Thank you, Mr. Chair.
I'd like to speak to the committee about tax fairness and its impact in the north. Residents of the three territories and the northern parts of the provinces face several challenges relative to those living in southern, more populated regions of Canada.
In addition to a difficult climate and restricted access to goods and services, they usually face higher living costs because long distances from major markets add to the cost of basic goods and services. Because of these challenges employers often find it difficult to recruit and retain employees--skilled workers in general, and people in the medical profession in particular.
In 1987 the federal government introduced the northern residents tax deduction as a measure to offset the high cost of living in the territories and remote parts of the provinces. The northern residents tax deduction consists of two parts: a residency deduction and a travel deduction.
Many Canadians are aware that it costs more to live in the north; however, few realize just how much more it does cost. The single most debilitating factor facing workers who wish to live in the north is the increased cost associated with running a household.
The Northwest Territories Bureau of Statistics did a study that indicated that NWT households spend nearly $3,000 more on food, $5,000 more on shelter, and they pay $7,000 more in personal income tax than the average Canadian household. The NWT has the highest average household expenditures. Nunavut and the Yukon are tied for fifth.
Just to give you an indication of the differences in prices, I have an example of some on-sale prices that were selected from an Iqaluit newspaper. They were compared to a grocery store in Ottawa; the date of comparison was July 16, 2007. For example, Cashmere bathroom tissue, a 24-roll pack, two ply, in Iqaluit is on sale for $23.99. Ottawa's regular price is $12.99. Another example would be Snuggle fabric softener, a 946-millilitre bottle. Ottawa's regular price is $4.99; in Iqaluit it's on sale for $10.89.
Increasing these costs even more is the impact of the goods and services tax. Since the GST is a percentage of the price of the goods, increased prices mean increased real GST payments. For example, a shopper buying toilet paper in Iqaluit will pay $1.44 in GST, while the Ottawa shopper pays only 78ยข in GST. The people in the north pay almost twice the GST per item compared with people in the south.
The northern residents tax deduction study paper was prepared by the parliamentary library in January 2004. The publication number is PRB 03-52E. It gives the rationale for the northern residents tax deduction.
The first reason is sovereignty. Nation-states the world over have historically acted to secure claims over sparsely populated and isolated areas by a variety of means. In some countries and in some historical periods these attempts to secure sovereignty have meant forcibly moving people into or out of northern and isolated areas. In more recent times governments have attempted to establish and/or maintain claims to these areas by generating economic activity and providing incentives for people to locate to these regions.
Another reason is economic development. Employment in northern and isolated areas tends to be concentrated in mines, energy development projects, administrative centres, military installations, and tourism. These sectors of the economy tend to be either seasonal or subject to cyclical fluctuations, leading to sporadic demand for workers. Special tax treatment, for example tax incentives like the northern residents tax deduction, can help employers in these areas recruit and retain workers.
Another reason is regional differences in wages and cost of living. The cost of living in northern Canada and in small isolated communities is higher than in large urban centres, primarily because of higher transportation costs. Shipping goods from distant major centres via ice roads, water, rail, or air adds to the cost of basic necessities such as food, clothing, and shelter.
To entice workers to these isolated areas and to compensate for higher living costs, some firms pay their workers isolation pay in the form of above average wages or benefits, such as housing or travel benefits, or both. Combined with a progressive tax system, for example a tax that is larger as a percentage of income for those with larger incomes, these higher salary benefits lead to unequal tax treatment. Consequently, some argue that special tax treatment is required to redress this inequity.
With respect to regional differences in the level of goods and services, residents of northern and isolated areas generally have less access to specialized goods and services, particularly with respect to health care, education, and recreation. The federal government has a long tradition of supporting regions through its equalization and territorial formula financing programs, which helps provinces and territories provide basic services comparable to those available elsewhere. Those in favour of special tax treatment for northern and isolated areas argue that the equalization and the territorial formula financing programs are insufficient and need to be augmented by tax measures such as the northern residents tax deduction.
Finally, with respect to environmental hardship, northern areas typically experience long, cold winters, and they have barren terrain. Distance from major population centres adds to the sense of isolation. As noted, some employers provide additional benefits to help employees alleviate the sense of isolation. Consequently the argument is made that special tax assistance is needed so that these types of benefits, which are typically not needed in southern or urban areas, are affordable, in particular for northern residents, again with a view to attracting and retaining workers.
According to Finance Canada's tax expenditures and evaluations, in 2006 the federal government lost $135 million of potential revenue due to the northern residents tax deduction. It is estimated that an increase of 50% to the residency portion would result in an additional loss of potential revenue of roughly $50 million. This would bring the total potential revenue to $185 million, or less than 1% of the total federal budget. However, for every $1,000 the deduction is increased, it has been estimated that $3 million would be returned to the residents of the Northwest Territories alone. Further, by taking action to reduce the high cost of living in the north, more workers would be enticed to remain in the north rather than flying in and out. Having these workers remain in the north would not only assist in the economic development of the north, it would also enhance Canada's Arctic sovereignty.
At an additional $50 million, this is significantly cheaper than the proposed military spending. We are requesting an increase to the northern residents tax deduction for the first time since it was introduced in 1987.
Thank you.