Finance Committee on May 28th, 2015

[The Chair, Conservative, James Rajotte]

I call this meeting to order.

This is meeting number 83 of the Standing Committee on Finance. Pursuant to the order of reference on Monday, May 25, 2015, we are continuing our study of Bill C-59, an act to implement certain provisions of the budget tabled in Parliament on April 21, 2015 and other measures.

Colleagues, we have two panels here this morning.

For the first panel we have Professor Frances Woolley from Carleton University. Welcome back to the committee.

From the Canadian Centre for Policy Alternatives we have the senior economist, Mr. David Macdonald. Welcome to you, sir.

From the Canadian Federation of Independent Business we have the senior vice-president, Corinne Pohlmann. Welcome back as well.

From the Canadian Manufacturers and Exporters we have the director of policy, innovation, and business taxation, Monsieur Martin Lavoie. Bienvenue.

From the Conference for Advanced Life Underwriting we have the chair of government relations, Mr. Terry Zive. Welcome to you, sir, as well.

You will each have five minutes for your opening statement. I think we're still trying to get a technical set-up for Mr. Macdonald, and hopefully we'll have that in place in time.

We'll start with Professor Woolley, please.

[Dr. Frances Woolley, Professor, Carleton University, As an Individual]

Thank you, Mr. Chair.

I would like to thank the chair and the members of the committee for inviting me today and giving me the opportunity to speak about the budget.

The 2015 federal budget is intended to be a balanced budget, a low-tax plan for jobs, growth, and security. U.S. experience shows that low taxes are no guarantee of jobs and growth. In fact, a recent study by the IMF found equality matters more for growth than low taxes. I quote, “lower net inequality is robustly correlated with faster and more durable growth.”

There's nothing inherently good for the economy about low taxes. What's important is to have a well-designed tax system which raises revenue equitably and efficiently, providing both income security and the foundation for economic growth.

The question I wish to address here is this: Which of the tax measures announced in the budget help build a good Canadian tax system, and which ones fail to promote either economic efficiency or equity or both?

Two of the budget measures are particularly praiseworthy. The first are the measures taken to prevent the use of synthetic equity arrangements. The OECD, in its “Action Plan on Base Erosion and Profit Shifting” wrote:

Fundamental changes are needed to effectively prevent...cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it.

Base erosion and profit shifting seriously threaten the ability of OECD countries to tax economic activity. I'm very happy to see the budget taking steps to forestall the erosion of Canada's tax base.

The second welcome change is the reduction to required RRIF withdrawals. Life expectancies have increased and rates of return on investments have fallen. A change was needed. It's about time.

Unfortunately, the budget also contains tax measures that have more limited potential to create jobs and growth. The first is the reduction in the small business tax rate. Advocates of lower taxes on small business would have us imagine a future Bill Gates building the basis of a world-class enterprise out of his garage. Yet as University of Calgary economist Jack Mintz and his co-author Duanjie Chen have pointed out, reductions in the small business tax rate could actually discourage a future Bill Gates from growing his business by creating, as they put it, “a 'threshold effect' that holds back small business from growing beyond the official definition of 'smallness'”.

Moreover, low small business tax rates create possibilities for tax avoidance—the well-paid, self-employed professional who uses a corporate structure to reduce personal tax liabilities rather than grow an enterprise.

The reductions to the small business tax rate are projected to cost $2.7 billion over the next four years. There are far better uses for $2.7 billion, for example, reforming the corporate tax base, or raising the GST threshold so that more small businesses would be exempt from the GST under the small suppliers rule, or working with the provinces to reform and reduce provincial business taxes.

The other tax measure introduced in this budget that causes me grave concern is the doubling of the TFSA contribution limits. TFSAs were a welcome addition to Canada's saving systems. They provide tax-sheltered saving opportunities for many who are not well served by RRSPs, such as students or low-income people. However, there is no case for an increase in the TFSA contribution limit to $10,000 per year. The long-term revenue cost is too great; there is too much potential for abuse of TFSAs.

Many economists advocate consumption taxation on the grounds that taxing investment income discourages savings and has serious efficiency costs. If this government wishes to move towards consumption taxation, and there are good reasons for doing so, we'd be better served increasing the RRSP contribution limits or relying more on the GST to raise revenue and less on income taxes. At the very least, there should be a lifetime limit on TFSA contributions.

The home accessibility tax credit is one final tax measure worth commenting on. I'm not convinced that this is the best way of helping the disabled or helping seniors remain in their homes. First, it is not refundable, so it will not provide help to those who need it most. Second, I've concerns about the implementation of this credit. What kind of home renovations count? Who decides whether or not any given bathroom or kitchen renovation improves accessibility?

Furthermore, linking the home accessibility tax credit to eligibility for the disability tax credit is problematic. My own research suggests that the disability tax credit is not well targeted. Some people with disabilities fail to receive the credit. At the same time there is some evidence that it may be abused.

It would be more sensible to help seniors and the disabled through direct program expenditures on housing, on community living programs, and on home supports. Canada doesn't need a low-tax plan for jobs, growth, and security; it needs a good tax plan for jobs, growth, and security.

This budget introduced important measures that go part of the way towards building a better tax system, but there is more to be done.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much, Professor Woolley, for your comments.

For technical reasons maybe we'll go to Mr. Macdonald last for his presentation, if that's okay.

We'll go to the Canadian Federation of Independent Business, please.

[Corinne Pohlmann, Senior Vice-President, National Affairs, Canadian Federation of Independent Business]

Good morning and thank you for the opportunity to be here.

CFIB is a not-for-profit, non-partisan organization representing more than 109,000 small and medium-sized businesses across Canada that collectively employ more than 1.25 million Canadians and represent about $75 billion in GDP. Our members represent all sectors of the economy and they're found in every region of the country.

I provided a slide deck presentation to the clerk, and I'm hopeful you can have it in front of you when I walk you through it as we go through the presentation.

Our latest “Business Barometer” was just released this morning, and it shows that small business confidence remained cool in May, essentially staying unchanged since April at 60.6, as you can see on slide 2. While things have not gotten worse, they also have not improved, and so measures that can help boost small business confidence, such as some of the measures within part 1 of Bill C-59 are welcome.

Given the important role small businesses play in the Canadian economy, it should be no surprise that small business confidence is a pretty good indicator of real GDP, which you can also see on the chart on slide 2. Measures that can help boost small business confidence should also help improve Canada's economy overall.

How do you build that confidence? You address the issues of highest priority to the small businesses. As you can see on slide 3, the top issues of concern are total tax burden, government regulation, and paper burden.

Four of the measures contained in part 1 go some way in addressing these issues and will be what I focus on today. They are the reduction in the small business tax rate, the increase in the lifetime capital gains exemption, the new quarterly remitter category for small and new employers, and providing accelerated capital cost allowance for manufacturing and processing equipment.

As you can see in slide 4, in a recent survey 83% of small business owners said that reducing the small business corporate tax rate would be an effective measure in helping them to maintain or strengthen their business performance, with almost half saying it would be very effective. This has actually grown in importance, as we've seen the value of the small business tax gradually erode relative to the general corporate tax rate, which fell from 28% to 15%, while the small business rate only fell from 12% to 11% during that same period.

We believe there are good reasons to have a lower small business tax rate, as it helps to offset some of the increased costs borne by smaller companies. These include the higher cost per capita of dealing with red tape, the more difficult and higher cost to access financing, and the more limited ability for smaller companies to access certain tax credits and tax advantages that larger firms can. As a result we're very pleased to see this commitment to reduce the rate to 9% by 2019. The only thing that might have made it better is if it could have been done sooner to help boost confidence now.

The next measure we are pleased to see is the increase in the lifetime capital gains exemption for qualified farm and fish properties. The lifetime capital gains exemption is the most important retirement savings mechanisms for all small business owners, as you see on slide 5. Most small business owners do not have pension plans; therefore, they must rely on other sources of income to finance their retirement years. In fact, the lifetime capital gains exemption is especially important for those in the agriculture sector as even more of them, close to 90%, said it is a very important mechanism for their retirement savings.

As you can see on slide 6, addressing this issue now is critical, as more than two-thirds of small business owners are planning to exit their business within the next 10 years, and most of them, 85%, are planning to exit to go to retirement. However, it not only helps small business owners with financing their retirement, but it also becomes an important tool for helping to finance the next generation of entrepreneurs. In fact, about half of the respondents in a recent survey stated that securing financing for the successor is one of the key challenges facing businesses that are going through a succession process. To overcome that challenge, some have been using the proceeds from the lifetime capital gains exemption to help finance their successor as they take over the business. Therefore, increasing the lifetime capital gains exemption will be well received, and we can encourage government to consider expanding it to $1 million for all small businesses in the near future.

A third item we welcome in the budget is the creation of a new quarterly remitter category that would reduce paper burden on brand new businesses just starting out. This may be a small measure, but it's hugely important in recognizing the increased cost that regulations and paper burden place on small companies.

Slide 7 shows that small businesses spend almost five times more per capita than larger businesses in dealing with red tape, and any measure that reduces that even just a little bit is welcome.

Even more important, when asked about the most burdensome federal regulations they face, CRA-related rules such as payroll tax remittances are at the top of the list, as you can see on slide 8. If you want to encourage more businesses to get started, we need to make the pathway as simple as possible so that they spend more time growing their business than doing government paperwork.

These small measures can have a significant impact on the ground, and we welcome more creative ways like these to reduce that burden on the smallest firms.

Finally, we welcome the extension of the accelerated capital cost allowance for investment in machinery and equipment used in manufacturing and processing. As you can see on slide 9, in a recent survey more than half of all small business owners and about three-quarters of those found in the manufacturing sector stated it would be effective in helping them maintain or strengthen their business performance. We believe this is an important measure that can help stimulate a sector that has the potential to help boost Canada's economy in the months ahead.

All the measures I have mentioned—the small business tax reduction, increasing the lifetime capital gains exemption, creation of a new quarterly remitter category, and an accelerated capital cost allowance—are welcome, as each of these have the potential to help boost small business confidence, which will ultimately be good for Canada's economy.

Thank you.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation, Ms. Pohlmann.

We'll go to Mr. Lavoie.

[Martin Lavoie, Director, Policy, Innovation and Business Taxation, Canadian Manufacturers and Exporters]

Thank you, Mr. Chair.

Members of the committee, I am pleased to be here with you today to discuss part 1 of the budget implementation bill.

Our organization, Canadian Manufacturers and Exporters, represents more than 10,000 companies in Canada. The companies we represent account for about two-thirds of Canada's annual exports and for more than one half of all private research and development expenditure. Our sector employs about 1.7 million people.

First of all, we want to express our appreciation to you for the support that has been shown to our sector by the government and the opposition parties over the years. The manufacturing sector is crucial for the development of our economy. Your support is important. We have covered a lot of ground since the dark years when some thought that the Canadian manufacturing sector was on its death bed. Not only is it not dead, it is back with a much more technological approach. I would be remiss not to express our appreciation for your support.

The most important measure of part 1 of the budget bill is the renewal of the accelerated capital cost allowance for the acquisition of machinery and equipment. Between 2007 and 2014, the federal government offered manufacturers a measure to depreciate their machinery and equipment over a two-year period using a straight line method of depreciation. This measure has been highly successful. By 2013, spending on machinery and equipment had reached pre-recession levels, at $14.3 billion, and has been growing since.

There are some indicators that lead us to believe the timing is right for a new wave of investments in our sector. The industrial capacity rate is now over 80%, which means many companies will start looking at investments in industrial capacity, including plant expansions, adoption of automated production systems, and so on. The question is whether these investments will take place in Canada or not. That's why it's important to keep the marginal effective tax rate on new manufacturing investments very low.

The new measures in the last budget, the ACCA, had a 50% rate on a declining balance. It might not be as generous as the previous two years' straight line rate, but at least it provided a level playing field with other countries, such as the United States, for new manufacturing investments. The new 50% rate will allow companies to depreciate more than 95% of their investments within five years, which is much better than the 30% declining balance that was previously effective before 2007. Even more important, this 50% rate will be effective for 10 years, allowing companies to plan ahead for large investments that are planned over a period of between three and five years on average.

As Corinne mentioned, the budget bill also reduces the small business tax rate from 12% to 9% over four years' time. This is good news. Approximately 85% of our members are SMEs and will benefit from this tax cut. By 2019, the small business tax rate will have decreased by 46% compared to the 2006 level, a significant reduction that will help provide a more competitive tax environment for SMEs in Canada, which make up more than 98% of all businesses in the country.

Finally, I'd like to remind committee members there are still very important challenges ahead of us if we want our manufacturing sector to grow and better compete globally. One of them is access to capital, especially for the acquisition of machinery and equipment used mostly for research and development or for prototyping purposes. For example, one of the fastest growing sectors in our sector is what we call additive manufacturing, or 3-D printing, where 80% of the activities with those machines right now are taking place in prototyping. Very few of these machines are used for end product fabrication right now, which means they don't necessarily qualify for ACCA. These machines used to be eligible under the scientific research and experimental development tax credit as a capital expenditure for the tax credit, but it's no longer the case since the government's decision to eliminate capital expenditure under the SR and ED tax credit. This is becoming a major issue, and we hear that both from companies buying these machines and also companies selling those machines, because we know that early adoption of these advanced manufacturing technologies is crucial for the future competitiveness of our sector.

Thank you very much again for inviting me, and I look forward to your questions.

[The Chair, Conservative, James Rajotte]

Thanks very much for your presentation.

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

[Terry Zive, Chair, Government Relations, Conference for Advanced Life Underwriting]

Thank you, Mr. Chair and committee members, for today's opportunity.

I'm Terry Zive and I appear before you today as a member of the CALU board of directors and the chair of CALU's government relations committee.

CALU and our sister organization Advocis represent approximately 11,000 insurance and financial advisers, who in turn provide financial advice to millions of Canadians. We're pleased to have this opportunity to comment on elements of the 2015 budget now contained in Bill C-59 that will assist Canadians as they retire and enter their ever-extending senior years. We would also like to comment on an additional proposal that CALU included as part of its pre-budget 2015 submission, which we hope will be given consideration during the 2016 budget process. It's never too early to start.

Demographically, we can all agree it is readily apparent that the boomer generation has had, and will continue to have, a significant socio-economic impact in Canada. Notably, the first boomers turned 65 years of age in 2011, and over the next 20 years, this group will expand the number of Canadians over the age of 65 to 23% of the population. As Canadians retire and age, two of their greatest concerns are receiving quality health care and the probability of outliving their personal savings. It is therefore critically important that all levels of government focus on encouraging Canadians to be more financially self-sufficient during their retirement years, and in doing so reduce their reliance on public programs and institutional support.

CALU is therefore very supportive of the reduction in the RRIF minimum factors announced in budget 2015 and now included in Bill C-59. These modifications, the first since the early 1990s, will help Canadians retain more of their savings and protect them from longevity risk. While CALU applauds the government for its action, we also strongly recommend the implementation of a regular review process of the payout factors, say every five years, to ensure that this important investment vehicle continues to provide the necessary financial support to aging Canadians when they need it most.

With a significant portion of the Canadian population moving into their retirement years, advancing age will drive the corresponding need for increased long-term care services. Last fall, the C.D. Howe Institute released a report that estimates that the total cost of long-term care will more than double to $140 billion over the next 20 years, leaving all of us to ask who will bear this additional cost.

The C.D. Howe report concluded that the provinces will need to shift more of the cost to those who can afford to pay. This will be an additional financial burden in retirement for which most Canadians are not currently planning. While we recognize and support the introduction of several long-term care initiatives in the 2015 budget, including the home accessibility tax credit and extending compassionate care benefits, we believe the looming funding crisis must be addressed with greater urgency.

CALU believes that long-term care insurance can play an important role in helping address this funding gap. Long-term care insurance provides a cash allowance to individuals who are unable to manage the activities of daily living. Greater ownership of this type of insurance coverage is critical to helping manage private costs associated with long-term care services. CALU therefore urges the federal government to continue to take a leadership position in preparing Canadians for what lies ahead. This can be achieved by: first of all, educating Canadians about their financial obligations relating to long-term care services; second, by working with the provinces to develop a more unified approach to determine who qualifies for subsidized access; and finally, by enacting the tax rules that will encourage more Canadians to own individual long-term care insurance.

Mr. Chair and committee members, I thank you for your time and attention. I'd be pleased to respond to any questions you might have.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

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

[David Macdonald, Senior Economist, National Office, Canadian Centre for Policy Alternatives]

I'd like to thank the committee for its invitation to speak today about Bill C-59. I'd like to limit my comments this morning to the proposed increase in annual contribution room in the tax-free savings account to $10,000 from $5,500.

I'd like to start with some critical information missing from budget 2015, without which I'm afraid the committee members may draw incorrect conclusions from the benefits of TFSA doubling.

The graph on the slide is reproduced directly from the federal budget 2015, and it purports to show that lower- and middle-income Canadians may gain more than wealthy Canadians from TFSA doubling. Unfortunately, the proportion of the population contained in each of these bars is not shown or included elsewhere in the budget, and this missing critical information for context to understanding what's happening here may lead to incorrect conclusions.

For instance, if the first bar on the left—for those making under $20,000—represented only 1% of the population, but received 15% of the benefits from TFSA doubling, as shown in the graph, this would certainly be a good deal for this group. Unfortunately, those making under $20,000 represent 34% of the population, but only receive 15% of the benefits—not an especially good deal.

On the other hand, those making over $250,000, representing the top 1% of the population, receive 4% of the benefits—definitely a good deal for them. In fact, the bottom 25% of the population in this graph—those making under $10,000—receive only 8% of the benefits of TFSA doubling; however, the richest 10% of the population receive 22% of the benefits of TFSA doubling.

However, looking at the distribution of benefits alone belies a larger fact, that very few Canadians are actually maximizing the TFSA room they already have.

This slide shows the percentage of Canadians who are maximizing their TFSAs in 2013, the most recent year available. It also displays bars of 10%, or deciles of the population, so as not to under-represent low-income Canadians, as the previous graph did.

For the bottom half of the population—those making under $30,000—maximization rates for TFSAs are vanishingly small. In every decile, the maximization rates are at or under 5%, meaning that 95% of the bottom half of the population haven't maximized the room they had in 2013.

Maximization rates are predictably higher at higher income levels, and they peak for the top 1%, where roughly one-third have maximized their TFSAs.

Underlying low maximization rates are low take-up rates in opening a TFSA account in the first place, particularly for low- and middle-income Canadians. For the bottom half of Canadians, only 30% have even opened a TFSA account; in other words, three-quarters of the lower half of Canadians don't have a TFSA. In contrast, 70% of those in the top 1% making over $250,000 do have a TFSA.

The final slide shows that since 2010 maximization rates have been falling. For the poorest 10% of Canadians making under $5,000 a year, only 4% maximized their TFSA in 2010, and that's fallen to only 1% in 2015. For the middle-income earners—this is the sixth decile—the maximization rate has fallen from 12% in 2010, when the maximum was $10,000 for a TFSA, to only 5% in 2015, when the cap was the much higher $36,500. This is prior to the doubling being discussed here.

The purported purpose of the TFSA program is to help low- and middle-income Canadians save for retirement and in particular to avoid the GIS clawback upon retirement. However, take-up rates, much less maximization rates among low- and middle-income Canadians have been poor, and the program has been much more rapidly taken up by the rich.

In order that this program does not produce TFSA millionaires who are eligible for programs meant for low-income seniors, like the guaranteed income supplement, it's important that the TFSA program have two caps put in place. First, a lifetime contribution cap should be set at $150,000, and second, a maximum amount of assets in a TFSA should also be set at a cap of $300,000.

I encourage the committee to include these caps in budget 2015.

Thank you, and I look forward to your questions.

[The Chair, Conservative, James Rajotte]

Thank you very much for your presentation.

Colleagues, I think we can do six-minute rounds if everybody stays tight to that.

With that, we'll start with Mr. Cullen, please.

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

Thank you to our witnesses for being here this morning.

Ms. Pohlmann, this graph that you bring out around business confidence is important. I just want to distinguish between causation and causality. Is it when the economy picks up, then small businesses feel better, or is it that small businesses feel better and they help the economy pick up?

[Corinne Pohlmann]

It would be hard for me to comment on which causes the other, but when we have tracked small business confidence to GDP, and as you can see it tracks fairly well, it's hard to know the difference.

We're asking our members in this particular question how they see their business doing over the next year: better, same or worse. They're doing their own outlook for their own business, not for the economy.

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

Timing is important. I think one of your comments was around the need to reassure and instill confidence in small businesses right now because we've had a zero growth economy for some time. We've had less than 1% for 16 months now, which is the largest period outside of a recession that Canada's ever seen since we've taken these stats.

I have a question about how fast the government is moving on doubling the TFSA limits and allowing for income splitting. When did those measures come into effect?

[Corinne Pohlmann]

Are you asking me that? Neither are issues we've commented very much on, so I don't know exactly when they....

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

Mr. Macdonald, when did those measures come into effect, the doubling of the TFSA and the allowance for income splitting?

[David Macdonald]

The income splitting has come into effect for the 2014 tax year, and the TFSA doubling is in effect at present.

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

So they're effective either immediately or retroactively in some cases.

That's my curiosity about lowering the small business tax rate. Priority is shown by urgency sometimes. What choices you make first show where your priorities are. The NDP has suggested that lowering the small business tax rate be done immediately and then again by another point almost immediately after that. My concern is that from the current plan of what the government has proposed around small business taxes, they are going to take three to four years to do it. Where's the urgency? If this is what you're showing us in terms...it matches both the economy being quite stagnant and confidence within small businesses that are creating eight out of ten new jobs, hopefully, to change this graph, why move so slowly?

[Corinne Pohlmann]

That was one of my comments. The only thing that could have made it better is if it could have been implemented immediately. We believe that would help in boosting the confidence of small businesses, which we think ultimately would help the economy overall.

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

The tax code has gone up significantly in complexity and cost of compliance, 60-odd per cent since 1998 according to the Fraser Institute. The costs associated with that per small business are extraordinary. Are we getting better or worse? How is the trend doing in terms of the costs of just filing taxes for small businesses in Canada?

[Corinne Pohlmann]

Our members are telling us it's getting worse. We did some research back in January that found the cost of compliance overall is costing the Canadian economy about $37 billion a year.

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

It's $37 billion a year?

[Corinne Pohlmann]

For all levels of government, not just federal.

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

Just to fill out taxes.

[Corinne Pohlmann]

Just to fill out forms. Not just tax forms, but all kinds of compliance. It's $37 billion a year, and we believe that's a conservative estimate.