Finance Committee on Nov. 6th, 2012

[Martin Lavoie]

Do you mean among our members?

[The Chair, Conservative, James Rajotte]

Yes.

Could you do the same, Mr. Cudmore, if you have any information the committee could consider? Of that big, broad public policy debate, we as parliamentarians have to justify to taxpayers, including the Canadian Taxpayers Federation which is in the room right now. The $3.6 billion is an awful lot of taxpayer money. The Jenkins panel came out with a specific report, which you two disagree with, but then you have to argue your case with very specific examples in terms of what types of innovations have actually happened as a result of business investment, as a result of the SR and ED program.

I'd like that information from both of you, okay?

[Ken Cudmore]

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

I want to thank all our witnesses for being here today, for responding to our questions, and for their presentations. If you have anything further, please submit it to the clerk and we'll ensure all members get it.

We will suspend for a few minutes and come back for the second panel. Thank you.

[The Chair, Conservative, James Rajotte]

I call this meeting back to order.

This is the 89th meeting of the Standing Committee on Finance. We are continuing our study of Bill C-45, A second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures.

For our second panel this afternoon, I would like to welcome four individuals.

First of all, representing the Canadian Federation of Independent Business, Ms. Corinne Pohlmann, welcome to the committee. We also have a second organization, the Canadian Labour Congress, with Ms. Angella MacEwen. Welcome to the committee. We have Mr. Gregory Thomas from the Canadian Taxpayers Federation. Welcome. We are expecting Mr. Albert De Luca, partner with Deloitte & Touche.

You each have five minutes for an opening statement, then we'll have questions at the end of the last statement.

We'll start with the CFIB.

[Corinne Pohlmann, Vice-President, National Affairs, Canadian Federation of Independent Business]

Thanks for the opportunity to be here today. CFIB is a not-for-profit, non-partisan organization representing more than 109,000 small and medium-sized businesses across Canada who collectively employ more than 1.25 million Canadians and account for $75 billion in GDP. Our members represent all sectors of the economy and are found in every region of the country.

The focus of my remarks will be on three provisions of Bill C-45 that are important to small business owners. They are the EI hiring credit, pooled registered pension plans, and changes to public sector pensions.

You should have a slide deck in front of you that I would like to walk you through in the next few minutes.

Measures that address barriers to small business growth are very important as they, more than anything, will help Canada's overall economy and job creation.

As you can see on slide 2, payroll taxes have, by far, the greatest impact on growth. Why? Because they are a tax on jobs. It must be paid regardless of any profit. This is why EI remains a key issue for us and it is why we continue to push for the extension and expansion of the EI hiring credit for as long as EI rates continue to go up, as they did in 2012 and will again in 2013.

Very recently, we asked specifically about the EI hiring credit and found that almost two-thirds said it was somewhat or very effective in helping to—

[The Chair, Conservative, James Rajotte]

I'm sorry, Ms. Pohlmann.

I'm told the translators are having a hard time keeping up. If any of you have an opening presentation that we could give them, that would help as well.

[Corinne Pohlmann]

I did provide a presentation to them.

The EI hiring credit was seen by 64% as being somewhat or very effective in helping them to maintain or strengthen business performance. It does this by offsetting at least some of the EI premium increases when businesses grow their payroll. This is especially important for smaller firms who tend to be more sensitive to these kinds of cost increases. While small business would prefer to see EI premium rates frozen, the EI hiring credit does provide some relief to the smallest firms.

However, I want to mention that we have some concerns with the suspension of the Canada Employment Insurance Financing Board Act and the dissolution of the board. We understand and support the need to cut costs, and it makes sense to suspend the board's operations while it has nothing to do. However, our interest has always been that there be an EI account independent and separate from general government revenues, so that surpluses that accumulated in the past, to the tune of $57 billion, could never again be spent on other government priorities. While we understand the practicality of suspending the board's operations, we insist that EI continue to be treated as an account separate from general revenues.

The next part of Bill C-45 that is of interest to small business relates to provisions intended to create pooled registered pension plans. This is important as the majority of small business owners don't have a retirement plan for themselves or their employees. Why is that? Most small business owners will tell you that having a retirement savings plan is too expensive and too complicated to administer.

We believe that PRPPs will start to address some of those issues. We recently asked small business what features they would find most attractive in a PRPP. We found that giving employers a choice, keeping costs low, having no payroll taxes on the employer contributions, and minimizing the paperwork were all equally important. In theory, with this framework in place, PRPPs should address these issues to some degree; however, it will be up to the provinces and financial institutions to make it attractive to small firms. The good news is that just over one-third would consider offering a PRPP and another 30% might become interested once they have more information. Offering more options for retirement planning is welcomed by CFIB and our members.

The last provisions of Bill C-45 that I want to focus on are changes to public sector pensions. We welcome these changes, as they start to address some of the unfairness and unsustainability of public sector pensions. Let me illustrate why this is a concern for small business owners. More than half, 58%, of small business owners said they did not feel they had sufficient disposable income to take advantage of the various retirement savings options available to them.

Furthermore, more than half do not believe that they will be able to retire comfortably until they are well past the age of 65. Contrast this with the fact that in the last five years, nine out of ten new federal public sector pensioners retired before the age of 65 with guaranteed retirement incomes. Much of this is being paid for by those very same taxpayers who cannot afford to put money toward their own retirement, partly because they have to pay taxes to help pay for government pensions.

Last year, CFIB launched a pension campaign calling for greater transparency of public sector pension liabilities and fairness for taxpayers. Over the last year we have collected over 55,000 action alerts from small business owners concerned about the state of Canada's public sector pension system. Many of you have likely received these in your offices. These small business owners are particularly concerned with the sustainability of the federal pension plan, as it has an unfunded liability estimated to be somewhere between $140 billion and $220 billion.

We're pleased to see that Bill C-45 will start to address these issues by gradually moving federal public sector workers to a 50-50 split in contributions from their current 37% share. This will also bring the federal public service more in line with most of its provincial counterparts. This measure was well supported by small business owners.

We also support the provision of Bill C-45 that will move the retirement age to 65 for new employees as of 2013. Many other organizations, including federal agencies like the EDC and Bank of Canada, have also made changes to address their pension issues by providing a different type of pension plan to new employees that includes increasing retirement age to 65. It is good to see the federal public sector is also moving in this direction. We believe that these provisions are a good start in addressing some of these issues.

All the provisions I have discussed here are important to small business. As such, we would want to see them implemented as soon as possible.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now hear from the Canadian Labour Congress.

[Angella MacEwen, Senior Economist, Social and Economic Policy, Canadian Labour Congress]

On behalf of the 3.3 million members of the Canadian Labour Congress, we want to thank you for this opportunity to present our views regarding the 2012 budget implementation bill.

The CLC brings together workers from virtually all sectors of the Canadian economy, in all occupations and in all parts of Canada.

Bill C-45, division 22, proposes to temporarily suspend the Canada Employment Insurance Financing Board, the CEIFB. The suspension of the CEIFB makes sense, as it was constrained in setting rates by subsection 66(7) of the EI act, which limited rate increases or decreases to 0.05% of insurable earnings.

The CLC never agreed with the CEIFB as it was established, because it failed to include input from premium payers who are employees and employers.

In past submissions to the government and to parliamentary committees, the CLC called for a separate employment insurance account, governed by an EI commission or similar body, established at arm's length from the federal government. Similar to the CFIB, we are concerned with the surplus that was taken. We argued that the EI account and any surplus funds placed in a reserve fund or premium stabilization fund should be used only for EI purposes.

The fact that the EI program is paid for by employer and worker premiums has not been adequately reflected in the governance of EI finances. If we consider the $57 billion that was taken from the account without the consent of premium payers, the account would be in a surplus position right now. The government would be less concerned about cutting back EI programming, and EI would be more effectively performing one of its key roles as an automatic economic stabilizer.

When the CEIFB is reinstated, the premium payers, who are the employees and employers, should have closer input into the premium-setting process, and effective joint control with the government over the management of any reserve funds and the use of any surpluses.

As well, we want to comment on how the EI financing system now in place is not operating in an appropriately counter-cyclical way.

Even though the federal government directly covered the cost of the EI measures in Canada's economic action plan, including the cost of the premium freeze during the recession, training benefits, work sharing, and the temporary five-week extension of regular benefits, the EI operating account went into deficit because of the large increase in the cost of regular EI benefits caused by an increase in the national unemployment rate from about 6% before the recession to a high of 8.6% in 2009 and continuing high unemployment since the worst of the recession. It's been at about 7.4% for the past year.

Premiums were frozen rather than reduced during the worst of the recession, and are now rising during a very weak recovery. While premium revenue is forecast to exceed EI expenditures in 2012, it will have to continue to do that in order to pay off the deficit of $9.2 billion that was in the EI operating account at the end of 2011.

The stage is set for continuing premium increases for several years in order to eliminate the accumulated deficit. Again, this is the case notwithstanding the huge EI surplus that was accumulated before the recession.

We believe the federal government should pay into the segregated EI operating account an amount equal to deficits in the account incurred from 2009 until such time as the account is segregated, and should cover any future deficits incurred in the account until such time as the national unemployment rate falls below 6.5%.

I would also like to speak to an unexpected tax change in Bill C-45. Bill C-45 clarifies the taxation of RCAs, closing an unintended loophole. At the same time, Bill C-45 extends pension-splitting to RCAs.

Budget 2012 states:

Under the Income Tax Act, a retirement compensation arrangement (RCA) is a type of employer-sponsored, funded retirement savings arrangement. RCAs are normally used to fund the portion of a higher-income employee's pension benefit that exceeds the maximum pension benefit permitted under the Registered Pension Plan (RPP) contribution limits.

This is effectively a tax break for wealthy seniors that will have very little benefit for most Canadians. Pension income splitting provisions do not benefit unattached seniors, who are 30% of all Canadians over the age of 65 and who are those most vulnerable to poverty, and there is no benefit to senior couples whose income is so low that they already pay no income tax.

The amount of tax savings from pension income splitting depends on the income level, so the small proportion of affluent seniors receive the largest reductions, with the majority of middle-income seniors seeing only a modest reduction, if any. This is especially true of allowing pension splitting on RCAs, into which many seniors will not have had the resources to contribute.

As well, different types of pension splitting have different impacts. Allowing spousal RSPs encourages the higher earning spouse to transfer the funds into the control of the lower earning spouse. Allowing the splitting of pension income for tax purposes reduces the couple's tax burden in the current year, but does not require funds to be shared with the lower earning spouse. An example of where this might matter is in the case of subsequent divorce, or the death of the higher earning spouse. Where pension splitting was encouraged via spousal RSPs, the lower earning spouse is far better off than in other forms of pension-splitting.

A thorough gender-based analysis of the budget and budget provisions, such as GBA+, as outlined on the Status of Women website, would illuminate the differential gender impact of such apparently gender neutral policy decisions.

[The Chair, Conservative, James Rajotte]

Ms. MacEwen, we must ask you to conclude.

[Angella MacEwen]

I have one more paragraph.

Pension-splitting measures cost $3.2 billion in 2010 alone. We argue that these tax expenditures would be better directed at returning the OAS to age 65, and improving the GIS so that all seniors in Canada are above the poverty line.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll now hear from Mr. Thomas.

[Gregory Thomas, Federal and Ontario Director, Canadian Taxpayers Federation]

Mr. Chairman, we appreciate the invitation of the committee to appear today.

The Canadian Taxpayers Federation is Canada's largest taxpayer advocacy group, with over 70,000 supporters from coast to coast, and 22 years of history advocating for less government, lower taxes, and more accountability from our elected officials.

We welcome the reforms contained in Bill C-45 as they apply to public sector pensions. We believe that increasing the retirement age for new hires to 65 is a good first step toward making government employee pensions at the federal level more sustainable. We salute members of all parties for taking leadership by reforming their own pensions and speeding that legislation to royal assent. It was a long multi-decade slog for us, and you folks managed to get the job done in 48 hours when the chips were down. That was inspiring to watch.

With regard to pensions, if you look at C.D. Howe Institute's estimates and the public accounts, you see that unlike the Canada pension plan, the government employees' pensions are completely funded out of general revenues. There are no pension funds set aside to secure the retirements of Canada's federal government employees. We believe that Parliament needs to have a serious look at this.

The government was able to put the Canada pension plan on a sustainable basis. Through reforms to old age security, by raising the retirement age to 67, and by giving people an incentive to stay in the workforce until age 70, you're also putting old age security benefits on a more sustainable basis. We think you need to look at this for government employees.

With regard to EI, we have a lot of sympathy for the arguments made by the Canadian Labour Congress. They rightfully feel that to have $57 billion of employment insurance funds snafued by government in order to apply them to deficit reduction is a shocking and upsetting development. The seizing of these notional pension surpluses in the 1990s falls under the same banner. We think that parliamentarians, people with their feet on the ground who have to go home on the weekend and explain all of this to their constituents, need to be very wary of actuarial assumptions and projections, notional surpluses, and these deficits that arise. When you move away from having individuals save for their own retirements, innocent people are subject to the manipulations of government and the financial system, and it doesn't serve anyone.

With regard to the EI funding, we note that for every employee up to the average industrial wage, employers and employees who are fully in the system pay over $2,000 combined into the EI fund each year. Many people will never claim against the EI fund, and yet you have entire regions of the country where people are multiple claimants, claiming more than three times in the last five years. It's particularly unfair in the Ontario labour market, where it's very difficult for most people who are working to even qualify for EI. We ask why you don't set up a plan similar to the Canada pension plan, where employees and employers contribute to a rainy day fund that individual workers can access directly.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Thomas.

We'll go to Mr. De Luca.

[Albert De Luca, Partner, National Leader, Global Research and Development, Government Incentives, Deloitte & Touche]

Thank you.

I apologize for not having a document handy, but I was invited yesterday to attend. There is a submission from Deloitte, which was filed on September 13.

My opening remarks relate to the R and D incentives program. I am the Canadian leader of the global incentives and investment attraction for Deloitte. I also preside over the board of the Quebec Industrial Research Association, l'ADRIQ. It's in this capacity that we're in contact with industry right across the country. I wish to reflect industry's view on the changes proposed in relation to SR and ED.

We think we need to position the incentives discussion in the wider discussion of innovation investment attraction or preservation. R and D incentives certainly serve to help increase productivity. We would agree with that, but R and D should also serve to increase economic wealth by creating the next generation of technologies.

Canada is attracting natural resource investments. Unfortunately, the related innovation investment is not being made, or at least not entirely. Canada, therefore, is not as attractive compared with the rest of the world in its strategy of attracting, preserving, or creating the next large technology company.

Canada's SR and ED regime has been widely viewed as an important positive factor in encouraging innovation investment in Canada. We believe that the proposals to reduce government support make Canada’s incentive regime less attractive than those of competing countries that are improving their incentive programs. In fact, Canada’s ranking in tax incentive generosity has already declined from third to fifth for small companies, and from ninth to thirteenth for larger ones, from 2008 to 2012.

With the changes announced in the budget, we anticipate that these rankings, especially for large companies, will drop even further. Our recent post-budget survey of Canadian companies confirms that reactions to the reduction in government support through the SR and ED program have generally not been positive and suggest that Canada’s R and D tax regime will be less attractive after the changes.

In our view, the elimination of incentives for capital expenditures does not recognize that capital investments are needed to perform R and D and that certain industries will be put at a disadvantage as a result of this measure. The software industry, for example, requires computers and related equipment in order to undertake R and D. Rather than completely eliminating all capital costs, we recommend that the government distinguish between short-term capital expenditures, such as computers and related equipment, and longer term ones, and treat the short-term capital expenditures in the same manner as material costs would be treated, as eligible for SR and ED credits.

In addition, rather than introducing a broad elimination of eligibility of capital expenditures for SR and ED, we recommend the introduction of a limitation process. For example, an approach similar to that for shared use equipment could be considered. Alternatively, the proposals could introduce a cap on the amount that would qualify.

Should the proposals relating to capital expenditures be retained, we would recommend that the draft legislation be refined to introduce greater certainty. I won't go through the series of notes in respect of the drafting itself, but there are a number of them that create some uncertainty as they relate to the legislation as currently drafted.

As we noted in our pre-budget 2012 submission of October 2011, we believe that Canada’s R and D tax regime should be improved by allowing the tax credits to be at least partially refundable for all businesses, as is the case in many countries and in Canadian provinces. The U.K., for example, has decided not to eliminate the program, but to make the tax credit entirely refundable for all companies. France is doing the same.

[The Chair, Conservative, James Rajotte]

About one minute, Albert.

[Albert De Luca]

Expanding the refundable credit to all businesses would more appropriately reward risks inherent in carrying out SR and ED in Canada, as opposed to applying credits only to profitable years when the credits are not as necessary. Long-term planning is made more difficult for many organizations, particularly those that operate in cyclical industries and cannot easily predict when they will have sufficient corporate tax liability to benefit from the SR and ED tax credits.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will begin members' questions avec M. Caron, s'il vous plaît.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you, Mr. Chair.

I will begin with Ms. Pohlmann.

The tax credit for hiring is an interesting measure. We are talking about $1,000 for each new employee. That money comes from the employment insurance fund. We often heard that about 530,000 businesses took advantage of tax credit in 2011. Yet there weren't 530,000 new jobs created in Canada—if we are talking about net numbers—in 2011. That's what I have a problem with. I asked the department representatives who appeared whether the businesses that took advantage of that tax credit had hired and retained employees over the whole year. They told me that was possibly not the case.

Tax credit is very attractive for businesses, but as far as job creation goes, do you really think that each of the 530,000 businesses who benefited from that measure retained their employees over the course of the whole year?

[Corinne Pohlmann]

I think it would be difficult for me to say yes they all did. Having said that, I do believe the purpose of the credit is to encourage businesses to hire new employees, but it's also to encourage them to retain their employees. That's just as important when you're going through a difficult time. It allows them to have at least something so that they perhaps can make that decision to hold on to their employees a little longer. That's the other important element behind why this credit, while small, is important to smaller companies.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

In the last election, the NDP said it was in favour of a tax credit for hiring that would be accompanied by a retention tax credit after a year.

Do you think that measure would be better for creating jobs that are more permanent and stable?

[Corinne Pohlmann]

Again, it certainly would be helpful to have something that would encourage people to retain their employees.

At the same time, businesses have to go with the cycle. They have to understand what they need from time to time. It's not always easy for every single small firm to hold onto every employee they bring on. We always say small businesses are the first to hire and the last to fire. They'll do anything they can to hold onto their people. We saw that through the recession very clearly. That type of incentive may also be helpful, but I think the way the EI hiring credit is now, it has also been useful for a lot of the very small companies.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you.

Mr. Thomas, we briefly discussed MP pensions, and I don't want to necessarily rehash that, except for the following point. The NDP suggested that an independent group look into not only the MP pension plans, but also their salaries.

Do you think such a measure would be positive in terms of how Parliament manages the issue of MPs' and senators' benefits?

[Gregory Thomas]

It is our long-standing position that parliamentarians need to continue to set their own salaries and make these decisions, because ultimately, they are accountable for the decisions. We survey our members on a regular basis in this regard, and our supporters, whom we survey, consistently believe that parliamentarians should be accountable for their wages, their benefits, their budgets. Therefore, they've historically been very resistant to the idea of getting any kind of expert commission.