Evidence of meeting #33 for Finance in the 39th Parliament, 2nd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was income.
A recording is available from Parliament.
4:45 p.m.
Bloc
4:45 p.m.
Prof. Luc Godbout
The middle-class if often affected, but it is not just the federal government's fault, nor is it just the provinces' fault. It is a combined effect, that starts from a good cause: setting up programs that are not universal in order to make low-income earners a priority. When they begin to earn more, it is as if we were knocking their feet out from under them. When both governments collect their share at the same time, there is not much left over.
Earlier, your colleague to the right asked me a question about how we could fix that. I will try to clarify my answer. If the two levels of government were to ensure that the implicit tax rates never exceeded the marginal rate paid by a high-income taxpayer, that problem would be solved. Personally, I conducted a more detailed study on the topic. Guidelines could be set, for example, to limit the maximum federal-provincial rate at 50%. For each additional dollar earned, governments should commit to never taking more than 50¢. However, implementing a measure like that is quite costly. Nevertheless, the issue will have to be dealt with sooner or later. It is not normal to—
4:45 p.m.
Prof. Luc Godbout
To be fair. We tell a single parent to make a little effort and to earn $5,000 more, and then we take away $3,800. I think that is a problem.
4:45 p.m.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
In another graph, on page 7, it says that Canada is below average in terms of the proportion of revenue from taxes on consumption and income taxes.
I am going to ask you to do an exercise that is perhaps not feasible immediately, but it would be interesting if you could do it. The United Kingdom is almost at the index, with 0.94. My question is very hypothetical, but if Canada were to reach an index like that, would we see a major adjustment to the model on a page 5?
4:50 p.m.
Prof. Luc Godbout
First of all, I must point out that the index is not nirvana. It is not a major target to reach. It is there only to rebalance things somewhat.
4:50 p.m.
Prof. Luc Godbout
It is a comparison. I have not done the calculations for Canada, but I did do them for Quebec, at both the federal and provincial level. To move closer to an index of one, there would perhaps need to be a three- or four-point increase in the sales tax. That would be the equivalent to a three- or four-point reduction in the income tax.
4:50 p.m.
Bloc
Jean-Yves Laforest Bloc Saint-Maurice—Champlain, QC
So to see an improvement, it would have been better to increase the GST by two points instead of reducing it by two points.
4:50 p.m.
Prof. Luc Godbout
And it should go to reducing the income tax. I am not getting political. Someone was elected by promising to cut the GST. Once he was elected, he did that. We must congratulate him for having kept his promises, even if it was not the best thing to do and even if there was no consensus in that area.
4:50 p.m.
Liberal
Garth Turner Liberal Halton, ON
Thank you.
I'd like to get your opinion on a couple of changes to the tax code. A family tax return or having more of a French-type system--Mr. Duff, would you say that's a good progressive idea or not?
4:50 p.m.
Prof. David Duff
I'm not a fan of that. I remain a fan of individual taxation, however, with the following exceptions. We have these attribution rules that I actually think don't respect individual taxation. Individual taxation treats individual ownership and entitlement to property and income seriously, and the attribution rules actually reject that. If you've actually transferred property to a lower-income spouse--I think you still need them for kids--the income is the spouse's income and it should be taxed in the spouse's hands. So I think the attribution rules for spouses are relative of an earlier era that we could do away with. It would make the system simpler.
I would actually encourage transfers of property between spouses. Now, that's only going to advantage high-income couples, and so lots of folks might reject it on that basis, but I think it takes individual taxation seriously.
The other thing that I think is not a bad idea is on the child care expense deduction. You're only able to get it if the child care is provided by someone other than a spouse or one of the parents. In fact, I think the dynamics of lots of child care arrangements are that it's a division of labour between spouses. It would be a reasonable thing to allow one spouse to income split with the other, up to the limits of the child care expense deduction, by paying the other spouse for the child care expense, which would do some income-splitting and actually allow the stay-at-home parent to earn income that could qualify for Canada Pension Plan, RSP contributions, etc.
4:50 p.m.
Liberal
Garth Turner Liberal Halton, ON
Thank you--none of which I asked you, but that was very good.
Mr. Boadway, I'd like to ask you about the capital gains tax rollover provision. As you may remember, in the 2006 election campaign there was some talk. The Conservative platform was to have a rollover of a six-month period of time. It hasn't transpired yet. Do you think it should?
4:50 p.m.
Prof. Robin Boadway
You know, I can give you an economist's answer on the one hand, and on the other, there are pros and cons to doing this. The pro of doing it is that it doesn't induce people to lock their savings into a given asset; it allows them to freely change assets without penalty. The con is that we're taxing capital gains favourably already by allowing you to hold capital gains until you've realized them and, in the meantime, accumulate returns as they accrue.
On purely equity grounds, what we'd like to do is tax capital gains as they accrue rather than when you realize them. Given that we don't have that system, I can see the argument for allowing a rollover provision, but I'm not convinced that....
4:50 p.m.
Liberal
Garth Turner Liberal Halton, ON
Okay, I have another question here, and again, this is on a similar topic. It's on the tax-free savings plan. Right now, the government seems to indicate to us that the only contribution that will be accepted into a tax-free savings plan is cash. Should we be accepting contributions in kind? If we do accept contributions in kind, then are we, in effect, nullifying capital gains taxes?
4:55 p.m.
Prof. Robin Boadway
I'm not sure I understand the question. What do you mean by contributions in kind? Are you talking about the new vehicle--
4:55 p.m.
Liberal
Garth Turner Liberal Halton, ON
It's the same as with an RRSP. You can make a contribution in kind--not cash, but a contribution in kind.
4:55 p.m.
Prof. Robin Boadway
Do you mean another asset?
4:55 p.m.
Liberal
Garth Turner Liberal Halton, ON
You're allowed to contribute up to a certain limit based on the market value of an asset you already hold.
4:55 p.m.
Prof. David Duff
It has an accrued gain on it already.
4:55 p.m.
Liberal
Garth Turner Liberal Halton, ON
Right.
We haven't had clarity from the Minister of Finance on this. We haven't really had clarity. This whole idea of a contribution in kind is quite significant, because as we go forward and develop this in 2009, this becomes a major point in tax planning.
Do you have ideas?
4:55 p.m.
Prof. Robin Boadway
I must admit I haven't thought through the details of this.
4:55 p.m.
Prof. Luc Godbout
I think I understand. The new tax-free savings account, the TFSA, does allow contributions in kind. However, there is a deemed disposition before the contribution in kind goes into the tax-free savings account. So there is a gain immediately before, as is currently the case with the registered retirement savings plans. Shares from a given company can be transferred to a TFSA. However, if there is a gain at the time of the transfer, that is taxable. From what I understand, you would like that not to be the case.
