Evidence of meeting #37 for Finance in the 40th Parliament, 3rd Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was federal.
A recording is available from Parliament.
President and Chief Executive Officer, Investment Industry Association of Canada
I agree with that. The problem is that our securities regulation extends far beyond capital raising, and for those other reasons we've advocated a single regulator.
Liberal
The Vice-Chair Liberal Massimo Pacetti
We are not going to start that debate here, Mr. Paillé, thank you.
Mr. Hiebert, six minutes.
Conservative
Russ Hiebert Conservative South Surrey—White Rock—Cloverdale, BC
Thank you, Mr. Chair. Thank you to all the presenters for your ideas and suggestions.
Of course, under our fiscal situation we're looking for ways to save money, not necessarily to spend money, but I was captivated I guess by a few of the suggestions that were made this morning.
I'd like to start by asking the Investment Funds Institute of Canada some questions. You've put forward some ideas that we've looked at, at length, in this committee earlier this spring: changes to pension income and providing some equality or fairness between registered plans and RRSPs and other such methods.
As I've read in your supporting documents, you have five different recommendations, and I'm wondering, as a beginning, if you had to choose one, which one would be your most important?
General Tax Counsel, Canadian Imperial Bank of Commerce, Investment Funds Institute of Canada
Are you talking about our main submission, number one?
Conservative
Russ Hiebert Conservative South Surrey—White Rock—Cloverdale, BC
You have five recommendations in this additional document. I don't mean the speaking notes. You have three suggestions in your speaking notes and you have five suggestions in your pre-budget submission. I'm looking at all five, and I'm asking myself which would be the most important for the government to implement.
General Tax Counsel, Canadian Imperial Bank of Commerce, Investment Funds Institute of Canada
If I had to pick the most important, I would say right now that it is the tax treatment of equivalent financial instruments.
Conservative
Russ Hiebert Conservative South Surrey—White Rock—Cloverdale, BC
Can you just elaborate on that, please?
General Tax Counsel, Canadian Imperial Bank of Commerce, Investment Funds Institute of Canada
Sure. That was the third item I spoke about.
Conservative
General Tax Counsel, Canadian Imperial Bank of Commerce, Investment Funds Institute of Canada
Yes, it is the GST/HST.
Conservative
Russ Hiebert Conservative South Surrey—White Rock—Cloverdale, BC
For the benefit of the members, could you just explain that? I know that you refer to the fact that there was an inequity under the GST. It's even greater with the HST, because of labour and salaries and such labour and salaries not being taxed for people who buy securities directly. Just explain the whole situation, if you could.
General Tax Counsel, Canadian Imperial Bank of Commerce, Investment Funds Institute of Canada
How the investment fund industry works is that the fund is charged a management fee by the fund manager, and that entire fee is now subject to HST. From that fee, various items in running the fund are charged. Because that fee right now is entirely subject to HST, all the expenses of running the fund are now subject to HST. That makes it a much more expensive investment product than other financial instruments on which you would not be charged HST.
Conservative
Russ Hiebert Conservative South Surrey—White Rock—Cloverdale, BC
For example, a Canadian who purchases a fund would be taxed on the management expense of the fund. But if the person went to a stockbroker and purchased securities directly, maybe even the same securities, even in the same proportion, there would not be an equivalent tax on the service provided by the brokerage.
General Tax Counsel, Canadian Imperial Bank of Commerce, Investment Funds Institute of Canada
Correct. You would not be paying the exact same amount of overall tax.
Conservative
Russ Hiebert Conservative South Surrey—White Rock—Cloverdale, BC
That is because the HST does not apply to the services provided by a brokerage.
Barbara Amsden Director, Strategy and Research, Investment Funds Institute of Canada
That is correct.
There are two parts to the answer, and it does get fairly involved and technical.
One of the problems is the structure of a mutual fund. It's like a little financial institution. And in fact for tax purposes or HST purposes, it is a financial institution. It's providing dividends and interest the same way you get dividends and interest if you hold a security. There's no tax or HST applied to that, but there is tax paid on everything that is being charged to it, as Debbie said.
Within a security from a brokerage firm there is tax being paid on the computers they use within that financial institution, but there is not tax on the salaries of the people working there. When you pay a commission for buying a security, there's no tax explicitly on the commission, but there will be some embedded tax that has been paid by the security's broker/dealer on, as I said, computers, rent, and so on.
How we got the rate of about four to five times as much tax within the fund that is sold to a client is that usually, for most financial institutions, the labour component and certain other components are about 75% to 80% of it. That is why there are significantly higher rates of tax embedded in the product of a fund, which is a diversified product as compared to a single security.
Conservative
Director, Strategy and Research, Investment Funds Institute of Canada
Yes. I actually appeared before this committee a long time ago, I think around the 1990s or 1991, when this came in. There's the GST legislation and then there are the regulations that fall under it. The legislation sets out what's taxed and what is exempt under section 123, and then there are some additional rules that would apply to explain how it actually works out for particular types of financial institutions.
Conservative
Russ Hiebert Conservative South Surrey—White Rock—Cloverdale, BC
Just to summarize, then, if labour were dealt with at a fund the same way it is dealt with at a brokerage firm, the taxes for the investor would be equalized.
Director, Strategy and Research, Investment Funds Institute of Canada
More or less, that is it in a simplified way. There are little tweaks here and there, but that is a very good summary of it, yes.
Liberal
Liberal
Paul Szabo Liberal Mississauga South, ON
Thank you.
There have been a number of presentations about having changes to RRSP limits and TFSA limits. On the Investment Industry Association of Canada, the second recommendation was basically that. But in the following commentary, it says “Increased limits for RRSP contributions and TFSA deposits will give investors flexibility to recoup market losses in their portfolios and allow them to build savings more quickly”.
Now I do understand that it's important to provide for pension income for retirement years and things like this, but is there anybody at this table who really thinks this is a priority, given the fact that we're in a pension crisis across all spectrums, really, and that the unused limits of carry-forward RRSPs for low- and modest-income Canadians is probably going to be $1 trillion because they have no money to invest? They have no way to invest. They don't have instruments. They've lost their income trusts.
It really would be nice for people to recognize the economic realities of the full economic spectrum of Canadians. I really think it was kind of insensitive just to suggest in this particular one that somehow we have to recoup market losses when people never had anything to invest in the first place.
Does somebody want to address that?
President and Chief Executive Officer, Investment Industry Association of Canada
I will make a couple of comments, since you made reference to our brief.
The first point to make, which reinforces what you've said, is that our third pillar works quite effectively: tax-assisted savings plans. I think that flexibility would be helpful. I think the Senate banking committee recommendations suggest that some additional flexibility would be helpful to Canadians. I think one issue that is an important one to bear in mind is an equity consideration, which is that I don't think we should be looking at RRSPs, which are the primary form of retirement savings for most Canadians, without putting it in the context of defined benefit plans that a shrinking number of private sector Canadians have. But the public sector does benefit from a very generous defined benefit plan.
Then the issue becomes how we get more equity into the system. Do we improve the benefits in ours, or do we go the other way?
