Finance Committee on May 28th, 2015

[Martin Lavoie]

Right.

[Mark Adler, Conservative, York Centre, ON]

Thank you.

Mr. Zive, I just want to ask you a quick question.

[Mark Adler, Conservative, York Centre, ON]

In 2006 when we first came into government, the Canada health transfer was $20 billion. I suspect that's because in the previous 13 years, the Liberals had reduced that to balance the budget. We've increased it this past year to the point where it's now $34 billion. The health transfer will grow 6% until 2016-17, and at 2017-18 will increase with a three-year moving nominal GDP guaranteed increase of at least 3% in line with normal GDP.

In your comments, you had mentioned how important that is for our senior population. Could you please comment on the significance of our increase, of what that will mean for our senior population?

[Terry Zive]

I'm sorry, Mr. Chair.

[The Chair, Conservative, James Rajotte]

A very brief comment, maybe 10 seconds.

[Terry Zive]

I think I would take that offline. I don't have a comment.

[The Chair, Conservative, James Rajotte]

Okay, thank you.

Thank you, Mr. Adler.

I just wanted to follow up with you, Ms. Pohlmann, on four points you mentioned on page 10 of your presentation. I'll take them in reverse order.

First of all, it's just a comment on the accelerated capital cost allowance for investment in machinery and equipment. I'm pleased you mentioned that as CFIB, and I'm pleased Mr. Lavoie pointed out that 85% of his members are in fact small and medium-sized enterprises. I think that's very important to point out.

On the third point, in terms of the creation of a new quarterly remitter category for certain small, new employers, I know your members know it, and you know it very well, but can you explain to non-small-business owners why that is an important measure?

[Corinne Pohlmann]

Yes. When you're first starting out in a business, CRA wants you to build a bit of a history with them, and so they require you to actually remit anything that business has to take from their employees and remit to the CRA, so payroll taxes, income taxes, all the rest of it. They have to do it on a much more frequent basis in their first year in order to build a history with CRA. After that it gets based on how much they actually have to remit, and they can go to a much smaller number of times. This allows them, in their first year, to not have to remit as often, because remitting is a lot of paperwork. It's taking the money from the employees or taking it out of their paycheques, making sure the right paperwork is being done and that it's being submitted to CRA at a point in time. If you don't do it at the right time or you don't have the right amount, you could get penalized. It's a very stressful part of that process. Doing that less often in the first year is going to make a difference so they can spend more time growing their business and less time on government paperwork.

[The Chair, Conservative, James Rajotte]

Perfect. I appreciate that clarification.

We'll go to your second item. In terms of increasing the lifetime capital gains exemption to $1 million for qualified farm or fishing properties, I think you said that this should be extended to all small businesses.

My farming relatives would probably argue that they are unique, that farmers and fishers are unique small businesses. I think they would make that argument. I'm pretty sure they would.

Could you make the argument as to why it should be applied to all small businesses equally rather than just certain unique categories?

[Corinne Pohlmann]

Its primary purpose from a small business perspective is as a retirement savings vehicle. When we ask our membership about what they're doing to save for retirement, by far and away, the proceeds from the sale of their business and the lifetime capital gains exemption is how they're going to finance their retirement. That's not unique to just the agricultural sector; that's pretty much across the board.

I think there is slightly more, 90% versus 80%, in the agriculture sector, who are saying it's a very important vehicle for them to save. Secondarily to that, we're also seeing it as an important potential tool for financing the next generation, and again, that's not just the agriculture sector but for all businesses. We think that being able to extend that to $1 million for all business owners is going to be important. We would certainly ask for that.

[The Chair, Conservative, James Rajotte]

I appreciate that as well.

The final one goes to your first point in terms of decreasing the small business tax rate from 11% to 9%.

There are serious people across this country who argue in fact that there ought to be just one business tax rate, that there ought not to be a difference between the small business rate and the larger rate, and that in fact this is not what the government ought to be doing. You obviously argue differently.

Put on the record CFIB's argument in terms of why there ought to be two rates in this country that apply to businesses.

[Corinne Pohlmann]

Yes.

[The Chair, Conservative, James Rajotte]

You've argued very well as to why the rate should be lowered, but why should there be two rates for businesses in this country?

[Corinne Pohlmann]

We believe that there should be two rates, and a lower rate for smaller companies, simply because the cost of doing business as a smaller company is generally higher per capita than it is to do business as a larger company. It allows smaller business to retain more of their income and actually invest it in those areas that are of higher cost to them.

The first is the cost of dealing with regulations. I showed you with a chart that it's up to five times more expensive for small businesses just to deal with the red tape than it is for a larger company.

Access to financing is much more difficult as a smaller company than it is for a larger company. In fact, when they do get financing, it's often more expensive because they can't necessarily get the same rates as a large company can. This allows them an opportunity to retain some of their own income and invest it back into their firms.

Those are just two, and we could go on with others as well, really key factors that we think are important as to why there needs to be a lower rate for smaller companies.

[The Chair, Conservative, James Rajotte]

I appreciate that very much.

I'd like to continue this discussion. It's been an excellent, informative discussion.

Thank you all for being with us.

Colleagues, we will take about a five-minute break as we switch the panels. We'll thank all of our guests here this morning and we'll bring the next panel forward.

[The Chair, Conservative, James Rajotte]

I call this meeting back to order. This is meeting number 83 of the Standing Committee on Finance, and we are considering Bill C-59.

I want to welcome our second panel. First of all, we have, presenting as an individual, Mr. Jason Heath. From the C.D. Howe Institute, we have Mr. Alexandre Laurin. Mr. Aaron Wudrick of the Canadian Taxpayers Federation is here. From the Macdonald-Laurier Institute we have Philip Cross. We have, from YWCA Canada, Ms. Ann Decter, director of advocacy and public policy.

Welcome, everyone.

Each of you will have five minutes for your opening statement and then we'll have questions from members.

We'll begin with Mr. Heath, please.

[Jason Heath, As an Individual]

Thank you, Mr. Chair.

My name is Jason Heath. I am a certified financial planner and the managing director of Objective Financial Partners in Markham, Ontario. I am a fee-only financial planner, meaning that I provide financial advice to clients, but unlike the typical financial planner, I do not sell investments or insurance. I am also a personal finance columnist for the Financial Post, which is the business section of the National Post, as well as MoneySense, which is Canada’s personal finance magazine.

Most importantly though, I am daddy, or dada, or much to my dismay these days, dad—which makes me feel very old—to five-year-old Joel, six-year-old Jayden, and six-year-old Mila.

The Criminal Code of Canada dictates that leaving a child under the age of 10 alone is considered abandonment, suggesting that older children are able to take care of themselves. The Canadian Red Cross babysitting course is for children age 11 and up. It therefore seems odd that a parent would be allowed up to a $5,000 annual tax deduction and a $2,500 annual tax refund for child care for a 16-year-old. A portion of private school fees for a child in grade 11 may qualify for this deduction, for example. The proposed limits for the child care expense deduction fall well short of the actual cost of child care in many Canadian cities, particularly for younger children. It would not be unreasonable to pay over $20,000 annually for infant child care in Toronto, for example.

Accordingly, I would be inclined to consider a modification to the child care expense deduction to allow up to $12,000 for children under the age of six and $6,000 for children age six to twelve. A child care expense deduction for teenage children is unnecessary in my opinion, except in the case of a disabled child. On that note, I think that $11,000 is not nearly enough of an eligible deduction for a child that qualifies for the disability tax credit. I suggest a $24,000 deduction limit for disabled children as it would not be uncommon for a family to spend this much, or more, on a live-in nanny, for example. It is also twice my suggested limit for the child care expense deduction for children under the age of six.

The cancellation of the Canada child tax benefit is a double-edged sword. It seems better to limit the administration of tax benefits for children to one single benefit instead of paying two benefits, with the resulting administrative government costs to manage both programs. On the other hand, it seems unfortunate, in my opinion, to cancel a means-tested benefit like the Canada child tax benefit in favour of a non-means-tested benefit like the universal child care benefit.

The result of the changes to these benefits may be a reallocation of tax dollars out of the hands of people who truly need and count on the money and into the hands of those who may not. The cancellation of the Canada child tax benefit also has a negative impact on single parents that is not offset in this bill by the family tax cut credit. I would be inclined to instead consider an increase in the Canada child tax benefit to provide more benefits for low-income and middle-class Canadians while reducing or negating benefits for those whose income exceeds a certain threshold. This could be done by instead cancelling the universal child care benefit and using the resulting savings to enhance proportionately the Canada child tax benefits for those whose income is below a certain threshold.

The Income Tax Act distinguishes between families that have more than one child in the claiming of tax credits like the amount for children, the children’s arts amount, the children’s fitness amount, and deductions like the aforementioned child care expense deduction. It seems odd that the family tax cut credit would not do the same. I would prefer to see it be based on the number of children under the age of 18 and suggest a limit of $25,000 of split income per eligible child.

In addition, I would prefer to see this credit even further benefit a young family contemplating having a stay-at-home parent for some period of time. This could allow a two-income family to temporarily become a one-income family and have a parent as a caregiver for a young child instead of both parents having to go to work and hiring a third party. This could be done by allowing the splitting of income for parents with children under the age of six without subjecting them to the $2,000 tax credit limit. I propose, instead, a $10,000 tax credit limit.

Finally, single parents do not benefit from the family tax cut credit. I would like to see single parents be able to claim the family tax cut credit by notionally splitting income with their youngest child under the age of 18.

Thank you, Mr. Chair.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

We'll now go to Monsieur Laurin, s'il vous plaît.

[Alexandre Laurin, Director of Research, C.D. Howe Institute, As an Individual]

Thank you, Mr. Chair.

I am very pleased to be here with you today. Thank you for the invitation to appear before the committee.

Back in 2011, following the federal election, I authored a study with Professor Kesselman of the C.D. Howe Institute on the family tax cut, or what was at the time the income-splitting proposal. Our study took place four years ago, so it was based on the assumption that provinces would follow suit, that provinces would also adopt income splitting, and there was no limitation other than the $50,000 limit to be split.

Today, I'll be very quick, and I'll simply present what were our main conclusions from that original study and what has changed since, because we now have a new income-splitting proposal that is very different.

Originally in our study we said the proposal was expensive, especially because of the cost to provinces that adds up to the federal. The benefits and the costs were highly concentrated mostly in the hands of single-earner families with a high-income earner. It created work disincentives for the lower-income spouses, so that means economic efficiency costs. We also discussed the theory around welfare and single-earner families enjoying some welfare gains by not having to pay for child care or for the value of any other family services that are provided by the at-home spouse. But those services have to be purchased by the dual-earner families, where both spouses work, so it creates gains for the single-earner families and costs for the dual-earner families. Dollar for dollar, in theory, the equality of tax burdens between single-earner and dual-earner families does not necessarily achieve tax fairness. That's the theoretical principle that we discussed in that study.

Finally, for families with children, we calculated that after-tax economic resources available for consumption, factoring in the cost of child care for any families that incur child care costs, and EI and CPP contributions, too, which are often forgotten, on average, across a wide range of family incomes, there was no obvious horizontal fairness problem to be solved. I can elaborate later what I mean by horizontal fairness, but I want to keep going because I only have five minutes.

The new provisions, the provisions in this bill, are significantly different. It's a different kind of income splitting because, first, it's a tax credit, so provinces don't have to participate. It changes a lot. The value is capped at $2,000, which is critical. These new provisions do mitigate many of the drawbacks we had originally identified. First, it is less expensive, and it still has that benefit of making the system fairer for one particular case: those dual-earner families that are identical in many or all respects but for their income splits—one is earning more than the other, and so they have different tax burdens. This new income-splitting provision will address that fairness problem, obviously. The tax savings are very spread out across eligible families, now that we have a cap, since the cap greatly—and I say greatly—limits the gains at the top. Before, in our original study, when the provinces were included in the calculation, the maximum gain for a single-earner family in Ontario was $11,000. That's much more than $2,000.

Tax benefits now being capped also means that single-earner families will still pay more taxes than dual-earner families when they have identical levels of income. That's consistent with the principle that I mentioned before: single-earner families enjoy welfare gains that dual-earner families do not.

Finally, the work disincentive problem is substantially mitigated with the $2,000 cap, since the lower-income spouse can now earn up to $22,000 in income before any disincentives kick in.

In conclusion, there are still some drawbacks, but the new provisions are better than the original proposal.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

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

[Aaron Wudrick, Federal Director, Canadian Taxpayers Federation]

Good morning, Mr. Chair and committee.

My name is Aaron Wudrick, and I'm the federal director of the Canadian Taxpayers Federation. Thank you for the opportunity to appear today to speak to part 2 of Bill C-59, the provisions of which the CTF is generally supportive.

CTF is a federally incorporated not-for-profit citizens group founded in 1990 and with over 84,000 supporters. We are dedicated to three key principles, those being lower taxes, less waste, and accountable government. Perhaps unsurprisingly we appear today largely pursuant to that first principle of lower taxes.

I did want to take a very brief moment to commend the government on balancing the budget this year. We at the CTF have been very critical of the many years of deficits, so we only feel that it's fair to also give credit where it's due and applaud the government for having the discipline to get back to balance. We do wish it had done so at a lower level of spending, but we're content to leave that debate for another day.

With respect to the measures in part 2 of Bill C-59, first is the increase in the child care expense deduction. We are strongly in favour of this measure. lndeed, we proposed an even greater increase in the deduction last fall. We also believe the government should consider modifying this deduction to allow a parent to pay a stay-at-home partner and claim that deduction in the same way.

With respect to income splitting, one of the CTF's guiding taxation principles is advocating for broad-based tax cuts. Our first preference is always cuts to the general tax rates so all Canadians who earn income can benefit. That being said, income splitting is not a terrible second best. What it adds in complexity—and as very diligent observers of the ever-expanding size of our tax code, I can assure you it is already very complex—it compensates for in equity.

We believe it is entirely reasonable to ensure the tax codes treat like as like, and a household that, for example, earns $80,000 a year should not pay vastly different amounts of tax depending on how that earning is divided up among spouses.

This government first introduced income splitting for seniors and has now done so for families. We would hope the next objective would be to introduce income splitting for everyone else in order to broaden the benefits of such a policy, including possible provision for single persons to split income with dependants in certain circumstances.

With respect to the universal child care benefit, it is again no secret we at the CTF prefer tax relief instead of entitlement programs. Taxing citizens and then returning the money with a bow-wrapped cheque courtesy of the Government of Canada is not our preferred model. Having said that, we are in agreement with the government that parental choice is paramount, and putting money back into the hands of parents to spend on the form of child care that works best for them is better than a policy of creating, as some have proposed, a large government-run day care system.

In summary, with the caveats we've already identified, we are generally supportive of the provisions contained in part 2 of Bill C-59. While we will never stop pointing out that complex boutique measures clutter up the tax code, raise administrative costs, and generally confuse Canadians when not necessary, the fact remains overall the federal tax burden faced by Canadians continues to go down, and we welcome that development.

Thank you. I'm happy to take any questions.

[The Chair, Conservative, James Rajotte]

Thank you for your presentation.

We'll now hear from Mr. Cross, please.

[Philip Cross, Senior Fellow, Macdonald-Laurier Institute]

I'd like to thank the finance committee for inviting me to this hearing.

Before I get started, just some background. From what I saw with the previous panellists and from this panel, I think what you're mostly going to get from them is micro-analysis of the individual proposals. I'm going to bring you some macro-analysis about the broad trends and the tax and transfer system that might help put these changes in context. The overview is based on a detailed report I wrote for the Macdonald-Laurier Institute called “Giving and Taking Away: How Taxes and Transfers Address Inequality in Canada”, which members can refer to for more details.

The main conclusion is that the tax and transfer system became markedly more progressive between 1976 and 2011. The progressivity of transfer payments had a much greater impact than taxes on the redistribution of income. The greater role of transfers partly reflects that cutting income taxes does little to help low-income people, as the lowest income quintile effectively pays no income tax, with an effective rate of 2.4%. Instead, it is transfers and government that provide over half of their tax income.

As we move up the income quintiles, taxes progressively increase and transfers steadily decrease up to the highest quintile for whom transfers are as negligible, at 3%, as taxes are for the lowest quintile, while the effective tax rate for the highest quintile reaches an average of 22%.

Looking at combining the impact of tax and transfers, it shows that only the highest two income quintiles pay more into the tax and transfer system than take out, while the other three lowest quintiles are net beneficiaries. The highest income quintile pays 80% of the total net redistribution going on within the tax and transfer system. So the system is quite progressive, even if it's not completely offsetting the growing inequality of market incomes over the last 35 years.

Despite rising incomes earned in the marketplace, net transfers to the middle class have increased. This was particularly the case for the second-lowest income quintile, where net transfers rose from 2% to 17%. Only the highest quintiles saw a net contribution increase. So overall, the tax and transfer system has become more progressive in redistributing income from the highest income earners to the lowest and middle incomes.

For 35 years Canada has moved to a system of higher transfers and lower tax rates for 80% of the population being paid for by the highest 20% of earners. We may be nearing the limits of the amount of resources that can be transferred from one quintile to the other four. As noted by Professor Kevin Milligan in a recent study for the C.D. Howe Institute, raising the marginal tax rate further on high-income earners risks reducing their labour supply and may even lead to lower tax revenues. Advocates of higher tax rates for upper-income earners should take note of the growing contribution of the tax and transfer system over the longer term. Critics of the benefit that income splitting may give to some of the highest quintiles should also be aware of this trend.

Finally, the focus of all parties on aiding the middle class at some point risks becoming either a transfer from some parts of the middle class to other parts of the middle class, or worse, from the left pocket to the right pocket of the same person.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation, Mr. Cross.

We'll go to Ms. Decter, please.

[Ann Decter, Director, Advocacy and Public Policy, YWCA Canada]

Thank you.

Good morning. I'm Ann Decter. I am the director of advocacy and public policy at YWCA Canada.

As the country's oldest and largest women's multi-service organization with member associations serving women and girls in nine provinces and two territories, YWCA Canada is pleased to share its remarks on part 2 of Bill C-59, which will implement the provisions of the budget tabled on April 21, 2015.

In our brief to this committee during pre-budget consultations, we recommended policies to support women, girls, and families, including a national child care system and increasing the national child benefit to reduce poverty. We specifically urged the federal government not to adopt income splitting in federal budget 2015 or at any time in the future as the benefits of this policy do not flow to vulnerable families. Our point of view has not changed.

According to the summary of Bill C-59, division 1 of part 2 implements income tax measures that introduce the government's family tax cut, known more commonly as income splitting.

Supporting women, girls, and families requires adopting policies that work for women, policies that are based on women's present-day lived realities, including high workforce participation rates. With a 65% employment rate of women with infants and toddlers—that would be a youngest child under three—and two-thirds of mothers with a youngest child in preschool or kindergarten, access to affordable quality child care would be a key support for families. Instead, it remains a social policy gap unaddressed by the federal government, and provincial governments struggle to offer a patchwork of responses across the country.

Families need child care, and child care needs federal government leadership.

According to a range of sources, the family tax cut as implemented by division 1 of part 2 will cost between $2 billion and $3 billion per year and will disproportionately benefit families with higher incomes. YWCA Canada would recommend withdrawal of this measure, maintaining the federal tax base, and using those tax dollars to increase the availability of affordable quality child care for Canada's families.

There are currently about 450,000 regulated child care spaces in Canada and 2.1 million children under six years of age. Increasing child care spaces will reach a greater number of families in need of support. It will support working mothers, who are the vast majority of mothers, and single mothers in particular.

Analysis of Quebec's low-cost, broad-based child care system has confirmed that child care is a social policy that strongly supports mothers, and single mothers in particular, to move out of poverty by dramatically increasing their access to employment. Between 1996, when low-cost child care was introduced in Quebec, and 2008, almost 70,000 additional mothers joined the workforce; employment rates for mothers with children under the age of six increased by 22%; the number of single mothers on social assistance dropped from 99,000 to 45,000; the after-tax median income of single mothers rose by 81%; and the relative poverty rates for single-parent families headed by women declined from more than a third to less than a quarter.

YWCA Canada would add that the mothers fleeing domestic violence with their children—who use our services across the country—can land on their feet in the community much more quickly when they can access affordable child care.

Division 2 of part 2 of Bill C-59 retroactively amends the Universal Child Care Benefit Act effective January 1, 2015, to increase the universal child care benefit to $160 per month for children under six and to create a new benefit of $60 per month for children from six to seventeen years of age, inclusive.

YWCA Canada's presentation to this committee during the pre-budget consultations recommended that the federal government streamline tax system supports for families into a single increased national child benefit with a maximum of $5,400 per year. Along with our partners, Campaign 2000, we recommended that the universal child care benefit be absorbed into the national child benefit. Bill C-59 does the opposite.

Nineteen per cent of families in Canada live in poverty. Campaign 2000's proposal focused this investment where it is most needed: on lower-income families. According to the Parliamentary Budget Officer, 51% of universal child care benefits will flow to “families with no child care expenses and families with older children”.

On behalf of the women and children who turn to the YWCA for help and support on a daily basis, we would encourage the government to reverse their thinking, increase access to affordable, quality, regulated child care, and focus transfer payments on families in financial need.

Thank you.