Finance Committee on Oct. 21st, 2014

[Clay Gillespie]

Our belief is that you should lower the percentage withdrawal that has to come from the RRIF and make it consistent through the life of owning the RRIF. Now the formula for under 70 is dramatically different from the age of 71. I have never quite figured out what was magical about the age of 71 but the percentage is a problem.

We believe there has to be some way of updating the percentage to make it more in line with what's going on in today's economic environment.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

How often would you see reviewing the formula for that?

[Clay Gillespie]

It matters which formula you choose, and we went through this and decided there are probably three different ways you can solve this problem.

The first way is just to update the formula to something like one over 95 minus your age and maxing out at 15%, and that would solve the problem today, but it wouldn't solve the problem tomorrow. So you'd want to update that at least every five years.

Another option we believe is possible, the second way, is an indexed annuity option whereby you just use annuity rates every year to set the payout for the year. Of course, annuity rates change with life expectancy and interest rates, so that would never have to be adjusted other than changing the number every year.

The third way is a dynamic RRIF model whereby the payment you have to take out is a combination of your capital payment and then you have an earnings component on there, because we believe there are two different types of RRIF investors: the GIC-type investors and the market-based investors. We're trying to figure the best way to equate both of them.

[Mike Allen, Conservative, Tobique—Mactaquac, NB]

On your recommendation with respect to the long-term care insurance, you offer two options there.

Is there a preferred option?

And the second question that goes along with that is about providers of this insurance. Is the market of providers broad enough for long-term care insurance, especially when so much of this is part of provincial responsibility? And to the point that was made before, it would be great and we want to keep people in their own homes and that would be fantastic, but a lot of us have our seniors' homes and we have other things. So a lot of people are using those provincial services. How broad is the insurance market for long-term care?

[Clay Gillespie]

I'll answer that question first. We know there are insurance providers that aren't going into the market the way it's structured currently and would go into the market if it were more dynamic. So if there were some kind of tax incentive to allow the purchase of a long-term care product, you would see an enhancement to the market, in our opinion.

As for which of the two solutions—and you didn't ask me that for the RRIF interestingly—but as for the long-term care, we think both have merit but the second one would seem a little easier to administer and that's taking the withdrawal out of the RRSP and using that to pay for long-term care.

[The Chair, Conservative, James Rajotte]

Thank you.

Thank you, Mr. Allen.

Colleagues, I'm suggesting we go to five-minute rounds.

Mr. Caron, go ahead.

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

Thank you very much, Mr. Chair.

Ms. Alepin, you talked about two recommendations. Let me start with the second one.

You didn’t have time to elaborate, but you talked about a race to the bottom in terms of taxation. That brings to mind the recent news about the takeover of Tim Hortons by Burger King. In that case, there was a lot of talk about tax inversion. Some economists even said that Canada’s corporate tax rate was getting close to the tax havens.

Is that what you were trying to get at? Could you comment on that announcement and the impact it will have on the Canadian and international tax landscape?

[Brigitte Alepin]

Thank you for your question.

In 2004, when I started looking at how tax systems were adapting to globalization, Canada had not taken a position yet. Canada had not yet shown what type of tax competitor it would become. I must say that I am a little surprised to see Canada react that way to tax competition.

The fact is that Canada has become a major tax competitor for the United States in terms of statutory rates. The competition is even stronger when it comes to effective tax rates. I personally had the opportunity to work on the records of multinationals to see what tax rate they were actually paying. Some multinationals were subject to tax inversion.

In Ireland, they now talk about the “double Irish with a Dutch sandwich”. Here in Canada, we talk about a “Canadian Club”. We propose tax inversion to a multinational, followed by a transfer of profits to a tax haven country with which Canada has signed tax information exchange agreements. That is all followed by the profitable use of R and D systems. So it is true that Canada has a surprising attitude. I did not realize Canada had to use its tax system that way to attract capital.

If Canada does not want to have to further reduce what is already close to zero for some multinationals and if it wants to remain competitive, I would say one thing. Perhaps it is time to discuss the possibility of everyone further reducing tax rates, either statutory or effective.

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

Let me ask you a question about that.

How does the takeover of Tim Hortons by Burger King benefit Canada in terms of tax competition?

[Brigitte Alepin]

It may simply be publicity to tell the world that Canada has become one of the top destinations for U.S. tax inversions, just like Ireland, Switzerland and the Bahamas. As such, it does not create a lot of jobs. It is more a journal entry transaction than anything else.

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

Thank you.

I would now like to go back to the issue of foundations.

As you said previously, we are talking about large foundations, which are often family foundations. You and other economists are of the opinion that these are tax shelters in the sense that they become perpetual foundations given that they spend only what they make. Basically, this also becomes a way for these major donors to keep the family’s assets and heritage in the family by removing it from the inheritance issue.

Could you comment on that?

[Brigitte Alepin]

Yes, and to explain it, let me give you an example. I will try to make you understand how completely distorted the system has become.

For instance, Canadians could use all the tax mechanisms Canada has to start up a multinational. During the lifespan of the multinational, their effective tax rates will be very low. When they want to sell their shares, say for $2 billion, they could decide to invest $1 billion in a private foundation. As a result, they would pay no taxes because of the tax credit. In addition, when they retire, they would become a major—

[The Chair, Conservative, James Rajotte]

Thank you, Ms. Alepin.

My thanks also go to Mr. Caron.

We'll go to Mr. Van Kesteren next, for five minutes, please.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

Thank you, Chair.

Thank you all for coming this afternoon.

I want to follow up, if I could, with Madam Alepin.

Mr. Keddy was talking about the volunteer disclosure program. We all know that there are people who avoid taxes. And we should clarify that avoidance is legal; it's when evasion takes place through illegal measures.... So that's a good clarification.

Our government has been involved with a number of programs—aggressive programs—to stop evasion and even avoidance. We've closed these loopholes.

Is it safe to say that these measures are the reason so many have come forward who would normally maybe hide in the bushes? Is that a safe analysis?

[Brigitte Alepin]

As I said earlier, in the past, we have noticed that little things in the voluntary disclosure program could be improved. Overall, the program works very well and it is important to reach out to taxpayers who have used tax avoidance. Attracting them in this way is smart. This system has been used in other countries.

Here is the problem. While we are looking for these taxpayers or catching them in Canada, we are also allowing multinationals to do the same thing in tax havens legally. That does not hold water.

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

I'll tell you what I'm a little more concerned about, because this is a practical application. Increasingly the auto industry, for instance—and I won't name any companies—have come to us. They're not concerned so much about.... Although I think they like our corporate rate, that's not the reason they're flooding into the country. They're threatening to leave the country if we don't do what other jurisdictions are doing, which is basically to pay them to come.

Extortion: isn't that more of a concern than lower corporate tax?

[Brigitte Alepin]

Yes, that should concern us more. You are saying that we might need to give them some candy to come to Canada. That's all true. That is why, at the end of the day, once we have gone through all the stages in detaxing multinationals and finished talking about the tax competition that might become destructive, we will have to do something about this competition and the use of tax gifts to attract capital. If we do that, other countries will eventually do it too. I think that is the key issue that needs to be addressed. You are right, but ultimately, at some point, countries will have to agree on the extent to which they want to do that. That is the initiative I am proposing.

In England, as you know, the tax rate has been recently reduced and British tax authorities are already afraid that other countries are overtaking them and that they will have to lower the rate some more. Unless we ultimately want corporate taxes to disappear, we must do something to—

[Dave Van Kesteren, Conservative, Chatham-Kent—Essex, ON]

But you recognize that we have a looming problem in this country. It's not so much our lower corporate rate. The problem is that other jurisdictions—the United States, Mexico, I'll say, to speak specifically—are enticing companies to come, and they're virtually bribing them to come.

Wouldn't you agree that this is more of a problem than our lower corporate rate? I guess I want an answer, yes or no, whether that's true.

[Brigitte Alepin]

Right now, this is a problem in Quebec, Canada and elsewhere in the world. I see the problem, but it is an international problem now. When we made the first tax cut announcements 10 years ago, we were all proud, because we thought Canada was going to be the most tax-competitive country in the world. Now, we are worried about other countries' response. At some stage, some of us will have to get ahead of the issue in order to make more progress on the key issue of tax competition between countries because it has become destructive.

[The Chair, Conservative, James Rajotte]

Merci.

Thank you very much, Mr. Van Kesteren.

We'll go to Mr. Rankin, please.

[Murray Rankin, NDP, Victoria, BC]

Thank you, Chair, and thank you to all the witnesses.

I wish I had more time. I just want to make a comment.

I really appreciate, Ms. Alepin, your suggestion of a conference. I think that's an excellent way of moving this forward. I'll just say that I hope the government takes you up on that suggestion.

Professor Robson, you talked in your remarks about a disparity between the paid tax preparers, whose services two-thirds of us seem to be needing, as compared with the non-profit tax preparers. It seemed to me you were suggesting there was a disparity or that we were disadvantaging the non-profit ones.

Could you elaborate on that?

[Prof. Jennifer Robson]

The full-profit tax preparers will be brought into CRA's new compliance scheme, a new regulatory mechanism. I think the agency is doing the right thing in focusing on education. Monitoring the performance of those paid tax preparers and providing those additional kinds of remedial services by way of information or education is a good thing.

My concern is that the only way, right now, that the agency is able to support the community volunteer tax programs is through the CVITP. Approximately 10, 15, maybe even 20 years ago, we used to provide funding to organizations to run those. Now we provide a little bit of information, and I'm concerned that if we're not finding ways to ensure that they have staff capacity, training, education, then as the tax system evolves and moves, are we protecting their capacity to serve the highest-needs clients?

[Murray Rankin, NDP, Victoria, BC]

In something you've written that was referred to me, you mentioned, and I'm going to quote you, “...the UCCB sends gobs of money to parents who don't need it and has the weird effect, for a childcare policy, of encouraging women to work less.” Could you elaborate on that?

[Prof. Jennifer Robson]

That's based on research done by Tammy Schirle, who has found that for the families who are receiving the UCCB, it actually leads to a decline in the workforce participation of women in those families. I think there's some fuzziness about that particular program, frankly. Is it intended to essentially be a cash transfer to families, in which case there are a lot of different ways to skin that cat? Is it a way to actually help people pay for child care services so that they can go to paid employment?

One of the other weird things that happens with the UCCB, in addition to giving it to, frankly, the wealthy bankers' wives, is this. Because it's taxable income, it looks as though it's probably actually reducing people's access to subsidized child care because it's included in the assessment of family income.

[Murray Rankin, NDP, Victoria, BC]

I see. Thank you.

Professor Woolley, you made a comment that I just thought cried out for some elaboration. You talked about the CCTB, the child care tax benefit, creating “a non-trivial marriage penalty”. Could you explain what you meant?