Bill C-2 (Historical)

An Act to amend the Income Tax Act

This enactment amends the Income Tax Act to reduce the second personal income tax rate from 22% to 20.‍5% and to introduce a new personal marginal tax rate of 33% for taxable income in excess of $200,000. It also amends other provisions of that Act to reflect the new 33% rate. In addition, it amends that Act to reduce the annual contribution limit for tax-free savings accounts from $10,000 to its previous level with indexation ($5,500 for 2016) starting January 1, 2016.

[The Chair, Liberal, Wayne Easter]

Thank you for that answer.

I would remind committee members that if any of the parties have amendments on Bill C-2, they have to be in to the clerk by 4 p.m. today.

With that, I want to thank the parliamentary budget officer and all of the witnesses for being here, and also for the good work you do on behalf of Canadians.

Thank you very much, everyone.

The meeting is adjourned.

[Jean-Denis Fréchette]

If I remember correctly, in our report the 83% referred to the first bracket. In our report, we said that if we started with the second bracket, as proposed by Bill C-2, 43% of taxpayers would be affected. Once again, those 43% do not just include taxpayers in the second bracket, but also those in the third bracket and others.

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

In short, Bill C-2 seeks to tax about 1% of the population more heavily in order to redistribute money to about 25% of the population in a significant way, let's say to 31%. Therefore 70% of the population will not necessarily see a change, despite the claim that the bill will benefit the whole of the middle class.

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

Thank you, Mr. Chair.

I am particularly interested in Bill C-2.

I would like to thank you once again, Mr. Fréchette, for your thoughtful work to answer to my question. Indeed, you compared the provisions of Bill C-2 on the reduction to the second income tax bracket, which ultimately affects all income above $45,000, the one for income between $45,000 and $90,000, with the measure we proposed, specifically, a 1% cut for the first tax bracket, which would affect 83% of Canadians.

This is being touted as a tax cut for the middle class, but people with incomes under $45,000 do not see a penny in tax relief. Ultimately, I would like you to confirm, based on the figures from the studies you have done, that someone who earns $210,000 would receive more in tax cuts than someone else earning $62,000 per year.

[Paul Lefebvre, Liberal, Sudbury, ON]

Thank you, Mr. Chair.

I want to talk about the TFSAs. Bill C-2 addresses that and reduces the limit from $11,000 to $5,000.

By income group, what percentage of Canadians are currently contributing the maximum amount to their TFSAs?

[The Chair, Liberal, Wayne Easter]

Thank you very much. You'll have to remain in suspense for three or four weeks, Mr. Liepert, for the outcome.

We will turn to bill C-2. On my list I have Mr. Lefebvre first, then Ms. Raitt, and then Mr. Caron. We'll try to hold it to four minutes each during this round if we could.

Mr. Lefebvre.

[The Chair, Liberal, Wayne Easter]

Thank you both.

We'll go to Mr. Liepert, but I expect that when we're into the next round of questioning we may still need you, Mr. Matier and Mr. Cameron.

Let me ask Ms. Lao and Ms. Malanik to come to the table as well, so that they are here for Bill C-2.

Mr. Liepert.

[The Chair, Liberal, Wayne Easter]

Okay. I have to cut you off there.

I will take two more questions in this discussion period, from Mr. Grewal and Mr. Liepert. Then we are going to move to Bill C-2, and we'll limit the questions to three minutes, if we could, to keep it pointed on Bill C-2.

Mr. Grewal, go ahead.

[The Chair, Liberal, Wayne Easter]

Thank you.

If we could, committee, because I think you have different people to come to the fore for Bill C-2, could we keep this round of about 40 minutes or 35 minutes to the economic and fiscal update?

Mr. MacKinnon, for seven minutes.

[Jean-Denis Fréchette, Parliamentary Budget Officer, Library of Parliament]

Thank you, Mr. Chair. It's the first time you called me Mr. Fréchette so I'm really happy with that.

Mr. Chair, vice-chairs, and members of the committee, thank you again for the invitation to appear and discuss our April 2016 Economic and Fiscal Outlook, which was released today.

As you have already mentioned, today I am joined by a number of members of my team, who will be pleased to respond to your questions.

Since our November 2015 report, the outlook for the global economy has deteriorated further and commodity prices over the medium term have been revised lower. Despite this weaker external outlook, we anticipate that the combination of fiscal measures in budget 2016 and the accommodative monetary policy will help bolster the Canadian economy.

We project that growth in real GDP will rebound to 1.8% in 2016 and then rise to 2.5% in 2017. Growth in the economy is then expected to moderate over 2018 to 2020, reflecting the tapering of fiscal measures and the normalization of the monetary policy.

The level of nominal GDP, which is the broadest single measure of the tax base, is projected to be almost $20 billion lower each year on average between 2016 and 2020 compared to our November report. However, relative to the government's planning assumptions for nominal GDP in budget 2016, our projection is on average $40 billion higher per year over 2016 to 2020. The difference is most pronounced in 2016 and 2017, reaching close to $50 billion in those years.

Our November 2015 fiscal outlook provided an independent status quo planning assumption for the start of this 42nd Parliament. We have updated our fiscal outlook to include measures announced in budget 2016 as well as measures announced prior to the budget.

We estimate that there was a small surplus in 2015-16 and we are forecasting a budgetary deficit of $20.5 billion in 2016-17, which is primarily attributable to the introduction of new measures since the government's fall update.

The deficit is then projected to rise to $24.2 billion in 2017-18 as the result of moving to the seven-year break even mechanism for EI premium rates, as well as increases in direct program expenses.

Over the remainder of the planning horizon, we project the deficit to decline to $12.4 billion based on the government's forecast that direct program expenses, in particular the operating costs of departments, will remain flat over the period from 2017-18 to 2019-20.

Compared to budget 2016, our outlook for budgetary deficits over 2016-17 to 2020-21 is $4.5 billion lower on average. The average difference is roughly in line with the $6-billion fiscal impact of the government's adjustment to the private sector forecast of nominal GDP.

Budget 2016 highlights the government's commitment to returning to balanced budgets and to reducing the federal debt-to-GDP ratio to a lower level by 2020-21. To provide a broader perspective on the sustainability of the government's finances, we have extended our projections beyond 2020-21 to show the long-term trajectory of federal debt relative to GDP. Our projections show the federal debt-to-GDP ratio declining continuously over the next several decades under current policy. This indicates that the federal fiscal structure underlying budget 2016 is sustainable over the long term.

We would be pleased to answer your questions concerning our economic and fiscal outlook, or any relevant matter such as Bill C-2 or, again, our current or future mandate.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Order. During this session, we'll basically be doing two studies or two orders of reference with the parliamentary budget officer. We'll break it into two sessions. First, we'll deal with Standing Order 108(2), the study on economic and fiscal outlook. In the second half of the session with the parliamentary budget officer, we will shift to Bill C-2, an act to amend the Income Tax Act, and comments from the parliamentary budget officer and staff in that area.

I understand, Mr. Fréchette, you have one opening statement that will cover the two. To introduce who is at the table: parliamentary budget officer, Jean-Denis Fréchette; Mr. Askari, assistant parliamentary budget officer; Mr. Matier, senior director, economic and fiscal analysis and forecasting; Mr. Cameron, economic adviser and analyst, economic and fiscal analysis; and Mr. Jacques, director, economic and fiscal analysis.

Mr. Fréchette, the floor is yours. It's been a long time since we used to work at the agriculture committee together.

Instruction to Committee on Bill C-2

[David Graham, Liberal, Laurentides—Labelle, QC]

Mr. Speaker, I am just wondering why the member for Rimouski-Neigette—Témiscouata—Les Basques wants to debate a motion regarding a bill that he has already agreed to send to committee. He voted in favour of Bill C-2 at second reading on March 21. Why does he now want to change a bill he recently voted for? The member already had the right to vote for or against the clauses in the bill. There is a whole section of committee appropriately referred to as clause-by-clause consideration for this very task. The bill has already been referred to committee. I do not see why he is now writing new conditions for his support.

Why will the member not let the committee do its work and hold its own debate rather than pushing for unnecessary delays?

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

moved:

That it be an instruction to the Standing Committee on Finance that, during its consideration of Bill C-2, An Act to amend the Income Tax Act, the Committee be granted the power to divide the Bill in order that all the provisions related to the contribution limit increase of the Tax-Free Savings Account be in a separate piece of legislation.

Mr. Speaker, as everyone knows, we are currently examining Bill C-2 at the Standing Committee on Finance. It was the first bill introduced by this government and it amends the Income Tax Act. When you look at the contents of the bill a little closer, it is clear that it contains two separate measures. The first measure has to do with changing the tax rates. The change this government is proposing targets the second tax bracket, whose tax rate would drop from 22.5% to 20%. The second measure has to do with the contribution limit for tax-free savings accounts, which the Conservatives had increased to $10,000 a year. This bill drops that limit back to $5,500.

I would like the House to instruct the Standing Committee on Finance to separate the bill so that the two issues can be addressed separately, because they are two fundamentally different issues.

Let us look at the TFSA, the tax-free savings account. Many people think or are under the impression, due to the way it was presented to the Canadian population, that it is basically a savings account for retirement, that people put money aside in that account after paying taxes on it, and that it can actually grow with interest and returns, and they will eventually be able to take that money out tax free because they already paid tax on it.

If we look deeper into the TFSA, we see it is a bit more complicated than that. It is more complicated because it is not only money that can be put in this account. People can put all kinds of things in this account. They can put stocks, bonds, derivatives, and all kinds of financial tools.

The concern with raising the ceiling to $10,000 was the fact that it became something other than a retirement savings mechanism. It became, basically, a way to shelter returns on financial investments. If I invest in the stock market and make a significant return on my investment, I will not pay the same income taxes as most of the population. With this money, I will be taxed only for half of what I would be earning, and I will only pay taxes on a portion of that half, while people earning incomes through work will actually be taxed on the entirety of their gains. We are in a situation right now where capital gains have a different tax status from income tax gains, basically.

When the ceiling was raised, there was a possibility that it could be no longer used as a savings mechanism but as a slush fund, in which people would deposit money, play the market with it through a variety of financial tools, and eventually escape the capital gains tax altogether. This possibility, I would submit, is not available to the large majority of Canadians. Those who have the means to play the stock market or the derivative market is actually a very limited number of people.

Many analysts who are studying the TFSA and the impact of the increased limit have been concerned about this. The Parliamentary Budget Officer, among others, estimated that the limit increase would have some serious adverse effects. In his update of the analysis of the TFSA limit increase, he estimated that by 2080, the long-term fiscal impact of the TFSA would reach 0.65% of the GDP. That is almost 0.7%. We are constantly being told in the House that it is impossible for Canada to meet its international aid commitments of 0.7%, because there is not enough money. However, this TFSA limit increase would have nearly hit this objective, but just a small part of the population would have benefited. The Parliamentary Budget Officer noted this as well. He looked at the distribution of TFSA benefits by wealth.

If we divide the population into groups, each representing a 20% wealth bracket, we see that the 20% representing the wealthiest households would receive a greater tax benefit than the remaining 80% of families who are not high-wealth households.

Therefore, we see that the Conservatives' proposal was extremely detrimental to the country's fiscal situation. In fact, it opened the door to the use of this mechanism not only as a retirement savings tool, but more so as a tax shelter for capital gains. The capital gains tax is already much lower than taxes on people's income, for example on working income. The concern that is being raised by many is that instead of being a savings mechanism, it almost becomes a rather significant tool for tax avoidance, and it will not be used for the purpose it was intended when it was introduced and passed in the House.

That is one measure that the government finally wants to reverse. Instead of keeping the 2015-16 ceiling of $10,000, the government wants to bring it back down to $5,500. That is one measure we agree with. We floated the idea during the election campaign. We believed that the amount of $5,500 was sufficient for reaching retirement savings goals.

In fact, depositing $5,500 for ten years, for example, will yield $55,000 plus interest, which is tax free. That is in addition to the other existing tools, such as RRSPs and the benefits people will have access to at 65, such as old age security and savings under the Canada pension plan or the Quebec pension plan.

The TFSA is an additional mechanism that can be used, a tool among many others. We believe that the $5,500 ceiling is adequate.

Now, there is a second measure in Bill C-2 which is extremely different from the ceilings of the TFSA. That is the modification of the tax brackets. The bill proposed to change a second bracket.

For those who might be listening at home, right now we have four tax brackets in Canada. The first one applies to income of $11,000 to about $45,000, which is at 15% right now. Then any income between $45,000 and about $90,000 is taxed currently at 22%. Then income of $90,000 to about $135,000 is taxed at 26%. Over that amount, income is taxed at 29%.

The bill makes two changes. It decreases the second bracket, so for all revenue, all income from $45,000 to $90,000 the rate is decreased from 22% to 20.5%, and it adds another bracket for those earning over $200,000 that will be taxed at 33%.

During that debate and during the campaign, I was actually a bit surprised at the low level of understanding of how our tax system works. That reduction on the amounts between $45,000 and $90,000 will not only affect those earning a total of between $45,000 and $90,000, but it will actually be applied on all income over $45,000.

Right now, somebody earning $150,000, an ordinary member of Parliament, for example, who earns about $135,000, will actually have a 1.5% reduction of his or her taxes on all the income between $45,000 and $90,000. Before $45,000, that income will be taxed 1.5% less.

Many people are under the impression that people earning over $90,000 will not be affected. On the contrary, they get the full tax reduction at that level.

We are going through the analysis. Much analysis has been done, including by the parliamentary budget officer. What we are seeing is that while the Liberals, during the campaign promised to have a middle-class tax cut, it is clear that those earning less than $45,000 will not see a single cent of that tax reduction. It is clear. It only affects people earning over $45,000.

I have been told in no uncertain terms that those who earn $35,000 to $45,000 might legitimately claim to be members of the middle class, which is a very difficult term to define. One way to define it is to look at all the income divisions in Canada, to exclude the 20% who earn the most, the 20% who earn the least, and that would give us a middle class that is anywhere between $20,000 to $60,000. That would be, roughly, what the middle class is in terms of income per year. There is a large chunk of that group who would not get a cent of that tax reduction. Therefore, to call this a middle-class tax cut is, in my mind, misleading.

There is a second part of it, which was supposed to pay for the lost revenues. That is the new tax bracket of 33% for income over $200,000. We know, and the government was forced to admit it, that it will not pay for the tax reductions. We all agree on that. Not only will it not pay for those tax reductions, but even people making an income over $200,000 would still have an overall tax reduction, even though this was supposed to impose more on them, because they still get the full tax reduction of that second bracket. That means someone earning $210,000 would still have an overall tax reduction. Someone earning $215,000 would still have an overall tax reduction. Is that what we mean by a middle-class tax cut?

For those of us on this side of the House, there is a problem. We agree with one large measure that would, if it is not addressed right now, have significant fiscal impact on the Canadian government. On the other side, we disagree with the measure that we find is misleading and which is not achieving the aims that were presented to the Canadian population especially during the election.

In addition, we still wanted to be constructive, since Canadians elected this government in part because of its promise to lower taxes for the middle class. We respected the verdict and we made a proposal to the government. Rather than excluding a large portion of the middle class, rather than simply reducing the second tax bracket, let us reduce the first tax bracket, the first level of income at which people have to start paying taxes. This tax bracket starts at approximately $11,000 because people are given a basic exemption that is not taxed. We proposed to reduce that tax bracket from 15% to 14%, a 1% reduction. What would that do? It would allow people who really belong to the middle class to benefit from this tax reduction. It would allow people who are currently getting a 1.5% reduction on income over $45,000 to have a 1% reduction on a similar income. It would make it possible to ensure that people who are earning $210,000 a year are not being given a tax cut. This is a series of measures that I believe all Canadians would agree with.

For reasons that cannot be explained, the government is opposed to this measure. So be it. However, I do not think that the government can disagree with the fact that the two measures in question are totally separate issues. I think that each one should be examined on its own merit. The Standing Committee on Finance has done some of the work. I also believe that it is in the government's best interest to move in that direction. We are offering the government an advantage on a silver platter. The media had a field day when these measures were presented to the Canadian public. We are offering the government the opportunity to hold two separate debates and two separate votes on the measures that it is presenting, measures it is proud of. It would be really worthwhile for the House to be able to vote on whether the bill should be divided. I know that I presented some extremely technical information, but it is hard not to get technical when we are talking about income tax. Finally, the two measures have completely opposite effects.

It goes to the notion of transparency and the notion of accountability as well that the House could actually pronounce itself separately on those measures.

We will have that chance in the finance committee. Bill C-2 is only 10 clauses long and we will do a clause-by-clause study. We will vote clause by clause in the finance committee, so we will have the opportunity to demonstrate in committee which clauses we are in favour of and which we are not.

Since Bill C-2 is the first bill presented by the Liberal government and it is one of the key measures that it wanted to bring forth to the Canadian population, it is important that the House have the opportunity to do the same and to vote separately on those arguments. It would be beneficial for the trust that the population puts in the Liberal government. It goes to the issue of credibility as well. It would go toward contributing to the answer to the question that many have asked so far.

Since we voted on the ways and means motion on which we could not divide per se, people were under the impression that starting on January 1, they would have a tax reduction if they considered themselves part of the middle class. Starting on January 1, when they saw their pay slips, they might have been surprised not to see any changes. They still do not understand.

I have not really heard the government so far in this debate talk about the technical aspects of it publicly. I hear the answers given either by the minister or parliamentary secretary saying that the government has given the middle class a tax cut, period.

This calls for some clarification. Here in the House, there are 338 MPs who represent all Canadians. The government would do well to clarify this. We are giving the government the opportunity to do that so we can debate these two points on their merits.

That is why we moved this motion to divide the bill into its two main parts. These main parts encompass all of the other elements, such as changes to the law and the tax credit formula for charitable donations. That formula generally uses the highest individual percentage, which will be changed, so it will have to be changed too.

This is not a very complicated issue. Can we divide the bill in two so as to deal with changes to the tax-free savings account and the tax brackets separately? That is what we are suggesting to the government.

I hope the members of the House will support this so we can clarify the work the Standing Committee on Finance is now doing and ensure that we are accountable and transparent to Canadians.

[Kevin Milligan, Professor, University of British Columbia, As an Individual]

Thank you very much.

I'll be brief. I have a couple of comments on Bill C-2. I have a couple of points to make about the new 33% top tax bracket and its impact on government revenues and tax planning and tax avoidance.

The first comment is just to emphasize the importance of considering the differences between federal taxation and provincial taxation. In a federation such as Canada it is more difficult to tax mobile economic factors at the provincial level. For example, if a province tries to tax high earners, some of that income may shift to other provinces through the use of financial and accounting techniques. As an example, there's something called an Alberta family trust into which a high earner could put some assets that essentially shifts taxation of the income from those assets to Alberta, where it faces lower rates.

On the other hand, at the federal level it is harder to avoid taxation, because if you're going to try to engage in these kinds of techniques, it is harder to shift money out of Canada than between provinces. In research with Michael Smart from the University of Toronto, we found that high-income taxpayers are much less likely to shift their income and engage in these tax-planning techniques in response to a federal change than they are to a provincial change. When looking at these revenue implications of a high-income tax bracket, then, we should definitely pay attention to evidence on federal changes versus provincial changes.

My second point is about the administrative measures that have been put in place over the past few months. These enhanced administrative measures are critical to combatting tax planning and tax avoidance. If the Canada Revenue Agency makes it harder for individuals to engage in tax planning, then the new 33% tax bracket is more likely to reach its revenue targets.

The government has already announced several measures that move in that direction. As an example, in the recent budget there's a change in the definition of active versus passive income for small business corporations, and there's also an announcement of several hundred million new dollars for enforcement programs at the Canada Revenue Agency.

But I believe there's still more to do on three fronts. First, we should reduce the use and availability of small business corporations as tax shelters. We can do that through examining spousal dividends, by looking at the lifetime capital gains exemption for small business corporations, and considering use of an employee count or an hours threshold, as Quebec has done, for access to the small business deduction.

The second thing we can do is reopen the case for the taxation of stock options. That was taken off the table by the finance minister recently, but I think there are some merits there that deserve some more attention.

Finally, on the issue again of tax planning and tax avoidance, it's really important to consider the international angle. Much of that happens through organizations such as the OECD. They pursue multilateral agreements to curb tax planning and tax avoidance at both the corporate and personal level, and at those international organizations, Canada can and should be taking a leadership role in pushing those processes forward.

That's it for my comments. I look forward to members' questions.

[Charles Lammam, Director, Fiscal Studies, Fraser Institute]

Thank you, Chairman Easter, and the rest of the committee for giving me an opportunity to share the work of the Fraser Institute with you today. I hope you find my comments helpful and informative as you deliberate these important public policy issues.

I'm the director of fiscal studies at the Fraser Institute. We're an independent, non-partisan economic policy think tank. The mission of the institute is to help average Canadians understand the impact of government policies on their lives and the lives of future generations.

I've been studying tax policy for about a decade now and have published several peer-reviewed studies on a range of economic policy issues, including taxation and government finances. Last month I co-authored a study titled “Canada's Rising Personal Tax Rates and Falling Tax Competitiveness”. Many of my remarks will draw from the findings of that research.

I should note that my comments today reflect my own opinions and observations about the research we have conducted. I do not speak for anyone else at the Fraser Institute.

Let me start by saying that a competitive tax system is critical to fostering a positive economic climate. Empirical evidence from across the world shows that taxes can influence whether people engage in economically productive activities, such as working hard, expanding their skills, investing, and being entrepreneurial. These are all activities that ultimately drive economic growth and prosperity.

Over the past 15 years federal and provincial governments in Canada of various political stripes have improved the competitiveness of our business tax regime, but little has been done on personal income taxes. Personal income taxes are particularly important when it comes to building a knowledge-based economy and attracting and retaining highly skilled workers such as entrepreneurs, doctors, lawyers, business professionals, and engineers.

The new top federal marginal tax rate proposed by Bill C-2, as well as recent tax rate increases in many Canadian provinces, harm our ability to attract skilled workers, and in fact discourage Canadians from realizing their full potential.

Critically the new top federal marginal tax rate of 33% is being layered on top of several tax increases by the provinces on highly skilled workers. For instance, as a result of federal and provincial tax hikes, the combined top federal-provincial statutory marginal rate in Ontario has increased from 46.4% to 53.5% since 2009. That's more than a 7% increase.

According to the latest available international data, Ontario's top combined marginal rate is the sixth highest among 34 OECD countries, and the second highest among G-7 countries, behind only France. More broadly, due to recent tax hikes, the combined top rate is now about 50% in six out of 10 provinces.

Consider that for a moment. In many Canadian provinces, including Canada's two largest, highly skilled workers can lose more than half of each additional income earned in labour income to personal income taxes. The economic evidence shows that high and increasing marginal tax rates discourage productive economic activity, making Canada a less desirable place to work, invest, and be entrepreneurial. They can also influence decisions about where highly skilled workers decide to live and work. There are many reasons why someone might decide to move to another jurisdiction, but empirical research shows that marginal tax rates play an important role in that decision, particularly for high-skilled labour.

The fact that Canada's tax rates often apply to lower levels of income than other countries further erodes our tax competitiveness. At an annual income level of $150,000 to $300,000 Canadian, every province's combined statutory marginal rate is higher than the combined rate in every U.S. state. This presents a clear challenge for Canada's ability to attract and retain skilled workers relative to our southern neighbours.

It's not just Canada's top personal tax rate that is uncompetitive. In most provinces a Canadian making $50,000 in Canadian dollars faces a higher statutory rate than they would in most U.S. states. This is despite the reduction in Canada's federal rate from 22% to 20.5%. In other words, Bill C-2 does little to address Canada's uncompetitive tax rates, even for the middle tax brackets.

The importance of a competitive tax system is not just fostering a skilled workforce. By discouraging productive economic activity, high and increasing tax rates ultimately diminish economic growth and prosperity. Indeed, because high and increasing tax rates adversely affect economic incentives, governments often do not receive the kinds of revenues they expect from these tax increases.

In closing, it is worth noting that past federal governments, both Liberal and Conservative, have acknowledged the importance of a competitive personal income tax system. For example, the economic plan of Paul Martin's Liberal government in 2005 called for lower personal taxes to “provide greater rewards and incentives for middle- and high-income Canadians to work, save and invest” and to “encourage more Canadians to invest in their skills and to remain in Canada, where their talents will help build a stronger, more prosperous economy”.

In 2006 Stephen Harper's Conservative government made a similar point in its economic plan. Unfortunately, since then marginal tax rates on highly skilled workers have generally become less, not more, competitive.

Thank you.