Finance Committee on Nov. 5th, 2013

[Randy Hoback, Conservative, Prince Albert, SK]

When you see this agreement come into play...of course, structural changes will happen in Canada now. You've got a new market access, so instead of stuff going through the west coast, now maybe it's going to go through Churchill or Thunder Bay or the Port of Montreal. Do you take those types of growth in your model and how that impact will domino through the whole economy?

[Glen Hodgson]

When we model economic growth it's very much a top-down exercise. We take the world as it is and then try to flow it through the various drivers of growth. But if you become more granular and look at the impact on a regional economy, for example, you would see it fairly quickly. You see the uptake in investment. You'd start doing port expansion, for example, in Vancouver, Montreal, and Halifax. Quickly that would translate into stronger growth numbers for the city or province concerned.

[Randy Hoback, Conservative, Prince Albert, SK]

When you talk about infrastructure and investing in infrastructure itself, could you be a little more specific about what type of infrastructure you're talking about? Is it educational infrastructure? Is it roads and highways, or rail?

[Glen Hodgson]

I have to start with the raw physical infrastructure. I'm on the road almost every week. Every major Canadian city is half dug up. Downtown you're replacing water systems. We're focusing on transportation infrastructure in cities, between cities, at the border. Canada is not a market leader. If you travel in Asia or Europe, you see much more advanced public infrastructure systems getting people around much more efficiently.

[Randy Hoback, Conservative, Prince Albert, SK]

Let's be fair. You've got denser populations in a smaller area in Europe and places like that. How do you take Canada, which is so widely spread out...? I have a five-hour plane ride every weekend just to go home. How do you take rail that they have in Europe and say that's what we're going to apply in Canada?

[Glen Hodgson]

Mr. Hoback, I think I've done that plane ride going west.

Start with your dense populations. We've debated things like high-speed rail in Canada for 25 to 30 years. Arguably, in the Windsor-Quebec corridor you probably have enough people, recognizing the fare box will not pay for things like high-speed rail. Nowhere in the world does the user pay the full cost. It's seen as a social benefit, taking people off the roads, out of airports. It's an alternative form of travel.

Southern Ontario would be the place I would start, and obviously the provincial government's committed to building public infrastructure, public transit, there. The question is whether we can do more, because clearly we need more if our economy is really going to function at a high level.

[Randy Hoback, Conservative, Prince Albert, SK]

Mr. Effer, you talked about income tax and simplification of income tax. How do you see that moving forward? As we do our pre-budget talks we're not looking at increasing spending. As you said, we're on track for a balanced budget for 2015. I think it's very important we get there. We're hearing that very clearly right across Canada. They want to see our books balanced and they feel it's important.

What types of changes would you give as an example of simplification of income tax that would still allow us to do that but make it easier for businesses to operate?

[Peter Effer]

One of the principles we've spoken about when we've been here before is some consistency and clarity in the provisions of the Income Tax Act. We appreciate that we're not going to shrink it down to the act of World War I—

[Randy Hoback, Conservative, Prince Albert, SK]

We just did a bill where we actually did a lot of clarity work—

[Peter Effer]

That was excellent to clear up a lot of old outstanding issues. It's that type of work that we're talking about.

There is also taking things such as what was mentioned in the submission—allowing more flexibility among corporations to move deductions. Losses are one example of the deductions. There are other examples; consolidated tax filings is another example. For simplicity, that will stop organizations from really jumping through hoops to accomplish the same thing.

[The Chair, Conservative, James Rajotte]

Mr. Hoback, your time is up. Thank you.

Mr. Caron, you have five minutes.

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

Thank you very much.

Lady and gentlemen, thank you for your presentations.

I would first like to speak to Mr. Effer regarding the issuing of flow-through shares for scientific research and experimental development.

Mr. Effer, I expect you have done your homework, but from my perspective, I fear that what you are proposing would have the same results as the Mulroney government scheme in the 1980s. At that time, it was possible for third parties to fund research and development in organizations, which led to extraordinary abuse because of the lack of oversight by the Department of Finance. Moreover this opened the door for enterprises to fund fictional projects simply to benefit from the tax credit, without any regard for the effectiveness of the research and its final commercialization.

Did you study what happened in the 1980s, when companies were allowed to claim that income tax credit? How is what you are proposing different from the scheme that led to so much abuse in the 1980s?

[Peter Effer]

As far as a study, no, we have not looked at the eighties. We know that audit techniques that have been undertaken in the last 20 years have improved, so we have confidence in the CRA to audit these projects. With the definitions of SR and ED, it's a critical program.

I'm sorry, the second question, sir?

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

How is the tax credit you are proposing different from the one which led to so much abuse in the 1980s, to such an extent that the government had to put an end to the program because it was being improperly used?

[Peter Effer]

In fact, keeping with the theme of tax simplification, we would actually want to use the same model that's used in the oil and gas and the mining industries. We're not trying to recreate the wheel. Those programs are working effectively. The idea is simply to take a model that works and apply it to a different industry, an industry with companies across the nation. In particular, it is a program that would provide investment capital generally to smaller organizations in Canada.

The interesting thing about doing that is that those smaller organizations in Canada would use that capital to generate innovation; the innovation would stay in Canada, the products would then be commercialized in Canada, and they would create jobs in Canada.

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

As opposed to the current tax credit for the oil and gas industry, you are proposing that we offer this possibility to all Canadian industries. Consequently, it would be much more difficult to supervise the effectiveness of the tax credit that would be assigned to the third party in this case.

[Peter Effer]

I think right now we have to appreciate that the SR and ED tax system deductions and credits are already being audited when companies are filing their tax returns and claiming these deductions and credits.

We're simply taking it one step further and issuing them out to shareholders.

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

In the 1980s, those companies were also audited. So that is no guarantee that some will not slip through the cracks.

I'd like to use the last minute and a half I have left to speak to Mr. Russell. One of your recommendations, which seems innocuous but would have some quite serious repercussions, is to eliminate withholding taxes for businesses offering group RRSPs, that is to say tax withheld for employment insurance and the Canada Pension Plan. That recommendation seems quite innocuous, but it would have huge ramifications. Indeed, when income tax credits were created for RRSPs, it was quite well recognized that those credits complemented the Canada Pension Plan, but did not replace it. As for employment insurance, it is an entirely distinct system created to protect the unemployed in periods of inactivity and offset their loss of income.

In fact, what you are proposing is much more than a tax measure. It would change the philosophy of RRSPs in connection with the Canada Pension Plan.

[Ian Russell]

The point we had been making is that we're not taking issue with EI. In fact, it's not an issue directly related to EI; it is directly related to registered retirement savings plans. They are a bona fide retirement savings vehicle. They are analogous in terms of the function they perform as a defined benefit or a defined contribution plan. With a defined benefit and a defined contribution plan set up by an employer, the employer can deduct the EI—the payroll taxes, if you will—against the contributions to those plans.

What we have looked at is group RRSPs. Group RRSPs function as retirement savings vehicles no differently from the way defined benefit and defined contribution plans function. Very often for lower-income Canadians who are working with very small companies, companies that can't afford substantive retirement plans for their employees, it has turned out to be the case that group plans are very attractive.

[The Chair, Conservative, James Rajotte]

Could you wrap up, Mr. Russell? I'm sorry, but we are way over time here.

[Ian Russell]

The only point I'm making is that we think the payroll deductions should be provided for group RRSPs in the same way they are for other retirement plans.

[The Chair, Conservative, James Rajotte]

Thank you.

I'll remind colleagues to leave enough time for witnesses to address their questions.

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

[Mark Adler, Conservative, York Centre, ON]

Thank you, Chair.

Thank you all for being here today.

I want to begin with Mr. Russell. The spate of monetary stimulus over the last number of years has been very successful in increasing domestic demand. The problem it has led to is that consumers or households are somewhat over-leveraged, and as a result, domestic demand has decreased. Therefore, is it not prudent that we as a government have pursued a very aggressive trade strategy—Ms. Campbell, you may also want to chime in on this after—which is so important to our economy? The export sector can replace or lend that demand or that strength of the economy back such that the domestic demand has decreased.

Could you comment on how important the foreign trade has been and how important it is that we negotiate deals like CETA?

[Ian Russell]

I'd be pleased to do that. I think the government's strategy to increase dependency on exports is really well placed, at a time when investment spending is down, and at a time when consumer demand is down, except in certain sectors, such as housing, in which it has been very strong.

I think the fact that the Toronto Stock Exchange rose five percentage points at the end of October sent a very positive signal that the trade deal with the EU is going to have very important implications for Canada in terms of opening up markets.

Nobody here has spoken about the automobile sector or the auto parts sector, which is Ontario based. It's going to be a real shot in the arm to that manufacturing, and I think it's going to lead to more automobile manufacturing in Ontario by virtue of the content requirements to take advantage of the 10% tariff reductions in Europe. As was said here, the other parts of the country, from the east coast to the west coast, are going to benefit from the opening up of opportunities in the energy sector and the agribusinesses.

So this is a real win for Canada, on top of which it's going to be a win for Canadian consumers, because manufactured goods out of Europe are going to be coming into Canada, similarly without the tariff. There are going to be certain sectors that have been protected in the Canadian economy and that are going to need some kind of assistance, but overall I think this is a well-placed strategy. As was said earlier, the deal with the EU is unprecedented. It rivals the North American free trade deal. Canada is doing the same thing by opening up these trade deals and taxation agreements with jurisdictions all around the world, and that's all very positive for us.

[Mark Adler, Conservative, York Centre, ON]

Thank you, Mr. Russell.

Just before I go to Ms. Campbell, how much time do I have, Mr. Chair?