Finance Committee on May 28th, 2015

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

Small “c”.

I'm wondering, Mr. Lavoie, if you could talk to me a little about the SR and ED program as it is right now and its effectiveness for your members. It only applies to labour, not capital. We have been urging an expansion of SR and ED to apply to capital, particularly on the manufacturing side, because it allows people to do the investments that are needed to modernize and increase productivity in Canada. Is this still a problem within this particular program?

[Martin Lavoie]

Yes, the capital expenditure has been eliminated from the tax rate this year, January 1—

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

Why?

[Martin Lavoie]

—as a decision of the Conservative government following the Jenkins report.

We hear about it a lot because a lot of the R and D in our sector is dependent more and more on capital, on machinery and equipment, as I said: additive manufacturing, automation, all these things. Yes, I think we support that and given that the capital side of SR and ED was costing the government...Finance officials said it was about $30 million a year, so it wasn't that much.

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

Thank you.

Mr. Macdonald, this graph you've shown us just in terms of the maximization rates dropping off for all income sectors, even wealthy Canadians, in terms of the government crowing about its popularity, not only does it disproportionately help wealthier Canadians, but it seems to be becoming less and less popular, according to the government's own stats. The concern we have is the cost of this program as it's going out and its inequity. It tends to help people who don't necessarily need the help. What does this do for the savings rate so far for Canadians? Is it increasing savings? The PBO says it isn't.

[David Macdonald]

I haven't studied that so I'd refer you to the PBO on that front.

It wouldn't surprise me if TFSA has cannibalized RRSP savings. I think for wealthy younger Canadians in particular, it makes a lot more sense to invest in a TFSA, because upon retirement, you gain full access to the guaranteed income supplement and old age security because TFSA withdrawals don't count as income the way RRSP withdrawals do. One of my longer-term concerns, besides the cost—although there's a study that...more extensively than I have—is we will easily have TFSA millionaires in 20 years who would access the full benefit values of the guaranteed income supplement.

[The Chair, Conservative, James Rajotte]

Thank you very much, Mr. Cullen.

We'll go to Mr. Saxton, please.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thanks to our witnesses for being here today.

My first questions will be for the Canadian Federation of Independent Business.

Ms. Pohlmann, some people, especially members of the opposition, have said that reducing the small business rate creates a disincentive for small businesses to grow for fear of crossing over the threshold. Do you agree with that?

[Corinne Pohlmann]

No, we do not agree with that. We're certainly hearing that argument more and more, but we believe that the number that seems to bunch up around that threshold is relatively small compared to the huge advantages it gives to so many other small businesses. We also don't know if those people stay at that threshold or if they do that for a year or two as they grow, and then they move on into the next threshold level. I think that argument doesn't really fly.

[Andrew Saxton, Conservative, North Vancouver, BC]

That's like individuals saying that they don't want to make more money because they're going to be paying more tax.

[Corinne Pohlmann]

Exactly.

[Andrew Saxton, Conservative, North Vancouver, BC]

On the flip side, how will lowering the small business tax rate encourage entrepreneurs to pursue their dreams and launch their own businesses?

[Corinne Pohlmann]

Certainly, as I said, launching a business can be expensive, and things like the cost of red tape and getting access to financing can be very difficult. By having a lower small business tax rate, you're allowing those businesses to keep more of their own money and to invest it back into their business, rather than having to look externally for that financing, and to deal more easily with the red tape. We believe those things are important in order to encourage more small businesses to grow.

[Andrew Saxton, Conservative, North Vancouver, BC]

Thank you very much.

My next question is for Mr. Lavoie of the Canadian Manufacturers and Exporters.

Mr. Lavoie, can you elaborate on how manufacturers will be better able to take advantage of the accelerated capital cost allowance now that it's been extended from two to ten years?

[Martin Lavoie]

There are two things. In general, the shorter the time for depreciation, the more incentive you have to renew your machinery and equipment over that period of time. That's the first one. The second thing, as I said, is that now that we have a 10-year stable tax measure instead of a two-year renewal, it's even better, because a lot of our members have expansion or acquisition plans that on average take between three and five years to happen. Two years at a time was not giving them enough long-term planning time to make their acquisitions. That's a good thing as well.

[Andrew Saxton, Conservative, North Vancouver, BC]

How important is it for the manufacturing sector to invest in new plants and equipment in order to remain competitive globally?

[Martin Lavoie]

I'll just give you a statistic. In Canada, for every hour of work, we produce $45 of goods. In Germany and the United States, it's over $60 of goods for the same hour. If you don't invest in machinery and equipment, you'd better be in a low-cost jurisdiction for labour, because otherwise what do you do? That's been a bit of Canada's problem. First, there are the demographics. Second, there is the skills shortage. Third, labour costs are quite high. The only long-term solution to that has to be investment in machinery and equipment, automation, and higher productivity.

[Andrew Saxton, Conservative, North Vancouver, BC]

Can you explain how the reduction in the small business tax rate is going to help manufacturers?

[Martin Lavoie]

As I said, 85% of our members are SMEs, and I totally agree with that. I'm a small business owner myself and nobody in our sector will say that they don't want to grow their business because their going to pay more taxes. There are going to be more taxes, because you're going to be making more money. I've never met anybody in five years at CME who said, “I don't want to grow because I'll pay more taxes”.

[Andrew Saxton, Conservative, North Vancouver, BC]

I haven't either. Thank you very much.

My next question is for Mr. Zive from CALU.

Mr. Zive, can you explain how the changes to the RRIF rules are going to help seniors? These rules haven't been changed in 40 years. How has the investment industry changed in 40 years?

[Terry Zive]

These rules had not been reviewed in 30 years, and clearly since that time, two key factors have changed. The first is longevity. People are living much, much longer. Second, rates of return in today's environment bear no resemblance to the rates of return in the early 1990s. The issue is, very simply, that at the current withdrawal rates under the old withdrawal schedule, people were going to run out of money. This change will allow them to retain a certain level of funds and income for the remainder of their life.

[Andrew Saxton, Conservative, North Vancouver, BC]

Can you explain to me how important it is for Canadians to be saving now for their retirement?

[Terry Zive]

It's quite obvious that if you don't put money away now and allow it to compound over an extended period of time, then you will find that you will not have sufficient funds in retirement to pay for a lifestyle, let alone health care needs, which will be inevitable. The time to start saving is now. The combination of capital and time creates a much better solution.

[Andrew Saxton, Conservative, North Vancouver, BC]

Would you agree that the tax-free savings account is a good vehicle in order to save for your retirement?

[Terry Zive]

I must say that CALU has not done any work on the TFSA, so I really can't comment other than to say that if you'd like us to do some further research, we would be prepared to do so and report back.