Debates of March 19th, 1996

Supply

[Martin Cauchon, Liberal, Secretary of State (Federal Office of Regional Development-Quebec)]

Mr. Speaker, I listened to the comments of the hon. member. Permit me to point out a few things with regard to the matter of the banking community. As you know, it is currently subject to a surtax. The banking community too must live according to the ebb and flow of the economy and not only the national economy, but the international economy and therefore must make the same economic shift as the G-7 countries around the world are obliged to. It involves a shift from a banking system that capably handles what is known as the tangible-real

estate and securities-to a banking system that will work much better with the intangible.

During this time, the federal office of regional development-Quebec, which I head, is working with financial institutions to set up funds providing financing on a patient capital basis to enable an SMB in high tech operations to obtain funding quickly, during the time it will take the regular financial institutions to make the change.

Secondly, I think the banks definitely pull their weight in working with the federal office. Even better, I realize, after a two week tour of Quebec, that there are agencies throughout Quebec that look after regional economic development and that take the time to target the priorities of the individual regions. This shows a taste for partnership and also what a partnership can do when the partners believe in it and really want to work together.

Allow me to conclude by mentioning an organization the hon. member is very familiar with, the Prouesse organization, which I recently came into contact with, which is looking after economic development in the east end of Montreal and which has targeted certain priority sectors, including the petro-chemical, plastics and rubber sectors. They are building on these economic realities and strengths, which have grown up over the years in the east end of Montreal.

[Réal Ménard, Bloc, Hochelaga—Maisonneuve, QC]

Mr. Speaker, we would have been very surprised had the minister not referred to the Federal Office of Regional Development. He cannot help it. I think that the hon. member will agree with me that members on both sides of this House will be under enormous pressure to review the tax system and that saying banks must also face the pressure of international competition will not help generate support. Although this is true, they should not be judged on that basis. The fact remains that, during the last two recessions, two industrial sectors made what can certainly appear as inordinate profits.

The first sector is the drug industry, to which I will get back later. The second sector is the banking industry. It is no sin to make profits, as many members would agree. In this day and age, however, profitable businesses must act like good corporate citizens, which is not so obvious. The hon. member referred to various local partnerships like the economic development corporations that have managed the transition to partnership. I am tempted to remind the hon. member that we would be hard-pressed to find examples of banks that get involved in their communities to a really meaningful extent.

Humanitarian involvement is still marginal. The purpose of my speech and of the bill that I may be bold enough to table some day is to ensure that banks, like other stakeholders such as the local economic development corporations the hon. member likes so much, are motivated to become partners in economic development.

[Paul Szabo, Liberal, Mississauga South, ON]

Mr. Speaker, I possibly will be splitting my time with the member for Bramalea-Gore-Malton, not necessarily equally.

[The Speaker]

You are going to have to work that out.

[Paul Szabo, Liberal, Mississauga South, ON]

Mr. Speaker, on March 6 the finance minister delivered his budget for 1996-97. Part of that budget included a very important aspect, one which was not incorporated in the detail to make changes, but rather a proposal. That proposal was to establish a technical committee on business taxation.

There has been a great deal of discussion within this House, across the country, and particularly in the United States presidential primaries on issues such as a flat tax on corporations and individuals. This is a much broader technical consultation.

With regard to the terms of reference, the finance minister said that Canadians want their tax system to generate a revenue in a fair and simple manner and that they also wanted to encourage growth and job creation. Given the complexity of combining these objectives, the Government of Canada has decided to undertake a review of those aspects of the tax law which most affect the creation of jobs.

In dealing with the terms of reference, the finance minister appointed a technical committee made up of I believe 10 professionals. Today we are debating a Bloc Quebecois opposition motion that deals with this technical committee. The motion states:

That this House deplores the fact that the technical committee set up by the Minister of Finance to analyse business taxation is comprised of members who are both judge and judged with regard to business tax reform; and that, this being so, the Minister of Finance should set up a joint committee of experts and parliamentarians to examine business taxation in an impartial manner and according to an open and transparent process.

The Bloc Quebecois motion includes a couple of elements I want to deal with. It was very clear in the debate the first thing it wanted to deal with was the conflict of interest or compromise with regard to some of the participants.

One of the Bloc members who participated in the debate went so far as to name a particular member of this committee set up by the finance minister, Mr. Robert Brown of Price Waterhouse. First I want to deal specifically with that because I know Mr. Brown. As one of the two chartered accountants in this House of Commons, in this 35th Parliament, I have to take the opportunity to defend my profession whenever possible.

When I was an articling student at Price Waterhouse, I met Mr. Brown for the first time. I worked with him over a number of years and came to know him as one of the most outstanding and revered professionals in the taxation field in all of Canada. Everybody knew who Bob Brown was.

If members would only appreciate that in a large multinational CA firm with international affiliations there are competitors even within the firm's own client base. How is it that a CA firm could opine on financial statements, could provide consulting advice and represent not only one oil company but also represent another? Is there a conflict of interest? Clearly if there were no rules of the game, if there were no professional rules of conduct, that could not happen. Within a CA firm there are rules. There are rules of confidentiality and conflict of interest. Members who work on certain files do not work on others.

The firm as a whole has a professional responsibility to the entire profession because it is the CA profession that has developed a set of standards and a code of conduct. The Canadian Institute of Chartered Accountants has a handbook which guides all accountants on not only their conduct but also on the rules of opining on various and sundry matters, particularly financial statements.

Canadians and people around the world look to the chartered accounting profession to provide a professional standard. The standard is set so high that only 37 per cent of CA students who wrote their final exam this past year were successful in meeting that standard. The profession is extremely proud of its high standards. It basically means we are there to protect the professionalism and integrity of the profession and to ensure that nothing that happens will bring disrepute to the profession.

Under the CA rules of professional conduct, if you are a member of the institute, as I am, and you become aware that something may be happening with regard to another member which may bring disrepute or which may reflect badly on the profession, you have a professional duty to bring it to the attention of a committee of the Canadian Institute of Chartered Accountants and let it investigate. If you do not and it is subsequently determined there was a problem and that you failed to bring it forward with full knowledge you could be equally culpable for the wrongdoing.

On the point of the integrity of the individuals and whether they can opine or participate in a technical committee even though their firm, an international firm, deals with clients who are taking advantage of certain tax measures today, they still can as professionals deal honestly, fairly and with credibility with issues they have been asked about with regard to the taxation of corporations by the Minister of Finance.

The second issue has to do with whether on this technical committee we need to somehow consider this as subverting the process and parliamentarians should be here, which is the insinuation of the motion. It basically states we cannot second this responsibility to these outsiders. We need to have hands on. There is no question we do, and we will.

However, as in all things, unless there is a motion on the floor and a focus to what is being discussed there is clear chaos. In this case the finance minister has basically said: "Let us have a technical committee. I want the people best qualified to analyse objectively the present situation. I want the expertise not only from the professional accounting side but from the economic side and the academic side. I want to establish that there are implications and detriments as well as those things that act positively in terms of job creation".

Now we are talking about giving it some focus. I compliment the finance minister on making the decision that we must have a review of business taxation. I would have gone a little further and said I want to extend it to personal taxation as well, but that will come. This is a starting point.

All of the members of the House have had communications from their constituents from time to time suggesting corporations are no longer paying their fair share of taxes. Individuals are paying a higher proportion of the total government revenue than corporations. The proportion that corporations have been paying has been going down. This is wrong and we have to do something.

In terms of raw data that is absolutely true. Corporations are paying less of a proportion of government revenues in terms of taxes than they used, but there is a reason. It is because of the character of corporate income taxation. The tax rate a corporation pays on its profitability has not changed.

A large corporation continues to pay a tax rate of about 50 per cent on its income. A small business pays approximately 25 per cent, under certain criteria. The rate has not changed. What has changed is that in determining the amount of taxable income a corporation has there are certain adjustments made.

When we look at an annual report it shows the revenue, the expenses and the net income from the business before taxes. When we do our tax return we take our net income before taxes, adjust it for certain things and then calculate the taxes owing.

There are three important items which would reduce or eliminate corporate taxes.

Number one is the existence of loss carry forwards or loss carry backs, seven years forward, three years back. If a corporation were in a bad situation because of an economic downturn or bad business decisions and lost a substantial amount of money, the taxation rules for business say it can carry the amount forward up to seven years and apply it against future income. That means that even though in a subsequent year a financial statement could show the corporation made $100,000, it would show it paid zero taxes, the reason being it had $100,000 in losses the previous year.

That is not to say this is right. I have recommended to the finance minister that the generous provisions of loss carry forwards and carry backs be scaled back. I am suggesting that if a business makes a bad business decision, maybe the taxpayers should not be subsidizing-

[The Speaker]

My colleague, perhaps you could enlighten the Chair. Is it your intention to take the full 20 minutes? If so, that is fine.

[Paul Szabo, Liberal, Mississauga South, ON]

Yes, Mr. Speaker.

The point with respect to the loss carry forwards has to do with the fact that businesses can be sheltered from a prior year's losses. A business could make a mistake which could cost it a lot of money. It may very well turn out that it had nothing to do with an economic downturn, it was just a bad corporate decision. The question one should ask, which I hope the technical committee will ask, is whether the taxpayers of Canada should underwrite or subsidize the bad decision making of businesses.

Maybe there should be some loss carry forward provisions, but not seven years forward and three years back. That is more than generous. It may be more than fair. I hope the technical committee will deal with that question.

The second point has to do with the flow through of dividends. I will not be able to explain this very clearly. Very simply, if a company receives a dividend from another corporation and turns around and pays out the same amount of money in dividends to its own shareholders, the company which received the dividend would show an investment income profit, but it would show no taxes payable, which is the problem our constituents have been raising.

However, it is right that no taxes should be payable. It pays taxes on the dividend income it receives, but it also receives a part IV tax credit on the dividends it paid out to its shareholders. The shareholders are the ones who ultimately will pay the tax. Therefore the liability flows in and out of that corporation. The corporation shows income but no taxes. There is not a problem but the optics certainly do not seem to defend that.

The third point has to do with deferred taxes. The study of deferred taxes was one of the most difficult for me. It has to do with concepts such as virtual certainty. Not only can we have deferred tax credits, we can have deferred tax debits.

Deferred tax credits can arise for something very simple such as the write-off rate for an asset. For instance, if a corporation were to buy an automobile for use in its business, for accounting purposes the corporation would generally write off the automobile over the useful life of the asset on a straight line basis. Under the Income Tax Act, however, the corporation has an opportunity to claim a capital cost allowance, which basically allows the corporation to write off an automobile on a faster basis. It is 30 per cent but it is on a declining balance basis. I will not explain the technicality but it basically is a different number for write-off for tax purposes than there was for accounting purposes. That means the bottom line for tax purposes is different from the bottom line for accounting purposes.

Therefore there is an item called deferred taxes. It is in fact a timing difference. It means those taxes will be paid eventually. It will catch up at the end of the time when the asset is fully written off. At any point in time there will be either more or less written off depending on what happens.

The reason we have all these different rates in the capital cost allowance is that there was some engineering in terms of trying to stimulate capital spending so that fast write-offs were available for computers and software, for manufacturing and processing, things that would help stimulate capital investment so that jobs would be created. I am sure this is an area the technical committee will to get into.

I know we all want to know more about offshore tax havens. Last November 1995 I wrote to the finance minister about offshore havens, among other things I asked him to consider in the budget.

It dawned on me that there were certain situations in which corporations could transact certain financial affairs with an offshore country and there would be no record. There was no way to track it and there would be no tax treaty between the two countries. The issue I raised with the finance minister was that in certain countries where we do have tax treaties we can deal with some of these problems associated with offshore havens.

For those countries where we do not have a tax treaty and where those countries want to have relations with Canada I recommended to the minister that we ought to seek to enter into accommodation agreements so that when there are financial transactions of note the governments would co-operate in making sure that knowledge of those transactions would be brought up. Each of the countries would be able to determine whether there was an activity going on not in accordance with the intent of the legislation or whether it was illegal. No doubt there are a number of other areas the technical committee has to get into.

Another thing I want to raise is the integrity of the individuals involved. There is no intent on behalf of any member in the House, I am sure, to personally point out to anyone that there is a problem with their personal integrity. We understand that in asking these people to put some focus to some of these serious and complex matters, as the finance minister has laid out, it will allow us a better

opportunity to do a better job in the House once we get the details and we identify them.

Ultimately history will judge whether they did their job well because we will have an opportunity to scrutinize their work.

[Philippe Paré, Bloc, Louis-Hébert, QC]

Mr. Speaker, it seems to me that the hon. member opposite spent much time defending the accounting profession. I do not think that what is at issue here, basically, is the profession per se. Part of the problem but not all of it rests with accounting.

The big question has more to do with figuring out why, two years into its mandate, the government has decided all of a sudden to set up a committee of experts to review the Canadian tax system. What is rather despicable about this approach is the fact that this committee is being formed after the Canadian government has already cut $7 billion in transfers to the provinces, taken billions of dollars away from UI recipients and drawn $5 billion on the UI surplus.

All of a sudden, out of the blue, it occurred to the government that perhaps it should have a committee of experts examine taxation, after all the chopping in social programs has been done.

I do not think that what is mainly at issue is the ethics of accountants. I think that accountants are totally within the law; however, and this is an important difference, something legal is not automatically ethical. When the legislation is unjust, inequitable and unfair to all citizens and that accountants operate within this legislation, while not being illegal, what they do may not be very ethical either.

I think, however, that we must agree that accountants are specialized in advising their clients on tax avoidance. How can we put any trust in these people to advise the government in reforming the Canadian tax system? I think that any involvement on their part in a process that the government might have wished to be perfectly serious and credible would defeat the purpose. That is why I contend that this cannot be a serious process, since some experts will be both judge and judged.

I would say that the hon. member for Joliette made this point very clearly today.

[Paul Szabo, Liberal, Mississauga South, ON]

Mr. Speaker, the answer is no, no and no. The member is still saying, when referring to the motion, that the members of the technical committee will be judge and judged.

In his intervention the hon. member said there is a conflict of interest. He asks how can they advise their clients and at the same time advise the government when they are on different sides of the fence.

Maybe the member missed the part of my speech where I said that there are professional rules of conduct. One cannot serve two masters. These people are not making decisions for us. They are going to assemble the information and the issues and put them in terms that are consistent with the terms of reference laid out by the finance minister. That does not exist anywhere.

The member also talked about tax avoidance. I want to share with members of the House a saying that accountants always use. Tax avoidance is necessary, tax evasion is illegal.

Tax avoidance is managing one's affairs in a way in which one minimizes the amount of taxes paid. Businesses do that. If they do not do it and every other business is doing it, they have a competitive disadvantage. Tax avoidance is not a bad thing. It is a necessary thing. These business people are going to consult with Canadians. They are going to provide the professional expertise just as any other consulting group would.

At the end of the day, members will have an opportunity to participate in a full dialogue based on the input received from this technical committee.

[Paul Devillers, Liberal, Parliamentary Secretary to President of the Queen's Privy Council for Canada and Minister of Intergovernmental Affairs]

Mr. Speaker, earlier in debate the hon. member for Joliette, in replying to a question posed by the hon. member for Mississauga South, compared the conflict of interest that he was discussing to something similar to, in the next election, the Bloc Quebecois and the Liberal Party of Canada having the same political advisers.

He used that to compare the potential alleged conflict of interest that is the subject of this motion. Could the hon. member draw a distinction for the House between political advisers and the professionals sitting on this technical committee?

[Paul Szabo, Liberal, Mississauga South, ON]

Mr. Speaker, one thing I have learned about this profession is that in debate, depending on whether one has the last word, one can say some pretty bizarre things.

The analogy of one person being a political adviser to two opponents is certainly preposterous. First, it would tell me more about the two parties than it would about the consultant. Second, if

the consultant had integrity he would accept only one engagement. That is the difference.

I said earlier that professional rules of conduct are very strict. If a member within a profession is in a conflict situation and does not disclose it and it becomes known to some other party who is also a member of the profession, the rules of conduct require that the member bring it to the attention of the discipline and standards committee of the Canadian Institute of Chartered Accountants for investigation. If it was not reported and there was a conflict of interest, both parties would be equally culpable for the damages. This is not to be taken lightly.

The integrity of the profession is its bread and butter. If it has no integrity then the opining on financial statements and providing professional advice to people on matters ranging from taxation to investment to accounting to good business practices and insurance measures, all goes out the door. Integrity is the most important commodity the accounting profession provides. That is being protected by the profession.

I can say that participation in the committee will only enhance the integrity of the profession.

[Nic Leblanc, Bloc, Longueuil, QC]

Mr. Speaker, Bloc Quebecois members did not accuse the club set up by the government of being dishonest. Nor are we saying that the people appointed by the government to conduct that review are incompetent. We simply say that the committee is in cahoots with the government, that it is a club which is a creature of the government, which was appointed by the government, and which will tell the government what it wants to hear.

The government is very aware of the whole taxation issue. Numerous studies were done over the years. The government is fully aware of the tax issues, and it also knows that it is its fault if Canada has a problem. The government creates the problem; the government is the problem. It is now asking a club made up of friends to tell it what to do, but it knows full well the cause of the problem. This is why we do not really believe in this exercise. We know that the government is guilty, that it is responsible for the problem, even though it says: "Tell us what the cause of the problem is". This is why the official opposition is very sceptical and why we say that this private club appointed by the government is merely there to hide what the government wants to hide.

[Paul Szabo, Liberal, Mississauga South, ON]

Mr. Speaker, I understand where the member is coming from. His allegation has been made.

When I look at the list of members there are eminent partners from two of the top CA firms in the country, professors and economists from two or three universities, and a couple of eminent lawyers. The allegation is that they are in cahoots with the government. That is an indictment of all those individuals who have through their professions achieved great distinction. It is a personal slight to the integrity of each and every one of those people. It is really uncalled for in the House. It is a very cheap shot.

The member must understand that the committee will not be making decisions on behalf of Canadians, the finance minister or the House of Commons. It is going to be advising the government and members of Parliament about the various situations which exist and the options that may be available so that we may more fully participate in a focused dialogue. It is constructive, it is the right thing to do and that is exactly what we are going to do.

[Gurbax Malhi, Liberal, Bramalea—Gore—Malton, ON]

Mr. Speaker, it is an honour for me to address today's debate on the opposition motion on business taxation.

Canada is consistently rated as one of the best nations in the world in which to live. Yet the only way to maintain our position on the world stage is to create a business tax system that not only raises money but also creates jobs. I fully support the attempt by the Minister of Finance to re-examine the tax act.

By establishing a technical committee of outside experts, only through a close examination of the grant system will we be able to encourage economic growth and job creation. Who better than the team of experts that is in the field of taxation to tackle the challenge?

It is my hope that such a professional review might lead to enhanced fairness in the tax system by ensuring that all businesses share the cost of providing government services. Otherwise we are faced with declining trust among Canadians and will have a greater reliance on what is known as the underground economy.

In fact, one of the biggest threats posed to Canada's financial well-being is the infamous underground economy. The Ministry of Finance should be commended for getting tough with tax cheaters in this budget. By reinforcing the existing strategy to combat the underground economy, we are sending a strong message to tax cheaters everywhere. The underground economy is not made up of honest people who are merely bending the rules.

The message we are sending to tax cheaters is clear; in your quest for personal gain, you are endangering Canada's economic future. Tough, fair enforcement programs, aimed at protecting our tax system, will help ensure this country's economic future.

The warning in the section of the budget is likely to deter people who might have been thinking of cheating their government out of tax dollars. Pushing an economy underground simply causes the

main source to dry up. You cannot expect water tomorrow unless you are prepared to prime the pump today.

With this budget announcement, Revenue Canada has put in place a multi-faceted approach that enhances its existing underground economy strategy. This strategy aims at enhancing current levels of respect for the tax system in a handful of especially high risk areas of the economy.

As I said back in 1994, anyone who chooses to live in Canada must be prepared to pay for that privilege. Where there is no honour in the honour system, perhaps the fear of getting caught will now prove to be a sufficient deterrent.

It is essential that we maintain the integrity of our taxation system. If the public's trust in the government's revenue generating methods becomes completely eroded, there is no turning back.

Had we failed to get our economic house in order, we would surely have been heading in the direction of a banana republic by now. The life blood of any economy lies in the level of trust it holds among its citizens. Results from this section of the budget should be quick and significant.

Benefits will come in two forms, both in terms of traditional revenue generated for public programs and of greater fairness to other taxpayers who have always met their obligations. Public trust, being as it is a two-way street, this government has repaid honest taxpayers in the best possible way. For the first time in recent memory a federal budget has not unveiled new taxes.

How and how much a country taxes its residents is critical in determining its future economic success or failure.

Without a doubt, taxes in Canada are still higher than most of us would like. This is why a fiscal turnaround is so vital. Only by controlling the debt can we free up resources to eventually ease the tax burden.

In its latest budget, however, the government has taken what is clearly a step in the right direction. There are no tax rate increases, not personal, not corporate, not excise. There have been no personal income tax increases in any of the last three budgets.

Fairness to taxpayers who comply with their obligations demands effective enforcement of the tax law to ensure everyone shoulders his or her fair share of the burden.

To build on Revenue Canada's highly successful underground economy strategy the budget has proposed to devote more energy to Revenue Canada's audit program for unincorporated businesses and self-employed individuals. A higher audit rate for these two high risk groups is expected to recover about three times the cost of bolstering the program.

Because a technical commitment in the Department of Finance will be examining ways of simplifying the business tax system,

including corporate income, capital and payroll taxes and personal taxes, taxpayers will be able to more easily comply with the system.

An effective tax system should not simply raise taxes. It should raise awareness of the importance honesty and fairness play in securing the nation's future.

[The Acting Speaker (Mr. Kilger)]

It being 5.15 p.m., it is my duty to interrupt the proceedings and put forthwith every question necessary to dispose of the business of supply.

Is it the pleasure of the House to adopt the motion?

[Some hon. members]

Agreed.

[Some hon. members]

No.

[The Acting Speaker (Mr. Kilger)]

All those in favour will please say yea.

[Some hon. members]

Yea.

[The Acting Speaker (Mr. Kilger)]

All those opposed will please say nay.

[Some hon. members]

Nay.

[The Acting Speaker (Mr. Kilger)]

In my opinion the yeas have it.

And more that five members having risen:

[The Acting Speaker (Mr. Kilger)]

Call in the members.

And the division bells having rung:

[The Acting Speaker (Mr. Kilger)]

Pursuant to Standing Order 45, I have been requested by the official opposition whip and the deputy government whip to defer the division on the question now before the House until tomorrow, March 20, at 5.15 p.m., at which time the bells to call in the members will be sounded for not more than 15 minutes.

[Marlene Catterall, Liberal, Ottawa West, ON]

Mr. Speaker, may I correct that. I think the deferral should be to 5.30 p.m. tomorrow.