Evidence of meeting #14 for Finance in the 42nd Parliament, 1st Session. (The original version is on Parliament’s site, as are the minutes.) The winning word was system.
A video is available from Parliament.
NDP
Guy Caron NDP Rimouski-Neigette—Témiscouata—Les Basques, QC
The last outstanding question, a different question, is the one raised by Ms. Raitt about producing the nine-page letter as an essential aspect for the discussion we'll have.
Do any of the government members object to officially requiring this letter and producing it for the committee? It was in the government's original motion as well.
Liberal
Francesco Sorbara Liberal Vaughan—Woodbridge, ON
Thank you, Mr. Caron, for your comments. We'll proceed with the motion I forwarded today.
Liberal
The Chair Liberal Wayne Easter
Okay. The question has been called on the motion that's before the committee.
(Motion agreed to)
Liberal
The Chair Liberal Wayne Easter
Just so we're clear, we're of the understanding that when the minister comes, there will be an hour on this issue, the KPMG-CRA tax issue, and an hour on estimates. That is just so we're clear for the steering committee. Is that correct?
Conservative
Phil McColeman Conservative Brantford—Brant, ON
Correct, but I just want to be very clear, Chair.
I submitted my motion within the time period to present it as a motion, and if it's not to be voted on here, I want to have your assurance as chair that she will come on the estimates, because that's what I think I heard you say.
Liberal
The Chair Liberal Wayne Easter
That's my understanding, and I think everybody is on the same page on that. Is that correct?
Okay.
Could we suspend for a minute to get the video conference up and go to witnesses? Thank you.
Liberal
The Chair Liberal Wayne Easter
Again, I want to thank the new witnesses for coming to the table on the reference of Bill C-2, an act to amend the Income Tax Act.
From the Canadian Labour Congress, we have Angella MacEwen. From the Conference Board of Canada, we have Matthew Stewart. Via video conference from warm B.C., from the Fraser Institute, we have Charles Lammam; and as an individual, we have Kevin Milligan, a professor with the University of British Columbia.
We'll be starting, Ms. MacEwen, with you. Thank you very much.
Angella MacEwen Senior Economist, Social and Economic Policy, Canadian Labour Congress
Thank you very much.
I'm here on behalf of the 3.3 million members of the Canadian Labour Congress, and I want to thank you for the opportunity to present our views on the changes to the Income Tax Act that are proposed in Bill C-2. The CLC brings together Canada's national and international unions, along with provincial and territorial federations of labour and 130 district labour councils whose members work in virtually all sectors of the Canadian economy, in all occupations, and in all parts of Canada.
Personally, I think it's important to analyze these changes in terms of whether or not they will increase fairness and reduce inequality. In the case of BillC-2, I find that the result is mixed. The first part of the bill deals with the proposed middle-class tax cut. This proposal reduces personal income tax rates on income between $45,000 and $90,000 a year and then increases tax rates on income over $200,000. As Andrew Jackson, my former boss, and the senior policy adviser at the Broadbent Institute points out, this definition of the middle class leaves out most workers. Why is this?
Most workers don't make enough money to benefit. Data from the Canada Revenue Agency shows us that only one in three individual tax filers had taxable income over $45,000 in 2013. Because of how our tax system is structured, the maximum benefit of $670 per year is only available to people who earn between $90,000 and $200,000 a year. That maximum benefit goes to the wealthy group who arguably don't need it. On top of this, we know that tax cuts are the least effective form of government spending in terms of reducing inequality or stimulating the economy. I think we heard from the last panel that tax cuts, in terms of addressing inequality, are not a really effective way of doing that.
While we are supportive of the increase to the top personal income tax rates, we think this revenue would have been better spent, for example, strengthening public services, such as health care. Public services benefit everyone and reduce inequality. Pharmacare and home care are good examples of health care spending that can increase efficiencies in health care delivery and make lives easier for Canadians.
On the second part of Bill C-2, regarding the tax-free savings account, we think it's great that the government has reversed the previous government's changes. Returning the annual contribution limit to $5,500 recognizes that very few Canadians had the resources to take advantage of the higher limit. In fact, only about 8% of eligible Canadians had reached the maximum contribution limit during the first four years of the program. Again, as the other panel noted, it's the lifetime contribution that's going to matter in the long run, but for now this is a good move.
On retirement security, the Canadian Labour Congress feels that a much more important action to provide Canadians with real retirement security would be to double the CPP as soon as possible. In terms of what workers get from the Canada pension plan, it costs less than other ways of saving, such as mutual funds, RRSPs, or even the tax-free savings account. In a country as rich as Canada, no one should retire into poverty.
Thank you for your time.
Liberal
Matthew Stewart Associate Director, Economics, Conference Board of Canada
Thank you very much for having me here today. Before I begin, I just want to say that the Conference Board is an independent, not-for-profit, evidence-based organization, and we don't lobby for any organization.
I'll speak briefly on the TFSAs first, and then I'll speak very briefly on the economic impacts of the tax changes proposed in this measure.
First, on TFSAs, why do we want to have these types of savings plans?
Tax-free savings accounts were created in 2009 to improve the incentives to save. There's sufficient evidence, we believe, that Canadians are under-saving. The share of employees with workplace pension plans is declining. Today, just 30% of Ontario tax filers who make more than $20,000 a year contribute to a workplace pension plan. Just 18% of tax filers without a workplace pension plan contribute to an RRSP, which was previously the main vehicle for saving for retirement. That means that 50% of people in Canada making more than $20,000 a year do not have a pension plan and don't contribute to an RRSP. Even for those who contribute, their contribution remains well below the average comparative contribution of those contributing to a pension plan.
Why would a TFSA be of use when so many Canadians are not taking advantage of the current RRSP rules? It makes sense basically for three groups of people. It makes sense for low-income groups, where it doesn't make sense to save in an RRSP as they face clawbacks upon retirement of government programs, such as the GIS. Also, it makes sense for young workers who could face higher tax rates in retirement as their income progresses into higher marginal rates. It also could aid seniors who try to generate income outside of an RRSP. For these groups it can eliminate very high tax rates on savings and encourage savings, which we believe is a good thing for the economy.
Have TFSAs been successful at inducing savings rates? What we do know is that they're widely used. There are almost 11 million people holding a TFSA and 18% have maxed out their contributions. One thing that really surprised me when I looked at the data is that 50% of those who had maxed out their contribution had income of less than $55,000 a year, so it's used across all income groups. That is likely to change, though, as the lifetime contribution increases over time.
Is the $5,500 limit suggested today enough? A young worker would probably be able to generate about $600,000 in today's dollars if they contributed the maximum over their lifetime. There is some question that perhaps that's not enough if they just use the TFSA, but it is significant if they use it together with an RRSP.
On income taxes, what I did is I modelled the economic impact of the income taxes, the hike on the high-income taxes and the reduction on the second bracket, and what I found is that it will boost GDP by a marginal amount. In fact, we expect it will increase GDP by just $800 million a year, adding about 5,000 jobs to the economy, so there is a marginal impact on the economy. There are a few risks, though, that people in the high-income bracket.... We have heard from our members that it makes it harder for them to attract high-income earners into Canada. We have heard that risk, but overall, there's a marginal impact on the economy.
Thank you very much.
Liberal
The Chair Liberal Wayne Easter
Thank you very much, Mr. Stewart.
Mr. Lammam from Vancouver, the floor is yours.
Charles Lammam Director, Fiscal Studies, Fraser Institute
Thank you, Chairman Easter, and the rest of the committee for giving me an opportunity to share the work of the Fraser Institute with you today. I hope you find my comments helpful and informative as you deliberate these important public policy issues.
I'm the director of fiscal studies at the Fraser Institute. We're an independent, non-partisan economic policy think tank. The mission of the institute is to help average Canadians understand the impact of government policies on their lives and the lives of future generations.
I've been studying tax policy for about a decade now and have published several peer-reviewed studies on a range of economic policy issues, including taxation and government finances. Last month I co-authored a study titled “Canada's Rising Personal Tax Rates and Falling Tax Competitiveness”. Many of my remarks will draw from the findings of that research.
I should note that my comments today reflect my own opinions and observations about the research we have conducted. I do not speak for anyone else at the Fraser Institute.
Let me start by saying that a competitive tax system is critical to fostering a positive economic climate. Empirical evidence from across the world shows that taxes can influence whether people engage in economically productive activities, such as working hard, expanding their skills, investing, and being entrepreneurial. These are all activities that ultimately drive economic growth and prosperity.
Over the past 15 years federal and provincial governments in Canada of various political stripes have improved the competitiveness of our business tax regime, but little has been done on personal income taxes. Personal income taxes are particularly important when it comes to building a knowledge-based economy and attracting and retaining highly skilled workers such as entrepreneurs, doctors, lawyers, business professionals, and engineers.
The new top federal marginal tax rate proposed by Bill C-2, as well as recent tax rate increases in many Canadian provinces, harm our ability to attract skilled workers, and in fact discourage Canadians from realizing their full potential.
Critically the new top federal marginal tax rate of 33% is being layered on top of several tax increases by the provinces on highly skilled workers. For instance, as a result of federal and provincial tax hikes, the combined top federal-provincial statutory marginal rate in Ontario has increased from 46.4% to 53.5% since 2009. That's more than a 7% increase.
According to the latest available international data, Ontario's top combined marginal rate is the sixth highest among 34 OECD countries, and the second highest among G-7 countries, behind only France. More broadly, due to recent tax hikes, the combined top rate is now about 50% in six out of 10 provinces.
Consider that for a moment. In many Canadian provinces, including Canada's two largest, highly skilled workers can lose more than half of each additional income earned in labour income to personal income taxes. The economic evidence shows that high and increasing marginal tax rates discourage productive economic activity, making Canada a less desirable place to work, invest, and be entrepreneurial. They can also influence decisions about where highly skilled workers decide to live and work. There are many reasons why someone might decide to move to another jurisdiction, but empirical research shows that marginal tax rates play an important role in that decision, particularly for high-skilled labour.
The fact that Canada's tax rates often apply to lower levels of income than other countries further erodes our tax competitiveness. At an annual income level of $150,000 to $300,000 Canadian, every province's combined statutory marginal rate is higher than the combined rate in every U.S. state. This presents a clear challenge for Canada's ability to attract and retain skilled workers relative to our southern neighbours.
It's not just Canada's top personal tax rate that is uncompetitive. In most provinces a Canadian making $50,000 in Canadian dollars faces a higher statutory rate than they would in most U.S. states. This is despite the reduction in Canada's federal rate from 22% to 20.5%. In other words, Bill C-2 does little to address Canada's uncompetitive tax rates, even for the middle tax brackets.
The importance of a competitive tax system is not just fostering a skilled workforce. By discouraging productive economic activity, high and increasing tax rates ultimately diminish economic growth and prosperity. Indeed, because high and increasing tax rates adversely affect economic incentives, governments often do not receive the kinds of revenues they expect from these tax increases.
In closing, it is worth noting that past federal governments, both Liberal and Conservative, have acknowledged the importance of a competitive personal income tax system. For example, the economic plan of Paul Martin's Liberal government in 2005 called for lower personal taxes to “provide greater rewards and incentives for middle- and high-income Canadians to work, save and invest” and to “encourage more Canadians to invest in their skills and to remain in Canada, where their talents will help build a stronger, more prosperous economy”.
In 2006 Stephen Harper's Conservative government made a similar point in its economic plan. Unfortunately, since then marginal tax rates on highly skilled workers have generally become less, not more, competitive.
Thank you.
Liberal
Kevin Milligan Professor, University of British Columbia, As an Individual
Thank you very much.
I'll be brief. I have a couple of comments on Bill C-2. I have a couple of points to make about the new 33% top tax bracket and its impact on government revenues and tax planning and tax avoidance.
The first comment is just to emphasize the importance of considering the differences between federal taxation and provincial taxation. In a federation such as Canada it is more difficult to tax mobile economic factors at the provincial level. For example, if a province tries to tax high earners, some of that income may shift to other provinces through the use of financial and accounting techniques. As an example, there's something called an Alberta family trust into which a high earner could put some assets that essentially shifts taxation of the income from those assets to Alberta, where it faces lower rates.
On the other hand, at the federal level it is harder to avoid taxation, because if you're going to try to engage in these kinds of techniques, it is harder to shift money out of Canada than between provinces. In research with Michael Smart from the University of Toronto, we found that high-income taxpayers are much less likely to shift their income and engage in these tax-planning techniques in response to a federal change than they are to a provincial change. When looking at these revenue implications of a high-income tax bracket, then, we should definitely pay attention to evidence on federal changes versus provincial changes.
My second point is about the administrative measures that have been put in place over the past few months. These enhanced administrative measures are critical to combatting tax planning and tax avoidance. If the Canada Revenue Agency makes it harder for individuals to engage in tax planning, then the new 33% tax bracket is more likely to reach its revenue targets.
The government has already announced several measures that move in that direction. As an example, in the recent budget there's a change in the definition of active versus passive income for small business corporations, and there's also an announcement of several hundred million new dollars for enforcement programs at the Canada Revenue Agency.
But I believe there's still more to do on three fronts. First, we should reduce the use and availability of small business corporations as tax shelters. We can do that through examining spousal dividends, by looking at the lifetime capital gains exemption for small business corporations, and considering use of an employee count or an hours threshold, as Quebec has done, for access to the small business deduction.
The second thing we can do is reopen the case for the taxation of stock options. That was taken off the table by the finance minister recently, but I think there are some merits there that deserve some more attention.
Finally, on the issue again of tax planning and tax avoidance, it's really important to consider the international angle. Much of that happens through organizations such as the OECD. They pursue multilateral agreements to curb tax planning and tax avoidance at both the corporate and personal level, and at those international organizations, Canada can and should be taking a leadership role in pushing those processes forward.
That's it for my comments. I look forward to members' questions.
Liberal
The Chair Liberal Wayne Easter
Thank you very much, all.
Members, we'll have to tighten up the questions fairly well. We have about three and a half minutes for the round of four questions.
Mr. Grewal.
Liberal
Raj Grewal Liberal Brampton East, ON
Thank you, Mr. Chair, and thank you to the witnesses for coming today and testifying.
This is a quick question to Mr. Lammam from the Fraser Institute and to Mr. Stewart.
Both of you mentioned that raising personal tax rates on the richest people in the country leads to a lack of talent coming into Canada. I've heard this through various witnesses who came through pre-budget consultations, and I asked this question a few days ago as well. It says, “empirical evidence”.
Can either of you guys point to a report that says x number of people decided not to take a job in Canada because of the tax rate in Canada?
Associate Director, Economics, Conference Board of Canada
Thank you very much for the question. We haven't done a study on this.
But my comments around that are that we meet with our members on a regular basis, which are large companies. That comment comes from complaints or suggestions from our members to look into that issue. They report difficulty in attracting high-skilled workers to Canada because of tax competitiveness. It comes purely from our members' complaints.
Liberal
Raj Grewal Liberal Brampton East, ON
It's almost a double-edged sword. A lot of Fortune 500 companies headquarter in Canada because of our corporate tax policies.
I would be really interested to know this. People say in all the reports that there's empirical evidence, but it doesn't mean anything unless there's numbers-based identification to say that Canada is losing out on top talent because of our personal tax rates. Again, only the top 1% of Canadians make north of $200,000 anyway.
Mr. Lammam, do you have any thoughts on that?
Director, Fiscal Studies, Fraser Institute
I do.
Thank you very much for your comments. I think it's an important point.
We have in fact reviewed the literature on this. We've looked at studies that have been done historically in Canada, and studies that have been done around the world. Clearly the evidence does show that taxes can affect where people locate and also work.
There has been research done by Statistics Canada, for example, looking at the mobility of knowledge-based workers, including doctors, engineers, and natural scientists. I'm happy to pass along references to that study.
There's been research published by the Canadian Public Policy journal, looking at the effect of taxation on emigration to the U.S. from 1995 to 2001. It found that Canadians, those who had the most to gain in terms of a lower tax bill, were in fact immigrating to the U.S. It is the most highly skilled who are more prone to moving across jurisdictions. They are more mobile than the average worker because of the opportunities afforded them. Also, research has been done, very important research, that was published by the Institute for Research on Public Policy.
There have been major studies that have looked at this issue, studies in the prestigious American Economic Review, which I would turn your attention to. It was published two years ago. This study, very innovative in what it did, looked at the influence of taxes on mobility decisions of skilled workers. The study looked at the effect of personal tax rates, and it found that they play a significant role in attracting foreign soccer players into top leagues in 14 western European countries. The effect was particularly strong for high-quality players, defined as players who had been selected for national teams at least once in their career.
Finally, a recent study, this one done by the National Bureau of Economic Research, used a similar method of tracking migration among a specific set of skilled workers. Specifically, the authors looked at “superstar” inventors, measured by patent citation data in eight countries, including Canada and the U.S., from—
Liberal
The Chair Liberal Wayne Easter
Mr. Lammam, I'm going to have to cut you off there. We're going to run out of time.
Liberal
Raj Grewal Liberal Brampton East, ON
Thank you, Mr. Lammam. I appreciate that.
If you could forward that documentation to the clerk, that would be appreciated.
I'm almost certain that professional athletes will pick the lowest tax thresholds, but I think that's outside the privilege of the committee.
Conservative
Lisa Raitt Conservative Milton, ON
Sure.
I just did a quick Google search, and I found an Industry Canada report talking about attracting global talent and the effect of taxation. Ask Minister Bains if he can point you in the right direction for that information.
On TFSAs, I have a general statement more than a question, because I don't want to be confrontational.
Conservative
Lisa Raitt Conservative Milton, ON
No, to the witnesses. To you guys, all the time, but not to the witnesses.