Finance Committee on April 14th, 2016

[Craig Alexander]

I will be very brief.

Second, the earnings also reflect risk-taking, and as a consequence, while the government wants to promote increased productivity and innovation, we need to be sensitive to the fact that higher taxes on high-income earners are basically a tax on success and are also a deterrent to taking additional risk.

In point of fact, I think the government is absolutely right to be focusing on trying to create more inclusive growth. I would argue that the tax system is not the most effective way of achieving this. I think removing barriers to opportunity from low-income Canadians, from aboriginals, from youths, from immigrants and others would be a more effective way of having an impact on income inequality.

Lastly, on the TFSA limit reduction, the two points I would make are that TFSAs are used across the entire income spectrum. They aren't just used by high-income individuals. Many lower-income households are actually pushing up against the contribution limits, and I would be happy to discuss that further during the Q and A.

Lastly, I would flag the complaint that the government will face large lost potential tax revenues from the TFSA as a bit of a perverse position to take on the TFSA. Basically, you're saying that if it's successful in encouraging Canadians to save, we should effectively take measures to ensure that they don't do that. I think that the opportunity cost revenues that are being estimated to the government from the TFSA are probably overstated, because if the incentive isn't there, Canadians won't save as much.

[The Chair, Liberal, Wayne Easter]

Thank you, Mr. Alexander.

Mr. Macdonald, try to keep it to five minutes if you can.

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

Thank you, Mr. Chair. I timed it to five minutes. Hopefully I can keep it to that this time around.

I'd like to thank the committee today for their invitation to speak. There are certainly a great many interesting topics that emerged from this year's budget. The focus on on-reserve infrastructure, particularly schools, clean water, and housing, is very positive and long overdue. The improved child and senior benefits will both reduce poverty rates among those groups by several points. I was surprised to see this fact was not better highlighted in the budget, actually.

However, today I'd like to focus on the tax bracket trade, specifically the creation of a new top income tax bracket whose proceeds are used to pay for a cut in the second bracket.

Now to be clear, we've advocated for a new top bracket for some time, particularly given the large income gains enjoyed by the wealthiest over the past two decades, although to maximize revenue from this new bracket, two additional measures are necessary. One is the prosecution of illegal tax evasion, and the other is the closing of tax loopholes.

Successful prosecution will be substantiated by new auditors budgeted for in this budget, and hopefully this committee will also examine and close tax expenditures or tax loopholes that allow the richest to avoid paying the statutory rate, a rate which most Canadians pay.

While I am in favour of a new top bracket, using its proceeds to reduce the rate in the second bracket is in effect an upper class tax cut, as I show in more detail in my paper “Real Change for the Middle Class”, which I believe you have a copy of.

I should point out that there's no official definition of the “middle class”, but undoubtedly it is going to have some relationship to the middle of the income spectrum, or median income, which is just over $60,000 for families or just over $30,000 for individuals.

Now, the second bracket doesn't even start until one makes at least $45,000, or 50% more than the Canadian median individual income. Without being in the second bracket, there can be no benefit from the rate cut proposed here. However, the full benefit of that rate cut isn't available until one makes $90,000 individually, or three times the median income, and that full benefit will be available to those making up to $200,000 when the new bracket kicks in.

I'd like to call your attention to Figure 2 on page 5 in my report, which shows quite clearly that the largest benefits go to the top 10% of families, who are making over $170,000, excluding, of course, the top 2% of families, who are making over $300,000 and will pay substantially more due to the new top bracket.

The upper-class 10%, excluding the very top, will see, on average, almost $800 more per family after the bracket trade. Families making between $170,000 and $300,000 are, I hope, no one's definition of the middle class, but they are by far the largest beneficiaries of this bracket trade.

However, the middle deciles that you can see better in Figure 2 on page 5 see surprisingly little of the benefit of the bracket trade. For instance, the lower middle class, the fourth and fifth deciles, see an average benefit of only $30, compared to the richest's almost $800. The upper middle class of deciles 6 and 7 do better, making about $175 a year, but again this is only a quarter of what the wealthiest make, at $800 a year.

The paper examines four other possibilities that use pre-existing tax transfer mechanisms to spend roughly the same amount, or roughly $3 billion, while attempting to better target the middle class.

The options examined are dropping the rate in the lowest bracket, increasing the basic personal exemption, increasing the GST credit, and increasing the working income tax benefit, or WITB. Any of these measures provides more benefit to middle class families. For instance, the WITB option would provide $350, on average, to lower-middle-class families, or 10 times more than the $30 they would make with the cut in the second bracket.

I'd encourage committee members to examine these alternative possibilities as more effective options than a rate cut in the second bracket, as described in the budget.

It is worth pointing out that roughly $3 billion raised by the new top bracket is a fair amount of money. I'm not sure that money should be spent on a tax measure. For instance, $3 billion annually would be sufficient to eliminate undergraduate tuition. It would also be sufficient to halve the fees for long-term care for the elderly or dramatically increase home care and caregiver respite supports, measures that will likely have more visibility than changing how much is deducted at source for most Canadians.

Thank you very much. I look forward to your questions.

[The Chair, Liberal, Wayne Easter]

Thank you very much. You had it timed wrong. You are 30 seconds under.

Thank you very much, Mr. Macdonald, and thank you for the paper as well.

From Toronto, we have Ms. Morris for five minutes, if you could.

[Wanda Morris, Chief Operating Officer, Vice-President of Advocacy, Canadian Association of Retired Persons]

Thank you very much.

With respect to the provisions in the change, our members are very pleased with the concept of tax relief. We polled them about the different parties' election promises, and a quarter of them said tax relief for the middle class was their highest priority. That was second only to increasing funds for home care.

In terms of how effective the budget has been in achieving that goal, we didn't poll on those specifics. Where we have some concerns about the proposed changes is with respect to the reduction in the TFSA limits. Before the limits were increased, we polled our members to see if they were supportive of the increase, and fully two-thirds of them were. With the announcement of a potential reduction, we polled again, and about 54% were opposed. Possibly the gap there may be attributed to people who anticipated using the higher limits and weren't able to do so. Approximately 81% of our members have a TFSA, so this is a proposal that is near and dear to their hearts.

Our concern is primarily about an ad hoc approach to changing the retirement framework for Canadians. What we know right now is that there is much poverty among Canadians, particularly seniors, particularly single seniors, particularly female single seniors. What we would prefer to see the government do is to take an overall strategic approach to look at retirement savings as a whole, rather than tinkering with one particular element and reducing the relief available.

CARP is a strong advocate for an enhanced Canada pension plan. We see movement happening in Ontario for a made-in-Ontario solution. There's a strong preference for a Canada-wide solution that covers all Canadians.

We're also deeply concerned about the way that registered retirement income funds are currently structured. Even with the changes that have been made in the past years to lower the mandatory rates, they are not low enough. Seniors are very vulnerable to changes in the market under the current structure. The assumption of a 5% real return, which the current rate seems to be based upon, does not reflect the reality of a low-risk portfolio, which seniors want and would be wise to adopt.

We cannot support a reduction in TFSAs as a stand-alone measure. We are aware that there are over a quarter of a million Canadians right now who are aged 90 and over; that number is projected to increase, particularly among women, again, a group very vulnerable to living in poverty as they age. We think that the RRIFs are falling far short of meeting their needs, so reducing an alternative vehicle that might offer some relief doesn't have the support of CARP.

[The Chair, Liberal, Wayne Easter]

Thank you very much. We're making great time.

Mr. Ball, the floor is yours for five minutes, if you could.

[Bruce Ball, National Tax Partner, BDO Canada LLP, and Member, Tax Policy Committee, Chartered Professional Accountants of Canada]

All right, thank you. On behalf of the Chartered Professional Accountants of Canada, I wanted to thank you for the opportunity.

As a bit of background, I'm a member of CPA Canada's tax policy committee, I'm a national tax partner of BDO Canada, and I'm also a chartered professional accountant.

I did want to point out that the CPA designation is now, with the amalgamation, the single accounting and business designation in Canada. This was accomplished by the merger of the three legacy designations: CA, CMA, and CGA. We have over 200,000 members now.

One thing I wanted to make clear is that we do recognize that the government was elected in terms of a fairly specific platform, and the main tax changes I'm going to focus on were part of that. We do respect that and we do recognize that they received a majority.

Bill C-2 has three main important tax changes: the reduction of the middle-class tax bracket that's been discussed, the new top bracket, and the decrease in TFSA contribution room. From a more general point of view, what we really wanted to point out and talk about was the fact that when you do change the tax system it can have various effects, positive, negative, and maybe some unintended effects as well.

We wanted to talk at a more general level, I think, and reinforce that the tax system is a key lever in terms of ensuring that we have a business environment that remains competitive, that we attract and retain the best and brightest minds, and that we also achieve economic growth and prosperity. Our main message today is that it is difficult to talk about three pretty specific tax changes in isolation without considering the tax system as a whole.

Going forward, our key message today really is that before any other tax measures are introduced or changed, we'd like to see a review from top to bottom of the tax system. The review should focus on a number of important factors, with reducing complexity, improving efficiency, effectiveness, and competitiveness being some of the key factors.

We think such a review would actually benefit taxpayers, businesses, and the government as well, the goal being to make Canada the most attractive place possible in terms of a place to live, invest, and do business in. We think that this is squarely in line with the government's agenda for growth. We also think there's no better time than now to do it, for a few reasons, the main one being that there hasn't been a real review of the entire system for over 50 years. The last one was the Royal Commission on Taxation in 1966. Clearly things have changed a lot since then.

The other thing, and I think this has been recognized, is that the tax system now is actually very complicated. It's complex. It's difficult to understand. It's very labour-intensive to deal with, and there are inefficiencies and costs associated with that. In our summary we point out that the compliance cost, according to the Fraser Institute, is probably somewhere around $25 billion for taxpayers and businesses, and perhaps almost $7 billion for the government.

The third reason, really, is that we think there's a lot of support right now for a significant review of the tax system as well. We note in particular for four years now this committee has called upon the government to explore ways to simplify the Income Tax Act and the tax system. Just this past February, it was recommended that the government initiate a comprehensive review of Canada's tax laws with the objective of making the country's taxation system simpler, fairer, and more efficient.

We just can't support that enough.

We were also encouraged that there was reference in the 2016 budget to the government's intention to review the tax system, and we wanted to recognize the chair's recent comments as well that there's a need to look at taxation as a whole, including everything from consumption taxes to income taxes, and corporate taxes to boutique tax credits or tax breaks. Again, that's exactly where we sit and I think a lot of other experts do as well.

Getting into how such a review would work, we believe there should be a panel and it should be guided by the following principles: to keep tax rates as low as possible, the tax bases as broad as possible, and eliminate inefficiency or ineffective tax preferences. We also echo the comment made earlier that the rate is exceeding 50% in a lot of jurisdictions and that is getting fairly high to levels that haven't been seen for some time.

The next key thing when reviewing the tax system is to take a look at the tax mix, especially between income taxes and consumption taxes. We believe that Canada is out of step with the other OECD countries in terms of that.

We don't have specific comments on the TFSA, but we do have the comment that the tax system should not tax personal savings. There should be some sort of enhanced incentives to make sure that Canadians are saving properly for their retirement.

Another key objective, we believe, is to try to keep corporate rates as low as possible to maintain Canada's competitive edge, attract new investment, and create jobs. We also believe that a review should focus on a pro-growth approach that encourages innovation, productivity, and prosperity.

Finally, with regard to working with the provinces and territories, a lot has been done, but we still think more could be done in terms of a more coordinated approach that will benefit everyone.

Just to sum up, Canada needs a tax system that is built for the 21st century, not what, we think, is a patchwork of original rules, amendments, and fixes that have accumulated over time and can cause uncertainty and unintended results. With a four-year mandate, we believe that now is the best time to deal with this, to work on a tax review and possibly tax reform. We would call on the government to have the vision, commitment, and focus to move forward to it.

I would be happy to address any questions on these issues.

[The Chair, Liberal, Wayne Easter]

Thank you all.

We'll turn to our first round of questions.

Mr. MacKinnon, the floor is yours.

[Steven MacKinnon, Liberal, Gatineau, QC]

Thank you, Mr. Chair.

I would like to thank all the witnesses. It was very interesting, even though there was some contradiction.

Mr. Ball, I was a business student a very long time ago, too long ago. I remember that one of your predecessors, Lyman MacInnis, who was the president of the Chartered Accountants of Canada at the time, spoke to us about the duty or the need to simplify the tax code. I am taking this opportunity to acknowledge the reforms that have taken place in your profession. You have the merit of being consistent across the decades, and I salute that.

You made a comment and I would like you to expand on it, if possible. You said:

“Canada is out of step with other OECD countries.”

Could you tell us about the OECD countries that you think are models when it comes to simplification or efficiency of their fax system, and I'd like you to go more into the principles that you touched on in your testimony.

[The Chair, Liberal, Wayne Easter]

Mr. Ball, go ahead.

[Bruce Ball]

I'd have to say, the approach I would use would be to take a look at all the OECD countries and determine which aspects of which country we like. Personally, I don't think it would be so much an issue of picking one country and deciding if that is the one to follow. Maybe I am not really answering the question because I would probably use an approach that's a bit different.

I think that one of the key things for a tax review panel would be to look at how all the other countries work, take the best from the best, and come up with a system that makes sense that way.

In terms of the tax-mix part, we believe that, generally, most of the OECD countries, and especially over in Europe, have a lot more emphasis on commodity tax than personal income tax, and that is something we support.

[The Chair, Liberal, Wayne Easter]

If anybody else has a point they want to add, just raise your hand on the question, and I will let you in.

Mr. MacKinnon, go ahead.

[Steven MacKinnon, Liberal, Gatineau, QC]

Just building on that, Mr. Chair, perhaps I would ask the other witnesses if there are international models of taxation they believe stand out as clearly superior to Canada's.

[The Chair, Liberal, Wayne Easter]

Mr. Alexander.

[Craig Alexander]

There is a large body of academic research that has been done on tax efficiency internationally, an awful lot of it looking at OECD countries and comparing the various tax systems and the effects. One lesson from the review of that literature is that consumption taxes are the least economically distortionary taxes to the economy. You see this across countries.

The United States is unique in not having a consumption tax. As a rule, economists prefer consumption taxes over personal income taxes and business taxes, although you have to address the aggressiveness of the impact of consumption taxes, in terms of the income distribution. You need to be sensitive to those issues.

Beyond that, however, the literature basically argues that the next least distortionary economic taxes are personal income taxes, and then the most distortionary are business taxes. Beyond that, it's a matter of figuring out not just what the tax mix is going to be but also the simplicity of the system, because there's a lot of economic cost to abiding by a very complex tax system.

It is here that we get into questions about whether.... I was encouraged that the budget eliminated some of the boutique tax credits, simply on the basis of simplifying the overall tax system, but I think that's where you end up, over time. The tax system incrementally tends to want to become more complex.

I would echo the comment that a review of the tax system and looking for ways to create more efficiencies to improve the tax mix and make it more efficient would be a very desirable thing.

[The Chair, Liberal, Wayne Easter]

You have a minute left.

[Steven MacKinnon, Liberal, Gatineau, QC]

Do I only have another minute?

[The Chair, Liberal, Wayne Easter]

Yes. I'm trying to limit people to six minutes in order to meet our 12:10 deadline.

Mr. Macdonald.

[David Macdonald]

Thanks for the question.

Certainly, progressivity is an important feature of any income tax system, and the more you switch away from income taxes towards other types of taxes, such as on consumption, the more you end up with less progressivity in the system rather than more. Something that we push for is more progressivity in a tax system.

That being said, you can address progressivity by switching more to income taxes, but you can also address it often by closing tax loopholes, of which there are plenty.

Unfortunately, this budget introduces another one, which is for teachers and which in some degree I'm in favour of, because my wife is a teacher. That being said, we've traded closing some tax loopholes for opening other tax loopholes. I think broadly speaking a much cleaner, progressive income tax system is going to be much easier to meet in terms of a lower bill.

The other thing I would point to are these questions. What are we doing with the taxes? What are we spending that money on? Are we spending it on something that we benefit from?

If such is the case, I think it's well worth increasing taxes to pay for programs that we can all benefit from or that certain portions of the population can benefit disproportionately from. It's very dangerous to disconnect taxation from what the money is being spent on.

Thank you.

[The Chair, Liberal, Wayne Easter]

Ms. Raitt, you have six minutes.

[Lisa Raitt, Conservative, Milton, ON]

Thank you very much.

Mr. Alexander, one of the charts that the parliamentary budget officer provided last Friday in talking about taxes gave some updates on how much tax income the government plans on collecting in the next five years, until the end of 2021. It says it's about $5.7 billion in extra taxes, and it all seems to be back-loaded in the final three years.

The question I have is this, and maybe Mr. Ball from the CPA Canada can help me. If we're talking about a review of our tax system, having just commissioned this Canada Transportation Act review, which took 18 months and is still in study, realistically from beginning to end how long does it take, from the call for a process to study this system to an end result whereby you see increases in taxation coming in because of efficiency? Isn't that a generational thing?

[Craig Alexander]

I'm afraid I don't have an expert opinion on how long it takes for the process to occur. I haven't done any studies of past tax reforms to see how long it takes from the start of a review to the end of a review. Having said that, I think there still is merit in constantly looking at the tax system and trying to evaluate efficiency, simplicity, economic impact, and whether it's achieving the goals that the government has.

I'm sorry that I don't have a specific answer to your question.

[Lisa Raitt, Conservative, Milton, ON]

No, that's okay.

Perhaps, Mr. Ball, I should have put it to you more directly.

[Bruce Ball]

I'm probably on the same page. I'm not sure how long it would take either. The main thing I'd be saying is that it should take as long as it takes, because we'd want to make sure we get it right. If the timing is that it really is only going to happen every 50 years, then we want to make sure that we do it right and not rush things through either. I'd agree with the comment just made in terms of looking at the system at all times. If we're going to do a comprehensive review, make sure we do a good review and come out with a tax system that raises money more efficiently and costs less to run.

[Lisa Raitt, Conservative, Milton, ON]

Fair enough.

Neither of you would have an idea of whether or not the government should be booking revenue based upon a review so quickly, and I think that's fair enough. I'll insert my own opinion on that at another point.

I did have a question. It was mentioned, I think by Mr. Macdonald, or perhaps it was somebody else. No, it was you, Mr. Ball.

I agree that we shouldn't be taxing savings. One thing that came out in the budget that has to do with taxation is the bail-in concept for Canadian banks. I don't know if C.D. Howe would like to answer this, or maybe CPA, but in the past when we studied the bail-in provisions we made it clear in our government that we would not be going after the deposits of regular Canadians. The government hasn't been clear on that so far. What is your opinion, in terms of bail-in, where Canadian deposits are at risk of supporting a bank if it does fail?