Thank you, and good afternoon, Mr. Chairman and committee members.
My name is Michael Conway, and I'm pleased to present, on behalf of Financial Executives International Canada, our views on your study of the structure of Canada's federal revenue-raising system.
FEI Canada is a voluntary professional membership association comprising more than 2,100 of Canada's senior-most financial executives, organized into 11 chapters across the country.
The recommendations presented to you are the result of the collective effort of our tax committee, which comprises senior financial executives representing a broad cross-section of the Canadian economy and is chaired by Barry Gorman, who is with me today.
Our submission focuses on three key components necessary for a sustainable economic environment: competitiveness, efficiency, and accountability of federal spending.
Competitiveness is critical to the long-term prosperity, and in certain cases the very survival, of Canadian business. Competitiveness implies production with the most efficient use of resources, notably capital and labour, consistent with the desired degree of product quality, access to capital required to invest in modern machinery and equipment, increased rates of productivity, and enhanced training and education.
As demographics change, Canada faces a severe labour shortage. We must attract and retain the best and brightest talent with the know-how required to increase productivity and competitiveness. Therefore, we urge the government to implement mechanisms that support Canadian economic value creators, that encourage global development, and improve Canada's business climate.
A supportive tax system is critical to enhancing Canadian economic competitiveness. With this in mind, we submit recommendations related to three topics: corporate taxes, human resources training and development, and free flow of capital.
Let me begin with corporate taxes. We have three specific recommendations in this area.
First, accelerate corporate income tax reductions. FEI Canada congratulates the government for introducing rate reductions, but it is worthy to note that Canada's effective tax rate is still too high. FEI Canada submits that Canadian corporate taxation must be internationally competitive to make domestic business more productive and to facilitate direct foreign investment. We need only to look to numerous foreign countries, such as Ireland, that have significantly reduced their corporate taxes since 1980 as a successful means of attracting increasingly mobile capital.
Second, reduce the proliferation of non-neutral tax preferences. Some corporations claim various tax incentives as a means of reducing their statutory tax burden, resulting in significant effective tax rate differentials across industries. This disparity is heightened by the different provincial corporate tax rates and credits.
Third, encourage provinces to normalize their corporate income tax rate structures and repeal remaining provincial capital taxes.
Next, let's look at human resources training and development. FEI Canada urges the government to actively aid Canadian businesses in supporting the enhancement of employee skills and qualifications in two specific ways: first, by broadening deductible qualifying education and training expenses; and second, by introducing a refundable tax credit for qualified education and training.
Business responds to incentives that benefit operations. An employee education and training credit will spur business to increase spending in this vitally necessary area.
FEI Canada further recommends that the government establish a centre for continuing workplace education and training to stimulate development of world-class champions of continuing education, further details of which are included in our brief. This kind of program would be particularly beneficial to small and medium-sized enterprises.
Our final recommendation in the competitiveness category is the need for a free flow of capital. We urge the government to continue reducing dividend withholding taxes for non-residents, at a minimum, to the 5% and 15% model found in most new treaty negotiations. This reduction would result in minimal revenue losses, as this primarily relates to emerging economies, such as India and China, that still have higher withholding rates.
On the other hand, complete elimination of withholding taxes would provide Canadian businesses better access to global capital markets at the lowest possible cost. Thus, we would like to expand our submission by suggesting government study the feasibility of eliminating all withholding taxes.
I would now like to move to our second category of recommendations, which concern efficiency. A tax measure is efficient when it achieves its goals in a cost-efficient manner. It is FEI Canada's position that several aspects of the Canadian tax system do not support efficiency, do not blend with overall fiscal policy, and do not minimize interference with system equity.
Canada's tax system is an overly complex patchwork quilt of overlapping tax measures, regulations, and administrative practices. Consequently, compliance costs are excessive. Non-resident investors have noted that Canada has a bewildering proliferation of tax rules and multiple tax jurisdictions. Taxpayers need more stability and consistency in the tax-policy-making process and in the administration of tax rules.
To facilitate a transition to a more streamlined tax system, FEI Canada would like to highlight two recommendations. First, we recommend that the government work with the provinces to adopt a national harmonized sales tax. Many Canadian corporations transact business in multiple provinces, and there are variances in both sales tax rates and between the GST and PST tax bases. Sales tax registrants must submit sales tax returns to multiple taxing authorities and dedicate resources to multiple tax reviews, queries, and audits. In harmonized provinces, businesses receive the provincial portion of the HST paid on purchases, which is currently 8%. In non-harmonized provinces, businesses are refunded only the GST they pay, not the PST they pay on their purchases. By moving to a harmonized sales tax, businesses in the now non-harmonized provinces would be refunded all the sales tax they pay.
Greater harmonization of provincial sales taxes with the GST would enhance competition and reduce compliance costs, as taxpayers and the government would only have to deal with one tax authority. A harmonized sales tax makes for an efficient tax system. Harmonization in the Atlantic provinces appears not to have led to a decline in provincial tax revenues or to an increase in consumer prices.
FEI Canada is advocating that the GST not be reduced below its current level. If these consumption taxes were cut further, alternative forms of revenue would have to be found, and spending would have to be reduced to cover the shortfall.
Our second efficiency recommendation is to call upon the government to implement either group tax consolidation or a loss transfer system. Canada is the only G7 country that does not permit group tax reporting, either in the form of tax consolidation or loss transfer. Our research reveals that some corporations devote more than 1,000 person hours, or over half a million dollars annually, in specialist costs, devising complicated tax strategies to effectively achieve the same end result as group reporting. Implementation of this proposal will reduce the compliance costs of corporate groups. This will be especially beneficial to small and medium-sized enterprises, as they can less afford elaborate tax planning.
Our third and final category of recommendations concerns accountability on federal spending. Spending by the federal government certainly affects the revenue system, since the government must raise revenues required to pay for its program expenses and national debt charges. While we commend the government on some recent spending restraint initiatives, we note that 2006-07 program spending has increased back to its 1997-98 level of 13% of GDP, and the 2006-07 budgetary expenses are at their highest level ever. These trends are not conducive to responsible management of federal fiscal resources. Aggressive debt reduction will result in lower interest charges in future years, resulting in more resources available for either tax reductions or necessary increases in program spending.
Consider one thing: one-third of our current program expenditures are for old age security and health care, two areas we know will continue to cost more as our population ages. To meet these growing obligations, we urge spending restraint and the maintenance of the current debt reduction structure.
We encourage the government to reallocate funds in areas that lead to economic growth, notably for infrastructure funding for research and development, transportation, and post-secondary education.
Finally, FEI Canada encourages the government to implement a regular review of the tax system, which is needed to be in keeping with the principle of transparency and which will provide the opportunity to modernize Canada's tax legislation at regular intervals so as to support and preserve Canada's competitiveness domestically and internationally.
Ladies and gentlemen, FEI Canada thanks you for your time and for the opportunity to present our ideas to you. Dr. Gorman and I would be pleased to answer any questions you might have.