Finance Committee on Nov. 2nd, 2011

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is the 26th meeting of the Standing Committee on Finance.

I want to welcome our guests here tonight and thank them so much for coming in on fairly short notice, and especially for attending the night session of the standing committee.

We are televised, ladies and gentlemen, and pursuant to the order of reference of Monday, October 17, 2011, this is our study of Bill C-13, an act to implement certain provisions of the 2011 budget as updated on June 6, 2011, and other measures.

We have five organizations represented at this panel: the Calvert Home Mortgage Investment Corporation, the Canadian Association of Retired Persons, the Conference for Advanced Life Underwriting, the Canadian Association of Fire Chiefs, and the Canadian Centre for Policy Alternatives.

You will each have a maximum of five minutes for an opening statement, and then we'll have questions from members. We'll begin with Mr. Koeller, please.

[Dale Koeller, Vice-President, Calvert Home Mortgage Investment Corporation]

Thank you very much.

Monsieur le président, ladies and gentlemen of the finance committee, good evening.

It's a great pleasure for me to speak to you today.

I consider it a great opportunity to speak about a matter that affects many honest Canadians, not just business people but also the thousands of people who rely on the specialized services of mortgage investment corporations.

A mortgage investment corporation, known as a MIC, is a business structure created by an act of Parliament in 1975 to increase investment in the mortgage sector and to make home ownership more accessible to Canadians. MIC shares have been eligible for registered accounts, RRSPs, and RRIFs since their creation. The Income Tax Act outlines stringent criteria to maintain eligibility as a MIC. Among the rules are an ownership limit of 25% as a shareholder, and related parties counted together in this 25% include a spouse and minor children.

The current ownership rules were legislated into the Income Tax Act in the late 1990s as a result of a comprehensive review of MICs by the Department of Finance. The rules were implemented with a ten-year penalty-free window for MICs to fall into compliance. MICs represent a legitimate form of lending that was conceived of by people like you. MICs were an excellent idea, and they continue to fulfill the purpose for which they were designed. However, changes to the rules governing registered accounts represented by Bill C-13 will have the effect of moving MIC shareholders into illegitimate and prohibited territory.

We understand the intent behind many of the changes, which is to address inappropriate tax planning schemes. These kinds of schemes do no favours for legitimate lending businesses like ours, and we applaud the government for the priority it places on tightening up the rules.

Bill C-13 accomplishes this in many ways. However, in our view it goes far beyond its therapeutic intent. What should be a surgical instrument aimed at a troublesome issue appears to be more like a sledgehammer that threatens healthy tissue over a much wider area.

Bill C-13 will in effect change the way the government has regarded MICs for more than 35 years. It will effectively limit ownership to 10% for the owner to maintain registered account eligibility of the shares. In addition to the ownership limit being reduced by 15%, those counted together in this maximum will be expanded from spouse and minor children to include any blood, marital, or adoptive relative.

All of this may sound benign or harmless, but from the point of view of those who operate a MIC, the short-term effect will be harsh, punitive taxes. The long-term effect may be the collapse of many businesses across the country and possibly financial ruin. Those who exceed the 10% ownership cap, together with their relatives, people who were all along in compliance with the Income Tax Act previously, will have their RRSP and RRIF taxed in the current year and every year until 2022. At that point, if the shares are still in their registered account, they will have their entire income confiscated with a 100% tax rate.

As you can see, law-abiding business people will be hurt; but more importantly, so will the many thousands of Canadians who hold shares in these companies. Who are these shareholders? A teacher, a farmer, a shopkeeper, a retiree. Together with the managers of the company, we the affected shareholders will have to deregister our retirement savings. The remaining shareholders may also suffer a penalty in the value of a company that must restructure to comply with this change in policy.

My company's a small business. We have only one office with eight employees. We've operated as a lender since 1982 and currently have $26 million invested in mortgages. Most other MICs are equally small. Yet together as an industry, we represent over a billion dollars and hundreds of MICs across Ontario, B.C., and Alberta alone. The contribution to the economy is significant across the entire country. We grant mortgages to builders and renovators, who employ carpet layers and plumbers, and many of these borrowers would be hard-pressed to find the financing they need through institutional lenders. We work with borrowers in small or rural communities, where institutions may not be able to help them.

What we finance directly fuels jobs, fuels economic opportunity, builds communities, and helps to support entrepreneurs and small industry in Canada. We ask for the opportunity to keep these dollars working in an economy that desperately needs our nurturing, and we commit to continue to work hard to invest wisely to support that growth.

In conclusion, I ask that you please remove the sections of Bill C-13 that apply to MICs. I understand your need to close inappropriate tax planning schemes. We have suggestions to help you prevent schemes without negative effects on the MIC industry. We can help you make this work more fairly. I would be at your disposal if I can help in any way.

Again, thank you for the opportunity to share this information with you, and thank you for the leadership and service in your work as members of our federal Parliament. Merci.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from Ms. Eng.

[Susan Eng, Vice-President, Advocacy, Canadian Association of Retired Persons]

Thank you very much.

I represent CARP, a national non-profit non-partisan organization with 350,000 members and 50 chapters across the country. We advocate for public policy change that improves the quality of life for all Canadians as we age.

Health care remains a top priority for our members, as it is for all Canadians, but it matters more as we age. Despite the fact that today's generation of older Canadians are living longer, healthier lives, the Canadian health care system serves Canadians very well for acute care, but it's not mandated to provide continuing care for those with chronic diseases for which medicine has no cure. That responsibility falls to informal caregivers and the home-care sector, which is at best a patchwork across the country.

CARP's particular focus today is on clause 23 of BIll C-13, which provides for a non-refundable caregiver tax credit. CARP is recommending that the tax credit be made refundable, that it be increased, that it be targeted at those who provide the heaviest care, and that all of this funding be within the same funding envelope.

The vast majority of Canadians want to stay in their own homes as long as possible, even if they have medical challenges. Being able to do so not only improves their health outcomes but keeps them among their friends and family, all of which adds to their quality of life.

This good social and health policy is also good fiscal policy. A well-integrated and successful home-care strategy has the potential of diverting massive amounts of demand from the formal health care system. It's estimated that home care is 40% to 75% less expensive than institutional care is.

Finally, not only is the comprehensive home-care and caregiver support strategy good public policy, it also makes good political sense. CARP polls its members regularly on our advocacy proposals, and they consistently rank caregiver support as a top priority. They appreciated the attention given to the role of family caregivers in the recent federal and provincial elections. They appreciated the acknowledgment of family caregivers with the specific non-refundable tax credit proposed and now passed in the recent budget, but they would prefer the refundable tax credit or allowance proposed in other platforms. Fifty percent of those polled by CARP last week thought the best way to support caregivers was through an allowance or a refundable tax credit.

The amount set forth in the budget, if it were refundable, would be welcomed by the 2.7 million Canadians now providing care to older loved ones. However, there should be a focus on those providing heavy care: those who are most likely to be reducing their hours of work or quitting their jobs altogether to look after a loved one, either permanently or during an acute period. Such people would not benefit from a non-refundable tax credit unless they had other sources of taxable income. Not only should they receive a refundable tax credit, but the amount should be increased beyond the $300 resulting from the budget changes. We believe it's possible to limit the budget expenditures with such a measure.

One in five Canadians over the age of 45 is providing care to an older person. That's about 2.7 million Canadians, according to Statistics Canada. Of that 2.7 million caregivers, 25% provide heavy care, defined as 30 hours or more of care each week. That brings us down to about 675,000 Canadians. Of the 2.7 million caregivers, some 25% are themselves seniors, and 30%, or some 200,000 people, are themselves over 75 years of age. A modest $1,500 per year for 675,000 caregivers would cost about $1 billion a year.

There are existing models of caregiver support and allowances here in Canada. Nova Scotia targets low-income families. It looks at the 20-hour threshold of care per week, and it provides up to $4,800 per year. It has budgeted a small amount and would look after only about 375 families. Manitoba has an option as well. Germany has something interesting, which is long-term-care insurance that provides a significant amount of care to caregivers.

I will be able to give you some more specific facts and figures, but suffice it to say that if there were an opportunity to divert a massive amount of care, and if you looked at the differential between home-care costs and institutional costs, there is the potential for anywhere from $4 billion to $10 billion a year in diverted costs.

Thank you very much.

[The Chair, Conservative, James Rajotte]

Thank you very much.

We'll now hear from CALU, please.

[Susan St. Amand, Chair, Conference for Advanced Life Underwriting]

Mr. Chair and committee members, thank you very much for allowing us to appear before you this evening.

My name is Susan St. Amand and I am chair for the Conference for Advanced Life Underwriting. I have run my own small financial services business in Ottawa for the past 22 years now, and prior to that I spent seven years in management with one of the largest Canadian chartered banks. Our brief provides more information on CALU and our sister organization, Advocis, but I want to remind you that more than 10,000 of our members are largely self-employed, independent small-business owners spread out across Canada. Each one of us advises approximately 300 families, many of whom are owners of small to medium-sized businesses.

Like you, we are very concerned about the ability of our business clients to fund their own retirement and the retirement of their employees, while preparing for the succession of their businesses. Although I have not implemented many individual pension plans myself for our clients, I do know they have a very valuable place in our system. When the new IPP rules were first introduced last March, I understood the proposed changes were directed at a small group of business owners who were obtaining unintended tax benefits from their individual pension plans. It appeared that the Department of Finance was now quite properly dealing with this problem. But then I started getting calls from our members, expressing concerns about the general impact of the proposals on the ability of their business clients to participate in defined-benefit-style pension plans.

Based on this feedback, CALU formed a working group of members who had expertise in this area. In mid-September, the working group completed its submission to the Department of Finance, noting a number of issues and requesting more time for consultation. It appears that the finance department was operating under a tight deadline, and Bill C-13 was tabled a mere two weeks after the close of the consultation period. Thanks to previous dialogue and input, the final IPP regulations did contain a change designed to mitigate the impact of one of the proposals.

However, CALU continues to have a fundamental concern with these proposals. We believe the IPP legislation challenges the ability of business owners and key employees to participate in retirement benefit programs with similar terms and conditions available to employees in larger private and even public companies. We see this as a dangerous trend that seems to assume that business owners will abuse employee benefit plans. We don't believe most of our business clients or their professional advisors design plans with the intention of taking advantage of the rules, and we are concerned about this perception and the role it may play as a basis for the development of tax policy.

I would now like to invite Kevin to make some specific comments on the legislation that will hopefully illustrate my points.

[The Chair, Conservative, James Rajotte]

You have two minutes, Mr. Wark.

[Kevin Wark, President, Conference for Advanced Life Underwriting]

Thanks, Susan.

Mr. Chair and committee, thank you for inviting us tonight.

I have to admit that as I reviewed the IPP proposals I was reminded of a point of discussion with my tax professor at law school. As I struggled to understand the application of a certain tax provision he told me, “Remember, there is no equity in tax law; each word and provision stands by itself and will not bend to the specific facts of a particular situation.” In other words, he was telling me that the tax laws will be applied as they are written, even if the result is not fair.

Because of this fundamental rule of tax interpretation, I believe it's incumbent on the drafters of such legislation to make sure the rules are not crafted in such a broad manner as to create unfair results. It is incumbent on organizations such as CALU to alert the government of those circumstances where unfairness can arise. I would like to spend the remaining time highlighting some of the unfair impacts of the IPP rules as they relate to the RRIF minimum withdrawal requirement.

As you may be aware, typically some members of large defined benefit pension plans have formed corporations as transfer vehicles for the commuted value of their pension benefits. In doing so, they create a pension surplus that is not subject to any withdrawal requirements, creating a tax deferral opportunity. The RRIF minimum payout requirement is being imposed on all IPPs in order to minimize this tax deferral opportunity.

It bears noting that this specific planning is not being done by small-business owners, but by employees who create a fictional employment relationship with a newly incorporated company that has been established for this sole purpose. Yet the RRIF minimum rule will apply to any defined benefit plan with less than four members, irrespective of how the surplus was created in the plan. We believe the proposals need to be better targeted to prevent the abuse while not impacting other IPPs.

It must also be appreciated that these rules apply retroactively to any plan meeting the definition of an IPP. So whether the plan has been created to facilitate the transfer of pension benefits or whether it's one that's had the good fortune of being in a surplus position due to strong investment performance, it will be governed by these rules. And not only do these rules operate retroactively, but they can apply to plans that were not previously treated as IPPs, simply because one or more of the members have terminated their participation.

[The Chair, Conservative, James Rajotte]

Thank you, Mr. Wark. We are overtime. I want to get all of the witnesses in and I want to ensure that every member has a chance to ask questions.

We'll now go to Mr. deHooge, please.

[John deHooge, Fire Chief, Ottawa Fire Services, Canadian Association of Fire Chiefs]

Thank you, Mr. Chair and members of the committee.

My name is John deHooge. I sit on the executive of the Canadian Association of Fire Chiefs and have the pleasure of being the fire chief for your city, the city of Ottawa.

The Canadian Association of Fire Chiefs is a non-partisan, national association formed in 1908. Our 1,000 members include fire chiefs and other fire chief officers from every Canadian province and territory. We include fire chiefs from Canada's first nations, industry, airports, seaports, major health care facilities, and Canadian Forces. Our national board of directors includes the presidents of each provincial and territorial association of fire chiefs. The CAFC is in the best position to speak on behalf of all elements of the Canadian fire service.

As part of budget 2011, the Government of Canada introduced a $3,000 income tax credit for volunteer firefighters who perform more than 200 hours of service in a year. Canada's fire chiefs have been advocating for tax relief for the volunteer fire service since 2003. The proposal adopted by the Government of Canada in budget 2011 was the proposal that the CAFC had presented to the federal government as our budget priority during last year's pre-budget consultations. In our view, tax relief for Canada's volunteer firefighters is a key part of the solution to addressing the recruitment and retention challenges facing Canada's volunteer fire services.

We would like to recognize the government for its commitment to pass this initiative into law. The CAFC appreciated yesterday's exchange between Shelly Glover, member of Parliament for Saint Boniface, Manitoba, and the Honourable Jim Flaherty, Minister of Finance, in support of the volunteer firefighter tax credit. We are also grateful for the work of MPs from all parties who have supported us in our campaign for tax relief for volunteer firefighters. This measure will help with the recruitment and retention of volunteer firefighters across the country, which will in turn protect Canadians and our communities.

Volunteer firefighters are unique, even among other volunteer emergency first responders. The vast majority of Canadian communities are protected by volunteer firefighters. Of Canada's 3,492 fire departments, more than 91% are volunteer departments, and four out of every five firefighters are volunteers. In many of Canada's rural and remote communities, volunteer firefighters are the only emergency first responders. In no other emergency responder service do volunteers play such a significant role.

As the fire chief for the city of Ottawa—a composite department that includes both career and volunteer firefighters—I can assure you that while they are volunteers in name, their training and the service they provide are highly professional. Volunteer firefighters are trained in the same way as career firefighters. Once recruited, it takes approximately three years to properly train a volunteer firefighter, and, sadly, many do not stay on past five years. The lack of reimbursement for out-of-pocket expenses, inadequate equipment and resources, and the time spent away from families and paid employment make it difficult to attract new volunteer firefighters and to keep those already trained.

It is worth noting that other volunteer emergency responders plan or choose when they want to volunteer, whereas volunteer firefighters are often on call all the time. These brave men and women leave their full-time jobs to attend emergencies, losing wages and incurring personal costs in the process.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from Mr. Macdonald, please.

[David Macdonald, Economist, Canadian Centre for Policy Alternatives]

Thank you.

First of all, let me thank the finance committee for their invitation to speak today.

My name is David Macdonald. I'm an economist with the Canadian Centre for Policy Alternatives, a non-partisan economic think tank here in Ottawa.

Although the stimulus package has now wound down and the global economic picture appears no more certain as the great recession drags on, depression-level unemployment in the U.S. and the European sovereign debt crisis continue. To be sure, the situation looks better here on this side of the Atlantic and north of the 49th parallel. Neither our banks nor our sovereign debt are facing anything similar. In fact, while Euro members like Greece are considering default, the Canadian debt-to-GDP ratio remains the lowest in the G-8, equivalent to $500 billion lower than second place Germany.

However, Canadians have not been immune to the global debt crisis. In Canada it has taken the form of much lower economic growth, higher unemployment, and underemployment. And while middle-class Canadians have not seen the price of their homes collapse, as has been the norm in other countries, they are buried under mountains of debt that will serve as a weight around the economy's neck when interest rates rise.

Stagnant real wages for most Canadians over the past several decades has meant that rising prices for houses and everything else were only affordable by piling on more debt. But this Faustian bargain is not likely to continue as household debt to disposable income tops 150%.

As private sector forecasters and the Parliamentary Budget Office revise their economic growth projections downward, Canada may well be in year four of its own lost decade of high unemployment, widening inequality, and slow growth. One and a half million Canadians remain unemployed or have simply given up looking for work. To add insult to injury, CIBC has just today released the fact that the full-time jobs that are being created are primarily low-paying jobs.

At the same time as additional demand is needed in the national economy, corporations are cutting back on investment because of uncertainty. They have instead chosen to keep their tax cuts in a bank account, not investing them in new equipment and not creating new jobs.

Consumer demand is significantly constrained by high debt loads. And the third actor, the federal government, has chosen not only to withdraw from job creation with the end of the stimulus effort, but to throw likely tens of thousands of public sector workers into unemployment lines through austerity measures.

This budget bill contains measures that are much more effective at encouraging capital investment than broad-based corporate tax cuts. Accelerated capital cost allowances for manufacturers and clean energy producers in part 1 of this bill are examples of tied tax cuts: corporations only get them if they take specific actions.

Similar incentives should be adopted for job creation. Tied tax cuts that are linked to actually creating jobs or investing in machinery are dramatically cheaper and can be much more effective than broad-based tax cuts at getting the desired results. This budget bill should look at expanding tied tax cuts not just in accelerated capital cost allowances, but also in job creation. While these measures would cost the treasury, they would cost significantly less than comparably expensive declines in the general corporate tax rate.

Given that Canada has the lowest corporate tax rate in the G-8, according to PricewaterhouseCoopers, we have room to increase that rate by several percentage points while maintaining first place. The additional revenue could provide long-term infrastructure funding for part 9 of this bill by augmenting the gas tax transfer. Not only would this whittle down the significant infrastructure deficit, but it would drive aggregate demand. Job creation would certainly be a result, but so too would stronger economic growth.

If the committee accepts that the federal government was successful in blunting job loss in the crisis of 2008, there is little reason why it couldn't employ similar tactics today--that is, job creation through infrastructure spending. However, employment itself is only part of the problem. This budget bill fails to address rising inequality in Canada. If anything, the children's arts tax credit from part 1 of this bill would go largely to higher-income families and only exacerbate the problem.

I encourage the committee to consider measures that might help to reduce instead of increase the after-tax income gap through the introduction of a new income tax bracket above $250,000 in income. The funds raised through this could support stronger social programs that ease the burden of stagnant wages for middle-class Canadians.

To conclude, dark clouds remain on the economic horizon, and the changes I've suggested above to this bill will take steps to better protect Canadians against the possibility of another lost decade.

I'd like to thank the committee for their time.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Macdonald.

We'll begin questions from members with Mr. Julian for five minutes.

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

My thanks to our witnesses for coming on short notice.

Mr. deHooge, the volunteer firefighter tax credit is important. You said that since 2003 this has been one of the requests that has come forward. Another one not in Bill C-13 is the public safety officers compensation fund. That's been on the agenda for firefighter lobbies since 1997. In 2006, NDP legislation was adopted by Parliament to create a public safety officers compensation fund that would include volunteer firefighters who pass away.

Could you speak to the issue of firefighters, particularly volunteer firefighters, who pass away in the line of duty? I've spoken with some of their families and many been left destitute, without the public safety officers compensation fund. Could you comment on that? We have a first step, but what about the government providing support for volunteer and professional firefighters across the country?

[John deHooge]

The proposal was brought forward initially by the Firefighters Association of Ontario. It is certainly something that the Canadian Association of Fire Chiefs would support. It certainly would help, recalling what happened last year with two Listowel firefighters who tragically were taken in the line of duty. That type of financial impact on the families is significant, and we would support a change to that legislation.

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

Would you have an idea of how many volunteer and professional firefighters have passed away since 1977, since firefighters started coming on the Hill to get the benefit that exists in the United States?

[John deHooge]

Unfortunately, I don't have statistics for the last number of years. Certainly with the presumptive legislation that number has increased over the last few years. Annually, here on the Hill, we honour 1,000 firefighters who have passed away in the past 100 years.

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

With the 200-hour-a-year threshold, do you have any idea how many volunteer firefighters go below that threshold and might not be included?

[John deHooge]

You want to know who would qualify for the tax credit. As part of our pre-budget submission to help the federal government understand the issue, the CFC conducted a survey of Canadian fire departments to determine how many volunteer firefighters would qualify under the proposal. The research shows that 45% to 65% of Canada's volunteer firefighters would meet the 200-hour threshold to qualify for the tax credit.

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

Mr. Macdonald, you referenced important low-paying jobs. Just before you arrived, we heard from the Parliamentary Budget Officer, who is projecting that another 100,000 Canadian families will lose a breadwinner over the course of the next few months. Certainly our numbers are still far below what they were in May 2008. When we go back to May 2008, there's been stagnation, even though the labour force has increased significantly.

Could you tell us to what extent the jobs are lower-paying that have replaced the jobs that were higher-paying prior to the last three budgets?

[David Macdonald]

What's interesting is that we can go back to, say, July or August 2008, prior to the 2008 recession. The key factor is the percentage of working-age adults with a full-time job. That percentage has dropped from about 52% to around 50%. This shows that while the unemployment rate has come down, what's made up the difference is not full-time jobs but part-time jobs. The unemployment rate is definitely lower. The problem is that people are working in part-time environments.

There is another challenge that StatsCan doesn't collect the data for. They may well be working in part-time jobs, but they would like full-time jobs. That data isn't collected. It's clear that the number of Canadians eligible to work in a full-time job is much less today than it was in 2008.

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

Do I have time for a last question? No?

[The Chair, Conservative, James Rajotte]

Unfortunately, you are out of time, but there will be other rounds, obviously. Thank you, Mr. Julian.

We'll go to Mr. Jean, please.

[Brian Jean, Conservative, Fort McMurray—Athabasca, AB]

Thank you, Mr. Chair.

Thank you, witnesses, for coming today.

I'm going to centre most of my questions in relation to CARP and Ms. Eng. We have had the opportunity to meet before in these same circumstances.

I've been a member of Parliament for just over seven years, and I've heard many times what seniors need and what they want. And of course we're concerned with the demographic and what's taking place just generally with the trend in Canada especially.

Now, you obviously are aware of the legislation today that eliminates the mandatory retirement age for federally regulated employees. You're aware, of course, of the pension splitting of the GIS top-up, which took somewhere in the neighbourhood of 680,000 seniors to be eligible for that $300 million in 2011 budget, the family caregiver tax credit, the personal exemption for income tax, which of course moved up to $10,382.... It's a big, worrisome problem, and I think we've responded well in the last five years. I see you nodding your head; that must mean we have.

[Susan Eng]

Yes, of course, but I think I've said before that despite the fact that these proposals are there, there still remains a problem for a lot of people.