Finance Committee on Oct. 25th, 2006

[Gilles Gagnon]

As public companies, we would like to be treated the same as the private companies under Canadian control, which have taxable revenues of less than $200,000. So these credits will be refundable, as they are in some provinces.

[Mike Wallace, Conservative, Burlington, ON]

Right. So how does that affect our government treasury?

[Gilles Gagnon]

In this case, the calculation is based on 60 companies, 20%. That would be $60 million, if we look at the amount of research invested by these 60 biotech companies in Canada.

[Mike Wallace, Conservative, Burlington, ON]

Based on the research that's done today, it's about $60 million.

[Gilles Gagnon]

It represents $60 million.

[Mike Wallace, Conservative, Burlington, ON]

And that's an annual amount?

[Gilles Gagnon]

On a yearly basis.

[Mike Wallace, Conservative, Burlington, ON]

Okay.

[Brigitte Nolet]

May I add to that?

Monsieur Gagnon is talking on the biotech side. On the pharmaceutical side, where we are looking at the SR and ED tax credit, we're looking at the definition and whether the definition could be consistent with the OECD definition, which is to expand it to include the social sciences. That's so projects, pharmaco-economics, different health care management programs--because we have a lot of universities developing those programs now--disease management programs that companies run can also be included in terms of your tax credit, which is less than $60 million a year.

So there are two different components, one that could target pharmaceuticals and one that could target biotech specifically.

[The Chair, Conservative, Brian Pallister]

I would like to thank all of you for your presentations. The committee is very appreciative both for your presence here today and the time and work that went into your preparation for this meeting.

We will now take a brief break to give the next witnesses time to come forward.

[The Chair, Conservative, Brian Pallister]

Order, please. Take your places, committee members.

Thank you.

I will now call the meeting to order. I would like to welcome our witnesses and committee members.

The mandate of the Standing Committee on Finance of the House of Commons is to study and report on the budget policy proposals put forward to the federal government. The theme this year is Canada's role in a competitive world.

We asked our witnesses ahead of time to limit their remarks to five minutes, even though we know that this will not be easy. Nevertheless, we are going to stick to that timeline. If you would just glance up at me, I will give you a signal when you have one minute or less left, and at the end of the five minutes, I will ask you to wind-up. The idea is to allow time for a dialogue with members and to give you time to answer their questions.

The first witness is Denis Juneau, the President of the Regroupement des cégeps de la région du Québec.

Welcome, Mr. Juneau. You have five minutes.

[Denis Juneau, President, Regroupement des cégeps de la région de Québec]

Thank you very much.

The Regroupement des cégeps de la région du Québec (association of CEGEPs of the Quebec City region) is pleased to participate in this consultation with the Standing Committee on Finance of the House of Commons, and it thanks the members for their attention to this brief. The topic of this year's public hearings, "Canada's place in a competitive world" is very close to home for the CEGEPs of the Quebec City region.

No one would dare dispute the important place that must be reserved for the education system, and especially post-secondary education in order to meet the challenges that are already facing Canadians and will only intensify in an economy that is now based on knowledge, technology and performance. In this context—and you will certainly agree with this—a well-educated population and a highly competitive labour force will be indispensable advantages in ensuring the country's prosperity. The CEGEPs of the Quebec City region play a major role in this in their community.

The CEGEPs of the Quebec City region will have their work cut out for them over the next few years to meet the development needs of their community. First, they will need to work at training a sufficient number of graduates to meet current labour market needs and close the growing gap between the supply of graduates and businesses' demand in the areas of science and technology. They will also need to adapt their study programs to the new realities of the labour market and develop new ones to support the region's development projects and modernize their infrastructure.

We note that a number of companies linked to the high tech sector, including some very large ones, have recently opened here, and our economic development and coordinating bodies have now received a clear mandate to promote the development of the high tech industry. This focus will now be given priority in the region and certain high tech markets to be developed, such as nutrition, pharmaceutical, health care, optics and photonics, electronics, geomatics, intermodal transport, to name just a few.

The CEGEPs' growing difficulty in meeting the current and foreseeable needs of companies and in supporting their growth threatens our competitiveness and risks weakening a fragile economy in Quebec. In order to maintain and improve our quality of life it is urgent that we invest more in post-secondary education, especially now when countries like China and India are investing massively in education, particularly in the sciences and technology.

The CEGEPs of the Quebec City region would like to make three recommendations to the Government of Canada to conclude this brief. They propose that the Government of Canada respond favourably to the urgent demand of the Quebec government, which seeks a substantial increase in federal transfers of funds for post-secondary training; undertake the transfer to Quebec of substantial, recurring and stable funds that are predictable from year to year; and ensure that these funds are equitably distributed among the CEGEPs and universities.

How will this money be used? To maintain the accessibility and quality of services, to update technological infrastructures, programs and human and material resources, to consolidate CEGEPs within their communities, to welcome immigrants and train them in French, to increase the skills of people already in the labour force, and finally to ensure the durability of buildings and the quality of the learning spaces.

Thank you.

[The Chair, Conservative, Brian Pallister]

We will now turn to Mr. Luc Godbout, a Professor at the University of Sherbrooke.

Welcome, sir. You have five minutes.

[Prof. Luc Godbout, Professor, University of Sherbrooke]

Thank you.

In its next budget, the federal government should set out clearly the solutions it intends to introduce to correct the fiscal imbalance. In one of the budget documents that came out at the time of the last federal budget, the government acknowledged the existence of a fiscal imbalance and made a commitment to take steps to correct the problem over the next year. That was good news, because it suggested that the respective roles of the federal and provincial governments within the federation might be reviewed.

However, as the months go by, the more it seems that the federal government, and consequently the provinces, are missing out on this opportunity. Despite recent reports by experts on the fiscal imbalance and equalization, meetings among the provinces on these matters are breaking down and the federal government seems to claim that this lack of agreement among the provinces means that nothing can be done. I would simply like to point out that the provinces may agree on the fact that they want more federal transfers, but that they cannot necessarily agree on the way in which they should be provided. It goes without saying, for example, that the provinces that do not receive equalization payments are opposed to any increase in these payments to the provinces that do receive them.

Sooner or later, even without unanimity among the provinces, the federal government will have to make a decision about how to deal with the famous fiscal imbalance. It must rely on certain principles in doing this. Principles are the main thing lacking when it comes to determining federal transfers. Over the years, the way in which the payments have been calculated has become increasingly arbitrary.

In his speech on the fiscal imbalance in Quebec City, Stephen Harper judiciously mentioned that at stake was the functioning and the spirit of the federation. I use the term "judiciously", because the objective of federal transfers is to give the provinces the resources they need to pay for the public services for which they are responsible under the Constitution. So these principles must be restored. There is no shortage of ideas. For example, the report of the Séguin Commission could be used as a basis, without being considered the Bible.

The federal government should avoid certain traps in its negotiations with the provinces. Some of them could try to take advantage of the situation to get special advantages that would be detrimental to the proper collective functioning of federal transfers. The introduction of federal transfers distributed simply according to a per capita rule must be rejected. This does not take the needs of the provinces into account.

I will now give you the most striking example of this. Since the federal government has been giving the provinces funds for social assistance based on the per capita rule, provinces with the greatest number of welfare recipients are receiving less money for each welfare recipient than provinces where there are fewer welfare recipients. The Quebec Ministry of Finance has calculated that Quebec was receiving less than $3,000 from the federal government for each welfare recipient, while Alberta was getting close $10,000. It is essential that needs be taken into account once again. For social assistance and education, for example, the amount should be based respectively on the number of welfare recipients and the number of students. In the area of health care, the demographic profile should be taken into account. The population of Quebec is aging. As people age, there is an exponential increase in the demand for health care. Therefore, it is inadequate to merely count the number of inhabitants in a province.

Furthermore, the federal government must never repeat what it did in 2005, namely sign individual agreements. At that time, the agreements were with Newfoundland and Nova Scotia. Under agreements of this type, money is given to the provinces without taking into account their fiscal capacity.

We must also stop saying that Ontario and Alberta are financing equalization: it is financed by the income tax and other taxes paid by all Canadians, throughout the country. The fact that Ontario and Alberta do not receive equalization payments does not reduce their fiscal capacity. We have to put equalization back on the rails, go back to the 10-province standard and take into account all sources of revenue, including non-renewable natural resources. In order to restore good intergovernmental financial relations, we must respect federal and provincial areas of jurisdiction under the Constitution, rebalance fiscal capacity among the provinces and, of course, increase the financial resources of the provinces. There are two ways of doing this: transferring tax room or increasing federal transfers.

Restoring a properly functioning equalization program requires an increase in federal transfer payments. The promise to reduce the GST must also be used to help correct the fiscal imbalance. To do this, the federal government must work in cooperation with the provinces, by giving them an explicit opportunity to recover this tax room. The federal government has already reduced the GST from 7% to 6% and has promised to reduce it to 5% during this mandate. Why does the federal government not consider withdrawing completely from the GST and offering these funds to the provinces? It goes without saying that substantial amounts of money are involved here.

The provinces should show their good will by playing fair, that is, to agree to having their federal transfer payments for social programs withdrawn, to make compromises and agree to a progressive implementation. That is what should happen.

[The Chair, Conservative, Brian Pallister]

Thank you very much.

We will continue with Mr. Denis Patry, the President of the Quebec City Chamber of Commerce.

Welcome, sir. You have five minutes to make your presentation.

[Denis Patry, Président, Chambre de commerce de Québec]

I would like to thank you for giving the Chambre de commerce the opportunity to express its views during the pre-budget consultations.

The Chambre de commerce de Québec, whose some 4,000 members are drawn from all sectors of the economy, is the largest organization of business people in Eastern Quebec. As a grouping of the dynamic forces in the region, the Chambre enables the business community to participate actively in the development of the region and to express its opinion on matters with a potential impact on its development. Whether on issues regarding the economy, the workforce, immigration or regulation, the Chambre has always felt duty bound to express and assert its views in the interests of its members.

We have several recommendations which address issues such as assistance to business in the area of interprovincial trade, university funding, corporate family succession, local economic development and income tax.

Assistance to businesses.

In our view the federal government's support to businesses must be increased. In addition to the tax incentives for research and development, a new program should be designed specifically to enhance corporate productivity and competitiveness. With this aim, the Chambre proposes that, for SMEs with fewer than 100 employees, all equipment, machinery and production-related computer equipment to be 100%t deductible in the first year following its acquisition or eligible for a refundable tax credit on the investment, valued at 25% of the cost of the goods.

With regard to workforce training, on which corporate productivity and competitiveness essentially depend, the Chambre proposes that the deductible training expenses of SMEs with fewer than 100 employees be eligible for double the amount invested by the company or for a refundable tax credit equal to 50% of the cost of the training.

In light of the substantial labour force requirements in Quebec, and specifically in the Greater Quebec City area, the Chambre recommends that action be taken by the federal government to promote the hiring of immigrant workers, in particular by facilitating access to work visas.

Since the environment is a concern of the greatest importance in increasing the competitiveness of our businesses, as well as communicating and disseminating new business values throughout the world, the Chamber is asking the federal government to give more credit to companies for their environmental initiatives. Such initiatives could, among other possibilities, take the form of a refundable tax credit for any investments intended to improve the company's environmental performance.

Interprovincial trade.

Since interprovincial trade is all too frequently hampered by restrictive measures which have a detrimental impact on the national economy, the Chambre recommends that the federal government reduce the barriers to interprovincial trade. National conferences on sectoral issues bringing together federal and provincial trade ministers would help to reduce the irritants.

University funding.

As institutions of higher education and advanced research—the true producers of business people and businesses in the new economy—universities occupy a commanding position in the national economy. The Chambre believes that training is a crucial element in corporate competitiveness and accordingly recommends that the federal budget include a substantial increase in the amounts allocated to the university network in order to maintain the quality of teaching and to develop research activities. The Chambre also proposes that federal transfers for post-secondary education revert to the levels that prevailed during the early 1990s.

Corporate family succession.

The tax collected when a business is transferred to the next generation constitutes a major obstacle to the preservation of family businesses. The Chambre accordingly recommends that the Minister of Finance postpone the imposition of the tax when the succession takes place between members of the same family. The Chambre supports the federal government's initiatives to create a capitalization for corporate succession.

Local economic development.

The Chambre recommends that the government maintain the community investment assistance program, which is an important economic lever for launching local projects with impact potential. The program should be continued since it supports the development of targeted intervention strategies and of the tools to sustain them.

Income tax. With a view to increasing the ability of individuals to consume and stimulate the local economy in Quebec and elsewhere in Canada, as well as helping us to remain competitive and retain our workforce and our brains, the Chamber proposes that the government reduce income tax.

[The Chair, Conservative, Brian Pallister]

Thank you very much, sir.

We continue now with Pierre Langlois, who is here representing

the Fédération des Chambres immobilières du Québec.

[Pierre Langlois, Director of Government operations, Quebec Federation of Real Estate Boards]

Good morning, Mr. Chairman and members of the committee.

The Fédération des Chambres immobilières du Québec represents over 12,000 members, who are all major socioeconomic leaders in their respective areas, and who advise Quebeckers who are trying to meet an essential need, namely housing, on a daily basis.

This year, the House of Commons Standing Committee on Finance chose Canada's place in a competitive world as the theme for this year's pre-budget consultations. In that regard, access to rental housing and property ownership are directly linked to competition. To illustrate this fact, you simply have to look at the problems encountered by the chambers of commerce of several American metropolitan areas to see that affordable housing is a significant threat to their economic development.

Of course, the situation in Canada and Quebec is completely different from the problems faced by a metropolitan area like New York city, for instance. Yet the increasing lack of affordable housing will make it harder for Canadian cities to meet private sector manpower needs. The gap in affordable housing in urban areas as compared to resource rich regions will make it harder for workers to move from a low employment area to one which is experiencing rapid growth.

In light of this situation, we would like to present, in the brief time allotted to us, several measures which may increase the number of rental housing units and make home ownership more affordable. In Quebec, the data speaks for itself. Construction on new affordable housing units, that is, rental housing which costs about 30% of average income, has stagnated. The only rental units actually being built in Quebec today are basically social housing, luxury housing and retirement homes. Without new rental housing capacity, with rents between $800 and $900 a month per family, the situation will continue to deteriorate. Clearly, access to affordable housing must be improved.

We therefore recommend that transactions involving the sale of low-income rental housing be exempt from the capital gains tax if the income is ploughed back into rental real estate. When an owner re-invests money from the sale of a rental property into another real estate property, he in fact did not realize a gain which would generate enough money to pay the capital gains tax.

This proposal addresses specific problems associated with the ownership of real estate as an asset class, such as the lack of liquidity, the difficulty of selling and the inability to increase the size of the asset, which are otherwise advantages in the securities sector and which apply, for instance, to stocks and bonds.

Rolling over a capital gain when an income-generating asset is sold, in our view, is a real way of increasing the number of rental units in Canada's largest cities; the fiscal rollover is just a way to temporarily delay paying the capital gains tax.

In order to strike a better balance in the rental housing sector and to help people become home owners, we believe the Home Buyer's Plan, the HBP, needs to be improved. Let's be clear: if you pay between $800 and $900 a month in rent, you would not be paying much more for a mortgage. The Home Buyer's Plan lets new buyers dip into their RSPs to qualify for a mortgage earlier. But the maximum amount under the HBP has been frozen since 1992 and in no way reflects real estate trends since then.

We therefore propose that the government first increase the amount allowable under the program from $20,000 to $25,000, and then to index it. In 1992, the cap represented about 20% of the average value of a home in Quebec. But today, it is only 11%. The popularity of the program is obvious: over one and a half million Canadians have used it since 1992, for a total investment of $15 billion.

For many years, the Canadian housing sector was recognized as being an integral part of the country's competitiveness. Canada stood out from other developed countries because housing, whether it was rental housing or outright ownership, was affordable.

Our ideas are based on the fact that there is a disconnect between our historic advantage and reality, based on various data provided to us by our research organizations and financial institutions. We therefore strongly recommend that the committee ensure that affordable housing remains a positive trait of the Canadian federation.

[The Chair, Conservative, Brian Pallister]

Merci beaucoup, monsieur Langlois.

Monsieur Pierre Patry, de la Confédération des syndicats nationaux.

[Pierre Patry, Treasurer, Confédération des syndicats nationaux]

Very well. Thank you very much, Mr. Chairman. I want to thank the Standing Committee on Finance for having invited the CSN to express its views.

The CSN is a union representing 300,000 members located throughout Quebec and Canada, working in most economic sectors.

It should be said that Canada's economic situation has been very positive since the mid-1980s. The IMF estimated that for the period between 1998 and 2007 Canada would have the highest economic growth of all G7 countries. This is due to increases in consumer spending, corporate investment and real GDP per capita, which is once again the best amongst G7 countries. There has been a decrease in unemployment and increase in the average job growth rate. Here again, we have shown the best performance of all G7 countries. Finally, inflation remains relatively stable.

Nevertheless, despite a good performance Canada-wide, it must be said that there are significant variations in economic performance from one province to the next leading to glaring inequality. Some regions are experiencing significant hardship.

With respect to the fiscal imbalance, we cannot forget Prime Minister Harper's commitment. In fact, in Quebec City, during the last election campaign, the Prime Minister undertook to correct the fiscal imbalance, which he then reiterated in the throne speech and in the 2006-07 budget. Unfortunately, things have been very slow to progress.

The fiscal imbalance is reflected in various ways. First, federal transfers to the provinces, which stood at over 23% in 1993-1994 totalled only 18% of revenues for 2005-06. Despite health care re-investments, federal transfer payments to the provinces only amount to 23% of revenue, which does not meet the targets set out by the Romanow report.

Federal transfers in the field of post-secondary education, social assistance and other social programs today represent only 11.5% of provincial expenditures, a far cry from the peaks of the mid-1990s.

Mr. Godbout spoke quite eloquently on the issue of social assistance. Currently, in Quebec, federal transfers for social assistance amount to $2,846 per claimant, whereas in Alberta they amount to $9,422 per claimant. That is both unfair and harmful.

The federal government has cut back in other areas, despite the fact that it has money. We need only consider the numerous encroachment on provincial areas of jurisdiction in the areas of health and education, where the federal government spends heavily.

The CSN believes that the fiscal imbalance needs to be addressed. The ideal solution would be tax transfers to the provinces. Otherwise, there would need to be a considerable increase in financial transfers to the provinces, with respect for provincial areas of jurisdiction. There is near consensus in Canada on the size of the fiscal imbalance. The Council of the federation assessed it at $9.5 billion, representing $3.4 billion for Quebec. This is a far cry from the $20 billion mentioned by Prime Minister Harper to explain why he considers the provinces' requests to be excessive.

The $3.4 billion figure is fitting given the size of the budget surplus noted over a number of years. It is also compatible with the Bloc Québécois' demand. The Bloc assesses the fiscal imbalance at $3.9 billion: $1.2 billion for post-secondary education, $2.1 billion for equalization, $400,000 million for health care in order to reach the 25% set out by the Romanow report, which, I might add, has already been achieved in the past, and $270 million to offset the day care services shortfall.

We believe that the Government of Canada must act in its next budget to correct the fiscal imbalance, and Quebec cannot demand any less than $3.9 billion.

I'd quickly like to address a few other points. With respect to employment insurance, the year 2005-06 showed an astronomical surplus. The program needs to be enhanced by lowering the eligibility threshold, and increasing benefit rates and benefit periods. But mainly, an independent non-government fund must be created, as supported by the Conservative Party in the past, which voted in favour of Bill C-280, introduced by the Bloc Québécois in 2005, if I'm not mistaken.

The government must also vigorously support the sectors which are struggling, by allowing them to develop recovery and restructuring plans. On that front, what the government implemented and announced to help senior workers in insufficient. Income support measures and assistance programs for the most vulnerable workers need to be developed to help those who will unfortunately not be finding other work, despite the possible corporate recovery and restructuring.

[The Chair, Conservative, Brian Pallister]

Thank you all for your presentations.

We will immediately start the question period.

Mr. Pacetti, you have seven minutes.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chairman.

Thank you for your presentations. It is always interesting. I only have seven minutes, so I may have to interrupt you at times.

My first question is for Mr. Godbout.

The fiscal imbalance and equalization issues are complex. Two years ago, there was a presentation made before the Standing Committee on Finance in order to explain the existing formula. I understand there may be only 12 or 15 people who genuinely understand the equalization formula. I think there may be one person within the Department of Finance of each province and a few academics in universities who understand it.

As I mentioned, it is a complex issue. Several studies have been carried out, namely this year, on equalization and the fiscal imbalance. You referred to the Séguin report. I don't know if it's the most recent report.

You also referred to the GST and the fact that provincial governments could perhaps access part of it. Has the fact that the Conservative government decided to decrease the GST from 7 to 6% meant that the Government of Quebec, for instance, could take that 1% difference? Is there a reason why it could not access that 1% immediately and 2% later on?

[Prof. Luc Godbout]

Equalization is indeed a complex issue, but let's be fair. It is a bit like an income tax form: it could be far simpler, but then it would be less accurate.

I referred to the Séguin report, but I also referred to the Council of the federation document as well as that of a panel of experts whose report was commissioned by the federal government. So, although it may not be simple, there is a way to find a solution.

As to whether the provinces should have or could have access to the 1% resulting from the July 1^st decrease in the GST, that would have been feasible. Legally speaking, there is nothing precluding their accessing that amount. But if we want to properly settle the fiscal imbalance, Ottawa will have to lend a hand and offer a 3% reduction in the GST.

During the last election campaign, Mr. Harper was standing by a cash register when he talked about decreasing the GST. He did not say he was going to give the money to the provinces, he said he was going to give it to the people.

Technically speaking, the provinces could have done that.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I understand. However, I want to know whether the provinces have a choice. They can choose to increase their tax rates—in this case, neither personal nor corporate taxes—there is nothing nor anyone who can prevent them from doing so.

[Prof. Luc Godbout]

No one has said no and no one has said yes. Indeed, the provinces can raise taxes. Provinces can take—