Finance Committee on Oct. 18th, 2006

[The Chair, Conservative, Brian Pallister]

I'd like to invite our panel to come forward.

We appreciate your being here today as part of the pre-budget consultative process. Our finance committee has been mandated by the House of Commons to carry out these consultations and to prepare reports to the finance minister later this year. We look forward to hearing your testimony and thank you all in advance for your participation and also for the preparation of the briefs you have submitted to us.

I will indicate to you when you have a minute left of your five, if you care to make eye contact, but I will cut you off soon after. You understand, of course, my reason for that is to allow time for an exchange with the committee members thereafter.

Unfortunately, today we have had to shorten the session slightly because of an impending vote this afternoon, so we'll get under way immediately. We will begin with Jim Facette, who is here on behalf of the Canadian Airports Council.

Welcome, sir, and over to you for five minutes.

[Jim Facette, President and Chief Executive Officer, Canadian Airports Council]

Thank you, Mr. Chair.

Good afternoon, ladies and gentlemen. Thank you for the opportunity to address you today on the importance of Canada's airports to our nation's economic competitiveness.

The Canadian Airports Council is the national voice for Canada's airports, with 45 members representing 150 airports, including all national airport system airports. Our members handle 95% of passenger traffic and 100% of the cargo traffic.

The theme of the pre-budget consultations--Canada's place in a competitive world--is one that the Canadian Airports Council is honoured to address. Several key areas of federal policy today directly, and often adversely, affect the competitiveness of Canada's airports in the world. On a host of issues, federal policy and spending priorities have an important impact on competitiveness for our airports. In the short time that I have, I'll present our five-point plan that we believe is worthy of this committee's attention in its report to the minister.

Airport rents. Canada is unique in the developed world for charging airport rents, and it creates a dramatic competitive disadvantage for Canada's airports, a burden of some $300 million a year. On assets valued at about $2 billion at the time of transfer, Canada's airports have paid back more than $2.5 billion in rent. Canada's airports have more than repaid the federal government for its initial investment in the nation's airports, while simultaneously investing more than $9 billion to upgrade and expand Canada's air transportation infrastructure to ensure we are well positioned for future growth and tomorrow's trade opportunities.

The future cost to airports of rent is estimated by our industry at $35 billion. As an interim measure, the definition of airport revenue that is used to calculate rent should be reformed. Most notably, revenue raised to cover debt servicing costs should be excluded from the total revenue used to calculate rent. It is not today. And as currently written, the definition punishes airports for making the very capital infrastructure investments that were tasked to them under Canada's national airport policy.

Canada Border Services Agency. Simply put, we are asking this committee to recommend to the Minister of Finance that the Canada Border Services Agency be given more money in order to meet the growing demand for customs services at airports. The role of customs agents at airports cannot be understated. As we move toward more liberalized air service agreements, we will need to have the necessary infrastructure in place to deal with the growing demands on the system.

Our smaller airports, that is, airports with less than two million passengers per year, find it difficult to attract international carriers if they don’t provide customs services. Many other small communities also have to pay for customs services and basically, these communities are being penalized for ensuring essential economic ties by means of a new international air service.

Arrivals duty-free. This summer, on August 10, security incidents demonstrated how vulnerable Canada's airports can be to ever-changing security requirements. Currently, Canadian federal duty-free-related laws and regulations do not permit the sale of duty-free goods upon arrival at Canadian airports. Duty-free or tax-free sales at Canadian airports are only available for persons who are about to leave Canada. The prohibition of arrivals duty-free creates a competitive disadvantage for Canadian airports and reduces the potential revenues that could be generated from international visitors and returning residents. Canadian airports are seeking support to change the Customs Act and duty-free shop regulations to permit arrivals duty-free at Canadian airports.

International air service agreements. CAC believes that we must liberalize our air service agreements in order to be more competitive. We need a new international air policy, one that will open up opportunities to Canadian airports and the communities they serve to the world.

In conclusion, Canada's airports play a vital role in the competitiveness of Canada in the world. They facilitate trade, connecting Canadians and Canadian business with the world. Strong, financially viable airports able to compete on an equal footing with other airports around the world, and with the resources required to take advantage of opportunities present today, are essential to Canada's continued economic viability.

Thank you very much, Mr. Chair.

[The Chair, Conservative, Brian Pallister]

Thank you for your presentation, sir.

We continue with Genworth Financial's Peter Vukanovich. Welcome, sir.

[Peter Vukanovich, President and Chief Executive Officer, Genworth Financial Canada]

Good afternoon, everyone. My name is Peter Vukanovich, and I'm the president of Genworth Financial Canada. We are Canada's home ownership company. Since 1995 we've helped over 700,000 low- and middle-income families achieve the dream of home ownership, both affordably and efficiently. I want to thank the committee today for having me here and allowing me to participate in these consultations.

You'll be pleased to know that I'm not here asking you for any money. However, I would like to remind you of the vital importance to our economy of a healthy and stable housing finance system, and to ask you to consider two recommendations to strengthen the system and benefit Canadian homebuyers.

For nearly a decade we've enjoyed a robust housing market characterized by record housing starts, steady price appreciation, and rapidly expanding access to mortgage credit. As a result, the wealth of many Canadians has grown substantially. However, it's becoming increasingly clear from a range of indicators that the housing market is slowing. Like all economic sectors, the housing market moves in cycles, and at this time in the cycle, it is more important than ever to ensure that we have strong mortgage insurance providers in our country.

Let me share with you two fundamental reasons why Canadians need strong mortgage insurers to mitigate the impact of a potential slowdown. First, it's our business to help more than 150,000 families a year who rely on mortgage insurance to get into a home. We also want to help them stay in it, even when they encounter periods of economic distress. Rather than force foreclosures on homeowners who temporarily default on their loan payments, mortgage insurers are highly incented to help people stay in their homes. This includes deferring payments and forgiving loans, and we do these things many hundreds of times a year for people in distress.

Additionally, when housing markets slow, defaults increase—that's the business we're in. Mortgage insurers play a vital role in speeding market recoveries by ensuring that there are mortgage funds available in both good and bad economic times, from large and small lenders alike. Rather than exit the markets as a result of increased claim payments, mortgage insurers stay committed. They stay committed to markets by writing new policies and by drawing on the reserves they have built up over the years during good times. The good news is that unlike in the 1980s and 1990s, today's insurers are currently well-positioned to keep delivering these important benefits to homebuyers.

I'd now like to suggest two important actions that this committee can recommend to strengthen the current mortgage insurance marketplace to the benefit of both homebuyers and the economy. These will likely sound familiar to many of you, as I was before this committee earlier this year.

The main thing we'd like to see is for the federal government to finish the job it started in last year's budget, when it introduced legislation to allow new entrants into the mortgage insurance market. As I told this committee earlier this year, I'd like to emphasize again that Genworth Financial fully supports and welcomes the principle of increased competition. However, we believe that the federal government's own goals of providing “greater choice and innovation in the market for mortgage insurance, benefiting homebuyers and promoting home ownership” will be undermined unless additional measures are introduced to support the legislation.

We believe the federal government should introduce market conduct rules or safeguards to ensure that the Canadian homebuyer actually benefits from this increased competition.

I have a legal opinion here from one of Canada's leading experts in the area, stating that the “current provincial insurance legislation does not adequately protect the policy goal of ensuring that the benefits of competition in the mortgage insurance industry inure to the people who ultimately pay for the mortgage insurance, the homebuyers, and not to those who get the benefit of the insurance, the mortgage lenders”.

We've made progress on this issue. We're very pleased. We've spent a lot of time at the Department of Finance. I would be very appreciative if this committee could recommend to the minister and the department that they go along with our recommendation.

Our second recommendation is to level the playing field with regard to the government guarantees to back up all players in the marketplace. I've told you about this before. It creates for our customers a difference in pricing whose time has passed. It made sense at one time in history, but based on the products and services delivered today, lenders should be choosing the product that best serves consumers.

In summary, the viability of Canada's real estate market is largely within the federal government's ability to control. Given the importance of this sector, we strongly suggest that the federal government do what it can to ensure that it remains strong and competitive and beneficial to Canadian homebuyers.

Mr. Chair. I appreciate your having me here. I'd be happy to answer any questions at a later time.

[The Chair, Conservative, Brian Pallister]

Very good, sir. Thank you very much.

We'll continue with Ward Griffin from the Canadian Printing Industries Association.

Welcome, sir.

[Ward Griffin, Immediate Past President, Canadian Printing Industries Association]

Thank you, Mr. Chairman, and good afternoon, ladies and gentlemen.

My name is Ward Griffin, and I am here today in my position as immediate past chairman of the Canadian Printing Industries Association. I'm also president of the Lowe-Martin Group, headquartered here in Ottawa.

The CPIA represents the many companies in the pre-press, print, bindery, and allied industries. Commercial printing is Canada's largest manufacturing industry, measured by number of establishments. The industry's 5,800 firms employ 84,000 people and contribute $12 billion to the economy, including $2 billion in exports.

Smaller firms dominate the industry. Printing establishments are located in virtually every community of any size. They provide stable career employment and economic activity in all parts of Canada.

Two themes dominate this submission. First, the Canadian economy is slowing down, meaning that a pro-business budget is necessary. Second, the budget must take action to improve the international competitiveness of Canadian manufacturers. The Canadian Printing Industries Association believes that these issues are more pressing than the questions asked by the standing committee about choosing between tax reductions and more program spending.

For some years, the CPIA has described problems associated with the capital cost allowance treatment of computer-like equipment used in our industry. Such equipment becomes technologically obsolete long before it wears out. It must be replaced prior to being fully depreciated, creating additional costs for printers already having trouble competing against non-Canadian firms. The CCA rate needs to be accelerated to reflect the true nature of our assets.

We also believe companies eligible for the small business rate should be able to expense data processing and digital equipment up to $45,000 in the year of acquisition. There are no two measures the standing committee could embrace that would have a more positive impact on the printing industry than to permit accelerated write-offs to computer-like equipment and to allow this expensing.

A 2004 report done for the CPIA by Ernst & Young entitled “Capital Cost Allowance for the Canadian Printing Industry” was presented to Finance Canada and included recommendations for improvement of the CCA system. The report made clear that improved productivity, achieved through increased and accelerated investment in physical assets, would have a positive impact on the growth of the Canadian economy, not just the printing industry. The report also observed that such measures would result in increased government revenue in the long run.

This wider benefit should be regarded by the standing committee as significant. The Canadian economy is slowing down. Adjustments to the CCA would therefore be well received by Canadian manufacturers who are generally seeking stimulus to spur investments.

It should also be noted that Canadian-based manufacturers are being faced with a capital cost allowance system in the United States that provides their manufacturers with a competitive advantage in both domestic and international trade.

Our submission also identifies three other non-tax measures that would improve the competitiveness of our industry. First, ensure a positive climate primarily in the U.S. for Canadian exporters; second, accelerate the process of attracting skilled immigrants to Canada and integrating them into the workplace; and finally, discontinue subsidies to Canadian publishers that continue to have their books printed outside of Canada.

Three measures that would improve the competitiveness of our industry have also been advanced in our brief. They include, first, implement broadly based and significant personal income tax relief; second, eliminate the corporate surtax for all businesses in 2008 and accelerate the reduction in the general corporate rate; and third, accelerate reductions in the small business rate.

Another issue raised in our brief is the need for an approach to taxing gasoline and diesel fuel that would mitigate the impact of rapidly rising prices.

Thank you for your attention to my remarks. I look forward to discussing them further with you shortly.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. Griffin.

The Chair will now recognize Mr. Pierre Beauchamp from the Canadian Real Estate Association.

[Pierre Beauchamp, Chief Executive Officer, Canadian Real Estate Association]

Thank you very much, Mr. Chair.

Thank you, Mr. Chair, for this opportunity to appear before you today.

I'm here as CEO of the Canadian Real Estate Association, which represents 86,000 realtors in Canada who contribute to the economy and the life in their communities, large and small, throughout our country.

Mr. Chair, each committee member has received a copy of our pre-budget recommendation. I hope the committee will support our recommendations on the federal housing policy.

Mr. Chairman, you asked us to address the theme of Canada's place in a competitive world. You asked us, and I quote, “What specific federal tax and/or program spending measures should be implemented in the upcoming budget to ensure that our businesses are competitive?”

To answer your question, we propose an income tax amendment that we have researched, developed, and advocated for several years now. That is the deferral of capital gains tax when an investment property is sold and the proceeds of the sale are reinvested in another property within one year.

The latest results from the World Economic Forum indicate that Canada's global economic stature is slowly eroding. On the World Economic Forum index that measures global competitiveness, Canada fell from thirteenth to sixteenth place over the last year. Among the reasons for the slide are Canada's high taxes and a banking system that does not encourage the free flow of investments to a variety of assets. The small investors are particularly disadvantaged. Canada is not leveraging its wealth to maintain its capital advantage.

Our proposal responds to those issues. Reinvestment in income property is an effective means to leverage some of this wealth, with a view to providing the quality environments required to sustain economic prosperity. Virtually the only criticism of the rollover concept has focused on the potential losses to the treasury for deferred tax revenues. But please note, this is not a deferral and not foregone revenue.

As the population ages and the number of productive taxpayers inevitably drops, anything that adds to the volume of tax revenue in the future must be considered prudent. Mainly, though, the cost argument overlooks the economic and social benefits generated by investment activity. These benefits aren't always easy to quantify, but let's be clear: today investors are sitting on their investments because of the tax consequences of selling. They are not selling. As a result, the government is not getting capital gains tax revenue.

Our commercial members provide us with examples of properties that could greatly enhance the neighbourhood. We simply live in them. They don’t change hands and are never improved upon. They could be part of the solution rather than promoting stagnation and deterioration.

The sale of investment properties triggers economic spinoffs. Small investors typically undertake renovations when they invest. To expand the volume of investment is to expand the volume of renovations and other purchases. Our proposal also helps to underpin the pace of labour mobility. This is particularly important in the light of economic activity in western Canada.

Canadians are increasingly migrating to where jobs exist. They should be able to migrate their assets with them. Households can move their furniture and belongings, including their stocks and bonds, but not their real estate investments without substantial tax consequences.

The minister has spoken about a pro-growth strategy. He has talked about liberating the forces of investment as a key to economic competitiveness. Our proposal is a natural component of such a strategy. It has the potential to help revitalize our communities and contribute to wider economic prosperity.

With me today is Dr. James McKellar, a professor and director of the program in real estate property at the Schulich School of Business at York University. Dr. McKellar has worked with us on this issue for a number of years. We are now ready to work with the government to help design an appropriate rollover of capital gains tax for investors.

The second recommendation is to increase the RRSP withdrawal limits under the national homebuyers plan. These limits were set back in 1992, and should be adjusted every five years to account for inflation. We're asking the committee to recommend that a maximum loan amount be raised from $20,000 to $25,000 to account for inflation.

The third recommendation we would like to highlight is the continuation of federal funding for the residential rehabilitation assistance program, or RRAP. The current federal funding ends in March 2007. We're asking this committee to recommend a further three-year extension of RRAP funding to 2010.

Thank you, Mr. Chair, for considering our comments. James McKellar and I would both be glad to answer any questions you may have today.

[The Chair, Conservative, Brian Pallister]

Merci beaucoup, Monsieur Beauchamp.

We'll continue with David Stewart-Patterson from the Canadian Council of Chief Executives. Welcome back, sir, and proceed.

[David Stewart-Patterson, Executive Vice-President, Canadian Council of Chief Executives]

Thank you, Mr. Chairman. It's a pleasure to appear before this committee once again to talk about priorities for the next budget.

On the surface I guess Canada's economy looks pretty good these days. We're now in our fifteenth consecutive year of economic growth; unemployment is at three-decade lows; income is rising; inflation and interest rates remain modest; and governments, federal and provincial, are raking in surpluses. However, our country does face serious challenges. The economy of the United States, our biggest market, is weakening. New economic powers such as China and India are transforming the competitive landscape worldwide. Manufacturers in particular are struggling with high energy prices and a high dollar.

This is why the Canadian Council of Chief Executives has focused so intensely over the past year on the need for a strategic approach to the question of how and where Canada should compete in the world. We therefore strongly support the commitment in the 2006 budget to develop a comprehensive, results-focused agenda for improving Canada's productivity and competitiveness. To this end, we also support the government's fiscal prudence, including its commitment of over $13 billion of surplus to debt reduction this year and its willingness to make tough choices when it comes to the review and reallocation of existing spending.

Earlier this year, we laid out a broad framework for competitiveness in a paper we called “From Bronze to Gold”. We expanded recently on this framework in a memorandum for the Prime Minister, and we've distributed copies of that memo to you today.

In short, many factors matter to Canada's ability to compete for people, ideas, and money within the global economy. To compete for people, we need safe streets, clean air, and access to high-quality education and training. To compete for ideas, we need public investment in research, better ways to commercialize those new discoveries, and sound treatment of intellectual property. To compete for investment, we need efficient regulatory processes, modern infrastructure, and of course, assured access to our markets. But on all three fronts--people, ideas, and money--the single most effective tool that governments have at their disposal is that of tax policy. To build a more productive and innovative economy, the next budget therefore should include further cuts to both personal and corporate tax rates.

In particular, our personal tax system must do more to reward people for investing in themselves and for investing in the economy. Increasing the basic personal exemption, for instance, would encourage more people to get into the workforce. Reducing punitive clawback rates on income-tested benefits would encourage people of modest income to aim for better jobs. Expanding the education and tuition tax credits would encourage more Canadians to invest in lifelong learning.

There should be higher contribution limits and more opportunities for tax-sheltered savings. The dividend tax credit should be made refundable to pension plans and RRSPs--that's a key element of the income trust issue. And people should have some ability to defer paying capital gains tax when they roll the proceeds of one investment into another.

Canadians want the best returns they can get when they set aside savings out of their hard-earned wages, and so do investors everywhere else in the world. The result is that corporate tax rates have a huge impact on where money flows. Canada has made some real progress in recent years in reducing corporate income tax rates. The result has been more, rather than less, money for governments. But this country is not alone in using corporate tax policy to attract investment, and Canada must go further.

As next steps, the government should eliminate the capital tax on financial institutions, accelerate the reduction in corporate income tax that has already been announced, and commit to a further reduction in the corporate tax rate to 15% after 2010. It should also ensure that capital cost allowance rates, as mentioned, reflect the actual useful life of assets, and it should consider a temporary acceleration of write-off rates to help manufacturers cope with the current competitive crunch. Also, it sounds like a minor matter perhaps, but it should eliminate the withholding tax on interest payments under the Canada-U.S. tax treaty. It's something that has been under negotiation for a while. It matters a lot to the ability of Canadian companies to buy other companies in the U.S.

Tax policy, I want to conclude by saying, is not an issue for the federal government alone. It's time for more provinces to step up to the plate and do their share. Our council is prepared to support bold action to help provincial governments meet growing needs in their jurisdiction, but we believe it's equally fair for the federal government to ask the provinces to work together in the national interest.

The Minister of Finance has put on the table the need to complete the conversion of provincial sales taxes to a value-added base and the need to form a single regulator for securities markets. We would suggest that action by provinces on these fronts should be a condition of the next federal-provincial agreement on fiscal arrangements.

Let me close by repeating that many factors matter to competitiveness. Anything that moves us in the right direction will be welcome, but no competitiveness strategy is going to be effective without further cuts in tax rates.

Thank you.

[The Chair, Conservative, Brian Pallister]

Thank you all for your excellent presentations.

We'll move immediately to questions. These will be five-minute rounds.

Mr. McCallum.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

Perhaps I'll start with Mr. Stewart-Patterson.

I certainly agree with a great deal of what you've said, and I agree with the importance of competitiveness. Would you be in agreement with the OECD, the IMF, and the majority of economists that, from the competitiveness point of view, it's better to reduce income tax than GST?

[David Stewart-Patterson]

I would say that anything that reduces the overall tax burden is helpful. I think the economic evidence is pretty clear. If the central goal of a tax cut is to accelerate economic growth and accelerate investment, you get the most bang for the buck out of income tax cuts rather than out of consumption tax cuts. You also get more bang for the buck out of corporate tax cuts than out of personal tax cuts. That's the economic evidence.

I think we understand the political realities, as well, in terms of what's feasible at any given time.

[John McCallum, Liberal, Markham—Unionville, ON]

I agree with that. I think that is a fair answer.

In terms of countries, like China and India, that are big competitors of ours--this is not a political question, although perhaps the last one was--I don't think our country is doing particularly well in those countries, when you look at the numbers on trade and investment, relative to other countries. How can we do better? In particular, do you think we should be more active in forming free trade agreements or other kinds of agreements with such countries than we have been in the past?

[David Stewart-Patterson]

Canada traditionally has focused on the multilateral process in terms of trade liberalization and investment rules. For a relatively small power, it's obviously easier for us to work within a multilateral framework, or at least within a regional one.

Given what's happened to the Doha Round in the WTO, I think it has given us a new need to focus more intensely on potential bilateral relationships. Where is the growth coming from in the world? Where are the big opportunities? And where is the big competition coming from? Canada clearly needs to devote more attention to Asia. I think that China and India are the two biggest and fastest-growing markets. They deserve special attention. But I think that entire region deserves closer attention, not just at a multilateral level but at a bilateral level.

[John McCallum, Liberal, Markham—Unionville, ON]

Thanks.

Mr. Beauchamp, I agree with two of your three recommendations. I have a little bit of difficulty with the capital gains one. The government, in the election campaign, made a promise that turned out to be technically impossible and much more expensive to do, I think. It was essentially to defer capital gains for everybody if that money was reinvested within a certain period of time.

Is your proposal pretty well the same as that, but applied to your sector alone? Is that what it is?

[Pierre Beauchamp]

No. The proposal is specifically designed for rental income property, to allow it to simply defer the tax on capital gains, provided the funds are reinvested.

[John McCallum, Liberal, Markham—Unionville, ON]

But that was the same promise the government made much more generally in the election campaign.

[Pierre Beauchamp]

Yes, I know, but we've done sufficient research now. We believe we can work with the government to achieve a result that is going to benefit Canadians in Canada and allow reinvestment of those funds, as opposed to having people just sit on the funds, as I pointed out in my comments earlier.

[John McCallum, Liberal, Markham—Unionville, ON]

Why should it be only your industry and not other investments too?

[Pierre Beauchamp]

It is not our industry specifically; it is for Canadian consumers. It's Canadian consumers who are the investors here, not the real estate brokers, not the members of our association.

[John McCallum, Liberal, Markham—Unionville, ON]

But why real estate only? That's my question.

[Pierre Beauchamp]

Because real estate only is not involved. Stocks and other areas can be transferred, but not this particular sector. I think there's been a problem with this sector. Why not real estate?

[John McCallum, Liberal, Markham—Unionville, ON]

Because I don't see any particular reason.... Perhaps you can say yes to real estate, but I don't see any particular reason why, if it's yes to real estate, it shouldn't be yes to everybody. So you haven't really answered the question. Why real estate?

[Pierre Beauchamp]

I would ask Dr. McKellar, who is our expert and who has done considerable research over a period of time, to address that specific question.