Finance Committee on May 29th, 2007

[The Chair, Conservative, Brian Pallister]

Yes, of course, but we're talking about revenue here—

[Armine Yalnizyan]

Well, it's not politically sustainable to sustain it on a property tax system. When I talk about growth revenue, sir, I'm talking about revenue that grows according to both population and the economy, whether it's through the consumption side or the income side, whether individual income taxes or corporate income taxes.

You need some growth source of revenue. The economy largely expands. There are very short periods of time when it recedes. The housing market is absolutely the inappropriate way to finance both social and physical needs, and it is really time for the federal government to step up to the plate and take part in rebuilding our nation, as it did from 1948 to 1970.

[The Chair, Conservative, Brian Pallister]

Thank you, madam.

Mr. Crête, you have six minutes.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Thank you, Mr. Chair.

Ms. Urquhart, at the beginning of your presentation, you said that we did not need to amend the bill in order to correct the problem of trusts. You mentioned a rule in the Income Tax Act that could be applied to prevent tax avoidance.

Could you explain that idea a little more for us, please?

[Dianne Urquhart]

First of all, section 245 of the Income Tax Act is the general anti-avoidance rule. If you make an attempted avoidance transaction that is for the purpose of only getting a tax benefit, and if it's determined that the transaction is abusive, then the Canada Revenue Agency is able to force you to pay a tax notwithstanding the attempted transaction. In this case, it's the non-arm's-length debt in the corporate subsidiary of the income trust that CRA can go in and say, “We don't permit you to have this high level of debt, we don't permit you to use a 15% interest rate”, just as an example. The thin capitalization rule, if it's used in conjunction with that, which is section 18.4...you are limited to having two times the debt relative to the equity in a non-arm's-length debt transaction.

The consequence is that they're forced to have that 2:1 ratio, and they don't get the interest deduction that is presently in existence, even in the case of a private income trust. The tax advisers are telling the foreign acquirers to come to the country because this new income trust tax legislation for you today applies to publicly traded. They're saying that if you come in and acquire this and make it private, you'll get the same ability to use the high non-arm's-length debt and get a full interest deduction for that.

I'm saying Canada Revenue Agency can say to that foreign private equity buyer or to that master limited partnership, “You're not allowed to do that. We're going to use these sections of the act and force you to not have such a deduction and have profits”—they're not all stripped out—“and you'll pay taxes to the Canadian government.” It would be grossly unfair not to apply that GAAR section and thin capitalization rule after having just removed the tax advantage for individual Canadians.

It's also essential, in my opinion, in the debate of hollowing out of Canadian corporations and income trusts, that we not have a tax advantage in this country that draws all those billions of floating capital in the world to our market because we're a tax haven for them. We stop ourselves being a tax haven by using this thin cap rule in the non-arm's-length step. They can do it for the royalties in the anti-trust as well. GAAR would apply to the artificially high royalty agreements within the energy trust.

[Paul Crête, Bloc, Montmagny—L'Islet—Kamouraska—Rivière-du-Loup, QC]

Ms. Yalnizyan, you mentioned the issue of fiscal imbalance. All across Canada, we can see that this question has only been dealt with in financial terms. Corrective measures have not been applied to the tax system, perhaps by transferring tax points, or things of that nature. You also mentioned the surpluses that have been built up over several years, but that situation could change.

What permanent changes would allow us to meet more realistic objectives, such as the war on poverty, or the lack of economic security that you mentioned?

[Armine Yalnizyan]

It's a wonderful question, and thank you for the opportunity to address it.

I think there is a real risk that we are going to have the surplus disappear. I think this government's goal is to cut the problem off at the source and make the surplus disappear. Two budgets ago the lion's share of the surplus went to tax cuts. This time, about $7 billion of a $35 billion bag over the next three years went to tax cuts and $15.2 billion went to debt reduction. I submit to you, the $22 billion this government has paid down in debt reduction over the last two years could be used to make a down payment on the $60 billion to $120 billion infrastructure deficit. It is absolute, utter folly to be paying down debt at this stage in our country's history when we have made such progress on debt-to-GDP reduction and it will continue to come down because of growth in the economy when we are facing such infrastructure deficit.

This is the time to roll over debt that is coming up, when you have a 40-year low rate in terms of interest rates. You are able to lever capitalization at a rate that no subsidiary level of government can do. This is the time when we need to get the money to invest. Instead, this government, and the preceding government, put a lot of emphasis on debt reduction as a way of soaking up the surplus. In fact, this government's call to do the tax-back guarantee, that any reduction in debt charges, because of debt paydown, go to further tax cuts, strikes me as a squandered opportunity to rebuild, not only the nation but—It's not even nation-building; it's what every citizen needs in every corner of the country, whether you live in Quebec or in the Northwest Territories. You need access to housing, you need access to roads, you need access to utilities and clean water. These are fundamentals.

It raises the question, what is the federal government there to guarantee? In what sense are we all Canadians, from coast to coast to coast, where we can rely on certain basics? It strikes me, just from a purely hard infrastructure point of view, that this is a squandered opportunity. From some of the evocative things that you're talking about, like fighting poverty, we know poverty isn't about income. We know poverty is about access to opportunity.

Thank you.

[The Chair, Conservative, Brian Pallister]

Ms. Ablonczy is next.

Ms. Ablonczy, you have six minutes.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

Thank you, Mr. Chairman.

We appreciate the panellists and all of you who have made presentations.

I would like to point out for the City of Toronto that this government, in the recent budget, put fully $39 billion toward addressing the fiscal balance to make sure that provinces such as Ontario have considerably more cash to fund services. That included, of course, making sure that per capita payments for things such as education and health care and all of these things were now equal across the country. Before, Ontario citizens did not receive the same money per capita as some of the other provinces.

In addition to the $39 billion, this government put $33 billion towards infrastructure, which you were talking about.

That's a heck of a lot of money, and some of it is going to go to Toronto. So I think this passionate concern that somehow these important issues are being neglected is simply not logical. The $39 billion plus $33 billion plus all the other transfers to provinces makes I think an enormous list. I don't want to do that list, because I have another question, but I think we need a little perspective here. Yes, you can always complain, but $39 billion plus $33 billion is not small change. I hardly think these important issues are being neglected.

I want to address a question to Mr. Jock, because in addition to the concerns we've heard from the City of Toronto, I know all Canadians are concerned about conditions for aboriginals. I'm particularly and specifically interested, as a former teacher, in the matter of education.

You know the old saying, "knowledge is power"—power to participate, power to get a good job, power to build a strong future. In this budget there was more money for aboriginal education, and those moneys keep continuing, but I'm specifically interested in the programs, which I know you're aware of, that target this whole area to ensure that aboriginal youth get the education they need.

I think it would be helpful if you discussed with the committee what is being done there and where you see these programs going, specifically in education.

[Richard Jock]

Thank you. That's an excellent question.

There are two aspects to the education element. One is that there are marginal increases that go to education. As I indicated, there's a 2% cap on funding in general.

What happens, and I'll use Alberta as a particular example, is that when the CHST and other transfers are increased and the province as well is able to invest more in education, the average cost of education increases.

For first nations in Alberta, say the situation is that on the reserve there's a school up to grade 8 and that what is expected out of their budget is that they provide for the tuition agreements for the students who would go to the local city or municipality to high school. Those amounts that go for the students in the high school are paid at the provincial average, which grows at a much faster rate than the 2%, which leaves a smaller amount—and proportionately smaller as time goes on, as those increases continue—for those elementary interests that are of course foundational and of prime importance.

What we are engaged in is a process of developing both standards and a costing formula with the department that we think will yield substantial results if implemented. I think that's what—

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

I think those are very important figures to know and to have in mind. I appreciate that.

I wish I had more time for everybody, but I had a question for Mr. Morand.

You brought out some technical drafting difficulties very specifically. We appreciate that, because people who work within this area all the time sometimes know these issues better than we do.

I'm curious about the response you had when you brought these forward to officials. Do you expect they'll be addressed, or are you bringing them to committee because you don't think they're going to be addressed? What's the situation?

[James G. Morand]

We've received no commitment from the officials that they will be addressed, and that's why we're before the committee--to ensure that the issues don't get lost in the shuffle.

[Diane Ablonczy, Conservative, Calgary Nose Hill, AB]

I think that's important, and we appreciate that.

Thank you, everyone.

[The Chair, Conservative, Brian Pallister]

Thank you, madam.

Speaking of mouthfuls, we continue with Madam Wasylycia-Leis.

[Some hon. members]

Oh, oh!

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

All right. I'm going to talk fast, so get ready. I have three questions; I'm going to get a question each for Dianne, Richard, and Armine, and I'm going to do it in 30 seconds. You'll each have a minute and a half to answer, starting now.

Dianne, first of all, I want to say that I don't think there's any similarity between you and the Liberal Party, which has hitched its wagon to the income trust lobby and which has in fact engaged in a smear campaign against anyone who believes that we should level the playing field in this regard. In fact, they both seem to suggest this weird notion that this is going to trigger a chain reaction; it's going to lead to new foreign owners who don't pay any taxes--this, of course, despite the fact that 11 of the largest energy trusts already are 50% foreign-owned.

Anyway, what is your answer to that? How can Canada be saved without removing the tax?

[Dianne Urquhart]

Well, first of all, apply GAAR and apply the thin capitalization rules. I'd like to note that in the United States the IRS did apply its anti-avoidance rules against the Canadian income trusts that owned American businesses, so we don't have to be worried about needing to have reciprocity. They taxed us, we tax them; that's the way it works. We both have thin capitalization rules and intercorporate pricing rules to prevent artificial transactions and pricing for the purpose of avoiding tax in our respective countries.

The other point I would note is that a German Institute for Federalism and Intergovernmental Relations study released in August 2006 found that 75% of the OECD countries have thin capitalization rules in place today for non-arm's-length debt transactions within corporations owned by multinationals. They concluded in interviewing the German multinationals that those multinationals use significantly less debt leverage in the country that has the thin capitalization rule, the consequence of which being they pay taxes to those foreign governments.

Thin capitalization rules work; that's why 75% of the countries have them. There's no excuse for Canada not to execute its thin capitalization rules in order to be competitive with the world. They exercise those tax obligations in their countries, so it's reciprocal for us to do the same. We will protect our government tax revenue base for all the various services that we've had a number of speakers seek to get better funding for.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you very much.

Richard Jock, many people said after the budget came down that the most glaring omission in the budget was its focus on aboriginal peoples--that it was a slap in the face to our first nations, Métis, and Inuit communities, that promises were made about clean drinking water, but there was nothing in it. Housing is a disaster, and there are third world country conditions.

If we don't find a way to significantly redress these concerns, what would be the impact in terms of human conditions and also in terms of...? We're hearing about protests and blockades. What will be the real outcome of all this?

[Richard Jock]

There are two aspects to this. One is that part of it responds to the point made about the situation of Canada as a baby boomer country.

I think first nations represent an important element of the future. The education system, with its need for investment, I would say, would be a critical investment. Among our post-secondary students, who are very interested in further education and training, we have a situation in which we estimate about 10,000 are not able to access post-secondary education funding through the department because of the funding limitations.

I would say in fact that government is at risk in such things as child welfare, where, in effect, by insufficiently funding it, government could be liable for knowingly underfunding these kinds of services.

Having housing fall farther behind is simply a human tragedy in the making.

But the other element is that in order to respond to the crises that come up, and you alluded to some of those crises, the department is forced to reallocate from within to deal with those crises. This simply delays what needs to be done in other communities. It becomes a whole process of problems and reallocation and not really dealing with the issue.

The only comment I can make on the other issue is that what's needed is hope and a plan for the future as a way to deal with it, as opposed to not dealing with it and the current circumstances.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

Thank you very much.

Armine, first of all, I'd like to hear point number three. You mentioned the GST and the CST. What's point number three?

Secondly, with respect to this pattern of the present government and the last government putting all their extra money against the debt—

[The Chair, Conservative, Brian Pallister]

There are twenty seconds left.

[Judy Wasylycia-Leis, NDP, Winnipeg North, MB]

—what would you do with $100 billion that is a cumulative result of these governments not dealing with problems we have?

[Armine Yalnizyan]

Ms. Ablonczy referred to the $33 billion going to infrastructure. I would suggest making sure that money goes to infrastructure. When you have it levered over P3s, we're paying more. As taxpayers, we are paying more for the privilege of having the private sector lever that money for us.

Also, the period of time over which the $33 billion is being spent is a much longer time horizon than that of the $22 billion we've dumped into debt reduction over the last two years.

And that was my point number three: infrastructure. You've made an important start in this past budget to address infrastructure issues, but you're doing it cheek by jowl with having the sale of public assets on your agenda, which is mind-boggling. That's point number one.

Number two is the tax-back option for every dollar we get back in debt charges. Don't give me my money back as a debt charge; please reinvest it. This is a crazy way to guarantee citizens anything. This is a revenue-neutral option for you that actually puts money where it belongs, in the bricks and mortar that build this country.

[The Chair, Conservative, Brian Pallister]

Merci, Madame.

We continue now to the second round.

Mr. McKay, you have three minutes.

[John McKay, Liberal, Scarborough—Guildwood, ON]

Three minutes.

Mr. Morand, it seems to me the argument that's been put forward here this afternoon is that the Minister of Finance has really screwed up; the rules don't contemplate that he's going to get absolutely no revenue out of this, and one of the reasons is that companies are going to load up with debt, and therefore the Minister of Revenue has to issue a notice saying, “You'd better enforce those GAAR rules and you'd better enforce those thin capitalization rules.”

Have you ever heard of the general anti-avoidance rules being applied to situations such as this?