Finance Committee on April 7th, 2008

[Prof. David Duff]

They have done a good job on wind power and a variety of other things.

[Dean Del Mastro, Conservative, Peterborough, ON]

Good.

I understand the premise that you're coming from. In some ways I support it; in other ways I'm really afraid of it, because an exporting nation is always afraid of being countervailed on its production.

I was also really struck by your suggestion of taxing inheritance. I try to draw personal examples into this. My grandfather, a poor immigrant who came here with literally nothing and worked for 50 years, passed on a small inheritance to his family. He paid every form of tax that there could be possibly be throughout that entire time. He passes on to his family the inheritance that he has left over, whatever he has saved, and you're proposing that it should be taxed.

[Prof. David Duff]

No, I'm not.

[Dean Del Mastro, Conservative, Peterborough, ON]

Okay.

[Prof. David Duff]

The key is that you said “small inheritance”. That's the key, right? The key thing is that these taxes should only apply to very substantial estates that are transferred from one generation to the next.

In fact, I was speaking a couple of weeks ago in connection with a debate in the U.S. right now about a gift and estate tax they have that is repealed in one year but comes back into existence in 2011. When I was speaking to the folks in the U.S., I was saying that I'm a big believer in the value of building up a business, an enterprise, or a family farm and transferring it from one generation to the next. That's part of the American dream and part of the Canadian dream. But at a certain point that value comes up against another set of values, which is the value of a degree of equality of opportunity and concerns about dynastic inheritances, and that balance is what I think needs to be accommodated in a tax with a very high threshold.

[Dean Del Mastro, Conservative, Peterborough, ON]

I wanted to go back to the HST, and I'd be happy to entertain comments from both.

We had testimony provided last week--testimony I happen to agree with--that it's not even how much tax you collect sometimes, but how you're applying the taxes. You talked about Ontario and provinces that don't currently have a value-added tax moving to a harmonized sales tax. There's no reason Ontario has to necessarily take a hit in moving to an HST. What we're really talking about is changing where we're applying the taxes to create a more competitive tax scheme overall.

Wouldn't you agree with that? Isn't that the incentive for Ontario, or provinces like Ontario, to move to a VAT--that it's more competitive overall?

[Prof. Robin Boadway]

It's clearly in Ontario's interest to move to the VAT to eliminate the inefficiencies associated with the fact that the current retail sales tax in Ontario taxes business inputs substantially. The question is how to do that.

There are two options you could pursue. One is to have Ontario do it unilaterally by adopting a Quebec-type system, a QST-type system--well, there are three ways of doing it. One is to harmonize the retail sales tax to the GST at the retail sales level just by including services, but you'd run into the same problem there as you would with the existing tax. Another possibility is having Ontario adopt the QST; then you'd have three separate provincial GST systems, which starts to become unwieldy for businesses dealing in many provinces. The only workable option, it seems to me, is for Ontario to harmonize with the federal GST by effectively joining the HST.

[Dean Del Mastro, Conservative, Peterborough, ON]

Did you have any comment?

[Prof. David Duff]

I agree, and I think it can probably be revenue neutral and certainly advantageous.

[Dean Del Mastro, Conservative, Peterborough, ON]

Mr. Godbout, did you have any input on that? I know that you talked about productivity. Certainly this is pretty key to improving on that--

[Prof. Luc Godbout]

Clearly, Ontario and the other Canadian provinces that have yet to do so would gain from harmonizing their retail sales taxes and turning them into value-added sales taxes. From a Quebecker's point of view, I wonder whether Ontario and the other provinces should be compensated, as was the case for the Maritime provinces. As the model student, Quebec was the first to take the initiative, but did not receive any compensation.

Aside from that, Ontario and all Canadian provinces should adopt that measure. I am not sure whether that harmonization has to be full and complete or whether the same approach should be adopted. I am not as categorical as Mr. Boadway, but I think that the tax should at least be harmonized and based on the value added.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

We'll now move on to Mr. Martin. You have seven minutes.

[Pat Martin, NDP, Winnipeg Centre, MB]

Thank you, Chair.

Thank you, guests and witnesses.

Mr. Boadway, in your remarks you reminded us that one of the purposes of corporate income tax--I think it's the way you put it--is to collect rent, almost, for the federal government to allow.... Or was that you, Mr. Godbout?

I see. Thank you for pointing that out. I think it was helpful.

My question is regarding the resource-based industries, where in recent years there has been an explosion of the flow-through types of businesses--the income trusts--especially in resource-based and then also in real estate. So the government took action to stop the income trusts. From a policy point of view, do you believe that was the right thing to do? Is that in keeping with one of the objectives you pointed out, that the government has to collect some revenue from the extraction of resources, especially in that sector?

[Prof. Robin Boadway]

The income trust set-up was essentially a vehicle for avoiding paying the corporate tax, to put it in the simplest possible terms.

[Pat Martin, NDP, Winnipeg Centre, MB]

It was a flow-through to the unit holders.

[Prof. Robin Boadway]

You can say that if you adopt the classical view of the corporate tax as being simply a withholding tax against shareholders, and you have a 100% full method of integrating personal and corporate tax, then it wouldn't make any difference who paid the tax: the corporation or the individual. But we don't have that kind of tax, and I don't think we should. I think the corporate tax should, in part, be a vehicle for taxing what economists call the rents or the pure profits that are earned by industries, whether through ownership of resources, or monopoly profits, or whatever it might be.

We know perfectly well how to design such a system. We should think about moving our tax in that direction, because in addition to it preserving the ability to raise rents through the tax system, it also makes the tax more efficient when it comes to investment decisions.

[Pat Martin, NDP, Winnipeg Centre, MB]

Does anybody else care to comment?

Mr. Godbout, you have a comment on income trusts.

[Prof. Luc Godbout]

We could not sustain two parallel systems where, on the one hand, some companies were exempt from tax because they chose to operate as a trust, and on the other, businesses had to pay taxes. Had the integration system worked properly, there would have been no problem, but that was not the case. Businesses changed vehicles simply to cut taxes, which is not a bad thing, but that is why amendments were made to the legislation.

[Pat Martin, NDP, Winnipeg Centre, MB]

Looking at the helpful graphs that you brought in, Mr. Godbout, I was startled--shocked, if you will--to see the assistance per job lost in the province of Alberta versus the provinces of Quebec and Ontario. Did your research show which specific industries had job losses in the province of Alberta and where the subsidies would be going?

[Prof. Luc Godbout]

We simply looked at changes in the number of manufacturing jobs by province between January 2005 and January 2008. In Canada overall, 280,000 jobs were lost. Very few were lost in Alberta, but aid was distributed per capita within the traditional sectors, and amounted to about 10%. That case isn't unique, it shows a strong tendency on the part of the federal government. Increasingly, aid is distributed per capita.

Concerning the Canada Social Transfer, it has been shown that welfare has produced somewhat comparable results. The funding is given to provinces according to their demographic weight, regardless of how many welfare recipients they have. As such, Alberta receives more welfare money from the federal government than it pays out to its welfare recipients. Alberta receives slightly more than $9,000 per welfare recipient, whereas Newfoundland receives approximately $2,000. This shows that it makes no sense to inject funding into certain sectors according to provinces' demographic weight, without taking into account their needs.

[Pat Martin, NDP, Winnipeg Centre, MB]

Yes, I agree.

In that same vein, it was only recently that they stopped allowing fines--like a business fine or a levy--and penalties to be tax deductible, but we still allow royalties to be tax deductible.

One of your presentations was critical of the idea that extraction royalties should be tax deductible in the province of Alberta, and that they would risk their political future, if you will, by having the temerity to raise the royalties of the oil and gas sector. If that's tax deductible at the federal end, how is the extraction company really paying more rent, to use your term?

[Prof. Robin Boadway]

I think the deductibility of royalties comes about by viewing royalties as a payment to the province for the right to use the resource.

[Pat Martin, NDP, Winnipeg Centre, MB]

And why is that tax deductible, then? What do you think the reasoning is for that being a writeoff?

[Prof. Robin Boadway]

I was saying the contrary--that it shouldn't be a writeoff.

[Pat Martin, NDP, Winnipeg Centre, MB]

Yes.