Finance Committee on Nov. 7th, 2012

[The Chair, Conservative, James Rajotte]

Could we have just a brief response, please, Minister.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

There are lots of groups that advocate many things in the field of taxation and EI. We have to make some choices and we have to place some limits on things so that we maintain our fiscal track to a balanced budget.

I tell you, the guy in Ottawa who owns the bicycle shop where I made an announcement recently, because of the hiring credit last year, hired one person he otherwise would not have hired. That's one person who had a job, who wouldn't have had a job otherwise if it hadn't been for that hiring credit. This is a very practical use of the EI system.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Brison.

We'll go to Mr. Jean, please.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you, Mr. Chair.

Thank you, Minister, for attending today. I know you have a very busy schedule.

On what Mr. Brison was saying earlier, $3.6 billion is invested in SR and ED by the federal government. Of course, that is the largest single funding program for businesses. I understand there are going to be no cuts. The Jenkins report that the government asked to be done said that they want less complicated rules, that they need to make sure people can do it and that it's more simple.

My general understanding is that any savings regarding SR and ED will be put back into direct investments. As far as this program goes, there are no cuts at all. There's just an investment possibility and maybe a change in where the money goes. Is that correct?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

That's right, and thank you for the question.

It follows on the direction of Mr. Jenkins' report. As I mentioned, $400 million as part of that pool of money is going to be used in a more direct way to assist in the creation of innovation venture capital in Canada, for which there is quite a serious need in our country, particularly for young innovative people who need a hand up, really, so they can get their innovation to market.

We have some fabulously innovative people in Canada. We have tremendous examples. We have MaRS in Toronto. We have NAIT in Alberta. There are great examples all across the country. A lot of them either sell out early, usually to Americans, or they give up because they don't have the financial wherewithal.

This isn't going to be a big government program, I can assure you, in which the government picks winners and losers. It's not going to be that, but there's going to be a sizeable amount of money, which we hope to leverage in order to assist these young entrepreneurs.

I know that some of the large manufacturers would prefer that we leave things as they are, but the government's view is that this is a better use of this pool of money.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Of course, this is the biggest funding envelope the government has for businesses, so it's important to get it right.

I'm going to turn to my constituency. I'm from Fort McMurray, as you know. It's a very busy place right now. It's been extremely busy over the last, probably, seven or eight years. There have been some changes with our government. In particular, in the oil and gas sector there was a phase-out in 2007 and 2011 of the accelerated capital cost allowance, ACCA, deduction. I understand that was done as a result of G-20 commitments, some of the concerns they had at the G-20 meeting. Indeed, I was curious as to what would be taking place in the future regarding this particular budget and what will go forward for the oil sands.

Frankly, Minister, we're too busy up there right now, and we don't need any more relief as far as taxes go.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

I appreciate that. You know the direction in which we have been going, which is to phase out any special benefits for oil and gas in Canada.

The oil and gas sector pays billions of dollars a year in taxes, and that tax revenue is used to pay for health care and other social programs by governments across Canada. In the 2007 budget and again in 2011, we took out some of the preference specific to oil sands producers, so they're gone and have been gone completely since 2011.

This year we're phasing out the Atlantic investment tax credit for oil and gas and mining sectors, a move which has met with some resistance. Quite frankly, these are good investments in Atlantic Canada, and they don't need a tax preference. They can make money and they do make money.

This is part of our commitment to the G-20 as well. We just talked about it again this weekend in Mexico City. A lot of the other countries in the G-20 are concerned that large gas and oil producers like Canada do not subsidize oil and gas production through taxation, through the tax system, and we do not. We've moved quite dramatically away from that during the course of this government.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

There has been a call by some parties and some provincial governments regarding the opportunity to use an ACCA for upgrading and refining capacity. I know the Alberta government has suggested there should be something on that.

Is that within the mandate of the G-20, regarding the upgrading and refining capacity? I know the NDP have suggested that we should put more of that type of oil and gas sector in our economy—

[The Chair, Conservative, James Rajotte]

Okay, question.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

—and stop sending a lot of it down to the United States.

Is that part of the G-20 mandate or is that part of our government's mandate in this particular budget?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

It's not, as far as I know, part of the G-20 mandate. The G-20 mandate is really concerned with subsidies in the extraction and production of oil and gas. But it's an interesting concept. It's not something we've addressed previously in budgets, so I'll look forward to receiving the report from the committee.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Jean.

Mr. Caron, you have five minutes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

Thank you, Mr. Minister, for joining us. I assume that an omnibus bill also requires an omnibus environment.

I would like to come back to scientific research and experimental development tax credit. Capital expenditures will no longer be considered as expenses qualifying for tax credit. We have heard a number of witnesses—including Canadian manufacturers and exporters—say that eliminating capital expenditures from the credit calculations could have a fairly significant impact, especially on the manufacturing and natural resources industries. That is because large businesses, in particular, often need pilot projects in the form of trial plants.

I would like to know why you decided to make capital expenditures ineligible, even though that was not part of the Jenkins report for large businesses.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

It was viewed, and Jenkins did discuss this, as the least efficient, the least stimulative part of the SR and ED R and D program. That's why we took it out.

It's important to realize that this isn't a dramatic huge change. This is reducing a 20% SR and ED investment tax credit to 15% of qualified expenditures. That's what it is. And it does not apply on the first $3 million of qualified SR and ED expenditures annually.

This is a benefit for smaller businesses that are innovative in R and D. Yes, it's not as popular, no doubt, with some of the large businesses doing R and D in Canada, but to suggest that that 5% difference is going to be the difference between doing R and D in Canada and not, with respect, I think is a bit of a stretch.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

I think we are talking about two different things. You are talking about tax credit rates, while I am talking about the ineligibility of capital expenditures in the calculations of tax credit for large businesses. Despite the fact that the Jenkins report did not mention this—only for small businesses—you decided to make capital expenditures ineligible for large businesses and those that often need capital expenditures to set up pilot projects in the form of trial plants.

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

I thank the member on his question.

Let me say that one of the complaints we have had about SR and ED, again, mainly from small and medium-sized businesses, is that they don't have the money to hire a bunch of accountants and so on to figure out all the paperwork they need to do.

In fact, it's getting so complicated that they hire specialists and pay them contingent fees of 30% and more. This is another issue we're looking at, about how much of this SR and ED money ends up in the hands of experts and consultants and doesn't end up doing what it's supposed to do, which is to create more R and D in our country.

To simplify the SR and ED program, the proposal in the bill excludes expenditures of a capital nature, including payments in respect of the use of or the right to use capital property, from eligibility for SR and ED deductions and investment tax credits. It helps to simplify the system.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

However, Canadian manufacturers and exporters surveyed their members. They say that, after capital expenditures were made ineligible for tax credit calculation, 69% of their companies are anticipating a drop in their R&D expenditures. In addition, 18% of them are thinking of moving their R&D investments elsewhere, since competitiveness will be lower here.

Don't you think that the impact is fairly significant, and that perhaps this eligibility change should be reconsidered?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

No, but it depends where a country starts. We start with the SR and ED program, which is among the most generous investment tax credits in the entire world. Now we're reducing it modestly, not dramatically, but modestly. It's still a very generous tax credit to large businesses doing R and D in Canada.

[The Chair, Conservative, James Rajotte]

Merci, Monsieur Caron.

Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

I want to thank you, Minister, for being here today. I know how busy you are, so thank you for your time today.

In my riding of York Centre, we regularly convene a number of businesses, mostly small businesses. About twice a month we sit around a table, and we talk about issues and different concerns and challenges they may have.

I have to tell you that, to a business, and these are all small businesses, they all say to convey thanks to the Minister of Finance, particularly for the small business hiring tax credit. They are hiring people as a result of this. A number of them wanted me to pass on a thank you for that.

I want to talk a bit about the IMF's comment on the governance reform provisions which are contained within Bill C-45 and how they relate to what we saw in Bill C-38, the first budget bill. These are designed, of course, to strengthen the financial architecture around the world and all of that.

Canada is co-chair of the G-20 working group. Can you talk about why it's important that Canada take a lead on this to strengthen the international financial architecture and push the IMF to be more effective, particularly with respect to developing economies? How will that benefit Canada?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

Going back a few years, we had the G-20 in Canada, as you know. Out of that came what the G-20 people refer to as the Toronto commitments, which were two important commitments. One was to reduce deficits by half by 2013, and the other was to move toward balanced budgets by 2016. Some countries are moving in that direction, and some are lagging a bit.

One of the big challenges we have in the framework group, which as you said is co-chaired by Canada and by India—and we've been asked to continue co-chairing it by the G-20 presidency for next year, which is Russia—is an accountability mechanism. What we've been working on—which I recommended to the other members of the G-20 on the weekend, and they accepted it, and it's in the communiqué—is that we will have a set of accountability measures so we can look at what countries are doing and how well they are complying with those commitments.

The whole idea is that the G-20 represents most of the large economies in the world and that we will move together toward more fiscally responsible government. That's important so that we avoid some of the very difficult situations we have seen in some of the southern European countries.

[Mark Adler, Conservative, York Centre, ON]

Thank you.

You also mentioned earlier that we can't be complacent, and of course we can't, notwithstanding the fact that we have the number one economy in the G-8, and the strongest job growth. We're recognized by the OECD, the IMF, and the World Economic Forum as having the best financial system and the best job growth. Forbes said we're the best place to be doing business.

Today, Mario Draghi, the ECB president, spoke in Frankfurt about the four pillars of the European Union economy. He had some fairly optimistic things to say about the European Union.

How do you see the European Union, and of course the forthcoming fiscal crisis, the fiscal cliff, in the U.S.? If a shoe drops, how will that affect us here in Canada?

[Jim Flaherty, Conservative, Whitby—Oshawa, ON]

The American situation is relatively straightforward. The calculation of the shock to the U.S. economy is 4% to 5% of real GDP. That's the American assessment of what will happen if they let the fiscal cliff happen without any adjustment. I have more faith in self-interest taking hold at some point and people realizing that this would be very unwise. It would hurt a lot of people in the United States. It would also hurt us and we would go into a recession not long after because still 75% of our trade is with the United States and there would be sharply reduced demand of course.

With respect to Europe, we've been pressing Europe for a long time, the eurozone countries, and sometimes we've created a chill in the room by not going along with everybody. I think it's having some effect. For the first time the leaders of the eurozone met following the IMF and World Bank meetings in Tokyo three and half weeks ago and actually set a deadline for setting up the legislation for the supervisory body for their banking system in Europe. It is to be done by the end of this year. Then the leaders of the eurozone instructed their finance ministers to get the implementation done. Their finance ministers are meeting on, I believe, November 12. There are some steps happening with some deadlines in the eurozone.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Thank you, Mr. Adler.

Mr. Mai, go ahead.

[Hoang Mai, NDP, Brossard—La Prairie, QC]

Thank you, Mr. Chair.

Thank you, Mr. Minister, for joining us today.

You know that the Governor of the Bank of Canada said this summer that there were issues regarding money referred to as dead money—which consists of over $500 billion sitting in private companies' coffers. You also talked about that.

I want to quote what you said:

We've done a lot through the tax system to encourage Canadian executives, business people, to start utilizing some of the capital they have on their balance sheets. At a certain point, it's not up to the government to stimulate the economy, it's up to the private sector, and they have lots of capital.

Now that we know that about $525 billion is sitting in those coffers and is not being reinvested in the economy, could you explain to us why your budget and your measures failed to fix that problem?