Finance Committee on April 14th, 2016

[Bruce Ball]

I have to be honest that—

Sorry.

[The Chair, Liberal, Wayne Easter]

I was going to suggest that we are on Bill C-2, but it does relate. You mentioned the budget.

Go ahead, Mr. Ball.

[Bruce Ball]

I was going to say that I'm not an expert on how banks work, so I'm not sure I can add much to that. I'd point out again my role in my firm is as an income tax specialist, so I don't have views on the question around banks.

[The Chair, Liberal, Wayne Easter]

Mr. Alexander has a comment, I believe.

[Craig Alexander]

The C.D. Howe Institute will be having a report out in the next month or two on the bail-in provisions for the banking system. The central issue is around the transfer of the liability. Is it the taxpayers who ultimately are backing the banking system, or should it be equity holders?

What the report looks at is the implications of the bail-in system, at some of the implications for common equity holders, and what the implications of that are to the financial system. I think one of the underlying assumptions is that the bail-in system is not designed to have depositors being the backing. Most of the discussions around the bail-in capital regime assumes that the depositors are going to ultimately be protected. I would encourage that fact because it increases the stability of the financial system if people know their deposits are safe.

[Lisa Raitt, Conservative, Milton, ON]

Yes, we're not Cyprus.

If I have one last question, it's one I know you can answer. Can you tell us a bit about the concerns the C.D. Howe Institute has expressed about total debt load for all governments across the country? We're looking at a $10-billion deficit, I think, in the Alberta budget coming out. The Newfoundland budget is going to be interesting as well. What's your point of view in terms of data across the country and not just the federal debt?

[Craig Alexander]

I think, from a national point of view, consolidated debt is what we should be focusing on. Although the federal government finances look very good, the debt-to-GDP ratio is quite low and is projected to remain stable, I am concerned about the implications when you add on the provincial debt-to-GDP ratios, which really does change the comparisons.

When you look at the Canadian federal government compared to the U.S. government, Canada looks very favourable. When you compare the U.S. government plus all the U.S. states, and then you compare the Canadian federal government plus all the provinces, then Canada is outperforming but it's not outperforming by the same margin. Having said that, I think, a sound budgetary practice is to anchor your fiscal projections in a projection that leads you back to balance. I do not like the debt-to-GDP ratio as a fiscal anchor. I think it's an extraordinarily weak anchor.

[Lisa Raitt, Conservative, Milton, ON]

Okay, thank you very much.

[The Chair, Liberal, Wayne Easter]

Thank you, both.

Mr. Caron, you have six minutes.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Thank you very much.

Since I don't have much time, I will get right to the point.

Mr. Macdonald, I love the options you presented. They are alternatives to what is in Bill C-2, which proposes reducing taxes for the second tax bracket and increasing taxes for the first tax bracket. As you said, taxes are being increased for 0.8% or 1% of the population and being distributed among 25% or 30% of the population by neglecting the remaining 70%.

Do you agree?

Mr. Alexander, do you dispute the assertion that the changes in tax rates that are being presented in Bill C-2 basically affect only about 30% of the population among the highest incomes, and are doing nothing, basically, for 70%?

[Craig Alexander]

The changes to the middle income tax bracket come in at incomes above $45,000. By definition, any Canadians who are below that amount are not going to benefit from the income tax cuts. If you think about this from a mixed point of view, there are measures in the budget that do support Canadian families with incomes below the $45,000. Purely on the basis of the tax changes that we are talking about, the tax changes only impact individuals with incomes above $45,000.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

From what you're saying, that's often the point of the government on the other side. Even with the other measures, it doesn't do much for couples without kids, for individual seniors, for example, except for single seniors. All in all, there are many Canadians who are left unaffected by the changes, even though it's called the middle-class tax cut.

Since you have appeared previously before the Standing Committee on Finance, I know your work on income inequality. I don't know whether you've had a chance to take a look at Mr. Macdonald's brief, but one of the options presented is the

working income tax credit or tax benefit. How do you see that as a real measure to actually address income inequalities, especially among workers with a low income or earning minimum wage, for example?

[Craig Alexander]

When I did some work looking at the ability of the income tax system to affect income inequality, what I found was that incremental changes to our tax system are not going to have large-scale effects. If you want to change income inequality more through the tax system, it would be taking the revenues generated at the high end and focusing that more on low-income Canadians versus middle-income Canadians. That would actually impact income inequality in a greater way, but the effect would still be incremental because the tax changes aren't going to be....

If we think about the high-income earners, you're basically looking at about 260,000 people, and then transferring income to.... If you do it to everybody else, you're talking about 35 million Canadians, so you're not going to have any real, discernable impact. The more focused you get, the bigger the impact you're going to have.

The one thing I would stress is that if you really want to make a big difference on income inequality, it's not going to be through the tax system. There are an awful lot of barriers that are preventing people from realizing their potential, and it's getting rid of those barriers that will actually raise people up the income scale. It's not the tax system that is going to have the biggest impact on changing income inequality.

[The Chair, Liberal, Wayne Easter]

Is there anybody else who wanted in on that? I thought Mr. Macdonald did. Go ahead.

[David Macdonald]

Sure. I think it's important to differentiate poverty from income inequality. There are certainly some very positive measures in this budget that address poverty specifically. But that, I think, is different from income inequality, which does focus more on the middle class. Is the middle class enjoying the same level of growth and incomes as the upper class? It's quite clear that they haven't over the last couple of decades.

That being said, I think the examination in the report shows that it's actually very difficult to target only the middle class without more benefits going either to the low end or to the higher end when you're using a tax-transfer system. If we are concerned about income inequality, I actually agree with Mr. Alexander that non-tax changes will likely have the biggest impact, increasing, for instance, unionization rates, or increasing, for instance, median wages and driving median wage growth in Canada, would likely have a bigger impact on income inequality by driving pre-tax incomes. We can offset that to some degree with the tax system, but non-tax issues are probably larger.

[The Chair, Liberal, Wayne Easter]

Mr. Caron.

[Guy Caron, NDP, Rimouski-Neigette—Témiscouata—Les Basques, QC]

Actually, I was going to ask you for the answer to that question. I will come back to you and to Mr. Alexander, after which I will also have a question for the accountants.

The PBO came out with a report on TFSAs. The figure that worries me, and I'm sure you read it, is figure 3, in which we're looking at the long-term impact it could have. I believe that behavioural changes were input into this model. In terms of percentage of the GDP, we are talking about 0.14% in 2020 with the higher ceiling, going up to almost 0.7% of GDP. Right now we're being told that we can't achieve that for international aid, because it's really too high and nobody is achieving it. We are ready to actually open with a higher ceiling, to 0.7% of GDP in terms of net impact.

Do you dispute the numbers of the parliamentary budget officer in that regard, Mr. Macdonald and Mr. Alexander?

[The Chair, Liberal, Wayne Easter]

It will be one at a time for the next question, but let's get answers to this one.

[David Macdonald]

It is pretty clear that with growing TFSA limits, whether at $5,000 or $10,000 or back at $5,000, the larger issue is what the lifetime limit of TFSA holders is. I think that will become an issue later on, as you face exactly that problem. This is skewed heavily towards the wealthy end of the spectrum. The folks who can manage to save, who have enough income to save, who have seen big enough raises to save, are going to be the ones with the most assets tax-sheltered through TFSAs or RRSPs or any of the other alphabet soups of savings vehicles.

Over the long run, if we go back to the Carter commission, which was mentioned earlier—the last major review of the tax system—one of the conclusions was that a buck is a buck. Whether you make money selling stocks or make money sweeping floors, you should pay the same amount. At present, that's not the case, given the 50% capital gains exemption, and with TFSAs it is even more not the case, because there is no taxation whatsoever.

A buck, then, is not a buck. If you're making a buck through what wealthy people do—buying and selling stock and real estate and so on—you pay no tax, but if you make a buck the way most Canadians do, which is working from nine to five, then you pay the regular tax system.

[The Chair, Liberal, Wayne Easter]

I'll have to cut you off there. I'm sorry, gents.

Ms. O'Connell.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you, Mr. Chair.

My first question is to Mr. Alexander.

At the beginning of your comments you mentioned the tax reduction for the middle class and the good things—the $3.4 billion, the stimulation, etc.—and you said it is also good timing, because people now have a higher debt load than ever before. Then later on in your comments you talked about the reduction, or taking the TFSA levels back to the $5,500, and said that more people could maximize it than the finance department is saying.

How can you correlate saying that the average Canadian has some of the highest debt loads we've seen with saying also that they're able to save more than ever? You somewhat contradicted the finance department's testimony yesterday in which they said it was about two million Canadians who are utilizing the full TFSA amount, and of those two million, it's the highest-earner spectrum. You contradicted that.

[Craig Alexander]

To be clear, the cut in the middle income tax rate will provide tax relief. Based on the personal savings rate, which is in the low single digits, the bulk of that money is likely to end up in consumption. A small portion of it will end up in savings.

My point is that the savings aren't going to add to economic growth. It won't show up in the government's estimates of how much more boost the economy gets from the tax cut, but it has a benefit because encouraging Canadians to save more is good.

Although we are seeing many Canadians take advantage of TFSAs, I think there are still concerns about whether Canadians are saving adequately for retirement. Canadians are carrying larger debt burdens longer in life, and there are issues related to what's happening to the savings life cycle. In other words, Canadians are saving later in life, and this creates concerns, particularly among Canadians who do not have an employer pension plan.

When we look at the Canadian population, we say, “What is the at-risk population that's going to fall short of income replacement during retirement?” What we find is that it's middle-income households that do not have employer pension plans. As a consequence, this is one of the reasons why RRSPs and TFSAs are useful savings vehicles, because they provide additional incentives for Canadians to save.

What's interesting about the TFSA, which hasn't come up at this point, is that the criticism that's being levelled is that the TFSA is predominantly being used by high-income households. This isn't true. It's being used across the entire income spectrum. In fact, the advantage of the TFSA is that it's designed to help people in the lower tax bracket, because often the people with the lower income tax rates are not getting large tax credits when they save through RRSPs. The TFSA will give them a better tax return, and tax payoff, in terms of their savings. As a consequence, it's low-income Canadians and low middle-income Canadians that benefit the most from a tax point of view through the TFSA.

What should the limit be, and what should the annual limit be, or what should the lifetime limit be? We want Canadians to save more. The fact that the TFSA has proven popular is a signal that it is a useful vehicle and a useful complement in terms of helping incent Canadians to save.

I don't view any of this to be contradictory.

[Jennifer O'Connell, Liberal, Pickering—Uxbridge, ON]

Thank you. I think where we differ is your definition of popular and who is finding the maximum contribution. There's no disagreement that TFSAs are important in encouraging more, but if you can't afford to put in that maximum, then it's those who can afford it that probably need the savings least. That's the issue with that limit.

I have a question in regard to you saying the finance department's comments are wrong about the highest earners being the ones taking the full utilization of TFSAs. Have you studied this? If so, what is that report?

[The Chair, Liberal, Wayne Easter]

Mr. Alexander, you go to this one, and I know Mr. Macdonald wants in at the last.

[Craig Alexander]

I'm going to be succinct.

If we look at Canadians, the estimate from Canada Revenue Agency data is that 20% of Canadians that are in TFSAs are hitting their maximum contribution limit. If we look at it by income distribution, for people at the high end of the income scale, about 32% of high-income earners are hitting the maximum. If you look at Canadians in the $20,000 to $25,000 range, about 17% are hitting that limit.

The Department of Finance is right. It is true that high-income earners are using TFSAs more, and more of them are hitting the maximum than people lower on the income scale. You should not characterize the TFSAs as being solely used as a savings vehicle by high-income earners, because in fact the data shows it's being used by Canadians across the entire income spectrum.