Finance Committee on March 20th, 2007

[Mike Wallace, Conservative, Burlington, ON]

Mr. Chairman, thank you for that.

I'm just seeing the amendment this morning for the first time, of course, but if I'm reading it right, based on the discussion we've had so far, to resolve the issue that you portrayed and want us to give thoughtful consideration to, my problem with the bill at the end isn't the changing in the amount and all that, from the $4,000—and obviously it made it to the budget—my problem is the view that it changes from pre-tax dollars to after-tax dollars.

Based on your arguments, as long as we're taxing the parents first before they contribute to their RRSP, there is no issue, whether it's $50,000 or not. Am I not correct on that?

You got into the discussion on it, so I'm asking for clarification from your position, since I'm listening to everybody's position on this. If the bill did not include the issue of pre-tax dollars, you'd have no issue. You like this amendment, or you want us to consider this amendment, because it includes dollars before the parents pay tax on it. Is that not correct?

[The Chair, Conservative, Brian Pallister]

Essentially, if we adopt this as it's proposed, without limit, what we would create is a situation in which RRSP deductions, which are currently 18% of earned income, up to a maximum of $18,500, could be deducted. That's irrelevant to this proposal. But there's no reference to say one or the other, so you could deduct from your earned income close to 20% of your RRSP contribution, as is the case now. In addition, you could also deduct an equal amount and contribute to an RESP fund for your child or children. And I think it's limited to that amount for a child or children; I don't think it's 18.5% for each child. That would be too much.

[Mike Wallace, Conservative, Burlington, ON]

Right, and you would not pay tax on it, based on the—

[The Chair, Conservative, Brian Pallister]

You could then transfer those funds into the name of the child, to be withdrawn in the child's name.

[Mike Wallace, Conservative, Burlington, ON]

Right.

[The Chair, Conservative, Brian Pallister]

We have Finance officials here. Perhaps committee members are interested in knowing what the revenue implications of this particular form of income splitting are.

Theoretically, at least, I suppose we could recognize that the amount of income tax displacement or loss of revenue on these dollars could be fairly considerable, given the likelihood that the money would be withdrawn in the child's name when they are a young adult who does not have very significant additional income—perhaps summer earnings or part-time earnings. Essentially you'd be taking that amount out of the revenue stream for tax purposes in the adult's name, assuming very likely a higher marginal bracket, and moving it into the child's name, to be withdrawn at a time when there would be very likely little, if any, tax to be paid. You're talking about a major revenue implication here.

I would invite Finance officials to come forward now, if they would.

[Mike Wallace, Conservative, Burlington, ON]

I don't mind asking the question.

[The Chair, Conservative, Brian Pallister]

Yes, that would be good. I'd appreciate it if committee members asked the questions rather than me. I'm trying not to involve myself too much in this.

[An hon. member]

Too late.

[The Chair, Conservative, Brian Pallister]

Again, I think there needs to be more fulsome discussion than we've had thus far. I hope Mr. McTeague would agree with that.

Welcome, and please state your name for the record.

[Yves Gingras, Chief, Employment and Education, Personal Income Tax Division, Tax Policy Branch, Department of Finance]

My name is Yves Gingras and I'm the Chief of Employment and Education with the Personal Income Tax Division at the Department of Finance.

[The Chair, Conservative, Brian Pallister]

Thank you for being here, Mr. Gingras. We'll ask Mr. Wallace and then Mr. St-Cyr if they have questions for you.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chair.

Things are a bit fluid, based on last night's budget, in terms of where we are today on the $4,000 piece. My concern is the second part of the bill, where under the recommendation of the bill's mover it becomes pre-tax, not after-tax, dollars.

If we leave it as after-tax dollars, and you are able to contribute where we indicated last night, the issue of collecting tax on it somewhere along the line is moot. Based on the chairman's perspective, likely students won't pay very much tax, so that revenue or income does get taxed at least once.

If we move to Mr. McTeague's bill, that money doesn't get taxed from me, because I have a student coming soon, for example. It doesn't get taxed from me when I contribute to my RESP. Then when my daughter goes to school, she won't be paying any tax, so it doesn't get taxed again.

Is that an accurate statement? What effect does that have in terms of money for the treasury?

[Yves Gingras]

Regarding Mr. McTeague's proposals, as I understand it, where contributions result in a tax deduction, there will be significant financial implications for the government during the contribution years. When the funds are withdrawn in the student's name, because students for the most part do not pay any taxes, the tax revenue would not be recovered.

Based on our understanding of the proposed initiative, we've drawn some conclusions, in terms of the bill's tax implications. Assuming that taxpayers' behaviour would not change, meaning that the new measures would not result in additional contributions, we have estimated that the financial cost of implementing the new measures would be $565 million in the first year. As I stated, these costs would not be recovered in instances where the funds would be withdrawn in the student's name, because generally speaking, students do not pay any taxes.

We could do a more detailed calculation and take into account the fact that some of these amounts could be taxable. However, it is logical to assume that most of the contributions would not be taxable when withdrawn for the students' benefit.

The costs could increase substantially, if we take into account the fact that contributors could increase their contributions to take advantage of the tax incentives.

[Mike Wallace, Conservative, Burlington, ON]

As an additional question—I don't know if you've had a chance—but did you see Mr. St-Cyr's amendment?

[Yves Gingras]

No.

[Mike Wallace, Conservative, Burlington, ON]

Okay, thank you.

[The Chair, Conservative, Brian Pallister]

Monsieur Gingras, it would seem imminently logical that if contributions could be made deductible from a person's income, the rate of contribution would increase rather significantly, would it not? Certainly our proponent has said this is the goal, and we realize that. Therefore, the revenue impact would be considerably increased as a consequence of the appeal to be able to deduct the contributions.

So when we say projected revenue impact of over half a billion dollars annually, is that based on current contribution levels?

[Yves Gingras]

The Department of Finance based its calculations on certain assumptions, specifically that contributors would not behave any differently. Based on that assumption, it concluded that additional costs would be in the order of $565 million.

We're talking here about the cost to the federal government. We can't lose sight of the fact that there will also be a cost to the provinces, given that the deduction would affect their tax base and hence their revenues. Provincial costs must therefore be added to federal costs.

[The Chair, Conservative, Brian Pallister]

Madame, we'll put you on the list; welcome.

Go ahead, Monsieur St-Cyr.

[Thierry St-Cyr, Bloc, Jeanne-Le Ber, QC]

I'm satisfied with that explanation. I think that by changing this from after- tax to pre-tax, we're creating a major tax benefit which comes very close to being a tax loophole, since young people will pay virtually no tax on these funds. I'm not opposed to encouraging parents to save for their children's education. What I'm saying—and that's the substance of my amendment—is that if we open the door to a limit of up to $18,000, that will prove to be far too costly from a fiscal standpoint, besides which only the wealthy will benefit from this measure.

The annual limit proposed in my amendment, namely $5,000, seems more than adequate. Over a period of 20 years, for example, contributions would total over $100,000. Everyone who contributes to an RRSP knows that with compound interest, which in itself is tax exempt, it is likely that the plan will grow to somewhere nearer to $300,00. Therefore, I think my amendment is entirely reasonable. I think it's a good compromise that will help the middle class without giving wealthier individuals an unfair advantage.

One more thing: earlier, Mr. Wallace stated that under the current system, money invested was after-tax dollars. Nevertheless, there is a benefit here because the value of the funds increases and the money is sheltered from tax. Therefore, more compound interest is earned. However, as it now stands, the bill provides a much bigger tax advantage and that's why we're proposing to limit contributions.

[The Chair, Conservative, Brian Pallister]

Mr. St-Cyr points out quite accurately that the current system does provide a tax incentive for contributions, which is the fact that the interest growth on the contributions is sheltered from the effect of annual taxation until the point of withdrawal by the student.

Your projected number of over $500 million annually is based on current contribution levels continuing, which we both agree is not an accurate hypothesis because most likely contribution levels would increase. Does your tax loss number take into account the reality that the interest currently is also tax sheltered? In other words, under a perpetuation of the current plan, there would be no revenue to be gained by the government from the interest earned on the contributions once they are tax sheltered in the name of the child in any case. Is that impact number a number net of that fact, or not?

[Yves Gingras]

The number I cited, which is an annual cost of $565 million, does not do a net calculation. If it did, not much of it would disappear, because most students are not effectively taxable. It is fair to assume that at the end, when this money was taken out in the name of the student, very little would be recouped from that initial fiscal cost.

[The Chair, Conservative, Brian Pallister]

Fair enough.

We continue now with questions. Mr. Dykstra is next, please.

[Rick Dykstra, Conservative, St. Catharines, ON]

Thank you, Mr. Chair.

The clarification I think I have is that the difference between the amendment and the current motion as I see it is that Mr. St-Cyr is suggesting a post-tax amendment. The original motion is obviously pre-tax. Is that correct?