Finance Committee on May 5th, 2009

[Thomas Mulcair, NDP, Outremont, QC]

Mr. Chair, my question is for Mr. Baker. And moreover, I wish to thank him for a most clear and straightforward presentation. As a prefatory remark, allow me to indicate that I do not seek to draw him onto political terrain. I have too much respect for his position. We can deal with the political matters.

From a technical and administrative perspective, I would like you to help us understand something. I had the opportunity to meet with several former employees of companies like Nortel and JDS Uniphase. These employees are now being taxed for the first time on phantom income. A while back, they purchased shares from their employer, at the cost of, let's say, $15. These are stock options. The value of these options rose to $115 a share, but they never saw the return. They were taxed for the first time and forced to pay hundreds of thousands of dollars, in some cases, although the stocks were worth nothing. Were it not for the fact that these shares were being offered by the employer, they would have been able to deduct capital losses. Yet, they do not have this right.

In fact, the imminent bankruptcy of Nortel means that it will be in deemed disposition. Employees will be taxed a second time. Similar cases in the United States have led to suicides. The United States resolved this problem. Here in Canada, a few dozen or so employees of JDS Uniphase in British Columbia are protected through an agreement with your department. These employees have been spared these problems, and never had to pay these taxes. Meanwhile, many other people living in the Ottawa region are grappling with this very problem.

I do not seek to draw you into the political arena, but I am trying to understand how an agreement was reached with some employees living in Minister Lunn's riding, whereas other employees in the identical—and I emphasize identical—situation in the Ottawa region are not receiving the same treatment.

At an administrative level, how was such an outcome possible?

[William Baker]

Firstly, this is a matter of tax policy. Our responsibility within the agency is to administer the act. As concerns certain employees located in British Columbia, the government chose to deal with that case differently. It is a decision that must be made by government. It is, otherwise, incumbent upon us to enforce the act as it is worded.

[Thomas Mulcair, NDP, Outremont, QC]

I am not sure that I understand all of the nuances of your explanation. You state that this is a government decision, but you are the government. You embody the state. By definition, you are the top civil servants.

You are appearing before us today and I am asking you a question on how you administer the act. You are right to point to the nuance. We are the ones responsible for lawmaking. I'm not asking you what you would do, if you were in our position, to amend the act.

You are responsible for enforcing legislation once it is enacted; therefore, how is it possible that employees of JDS Uniphase, in British Colombia, are subject to a diametrically opposite decision? Nortel employees based in Ottawa and JDS employees based in British Columbia had exactly the same problem, but did not receive exactly the same treatment by public administration. That, Mr. Baker, is my question.

[William Baker]

Again, I'll just repeat. The tax treatment of stock options and stock purchase plans is clear under the act, and we administer it in accordance to that. Any change in light of economic developments or economic distress would have to be considered by the Minister of Finance, if they wish to change the act. Now, the government has the provision, through the remission order process, to make specific decisions in cases where it deems that some type of relief is required. That is available through a statutory process, the remission process. That would be the mechanism. That is not a decision I or officials in the Canada Revenue Agency would make.

[Thomas Mulcair, NDP, Outremont, QC]

We understand each other in that one of the foundations of our society that is based on the rule of law is that the law applies equally to everyone. Now, governments can decide that a remission order will apply in a certain case, but it is the fundamental nature of our society that the same rules apply to everyone in exactly the same situation.

For the third time, I'm trying to understand how it is that with employees of JDS Uniphase in British Columbia we have remission orders and one treatment with regard to their stock option process, and we have other people, notably with Nortel here in the Ottawa region in particular, where they've already been banged out, many of them for several hundred thousand dollars up here; and now that Nortel is about to go bankrupt, they're going to get hit again for several hundred thousand dollars because of the deemed disposition.

How is it possible, in a society based on the rule of law ,to have different treatment for identical situations based on the same statute? That's my question for you, Mr. Baker.

[William Baker]

The Canada Revenue Agency has in certain areas some discretion. I'll give you a different example completely. For instance, we've used the authority we have to extend the filing season for victims of the Manitoba flood. They have until the end of May to file their tax returns, and that's something we have as a discretionary authority. When it comes to a different interpretation or a different application of the law, that's a decision of the government, and our job is to administer that decision.

[The Chair, Conservative, James Rajotte]

One minute, Mr. Mulcair.

[Thomas Mulcair, NDP, Outremont, QC]

I'll ask it another way, and again, I'm mindful of not drawing you onto my turf of the politics of it. But I will ask you this: can you name me one other case that you know of where people who are in different parts of Canada, who have an identical revenue situation, have totally different treatment from their government? Do you know of any other case?

[William Baker]

Certainly I'm not equipped to respond to that. I'd have to look at it. We've had tax administration now for 90 years, and I'd have to see if there are examples--

[Thomas Mulcair, NDP, Outremont, QC]

Would you get back to us if you find any?

[William Baker]

--but I'm certainly not aware of any as we speak.

[Thomas Mulcair, NDP, Outremont, QC]

Neither am I.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

We'll go to Ms. Hall Findlay, please.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you very much, Mr. Chair, and thank you very much, everybody, for being here this morning.

I want to follow on some of the questions from my colleague John McKay on TFSA. This follows a number of questions that I had actually been pursuing in the government operations committee as well. It has to do with the cost of the program, the $19 million to $20 million. We asked quite a long time ago, when the forecasting was done, how many taxpayers did it involve? In establishing the estimates that this program would cost $20 million, if I remember correctly, a significant portion of that was implementation, then some portion of it was advertising.

I have another question, because my understanding is that there was an additional advertising component, in addition to the $20 million, but I remember it was in Finance. So that's another question. But we never really got an answer as to how many taxpayers were expected to take up this program in order to establish a forecast of $20 million to implement it.

[William Baker]

Mr. Chair, I do believe we actually did reply to the committee, and the figure was eight million. The estimate was based on eight million Canadians opting to open up tax-free savings accounts. That information was a follow-up, so we would have provided that in the weeks following our appearance on supplementaries (B) in February. So eight million was the figure that went into the design calculation to set up the administration of the tax free-savings account.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Thank you very much. That confirms the response.

Now that we're into the tax filing season--and I know it's too early to confirm--do you have a sense, given the economic situation, of whether that's in line with what happened?

[William Baker]

Frankly, it's way too soon to tell, because people can operate up to the end of the year to do this. I suspect many will. They'll see what their overall economic situation is, as often people do when they make contributions to RRSPs. It's often done at the last minute, when they decide whether they can afford it or not, or what's in their best interest. So that question will have to wait, I think, until we get through the current year to have a reasonable answer for you.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Okay.

To another part of this, earlier the response was that the estimate of forgone revenue was about $2 billion a year. In those forecasts, because we don't know yet, someone will have to have done an analysis to determine that as an estimate. To determine that, I'm assuming one would need to have some idea of the average income of the people who would be taking advantage of it and to what extent. So zero to 5,000: can you give me some idea of that number? What's the average income, or perhaps not even the average but the median? What are the numbers that you used in the forecast in terms of the nature of the taxpayer who would be most likely to take advantage of this program? Obviously you can't answer the fact, but in the forecast...?

[William Baker]

Certainly, as indicated earlier, the forecast would have been developed by our colleagues in the Department of Finance. With your permission, perhaps they would be better able to respond to that.

[Martha Hall Findlay, Liberal, Willowdale, ON]

Sure. We'll open that up.

[Brian Ernewein]

Thank you.

To answer the revenue estimate question first, and to fulfill the undertaking to come back to the table on that point in response to Mr. McKay's question, budget 2008 did include the revenue estimates for TFSA.

Very quickly, in 2008-09, there's a relatively small amount of $5 million, growing, as tax-free savings grow of course, to $50 million for 2009-10, $190 million for 2010-11, $290 million for 2011-12, and $385 million for 2012-13. In the budget, it says that the cost expressed “relative to the size of today's economy” is expected to “grow to over $3 billion annually”. So it is a program, of course, where, as the savings grow on a tax-free basis, the costs would grow.

You asked about the methodology used to determine that. We do have profiles as to the various sorts of income levels, and of course consequent tax payable at various income levels, but again, this relates to the 2008 budget, and I'm afraid I don't have any of that material with me today to share.

[The Chair, Conservative, James Rajotte]

You have 20 seconds.

[Martha Hall Findlay, Liberal, Willowdale, ON]

The reason for the question, if it's not politically obvious, is that there is a concern that this program will have cost a great deal of money, both in terms of implementation--and I'll have to wait for the next round to hopefully ask more questions about some real concerns about the very high costs of implementation--and in terms of the significant proportion allocated to advertising when the private sector is doing it. But specifically--

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Hall Findlay.

[Martha Hall Findlay, Liberal, Willowdale, ON]

--it's the high-income people who will take the most advantage of this.