Finance Committee on April 14th, 2008

[Garth Turner, Liberal, Halton, ON]

All right. Let me ask you this, based on your other comments. It seems to a lot of tax-planning professionals that the tax-free savings account will be of the greatest benefit to the higher-income earners--who've maxed out their RRSPs or have sizeable pension income--who will be able, for example, to be now sheltering $5,000 a year from, say, capital gains tax. Does that worry you?

[Prof. Neil Brooks]

It worries me greatly. Here are two fundamental things that are wrong with the plan. It stands tax equity, as we understand it in our income tax system, on its head, because the difference between these prepaid tax savings plans and registered retirement savings plans is that in these prepaid tax savings plans the income from capital is never taxed, which means that if I invest in one of these tax prepaid plans, and I get lucky, and over the course of 10 years make $2 million on my investments, that whole $2 million is free from tax. And as you probably read in the newspapers just a few days ago, there are Canadians who apparently have a quarter of a billion dollars in RRSPs, so we're not talking peanuts here.

If I put money into one of these plans and I make a million dollars, it's never taxed. On the other hand, if I put my money into savings in one of these plans and I lose money, it's never taxed. So here we have a person who's made a million dollars and a person who's lost money--both are taxed the same, namely, zero. That is inequitable.

[Garth Turner, Liberal, Halton, ON]

Yes, okay, thank you. Bad idea.

Now, Mr. Heady, it's a good idea for retirement, not a good idea for tax avoidance.

Mr. Heady, Britain has had a tax-free savings plan variety for a while. How does it differ from the one that has been proposed in Canada? I don't know if you're familiar with ours, but this is going to be a savings plan you can use. It's not related to retirement. It's not specific for any kind of goal. It just allows people to put aside money and not pay tax on it. How does that differ from the one that's in place in Britain?

[Christopher Heady]

Well, I'm not familiar with the Canadian scheme. The current scheme in the U.K. is tax free, yes. You put in money you've paid tax on and you don't pay any tax on the return, but there is quite a low limit on the amount you can put in.

[Garth Turner, Liberal, Halton, ON]

Is it open-ended or is it intended for retirement purposes?

[Christopher Heady]

No, it's open-ended. You can withdraw the money at any time.

[Garth Turner, Liberal, Halton, ON]

What's been the experience of revenue loss to the government?

[Christopher Heady]

I'm afraid I don't have the figures on the revenue loss to the government.

[Garth Turner, Liberal, Halton, ON]

All right, so we don't know the cost.

[The Chair, Conservative, Rob Merrifield]

Thank you very much.

Mr. Laforest, the floor is yours. You have five minutes.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

My question is for Mr. Heady.

You submitted several charts and statistics that establish links between tax revenues, consumption taxes and income taxes. You talked about progressive taxation and you compared various countries.

Given the study undertaken by the Standing Committee on Finance, we should ask ourselves whether our taxation practices are the best way to make Canada competitive and to enable all citizens to live adequately.

Do you know if there is data showing which countries have the fewest citizens living below the poverty line? In other words, regardless of where those countries appear on the charts, are there countries where the incidence of poverty is low, but that nevertheless have satisfactory economic growth and good social measures?

[The Chair, Conservative, Rob Merrifield]

Mr. Heady, go ahead.

[Christopher Heady]

I think it's not possible to simply look at the tax ratios and talk only about, for example, the level of income or the instance of poverty, because there are so many other things that affect that. But what you can do is compare the progress different countries are making and try to relate that to the taxes that there are. When we study this, what we find is that countries that raise a lot of their money from corporate taxes do not do as well in terms of growth as do countries that raise more of their taxes from consumption taxes.

If you're looking to change the tax system in a way that would increase the rate of growth in Canada, the logic of that experience is that you should reduce corporate tax rates and replace the revenue with consumption taxes.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

That's interesting, but I would like to go back to my question. Which countries have the most people living below the poverty line? Does the OECD have those statistics?

[Christopher Heady]

We do have statistics. I can't tell you exactly which countries were the very lowest, but I know they would include countries such as Denmark, Sweden, Finland, and probably Norway. These are countries with tax-to-GDP ratios that are considerably higher than Canada's.

[Jean-Yves Laforest, Bloc, Saint-Maurice—Champlain, QC]

That pretty well answers my question. It is fair to say that in countries with low levels of poverty, the tax system very likely reduces poverty. Those countries tax companies, individuals and consumption according to a model that reduces poverty.

I would also guess that countries with less poverty have good economic growth. That is very interesting. Thank you very much, Mr. Heady.

I have a question for Mr. Conway.

[The Chair, Conservative, Rob Merrifield]

Your time has gone, so you'll have to save it till the next round.

We'll now move on to Mr. Wallace. You have five minutes.

[Mike Wallace, Conservative, Burlington, ON]

Thank you, Mr. Chairman.

Thank you to our guests for being here today.

I'm going to start with the FEI for a moment. You represent financial executives from a corporate perspective, I'm assuming. Is that right? It's corporate issues.

[Michael Conway]

Yes.

[Mike Wallace, Conservative, Burlington, ON]

If you look at one of your things under federal spending—I agree with the majority of what you say—you've got research and development in there as one of the items where you think we could be reallocating funds. Then I look at Mr. Heady's chart, and it shows Canada from the large firms, who are sort of middle of the pack, maybe a little ahead of the pack, and from the small and medium-sized firms, who are quite invested in tax incentives for R and D.

My question is this. Where would you like to see us? What more could we be doing? Are we not doing a pretty good job in that area already? What am I missing here, based on what I'm seeing, on a comparative basis—because we're talking about being competitive—from Mr. Heady's chart compared to what you're asking for in your report?

[Michael Conway]

In our brief, we urged the government to implement mechanisms that support Canadian economic value creators. Canada needs the champions that some of the SR and ED credits, the R and D credits, which is a good system, are promoting. We look at Research in Motion as a prime example of a Canadian corporation that came from nowhere, x number of years ago, and has become a global leader today. We need more RIMs in this country. So spending on infrastructure directed.... One of our points was that we need to control the spending, as we said, for the various reasons we discussed, but we said that when we're looking at spending we have to direct it, and the direction is towards infrastructure. And within the infrastructure we've talked about R and D because it promotes the Canadian economic value creators and the training.

[Mike Wallace, Conservative, Burlington, ON]

Okay. I haven't had a chance to read your report, of course, so it's a general statement that this is an area that could use more funding. You're not saying exactly what percentage or an increase of any certain amount.

[Michael Conway]

We're saying, as we're looking at where we're spending money, spending on infrastructure that makes Canada more competitive is a good thing. Then when we start thinking about infrastructure, we think about R and D, we think about training, which is one of the reasons we've put forward the investment tax credit concept, to promote Canadian businesses, to do more training of our labour force.

[Mike Wallace, Conservative, Burlington, ON]

You're segueing into my next question.

On the human resource training and development piece, you talked about broadening the definition of what's currently deductible, introducing a tax credit for qualified education. Can you give me some concrete examples of what is not included and what you'd like to see included? General things aren't helping much.

[Michael Conway]

I don't want to get too much into details, but there's actually an interpretation bulletin that specifies that certain types of training are deductible in the current year, and other types, interestingly enough, that are longer term are considered to be of a capital nature, and they need to be capitalized and the deduction spread over years. For us, that's counterintuitive. If you're promoting training and you're increasing the value of your workers, that should be something we promote, not defer over a long period of time.