Finance Committee on Oct. 4th, 2010

[Benjamin Tal]

I think if you look at the housing market in Canada, it has basically been booming for ten years. A lot of pent-up demand has been utilized. Then over the past year or six months we have seen Canadians trying to beat the HST and have basically accelerated their purchasing borrowing activity from the future and the future has arrived. This means there will be a very non-lineal recovery in the market. That's why we believe the first half of the year was very strong in the housing market, artificially strong, and now we're going to slow down.

After a peak or after a boom of ten years, if you look at the house prices vis-a-vis income, or vis-a-vis rent, or vis-a-vis demographics, you can see that basically we were overshooting. And if we were overshooting it means we have to go down. The only question is how quickly and how much. That's why I say we're not crashing here, because we don't have the preconditions for a crash, but we definitely have the conditions for a slowdown.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Would you like to add anything, Mr. Dupuis? No, okay.

I have another question. Speaking of the demographic slowdown that was mentioned, how do you see that unfolding? We hear predictions about tens if not hundreds, if not more, removing themselves from the workforce in the next 10 to 15 years. What impact do you see that having on the Canadian economy, and what can be done to address that?

[Benjamin Tal]

Do you want to continue with that?

[Glen Hodgson]

We do long-term forecasts going up to 2030, and basically show the slowing trend of labour force growth over that period. So the first symptom would be you'd see all the boomers getting ready to retire; they'd leave the workforce. They'd maybe work half-time, but you'd have a lot fewer hours worked and overall labour force growth would slow.

As Benjamin was saying, that has a deadening impact on the overall economic growth potential. It's happening already; you can already see it happening in various parts of our economy. That's probably the reason why the unemployment rate didn't jump as high as in the last two recessions. It is that employers were worried about the fact that they wouldn't be able to find new people in the recovery period we're now in. But it's very evident if you look at the demographics that we'll be facing that slowing impact. We've seen it over the last five to eight years and we're going to see it going forward now.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

A shrinking economy?

[Glen Hodgson]

It will impact on the overall growth potential of our economy, because labour force growth and therefore consumption growth is really a fundamental piece of an economy's growth potential.

[Benjamin Tal]

That's why immigration policy is crucial. I think immigration quotas will be raised over the next ten years. That will be an economic reality in order to balance this impact.

[Carlos Leitao]

Maybe a little different note on the question of demographics. We are assuming, and it's an honest assumption, that labour force participation rates will remain the same. By that I mean that 65-year-olds will behave the same way in 2015 as 65-year-olds did in 1960, meaning they will be glad to retire, to leave the labour force and go fishing or something.

I think that maybe these days that is not a prudent assumption. I think a lot of people over 60 would like to remain in the labour force. If that's the case, then perhaps the shock that Glen alluded to won't be as severe. For all the people to stay in the labour force we need some institutional changes to allow for that in terms of retirement, retirement age, retirement benefits. For some people it might not pay to stay in the labour force if by doing so they'll miss out on some pension payments, but we should not simply assume that a 65-year-old will behave the same way his grandfather did.

[Russ Hiebert, Conservative, South Surrey—White Rock—Cloverdale, BC]

Do you have any comments on the U.S. debt levels that we're witnessing and the impact that will have on the Canadian economy?

[Glen Hodgson]

I have a commentary sitting in my computer right now addressing that very issue. I'll try to put it on our website or get it in one of the national newspapers in the coming weeks. But it's frankly shocking to see how quickly the U.S. federal debt has jumped from 6% of GDP to 80%, heading toward 100%. The states are in a horrible position. I was calling it a ticking time bomb. I think it's something we're really going to have to worry about. Unfortunately, we can't do much about it except sit back and watch and maybe get our own act together, which we've already done.

[François Dupuis]

Indeed, we are very concerned by the debt level of the United States. But the tax room in that country is among the largest in the world. Their rates of taxation are very low. As we know, Americans do not like taxes. If, one day, they hit their peak, a slight increase in the rate of taxation would probably end up reducing their debt pretty significantly. You always have to look at both sides of a problem. At least they have that advantage, right now.

[The Chair, Conservative, James Rajotte]

Thank you.

I want to thank you for your presentations and your answers to our questions.

If you have anything further you'd like the committee to look at, even on an ongoing basis—and Mr. Hodgson mentioned some reports—please feel free at any time to forward those to the clerk and we'll ensure that all members get them.

Thank you so much for your time here today.

Colleagues, I will pause for a few minutes and then we will move on to Bill S-3.

[The Chair, Conservative, James Rajotte]

I call the meeting back to order, colleagues.

The clerk has asked me to remind you that we will be at 1 Wellington tomorrow at 9 a.m. That is the new building next to the Chateau Laurier.

We have an hour set aside for the study of Bill S-3, an act to implement conventions and protocols concluded between Canada and Colombia, Greece, and Turkey for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income. We do have....

[Mike Wallace, Conservative, Burlington, ON]

We do?

Do we actually have questions, or can we move to doing...?

[The Chair, Conservative, James Rajotte]

We're expecting officials from the Department of Finance, but perhaps we'll follow Mr. Wallace's lead and just get asense of whether committee members do have questions or issues they wish to raise. My understanding is that it is a very straightforward bill and that the parties do not have too many questions.

We'll ask the officials to take a seat.

[Tim Wach, Director of Legislative Development, Tax Policy Branch, Department of Finance]

Something was happening up here and they wouldn't let us in.

[The Chair, Conservative, James Rajotte]

My understanding is that the officials do not have an opening statement.

Is it correct, Monsieur Castonguay, that there is no opening statement by the officials?

[Alain Castonguay, Senior Chief, Tax Treaties, Tax Policy Branch, Department of Finance]

That's right.

[The Chair, Conservative, James Rajotte]

Okay.

So we do have two officials from the Department of Finance.

Mr. Pacetti.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Thank you, Mr. Chair.

I just have a couple of standard questions. Is there anything unusual in the bill or different from other tax treaties that you would like to bring to our attention?

That would be the first question.

[Alain Castonguay]

These bills generally follow the OECD model and our own policy, which is patterned after the OECD model. There are a few things that are different. One of them, for example, is that the taxation of non-resident business in treaties requires a permanent establishment--that is, a substantial presence from a business in a country. In some cases, other countries will insist that the provision of services, without a permanent establishment, is sufficient presence to warrant taxation. And actually in three of these treaties we do have this provision that basically if someone comes to Canada for more than six months providing services, or goes to the other country for more than six months, then they would be taxable in that country.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

Why would this bill be introduced in the Senate rather than in the House of Commons?

[Tim Wach]

My understanding is that with tax treaties it's not unusual because it's not a revenue-raising bill. It only acts as a shield for taxpayers against taxation, so it can be introduced in the Senate.

[Massimo Pacetti, Liberal, Saint-Léonard—Saint-Michel, QC]

I have just a quick question on some of the technicalities, on the rate of withholding on dividends, the rate of withholding on interest payments, the withholding on royalty, and the periodic pension payments. Among the bottom four, interest payments, royalty, and periodic pension payments are all the same, but when it comes to dividends the rate is different for each country. Colombia and Greece are at 5% and Turkey is at 15%. In all other cases the amount varies as well. I'm just wondering why that would be, and why it wouldn't be standard for all treaty countries.

[Alain Castonguay]

That's right. Our treaty policy is to insist on a rate of 5% for dividends when they are dividends from direct investment, usually defined in treaties as investment above either 10% or 15% equity position, and 15% for other dividends.

In the case of Turkey, this is give-and-take negotiation. Their policy is to seek higher rates of withholding in countries with which they are perceived to import capital. And these are the rates that they have with countries comparable to us, like the U.K., the U.S., and others.