Finance Committee on Oct. 21st, 2014

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

There should be a case made.... I mean, they can take advantage of the charitable tax credit on that 1% or 1.5% they're charging, so there's no reason....

You know, this is a win-win.

[Bruce MacDonald]

We certainly think so. Thinking of the example we gave, ultimately, when a charity receives a contribution of $100 through a credit card, they're expected to receipt for that $100, but they're getting $95. I think the issue here is how we can direct more of those dollars directly into the missions and causes.

[Gerald Keddy, Conservative, South Shore—St. Margaret's, NS]

Turning to you, Mr. Dillon, from Credit Union Central, in full disclosure I'm a credit union member. I have been since I was a child. In rural Canada, often the only banking institution we have is the credit union. You do great work. At the same time, I pay a premium to be a credit union member and live in the community I live in. I can get cheaper money at the bank, quite frankly, so it's not all just a one-way street here.

I have some real concerns. You're suggesting that we conduct a mandate review for Farm Credit Canada. I can tell you that the last people who lobbied me for that were the big banks. When you go into Farm Credit, they have people who are experts in agriculture. They know the type of farming that you're already in. They offer good advice. They can look at your business plan and determine very quickly whether it's a reasonable, rational business plan or not.

Why would we take that out of the marketplace and out of the hands of small farmers and farmers across Canada?

[The Chair, Conservative, James Rajotte]

Make it a brief response, please.

[Eric Dillon]

Sure.

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.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Keddy.

We'll go to Mr. Brison, please.

[Scott Brison, Liberal, Kings—Hants, NS]

Mr. Dillon, in terms of the tax credit you're seeking, the $66 million and the associated multiplier effect or leverage in terms of lending, last year's Budget Implementation Act eliminated a long-standing tax credit for credit unions of $42 million. What has been the impact of that elimination on your members' ability to lend to small businesses in communities served across Canada?

[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.

[Scott Brison, Liberal, Kings—Hants, NS]

Thank you very much.

Mr. Moffat, I would appreciate your thoughts at this committee on the Conservatives' income splitting proposal from their last platform, and your thoughts on it as a use of government resources.

[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.

[Scott Brison, Liberal, Kings—Hants, NS]

In terms of the Conservatives' EI tax credit, small business tax credit, you've said that it “makes it weirdly profitable to fire people”. Can you explain for the benefit of the committee that statement? You seem to be saying it creates a disincentive to growth.

[Mike Moffat]

Normally, when you design a targeted tax credit for businesses, the eligibility requirements tend to be backward looking. They say that if you paid so much in tax or your earnings were a certain amount the year before, then you're eligible for this, and then what you do next year you may get a tax credit for. The proposal here was designed a little strangely: that the eligibility criteria was forward looking, that your actions next year determine whether or not you're eligible for the credit. You can find yourself in a situation where you look to be paying too much in EI, thus making yourself ineligible for the credit. By either delaying hiring, reducing hours, or in extreme measures firing people, you can actually make yourself eligible for the credit.

It was just, in my view, a design error. Had the design been backward looking instead of forward looking, I think there may be some merit to the idea.

[Scott Brison, Liberal, Kings—Hants, NS]

Okay.

What's your view of the Liberal proposal of an EI premium holiday for two years, only for new hires, for companies that actually increase their employment?

[Mike Moffat]

I think it's a stronger benefit. Now, again, based on what I said earlier, my inkling is always to have fewer tax credits, period. But if you're going to have a tax credit, I think the Liberal plan has two advantages over the Conservative one. One, it's backward-looking, so it doesn't have this weird drop-off point. Two, you only get the credit for increasing spending. You're not paying people for spending they were already doing. It's based on an incremental increase.

[Scott Brison, Liberal, Kings—Hants, NS]

Professor Cockfield, to follow on Mr. Keddy's questions about the tax code being too complicated, over the last eight years has the tax code in Canada become more complicated?

[Prof. Arthur Cockfield]

Yes. I don't think anybody would argue that it's become simpler. There was a commission, the Advisory Panel on Canada's System of International Taxation, struck by the Department of Finance in 2008. They investigated tax simplification, had some recommendations, but to my knowledge, none of those recommendations thus far have been implemented.

I suppose I should also say again that since at least the late eighties, it's just grown in terms of complexity, to the point now where we have certain sections, section 95, that is over 150 pages of tiny print—one section in our Income Tax Act.

[Scott Brison, Liberal, Kings—Hants, NS]

Okay, thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Brison.

We'll go to Mr. Allen, please.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you to our witnesses for being here.

Mr. Cockfield, I'd like to start on that line of questioning on tax simplification again. I know that the U.K. has a model whereby they have a sunset clause on their unlegislated tax measures, so that if something is not legislated, it's deemed dead after a certain period of time. This fall, the Minister of Finance is going to file his first report based on this committee's recommendation in the last budget bill with respect to unlegislated tax measures. That will happen this fall.

What I'd like to understand is this. The tax code was roughly 13 pages in 1917 and now it's 3,206 pages, give or take a few pages. It got that way over a lot of decades. What has been the key success of other countries in regard to kicking off that effort and making sure it's successful, as opposed to sticking in the mud?

[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.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Thank you very much.

Mr. Dillon, I'd like to go to you for a few questions with regard to the credit union. In my riding a lot of small rural communities have credit unions. That's the only financial source that is actually in those communities.

You've already talked about your loan profile being at around 18.6% of the small business market. With this credit that you're talking about, the capital growth tax credit, what does that extra $700 million in potential lending mean to employment in the rural areas? Right now, I think the branches in New Brunswick and Atlantic Canada probably have between 9 and 15 employees per branch. What does that mean for employment in the regions for the credit unions?

[Eric Dillon]

That's a very difficult question to answer. That's national data as to where that money is deployed. Certainly we could try to come up with a bit of an educated guess for the committee, but I wouldn't want to wager a guess and be wrong today.

Suffice it to say, though, that while credit unions have grown in this country, there is a tremendous amount of employment created at the local level where credit unions are the only institution in town, I think both in terms of service provided and the economic benefits of having those people employed there. In my remarks earlier, you heard exactly how many communities are served by just a credit union in terms of financial services, and certainly we'll be happy to provide the committee some analysis behind that.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Okay, if you would....

Also, the other challenge you had on the financing side of this, if I understand it correctly, is that it's a member-driven type of organization, as opposed to the banks, which are shareholder-driven organizations. If I want to get out of my bank stock, I sell it and I leave. When the members leave, they leave and take their money too. Is that correct?

[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.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

Mr. MacDonald, I'd like to ask you a question about the stretch tax credit.

It seems to me if you have your groups approaching 150 MPs, and you have consensus among the charities as to this being the way, is there consensus in the charities and non-profits that this is the best option that exists? Can you actually project that this is going to drive up more and more giving? Has there been a long-term projection of the tax consequences and loss of revenue to the federal government on that?