Mr. Speaker, I welcome the opportunity to begin debate in support of Bill C-36, the Income Tax Budget Amendment Act, 1995. I will begin my remarks with a few observations about the context of the tax measures we are proposing. To do that I must revisit the challenges the country faced and the expectations of the people we represent when the 1995 budget was introduced.
Then-as now-, Canadians wanted their governments to spend their money and to make savings in a sensible way, according to their values. And their values were undeniably reflected in the principles guiding our budgetary decisions.
These principles, underlying the bill being debated today, were set forth by my colleague, the Minister of Finance, in his budget speech.
The first principle stated that the government had to put its house in order. In other words, the budget had to focus on reducing program spending, rather than increasing taxes.
Another principle emphasized the need to be fair, fair toward the various regions of this country and its different citizens.
The record shows that we kept faith with Canadians. For the three year period that was the focus of last year's budget, from 1995-96 to 1997-98, the government has secured almost $7 in spending cuts for every dollar in new taxes. The spending reduc-
tions that were set out for the three year period total $25.3 billion and we took care to ensure that the burden was shared fairly.
Some $16.9 billion, or two-thirds of the total cuts, are to come about because of program review actions announced in the 1995 budget. This top to bottom re-evaluation of what government does and how government spends is now well under way and reflects an important reality of the 1990s.
In today's world where resources are limited, there is no question that government must change. If we are to do a better job of meeting key priorities we must reduce our presence in areas where others can do the job better.
The results of our actions in all three budgets introduced by this government speak for themselves. In 1993-94 federal program spending stood at $120 billion, or almost 17 per cent of GDP. By 1998-99 the money we spend on programs will be down to $105.5 billion, or 12 per cent of GDP.
From the start we set out tough deficit targets and we are firmly on track to meeting them. Our milestone is a deficit equal to 3 per cent of GDP for this fiscal year and 2 per cent next year.
As I mentioned previously, most of our decisions focused on reducing expenses. But, given the size of the challenge, we could not avoid a reform of the tax system.
In the budget speech, the minister pointed to the fundamental principle guiding our tax policy: taxes involve more than just rates, there is also the question of fairness.
With this in mind, we introduced a number of tax measures increasing the fairness of the system. We did not, however, increase personal income tax rates. In fact, we have not changed these rates in any of our three budgets, because we are well aware of the deep exasperation felt by many Canadian taxpayers.
I would like to briefly describe a number of measures we are proposing in the bill before us today.
I am sure all members will agree that fiscal equity begins with the collection of all taxes payable. We cannot allow some Canadians to evade their duty at the expense of other taxpayers.
Measures in this budget will protect the collection of source deductions made for income tax, Canada pension plan contributions and unemployment insurance premiums. Let me explain.
There have been cases where taxpayers are encouraged or even forced by third parties in a position of influence not to remit source deductions and similar withholdings. This can happen, for instance, where a secured creditor of a taxpayer in financial trouble controls the disbursements of the taxpayer's business. In an attempt to recoup its own losses, the creditor permits the payment of wages but refuses the remittance of source deductions and similar withholdings.
To protect source deductions in these and similar circumstances the government proposes amendments that would make such secured creditors liable to pay unremitted source deductions, along with any interest and penalty charges, just as the taxpayer is liable.
It is also proposed to allow Revenue Canada to exchange business name and address information with other federal departments and the provinces when they adopt the business numbers to identify corporations, partnerships or certain associations of taxpayers. This will allow federal departments and provinces to cut duplication, simplify business registration and develop joint business services. From the business person's point of view it will reduce the cost of compliance and give access to more effective government services.
I would now like to talk about the measures in this bill that propose changes to the tax system itself, changes that will make the system fairer. For example, we propose to change the tax system on investment income of private holding companies by eliminating the attractive deferral opportunities that existed until now.
Also, the current film incentive measure will go from the present tax shelter, which profits high income investors, to a new refundable credit offered directly to Canadian film producers.
The government is also acting to eliminate tax advantages flowing from family trusts. This includes repealing the previous government's decision to allow deferral of the 21-year rule.
I will now turn to other tax issues. First, measures in this bill affect the tax assistance the government provides to Canadians to encourage them to save for retirement. In last year's budget it was announced that the contribution limit for RRSPs would be reduced to $13,500 for this year and next, then allowed to rise incrementally to $15,500 by 1999.
In that budget it was also announced that the contribution limit for money purchase registered pension plans would be reduced to $13,500 for this year, then rise incrementally to $15,500 by 1999. However, in this year's budget the government announced that the contribution limits would instead be frozen at $13,500 for another six years, that is until 2003 for RRSPs and 2002 for money purchase plans.
The legislation before us implements the changes to the contribution limits announced in the 1995 budget. The further freeze in the limits that was announced this March will be dealt with at a future date.
As well, under this legislation, the amount of over-contribution allowed to an RRSP without being subject to the one per cent per month tax penalty will be cut from $8,000 to $2,000. There are, however, some traditional measures to accommodate taxpayers with prebudget over-contributions below the old limit but above the new one.
The 1995 budget changes will being the limits closer to the original pension reform target of providing tax assistance on earnings up to two and one-half times the average wage. The subsequent 1996 changes will bring this target down to two times the average wage, allowing us to better target this assistance to those who need it most, modest and middle income Canadians, while limiting the cost to the government and all its taxpayers.
As we consider the Canada of the future, in the early decades of the next century, there can be no question about the need to encourage retirement savings. In so doing we help today's wage earners prepare for their eventual exit from the workforce and thus avoid a too heavy reliance on public pension and income support programs in years to come.
Let me pause for a moment and mention one measure being introduced which affects today's higher income seniors. These individuals must repay part of the old age security benefit to the extent that their income exceeds an indexed threshold of $53,215 for this year. Through Bill C-36, instead of having them receive the full benefit and then make a repayment when they file their income tax, the government proposes to reduce the benefit before it is sent out. I want to stress that the level of the clawback is not being changed with this measure but simply how it is implemented.
Let me now turn to another issue which I wish to discuss in some detail, the action to eliminate the deferral of tax on business income. Under current law unincorporated business owners can use a fiscal year that does not correspond to the calendar year. If the year end is, for example, January 31, then all income for the remaining 11 months is added to next year's taxable income. Needless to say, taxpayers taking advantage of this feature enjoy a significant benefit over others. This approach runs counter to the general rule for taxpayers that income is taxed in the year in which it is earned.
To remedy this situation and to treat all taxpayers as equally as possible, a new rule was announced that would require all sole proprietorships, professional corporations and partnerships to have a fiscal year end of December 31. This proposal, however, came in for considerable criticism from many business people who are affected by the change and from members of this House.
The government has listened to them. It recognizes that some of the comments made to us were valid. Many businesses are of a seasonal nature and a fiscal year end of December 31 imposes hardships on them. Operators of a ski hill, for example, would prefer to focus on their business in the winter months, not on their accounting.
Second, a uniform year end would see much of the demand for accounting services concentrated in December and the few following months. In contrast, the variation of year ends allowed by the current system spreads the work more evenly throughout the year to the benefit of small businesses as well as their accountants.
The response has been to provide an alternative method of calculating income, one that addresses the goal of treating taxpayers as consistently as possible and at the same time allowing small business to retain a fiscal year end that reflects their needs.
Under this method taxpayers with a year end other than December 31 will have to adjust their income to take account of earnings between their fiscal year end and the end of the calendar year. There will be, of course, a transitional provision so taxpayers can allocate additional income from 1995 to future tax years. This alternative method will be available to individuals carrying on a business and to partnerships where all members of that partnership are individuals.
Let me also mention in passing that the decision to allow individuals to retain a fiscal year that does not end on December 31 has implications for their remittance of collected GST amounts. Individuals will continue to have the option of adopting their fiscal year for GST purposes.
The third area I wish to discuss is changes the budget made to corporate income tax rates. The government announced an increase in the large corporation tax by 12.5 per cent. As well, it proposes to raise the corporate surtax on profits from 3 per cent to 4 per cent. Taken together, these two measures will generate an extra $260 million annually.
The goal is to ensure that big companies contribute a more equitable share of the burden required to bring the deficit down. A temporary tax is being imposed on the capital of large deposit taking institutions, including banks. From February 27, 1995 to October 31, 1996 the budget anticipated this would raise $100 million over the covered intended period. Life insurance companies, which already pay an additional capital tax, would not be subject to this temporary surcharge.
Finally, let me mention one amendment that is not targeted at the fiscal environment but is targeted at the natural environment. The legislation acts to eliminate the current limit on the charitable donations credit for the donation of ecologically sensitive land. The current limit is 20 per cent of income, a level that may be a
disincentive in some cases where the value of the land is high relative to the donor's income.
This measure reflects the fact that the government appreciates not only the vital importance of environmental action, but also the growing importance of the charitable sector in Canadian society. In this year's budget, for example, a number of additional measures were announced that will be introduced in the months ahead.
The tax changes we are proposing in this bill are fair and equitable. They are totally in accordance with the principles we have set for ourselves to give direction to the tax policy. These principles, as I am sure members are well aware, reflect the values and expectations of Canadians.
As elected representatives of the Canadian people, we would fail in our duty if we departed from these principles. That is why I urge my colleagues to join me in supporting this important bill.