Finance Committee on Oct. 18th, 2017

[Dan Albas, Conservative, Central Okanagan—Similkameen—Nicola, BC]

Good morning to you all.

I am the member for Central Okanagan—Similkameen—Nicola, in BC.

I'm very happy to be with all of you today. I'm looking forward to your testimony.

[The Chair, Liberal, Wayne Easter]

My turn to greet you; good morning, everyone.

I'm Wayne Easter, the member of Parliament for the riding of Malpeque in Prince Edward Island. If you get any of those good Malpeque oysters, that's where they come from. They keep everybody happy.

With that, welcome. We'll start with the first witnesses from the industrial research association of Quebec, with Mr. Monette and Mr. De Luca.

Go ahead.

[Pascal Monette, President and Chief Executive Officer, Association pour le développement de la recherche et de l'innovation du Québec]

Good morning. Thank you for the invitation.

My name is Pascal Monette. I am the President and Chief Executive Officer of the Association pour le développement de la recherche et de l'innovation du Québec or ADRIQ. In fact, “Association de la recherche industrielle du Québec” is not the right name. Forty years ago it was known as the Association des directeurs de recherche industrielle du Québec, but it evolved.

I am here with Albert De Luca, who is the president of the board of directors.

I am pleased to be here.

I will say a few words about ADRIQ.

The association has existed for 40 years. Its goal is to advance research and innovation for the benefit of enterprises and also to improve competitiveness. In short, as I often say, we sow the seeds of innovation. We know that the innovation vector is a very important aspect in the development of our enterprises, particularly in the context of global competition.

Our employees and our board of directors are very representative of the research and innovation ecosystem. We have representatives from academia, colleges, research centres, small and large businesses, manufacturing and IT. As you can see, we are very representative.

We act on two fronts. First, we try to have a positive influence on research and innovation policies. With the Government of Quebec, in fact, we participated at a great deal in the development of the recent Quebec strategy on research and innovation, which was released last May. We also provide services to businesses to help them to be more innovative. Over the past years, we met with close to 2,000 businesses and spent several thousands of hours in discussions with them to help them become more innovative.

In the course of our work with the Government of Quebec, we published a brief which we will provide to the committee. It was entitled “Quatrième révolution industrielle: l'urgence de collaborer pour innover”. The title of the brief already gives you some indication of the themes we wish to discuss.

The brief contains 20 recommendations. I will review the four pillars that form the basis of those recommendations, and then I will give the floor to Mr. De Luca for his presentation on the Industry 4.0 concept.

The first of the four themes broached in the brief is the commercialization of innovation. We know that Canada and Quebec are hotbeds of university research, but given the investments that are made, we feel that the research outcomes that can be commercialized are not yet significant enough.

The second theme is the necessary collaboration between those who do research and the enterprises. Some good things are already being done, but we need to see more. At our annual gala, we highlight the best partnership projects, but there should be more of them.

The third theme is the culture of innovation and the development of scientific careers. I am more familiar with the situation in Quebec. In our province, there is a debate on the scarcity of labour, particularly in the information technologies. Businesses practically fight to figure out who should get tax credits. The problem persists; there has to be some pipeline to encourage young people to choose scientific and technological careers.

For instance, in Industry 4.0, the manufacture of the future provides jobs in highly computerized, clean, stimulating environments. We are no longer in greasy, noisy, soul-destroying plants; we have evolved.

So that is the fourth theme. The Government of Quebec gave us a mandate to develop a network of 4.0 centres of expertise in order to help Quebec manufacturing businesses get to the 4.0 transformation, because they have gotten behind considerably.

I will stop here.

Mr. De Luca, I yield the floor to you.

[Albert De Luca, President of the Board of Directors, Association de la recherche industrielle du Québec]

Mr. Chair, first I would like to say that it is always very stimulating to see the variety of sectors that are represented in these consultations. It's refreshing to see to what extent we are able to discuss things in Canada without getting agitated. This is not always the case in other countries. It's good to live in Canada.

To follow up on what my colleague was saying, I want to point out that Quebec took an initiative several years ago by investing a lot in innovation and research. I am convinced that basic research is not sufficient. That is a challenge.

Since we are more concerned with the commercialization of innovation and research, we look at the outcomes of knowledge, if you will. For these reasons, we encourage more co-operation between businesses and equity. I see that there are people here from the Fonds de solidarité des travailleurs du Québec, and they are an important player when it comes to investing in business.

In addition, we want to encourage the democratization of research in business. As to the means to do that, we believe that the existing programs that encourage research and development make it possible to have a broader and more democratic platform, so that all businesses can invest and decide on the projects that interest them. Consequently, we believe in maintaining the current program, even if the Innovation Superclusters Initiative and the Strategic Innovation Fund are effective in that they allow people to choose certain sectors deemed a priority for Canada, which can lead to more investments.

Essentially, we believe that there is a balance to find between a platform of incentive measures for research and development that apply to everyone on the one hand, and more targeted measures on the other.

As for co-operation among businesses, allow me to take Quebec as an example. That province has programs that encourage cooperation between large enterprises and SMEs. It's important to understand the advantages of such programs. Just imagine the risk sharing that is made possible thanks to the co-operation between large and small businesses. It also means that SMEs can find new clients. There are commercial advantages to such collaboration. It also leads to an exchange of knowledge.

We also think that Canada should look at measures to encourage co-operation among businesses, as Quebec does. The models already exist and don't need to be reinvented. Basically, it means encouraging big business to work more with SMEs.

To conclude, I want to express appreciation for the superclusters initiative. We read the initial conclusions and the choice of the nine superclusters, one of which concerns the innovative manufacturing sector. I am not sure that that was the word that was used, but let's call it that. I think that that particular supercluster is in the Waterloo area close to Toronto.

Quebec is working with that initiative, with the Industry 4.0 concept Mr. Monette referred to earlier. In defining the superclusters, it is important to understand what is happening everywhere in Canada, including in Quebec, in order to see if there could be more co-operation with regard to the superclusters that will finally be chosen.

Finally, the $1.3 billion Strategic Innovation Fund is very important. It stimulates research in the automotive sector and the aeronautics sector, through the Strategic Aerospace and Defence Initiative, as well as the Automotive Innovation Fund. In the last budget, these two funds and others were consolidated to create the Strategic Innovation Fund. The $1.3 billion fund has already been spent, which means that the big projects that would be eligible for funding through that program cannot receive any, because there are no more funds, basically.

Thank you.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Albert and Pascal.

I should mention as well that we received quite a number of submissions, 423, I believe, before August 10. Those are on people's iPads, so you'll see members looking at their iPads from time to time, and it's not to see if you're saying the same thing today because you can add to it. We do have those submissions and they're part of the consultations.

Next we have the Canadian Association of Student Financial Aid Administrators, Ms. Piperni and Mr. Levac.

[Cara Piperni, Past President, Canadian Association of Student Financial Aid Administrators]

Thank you, Mr. Chair and members of the committee, for the opportunity to appear today on behalf of CASFAA, the Canadian Association of Student Financial Aid Administrators.

My name is Cara Piperni, and I'm the director of the scholarships and student aid office at McGill University here in Montreal and past president of CASFAA. My fellow board member joining me is Josh Levac, who's my counterpart at Lakehead University in Thunder Bay, Ontario. CASFAA represents the financial aid offices of 94 universities, colleges, and institutes across Canada. We are uniquely positioned in the trenches to provide a national perspective on both the opportunities and issues of student financial assistance.

We first wish to acknowledge the much needed boost in the Canada student loan and grant programs in the past two federal budgets, the redistribution of resources toward consideration of financial need, the relief in loan repayment, fixed-rate student contribution, and expanding the net for part-time students to qualify for loans and grants. It absolutely makes a difference. On-site job opportunities and experiential learning, the youth employment strategy, absolutely resonate with us, as did the recent announcement creating 60,000 student work placements over five years.

Unfortunately, there are still many students disadvantaged in the current system who require additional forms of government assistance. We are witness every day to the lived experiences of students who struggle to enter or stay in post-secondary education or to fully enter the job market upon graduation, due to financial constraint and a host of other barriers.

The key to a productive economy is a well-educated and prepared workforce regardless of identity, background, and financial capacity. Our proposal of a needs-based national work study program serves to bring the youth employment strategy, as well as many recommendations from the expert panel on youth employment, into finer focus for post-secondary education students from lower socio-economic backgrounds and other under-represented and vulnerable identities, such as indigenous students, first-generation students, new immigrant students, and students with disabilities.

The idea is to give priority access to on-campus jobs to students who rely on Canada's student loans program for their studies. That is nearly 500,000 students annually, according to the last published statistics. Why? With increased costs, both tuition and living, the reluctance to enter PSE is often about the debt they need to assume when the certainty of good-paying work is not assured.

Also, retention and graduation rates often suffer without engagement in the campus community. Extras, such as clubs, field experiences, and volunteering for non-profits are out of reach for low-income students because they are barely making ends meet simply covering the basic cost of attendance.

Good-quality part-time work, especially in an understanding environment that respects that school comes first, helps students address their budget shortfalls after government aid and other resources are exhausted and without incurring more debt.

Finally, it's tough to enter the labour market for the first time when you don't have the networks, the soft skills development, or experience to draw from because you come from a disadvantaged background. We see this as a federal grant administered by post-secondary educational institutions on the basis of the number of their students on federal student financial assistance. Schools are in the best position to identify the most vulnerable low-income students who have a host of other barriers, provide some wrap-around support services such as career reflections and financial literacy, and use the power of work to build the confidence and skills that can be parlayed into future employability.

We envision 100% of federal monies going into the pockets of students for work performed. Schools would also contribute to this funding from their research grants, offering budget and other sources to enhance the impact and reach of a national work study program. There are examples of successful programs we can draw upon. The U.S. federal work study program promotes college access and persistence. It covers up to 75% of wages for student employees to work on campus 10 to 15 hours a week. It has a proven positive impact on retention and graduation, and has had a strong effect on post-graduation employment. These results were magnified for the lowest-income students.

The province of Quebec has a long-standing work study program that is co-funded in equal parts between the ministry of education and participating educational institutions. It is dedicated to students on Quebec's loan and bursary program, including those who've reached their debt limit in their program of study.

On my campus, researchers love the work study program because it stretches their research grants to either pay more, or give more students hours in their labs. That's just one example. We see it providing the dignity of work and increasing persistence by providing practical opportunities to enhance the education experience and be connected with activities on campus.

Thank you for your time and consideration. We look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you, Cara and Josh.

Turning to the Confédération des syndicats nationaux, we have Mr. Patry, president, and Mr. Bélanger, union adviser.

Welcome, and thank you for coming.

[Pierre Patry, Treasurer, Confédération des syndicats nationaux]

Thank you, Mr. Chair and members of the committee.

The Confédération des syndicats nationaux, or CSN, is a trade union organization with nearly 2,000 member unions who together represent 300,000 working women and men, primarily within Quebec.

The CSN welcomed the changes made to ensure that personal taxation is more progressive by introducing a marginal tax rate of 33% for taxpayers earning more than $200,000, and reducing the rate for the second tax bracket from 22% to 20.5%.

The CSN believes that the government must limit the many tax benefits that disproportionately benefit high-income earners. In our brief, we suggested a few measures to protect the tax base. The CSN welcomes the recent government initiative to correct unfairness due to the increased recourse to tax planning based on private companies under Canadian control.

We think it is unfair to allow income splitting between an owner-shareholder and his or her spouse and adult children when they do not actively participate in running the business. It is also unfair to allow the conversion of surpluses into capital gains that are taxed at a lower rate, when they should be taxed as salary or dividends.

Finally, it is not normal that the tax treatment of passive investments held by a private company provide a financial advantage to the owner-shareholder that is far superior to what is available to the middle-class taxpayer who invests in a registered retirement savings plan, an RRSP, or a tax-free savings account.

Wealth accumulated by Canadian individuals in tax havens is estimated to be $300 billion, which results in annual losses of tax revenues of approximately $6 billion. After the United States and Germany, Canada is the country most affected by the transfer of multinationals' profits. By rejecting motion M-42 introduced by Bloc Québécois MP Gabriel Ste-Marie, the Trudeau government and Conservatives gave their approval to the use of tax havens by businesses.

In its election platform, the Liberal Party of Canada promised collaborative leadership. However, with regard to the Canada Health Transfer, or CHT, the Trudeau government instead imposed on the provinces an annual increase based on Canada's nominal gross domestic product, GDP, that has a cap of 3%. The federal government is encroaching on the provinces' jurisdiction in health care by making access to certain funds conditional on provincial investments in mental health and home care.

The agreement that the Government of Quebec reluctantly signed is insufficient, since according to Conference Board of Canada forecasts, health care costs will increase on average by 5.2% every year from 2015 to 2035, far beyond what is to be found in the CHT agreement.

CSN is pleased that the federal government intends to make more investments in infrastructure to improve the competitiveness of Canada's economy,even though this will result in higher budget deficits. However, the new element of the federal public infrastructure investment strategy is the large-scale use of public private partnerships, or PPPs, through the new Infrastructure Bank of Canada. According to the Fall Economic Statement 2016, the federal government estimates that the private sector could finance up to 80% of the cost of certain infrastructures.

The CSN believes that a change of this magnitude should have been subject to public debate. The approach proposed by the federal government raises several problems.

The Trudeau government continues to focus on the development of the oil sands, which is absurd given the challenges of climate change. That said, Budget 2017-2018 includes some measures that could accelerate the modernization of Canada's and Quebec's industrial fabric and are compatible with the industrial policies promoted by the CSN.

With respect to the renegotiation of the North American Free Trade Agreement, NAFTA, the CSN believes that this is an opportunity to correct the deficiencies in the current accord. In order to do so, major changes must be introduced. First of all, a new NAFTA agreement should fully take into account the protection of citizens' and workers' rights. In addition, the new accord should fully integrate issues related to the protection of the environment. The new agreement should not prevent the Canadian and provincial governments from implementing public and economic policies needed for socioeconomic development. Also, the new accord should allow us to protect certain strategic sectors such as supply management, which we hear a lot about in the news, as well as public procurement, the telecommunications sector, and cultural industries. Finally, the CSN urges Canada to take advantage of the renegotiation of NAFTA to eliminate the right of multinationals to sue countries, which implies the elimination of the dispute settlement mechanism between investors and states, that is to say the famous chapter 11 of the agreement.

In the area of labour training, the government intends to undertake a major reform of labour market transfer agreements. In particular, it plans to amend the Employment Insurance Act in order to broaden the eligibility criteria for training programs and the services provided under these agreements. The CSN supports making these training programs available to groups that are underrepresented in the labour market, provided that the government continues to improve the employment insurance program. There is much work to be done to make this program responsive to the realities of the working world, even though we must acknowledge that the current government did act on this matter.

Finally, Budget 2017-2018 announced the creation of an entity that will identify the skills that Canadian employers are looking for and require, while proposing innovative approaches to procurement and skills training. The creation of this federal body calls into question the labour institutions that Quebec has created over the years. In addition, the CSN believes that skills acquired through this training must be transferable in order to further the independence of working men and women.

Thank you, Mr. Chair.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Patry and Mr. Bélanger.

We now turn to the Quebec workers' solidarity fund. Mr. Morin and Mr. Tremblay, welcome.

[Gaétan Morin, President and Chief Executive Officer, Fonds de solidarité des travailleurs du Québec]

Thank you, Mr. Chair.

Good morning to all of the members of the House of Commons Standing Committee on Finance.

The Fonds de solidarité FTQ is very pleased to participate in the pre-budget consultation launched in advance of the 2018 budget.

The Fonds is thrilled that the questions proposed by the committee are very much aligned with the Fonds' mission. Indeed, the economic growth of businesses and communities is at the very heart of our organization's priorities. Furthermore, the Fonds' mission espouses the model of inclusive growth, a concept that your government has also put forward.

The Government of Canada has committed to investing in inclusive growth that seeks to strengthen the middle class and stimulate growth to enable the Canadian economy to prosper in a sustainable fashion. We share that wish and want to contribute to the realization of that government priority.

Since its establishment in 1983, the Fonds has embraced the concept that large institutions describe as inclusive growth, first by making it easier for Quebec's middle class to save, even with more modest income, thanks to tax credits offered by both levels of government, but more importantly, by channelling those savings from the middle class toward businesses. These savings provide patient capital to businesses, which is hard to come by these days, to support their growth and enable them to provide quality jobs.

Thanks to the return of the funds from the federal tax credit to our shareholders in 2016, the Fonds played a leadership role in promoting inclusive growth. Several aspects of our organization's strategic planning have a positive effect on businesses and communities.

Firstly, the Fonds stimulates economic growth and job creation. With net assets of $13.2 billion, the Fonds is present in all sectors of economic activity in Quebec, and all phases of companies' development. Our network finances more than 2,700 partner companies and helps to create, maintain or protect more than half a million jobs.

Over the past ten years, the Fonds directly invested close to $6 billion in companies and specialized private funds. A recent KPMG study concluded that while the Fonds' investments were mainly aimed at supporting small- and medium-sized enterprises located in Quebec, the activities of these enterprises also stimulate the rest of the Canadian economy. The impact on the economic fabric outside Quebec is substantial, representing an additional 16% over the value of the impact measured in Quebec alone.

In addition, through its presence in all regions of Quebec, the Fonds has the desire and the capacity to stimulate local and regional economies. The same KPMG study showed that the Fonds' partner companies are proportionally more present in less economically favoured regions, and that they help increase the employment rate and reduce income gaps in the regions. In a territory like Quebec, it is not reasonable to pit regions against each other; prosperity should encompass the development of all territories and foster the well-being of everyone, everywhere. In deploying its network of experts supporting regional and local economies across Quebec, the Fonds is attempting to meet that challenge.

Our organization also wishes to strengthen the middle class and stimulate growth by encouraging savings, by providing communities with socioeconomically structuring infrastructure, and finally, by tackling the employability challenge. We discuss the other aspects of our strategic planning in our brief.

In short, the Fonds de solidarité FTQ is already taking concrete action to promote the growth of a robust middle class. These measures are generating and will generate benefits for communities.

These consultations are normally used to make demands on your committee. However, the Fonds would rather use this platform to demonstrate its ability and willingness to play a role in addressing the issues that that have been identified as priorities in inclusive growth. We can and we want to work with your government to help meet its objectives in terms of retirement savings, tax reductions for the middle class, job creation, innovation and economic development.

Thank you for your attention.

We will be pleased to answer your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Mr. Morin and Mr. Tremblay.

We have Mr. Gagnon with Imperial Tobacco Canada Limited.

[Eric Gagnon, Head, Corporate and Regulatory Affairs, Imperial Tobacco Canada Limited]

Thank you Mr. Chair.

Good morning everyone.

Thank you for giving me the opportunity to make a presentation before the committee.

My name is Eric Gagnon, and I am the head of corporate and regulatory affairs for Imperial Tobacco Canada, the largest legal tobacco manufacturer in Canada. I stress the word “legal” because there is a thriving illegal market in Canada today.

I will start by saying that there are important health risks associated with smoking. You may agree or disagree with tobacco consumption. However, cigarettes are still legal in Canada, and I think we can all agree that, if adult consumers choose to smoke, we are all better off if they buy their products legally.

Unfortunately, over the last half of this year, industry data suggests that there has been a major spike in illegal tobacco activity in Canada and in Ontario in particular. That should concern this committee because illegal tobacco is already costing governments $2 billion in lost tax revenue annually.

Let me remind you of some of the basics of the size and the scope of illegal tobacco in Canada. According to the RCMP, there are over 50 illegal cigarette manufacturers in Canada and more than 300 smoke shacks manufacturing and selling tobacco outside existing legal, regulatory, and tax frameworks. There are over 175 organized crime groups that are dealing contraband tobacco across the country. Illegal tobacco rates are in the 15% to 20% range in Atlantic Canada, in the 30% to 40% range in Ontario, and in the 12% to 15% range in the west. To put things in perspective, if Ontario were a country, it would have the third-largest illegal tobacco market in the world.

You should be very concerned about policy decisions in Ontario that are making this situation much worse, including a reckless move earlier this year to increase tobacco taxes by $10 per carton over the next three years. As the biggest market in the country, when illegal tobacco rates rise in Ontario, it means even more lost tax revenue for the federal government. The only province making significant inroads in this is Quebec, where aggressive enforcement actions have reduced the illegal tobacco rate from 40% to less than 15%.

With that in mind, we offer three recommendations to fight illegal tobacco. In so doing, I will draw parallels for each of the government's approaches to marijuana legalization.

First, Canada needs a predictable framework for tobacco taxation. International experience shows that a moderate, annual increase that's tied to a variable like inflation is the best approach, like the model that was put in place last year for alcohol.

There is also a need for federal-provincial coordination on tobacco taxation like the finance minister has proposed for marijuana. While the tax framework proposed for marijuana is designed to match the black market price and kill the illegal market, with tobacco it seems to be the exact opposite, with repeated tax increases pushing legal prices to well over $100 per carton in most provinces compared to as little as $15 for the illegal equivalent.

Second, a whole-of-government approach is needed for tobacco in which taxation, regulation, and enforcement are considered in the context of a thriving illegal trade. The government is designing a marijuana framework to drive organized crime out of that business, but it is ignoring the illegal tobacco trade. However, the same organized crime groups are behind illegal tobacco and marijuana, so you really need to ask whether Canada is better off if you drive organized crime out of marijuana but then they gain an even stronger footing in tobacco.

Third, the government needs to reconsider its plan for plain and standardized packaging of tobacco and the standardization of cigarettes themselves. In Bill S-5, which is before the House, Health Canada has given itself the regulatory authority to mandate that every tobacco package and every single cigarette must look exactly the same. If that happens, it will be impossible for consumers, retailers, and law enforcement to tell a legal product from an illegal product, and the contraband problem you have now will be exacerbated by a flood of counterfeits.

Health Canada claims that excise stamps and health warnings will distinguish legal products from illegal products; however, those are already appearing on clear, illegal products, including baggies of cigarettes. The stamping system is something this committee needs to look at. It is completely broken. There are products being produced by unlicensed manufacturers that are sold with a federal excise stamp. Since no one will explain to us how this is happening, perhaps you can ask for answers, because it undermines the integrity of the whole tax and regulatory regime for tobacco in Canada. In the meantime, it is reckless to continue down the path of plain and standardized packaging when there are already no controls over the means to differentiate the existing products.

The government seems to recognize the risk of plain packaging. The parliamentary secretary to the ministers of health and justice, Bill Blair, said in August that some level of branding will be allowed on marijuana to help fight the illegal market, yet when we made the same argument for tobacco, we were ignored. There is a need for consistency between marijuana and tobacco on taxation, packaging, and the focus on getting organized crime out of the business.

If you are willing to invest in fighting illegal tobacco, as Quebec has done, there is billions in lost revenue that can be recouped.

Thank you for your time. I look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much, Eric.

We now turn to the last panellist, Mr. Bédard, an economist at the Montreal Economic Institute.

Welcome.

[Mathieu Bédard, Economist, Montreal Economic Institute]

Thank you for the opportunity to be here.

For its part, the Montreal Economic Institute will focus on tax policy, an issue that is central to productivity. Canada has long trailed the United States in terms of wealth, largely as a result of lower productivity. One of the factors that contribute to this discrepancy is corporate taxation, which limits the ability to make productivity-boosting investments. While the government has very recently announced that it will reduce the rate for small business, which is welcome news, the basic rate that applies to larger businesses, which still remains at 15%, is the one that is the most significant in terms of productivity.

When thinking about corporate taxation and its effect on productivity, it is worth keeping in mind the current context in which U.S. President Donald Trump has just reiterated his intention to reduce the top federal corporate income tax from 35% to 20%. Such an abrupt reduction would have serious repercussions for the productivity of Canadian workers through a loss of fiscal competitiveness.

The consequences would be borne in large part by workers. This is because workers are less mobile than capital, a difference that has become even more significant in recent decades as the mobility of capital has increased. In terms of how easy it is to conduct business in Canada, Canada tends to fare poorly compared with the United States. However, it does outshine the United States in one of the key subcomponents of these indexes, and that is with regard to taxes. This advantage has been very important in attracting investments to Canada. The proposed U.S. reform, however, would make Canada much less competitive in terms of taxation.

A reduction in the corporate tax rate in the U.S. would attract more capital there in search of a higher relative return. This would mean two things for workers. The first is that, since capital is a complement to labour, there would be a reduction in the demand for labour in Canada, which in turn would depress wage growth. The second is that lower levels of investment reduce productivity growth, which would again restrict wage growth. As such, workers would bear a large share of the effect of Canada's relatively higher corporate taxes. It is worth keeping in mind that research shows that workers bear about 50% of the burden of the corporate tax. Canadian workers, through lost productivity, would therefore likely be the first to suffer the consequences of the American tax cuts, were Ottawa to leave the Canadian rates unchanged.

The maintenance of our current tax system in the event of an American reform would entail a loss of productivity when business investment crosses the border. The Government of Canada, therefore, has an interest in reforming its own corporate tax system without delay. It is our contention that introducing a proportional taxation based on the 10% rate that will apply to small business as of January 1, 2018—so that one single federal rate remains for all Canadian businesses—would counter the American reform.

By acting now, the Canadian government would be sending an unequivocal signal to companies that Canada is a good place to do business and will continue to be a good place to do business regardless of American reforms. This would maintain and possibly improve Canadian workers' productivity, in addition to being a great indirect help to them.

Another federal measure that would unambiguously improve Canadian productivity is to either substantially reduce the capital gains tax, or simply abolish it. Just as sin taxes reduce the behaviour that is being targeted, the capital gains tax hinders capital formation, which is one of the basic foundations of all economic growth. In fact, most government policies that intend to boost economic growth are geared towards increasing the supply of capital. This would also affect job creation and wages throughout the economy, as less capital can be matched with workers to make them more productive through technological and other improvements, which is a prerequisite for wage increases.

Taxing away capital is not the only detrimental effect of this tax. Capital gains taxation also encourages people to lock in their investments. Unlike most other types of income, realizing capital gains is largely a matter of choice, in the sense that you can simply choose not to sell and not to pay your capital gains tax. This makes it much more sensitive to taxation than other types of income. When rates are high, individuals who own assets become more reluctant to sell them, requiring greater benefits to outweigh the tax burden. For them, the capital gains tax thus reduces the probability that a given stock will be sold.

This hurts economic growth because it discourages the reallocation of assets to their most productive uses. Research pursued in the U.S. has suggested that for every 1% drop in the tax rate, capital gains realization increases by 1%. So we're on a 1:1 ratio.

The capital gains tax does not only reduce overall investment, it also affects which businesses venture capital invests in. Venture capital tends go to firms that offer unproven but potentially revolutionary technologies, services, or products. These are things that naturally boost productivity.

The capital gains tax, however, reduces the willingness of venture capitalists to finance these riskier business start-ups. As a result of the deterrent effect of this tax, they prefer less innovative forms of entrepreneurship. These effects of the capital gains tax represent one of the biggest fiscal burdens on economic performance and productivity in Canada. In a study of the macroeconomic effects of the different taxes that governments can use to raise revenues, the federal Department of Finance found that taxes that affect capital goods are the most detrimental to economic activity and productivity.

If governments were to reduce taxes on capital income by $1, the economic gains would be approximately $1.30. The elimination of this tax would bring about the most economic gains.

Moreover, the tax cannot be justified by the meagre revenue it generates for government. The reduction in federal government tax revenues would not be significant, approximately $4.3 billion or just 1.5% of its total revenues. Taxation of capital gains is particularly pernicious because it is the kind of income that is derived from the efforts of investors and entrepreneurs to grow the economic pie, which is the basis of our productivity and ultimately the prosperity of all Canadians.

Thank you.

[The Chair, Liberal, Wayne Easter]

Okay, and your recommendations are after that in your brief. Thank you very much, Mr. Bédard.

We will go to a little bit of flexibility on the seven-minute rounds.

Mr. Fergus.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Thank you, Mr. Chair.

First, I'd like to thank everyone for being here this morning to take part in this meeting.

Frankly, I don't know where to start.

The contribution made by the Association pour le développement de la recherche et de l'innovation du Québec is very interesting. I have seen the results with my own eyes.

I also had the pleasure of meeting the representatives of the Canadian Association of Student Financial Aid Administrators on several occasions in my current life as a member, and previously when I worked for Canadian universities.

I certainly commend the work of the CSN and of the Fonds de solidarité FTQ. I will have questions for their representatives a bit later.

I will begin with Mr. Bédard.

I must respond to some of the comments you made before the committee. You said that income tax was a good measure of Canadian productivity. I am very preoccupied by productivity. I adore the work your organization does, and I have attended several of its annual conferences. That said, I must say that in the United States, the corporate tax rate is 35%, whereas it is 15% in Canada, and yet we have not seen an improvement in the productivity rate of Canadian workers.

Explain to me why you say that changing income tax rates will necessarily bring about changes. For many years, the corporate income tax rate in Canada has been lower than in the United States, and yet we have not seen an improvement.

I would like a brief answer to my question, because I have another one for the Fonds de solidarité FTQ representatives.

[Mathieu Bédard]

Briefly, I would answer that the United States has many other things to offer companies. Among the World Bank Doing Business indicators, income tax is the only point on which Canada leads the United States. They have other assets to offer.

The corporate tax rate is something we can control relatively easily. It's something we can act on fairly quickly, as compared to other things that are much more complex and depend on other levels of government, among other things. I think it can be one of the levers we can use to make Canadian businesses, Canadian workers and all Canadians much more productive.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

I apologize, perhaps I misunderstood the comments you made earlier. You said that it is a major factor that has an impact. Now you are saying that there are other factors.

[Mathieu Bédard]

It has a major impact.

If we look at economic history and what has happened since 2000, the answer is more complicated and will depend on certain facts. The effects of any given situation sometimes take some time before they are felt. Businesses have to have time to adjust and move their investments around. If you look at what has been done since we started reducing the corporate tax rate, you have to take into account the fact that it can take some time before investments are actually made.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

I hope this isn't a situation where reality is not aligned with theory.

Thank you very much.

Mr. Morin and Mr. Tremblay, thank you very much for the work you do.

I know that the Fonds de solidarité FTQ really supports Canadian businesses and has done so for years. The Fonds has had a remarkable effect on the vitality of our businesses. The investments you make give Quebec businesses a chance to boost their returns.

Can you talk to us about the importance of returning the tax credit in facilitating investment by Quebeckers in their businesses, through your fund?

[Gaétan Morin]

As I said at the outset, the Fonds de solidarité FTQ provides patient capital. Obviously, without the return of the tax credit we could not have continued to do this long term. Our entrepreneurs and businesses in Canada and Quebec need long term patient capital. So this allowed us to think long term again.

We did some strategic planning to see how we could do more for Canadian and Quebec businesses. We continue to invest in all sectors of the economy, but this allowed us to emphasize certain sectors that create more jobs, significant value, or export a great deal, for instance companies in the aerospace, agrifood, forestry and life sciences sectors. We were both present last year at the launching of Sterinova, a life sciences and biotechnology sector enterprise.

So this allows us to continue to support our entrepreneurs over the long term. To develop businesses you need a lot of resilience, a lot of time, and patient capital.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

Even though you make patient investments, your profitability rate has remained excellent, if I remember correctly.

[Gaétan Morin]

We have been doing this for 34 years. Performance always has to be assessed over a long period. The return for our shareholders since the creation of the Fonds has been 4.2%.

We have 34 years of experience, expertise and development in our economic sectors. And so we have specialized teams and we can target entrepreneurs who want to go further, that is to say the best Canadian and Quebec companies. Our good knowledge of the economic fabric allows us to bet on the best horses, those who will help us to produce a good return for our shareholders. That is the balance we create.

As for the tax credit, obviously, since we provide patient capital, the shareholder who invests with us has to be patient to. He has to wait for retirement before we can buy back his shares. This allows us to have access to those funds over a period of 15, 20 or 25 years. The tax credit also allows our shareholders to be patient.

[The Chair, Liberal, Wayne Easter]

You have time for just a very quick question, Greg.

[Greg Fergus, Liberal, Hull—Aylmer, QC]

What can we do to further encourage patient investments?