Public Accounts Committee on May 25th, 2015

[Michael Ferguson]

I think we have specifically highlighted this in the report, because we felt it was something that needed to be brought to Parliament's attention. These types of tax measures could be substituted for through direct program spending, in which complete evaluations would be done on a periodic basis, but the same kind of evaluation rigour does not exist for these types of credits. That's why we made the recommendation in paragraph 3.61.

[Adam Vaughan, Liberal, Trinity—Spadina, ON]

This particular credit was brought in in 2009 when the housing market across North America was in extraordinary turmoil, with the mortgage crisis that hit the United States and the downturn in the housing market in this country. A stimulus package was brought in, but how do you know how to evaluate whether that stimulus package is still needed? How do you know whether it's needed in certain parts of the country in different ways than in other parts of the country? If you're not evaluating that particular tax policy, it appears to be a tax credit for the sake of making a tax credit, but you have no idea how effective it is, you're not monitoring its effectiveness, and you're not tracking how it's being used and whether it is in fact stimulating an uptake in first-time buyers that might be present with or without the measure.

[Michael Ferguson]

In your question, you're touching on something we have dealt with as well in our recommendation in paragraph 3.33, where we say, “To adequately support parliamentary oversight, the Department of Finance Canada should adopt improved reporting practices for tax-based expenditures to provide additional information, including cross-references of tax expenditures to direct program spending, so that readers can understand total government spending”.

It's important to do the evaluations of the tax measures, the tax-based expenditures, but I think that's also why it's important to make sure that when people see this type of a program, they can understand if there are other types of programs that would be linked to the tax measure. As I understood your question, you're talking about an evaluation of more than just the individual tax measure, which we think is something that should be done and which is part of our recommendation in paragraph 3.61. You're talking about an evaluation that would look at the broader interaction of this tax measure with other measures, whether they be tax measures or direct program spending. We would say that at least the first step in that is our other recommendation in paragraph 3.33 that helps the reader understand the linkage between a particular tax measure and direct program spending.

[Adam Vaughan, Liberal, Trinity—Spadina, ON]

The concern would arise that you're moving on changing the tax code with a stated objective, but you never go back to check whether or not you've achieved what you started out to achieve. It's almost a tax break for the sake of a tax break without ever understanding whether or not it had the impact you wanted it to have on the market. It's one thing to track the accounting rules and to make sure it's being used properly, but if it's brought in as a stimulus to respond to a particular crisis, surely you have to assess whether or not it had any impact on that crisis to know whether you should stop it or start it again the next time the same conditions exist.

[Michael Ferguson]

In the course of your question, you've let me touch on all three of our recommendations. Our other recommendation was about providing more information. We've talked about the fact that there is information available on the website, but at the same time that the main estimates come out, the tax expenditure and evaluation report is prepared. The main estimates are tabled with Parliament, but the tax expenditure and evaluation report is not tabled with Parliament, so making sure that Parliament is aware of all of this information at once would be important to make sure that it isn't forgotten. Again, because these types of expenditures, these tax measures, are substitutes for direct program spending, it's important that there be a way for Parliament to be aware of what they are, that they exist, that the information be tabled, and that it contain the same type of information going forward, future year projections. That is how Parliament can make sure it can still ask questions about the programs and that they still have relevance.

Then from the department point of view, treating the tax measures the same way direct program spending is treated, and doing the same types of evaluations on them that would happen on direct program spending would ensure consistency in the way those types of programs are being evaluated.

[The Chair, NDP, David Christopherson]

Thank you. The time has expired.

Once again we will go to Mr. Woodworth.

You have the floor, sir.

[Stephen Woodworth, Conservative, Kitchener Centre, ON]

I'd like to follow up on a few loose ends from my earlier questioning, and I'll begin with Mr. Marsland.

We didn't really have time to discuss what happened in relation to the evaluation of the first-time homebuyers tax credit. Could you tell me just a little bit about why that evaluation didn't occur, or has it now occurred? What is the status of that?

[Andrew Marsland]

In relation to the first-time homebuyers tax credit, in the period in question, which I think is 2008-14, we closely monitored the credits and, in the context of the department's broader monitoring of the housing market, we covered aspects such as the credit's relevance, its fiscal cost, and possible compliance and administrative issues. In terms of the reporting on that, we provided estimates of the stimulus value and the job impact in relation to the credit under the housing investment measures. Those were part of the government's periodic reports on the economic action plan.

The department also monitored the evolution of real estate prices in Canada and conducted studies to understand the determinants of price changes, and that, of course, involved monitoring the potential effects, desirable and undesirable, of the first-time homebuyers' tax credit on the real estate market.

[Stephen Woodworth, Conservative, Kitchener Centre, ON]

Is there any intent to tie all of that together in what might be described as an evaluation rather than merely monitoring?

[Andrew Marsland]

As I mentioned earlier, this is one of the eight measures whereby we don't think we evaluated it, but I think part of our response to the Auditor General's recommendation is to ensure we have a system in place to cover all the bases in terms of evaluating these measures.

[Stephen Woodworth, Conservative, Kitchener Centre, ON]

Right. You heard earlier the Auditor General's critique about the evaluations and how there seemed to be gaps. Can you add anything further on that?

[Andrew Marsland]

It rather goes to the issue of what's a tax expenditure. As I mentioned earlier, we define a tax expenditure as any deviation from a benchmarked tax system. We define our benchmarked tax system as broadly as possible, so we report on as many tax expenditures as possible really.

In that context, we capture a whole range of different measures that serve different purposes in the tax system. Some, as the Auditor General observed, are closer to substitutes for direct spending, but many are not. They go to the accurate measurement of income. They go to simplicity. For example, we report as a tax expenditure the taxation of capital gains on realization as opposed to accrual. We do that for practical purposes. It would be extraordinarily complex to tax capital gains as they accrue before the property is sold.

I say that to point out that there is not a homogenous nature to a tax expenditure. There's a vast range of measures, and in looking at them in terms of how you evaluate them, you need to take into account and look at the risks associated with them, the expenditures, whether or not they're really an integral part of the tax system and whether the risks are perhaps not as high. You need to understand the cost of them and how they're performing but to look at them in slightly different lights.

[Stephen Woodworth, Conservative, Kitchener Centre, ON]

Thank you.

Now I'll go back to Madame Lavoie just for a moment. I'll try to squeeze in a question about whether the IMF or the OECD at any point has ever said that Canada's reporting on tax expenditures is second to anyone else's, or have they said the opposite? Has there been a comparative exercise or comment from them?

[Maude Lavoie]

I'm not aware that the OECD or the IMF or other international organizations would have ranked countries. As I mentioned earlier, countries make different choices in the information they provide. Certainly, some organizations have tried to develop guidelines and things like that, and they've noted that Canada is doing very well in certain respects. But I'm not aware of specific ranking, if that's your question.

[Stephen Woodworth, Conservative, Kitchener Centre, ON]

How about on the question of how frequently tax expenditure reports are published? Where does Canada stand relative to the rest of the world in that measure?

[Maude Lavoie]

As far as I'm aware, many countries publish a similar report providing cost estimates of their tax expenditures on an annual basis, but I'm not completely sure about that question.

[The Chair, NDP, David Christopherson]

That's very good, thank you. The time has expired.

Back over to Monsieur Giguère who gets the floor again, sir.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Thank you, Mr. Chair.

I hope the witnesses are not too surprised by my questions. In any case, I think that they will be able to answer them quite easily.

In point 3.58, it says that the issue also represents a global vision. There is a paradox here; we saw what Professor Léo-Paul Lauzon said. I hope you are familiar with his research work on this. He says that gradually, we are seeing the richest 5% of the population not have to pay any income tax whatsoever. A large proportion of these highest-income people manage from one year to the next not to pay any income tax, or to pay very little.

The question we must ask ourselves is the following: Is what you are doing to the Canadian tax system, overall, not going to result in a situation where our grandchildren are going to have to pay for the tax credits we have at this time? The problem is serious, and we note that tax expenditures increase constantly. These tax expenditures systematically favour the richest group of the Canadian population. We don't want our grandchildren to have to pay our bills. As point 3.58 indicates, there is a some kind of flaw in the overall analysis.

Please do not all answer at the same time.

[The Chair, NDP, David Christopherson]

Anybody?

[Miodrag Jovanovic]

I think that Mr. Giguère has raised an important concern about the system, which is that everyone must pay their fair share of tax. As for people with high incomes, I would simply like to mention that those who are in the highest tax bracket, which is 29% at the federal level, represent 3% of the Canadian population, but they pay 35% of the income tax. I would also like to add that every year, the department takes a close look at things in order to ensure that the system is fair. And with every budget, we list what we call the integrity measures that were established by the government.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Nevertheless, we still have the same problem.

As for the 3% you refer to, the richest Canadians, we see that the gap between their growing wealth and their taxable income continues to grow. In fact, those people are not taxed on the increase in their wealth but only on a fraction of it. You say that they pay a lot of tax. They do pay a good part of Canadian income tax, but the question is, do they pay their fair share? You say that they are in a 29% tax bracket, but the issue is that very few of these people pay 29% on the increase in their wealth. They only pay that on a fraction of their taxable income. Which brings us back to the conclusion of the Carter Commission, which was that Canadians are not taxed fairly.

[Miodrag Jovanovic]

I think that there is a much broader question here, regarding how the Canadian tax system should be set up. In my opinion this goes somewhat beyond the framework of our discussion today.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

From time to time we need this information in order to make a decision.

If income tax should help us to reduce inequality, and if you are not able to inform us on how to reduce it, how can we adopt legislation to make things progress? In fact, these questions have been raised by the Parliamentary Budget Officer. We need this information.

[Miodrag Jovanovic]

I would like to add a comment.

Is the question to determine whether tax expenditures are systematically regressive? I do not know. In fact, we have tax expenditures which by definition are far from regressive. For instance, the Working Income Tax Benefit definitely targets low-income people. This is a measure that was conceived to counter what we call the welfare wall.

[Alain Giguère, NDP, Marc-Aurèle-Fortin, QC]

Mr. Chair, you understand the problem we have.

If the witnesses cannot answer these questions, how can we correct a situation we feel is unacceptable, through legislation?

Still on this topic, I will refer to Mr. Marsland's opening statement. He stated that in 2014, there were 364 pages of legal, tax and financial legislation. For the majority of Canadians, the Income Tax Act is a madly complex legal document. I'm referring to the report of the Ordre des comptables professionnels agréés du Québec, the Quebec CPA Order. Their report stated that the Income Tax Act had become an Aladdin's cave in which people get lost. Here again, the officials from the department are worsening the problem. They are increasing the size of the Income Tax Act rather than simplifying it.

Here is the best example I can give. All we have to do is look at page 17 of the document on tax expenditures and evaluations published in 2013, regarding the tax credits for disabled persons. Still today, many members have to inform disabled persons regarding the definition of a disabled person and the rights they have. It is all well and good to have a law—and I echo Mr. Albas' statements on this—but it has to be accessible to the vast majority of Canadians. Canadians have to know that this is accessible and they have to know how to access these credits. Once again, in all of these documents that were submitted and in all of the report, there is a problem. The whole issue is the accessibility of tax deductions or credits in this maze of tax legislation.