Finance Committee on Oct. 19th, 2010

[John Dickie, President, Canadian Federation of Apartment Associations]

Good morning. My name is John Dickie.

The CFAA represents the owners and managers of close to one million rental homes across Canada through seventeen local and provincial associations. One of our members is the Saskatchewan Rental Housing Industry Association, which you'll hear from shortly, but they are an independent entity and are located, as the name indicates, in the west, whereas our head office is here in Ottawa and my personal experience is in Ontario and Quebec, where I've spent my life.

The submission that CFAA gave to you is still one we would advance. In addition, I provided some documentation to the clerk this morning, which has the French version after the tab. The reason for providing this extract, this new documentation, is that this is from a report we commissioned and which was just issued a few short weeks after the deadline for submissions to the committee. So I'm going to be referring to extracts from a report prepared by Frank Clayton, PhD and urban and real estate economist, who addresses government subsidies to homeowners versus renters in Ontario and Canada. The extracts simply relate to Canada, since this is a federal committee. I want to point out to you the different way in which the tax system deals with homeowners as opposed to renters.

Dr. Clayton looks at both direct spending and tax expenditures. His key finding, which I found fairly startling, and I think you may find it startling as well, is that through the tax system and program spending the federal government delivers subsidies to homeowners on average of $1,823 a year, while to private renters the average is $308 a year, so one-sixth as much. This is despite the fact that homeowners have roughly twice the income of renters on average. We allege that we have a progressive income tax system. In this regard, the tax system is not particularly progressive. If anything, it works in a regressive manner. The CFAA would like to address that.

What is included in these subsidies that Dr. Clayton has studied? He has included direct spending, but also tax expenditures. A tax expenditure, I'm sure you all know, is a tax provision that deviates from a normative or a benchmark within the system. It can take the form of an exclusion, an exemption, an allowance, etc., rebates and so on. The example you are probably most familiar with is that the capital gain from the sale of a principal residence is exempt from capital gains taxation, whereas on the rental side, when a rental property goes up in value that increase in value is taxed. The landlord cuts a cheque to the government, but fundamentally since this is such a competitive industry the tenants are having to pay that tax through their rents over time.

At the bottom of page 3, or page 4 in the French version, there's a listing of the different sources of this large subsidy to homeowners. In total, Dr. Clayton estimated that the subsidies for private housing are $17 billion. Homeowners are the beneficiaries of 93% of that amount. Renters are the beneficiaries of 7% of that amount, despite making up 31% of the population.

What does CFAA want done about this? First of all, we ask the government and Parliament to recognize that this situation exists and to keep it in mind when designing new tax provisions. Secondly, we ask the government to pay attention to this situation when new programs are designed. Things like the homeowner renovation tax credit, which has just been concluded, gave more than $3 billion to homeowners and not a penny to renters, which made the situation worse. So we're saying that when programs are designed they should be designed so they provide benefits to renters, not just to homeowners. The third thing we ask is that both the government and Parliament gradually improve the tax situation of renters. That means a variety of things, the first one of which we have on the table, which is a tax deferral when a property is sold and then another one is purchased. That is addressed extensively in our main submission.

I thank you, and I will look forward very much to questions.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll now hear from the Saskatchewan Rental Housing Industry Association.

[Diana Mendes, Spokesperson, Saskatchewan Rental Housing Industry Association]

Good morning.

My name is Diana Mendes. I am here today as a spokesperson for the Saskatchewan Rental Housing Industry Association, or SRHIA. Tyler Stewart, SRHIA's director, was slated to speak at a session of this committee that was to take place in Saskatoon. Unfortunately, that session was cancelled, and he was unable to travel to Ottawa, so I am here in his place.

SRHIA represents the Saskatchewan rental housing industry. SRHIA is also a member of the Canadian Federation of Apartment Associations.

For many years in Canada, public policies at all levels of government have promoted home ownership. Most recently, in the 2009 federal budget, homeowners were given billions of dollars under the home renovation tax credit, while renters were ignored. However, most low-income Canadians are not homeowners, and the larger part of income tax benefits of home ownership do not accrue to low-income households even if they are homeowners.

The current tax position means that Canada’s housing markets are not providing the housing opportunities in the rental sector needed by households with low and moderate incomes, and by people who move between cities. Excess home ownership inhibits labour mobility and raises unemployment rates.

In order to move toward a balanced housing policy, we suggest that the budget should provide improved tax rules for rental housing to move the tax position of renters closer to that enjoyed by homeowners. In the 2011 budget, the improved rule should be a tax deferral of capital gains and recapture of CCA when rental real estate is sold and another property of equal or greater value is bought within 12 months. Allowing this tax deferral on real estate sale and reinvestment would reduce the cost of rental housing and improve affordability of the housing supply. It would promote efficient capital allocation across the economy. It would promote more compact, environmentally sound urban redevelopment. It would help small investors, middle-income families, as well as seniors. It would permit relocation by owners and managers, and reduce absentee ownership. It would level the rules between rental property and other businesses, level the rules between businesses that rent and those that own their premises, and level the rules between rental property and shares in companies.

The deferral cost of the proposal is reasonable. The federal government revenues that would be deferred by the proposal in the first year after implementation are approximately $450 million. In the years that follow the first year, the direct deferral amount should decrease, given that taxes payable, deferred from the first and subsequent years, would appear as an additional tax payable thereafter.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now start members' questions with Mr. Szabo, please.

[Paul Szabo, Liberal, Mississauga South, ON]

To the last presenter, I must admit that on the issue with regard to people who aren't homeowners, if the whole idea of the home renovation credit was to stimulate spending and job creation, etc., it didn't matter who purchased it; renters should have been able to participate, I would have thought.

However, I want to spend my time with the Edmonton Chamber of Commerce.

Do you consider EI premiums to be a tax?

[Rick Hersack, Chief Economist, Edmonton Chamber of Commerce]

Yes, we do: a payroll tax.

[Paul Szabo, Liberal, Mississauga South, ON]

They're a tax. Okay.

I'm looking at the August 13 submission you made, which indicates that you'd be updating or expanding upon it this fall. I want to know your view, coming from a major municipality, on the stimulus program and the concern about projects that are started but may not be completed by the March deadline, and what impact that might have on a city like Edmonton.

[Rick Hersack]

Although we don't have a direct policy on that, we are very aware of the fact that there are stimulus dollars that have not been expended. For example, the City of Edmonton has not been able to expend all of theirs.

We believe the economy is still at a point where it is certainly not what we would consider fully recovered, and so the continuation of those stimulus dollars beyond the deadline date would certainly be a worthwhile endeavour.

[Paul Szabo, Liberal, Mississauga South, ON]

You would support that.

[Rick Hersack]

Yes.

[Paul Szabo, Liberal, Mississauga South, ON]

The Parliamentary Budget Officer has suggested that of approved projects right now, anywhere from 25% to 50% of them may not be completed by March 31. This really needs to be answered by the government. Hopefully we'll have some resolution of that, because it is a disaster scenario.

In your experience with this stimulus program, you may recall the terminology “shovel-ready”. Are you satisfied that the moneys that you've been able to observe in terms of the projects in Edmonton in fact have substantively been utilized for so-called shovel-ready projects?

[Rick Hersack]

I believe so.

[Paul Szabo, Liberal, Mississauga South, ON]

You do. Okay.

The process of getting approval.... There are, obviously, in the real world, whether it be weather or whether it be engineering reports or whether it be consultants' reports, these kinds of things that always tend to drag things out. Is there a submission made by the City of Edmonton itself with regard to its concerns that you are aware of?

[Rick Hersack]

It's been a while. I believe there have been some concerns made by the City of Edmonton on the length of time it takes to get the approvals, particularly as those occur between the federal, provincial, and municipal governments.

[Paul Szabo, Liberal, Mississauga South, ON]

Finally, I just want to look at some of the numbers. I must admit, when you start off with the first recommendation about ensuring that the debt-to-GDP ratio falls below 30% by 2015--I mean, it's a nice wish, but to get there means you have to do something. If the Canadian Society of Professional Engineers is correct, where we have a $125 billion infrastructure deficit in Canada, which is going to cost a real reduction in GDP of more than 1% a year if we don't do something about it, the numbers may not work. If you don't get the growth, are you going to have to cut somewhere? Is that your view? And if we do have to cut, where would you cut to meet your target of reducing the debt-to-GDP ratio down to 30% by 2015?

[Rick Hersack]

That's a very good question, because we certainly agree with you that without growth there have to be cuts in spending. The issue is not a simple one, I agree with you. We have recommended, certainly, that the federal government sincerely look at all of its programs and really fund those programs that are critical to the economy, and consider not funding programs that are less critical.

[Paul Szabo, Liberal, Mississauga South, ON]

We have less than two minutes left, so let's follow up on this, because I think it's important to hear what Canadians have to say and those who represent Canadians. Are we talking about investing for the hope of improving GDP growth, or are we talking about spending in terms of helping those who are at risk of falling through the cracks? You understand we're talking about responsible spending. What is it?

[Rick Hersack]

From the Edmonton Chamber of Commerce point of view, it is certainly investment spending that would lead to growth.

[Paul Szabo, Liberal, Mississauga South, ON]

Health care would not be as big a priority for you?

Fair enough. Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Szabo.

We'll go to Monsieur Paillé.

[Daniel Paillé, Bloc, Hochelaga, QC]

My questions are for Mr. Dickie.

You draw a link between taxation and a number of advantages. On page 5 of your document, I note that all of your requests to the government would amount to a reasonable $450 million. I then told myself that either that was insufficient or the potential positive outcomes were rather substantial.

On page 2 you state that, because of Canada's current tax position, there is excess home ownership and people are unable to sell their homes, and labour mobility is inhibited. You are saying that the unemployment rate is increasing because people are unable to sell their homes. I would like to know how widespread that is.

On pages 3 and 4, you say that the tax conditions lower rents and encourage better maintenance. According to you, people who invest because of favourable tax conditions benefit from a better return on their assets. I think that any portfolio manager would agree that if there were no taxes, returns would be enhanced.

Furthermore, on page 3, you state that a tax deferral would promote sound urban redevelopment. You go so far as to say that it would improve labour mobility and reduce absenteeism rates. I get the impression that you are placing too much importance on taxation. Being a tax expert myself, I would never have thought that $450 million could generate so many advantages. It would seem to me that if that were the case, those measures would already have been implemented. So how did you come up with all those positive elements?

[John Dickie]

The question, as I understand it, is how can we get all these benefits from a session that only costs $450 million--and as a deferral at that? The answer is that people are operating at the margin. In other words, there's a decision on whether to sell or not. When they sell, someone else buys the property, comes with new eyes to the property, and decides to improve it. So you get these improvements and avoid absentee ownership.

We are not saying that the $450 million in deferral costs would generate $1 billion in revenue through these other mechanisms, but we are saying that all these other mechanisms are at work.

If one wanted to improve the affordability of housing dramatically, one would have to bring in other measures besides this $450-million deferral. But $450 million less tax paid out of maybe $4 billion total is 10%. It matters to owners. So there would be an impact on housing affordability.

Many of these other impacts are because people are incented to do something differently, and different outcomes happen. For example, on the question of environmentally sound urban redevelopment, we're not going to have every city in Canada all of a sudden blossom into wonderful new developments. But at the margin there are blocks that cannot be developed because the owners will not sell because they're locked in. Some of those blocks will sell, and there will be some of those developments.

[Daniel Paillé, Bloc, Hochelaga, QC]

I would like to use the example that you give on page 3 in the English version. You talk about a printer whose company is worth $500,000. Let us suppose that the print shop is located in the town of La Pocatière. Mr. Généreux, who is not here, is a printer. He is the owner of Impressions Soleil in La Pocatière. He is a printer by profession.

According to what you are saying, his tax treatment would be different depending on whether or not he owned the premises or set up his print shop in premises owned by someone else. We are really talking about two different individuals. One is a printer, and his tax status is different given that his business is printing and not real estate. However, should he rent the plant from another individual, this person works in the real estate sector. The owner of a building and the owner of a print shop are equal, tax-wise. The tenant, however, does have a certain number of tax advantages or disadvantages. I am trying to understand. Your tax model will more than likely put all building users into the same category, which could be complicated.

Moreover, since I come from a very urban riding with many tenants, I am in favour of tax measures aimed at helping tenants and small property owners. However, we should not confuse the types.

[John Dickie]

If I understand the question, the point is that the current tax system advantages the person who buys. There are some advantages to that. We have a very high home ownership rate. Among businesses, if someone owns their premises there may be some advantages to that in terms of their connection to the community.

On the other hand, they are also mixing up what they're doing. In a sense, the tax system incentivizes someone to be both a printer and the operator of a property. One of the key benefits of renting, either residentially or commercially, is that the businessperson can concentrate on the business; the landlord concentrates on the property. The landlord knows how to manage that, looks to the long term, and can get financing to improve the building, when perhaps the printer doesn't have the money, but now's the time to change the roof.

So we're saying that pushing people to own rather than rent is bad for the economy. It results in a less efficient allocation of resources and is unfair. The costs that the landlord pays are costed on the margin flow-through to the occupant, the tenant, whether they be a business tenant or a residential tenant.

[The Chair, Conservative, James Rajotte]

Thank you.

Merci, Monsieur Paillé.

Ms. Block, please.