairman.
Welcome to our witnesses.
To Ms. Alepin, thank you very much for explaining your graph because that was a one-page that we all had, and were trying to interpret so that's much appreciated.
I have to compliment you on your quote “Bill Gates, pay your taxes just like the rest of us”. Quite frankly we've seen tax avoidance from far too many major companies and corporations across the country. But it's a huge responsibility to try to build a system by taking the system that's already in place and trying to mould it so that it's more responsive to the needs and the changes that Canadians expect to see.
When you look at fairness in the tax system, closing the loopholes, strengthening tax enforcement, and you take some of the larger corporations, and in particular your graphs on the charities, how do you propose changing that system to make it more responsive and, quite frankly, more fair for all Canadians?
Ms. Brigitte Alepin:
That, of course, is a very good question.
In terms of private foundations, it is easy. I think the simplest way, and in fact there is one, is to impose additional obligations on private foundations in the charitable sector. Right now, we cannot really say that these foundations are charities because they do not spend more than they make. As a result, the initial capital is always intact. That is true for most foundations. Studies show that they raise about 4% each year as a charity, and that covers their operating expenses.
Overall, Canadian private foundations are probably designed to be permanent. That is the crux of the problem. We must support private foundations and charitable work, but we must ensure that it is good for Canadians.
In my view, the simplest way to correct the situation is to increase the charity rate every year. Right now, the rate is 3.5%. In the U.S., it is 5%. Studies show that it could be easily set at 8%. An amount of $25 billion is tied up in private foundations. A lot of money is therefore reinvested every year.
Do I have time to answer the question about multinationals?
Mr. Gerald Keddy:
No, I'm going to switch. Thank you.
You're talking about $25 billion of non-tax revenue sitting in foundations in Canada today. That's a huge amount of money.
One of the other issues you talked a lot about is tax evasion and tax fairness, international tax evasion and tax avoidance. Again, the whole principle of tax evasion is a difficult number to equate. Those taxes have been evaded, because people have broken the law to hide that money.
One of the things we have seen that's working is the voluntary disclosure program. Although it is criticized by some, the voluntary disclosure program has really brought people out of the closet, quite frankly. They went from 1,200 in 2006-07 to 5,200 in 2013-14, and this year so far 6,700 people have voluntarily disclosed. That's nearly 12,000 individuals and companies hiding money offshore.
How do you account for that, how do you qualify that, and how do you continue to build on that record?
Ms. Brigitte Alepin:
The voluntary disclosure program is a good program, although it can be improved in some ways. I am pleased that the federal and provincial governments are doing something along these lines.
To go even further down the road of detaxing Canadian multinationals, I will say this. Right now, there is a global movement because there are a number of problems. I think the OECD is doing quite an amazing job with its BEPS project. Some aspects need to be improved, but, overall, taxing revenue at its source is a great idea. Setting up the system is going well.
Whether in Canada or abroad, the shortcoming is that we are not addressing the race to the bottom issue. We seem to think that countries will act differently from what economic theory teaches us. The theory is that, when we are in the ideal competitive position, we can make decisions that do not benefit us overall.
Tax rates in Canada are still adequate for multinationals as well as small and medium-sized businesses. We are not like Ireland where the rate is 12% or the U.S. where the rate is 35%. In Canada, tax rates are adequate and our way of doing things seems to work. In fact, tax rates have been significantly reduced in the past 10 years.
What country will lead the race to the bottom in tax rates next? Our position might be less favourable then. Canada needs to address this problem.
Ms. Woolley, we might not agree on a number of things, but I think we do agree on this one: paying down the debt, and I think a certain amount.... When we look at the surpluses that potentially will be generated over the next five to six years, there's always the argument about whether you spend a little on new services or new programs, or a little on tax relief, or you pay down the debt.
Since you were one of the only ones on the panel who commented on paying down the debt, do you have a percentage that you would apply based on, let's say, a $6-billion surplus? What percentage would you have as debt repayment?
Mr. Clay Gillespie:
It matters which formula you choose, and we went through this and decided there are probably three different ways you can solve this problem.
The first way is just to update the formula to something like one over 95 minus your age and maxing out at 15%, and that would solve the problem today, but it wouldn't solve the problem tomorrow. So you'd want to update that at least every five years.
Another option we believe is possible, the second way, is an indexed annuity option whereby you just use annuity rates every year to set the payout for the year. Of course, annuity rates change with life expectancy and interest rates, so that would never have to be adjusted other than changing the number every year.
The third way is a dynamic RRIF model whereby the payment you have to take out is a combination of your capital payment and then you have an earnings component on there, because we believe there are two different types of RRIF investors: the GIC-type investors and the market-based investors. We're trying to figure the best way to equate both of them.
Ms. Brigitte Alepin:
Thank you for your question.
In 2004, when I started looking at how tax systems were adapting to globalization, Canada had not taken a position yet. Canada had not yet shown what type of tax competitor it would become. I must say that I am a little surprised to see Canada react that way to tax competition.
The fact is that Canada has become a major tax competitor for the United States in terms of statutory rates. The competition is even stronger when it comes to effective tax rates. I personally had the opportunity to work on the records of multinationals to see what tax rate they were actually paying. Some multinationals were subject to tax inversion.
In Ireland, they now talk about the “double Irish with a Dutch sandwich”. Here in Canada, we talk about a “Canadian Club”. We propose tax inversion to a multinational, followed by a transfer of profits to a tax haven country with which Canada has signed tax information exchange agreements. That is all followed by the profitable use of R and D systems. So it is true that Canada has a surprising attitude. I did not realize Canada had to use its tax system that way to attract capital.
If Canada does not want to have to further reduce what is already close to zero for some multinationals and if it wants to remain competitive, I would say one thing. Perhaps it is time to discuss the possibility of everyone further reducing tax rates, either statutory or effective.
Mr. Dave Van Kesteren:
Thank you, Chair.
Thank you all for coming this afternoon.
I want to follow up, if I could, with Madam Alepin.
Mr. Keddy was talking about the volunteer disclosure program. We all know that there are people who avoid taxes. And we should clarify that avoidance is legal; it's when evasion takes place through illegal measures.... So that's a good clarification.
Our government has been involved with a number of programs—aggressive programs—to stop evasion and even avoidance. We've closed these loopholes.
Is it safe to say that these measures are the reason so many have come forward who would normally maybe hide in the bushes? Is that a safe analysis?
Mr. Murray Rankin:
Thank you, Chair, and thank you to all the witnesses.
I wish I had more time. I just want to make a comment.
I really appreciate, Ms. Alepin, your suggestion of a conference. I think that's an excellent way of moving this forward. I'll just say that I hope the government takes you up on that suggestion.
Professor Robson, you talked in your remarks about a disparity between the paid tax preparers, whose services two-thirds of us seem to be needing, as compared with the non-profit tax preparers. It seemed to me you were suggesting there was a disparity or that we were disadvantaging the non-profit ones.
Could you elaborate on that?
Mr. Mark Adler:
Thank you, Chair.
Thank you, all, for being here this afternoon.
We never really have enough time to explore in full detail all the topics that we would like here, but I would like to begin. I know everybody around the table would certainly agree with the fact that our government has a strong record of combatting international tax evasion, and getting tough on tax cheats. In fact, from 2006 to March 31 of this year, the CRA has audited over 8,600 international tax cases, identifying over $5.6 billion in additional taxes that are now being collected. Moreover, the economic action plan of 2013 introduced a number of new measures dedicated to offshore compliance activities, and an investment of $30 million over five years in support of their implementation. Economic action plan 2014 has introduced even more. In fact, since 2006, our government has introduced over 85 measures to improve the integrity of our tax system. It's to the NDP and Liberal discredit that they voted against every single one of these measures.
My question for Ms. Alepin, would you not agree that that is a step in the right direction?
Ms. Brigitte Alepin:
Yes, it is a step in the right direction. However, I would like to make two comments about this issue, although I made one of them earlier.
I find that the tax system is sending a mixed message. On the one hand, the investigative measures are extremely tough and restrictive for taxpayers who use tax havens. On the other hand, we have a tax system in place that allows multinationals to use tax havens legally. That is my first comment.
I also have trouble understanding something. Right now, multinationals are in fact able to do business in tax havens without paying taxes anywhere. They pay no taxes in tax havens or in Canada. In this case, how is the government handling the fact that the system has become unfair for the country's small and medium-sized businesses? I cannot figure that out. We hear that this is a step in the right direction, but setting up a tax system for multinationals is no such step. Multinationals actually pay less tax than small and medium-sized businesses.
When I started my career in taxation, that was not the case. Small and medium-sized businesses used to pay much less tax than multinationals.
Mr. Richard Harris:
Thank you, panel.
I just want to be clear. In my mind there's a clear difference between what we would call tax evasion or tax avoidance and tax benefits and tax allowances. One is bad; the other is good.
I always believed that, if Canadians were to do all of the things that they should do to try to earn a good living such as get an education, work hard, and handle their money in a prudent fashion, and if they make a good life for themselves, to the extent that the chances were very slim that they would ever be dependent on the government, maybe they should have some sort of a reward, a small reward, to do that. That's what we call tax breaks, tax breaks for Canadians.
Now over the last eight years our government has lowered the average tax to Canadian families by, I think, about $3,600 a year. I would suggest that the average Canadian middle-class family does not put that $3,600 a year into a sock somewhere every year and just let it sit there. They put it back into the economy because they buy things. That's good for the economy. As a matter of fact, just at the bottom line, for every dollar in tax breaks that the federal government gives to a Canadian family, they reap 5¢ just at the basic level on every dollar that's put back into the economy. It only has to turn over 20 times in the economy, which could happen in a day, and the government has that dollar back. That's good for the economy.
If some panellists here today think that tax breaks for Canadian families or for working Canadians are not necessarily a good thing, I would like to argue that they are a very good thing and that we should do whatever we can to support them. It doesn't stay in a sock; it gets put back into the economy.
I just have one question.
Mr. Gillespie, you talked about individual long-term care insurance. I think that's a great idea. I think that anyone who is willing to put money into a program like that so that they relieve the government of supporting them when they're in their senior years should maybe get some sort of reward, such as a tax allowance, on the premiums that they pay because, at the end of the day, the government is going to come out far better than if they didn't do that.
Is that a good suggestion?
Thanks for that.
Thank you very much, Mr. Harris.
I only have a couple of minutes unfortunately, so I don't think I'll have any chance for a question. Perhaps I can make a couple of comments and have people respond.
First of all, I appreciate CALU's recommendations. I think they've very healthy in terms of the policy debate.
Second, Professor Woolley, I know you had more in your opening presentation. Your third concern was about the CCTB system in terms of when the government should look at addressing. I've got about a minute here if you want to expand on what your third concern is and how we should address it. The first concern is the clawback, the second is marginal rate. Do you want to expand on the third concern? I was going to get into the income splitting debate, but I don't think I'll have time to do that.