Finance Committee on Nov. 1st, 2011

[Matthew Lynch]

I don't know if I have summed it up...but it's $29 million for party expenses, $25 million for candidates, and that comes to about $54 million; and then $21 million to $32 million for the estimate for the tax credit.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

So in 2008 it would have been $86 million in all--

[A voice]

[Inaudible--Editor]

[The Chair, Conservative, James Rajotte]

Order.

[A voice]

[Inaudible--Editor]

[The Chair, Conservative, James Rajotte]

The time is up anyway.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

So it was $86 million in 2008.

[The Chair, Conservative, James Rajotte]

Order, order.

Thank you. Merci.

I want to thank the officials for coming, for their patience.

We will suspend for a couple of minutes and then we'll bring our witnesses forward.

Thank you.

[The Chair, Conservative, James Rajotte]

I call this meeting back to order.

I want to thank our guests for being so patient. I really do appreciate that.

We do have four presenters. We have first, as an individual,

Jean-Pierre Laporte, Pension Lawyer. Welcome.

Second, from the Federation of Canadian Municipalities, we have Mr. Vrbanovic and Mr. Buda. Thank you so much for coming.

Finally, from Canadian Manufacturers & Exporters, we have Mr. Jayson Myers, the president and CEO.

We are on a very tight timeline. I'm going to ask you all to present an opening statement, but if you could do that within five minutes, I'd appreciate that very much. Then we'll have questions from members.

We will begin with Mr. Laporte. Go ahead.

[Jean-Pierre Laporte, Pension Lawyer, As an Individual]

Thank you for this opportunity to provide the standing committee with some observations about certain aspects of the proposed legislation contained in Bill C-13.

By way of background, I am a pension lawyer and I currently practise in the city of Toronto with the law firm of Bennett Jones, LLP. I've been specializing in the area of pensions and benefits since 2001, and I have a particular interest in pension law reform. Some of the committee members who served on this committee in the last Parliament may remember that I have made presentations to parliamentarians on reforming the Canada Pension Plan in the past.

One particular element of Bill C-13 that may be of interest to this committee is the provision of new rules affecting individual pension plans. I have written one of the very few academic papers on individual pension plans in Canada. In March of 2007 the Estates, Trusts & Pensions Journal said of individual pension plans, “Are they worthy of a second look?”

In the brief time allotted to me, given the relative dearth of expertise in Canada on IPPs, or individual pension plans, I thought it would be a most judicious use of your time to focus my remarks on two proposed changes that could impact IPPs.

I don't want my remarks to be overly technical. I'm sure the officials from the Department of Finance are quite capable of explaining the current regime and how the proposed new laws would work, and I leave that to them. But I want to make some general comments. My intervention is simply as a private sector service provider who's acquired familiarity with these pension rules and how they interact with the day-to-day lives of Canadians.

The two changes I want to talk about are those relating to buy-back restrictions and forced distributions at retirement. I propose to comment briefly on both.

In terms of the buy-back restrictions, this is the ability that someone has under a registered pension plan to buy back years of service at a time the plan wasn't in existence. By way of illustration, if you have an employer, for example, an individual who has incorporated a company, a small business owner who has been carrying out that business for a number of years and then decides to set up a pension plan, an IPP, if it's a defined benefit plan, which most IPPs are, the actuary for the plan would say that's going to cost, say, $600,000. In order to fund that $600,000 hole in the pension fund, you would have to transfer moneys from your existing RRSP or other registered sources, like a defined profit-sharing plan. If there isn't enough money in the RRSP, the company could make a tax deductible contribution to make you whole, so that the pension fund has enough moneys to pay the pension that was promised.

The proposed new rules would force you to not only use the money in your current RRSP, but also to use up any RRSP unused contribution room you have. This would mean that at the end of the day you would be left with no ability to tax shelter in excess of what is in your pension fund. That is a change in the law that I think may not be to the advantage of small business owners, the very people who are usually tasked with the job of creating employment and creating economic activity. So that's one concern I have with the buy-back.

The other is the new rule that would force the moneys that have accumulated in the pension fund to be distributed as if the pension fund was a registered retirement income fund, or RRIF.

Currently, in the Income Tax Act and regulations, there are some rules that say that if you have a RRIF, based on your age you have to start taking parts of it out, and of course you get taxed on that. My concern is that if the RRIF rules are such that you're forced to take more money out of the pension fund than what the pension plan itself contemplates, you're creating a bit of a deficit, because the fund was supposed to last for a number of years. Now you're increasing the amounts that are coming out of it, so you're creating an imbalance between the moneys that you had set aside for retirement and what they're supposed to do for you.

So that's another kind of issue with the proposed rules, and I just wanted to make sure that this committee had a chance to think about that, because, again, IPPs are really targeted at small business people, and those are the very people to whom we're trying to give a break, so they can keep employing people, etc.

That's about it.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll now hear from FCM, please.

[Berry Vrbanovic, President, Federation of Canadian Municipalities]

Thank you very much, and good evening, Mr. Chairman and members of the House finance committee.

On behalf of the 2,000 member cities and communities of the Federation of Canadian Municipalities, I want to thank you for the opportunity to speak to you again this evening as you consider Bill C-13, and in particular part 9 as it relates to the gas tax legislation.

Our central message is brief and has three points.

One, the government's recent budget commitment to develop a long-term infrastructure plan, which would provide permanent long-term stable funding, holds great promise for Canada's cities and communities.

Two, the gas tax fund should be the cornerstone of this new infrastructure plan.

Three, as this new plan is developed, we must ensure that the gas tax fund is indexed to protect its purchasing power over time.

That's the only way for all the governments to continue reversing our infrastructure decline. The gas tax fund was a great way to address the infrastructural issue in Canada.

From 2005 to 2014, the fund will invest $13 billion in municipal infrastructure, from new drinking water facilities to public transit, from roads and bridges to waste water facilities. The GTF has gone a long way to slowing the decline of our economic infrastructure.

We all know how inflation, no matter how mild at the moment, erodes buying power. For example, between 2005 and 2009, the construction price index, tracked by Statistics Canada, increased by 21%, more than double the consumer price index we're familiar with. Without indexation, the gas tax fund will effectively shrink while infrastructure costs rise. In fact, the gas tax fund will lose one-third of its purchasing power over the next 20 years. That means the fund will be able to invest in one-third less infrastructure in 2030 than it does today. That means our cities and communities will be back to juggling priorities and delaying much needed infrastructure investments.

Let me be quite clear. We applaud the government's economic action plan and its commitment in the budget to developing a new long-term infrastructure plan. The success of the economic action plan demonstrated that when governments work together we can provide better value, services, and programs for Canadians. We know that if governments work together we can restore aging roads, bridges, water systems, and public transit and still provide people with the everyday services they need. We can continue to do all this if we work together to develop a truly long-term, fully financed plan to invest in our country's public infrastructure.

Financing is the foundation of any long-term infrastructure plan, particularly long-term financing. Infrastructure projects are long-term projects requiring long-term commitments, so we need a frank and serious discussion about protecting the value of the gas tax fund into the future. The most appropriate venue for this discussion is the long-term planning process being led by Minister Lebel, and I fully hope and expect that this discussion will occur.

Without an infrastructure investment plan that protects the value of the gas tax fund, we will see the recent advances slow and then reverse. Our cities and communities will be left without a long-term predictable funding source they can count on, and that will have a significant impact on all of us.

Canada needs first-rate and efficient public infrastructure to maintain its quality of life and its economic competitiveness.

To build and maintain that infrastructure we need that long-term plan, the cornerstone of which needs to be a permanent gas tax fund indexed to protect its value over time.

Thank you. Merci beaucoup.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation. Merci.

We'll now hear from Mr. Myers, please, from the Canadian Manufacturers and Exporters.

[Dr. Jayson Myers, President and Chief Executive Officer, National Office, Canadian Manufacturers and Exporters]

Thank you, Mr. Chair.

Ladies and gentlemen, I want begin by thanking you for the invitation to come and talk about this bill.

I'd like to specifically address the issue of the two-year write-off for manufacturing and processing of machinery and equipment investments that the bill would extend to the end of 2013. This is something that is very important. Manufacturers, and many businesses generally, and the Canadian Manufacturers and Exporters strongly support and congratulate the government for extending it in the budget.

I have provided some material that shows you our response to the budget, particularly with respect to the two-year write-off. I've provided you with a great deal of analysis as to why that was important, and that's the analysis we provided the finance minister as well as the people in the Department of Finance. I've provided you with a quick slide deck just because I want to refer to a couple of slides and graphs that I think are extremely important.

As you know, manufacturing and exporting business sectors have been faced with quite a few big challenges over the past few years, to say the least: rapid appreciation, volatility of the Canadian dollar, rapidly rising costs, and a recession that within six months took out 30% of production in manufacturing. Now we're regaining that. We're about 10% lower than where we were at the mid-point in 2008. It's been a slow recovery, a faltering recovery thanks to issues like Japan.

I think we've learned a few things from the recession. First is that we don't create wealth in an economy by spending other people's money around and around and around again. You create wealth by producing real products and services that customers value.

The second thing is that going forward, let's face it, governments and consumers are pretty much maxed out. We can't continue to borrow our way to economic growth. We have to focus on two main areas: business investment and exports. The two are interlinked because the investments are what improve productivity, competitiveness, innovation, and drive export success.

We also have to realize that we're facing some long-term challenges in terms of demographics, health care, and environmental issues, and we're going to have to depend on innovative businesses, manufacturers in particular, that bring 82% of all new products to market to solve some of those problems.

But I want to point out--and this was our rationale, our argument, to the Minister of Finance--the importance of cashflow, the importance of profitability, both in boosting employment and in generating investment growth.

If I could draw your attention to page 2, there are two graphs in particular. I apologize; I'm an economist by background and I can't move without graphs here. But I do want to show you this. The top is the relationship between after-tax profitability of Canada's business sector as a whole and the unemployment rate. What this shows me is that there is a very close relationship. In fact, profitability changes before the unemployment rate. But what it shows me is that when businesses have money, they invest, they grow, and they employ more people.

The second graph shows the relationship between after-tax cashflow, which is--and I'm sorry for the technical details here--before-tax profits minus corporate taxes, plus capital consumption allowance. But you see here a very close correlation: cashflow drives investment activity. We are seeing business investment activity increase by 3.5% in the first quarter alone and by 3% in the second quarter. Business in manufacturing investment is up by more than 10% over the first half of this year, which is an indication that the cashflow is improving. I think it's also an indication of the importance of the two-year write-off at this time.

The tax structure we have, I think, should be geared to leaving more money in the hands of companies that are making investments in productive assets, in technologies, in new production technologies, in research and development, in new product development, and in upgrading the skills of our workforce. Those are the investments that are going to make a difference for the Canadian economy going forward.

So the budget that was introduced in March and in June that included the extension of the two-year write-off up to 2013 was really important because it's a tax deferral. What it does is move cashflow up front. It provides the whole manufacturing sector with about a 12.5% additional return on investment in the first three years of that investment.

That's what's so important today, when we need to replace technologies very quickly and we're competing with the rest of the world to do that. It was a badly needed infusion of cash, especially in the midst of recession, and extending it for a two-year period gives companies a period of certainty so that they can make investment decisions.

That's why Soprema in British Columbia made a multi-million-dollar expansion. That's what has helped Celestica move into solar panel manufacturing. It has helped Prévost bus lines in Quebec develop a new robotic system. And it has helped Aberfoyle heat treating, a 10-person operation, get a new contract with Boeing to do heat treating for Boeing aircraft. This is so important. It was supported by 47 industry associations, as well as by the Canadian Labour Congress.

We definitely support this measure in the bill. In our view, it should be made permanent. It makes sense to make it permanent, simply because we need these investments in order to grow the economy.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Myers, for your presentation.

We're going to begin members' questions with Mr. Julian, for a five-minute round.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Thanks to our witnesses for coming forward. We apologize for the delay as we were sorting out our committee business. It's very good that you're here this evening.

I wanted to start with Mr. Buda and Mr. Vrbanovic on the issue of infrastructure generally. We heard testimony yesterday that we have an infrastructure deficit that was evaluated before the stimulus program at about $125 billion. But of course, as you know, there is an ongoing year-to-year stimulus deficit. In transit alone it's been estimated to be about $10 billion a year.

This is an important step. It's only a very small first step to what's needed to address the deficit on an annual basis and the overall infrastructure deficit that exists across the country--or the infrastructure debt, if you like.

If you could, I'd like you to speak to the issue of the gas tax transfer and to what extent that addresses the annual deficit, where you see the FCM's evaluation overall as to the infrastructure deficit generally across Canada, and what measures could be taken to increase the amount set aside in Bill C-13 to seriously address on an ongoing basis the deficit that exists in infrastructure in this country.

[Berry Vrbanovic]

Thank you very much for that question. As you point out, when we released our report in 2007 it really talked about two numbers: an infrastructure deficit of $123 billion and a need for about another $115 billion over the next 20 years in new infrastructure that was needed in this country.

We know in the intervening years there's obviously been progress made by municipalities through the gas tax, their own investments, and investments from provincial and territorial governments toward tackling some of that deficit. As well, there have been some successes that have obviously been achieved more recently, in the last couple of years, through the stimulus program and the investments that were made in infrastructure there.

The focus going forward is really on the development of that long-term infrastructure plan. That was our primary ask in Budget 2011. It was referenced in version 1.0 and in version 2.0 of Budget 2011. Over the last number of months, our officials have been having dialogue with Mr. Lebel's officials towards developing that long-term infrastructure plan.

The first phase of that plan will actually be to take stock of exactly where we are. As I said, there has been progress made, but to what amount specifically, we don't know. That's obviously an extremely important part if we're going to develop a long-term strategy involving all three orders of government to tackle the enormity of the issue going forward.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

At this point, you haven't been able to do a full evaluation of to what extent investment is needed in infrastructure generally. So the figure of $123 billion wouldn't be valid, but the ongoing figure of $10 billion to $11 billion a year is valid. Is that not correct?

[Berry Vrbanovic]

Again, I think it's important to remember that the focus is really on developing that long-term plan and really doing an assessment of exactly where we're at amongst the municipalities of this country in terms of that deficit going forward, so that we can collectively develop an approach that's going to tackle the needs we face.

[Peter Julian, NDP, Burnaby—New Westminster, BC]

Okay, but we can surmise that the $2 billion, you said very clearly, has to be indexed, and we've heard that loud and clear. But you're not stating that the $2 billion would be sufficient to address infrastructure needs across the country. That requires increased and additional investments.

[The Chair, Conservative, James Rajotte]

Please make a very brief response.

[Berry Vrbanovic]

Sure, very quickly, unequivocally, we believe it is necessary to index it in the long run. What that indexation should look like and what it is based on is obviously a matter of discussion that we believe is part of that long-term plan we're speaking of.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Julian.

We'll go to Mr. Adler, please.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

And I want to thank all of the witnesses for being here this evening.

I want to direct my questions to the manufacturers and exporters. Mr. Myers, it's good to see you again.

You spoke about the two-year write-off. I know there are a number of manufacturers in my own riding of York Centre that have benefited from this provision. It has led to increased business; they've hired more employees. It has been a huge boon for them.

I was wondering if you could give a couple of examples, because you represent how many...what's your membership?

[Dr. Jayson Myers]

About 10,000.