Finance Committee on Oct. 22nd, 2009

[Michael Rosenberg, President, Economics of Technology Working Group]

I'm Michael Rosenberg, president of the Economics of Technology Working Group, which is an independent organization that has an office here in Toronto.

The topics I want to discuss are the measurement of the economy, the productivity issues, and the effects of natural resources pricing and how that relates to climate change and carbon pricing.

The measurement of the economy is properly done using the net domestic product, which is published by Statistics Canada along with the gross domestic product. Although everybody tends to use the gross domestic product under the assumption that it equals the total output of the economy, in fact it does not. It is greater than the total output of the economy. Just as a business has to take its gross revenue and subtract certain expenses to get its profits, you have to go through a similar process with the total economic production. In fact, some of that is already done in the gross domestic product. If it weren't, the gross domestic product would be several times larger than it actually is, if you just added up everybody's revenue.

Nevertheless, it is not the final result; it is an intermediate result in the calculation. That's why it is called “gross.” It does not contain the subtraction of depreciated or depleted capital. Once you subtract that from the gross domestic product, you get the net domestic product. Obviously, the net domestic product is the actual amount of production, because if all a company does is produce enough to replace its worn-out capital and it goes on doing that year after year, it hasn't produced anything. That portion of its production is not output. Therefore it is the same thing for the entire economy.

When you measure the economy that way, you find out it has generally increased at about 1% less than the gross domestic product numbers would indicate, or, when the economy is shrinking, it goes down at a 1% rate more than would be otherwise indicated. Furthermore, when you calculate in terms of per capita, which is what you really want to know in terms of how well the economy is doing, that's an extra 1%.

Generally speaking, we've had a number of small recessions that were never reported, and during this recession it has been much larger than as reported. So far there's been one quarter of data since the submission I made, so I can now say that the decline in this economy has been 9.5%. That's almost 10% of production that was going on a year ago that's not going on now.

That's as large as the 1990s recession and much larger than the 1980s recession. The point that this leads to is that productivity has not been increasing since the mid-1970s. There's been a certain number of ups and downs in the economy related to how many people are working at any given time, but there has not been any improvement in productivity. The effects of technology on productivity are generally to add a lot of additional expenses.

Once those are considered by considering the capital cost, which is what I'm emphasizing here, you find out that basically for all of the technological advances we have, at best it's been somewhat neutral over the last 30 years. We are now heading into a period of resource limitations, which means that with all of those resources being used up in technological and capital developments, the actual prospects are for productivity to decline as less is available for actual output. This is the first recession in which productivity has actually declined, so the decline in the economy during this recession has been partially due to a decline in productivity and partially due to fewer people working. In the past it's been only because of the decline in the number of people working. We are in a diminishing return situation.

Lastly, on natural resource pricing, I just want to give you the thought that a cap and trade system or anything else that puts a price on carbon is not a harm to the economy. It's not like people are saying that we have to do this to save the environment and it may cost something to the economy. That's not how you should think of it. You should think of it as, if we continue to emit carbon, we're doing real physical damage that will reduce the economy in the future. Therefore, to price that into the price now will actually improve the economy because of the allocation that it results in.

[The Vice-Chair, Liberal, Massimo Pacetti]

I'm going to leave it at that. Members will have time to ask questions later. I just want to get through the presentations from everybody.

From the Tax Executives Institute, we have Ms. Pollock or Mr. Penney.

Ms. Pollock.

[Sherrie Ann Pollock, Vice-President, Canadian Affairs, Tax Executives Institute]

Good afternoon, everybody.

My name is Sherrie Ann Pollock. I'm head of tax for RBC Dexia Investor Services. I'm here today on behalf of Tax Executives Institute as its vice-president for Canadian affairs.

With me is David Penney of General Motors of Canada, the institute's secretary.

The Tax Executives Institute is the pre-eminent global association of business tax professionals, with 7,000 members working for 3,000 of the largest companies in Canada, the U.S., Europe, and Asia. My comments today are informed by both TEI's Canadian members and others whose firms have significant operations and investments in Canada.

We believe TEI's recommendations for tax policy and administrative changes will maintain or improve the competitiveness of the Canadian tax system, thereby fostering economic efficiency, growth, and job creation.

During the past eight years, the federal government has increased Canada's competitiveness in the global marketplace by reducing business tax burdens from a high of 29.12% in 2000, to 18% this year, to 15% by 2012. Canada's federal corporate income tax rate is on course to be the lowest among the major industrialized nations. Although Canada is not immune to global recessions, the scheduled reductions in the corporate rate, combined with the elimination of burdensome capital taxes such as the federal capital tax and corporate surtax, have mitigated business cutbacks in Canada and tempered the severity of the downturn for Canadians.

We urge the government to stay its course or accelerate the schedule of corporate income tax rate reductions. The standing committee should ensure that other countries do not leapfrog the Canadian timetable.

TEI commends the federal government for undertaking initiatives to encourage the provinces to promote Canada's competitiveness and improve the administrative efficiency of the provincial tax systems. Many provinces have followed the federal lead, reducing income tax rates and eliminating or reducing their capital taxes. We urge the standing committee to continue working with the provinces to eliminate the last vestiges of provincial capital taxes.

In addition, TEI supports harmonization of the provincial and federal sales tax systems. Substituting a value-added tax system for provincial retail tax systems promotes a more neutral and competitive business tax environment by eliminating cascading taxes on business inputs. Hence, we are pleased that Ontario and British Columbia are substituting a federally harmonized VAT system for the retail sales tax regime, but we oppose the proposed temporary restrictions on large corporations for claiming input tax credits for the provincial component of certain expenses.

Moreover, to be fully effective, we recommend that financial services be zero-rated under the federal and provincial systems, just as they are under the Quebec sales tax regime. Thus, TEI encourages the government to work with the provinces to expedite the implementation of a fully harmonized system.

To this end, we've consulted with the Ontario and British Columbia governments about the implementation of the harmonized system. We remain ready to consult further with the standing committee, the Department of Finance, and the non-harmonizing provincial governments about crafting a workable, fully harmonized system.

Finally, to enhance the competitiveness, efficiency, and fairness of Canada's tax system, the government created the Advisory Panel on Canada's System of International Taxation. The advisory panel released its final report on December 2008 and endorsed several TEI recommendations. We highlight three for the committee's consideration.

First, TEI supports the elimination of all withholding taxes. Thus, we applaud the January 1, 2008, elimination of withholding taxes on all outbound interest payments on arm's-length debt and the provision, in the protocol to the Canada-U.S. treaty, for eliminating withholding taxes on non-arm's-length interest payments by next January.

More is needed, however, to ensure that Canadian businesses have access to global capital markets at the lowest possible cost. Since 2003 the United States has negotiated a nil withholding rate for dividends to group companies with several countries. TEI believes the standing committee should ensure that Canadian residents have the same benefits that residents of other U.S. treaty partners have so that they can effectively compete for increased capital investment, exports, and jobs.

To reach the government's goal of having the lowest effective tax rate among the G-7 group, we urge the standing committee to embrace the advisory panel's recommendation to eliminate withholding taxes and dividends to related group companies through bilateral negotiations, beginning with the U.S. treaty.

Second, to improve access to skilled services, the government should repeal the withholding tax requirement under regulations 102 and 105, especially in respect of payments to U.S. service providers. The advisory panel report discusses the pros and cons of the withholding regimes and recommends that the current system be replaced with a system whereby non-residents self-certify their eligibility for reduced withholding taxes. As important, the advisory panel recommends that the requirement to withhold taxes on services be eliminated where the non-resident service provider certifies that it is exempt under a treaty, such as the Canada-U.S. treaty. We urge the standing committee to implement the advisory panel's recommendations.

Finally, TEI urges the government to consider a broader, or even a full, exemption system for dividends from active business income from foreign investments. A broader exemption would enhance the inherent economic advantages of foreign investments at significant savings to taxpayers, because the cost of complying with complex foreign-affiliate tracking and reporting rules would be eliminated or substantially reduced.

In conclusion, TEI commends the standing committee for holding pre-budget consultations.

On behalf of TEI, thank you for the opportunity to participate. Mr. Penney and I will be pleased to respond to any questions you may have about our recommendations.

[The Vice-Chair, Liberal, Massimo Pacetti]

Great. Thank you.

From the Woodcliffe Corporation, we have Mr. Oberman.

[Paul Oberman, President and Chief Executive Officer, Woodcliffe Corporation]

Thank you, Mr. Chair.

I'm president and CEO of Woodcliffe Corporation, which owns one of the largest portfolios of heritage properties in Canada. You have before you today copies of our written submission, which I hope you've had an opportunity to review--or will, if you haven't--as well as a list of the municipal tax relief programs for heritage properties currently in operation across the country.

I understand this committee is interested in programs that will be quickly and significantly stimulative economically and provide good value to taxpayers relative to their costs. Our proposal is to modify existing heritage property tax relief programs, or HPTRs, and to create a new federal agency that will manage these programs for profit to the government.

There are currently HPTRs operating across Canada, with the exception of Nunavut and the Northwest Territories. Quebec has programs in all of its municipalities that provide realty tax rebates of between 25% and 50%. Of the remaining 50-odd municipalities across the country, approximately 60% are in Ontario, where rebates of up to 40% are available.

However, none of the programs have been particularly effective to date because they are not coordinated and they provide insignificant financial benefits to property owners. If owners of qualifying properties were permitted to direct proceeds of rebates to lenders over a long period of time, they would be able to borrow sufficient sums at attractive rates to properly restore and maintain their heritage properties. We propose the creation of a new federal agency to coordinate heritage programs across the country and to act as a clearing house, receiving and directing realty tax rebates without incurring any direct financial liability. We believe the proposed program would be cost-neutral and that the monetary profits it will generate can be shared by all three levels of government on an equitable and non-competitive basis.

It's far more expensive to restore and properly maintain a heritage property than it is to demolish and rebuild it. These increased costs and inconsistent regulations act as an obvious disincentive to the private sector. However, a well-coordinated HPTR program can provide significant economic benefits to property owners by bridging the delta between cost and value, and it has the ability to generate significant profits rather than costs to the government.

Aside from appropriate guidelines, what's really missing in the current program is the ability to receive and direct rebates over a sustained period of time on an assured basis. If property owners knew that these benefits were available over a long period of time, provided the specific and uniform guidelines were adhered to and independently certified, and that they could assign the receipt of rebates to institutional lenders as security for financing, they would line up to hand over heritage easements and perform work that would ultimately increase the value of their respective properties.

If lenders knew that rebates were receivable over a sustained number of years and that a federal agency would ensure that payments were properly directed, they would likely lend against these revenue streams at CMHC-equivalent rates. Needless to say, these lending rates are amongst the most favourable in Canada and institutional funds would be readily available.

To be clear, what's proposed is that property tax rebates would be directed by this new agency only to the extent that they are received, since the payment of realty taxes ranks ahead of all other obligations against real property, including mortgages. The federal agency would merely have to act as a clearing house and would not incur direct financial liability.

In exchange for its services, the agency would be entitled to charge fees, perhaps as a percentage of loan amounts secured by the funds that are directed. It's estimated by Heritage Canada that there is currently $8 billion to $10 billion of restoration and deferred maintenance work to be performed across the country. Since the bulk of the cost associated with restoration and maintenance is expended on skilled labour, significant levels of job creation can also be expected. Aside from the fees chargeable by government, increased realty taxes, GST, HST, VATs, as well as significant levels of both corporate and personal income taxes would also be generated.

The amounts of realty taxes that would be rebated by municipalities would ultimately equate to deferrals, since under market value assessment, property taxes would increase exponentially as a result of the restoration work performed. Time doesn't permit me to get into specific examples of how funds would flow, but I can tell you that from our experience, which is considerable in these matters, the economic model is sound and sustainable.

The Richard Ivey School of Business at the University of Western Ontario is currently working on an analysis of our proposal as well as specific recommendations for implementation. Certainly they'd be delighted to share their report with you.

In conclusion, our proposal is to create a new federal agency that would coordinate HPTR programs at the national level. This agency would direct realty tax debates to property owners and/or lenders when and if received and would therefore incur no financial liability to the government. The proposed program would be cost-neutral, would likely generate significant profits for all levels of government, and would create immediate and significant financial, environmental, and cultural benefits for all Canadians.

Thank you.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

We are now going to Opera.ca, with Ms. Hargraft.

[Jane Hargraft, General Manager, Opera Atelier, Opera.ca]

Good afternoon.

My name is Jane Hargraft, and I'm the general manager of Opera Atelier, which is a $2.5-million opera company located in Toronto. It produces two operas per year and tours internationally every two to three years.

I'm joined by David Ferguson, who is the chair of the Canadian Opera Company, a $34-million company also located in Toronto that produces seven operas every year.

We are here as volunteers speaking to a brief submitted by our member associations. The executive director could not be here today. We will be speaking for opera companies large and small, composers, singers, directors, librettists, musicians, dancers, and audiences. We are all part of Canada's $46-billion creative economy.

On behalf of myself and Mr. Ferguson, I want to thank you for the opportunity to meet with you today.

Before we begin, we'd like to thank the Government of Canada for its sustained investment in arts and culture, including the recent permanent $30-million increase to the Canada Council for the Arts and the five-year renewal of important programs of support at Canadian Heritage.

We have three recommendations that are consistent with those of our colleagues in other performing arts sectors. The first is to increase the base budget of the Canada Council for the Arts by $120 million over three years. The second is to invest $25 million in a market development program. The third is to increase the federal tax credit to 39% for donations over $200 and under $10,000.

[David Ferguson, Chair of the Board of Directors, Canadian Opera Company, Opera.ca]

Opera Atelier and the Canadian Opera Company support the broader opera sector's call on the federal government to build on its current investments in arts and culture by increasing the base budget of the Canada Council for the Arts by $120 million over three years.

This would ensure, first, the sustainability and growth of this sector that is so vital to the overall economy and, second, the continued access of all Canadians to the arts. Even with the recent and much-appreciated increase in support for the Canada Council, federal investment has not kept pace with either the growth in cultural expression or the increasing cost of production.

The Canada Council currently funds Opera Atelier at 8% of its operating budget and the Canadian Opera Company at 6% of its operating budget. Nationally, the average support of the Canada Council for the Arts of the operations of opera companies in Canada has decreased 4% over the last decade, from an 11% average to the current average of 7%. In the same period, the consumer price index has increased by 23%.

Decreases in the proportional support of the Canada Council mean different things for different companies. Now in its 60th season, the Canadian Opera Company has a long history of producing opera of the highest artistic standards. We're recognized around the world for our new opera house, the Four Seasons Centre for the Performing Arts, and for the innovation and risks that we have historically been able to take. Our innovations include the introduction of surtitles designed by the Canadian Opera Company to increase accessibility and now used by opera houses around the world. We have taken artistic risks such as this season's highly acclaimed production of The Nightingale and Other Short Fables.

Yet our ability to take these artistic risks and develop further innovations in our field is often hindered as we seek to do more with less. Opera companies in Canada are sensitive to escalating ticket prices. Even though at the Canadian Opera Company, for example, box office revenues from entirely sold-out seasons cover only 40% of our annual costs, the Canadian Opera Company remains committed to maintaining accessibility by minimizing ticket price escalation. Increased investment in the Canada Council for the Arts by the federal government will allow us and other opera companies in Canada to maintain ticket prices at an affordable level.

As the largest producer of opera in the country, the Canadian Opera Company has a national leadership role to play in the development and sustainability of this art form and its accessibility for all Canadians. A significant increase to the grant by the Canada Council for the Arts would aid the company in fulfilling its national role through innovative programs such as cinecasting into theatres across Canada and providing smaller Canadian communities with access to Canadian Opera Company productions.

[Jane Hargraft]

Opera Atelier is a unique and world-renowned company that specializes in baroque and early classical opera and dance. We have toured over the last 25 years extensively in Europe, the United States, and Asia, most recently in Korea.

We support the recommendation made that the Government of Canada invest $25 million in a market development program that will help connect Canadians to arts and culture, and help export-ready Canadian cultural products reach the global marketplace.

When Opera Atelier tours internationally, we act as cultural ambassadors and share Canadian values with the world. In addition to giving us a role as cultural ambassadors, cultural touring really gives Canada a trade advantage in a competitive global economy.

When we were in Asia, for example, Canadian companies were there, too, companies like BMO Financial Group and Sun Life Financial, sharing Canada's cultural exports with potential global partners and aligning these partners at the level of values. In a competitive marketplace, shared values become a tangible trade advantage.

We tour to less developed markets or to markets where there is a great deal of government support, and when we do this, almost always this means that the presenters, the people who are presenting us, cannot cover the full costs of our unionized musicians and artists. But these markets are exactly where corporate Canada is developing their shareholder value and where we can support the development of Canadian businesses abroad.

[David Ferguson]

Our brief also supports the recommendation put forward by Imagine Canada to increase the tax credit on private donations to 39% to incent more giving by middle-income Canadians.

Time doesn't allow us to provide further elaboration on this recommendation.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you.

The members will have seven minutes for questions and answers. The seven minutes are for both you and the member.

Mr. McCallum.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you, Mr. Chair.

Thank you all for joining us this afternoon.

I'd like to begin with a question to Mr. Galloway and, I think, Ms. Wilding too.

Mr. Galloway, you mentioned payroll taxes in your brief and possible reductions. But as you may know, the latest government budget document foresees substantial increases in employment insurance premiums, beginning in 2011, to the point where for a two-earner family, the additional cost would be $1,200; and for a 10-person firm, the additional cost would be $9,000.

We all agree, or at least I believe—I won't speak for the others—that employment insurance should be balanced over the cycle. But there are different ways of defining the cycle, and the proposed increases are quite substantial; the curve is steep. An alternative would be to have lower increases in employment insurance and to take a longer time, more years or a more gradual approach, to balance the fund.

Given that the Toronto Board of Trade has many business members and that Mr. Galloway has mentioned it, my question to you is whether, from your point of view, you would prefer to see these abrupt increases in EI premiums or more gradual ones.

[Carol Wilding]

Brian has done more work on this. The specifics of EI reform is not an area we came here to speak to in any depth today.

[Brian Zeiler-Kligman, Director, Policy, Toronto Board of Trade]

Certainly it's not one that we've had extensive conversations on with our membership. But as an initial stab at what you asked, a smoother increase would be preferable to a sharp spike, particularly when many of our members are still feeling the effects of a recession.

[Bill Galloway]

From our perspective, we believe the government has various levers available to it within the EI system to strike the right balance in terms of what's necessary.

I think from a practical point of view, trying to have a more measured approach to it over time, to allow us to get out of this cycle, would be something we would see as beneficial. At the end of the day, the fund has to be balanced and has to work for Canada.

[John McCallum, Liberal, Markham—Unionville, ON]

Maybe the Tax Executives Institute, since you're the experts on tax, has a view on this?

[Sherrie Ann Pollock]

Sure, I guess I have a view on this one.

To echo Mr. Galloway's comments, generally speaking business isn't usually in favour of sharp spikes; they tend to want to take the long view of things. So if you take the long view and implement it over time, I think that would be our preferred approach. But ultimately you do have to balance it, at the end of the day.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

Let me now change the subject to opera. I like this idea of supporting opera—and not just opera, but Canadian arts—in terms of a market development program that you describe, partly for its own sake but also because it can reinforce diplomatic or economic efforts, particularly in Asia. We believe Canada should become more closely attached to China, India, and Asia because that's where the growth is. I think what you're talking about might complement that.

But can you describe to me essentially how this would work? How would the $25 million be spent?

[Jane Hargraft]

The proposal in the briefing documents suggests that about half of that would go to touring. It goes two ways. One way is to bring presenters here to Canada to see the product so that they can then book at such things as the Hong Kong festival and Singapore. Beijing has all these fantastic new facilities that they need to program. So they can see the product here and know what they can then bring.

The support for opera, for example--because that's what I know--is extremely expensive. Typically what we've seen is that presenters in Asia can cover about half the cost. We obviously don't expect to go without getting private funding, and that's where companies will support us, particularly companies like BMO and Sun Life, who are very active and know that when we are there they have a prime opportunity to align on a values base.

So the program would work. Doing it through the Canada Council I think would be really useful because it's juried. They can go on artistic merit, and really it's highly respected by the arts organizations. That would be great.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you.

I think I have time for one more question to Ms. Wilding.

This is about your brief. Speaking about the Canada-Ontario Immigration Agreement, my riding is Markham—Unionville, which is one of the most multicultural ridings in the country, so I can attest very strongly to the importance of measures to help new Canadians integrate, especially but not only with regard to language.

Maybe you could tell us, since you emphasized this as one of your three points, from the point of view of your members, why do you rank this so high? I mean, I totally agree with you, but why do you rank it so high in terms of your thinking?

[Carol Wilding]

From the perspective of...and to your point, which is when we look at the immigrant population—as I said, referencing some of the RBC studies and others—the actual productivity of that force and its contribution economically and in other ways is just not being leveraged. We haven't effectively integrated them into the workforce in a productive way. They represent a huge talent base for us that we're not utilizing effectively.

So the opportunity that's here with this fund is to integrate them much more quickly. They are the ones who are actually suffering, as well, in particular in this economic situation, and then when you look at the settlement patterns in terms of where they tend to gravitate initially for settlement and then move outwards.

So the rationale is there. The challenge is that there are capacity constraints such that we can't seem to flow the funds.

[John McCallum, Liberal, Markham—Unionville, ON]

Thank you very much.

[The Vice-Chair, Liberal, Massimo Pacetti]

Thank you, Mr. McCallum.

Mr. Bob Dechert, you have seven minutes.

[Bob Dechert, Conservative, Mississauga—Erindale, ON]

Thank you, Mr. Chair.

Ladies and gentlemen, thank you for your presentations and for taking the time to share your views with us.

I'd also like to start with Ms. Wilding.

It's good to see you again. Although I represent the city of Mississauga, I was also a member of the Toronto Board of Trade for many years while I was in the practice of law here. I know about the good work that the Toronto Board of Trade does to promote industry and the economy of the whole GTA region. So thanks very much for that.

I also would like to focus, as Mr. McCallum did, on your recommendation number two. It's very important. I also represent an area with a high percentage of new Canadians and see some of the problems.

Specifically, you suggest in your brief that we should include money to create an integrated suite of programs and supports for small and medium-sized employers to build their capacity to attract and retain skilled immigrants. Can you expand on that a little and tell us what exactly those kinds of programs are that you're recommending? And what percentage of that $920 million do you think we should be targeting at those kinds of programs?

[Carol Wilding]

I'll address it generally and then pass to Brian.

A large portion of our base of members are in the SME market, in the small to medium-sized market. They are creators of a lot of the economic wealth in the economy. We know in discussion with them that they haven't been able to access and integrate the immigrants in a way that maybe the resources of some of the larger enterprise companies do. So we're looking for more of the opportunities in terms of being able to get them.

We in particular have one initiative under way. That's not what I'm saying the funding is for, but that's the kind of thing that we—