Mr. Speaker, today is a sad day for parliamentarians, a sad day for Quebec and a sad day for Canada. Our thoughts today are with our hon. colleague, the Leader of the Opposition who is courageously fighting a very serious personal battle. I wanted to begin my comments by letting him know that our prayers are with him, his family and his children. All Canadians are with him.
I am pleased to join in the debate and to support Bill C-59. There are several aspects of the legislation and how it relates to our overall tax system that deserve comment and clarification.
Let me emphasize that our government knows full well Canadians believe taxes are already too high and we agree with them. That is why our priority objectives are to stimulate economic growth while putting in place real fiscal discipline. It is this double-barrelled thrust that will ultimately allow us to reduce taxes in the years ahead.
Let us remember that the tax deficit relationship is a two-way street. Every dollar of deficit borrowing we accept today will axiomatically lead to higher taxes tomorrow. Every dollar we can trim from the deficit, preferably through spending cuts but also through tax measures if need be is a step on the road to keeping the tax burden down.
That is why our government's 1994 budget was in many ways a tax reform and a tax reduction budget. It included measures to eliminate loopholes and increase tax system fairness and equity. It also committed to direct action to bring down unemployment insurance premiums which is a payroll tax that acts as a real barrier to new job creation.
It was also a tax reduction budget because of the firm commitment made by the Minister of Finance to cut the deficit to 3 per cent of the economy in three years. Again, let me make this central point. Fiscal discipline is the key to long term tax reductions in two key ways.
Obviously the less we have to borrow the less we have to tax to repay the loan and its interest, but there is another important dimension to this process. Controlling government's appetite for debt is our fundamental tool for getting interest rates back down. Lower interest rates mean lower carrying costs on our $500 billion debt. Again that means fewer tax dollars we need to spend.
I understand the concern some Canadians may feel about measures that add to tax revenues today in order to let us cut taxes in the future. We know the tax fatigue felt by so many. That is why the 1994 budget undertook a program of net spending reduction over three years. That is the most significant of any budget in a decade.
Over 80 per cent of the net fiscal improvement delivered by the 1994 budget over three years comes from spending cuts. In other words there are $5 of spending cuts for every $1 of revenue increase.
There is another aspect of our approach I must highlight. The net savings of $17 billion we will achieve in spending cuts comes after paying for our new initiatives. Some $6.7 billion in current federal program spending was reallocated to encourage growth, create jobs and to fund new priorities.
So far I have touched on the broad budgetary context of Bill C-59. Now let me comment on some of the specific aspects of the legislation and how it relates to the tax system and to other issues.
Clearly the most contentious part of the legislation is the measure to subject the age credit to an income test. Let me remind hon. members how this will work. Under the existing tax system Canadian seniors 65 years and over are eligible for special tax relief in the form of an age credit. It results in a combined federal-provincial tax reduction of about $950 per year. It is critical to note that under Bill C-59 individuals with net incomes below $25,921 will retain their full credit. That represents three-quarters of all seniors; 2.6 million seniors will not be affected.
But what about the 800,000 seniors who will feel an impact? Like our tax system itself, the effect will be progressive. For individuals with net incomes above the threshold, the age amount will be reduced at a rate of 15 per cent of their net incomes exceeding $25,921. The threshold will be indexed.
The bottom line is that most of those who will be affected will continue to receive partial benefits. In fact, only about 6 per cent of seniors, some 200,000, will no longer receive benefits because their incomes exceed $49,134, the threshold at which the benefits will be exhausted.
Let me just step aside for a second and give a context to that threshold. In 1992 only 10 per cent of all Canadians filing tax returns had incomes over $50,000. I should also point out that the reduction will be phased in over two years. For 1994 the reduction will be one-half of the amount otherwise determined. As well, the age credit will remain transferable to a spouse.
Let me now turn to the measures in Bill C-59 to eliminate the $100,000 lifetime capital gains exemption. As was said in the House yesterday, this exemption has been subject to much criticism. It distorts the tax system, totally exempting certain gains while taxing others. It also gives our tax system the real sense of being inequitable because it mostly benefits high income Canadians.
Let me highlight just one aspect of the dilemma. In 1992 there were some 12,000 Canadians out of the 19.4 million tax filers who earned $50,000 or more yet paid no income tax. A wide range of allowable tax deductions and credits made it possible for these people to eliminate their tax liability. Figures show that over 4,700 people in this group, some 40 per cent, used their lifetime capital gains deduction to reduce their tax payable.
I am not suggesting that those Canadians did anything wrong. But there is a real public policy problem, a philosophical wrong at work when millions of less affluent taxpayers see those well-off individuals escape taxation completely.
The bill will be an important step in helping to restore Canadians' faith in tax equity. It will help prevent some people from feeling any justification for their tax evasion, an important goal when the Auditor General reports billions of dollars of unpaid taxes.
The issue of tax system fairness and the ability to avoid taxes leads me directly to other measures of Bill C-59, those related to the corporate sector. There are many Canadians today who feel that the business sector receives preferential treatment compared to the individual taxpayer.
It is worth noting that people often focus on the corporate income tax and do not recognize the many other taxes that businesses must pay. They include provincial corporate income taxes, capital and insurance premium taxes, payroll levies such as UI premiums, Canada and Quebec pension plan contributions, workmen's compensation premiums, and municipal property taxes.
In fact in 1993 Canadian corporations paid some $51 billion in such taxes, about $21 billion to the federal government and $30 billion to the provincial and municipal governments. That being said, the perception of corporate welfare bums still remains in many minds. People still read of profitable corporations paying no tax. They believe there are still too many loopholes and deductions that are not justified given our serious national debt problem.
Bill C-59 takes new steps to reduce deductions and eliminate loopholes that were clearly violating the spirit of a fair tax system. For example, the bill will reduce the tax deduction for eligible business meals and entertainment expenses from 80 per cent to 50 per cent. This measure will make the tax system fairer by helping to ensure that all businesses, large and small, pay an appropriate share of tax. It also better reflects the element of personal consumption that we believe is inherent in such expenses.
I should reiterate a key point made by the government's opening speaker. This measure is consistent with recent reductions of business meals and entertainment expense deductions in Ontario, Quebec and the United States.
The legislation also proposes to restrict the use of certain tax shelters. These are ones where limited or passive investors in a partnership have been able to claim tax deductible losses and/or to receive cash distributions that actually exceed the cost of their investment.
Similarly Bill C-59 will also curtail the use of the tax avoidance technique known as a purchase butterfly. Let me remind members of how this flighty corporate provision has functioned.
Current federal tax rules permit corporate property to be divided pro rata among its shareholders on a tax deferred basis. This assists the splitting up of a corporation so that the shareholders can continue to carry on separately the corporation's business.
In recent years, unfortunately, the rules have been used to avoid or defer tax on the sale of corporate assets. In May 1993 the government introduced rules to curtail cross border purchase butterfly transactions. Bill C-59 proposes to modify these rules and extend them to all purchase butterflies.
The final measure I want to highlight is the proposal to make large private corporations ineligible for the small business deduction. In today's new economy small business is the major job creator. It is a sector that deserves effective targeted support.
Unfortunately under the existing rules this support was also going to larger firms, companies that do not have a reasonable claim on the limited public and taxpayers' purse.
The small business deduction recognizes the special financing difficulties and higher capital costs faced by the vital small business sector. The deduction lowers the basic federal tax rate on the first $200,000 of active business income of Canadian controlled private corporations from 28 per cent to 12 per cent, a reduction of 16 percentage points.
This lower tax rate provides small corporations with more after tax income for reinvestment and expansion. Regrettably under the current rules, some very large corporations are also obtaining this benefit. The proposed rule changes will make large corporations, those with taxable capital of $15 million or more, ineligible for the small business deduction. As well, the rule changes will reduce the deduction for corporations having taxable capital between $10 million and $15 million.
Let me acknowledge that Bill C-59 will not in itself resolve Canada's fiscal problems nor restore equity throughout the tax system. Those are the goals that will only be met by consistent, continuous effort, effort our government is committed to delivering.
Bill C-59 does take valuable steps in both directions, measures to broaden the tax base for fiscal renewal and even more important, measures to improve the fairness and efficiency of the tax system itself. On both counts it deserves the full support of the House.
As I said, Bill C-59 in itself is not going to change or fix all our problems. We do need a continuous and consistent effort to deal with the deficit and the debt.
I want to spend the remaining moments of my time to review very briefly some of the initiatives that the government and the finance minister have brought forward in preparation for our next budget.
On October 17, 1994, the finance minister came before the finance committee of the House of Commons and outlined the framework for economic policy. I want to remind hon. members of the first principles that the finance minister articulated for all members.
"First, we have one overriding goal as a government, that is jobs and economic growth. Second, good economic policy and good social policy are one and the same. Third, a country that is to continue to care for its citizens must be a country that can pay its bills, and, fourth, we need to create a new infrastructure for a Canada of ideas and innovation". Finally he said that government itself must change. A government cannot or should not do everything. Responsibility should lie with those who are best able to do the job.
We have had changes in the world economy. We are now in a strong economic recovery. Jobs are being created. The job crisis is not just about a recession or a cycle. It is a global epidemic. The world economy is truly integrated. Trade barriers are now gone. Communications are instant. Transportation is efficient. Markets never close and of course information technology is exploding. All this spells competition and opportunity. To be successful we need to upgrade our skills to fit a knowledge based economy. In addition we must reform our social and income support programs upon which so many Canadians have become dependent.
The fiscal track we have been on is unsustainable, not because of ideology but because of its mathematical reality. The only answer to our job dilemma is sustained substantial economic growth. That growth requires improved productivity in terms of ingenuity, better management and paying attention to the common sense workers.
High productivity increases incomes and contributes to a higher standard of living for all Canadians. To improve our productivity we must also improve our skills.
During the social program review and in the budget review it has become clear that we will and we are reviewing all programs. Rather than trying to fix everything by ourselves we are also trying to facilitate solutions in partnerships with business, industry, and Canadians at large.
We must also continue to clean up federal regulations which cost businesses billions of dollars. We must create a healthy fiscal and monetary climate. We must restore our fiscal health and deal with the deficit and the debt. As we know the debt is growing faster than the economy and that is unsustainable. As the finance minister and the Prime Minister have told us on so many occasions, our goal is to balance the budget.
As an interim target the government is committed to reduce the deficit to 3 per cent of GDP by the 1996-97 year. We are going to hit that target.
Finally let me highlight the principles guiding our choices in the 1995 budget as represented to the finance committee on October 18. He said that deficit reduction is an integral part of jobs and growth strategy. Fairness, and I stress fairness, is paramount so the most vulnerable in our society will not be left behind. Deficit reduction must be selective and strategic, reflecting clear priorities and not simply a mathematical across the board approach.
Budgetary action should weigh on the side of cuts and expenditures and not increased taxes. Economic assumptions must be prudent to stimulate confidence that deficit targets will be achieved.
We have $120 billion that the government spends on programs, one-third of which went to individuals in the form of elderly or UI benefits, transfers to Indians or to the Inuit. Twenty-five per cent of transfers were to other levels of government, ten per cent to business subsidies, international assistance, et cetera, and nine per cent to defence. All aspects of our program spending will be reviewed.
This is the commitment of the government. This is the direction established by the 1994 budget. This is the direction supported by Bill C-59.