Finance Committee on April 24th, 2007

[Mark Carney]

I'm going to state government policy around the issue, because the discussions between the department and the minister, and the advice given to the minister and ultimately to cabinet, are subject to cabinet confidences.

Let's go to interest deductibility in terms of the incentives for Canadian corporations. I would refer to my previous answer to the interest deductibility question on overall tax competitiveness. We and the government believe that focusing on one aspect of the international tax system misses the broader issue of tax competitiveness--that the government is committed to tax competitiveness.

But one of the important things is that with the existing system, prior to budget 2006, as outlined in a number of Auditor General reports and the Minsk committee, and as referred to by this committee in recommendation 35 of the finance committee report, the use of tax havens resulted in a greater incentive to invest outside of Canada than in Canada.

When one goes back to the creation of jobs, productivity, and growth in Canada, we're looking to establish a neutrality for Canadian corporations between investing in Canada and investing abroad, in the context of providing an overall competitive corporate tax system, where there has been substantial progress over the last two budgets.

[Robert Thibault, Liberal, West Nova, NS]

Wouldn't you agree that there is a huge difference between a tax haven where people hide money in order to avoid taxes and an investment in foreign markets--in plants, equipment, and assets that provide raw materials--an investment coming from Canadian-generated funds that bear interest that is deductible? There's a huge difference.

We see a hollowing out of our economic assets, first in the income trust, and now in our globally competitive companies with their losing of this advantage. We see our contracts with the Department of National Defence now going to original equipment manufacturers, including life cycle maintenance and supply. We hear from people in our aerospace industry and our defence contracting industry that they will have to consider selling out to foreign interests because over the long run they can't be competitive in that type of market.

The research your department does--and I'm sure it's excellent--is paid for by public funds, so the advice should be public. The decision the minister makes is his to make--the decision that cabinet makes--but the advice provided by your research is included in these figures on how much taxpayers are paying for that advice.

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. Thibault.

We'll continue now with Mr. St-Cyr for five minutes.

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

Thank you, Mr. Chairman.

I want to get back to the fiscal imbalance. I'd like to know your view. In the last budget, there were transfers, that is to say mainly increases in equalization and transfer payments.

Would you characterize those transfers as cash transfers or tax transfers?

[Mark Carney]

I'd like to turn the floor over to Barbara Anderson.

[Barbara Anderson, Assistant Deputy Minister, Federal-Provincial Relations and Social Policy Branch, Department of Finance]

The transfers that were in the budget in the fiscal balance package were cash transfers to provincial and territorial governments.

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

In that case, would you say there have definitely been gains in terms of budget transfers, cash transfers, but that there's been no progress, for the moment, from a fiscal balance standpoint?

[Barbara Anderson]

No, I think the budget package restored fiscal balance.

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

In that case, I'm going to ask you: what tax transfers does this budget contain? I haven't seen any. When I looked at the budget, I saw no tax transfers.

I'm trying to see how we can resolve the fiscal imbalance if there weren't any tax transfers.

[Mark Carney]

I think the question ignores fundamental powers of government at the provincial level. The provinces have the same taxing powers as the federal government, so there isn't the need to transfer tax points. In fact, the decision of the Province of Quebec has been to reduce some taxes over subsequent budgets.

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

In that case, I'm going to ask you another question. I know you can't be partisan. I'm asking you to stick to the facts.

In Quebec, the Conservative Party distributed advertising that claimed, for example, that, if the Liberals were elected, they might take that money back, cut equalization transfers and reduce transfer payments. I'm aware that you can't be partisan, but are they right in saying that nothing, technically, would prevent the Liberal government, or another government, Conservative, NDP or I don't know what, from reducing equalization transfers or transfer payments in the next budget or a future budget?

[Mark Carney]

The measures to restore a fiscal balance outlined in budget 2007 are all on a long-term, sustainable, and predictable track. They all run to 2014, lining up with the Canada Health Act. Provided the budget is passed, those measures will be in place.

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

Legally, is there anything that prevents this plan from being amended by the next government? Is there anything preventing the next government from reducing these amounts in the next budget?

I know the answer, but I want to know whether you know it as well.

[Mark Carney]

The law is the law. One cannot bind future Parliaments.

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

I'm going to ask you a slightly more technical question, on equalization more particularly. Currently, under the rule presented by the minister, there is the possibility of including 0% or 50% of non-renewable resources in calculating the tax base. If 100% of resources had been included in the tax base calculations, how much equalization would that have yielded, and what would have been Quebec's share?

[Barbara Anderson]

I certainly don't have the numbers with me, but we can get them on what 100% would be worth under the status quo, under the new program, and what 50%.... So we will get details.

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

Thank you.

I have another question. Earlier my colleague referred to the impact of the income tax cut compared to the GST cut. You studied that in relation to productivity. If we had the same amount of money to spend, can you tell us what the most beneficial impact on productivity would have been?

For the same tax expenditure, what would have had the best impact on productivity: a GST cut or an income tax cut?

[Mark Carney]

What are the income tax cuts? Your question—

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

Which would have been the most beneficial?

[The Chair, Conservative, Brian Pallister]

Thank you very much, Mr. St-Cyr.

We'll continue now and I'll ask a couple of questions.

Various Auditor Generals' reports have been issued over a number of years, outlining the growing concern about offshore flow of capital to lower-tax regions of the world. I want to verify, just for the purposes of clarity, that nothing will stop that from happening in the future. Nothing contained in this year's budget would stop Canadian companies from being able to export capital to low-tax jurisdictions, if they chose to.

[Mark Carney]

That's correct.

[The Chair, Conservative, Brian Pallister]

So they'd still be able to do that.

So what's at issue is the interest deductibility of borrowing money on these Canadian assets, writing off the interest charges to reduce Canadian tax obligations so that such capital could be sourced by that leverage. Isn't that the issue that's addressed in the budget?

[Mark Carney]

Yes, Chair, you are correct. And I'll go back to Mr. Thibault's question on the use of tax havens.

By using tax havens to make these investments, the indications of the Auditor General and others is the overwhelming number of these investments use tax havens. The reason they use tax havens is to get two deductions, if not more, for the same borrowing, for the same investment. That's what skews the incentive.

[The Chair, Conservative, Brian Pallister]

So in effect the interest to be deducted against a Canadian company is allowed, encouraged in fact, to reduce its Canadian tax obligations domestically, to take the capital and move it to other jurisdictions where it would be subsequently invested as the company would see fit, and that is in essence the reality that has existed for a number of years. Despite recommendations in the report to the previous government, nothing has been done to change that reality.

Now the argument is being made that by forcing Canadian-domiciled corporations to pay this tax they would be made uncompetitive, and therefore--the phrase was used by Mr. Thibault--the economic activities of this country would be hollowed out.

Do you have any facts to present to this committee that would give evidence to the truth of that statement?

[Mark Carney]

To support the statement? No, I do not have facts to support it.