Finance Committee on May 26th, 2015

[The Chair, Conservative, James Rajotte]

I call this meeting to order. This is meeting number 82 of the Standing Committee on Finance.

Our orders of the day are pursuant to the order of reference of May 25, we are studying Bill C-59, an act to implement certain provisions of the budget tabled in Parliament on April 21, 2015 and other measures. This is our first session.

We have with us here this morning a number of individuals to present. I want to welcome all of you and to thank you for appearing here this morning.

We have Professor Maureen Donnelly from Brock University.

We also have Professor Allister Young, from Brock University as well, I understand.

We have from the Canadian Federation of Agriculture, Mr. Ron Bonnett, president.

From the Canadian Labour Congress, we have their senior economist, Ms. Angella MacEwen.

From the Canadian Manufacturing Council, we have the vice-president, Mr. David Podruzny.

From Imagine Canada, we have the president and CEO, Mr. Bruce MacDonald.

Welcome to everyone.

From the Library of Parliament, we have Monsieur Jean-Denis Fréchette.

Welcome once again, Mr. Fréchette.

You will each have five minutes for your opening statements, and then we'll have questions from members.

We'll begin with Ms. Donnelly, please.

[Maureen Donnelly, Associate Professor, Taxation, Goodman School of Business, Brock University, As an Individual]

Thank you.

Actually, Professor Young is going to begin and then we'll switch to me.

[The Chair, Conservative, James Rajotte]

Mr. Young.

[Allister W. Young, Associate Professor, Taxation, Goodman School of Business, Brock University, As an Individual]

I am here today to address provisions of Bill C-59 dealing with changes to the tax-free savings account, specifically the proposed increase of the TFSA annual contribution limit from the current $5,500 to $10,000.

I speak against this very large increase of more than 80% on the basis that the existing TFSA, with its $5,500 limit, is already failing to serve its stated purpose. To almost double the limit will exacerbate the inequity that research has already identified.

I will refer you specifically to our article published in the Canadian Tax Journal entitled “Tax-Free Savings Accounts–A Cautionary Tale from the UK Experience”.

The purpose of that research project was to predict how Canadians would use the TFSA and specifically whether the government's promise would be borne out, i.e., that the introduction of the TFSA would benefit all Canadians at all income levels in all walks of life.

We used data from the British experience with their tax-free savings plan, the ISA, or individual savings account, a tax measure very similar to the Canadian TFSA. There was every reason to believe that the Canadian experience would be similar to the effects that the British savings plan had already shown, as follows:

One, as income rises, so does plan participation.

Two, the introduction of such a plan does little to break down the barriers to savings faced by low-income individuals.

Three, the plan take-up rate in terms of new savings by low-income individuals could be less than 5%.

Four, the proportion of accounts held by low-income individuals falls consistently over time, as the proportion held by high-income individuals continues to rise.

Five, these plans provide a significant opportunity for income splitting in single-income households.

Six, the typical account holder is a man, belongs to the highest-income cohort, and is approaching retirement.

[The Chair, Conservative, James Rajotte]

Ms. Donnelly, continue. You have three minutes.

[Maureen Donnelly]

These were our predictions for the tax-free savings account, and on that basis it belied the promise of universal benefit. As Canadian data emerges on the TFSA experience to date, research recently published by our Canadian tax academic colleagues, in particular Professor Kevin Milligan of UBC and Professor Jonathan Kesselman of Simon Fraser, suggests that our predictions were more accurate than we would have liked.

Yes, it is true that millions of Canadians in all walks of life have opened and made contributions to TFSAs; however, that does not answer the question as to which Canadians at which income levels will the largest benefits accrue and at what cost to the Canadian tax system.

One of the features of the TFSA that most unsettles tax policy scholars is the ability for interspousal contributions. Canada's benchmark tax has always identified the individual as the appropriate tax unit. Measures that allow transfer of wealth between spouses undermine that principle and represent significant disincentives for Canadian women to enter or re-enter the workforce by disproportionately benefiting single-income households.

In conclusion, this is an extremely expensive tax expenditure. Although early-year estimates may not shock, the long-term estimates of revenue to be forgone by future governments are enormous and will serve an increasingly narrow population of Canadians over time.

The budget speech refers to four reasons Canadians might use their TFSA to save: one, buy a home; two, start a business; three, pay for post-secondary education; and four, make retirement more comfortable.

Reducing the public treasury through increasing tax-free savings is a very blunt instrument to use in the pursuit of helping Canadians make these key aspects of their lives more affordable. More equitable and more finely tuned measures already exist for those specific purposes, and any additional expenditures through the tax system should be directly targeted. To simply expand the TFSA does not serve that purpose and is not worth the high cost to the citizenry as a whole.

Those are our remarks.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll now hear from the Canadian Federation of Agriculture, please.

[Ron Bonnett, President, Canadian Federation of Agriculture]

Thank you, and thanks for the invitation to attend.

As mentioned, I'm the president of the Canadian Federation of Agriculture, and we represent about 200,000 farm families across the country.

I'd like to make a few comments on some of the provisions in the 2015 federal budget and Bill C-59.

The first concerns the decrease in the small business income tax rate from 11% to 9%, applying to the first $500,000 of income.

This measure will provide broad tax relief for Canadian producers, providing them an additional flexibility to manage risk, to reinvest in their operations, and to improve productivity. Any such relief directly contributes to Canadians' agricultural competitiveness in global markets.

As well, the extension of the tax deferral regime that applies to patronage dividends paid to members of agricultural cooperatives through eligible shares is welcomed. Agricultural cooperatives provide valuable support to small and medium-sized agricultural producers as a resilient business model that provides improved risk management capacity, improved market access, and a variety of other benefits to their members.

These businesses play an important role in the economies of rural communities across Canada, and such a tax deferral enhances cooperatives' capitalization capacity and frees up important investment funds that would otherwise be directed towards addressing members' associated tax liabilities.

As well, I would briefly like to comment on the provision for accelerated capital cost allowance for investments in machinery and equipment. While the benefits of such a measure do not directly relate to the majority of agriculture operations, a vibrant food processing industry is essential to the ongoing success of the Canadian agricultural industry.

I would like to dedicate the rest of my time to discussing the increase to the lifetime capital gains exemption and the important role that tax policy plays in what is soon to be a significant transfer of farm businesses to the next generation.

The continued success of Canadian agriculture as an economic driver for Canada requires a tax policy environment conducive to continued viability and competitiveness for Canadian farm businesses. One of the most pressing issues facing Canadian agriculture is the rising age of Canadian farmers. Over the next 10 to 15 years we expect at least 120,000 farms to transfer ownership, with total assets well over $50 billion. As such, CFA would like to express its support for the bill's immediate increase to the lifetime capital gains exemption for owners of farm and fishing businesses from approximately $813,000 to $1 million.

The additional exemption of nearly $200,000 in capital gains offers producers important tax relief, allowing them to maintain more of their capital for retirement and also providing additional flexibility to develop a succession plan that meets the needs of both parties.

There are other things that can be done to improve the issue of succession planning. Capital gains exemption is just one aspect of the tax policy environment that influences the succession process and operational arrangements involved.

We have several outstanding recommendations.

The first concerns barriers facing farms transferred to the next generation under joint sibling ownership. Subsection 55(2), often regarded as the most complex section of the Income Tax Act, adds significant barriers to splitting up a farm corporation that is jointly owned by two siblings. This is because section 55 considers siblings to be unrelated or at arm's length.

Joint sibling ownership will be a common result of many intergenerational transfers over the next decade. Parents can transfer to their children on a tax-deferred basis, but unexpected issues can arise following the transfer that even the most comprehensive succession plan cannot account for. If the siblings then need to split up the operation, it can no longer be done on a tax-deferred basis. CFA has recommended that the Income Tax Act deem siblings to be non-arm's length, specifically for farm corporations.

Second, section 84.1 of the Income Tax Act currently limits the access to the capital gains exemption when a transaction occurs between family members. In the sale of a company's shares to a non-related purchasing corporation, a holding company is generally used as the purchasing vehicle. This allows the purchaser to access the acquired company's income stream and allows the vendor to access their enhanced capital gain exemption on the sale.

However, when dealing with family, the benefits of this structure are effectively denied. Most family farms now operate as corporations, and as such the intergenerational family farm transfer rules are not facilitating the transfer.

We recommend that amendments be made to section 84.1 of the Income Tax Act so that it no longer contains those constraints.

This is a brief overview. We have provided the members with a full pre-budget submission, and it goes into more detail.

In conclusion, I would like to thank the committee for allowing me to speak to this bill and once again reiterate our support for the four amendments I previously touched on.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We will now hear from the Canadian Labour Congress, please.

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

Thank you.

On behalf of the 3.3 million members of the Canadian Labour Congress, we want to thank you for the opportunity to present our views today. The CLC brings together workers from virtually all sectors of the Canadian economy, in all occupations, and in all parts of Canada.

Part 1 of Bill C-59, which we're speaking to today, would implement a wide variety of income tax and related measures. Today our comments will be limited to three provisions: reducing the required minimum amount for withdrawal annually from the RRIF; increasing the annual contribution limit for the tax-free savings accounts; and renewing the accelerated capital cost allowance for investment in machinery and equipment.

First of all, in terms of retirement security, the changes to the RRIF withdrawals and the increases to the tax-free savings accounts are measures that are both related to retirement security, but it will be no surprise to members of this committee that the Canadian Labour Congress feels that expanding the Canada pension plan is a much better solution to the looming retirement security crisis in Canada. Changes to RRIF withdrawals benefit older workers who already have RRSP savings, but they do little for workers without the means to save through RRSPs. This is significant because only a third of Canadians today contribute to RRSPs, and the unused RRSP contribution room reached $790 billion in 2013. Eleven million workers in Canada have no pension plan other than the CPP. At the same time, the annual contribution limit for the tax-free savings account would increase to $10,000, as has already been discussed, and this measure would have an estimated cost to federal revenues of $1.1 billion by 2019.

Even at the maximum annual contribution of $5,500, the TFSA is projected to cost the federal government up to $15 billion annually, and cost the provinces another $8 billion when the program is fully mature. Doubling would further increase this cost almost exclusively to the benefit of higher income earners. In contrast, expanding the CPP would benefit all workers, follow workers who change employers or who have multiple employers, and be simple for employers to administer.

In terms of supporting manufacturing, we recognize that as a result of globalization, unfavourable trade deals, a high dollar, and the most recent recession, manufacturing in Ontario and across Canada has experienced devastating losses over the past decade. In recognition of this reality, we have long supported renewing the accelerated capital cost allowance for investment in machinery and equipment. This measure was first introduced in 2007, renewed in 2011 and 2013, and would now be renewed until 2026. While we support this measure, we want to note that corporate tax cuts have failed to spur business investment. In the same vein, we feel that continuing this accelerated capital cost allowance would be insufficient to support a struggling manufacturing sector in Canada.

Coming out of the recession, business investments in manufacturing have been very slow to rebound, despite the continuation of the accelerated capital cost allowance. In October 2014, the monetary policy report released by the Bank of Canada suggested that this is in part because of a semi-permanent loss of capacity in several manufacturing export sectors. Low interest rates and low taxes have not been sufficient drivers of growth. Weak and uncertain demand have played a significant role in subdued investment. All signs point to the need for the federal government investment in infrastructure to spur growth and therefore boost business confidence and private investment.

A singular focus on tax cuts has significant drawbacks. We note that while the budget 2015 documentation mentions the importance of investment in skilled labour in the same sentence as it mentions investment in machinery, government action on this front has been noticeably absent.

Let me remind the committee of some of the recommendations the Canadian Labour Congress has made in the past that would make a difference to investment in skilled workers.

One, establish a national skills council that brings key stakeholders together to identify skills gaps and develop strategies, policies, and programs to address them.

Two, establish a mandatory national workplace training fund. Employers with a payroll of more than $1 million who fail to invest 1% of their payroll in training should pay the shortfall into a public fund that is used to finance work-related training initiatives.

Three, increase funding for the labour market agreements, the LMAs, with the provinces and territories to help vulnerable unemployed workers, including immigrants, aboriginal peoples, persons with disabilities, women, older workers, younger workers, and less skilled individuals.

Four, mandate employers to hire and train apprentices. The federal budget should ensure that those projects receiving federal dollars through the new building Canada fund and the investment in affordable housing program mandate employers to hire and train apprentices.

This budget further erodes the fiscal capacity of the Canadian state and rejects the opportunity to take advantage of exceptionally low borrowing costs and invest in the current and future needs of working people in Canada.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll now hear from the Canadian Manufacturing Council.

[David Podruzny, Vice-President, Business and Economics, Chemisty Industry Association of Canada, Canadian Manufacturing Council]

Thank you for this opportunity to meet with you.

The Canadian Manufacturing Coalition represents 50 trade associations representing over 100,000 companies and is represented in all 21 subsectors of manufacturing. Sales in 2014 were $621 billion, and that was a 5% increase from the year before. Exports were $525 billion. That's also a new record. We've had a weak start to 2015 because there's been some short-term weakness in manufacturing.

I'm here today to speak in support of the accelerated capital cost allowance 10-year extension at a 50% declining balance rate as it was introduced in budget 2015. In summary, analysis shows that the competition had a better system. We believe budget 2015 will level that playing field in this area.

I personally represent the Chemistry Industry Association of Canada, so some of the examples that I'm going to be using will come from there.

Let me start by saying that we commissioned an independent study in early 2014 and we shared that with the standing committee during the pre-budget hearings in the fall. The study shows that the measure adopted matches what already exists as a permanent feature in the United States.

The second point I'd like to make is that there is an opportunity to invest in North America. The accelerated capital cost allowance, which is levelling the playing field, puts us back in the game. For over a decade there has been very little investment in North America; a lot of it has been going to developing economies. Shale gas and generally lower energy prices are changing and putting us back in the game.

The third point I want to make is, why 10 years. Why extend it for so long? This takes account of business cycles and planning processes. Investors can look with certainty on this aspect of planning in the future. I have an example, which I've supplied to you, of a timeframe for a large capital-intensive investment. Think of an investor considering a billion-dollar investment and looking at perhaps five years before there is any prospect of income. The ACCA will provide some front-end cash flow. Having a 10-year time horizon, or roughly two business cycles, will also allow everyone to measure if this is resulting in incremental investments. That's the last point I'd like to make.

There are budget pressures, and it's important to demonstrate that a measure is providing incremental net benefits and not costs. Our sector plans to measure incremental investments over the first five years of this ACCA. We want to demonstrate that it should be a permanent feature in the future.

ln summary, we strongly support the federal government adopting a 10-year accelerated capital cast allowance.

I would be pleased to take questions later.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll go to Imagine Canada, please.

[Bruce MacDonald, President and Chief Executive Officer, Imagine Canada]

Thank you, Mr. Chair. I would like to thank you for your invitation and for giving me the floor today.

As an umbrella organization for the charitable and non-profit sector, Imagine Canada is pleased to share its thoughts with you regarding the provisions in Bill C-59 and the federal budget for our sector.

I do not have to remind the committee about the contribution of charitable and non-profit organizations in Canada and around the world, whether in terms of social services, arts and culture, amateur sport, the protection of the environment, education, health care and health research, international development or religious practices.

We keep saying that the charitable and non-profit sector is a major economic asset for Canada. It accounts for 8% of the GDP and employs over 2 million people from coast to coast.

In 2012, this same committee held extensive hearings on the issue of tax incentives for charitable donations in Canada. You heard the testimony of organizations from across the country, you learned about our challenges and possibilities, and you made recommendations to improve our financial health.

Every federal budget since 2012, including this one, has responded to your recommendations.

With regard to Bill C-59, it clarifies eligibility for qualified donee status for foreign charitable foundations. We see this mainly as a housekeeping measure, ensuring that the letter of the law is brought into line with the intent of a previous budget measure.

While we would have liked to see other measures from the 2015 budget included in this bill rather than waiting for subsequent legislation that may or may not come prior to the upcoming election, we appreciate that the department wants to take the time to get the particulars right.

We are pleased that the budget expanded the Mitacs internship program, in which charities and non-profits are now able to participate. Access to specialized research will help many organizations improve the work they do.

We look forward to two budget measures in particular that arose from this committee's hearings in 2012, and which we strongly support.

The first one of these will see a capital gains exemption when the proceeds of selling real estate or private company shares are donated to charity. Members of the committee will know that in terms of encouraging donations from the broadest array of citizens this was not Imagine Canada's top priority. That being said, those of you with whom we have spoken aIso know that we have strongly supported this measure and we were pleased to see it in this year's budget.

We are particularly pleased that the provision will apply to cash donations made from the proceeds of the sale of such assets. While addressing potential valuation issues, this will make it easier for donors to split their donations among a greater number of charities, if they so wish. lt will also make it easier for recipient charities, particularly small charities, to manage the receipt of such donations as they will be dealing with cash donations and will not have to manage assets that may be transferred to them. We are hopeful this measure will translate into hundreds of millions of dollars' worth of new donations over the next several years.

The budget also announced that charities will be allowed to invest their assets in limited partnerships. This will benefit the sector in two ways. First of all, foundations will be able to make investments, which they previously could not do, to diversify their portfolios. Second, operating charities and non-profits may themselves be involved in limited partnerships. The ability of foundations to invest in these ventures could free up significant amounts of capital. While we are waiting for specific details on how this will work, our initial estimate is that tens or even hundreds of millions of dollars could be available annually for partnerships involving charities and non-profits.

These two issues were among those about which this committee heard testimony and made recommendations. By our count, the only significant outstanding recommendation is the stretch tax credit for charitable giving, which we recognize would come at the highest cost to the treasury, as we believe it would have the greatest impact.

I hope that next year I'll be invited back to testify about the adoption of the stretch tax credit. ln the meantime, I want to recognize the significant progress that has been made in budget 2015.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you.

I notice some of you have smartly begun next year's pre-budget consultations. I appreciate your innovation there.

Mr. Fréchette, the floor is yours now.

[Jean-Denis Fréchette, Parliamentary Budget Officer, Library of Parliament]

Thank you, Mr. Chair.

I'm the only witness who got some chocolate. I suspect it's a perk because I'm the last one to speak.

Mr. Chair, vice-chairs, and members of the committee, thank you for inviting me to assist with your study of Bill C-59, Part 1.

My comments are focused on the increase in the annual contribution limit for Tax-Free Savings Accounts (TFSAs), a measure the Office of the Parliamentary Budget Officer has studied in detail.

Before the changes proposed in Bill C-59, the fiscal impact of the TFSA program was expected to grow from $1.3 billion in 2015 to $54 billion in 2060. This is equal to a roughly eightfold increase as a share of the economy. The changes to the contribution limit proposed in Bill C-59 would increase the impact in 2060 by a further 20%, to $63.6 billion.

The proposed TFSA limit of $10,000 will not be indexed to inflation. This policy decision reduces total long-run fiscal costs by 15% in 2060.

The implications of the changes in Bill C-59 to the long-run sustainability of debt as a share of GDP will be assessed by the PBO in a future report, our fiscal sustainability report.

Over the long run, the TFSA program will become increasingly regressive, by income and especially by wealth, as you can see in Figures 2 and 3 of our presentation. By 2060, households in the top half of the income distribution will benefit by 20% more than households in the lower half. The wealthiest 50% of households are projected to benefit by 1.2 times more than the lower half.

Finally, Mr. Chair, as per your question the other day about the amount of new money or existing savings invested in TFSAs that involve the purchase of equity or bonds in Canadian companies, I can report that TFSA administrative data and other data sources that we have obtained so far cannot currently be used to determine whether investments in Canadian equities or bonds have increased due to TFSAs.

However, TFSA contributions are expected to originate mostly from the reallocation of existing savings and taxable accounts. External estimates of the responsiveness of savings through tax-preferred programs like the TFSA are mixed, but typically small. The PBO therefore expects that a comparatively small proportion of TFSA contributions will be the result of new savings. The TFSA is relatively new and the PBO has not yet independently assessed the savings behaviour of Canadians in response to the TFSA program, but this work could be pursued in a future study.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Colleagues, we'll do rounds of five minutes, or maybe five minutes and 30 seconds, please.

We'll start with Mr. Cullen, please.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Ms. MacEwen, you may be pleased to note that we were at a Chamber of Commerce event this morning and they cited workforce training as their number one priority for governments to take on going into the fall campaign.

Under some of your recommendations with regard to Bill C-59, I'm wondering what the gap is that is not being addressed with respect to companies taking on and training apprentices and bringing them up to their full Red Seal and Blue Seal qualifications. We're spending an extraordinary amount of money, both as government and as individuals across this country, with the promise that getting those skills will enable people to get into the areas where a skills shortage has been identified. What's the problem with Bill C-59 in terms of addressing that gap?

[Angella MacEwen]

As we mentioned, there was an opportunity here to mandate that employers use apprentices for any infrastructure building that government does. Part of the problem is that third-year apprentices are much more expensive than second-year apprentices, so employers will hire first-year and second-year apprentices to do work. Third-year apprentices have a much more difficult time. Completing their apprenticeship training becomes very challenging.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Your suggestion is that when the federal government spends money on, say, infrastructure programs, which they're not spending nearly enough on right now given the needs of the economy, there be some qualification that the contractors actually pick up and help train those apprentices to get them up to full Red Seal and Blue Seal standards.

[Angella MacEwen]

Absolutely, because the Red Seal and the Blue Seal are also issues in terms of labour mobility across Canada, which is another issue that this government has raised. Having that quality training and those opportunities for those workers to get those skills that are transferable is really critical.

[Nathan Cullen, NDP, Skeena—Bulkley Valley, BC]

Thank you.

I'm not sure who will take this, Mr. Young or Ms. Donnelly, but a comment from the Parliamentary Budget Officer just now was that the TFSA program gets increasingly expensive and regressive over time. You've studied the British model. How long has that particular example been going on? Do we feel confident with the experience and are we then able to transfer that experience on to Canada?

[Maureen Donnelly]

That was the purpose of the research we did. The U.K. experience has been in place since—

[Allister W. Young]

—1999.

[Maureen Donnelly]

—so they're quite a bit farther ahead than us, and since there wasn't enough Canadian data, this looked like it would behave the same way. That's what they have found.