Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce
Issue 4 - Evidence - Meeting of December 8, 2004
OTTAWA, Wednesday, December 8, 2004
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-5, to provide financial assistance for post-secondary savings, met this day at 4:07 p.m. to give consideration to the bill; and to study issues dealing with charitable giving in Canada.
Senator W. David Angus (Deputy Chairman) in the chair.
[English]
The Deputy Chairman: I call to order this meeting of the Standing Senate Committee on Banking, Trade and Commerce.
I wish to welcome our witnesses who are appearing in connection with our committee's study on issues dealing with charitable giving in Canada. This is our final day of hearings on this subject, which we started several weeks ago. The study will have two parts. The first deals with incentives, or lack thereof, to Canadians to make charitable donations. There is a view that the overall structure in Canada could be improved. We have been taking evidence in this respect and we hope to file a report in the Senate later this week or early next week that could lead to some changes.
I would say welcome as well to Canadians who are watching us on television.
Our witnesses are Mr. Brian Gray and Mr. Barry Turner from Ducks Unlimited. Mr. Turner is not unknown in these parts. He is a former distinguished member of the Canadian Parliament. If I may say, welcome back.
Mr. Barry Turner, Director of Government Relations, Ducks Unlimited Canada and The Nature Conservancy of Canada: Mr. Chairman, I am the Director of Government Relations for Ducks Unlimited Canada and have been for five years. Dr. Brian Gray is the Director of Conservation Programs for Ducks Unlimited for Canada. He is an expert on many of the areas we will talk about tonight. I am not a tax expert and will not pretend to be one.
Ducks Unlimited is known as Canada's conservation company. It has been around for 67 years and is the largest and most successful conservation organization in Canada. We are very proud that our mandate is to conserve wetlands, not only for waterfowl but also for wildlife. Protecting wetlands means healthier water for Canadians.
The Deputy Chairman: Please tell us a bit about your membership, how you obtain your mandate and to whom you are accountable.
Mr. Brian Gray, Director of Conservation Programs, Ducks Unlimited Canada: We have a paid membership of about 80,000 Canadians. We hold fundraisers across the country, mostly through our banquet system. We have about 700 events across the country, run by 7,000 volunteers. In addition to our 80,000 members, we have 70,000 supporters — businesses, farmers, et cetera.
We have a great deal of expertise in working with private landowners, most of whom are farmers. Currently, we have about 15,000 active landowner agreements that we are managing or working with across Canada. Our primary area of focus in the past was the three Prairies provinces. However, about 25 years ago we expanded and are now working in every province in Canada, and we have offices in every province. We are governed by a board of directors comprised of 67 board members who represent each province of the country. We have a set number of seats on our board for each province.
You were given a handout in advance that has since been slightly revised. I asked the clerk to pass out another paper dealing with inventory lands owned by businesses or developers that sheds a different light on what is in the paper entitled “Achieving Conservation Success.” I will not dwell on that.
The case for nature conservation in Canada is more than simply environmental, aesthetic or spiritual. It is increasingly becoming economic. In 2000, the Canadian Wildlife Service of Environment Canada issued its last summary of the importance of nature to Canadians. It looked at the economic significance of nature to Canadians. That report used 1996 data, so it is a bit old. However, they have found some monies with which to resurrect that survey and they will work with the provinces, conservation organizations and other federal departments to do so.
In 1996 numbers, there were about 215,000 Canadians employed directly in nature-related activities, generating $12 billion in gross domestic product. You can imagine that it has become much more economically active eight years later.
The natural systems provide vital functions in our lives. Quality of life depends on air, water purification, erosion and flood control. Genetic resources and biodiversity are protected. Pest control is managed, as are recreational and cultural pursuits. All of this has an economic value.
You may have seen a document that I sent to all of your offices in the last two weeks called “The Value of Natural Capital in Settled Areas of Canada.” This paper was written by Dr. Nancy Olewiler, a well known economist at Simon Fraser University. Dr. Olewiler, in cooperation with Ducks Unlimited and The Nature Conservancy, closely analyzed four areas in Canada with regard to the economic value and impact of natural capital in settled areas. Suffice to say that every dollar spent can generate $2 in return through protecting natural capital. I encourage honourable senators to read that paper.
I will not talk about the first proposal in the document that was distributed to you, the National Conservation Fund, because I know that you want to look at issues dealing with charitable giving in Canada.
Three areas should be looked at. Fifty per cent of Canada's species at risk are found on private lands, and these lands are becoming subjected more and more to various types of developmental pressures. The Panel on the Ecological Integrity of Canada's National Parks stated that conserving habitat on private lands around parks is essential for maintaining the ecological integrity of our national parks. I think, as an example, of Waterton Lakes National Park in southern Alberta where some lands surrounding the park have recently been protected by The Nature Conservancy of Canada as buffer lands to the park itself.
The Government of Canada has taken some important steps in the last few years with the Ecological Gifts Program whereby lands can be donated to various conservation agencies. However, when such lands were donated four years ago, a capital gains tax of 75 per cent had to be paid. The tax was reduced to 50 per cent three years ago, and to 25 per cent two years ago. Therefore, there is still a fair amount of disincentive for landowners to donate lands under the Ecological Gifts Program, because they still have to pay 25 per cent on the capital gains portion of the assessed value of that land. We think the tax should go to zero.
Finance Canada and the government also recognize the donation part of what they call an “EcoGift.” It can be donated part as a sale and part as a gift — in other words, you might wish to donate some of the land but sell a portion of it. For example, let us say that you had some land valued at $100, and that was the fair market value of that land. If you were to donate that land, you would have to pay $25 in capital gains. If you were to sell it, you would be given a receipt for the $75 but still pay capital gains of $25. We think that is a good idea, but perhaps that capital gain could go to zero as well, as a stronger incentive for landowners.
If you have the document there, honourable senators, there are three areas. One is to remove the capital gain from ecological gifts, or including a donation of ecologically sensitive lands as inventory. The third issue I want to talk about is exemption of GST on the purchase of lands by conservation organizations. I will address that one first. If Ducks Unlimited or the Nature Conservancy of Canada purchase lands for conservation purposes, we must pay GST on that purchase. That is a disincentive to us. We would rather use the GST that we have to pay when we buy land for other purposes; for conservation purposes. It could be a substantial amount of money. That should be forgiven when a conservation organization buys land. That is a special request, an exemption that we would ask the government to consider, to allow us not to pay GST on the purchase of lands for conservation reasons. We would use those monies for our own conservation reasons instead of giving it to the Government of Canada.
Second is the issue dealing with land that is owned by businesses or developers. I have asked the clerk to hand out a sheet to you that explains in much more detail what was in the initial document. It is entitled “Encouraging Donations of Ecologically Sensitive Lands Held as Inventory Briefing Note.” It is one page, and I believe you now have that. This explains the issue clearly.
Donations of ecologically sensitive lands held by corporations or individuals as inventory in their businesses are not subject to the income tax benefits provided through the federal EcoGift program. The barrier here is that the disposition of land held as inventory yields profit rather than a capital gain because it is not a capital asset, one hundred per cent of which is deemed income for income tax purposes to the developer. The tax benefits of the ecological gift programs apply only to capital gains associated with the gift. We think that if the Income Tax Act was amended so that the deemed profit associated with the donation of ecologically sensitive land held as inventory was treated the same as the deemed capital gain associated with the donation of land held as capital, it would be an incentive to developers to donate lands.
I know, for example, that there are some significant lands in the Oak Ridges Moraine north of Toronto held by developers. Some of these lands could be potentially given to a conservation organization, but the disincentive for the developers is that because it is land held as inventory, it is treated differently in the tax system than if it were a gift to a conservation organization. We think the Finance department should address that issue as well.
Therefore, we are asking for three things: One, we think we should be GST exempt — the “we” meaning a conservation organization that buys land; two, lands held as inventories should be treated differently under the tax system to incite developers to donate lands to conservation organizations; three, the capital gain on the donation of lands by individuals should be reduced from 25 per cent to zero.
Those are the three areas we want to cover. We would love to have some questions.
The Deputy Chairman: Did Mr. Gray have anything to add?
Mr. Gray: Conceptually, we have been locking horns with Revenue Canada and with Finance Canada. The way the government looks at this is that they are losing revenue, or losing an opportunity to gain revenue. In this document that was referenced earlier, we are trying to provide information to demonstrate that that is the wrong way to look at the situation. Look at it as investment where you get a two-for-one return on your investment.
We focused on the settled areas of Canada to show that it is cheaper to have Mother Nature provide pure, clean water than it is to build treatment plants. It is much cheaper to let nature reduce greenhouse gas impacts than to go back and try to restore those areas. We picked geographically dispersed areas across Canada to illustrate this point. We are saying that nature provides ecological goods and services. Give us more tools to get more nature into the settled areas. That is the conceptual overlay with which to look at these situations. You cannot just look at them and ask, “Why should we do this, because we will lose the revenue.” Look at it as an investment on which you will get a return.
The Deputy Chairman: Just as an aside before I go to the questions, the Senate committee on Energy, the Environment and Natural Resources is currently conducting a study on sustainable development which you will find germane to what you have just said, and it might be that you will have some interesting evidence to bring before that committee. That committee is dealing exactly with some of these questions, such as protecting the environment, checking into the water, the disappearance of certain aquifers, and the mapping of same. In that context, there are so many issues that stand out, and there is an issue directly flowing from your evidence. I suggest that you might contact the clerk of that committee, Ms. Keli Hogan. You will find a warm welcome.
Senator Massicotte: I want to get a better understanding of how the tax treatment of inventory of land works. The point you are making is that if the land costs $80 and it has a value of $100, then the developer who owns the inventory will be taxed on income of $20. You are proposing that it be tax free for the land to be deemed as capital or public securities, is that your point?
Mr. Turner: If the land is sold by the developer, the profit is 100 per cent taxable.
Senator Massicotte: When the developer gives the land as a donation, under the corporate structure for donation does he not get a deduction equal to the value?
Mr. Turner: He would get a $100 tax receipt, but it would not be the same as under the ecological program.
Senator Massicotte: He still gets the $100 deduction under the corporate structure?
Mr. Turner: I think he would, but I am not a tax expert. Land held as inventory is treated differently.
Senator Massicotte: If he gets a deduction equal to the fair market value, which is the deemed sale price, then it works out as if he gave up the land for the cost, no?
Mr. Turner: If he is prepared to do that.
Senator Massicotte: There is no tax consequence?
Mr. Turner: I am not a tax expert. If it works that way, you are probably right.
[Translation]
Senator Plamondon: Who sets the monetary value of ecologically significant land? Who certifies that it is a site of ecological interest? Are all sites of ecological interest? How do you assess the monetary value of the land?
[English]
Mr. Turner: Senator, the scientists would have to deem the land to be of significant ecological value, for example, under endangered species legislation. I understand Senator Oliver may have a particular turtle species on some property that he owns in Nova Scotia. If it is deemed by scientists that that turtle is endangered, then Senator Oliver's land is very precious to the people of Canada. He should be given some kind of special encouragement to protect that land.
A qualified, recognized appraiser would be asked to appraise the value of the land on fair market value. There is something called a 'Federal Appraisal Review Panel' that would review that appraisal to determine if it is actually authentic, accurate and acceptable. If it is not, that panel, a federally appointed panel, could ask for another appraisal. The final say is in the hands of the Minister of the Environment for Canada, Mr. Dion.
[Translation]
Senator Plamondon: If someone has land that he clear-cuts and then sells for its ecological value, does that change the situation? Do you look simply at the ecological value or do you look at the economic value? If the land has been clear-cut, does it have less value? How do you handle that?
[English]
Mr. Turner: If some land were deemed to be of ecological significance and the owner was to reach an agreement for an easement on the land, to protect the land by way of a legal document, then he or she would not be able to alter that landscape. They could not cut the trees at that point, if the trees were deemed to be ecologically significant, unless the agreement said that they would be allowed to do certain things on the land, but they would be disallowed from doing other things, and that would be probably signed in perpetuity; forever.
Senator Fitzpatrick: This, I am sure, is a very difficult question to answer, but before I ask it I would first like to say thank you very much for coming. This is a very important issue to us across Canada, particularly in my area of the Okanagan-Similkameen. This is a very fragile area where we are doing a number of things to try to save the ecosystems, and there are some very special ones there. Your recommendations are sensible and I hope we will be able to do something with them.
All of us around this table probably have areas in which we are particularly interested. Do you have any idea of the magnitude that we would be talking about over a period of time for the donation of ecosystem lands? Obviously, my view is that if we do not do something about it now, then it will be much more costly in the future to this country. It does not seem to me that the government would lose very much money by looking at these considerations and doing something about them. Can you give us any guidance in that area?
Mr. Turner: Senator Fitzpatrick, I understand that the Okanagan is pretty good grape-growing country, too.
Senator Fitzpatrick: That is true.
Mr. Turner: When you were asking me that question, I was thinking of the movie that we have all seen many times, Gone with the Wind. There is a scene in the movie, after the civil war, where someone picks up a handful of dirt on the farm — everything is burned, and someone says, “There is nothing left.” He picks up the dirt — I remember the scene, but I have forgotten who it was — and he lets the dirt fall through his fingers and he says, “You are right, but this will last forever.” This is what endures here. It is the land.
Your question is a very broad one. Unless we create incentives through using the economic instruments that we can, as a country and a government, landowners will continue to be able to use the land for the purposes for which they have been using it for the past 150 years: to farm or to cut trees. If the government looks ahead to what it wants the valleys, rivers, streams, lakes and landscapes to look like, whether it be the Okanagan, the Oak Ridges Moraine, Newfoundland or northern Manitoba, without a vision, the land will perish. It is time to say that we cannot keep abusing our air, water and soil. We have to use instruments to create incentives for landowners, because in many cases farming on the Prairies is tough. Senator Gustafson knows that. He has been farming there all of his life and so have his neighbours, and they have had tough years. If the governments can create the right instruments to allow people to stay on their lands and farm them, as Mr. Gray mentioned a moment ago, through providing what we call ecological goods and services, they must be compensated for that. You cannot just say “We want you to stop doing this because it is hurting the runoff, and it is filtering up the river and the fish are dying.” The landowner asks, “What is in it for me?” That is a good question.
The answer lies in looking at the broad picture. As decision-makers, we must look at the big picture. What are we doing to our land, air and water and our biodiversity, our wildlife? How can we best protect all of these? The government has brought in endangered species legislation to protect endangered species. Agriculture Canada has brought in the Agriculture Policy Framework to encourage farmers to start doing farming differently. There is an environment pillar there under which Mr. Gray and I have had a lot of involvement with the former minister of agriculture and the current one. Other than saying what I have said, there is no silver bullet. Perhaps Mr. Gray knows one that I do not.
The Deputy Chairman: I would like Mr. Gray to supplement that response, but I should point out, senators that we are in somewhat of a time bind. The point has been largely made. Senator Oliver, who is next, will be the final questioner. If there are any points you have not made that you want to make, please do so now. I am sure you will provide the rest of the answer for Senator Fitzpatrick. Please proceed.
Mr. Gray: To answer more directly to the question, at least as I interpret it, seven years ago there was a 75 per cent capital gains tax. In other words, you had to pay a 75 per cent capital gain for a gift of ecological land. It then went down to 37.5 and then down to 25. In our experience, the floodgates did not open, and we did not see this landslide of gifts. With the difference remaining between 25 per cent and zeroing that out, we will not see a 10-fold increase in land donations. We will see an increase, but it will not be a huge amount. Our point is that every little bit helps. We have seen enough in the last three years, when it has been 25 years since our beginning. If we provide you information on our two organizations, the records will show that donations have not tripled in the last three years.
Senator Fitzpatrick: If we went to zero, then I guess your job, all of our jobs, would be to first identify the lands in question and then provide the information that there is this incentive to encourage the process of turning those lands into ecological areas, but allow a good enough tax relief to provide a good enough incentive.
Mr. Gray: To draw a full circle to Mr. Turner's response, the important thing here is also the signal that the government will be sending to Canadians that we value these areas, and they are important for all Canadians.
Mr. Turner: The donation of a cultural gift, like a statue, a carving or a valuable painting that appreciates, has a capital appreciation. The donation of a cultural gift to the state does not pay any capital gains. For donation of land, you still pay 25 per cent. We think that is wrong.
Senator Fitzpatrick: I agree.
Senator Oliver: I will be very brief, Mr. Chairman. I know that you are running out of time. Could you tell me how much land is owned by either the Nature Conservancy of Canada or Ducks Unlimited — are they mutually exclusive or are they the same? What amount of land do you have now, and what is the tax treatment on that land? In other words, in municipalities where it is, are you tax-exempt for that?
Mr. Gray: No, we are not. We pay taxes on it, speaking for Ducks Unlimited; I cannot speak for the Nature Conservancy. We pay municipal and provincial taxes, property taxes, on all the land we have.
Senator Oliver: What is the relationship between Ducks Unlimited and the Nature Conservancy of Canada?
Mr. Turner: We are two separate organizations, but we are both very much involved in acquiring land for conservation reasons.
Senator Oliver: Is the land given to both organizations? Are you both acquiring lands?
Mr. Gray: We are separate organizations, but we are both acquiring lands separately.
Senator Oliver: What is your total land holdings now in Ducks Unlimited?
Mr. Gray: For Ducks Unlimited, the land that we own title to is about 250,000 acres.
The Deputy Chairman: All over Canada?
Mr. Gray: Yes.
Senator Oliver: On which you are paying substantial property taxes?
Mr. Gray: In most areas we are assessed at the lowest rate, which is the agricultural rate. In some areas we have to fight that periodically, where developers want to increase our tax base so that the land becomes developed. However, right now, everywhere across Canada, we are taxed at the agricultural assessed rate.
Senator Oliver: Before this committee today, you are looking at a federal tax, capital gains, but are you doing anything about the property tax issue with the municipalities and provinces?
Mr. Gray: Not yet. When you get down the scale to that level, we want to be part of the community and we want to pay for the infrastructure in that community. Maybe a generation from now, when we have all the economic information in place, we could show that our lands do benefit the community through tourism or whatever, but right now we are not comfortable with pushing that aspect at the municipal level.
Senator Moore: My question is further to what Senator Oliver was asking. When a party gives you a parcel of land or you buy it, is there some written undertaking as to what the future use will be? Is it given in perpetuity for conservation use only, and do they get it back if you decide to make some other use of it? In other words, does the giver have the right of first refusal to buy it back from you? Are those arrangements entered into?
Mr. Gray: Generally speaking, the agreement on the gifts that we have received is that it will be held in perpetuity for the purpose of the gift, which is natural values. It depends on the individual. Sometimes they want to be specific in the legal agreement and say that this is what you will do, and if you do not that, it reverts back. Sometimes it is based strictly on trust and other times it is more detailed.
Senator Gustafson: The lands that you receive, are most of them from estates, corporations or individuals — if it is land that is gifted to you?
Mr. Turner: It is mostly from individuals, because we do not get Crown land gifted to Ducks Unlimited.
Mr. Gray: To supplement that, our preference, when we get a gift or when we buy land ourselves, is to turn that land over to the Crown, to the province, with an agreement similar to what you were talking about, that if it is going to be managed and held this way in perpetuity, but if it is not we have the first right to receive the land back. In Quebec and Ontario, we turn quite a bit of our land over to the provinces. In the Prairies, generally we do not because there is no infrastructure in those provinces to take care of that land, so we hold it.
Senator Gustafson: Where a farmer would gift you land, does the $500,000 capital gains come into play?
Mr. Gray: Yes, it does; but their opinion would be that we need all the help we can get, and we would like that to stay with the land issue and not with the gift issue.
Mr. Turner: Just to finish on that, just across the river on the way to Montebello, some of you may have seen the large Ducks Unlimited signs along Highway 105. We have recently entered into an agreement with the Quebec government to acquire almost 5,000 hectares of land along the Quebec side of the Ottawa-Outaouais River. Those lands will be protected in perpetuity, but it is in cooperation with Ducks Unlimited, the Quebec government and private landowners in the Outaouais.
The Deputy Chairman: Gentlemen, I want to thank you for coming. As you can see from the attentive and large turnout of senators, this is a subject of great interest. We will look forward to seeing you soon at the committee on energy and the environment, where we will give you more time to elaborate on some of these issues.
We have some witnesses from the government who have come and would like to give a rebuttal to some of the testimony they have heard in our study on charitable giving.
Gentlemen, from the Department of Finance, welcome back. For the record, would you both please describe your functions at Finance, and then perhaps give a slight introductory comment as to why you have requested to return to these hearings?
[Translation]
Mr. Serge Nadeau, Director, Personal Income Tax Division, Tax Policy Branch, Department of Finance: My name is Serge Nadeau and I am the Director of the Personal Income Tax Division at the Department of Finance.
[English]
Mr. Bill Murphy, Senior Tax Policy Officer, Personal Income Tax Division, Tax Policy Branch, Department of Finance: I am Bill Murphy, senior tax policy officer with the tax policy branch of the Department of Finance.
The Deputy Chairman: I understand you have followed our hearings — certainly, you did, Mr. Nadeau, a couple of weeks ago. You are fully familiar with the evidence that has been adduced before us. Could you just indicate now the specific reason why you would like a few minutes of our time today?
Mr. Nadeau: Honourable senators, I would like to thank you for giving us this opportunity to provide you with additional information on the tax treatment of charitable donations. The primary objective today is to draw to your attention key considerations in assessing two suggestions that have been made to the committee by other witnesses, in particular last week. First, I would like to discuss issues relating to proposals to extend the half-inclusion rate on capital gains arising from donations of publicly-traded securities to private foundations. Second, we would like to address proposals to eliminate the remaining capital gains tax on such donations.
I think my opening remarks should have been distributed, so I will go through them.
[Translation]
Senator Hervieux-Payette: Mr. Chairman, I would like to make a point. Our witness seems to be francophone. We have very few witnesses who speak French and we would appreciate it if francophone government officials occasionally used their mother tongue in addressing us because it would give us great pleasure and enable our colleagues to hear the translation. I am sure that you are fluent in French, Mr. Nadeau, but most of the time we hear witnesses in English and we are very happy to have an opportunity to speak our first language.
The Chairman: Thank you, Senator. However, witnesses know that they may speak in the language of their choice.
Mr. Nadeau: Mr. Chairman, if senators would prefer that I speak French, I will be very happy to do so. Let me begin by discussing issues relating to the extension of the half-inclusion rate to donations to private foundations.
There are currently about 8,000 registered charitable foundations in Canada — about half are public and half are private. Private foundations argue that they should receive the same preferential tax treatment as other registered charities because their funds also flow to approved charitable activities.
We recognize the important role of private foundations in addressing the needs of the communities they serve. However, the operation of a private foundation and its relationship to its founders is different from that of a public foundation and its relationship to its board.
In addition, the cost of extending the half-inclusion rate measure to private foundations is an issue here. But I would like to focus for the moment on an important issue — the potential for self-dealing when donations are made to private foundations. This issue arises because donors to private foundations and foundation directors usually do not deal with each other at arm's length. Indeed, donors and directors are often the same individuals. By self-dealing, I mean that a donor, because of his or her relationship to a private foundation, might continue to vote the shares donated to it through the private foundation and perhaps also get some economic benefit from continued control over the shares — particularly if that donor holds a large and controlling block of shares in a public company.
For example, because of an individual's business interests outside of his or her foundation, that individual may decide that donated shares of a particular type will be retained by the foundation, in circumstances where a foundation director acting at arm's length would sell the shares in order to maximize the benefit to the charity.
Self-dealing is less of an issue with public charities. With public charities, a donor is normally at arm's length from the board of directors, so donors have much less ability to control the disposition of their shares once a donation has been made. Rules to limit self-dealing, such as those in place in the US, could involve significant complexities. For example, strict limits might be placed on a foundation's holdings of a particular stock if the foundation's directors or related individuals control the company in question.
But how would “control” be measured in a way that could be defined in legislation? This could be a complex undertaking. The charitable sector has acknowledged that self-dealing is a real issue. However, this committee has also heard some remarks from witnesses who suggested that recently proposed changes to the rules for registered charities have removed these concerns. Such is not the case.
Budget 2004 did propose an intermediate sanction dealing with undue benefit, but the proposal essentially duplicates the existing prohibition in the Income Tax Act and merely introduces a lesser sanction for minor or first- time offences. It does not introduce new or different rules to deal with the subtleties of self-dealing.
In conclusion, there are valid policy arguments for ensuring that private and public foundations operate on a level playing field. Indeed, their work and support for the voluntary sector is important in meeting the needs of the community. However, the self-dealing issue is not trivial and would need to be dealt with in a manner that meets both the needs of the foundations and the policy objectives of the government.
Now, I would like to turn to proposals you have heard to eliminate the Gains Tax on Donations of Listed Shares to Public Charities. I believe it would be helpful to the committee if I made two comments on issues raised in that discussion: first, relating to the fiscal cost of the half-inclusion rate measure; and second, regarding the level of assistance in the United States. You were provided with certain comparisons last week and I would like to review those comparisons.
At present, with a typical donation of publicly listed shares in Canada, government support, as a whole, is about 53 per cent of the cost of the donation, while the donor pays about 47 per cent. This is shown in Table 1, which is on page 5 in the English version of my brief. The exact percentage will vary slightly depending on the province and on the amount of capital gains involved. The donor decides which charity will receive the donation and over what period of time. But in each case, government support is at least half of the cost. If the capital gains tax were removed altogether, government support would amount to about 60 per cent of the cost. So the donor would assume only 40 per cent, whereas the government, which means the taxpayers, would assume 60 per cent.
How much does this measure cost in terms of foregone revenue? As you may know, each year the Department of Finance publishes a study of revenue foregone by each tax measure. The report that we publish every year is entitled Tax Expenditures and Evaluations.
Table 2 is an excerpt from the 2004 report. The explanatory note to Table 2 is key to understanding the cost of the measure. It is impossible to exactly quantify the cost of the measure without knowing how donors would have behaved had the measure not been enacted. Therefore the report shows an upper and lower limit for each year. The lower limit indicates that the estimated cost to the federal government would be seven million dollars in 2003 if the measure did not result in any increase in charitable donations. This would have occurred if all donors simply replaced their cash donations with donations of shares, so that the only marginal cost to the federal government was the capital gains tax foregone. For 2003, the cost would have been approximately seven million dollars.
At the opposite extreme, it is possible that every donation of eligible shares was a donation that would not otherwise have been made. In fact, that was the argument made last week: namely, that having a reduction in income tax for capital gains would increase these donations. In this case, the cost to the federal government consists of both the capital gains forgone and the charitable donation credits associated with the new donations. Under this scenario, the cost is estimated to be $53 million in 2003. So we have a floor value and a ceiling value here, ranging from $7 million to $53 million. No doubt the true cost of the measure falls somewhere between these two extremes.
But one cannot conclude that virtually all donations of shares came about as a result of the incentive, and that the measure cost only $7 million a year. The measure may have been a considerable success, in which case the cost was high, and if the measure was not successful, the cost is low.
I come now to the tax treatment of donations in Canada and the U.S. Since the issue was discussed earlier at this committee, let me turn to a comparison of the relative generosity of the tax treatment of gifts of securities in Canada and the United States. As shown in Table 3, the effective rate of tax assistance is roughly comparable in the two countries. Although capital gains on donations are not taxed in the United States, the total tax incentive is similar because the charitable donation deduction in the US is not as generous as the charitable credit in Canada. For 2004, the effective rates of assistance are about 53 per cent in Canada and 52 per cent in the US.
Furthermore, the US tax system places several restrictions on a donor's ability to claim tax assistance that are not faced by a Canadian donor. American donors can claim donations up to only 30 per cent (typically) of adjusted gross income, compared to 75 per cent of net income (or higher) in Canada. This can be a significant factor when large donations are involved. You heard this comment last week. Second, for high-income Americans, the charitable deduction is currently clawed back by 3 per cent of income beyond about $140,000, up to a limit of 80 per cent of the value of a donation. This clawback is scheduled to be phased out by 2010 in the United States. However, there is no clawback at all in Canada.
You may also be interested to know that for cash donations, Canada's treatment is more generous than that in the United States in several respects. For low- and middle-income earners, the Canadian credit, which is set at the top marginal rate (once a donor has accumulated $200 or more of donations in a year) is worth more than the U.S. deduction. Most American donors get no tax benefit from an additional charitable donation because they claim the standard deduction, which does not allow them to make a donation to charitable organizations.
To summarize, the Canadian tax treatment of cash donations is clearly more generous than that in the United States for most donors. However, on the whole, the tax treatment of donations of publicly-listed securities to public charities is roughly comparable, especially when you include the income limitations and the clawback.
Finally, I would mention the issue of fairness between those who make cash donations to charities compared to those who donate shares. Those who donate shares, typically higher-income individuals, are already favoured by the tax system (as shown in Table 1). Yet charities depend far more on gifts of cash than they do on gifts of securities.
I would welcome any questions which honourable senators may have.
The Deputy Chairman: Clearly, Mr. Nadeau, you are throwing some cold water on the other testimony we have heard. Despite everything, however, how do you explain the fact that donations are much higher in the United States than here in Canada?
Mr. Nadeau: There are various hypotheses for this.
The Deputy Chairman: It must be because in the United States there are other incentives for giving more. If I understand correctly, you are comparing apples to apples, are you not?
Mr. Nadeau: Various hypotheses have been advanced, particularly the one involving the size of the public sector in the U.S. compared to the size of the public sector in Canada. In Canada, the government is much more involved with respect to education, health care and poverty. Some statistics have been sent to the committee in this regard. The size of the public sector in Canada is about 34 per cent, whereas it is about 25 per cent in the United States.
Many Canadians have delegated responsibilities for charitable activities to the state. That is an explanation that is often given.
[English]
Senator Tkachuk: On page 9, Table 3, for top marginal tax rate, you have 46 per cent for Canada and 40 per cent for the United States. Their top marginal tax rate starts at what amount of income?
Mr. Nadeau: At approximately $350,000 Canadian.
Senator Tkachuk: And ours starts at what amount?
Mr. Nadeau: At $113,000.
Senator Tkachuk: Is our rate between $50,000 and $120,000 the same as theirs, or substantially higher?
Mr. Nadeau: Our rate is substantially higher. Depending on the state, it can be as much as 10 per cent higher in Canada than in the U.S.
Senator Tkachuk: I always wonder how tax rates are arrived at, because in reality nothing happens to that money except that the government does not get it. The money is still spent, either for a need that the government might have had to pay for otherwise, or for goods and services from which the government would receive sales taxes and income tax from salaries.
There is an argument to be made, and many economists make it, that money outside of the government actually generates more money for the government. It is possible that if money is put into charities, they might spend it more wisely and there might be more economic activity from which the government would benefit. How would you calculate those numbers?
Mr. Nadeau: That is a fair comment. We hear that a lot, and it is appropriate. There are different choices. Fifty million dollars could be spent on charities in terms of tax expenditures or it could go into reducing tax rates, economic development or other activities. The consideration is where the highest return is achieved. Is it from giving $50 million to charities, which of course do a lot of good things, or spending it elsewhere, or collecting $50 million less in taxes? That is difficult to estimate.
Senator Tkachuk: We have heard from witnesses who have given us their numbers, although they may have been overly generous in their favour, as to what the benefits and the tax considerations might be. The numbers you present are not real numbers because you cannot say that this will be the cost to the government as compared to their costs, because once the deduction is made by the taxpayer, that money is still spent and income tax is paid. In other words, money is still being generated in the economy and generated to the government, even though the government did not have its hands on it in the first place.
In my view, money would be spent more efficiently in the hands of the charities than in the hands of the government. Although that is my view, it may not be the view of all members here. Is it not fair to say that these are not exactly proper numbers either?
Mr. Nadeau: You are right in that they do not take into account the economic feedbacks effects. However, it is the fact that if a tax credit is granted on donation, this is money that goes back to the taxpayer. This means also that some taxpayers are subsidizing this transfer of tax credit, and that may be perfectly fine. That is a choice of the government. However, is it better to transfer $50 million to charities or to collect $50 million less in taxes, as an example? There is $50 million less in taxes and the money remains in the sector. Instead of $50 million in tax reduction, there could be $50 million for the National Child Benefit. That is the type of comparison that needs to be made, and that is very difficult. You are ultimately right that the $50 million is a ceiling, to some extent.
Senator Tkachuk: Absolutely. It is not the right number. We cannot just buy the numbers. We can buy the theory but not the numbers. A panel of economic experts would have differing opinions on what the impact would be on the economy if the government did not collect this money. Some would even argue that the economy would benefit to such an extent that the government would collect more tax by investment in charitable institutions.
Mr. Nadeau: I have not heard it said that the government would ultimately collect more taxes than the tax break given. I do not think that would be the case. However, some may say that the tax expenditure is lower.
Senator Tkachuk: That might explain why we have the taxes that we have.
[Translation]
Senator Hervieux-Payette: My question will be quite brief. We have been given some statistics and we have been told that 43 per cent of charities were religious in nature. I asked the department about the requirements regarding these religious communities. I am told that they are not as strict as for other organizations. I wanted to know whether we have the same standards for all organizations that call themselves religious as for other, non-religious organizations.
Mr. Nadeau: The Income Tax Act sets out absolutely the same requirements for both religious and educational organizations. As far as the administration of this goes, we have people here from the Canada Revenue Agency who could perhaps answer the question. I would not want to answer for them, but I think the criteria are absolutely the same for both types of organizations. They have rules to follow and they do so to the best of their ability.
Senator Hervieux-Payette: I am concerned about that, and the reason I raised the issue is that we have heard that some religious movements may have had a terrorist component. I was wondering what type of checking is done and how these people qualified, particularly as regards their reports — in other words if they spend three times more than they say they receive.
I do not know how this is managed, but I have been told one thing for sure: there may be more receipts than donations. That is my information, which I cannot prove, but I just wanted to hear your answer to that question.
Mr. Nadeau: There is no difference as far as the act goes. However, administratively, it is difficult to answer the question, because we are not in charge of that. However, someone from the Canada Revenue Agency could answer this specific question.
[English]
The Deputy Chairman: Given the time, I want to thank both of you gentlemen. If you would be kind enough to consult with your colleague in CCRA on Senator Hervieux-Payette's question, and develop any relevant information for us and get it to us quickly, it would be helpful. We will be deliberating tomorrow, if possible.
You have expressed a serious concern about any move that would give a tax break further to private foundations, and you have talked about self-dealing. We have not had time to explore that in questioning, but would it be fair to say that you have come back here tonight to sound a little warning to us: “Hey, senators, before you start recommending big changes in the tax breaks, take note of these things?”
[Translation]
You are telling us to proceed cautiously and that things are not all that simple.
Mr. Nadeau: Exactly.
The Vice-Chair: I would like to thank both of you on behalf of the committee. Your presentation was most interesting, and will be very helpful in our study.
[English]
The Deputy Chairman: Let me now extend, on behalf of the Standing Senate Committee on Banking, Trade and Commerce, Mr. Minister, a warm welcome.
We are here this evening to study Bill C-5, which is a special bill that is making its way through our system, entitled the Canada Education Savings Act. I believe the bill has been referred to this committee only this afternoon, having passed through regular stages in the House of Commons, including their committee. It is had first and second readings in the Senate. We are here to hear from you, Mr. Minister and your colleagues, as to what this bill is all about and why we should enhance its fast passage through the system.
The Honourable Joseph Volpe, P.C., M.P., Minister of Human Resources and Skills Development: Thank you, Mr. Deputy Chairman. I appreciate, first, the fact that your committee has undertaken in such quick fashion the opportunity to engage in a study of this bill, which I think is very important. It is not without reason, then, that it was one of the first bills presented in the house when Parliament resumed just this last fall.
[Translation]
Thank you for providing me with the opportunity to discuss the proposed Canada Education Savings Act. It is a forward-looking act, signalled in the recent Speech from the Throne, that represents a sound investment in our children, Canada's future and all citizens upon whom our continued prosperity rests.
[English]
That is why helping low-income families save for their children's future post-secondary education is a principal feature of this legislation. It complements other measures to provide today's post-secondary students with additional financial assistance, including significant improvements to the Canada Student Loans Program and Canada Study Grants.
The goal of the Government of Canada is to ensure that no qualified Canadian misses out on post-secondary education because of lack of financial resources. To fulfil this objective, we need to invest in our children's future. I use that term collectively because the children who are born each and every day this year belong to each and every one of us, and they are part of our Canadian component, our future as well as our present. Bill C-5 contains several instruments that will allow Canadians to make that investment, through planning and saving for their children's and grandchildren's post-secondary education.
Our studies tell us, as if we did not know, that better than 93 per cent of all parents want their children to pursue post-secondary education. This type of thinking is very much a part of our culture. Since its inception, the Canada Education Savings Grant Program has been very successful and reflected that widespread support that studies demonstrate. For example, there are approximately $13 billion today in private RESPs, i.e., savings made by parents and grandparents for children. The Government of Canada has paid over $2 billion into those grants. This has all happened in the last six years.
However, and it is an important however, only 8 per cent of families in that bracket that earn $25,000 or less in family income invest in Registered Education Savings Plans or RESPs, or in fact take advantage of the Canada Education Savings Grant. It is a dismal number.
Clearly, even though most families want to invest in their children's future education, some or many lower income Canadians lack the necessary assets, or one might suggest the appropriate understanding of investment or savings mechanisms, to do so. Other studies indicate that asset building, which is what most post-secondary education savings represent, is as important as having income for economic and social well-being. That asset building is what we will focus on. The income is what the parents can do themselves.
Bill C-5, which is grounded on an asset-based policy, recognizes that low income people need to build assets for the future, just as those who are more familiar with that process in the middle and upper income brackets, do. This is made abundantly clear when we see, in a recent Statistics Canada report, that young Canadians were asked if any savings had been put aside for their post-secondary education by either themselves or others. A much bigger percentage of those who reported savings than those without had taken some post-secondary education beyond high school. For example, those who had had savings were more likely to have engaged in post-secondary education to the rate of 74 per cent, whereas those who had no savings set aside were only able to answer in the positive by 50 per cent. The aim of Bill C-5 is to help lower-end income Canadians accumulate those crucial assets.
I will outline the key features of the act. First, there is a new feature. A Canada Learning Bond is that key feature and it is a one-time grant of $500 available for children born after January 1 of 2004; this year.
The Deputy Chairman: I would not normally intervene in the middle of an outstanding statement, though I have one question and it will be the only one I ask. The Canada Learning Bond — are we talking about a bond that bonds people together, or a bond like a security, or a buzz word, sort of a sobriqué that the government has given to this particular initiative?
Mr. Volpe: I hope it is a security that leads to a sobriqué, because we want to use that security to bond people to the concept and culture of savings for post-secondary education.
The Deputy Chairman: Is it a nickname, in a sense?
Mr. Volpe: It is the bond, the financial instrument.
Senator Hervieux-Payette: Will they get the money?
Mr. Volpe: They will get it, $500. It will be put in the bank for them, put into an account and it will stay there, accumulating interest, until that child becomes of post-secondary school age and/or qualification.
I will deviate from my notes because you have asked an important question. Not only that, honourable senators, that $500 is augmented by an additional $100 every year by the Government of Canada for as long as the family stays in the category that earns a National Child Tax Benefit. If the family moves into a middle or upper income tax category, they would no longer qualify for the $100 additional amount, which amount will be added to that $500 for 15 years, assuming, of course, that the economic or social condition remains constant. We hope it does not.
Our economic and social policies — allow me to brag about my government's successes — will move more and more people into that category. For those who do not, we have these kinds of policies. If that family stays in receipt of the Child Tax Benefit then $100 is added to that bank account set aside specifically for receiving this Canada Learning Bond and for ensuring that there is an accumulation of interest on behalf of this learning bond for that child, to be utilized during that period when he or she might be of post-secondary education age, up to age 25, am I right? No, it is up to age 21, but there was a desire to move it forward to about 25.
There has to be an exercise of that option. The Government of Canada, which is all of us, is willing to make this investment in asset building and we are willing to augment that asset. We want to encourage families to augment that asset. We encourage them; we do not compel them to do it. They could match that every year or put in more. Our Registered Education Savings Plan allows for that. This is what the Government of Canada wants to do. As I said, senator, it is not simple for the purpose of putting a security bond in place that will then be used for further education down the road, but to bind that family to that concept of saving for the future. Typically, families that have an income in that range of $25,000 or under $35,000 have a difficult time in asset building. We want to give them the opportunity to do that.
The Deputy Chairman: Thank you for the clarification. In terms of communications strategy of that laudable initiative, you have picked a name. I hope it works for you.
Mr. Volpe: So do we, and thank you.
Perhaps I might return to the formal presentation, and we can interrupt it if you feel comfortable in doing that. Allow me to put into the record what the intentions are so that you can judge for yourselves.
As of January 1, 2004, any child born after that date is automatically eligible, provided he or she is born into a family that meets that income stream. Parents are not required to contribute to their child's Registered Education Savings Plan in order to receive this bond. However, they need to come forward with a birth certificate, a Social Insurance Number, or SIN, and go to the bank and say “We want to set up this account.” We need parents to do that. We hope it does not sound paternalistic or patronizing, but it is the first incentive: “Go and put that interest-bearing $500 aside for your child. All you have to do is bring a copy of the birth certificate, get a SIN number and there you go.”
The Deputy Chairman: You have to set up the account, the RESP. You will offer them $25 to help them do that?
Mr. Volpe: That is right, because we think that is all it will cost, and the banks have assured us that they will not charge more. There is an old axiom that where there is a will, there is a way. We are trying to stimulate the will.
In addition, up to and including age 15, because in most provinces children must stay in school until age 16, these children will receive an annual $100 supplement instalment, every single year. The bill also builds on and contains improvements to the Canada Education Savings Grant or the CESG program. When parents contribute to their RESP, they receive a matching grant, and that is good. Families with a net income of $35,000 or less would receive a match rate of 40 per cent on their first $500 of RESP contributions each and every year. If they put in a dollar, they will get an additional 40 cents. This is an increase from the current 20 per cent. We are serious about engaging people in this culture of learning. We recognize that conditions demanded that we do more. We are in a position where we can do more, and we will do more in the future.
For middle income families earning more than $35,000 but not exceeding $70,000 per annum, the match rate will go from 20 to 30 per cent. Presumably they are already making investments and asset building, so the instruments already work for them quite well. However, in going from 20 per cent to 30 per cent, that is already a 50 per cent increase in the matching rate. As well, there will continue to be a 20 per cent match rate on all other RESPs.
While this bill launches the Canada Learning Bond, it does make some adjustments to the Canada Education Savings Grant. It is estimated that 4.5 million children could benefit from the enhanced Canada Education Savings Grant next year alone. With Canadians having some $13 billion already invested in RESPs and with the improvements in this bill, we could see an increased number of parents investing in the future of their children, and see that translated into enrolments in the future.
[Translation]
If we examine the adoption process of this bill to date, we can see that many people support these measures to help low-income and middle-income families to save up for their children's post-secondary education.
The members from the different political parties who sat on the standing committee of the House helped this process very much.
[English]
Nine amendments were introduced nonetheless, with broad agreement amongst committee members. Most were considered to be of a technical nature and were introduced by my parliamentary secretary on behalf of myself and the department. However, I would like to speak to two substantial amendments that I believe improve the bill for all Canadians, and we were happy to receive these amendments.
Consequential amendments were proposed and accepted that would give the Income Tax Act, which governs RESPs, a broader scope by permitting education assistance payments from RESPs to be made for part-time students enrolled in post-secondary education. Since the number of those kinds of students increases consistently, we felt that they should continue to be able to benefit from the bases that are the foundation stones of our thinking on this matter. Currently, only full-time students can access their RESP savings to fund their education. Through this amendment to the bill, the government is recognizing that education is not a one-size-fits-all proposition. Not everyone is within the four walls of academia every day of the school year. Sometimes there is an opportunity to work and study at the same time. Family responsibilities, financial considerations and personal choice all play into a person's educational decisions.
[Translation]
No need to tell us that low-income Canadians are those who, more often than not, take part-time courses, and it is exactly those Canadians we want to help. This provision on part-time study might encourage someone to get a college or university degree rather than being content with less.
Another amendment we are happy with has to do with measures to make sure that Canadians are informed about improvements.
[English]
If you can imagine, we needed an amendment to remind us that we should trumpet the opportunities inherent in the bill and ensure that people take advantage of them. It was done, and now we are compelled to do what we were hoping to do. We are developing an outreach and awareness program that will complement traditional communication products and national advertising. The goal is to build grassroots outreach activities and establish partnerships with community organizations that work with targeted groups. This amendment ensures that our outreach and awareness program will be ongoing.
I am also pleased with the spirit of cooperation that resulted in the speedy passage of Bill C-5 through the House. Not only did it demonstrate what can be achieved when parliamentarians work together, it also helps to draw us closer in meeting tight deadlines and ambitious visions.
Financial institutions will need a minimum of six months to update their systems and train their staff to meet the new measures contained in this legislation, but you would probably know that better than I.
The first matching provincial programs have already been announced. In 2005, we will mark Alberta's one- hundredth anniversary of joining Confederation. To launch the province's centennial celebrations, Alberta has announced its Alberta Centennial Education Savings Program, which will provide a universal incentive to encourage savings into an RESP for post-secondary education for any child born in Alberta in 2005 and beyond.
The proposed Canada Education Savings Act provides the necessary authority to enter into administrative agreements with provinces and territories to deliver on their behalf the programs that have similar purposes to the Canada Learning Bond and the CESG. Alberta is the first to make that request; hence the reason for the urgency. It also gives the Government of Canada the authority to collect information from Alberta citizens for the purpose of administering the program. As well, it allows funds from the Province of Alberta to be deposited into an RESP.
The Prime Minister agreed to Premier Klein's request that the Government of Canada deliver the provincial program on behalf of the Government of Alberta on a cost-recovery basis. The Government of Alberta expects to be in a position to flow funds to eligible beneficiaries by April of 2005.
This agreement with Alberta exemplifies the importance that both the Government of Canada and its citizens place on partnerships with provinces. Bill C-5 shows how, while respecting each other's jurisdiction, the two levels of government can work together to meet the needs of the country and to help Canadians plan their future.
[Translation]
Our goal is to ensure that no child misses out on post-secondary education because of a lack of financial resources and the other provisions provided for in the bill will help us to achieve the goal.
[English]
I know we all share the goal of having Canadians fulfil their potential so that we can continue to ensure our nation's well-being.
Once again, senators, I thank you for allowing me the opportunity to address you, and I shall be delighted to answer any questions. If I cannot, I have capable people with me who can.
The Deputy Chairman: Thank you, minister. That was a very enlightening opening statement.
[Translation]
Senator Plamondon: Thank you for your presentation. On the first page, you say that only 8 per cent of families have taken advantage of this plan. It does not surprise me at all to find out that families earning $25,000 — and when we are talking about a family that is at least two adults and one child — do not have the necessary financial means to regularly deposit even only $10 a week in a bank account. First of all, because with a $25,000 salary — I do not know if that is gross or net — there is even less money in the consumer's pocket when you talk net salary.
Before being appointed to the Senate, I spent my life helping consumers draw up their budgets and I think that what should have preceded this very praiseworthy initiative would have been to involve the groups involved in budget consultation, or even to set some up across Canada in order for people to be able to change their ability to repay to an ability to save.
When people can pay off their debts and they can see the light at the end of the tunnel, at that point, during the whole process, you can transform the ability to repay into an ability to invest.
What is interesting in your project is that the goal is to get low-income families not only to work but also to save. Because when you are saving up for something, that means you have an objective. It is sort of like setting out an objective at the beginning of a trip. You have to think ahead how the trip is going to go. What is the itinerary, and what do you have to bring along?
We can support the parents another way if we tell them how to help their child to reach the goal and go on to a post- secondary education.
The Deputy Chairman: And what is your question, Senator Plamondon?
Senator Plamondon: What kind of campaign have you devised to motivate people to get by on $25,000 a year while putting savings into this program?
Mr. Volpe: You have already understood that the objective is commendable. It is worthwhile because we are trying to develop the habit of saving. It is not just a matter of providing funds for the child's future, you also have to understand how to do it and why you are doing it.
Today, we are talking about our children's own educational future, but we are also talking about the future of a lot of other things. And whether you are grossing $25,000 or $18,000, the most important thing is to know how to manage that money.
The government wanted to give an opportunity to all those who wished to do so to use the savings opportunities made available to them, whatever their annual income. To that end, you have to give them the initial motivation they need.
The exercise is not to save up for just any old thing. It is actually an incentive to invest in the future of your children using whatever mechanisms already exist. The objective would be to develop some ambition. It is time to enter the world of those who make contributions.
Senator Hervieux-Payette: My questions will probably be of interest to my staff. My assistant has a two-year old baby and she is expecting for March. I think that only one baby will be able to have the benefit of your program. Is that actually the case? I would like you to confirm this.
Second, if grandparents, uncles or aunts want to contribute, do those parents earning less than $35,000 still continue to get the annual $100? Will they be able to contribute to the previous child education fund program?
Mr. Volpe: First, I would like to congratulate your assistant because her situation also helps with the country's demographics. As for your question about those who can make contributions, I will let Ms. Thivierge answer that.
Ms. Marie-Josée Thivierge, Assistant Deputy Minister, Human Investment Programs, Human Resources and Skills Development Canada: First, the learning bond applies to children born after January 1, 2004. Now, concerning the improvement to the Canada Student Loans Program, it will be in force as of January 1, 2005.
Contributing to an RESP is what gets everything going. Basically, a family must open an RESP account for the child in order to have the Canada learning bond deposited in that account, based on eligibility. After that, if the family chooses to make contributions, whether it is the immediate or extended family, then the family contributes to the RESP and there will be a contribution under the education savings grant program that will be added to the amount which applies to the family in question.
I am not sure I totally understood your question on grandparents' income and eligibility. Could you clarify your question?
Senator Hervieux-Payette: If the parents qualify for the $100 and the grandparents give a Christmas present for the grandchildren's education, will those low-income parents lose the $100 under this program?
Ms. Thivierge: No. The learning bond has its own eligibility criteria and the subsidies to education savings are part of another program. The common objective of both is to encourage saving for post-secondary education. Insofar as the family eligible for the child benefit supplement gets the $100, that amount is acquired based on eligibility.
Senator Hervieux-Payette: As long as they are within the acceptable limits of the $35,000 annual income, will they be entitled to that $100 amount every year for the full 15 years?
Ms. Thivierge: The $35,000 amount is used for illustrative purposes. It is an approximate amount but the eligibility criteria is whether the family, for a period of one month during a full year was eligible under the National Child Benefit Supplement and it is the eligibility for that benefit that triggers the payment of the bond.
Senator Hervieux-Payette: Is it the same in Quebec as in Alberta? What will the regime be in Quebec?
Ms. Thivierge: First, the family has to make the effort of initiating an RESP. The family decides whether it wants to start planning for education.
That is done between the family and the financial institution. Insofar as a family decides to open a Registered Education Savings Plan and qualifies for the National Child Benefit Supplement, it will have access to the payment depending on the eligibility of the bond. After that, if the family decides to contribute to the education savings plan, it might qualify for the federal contribution based on the education savings grant plan.
[English]
Senator Cordy: As a former teacher, anytime somebody provides an incentive to make higher education more accessible, in my opinion it should be commended. I just have a few short questions. First, if a family receives a Canada Learning Bond for their child of $500, the one-time $500, and the family's circumstances change, does this $500 still remain in the account for the child?
Mr. Volpe: Yes.
Senator Cordy: Is the $100 yearly automatic or is it based on the family filing income tax forms? How does this work?
Mr. Volpe: There is always the income test. The income test is related, as Ms. Thivierge said, not to the amount of money you make but to the extent to which you maintain your attachment to the National Child Tax Benefit. As long as you are in receipt of that benefit, then you qualify for that $100.
Senator Cordy: It would just go into the account automatically?
Mr. Volpe: That is right. If I might, Senator Cordy, I wanted to underscore the fact that this is a program that attempts to target a particular group that has not taken advantage of the instruments currently available. However, in answer to Senator Hervieux-Payette's question, I think it is important to keep in mind that I also indicated that there are other adjustments to the Canada Education Savings Grant that actually allow people who move into a different income bracket to also profit by virtue of the fact that we have increased the amount of match rate.
Senator Cordy: It is a wonderful thing if they do move into a higher income bracket.
Mr. Volpe: Of course.
Senator Cordy: That is a positive thing. I am pleased to see the outreach and awareness program. As you mentioned, the target in this area is people who have not been able to access this type of program for their children. Often, people are not aware of the programs that are available because they do not have the communication networks that middle class families may have.
Do you have a plan in place? You talk about tying in with partnerships with community groups. Would that include programs in maternity hospitals — like in Halifax, for example, the Children's Hospital and the Grace Hospital — so that people are aware of this program right away?
Mr. Volpe: Those are probably excellent ideas. I do not want to diminish the competence of the officials around me, but I will let them off the hook in answering this one.
When this amendment came to us last week, everyone immediately frenetically went about their business looking at all the ways in which we could make this program much more public. For me to give you, or to ask them to give you, a picture of a specific program right now would be an incomplete response. Know that we are moving in that direction, and we are now obliged by that amendment and the law to do precisely that. Whereas we intended to do it because it was a good thing to do, now we have to be more methodical and systematic.
Senator Cordy: I think it is an excellent amendment. Very often, families or individuals in Canada are not aware of programs that are available to them.
If someone has not enrolled their child despite our best efforts, would it be retroactive? If the child were four years old, would they get their $500 and $100 for the three years?
Mr. Volpe: The only answer I can give is one in the affirmative, yes.
[Translation]
Senator Robichaud: Are you also looking at the extended family for the information and communication program? That extended family may contribute and help young families avail themselves of the benefits of this program. Is that the case?
[English]
Mr. Volpe: The idea is to capture all of those who can make a contribution. When, as Ms. Thivierge says, the extended family is involved, in some cases what will happen is that the primary caregiver can give consent to have that bond put, for example, into a grandparent's account. What we will now have to do is take a look at a strategy that engages all of those who might potentially be a part of this program.
From a personal perspective, grandparents like Senator Hervieux-Payette are most anxious to go ahead and make contributions, but I am not in that category yet. I am in the category of the willing. I have not made those kinds of contributions yet.
However, the idea is that we would want the parents to make that first step. The legislation is written such that the primary caregiver — the parent, mom and dad — has to make a definitive and deliberate decision to hand that off to somebody else.
Our strategy, as I understand it in its emerging form — I was going to say its embryonic stage, but I did not want to make too many allusions to this — would capture all of those who might eventually enhance that culture of contribution, setting aside, investment and long-term vision.
[Translation]
Senator Robichaud: When you talk about grants equivalent to 40 per cent of the first $500 amount, if the nuclear family can only contribute $100, are the contributions of the extended family subject to this grant equivalent to 40 per cent?
Mr. Volpe: There is the learning bond and also everything else in the legislation. You are always making contributions.
[English]
In English, you are making contributions into the RESP. If you move out of that category, or the contributor is outside of that category of below $35,000, you get the benefits that accrue to you under the other program. But if already, at the very beginning, you got that one-time, $500 bond, then you continue to profit from the $100 annually, provided you stay within that trigger mechanism. Anyone else in the larger family that wants to contribute, if they do not fall into that category, they fall into the rest of the categories where you are getting a match rate by the government and whatever accrues to you as a result of the match rate. We try not to leave anybody behind.
Senator Moore: Just to clarify, minister, I think someone else was alluding to this. A donation or a contribution to the learning bond account can only be made by a person whose family qualifies for the National Child Benefit supplement, or does that person contribute to the RESP?
Mr. Volpe: There is a contribution to the RESP. The Government of Canada continues to contribute the $100, but it only contributes that $100 as long as the family is in receipt of the Child Tax Benefit. That does not mean that the account, once it is set up — remember it is an RESP account and it is the Government of Canada's $500 bond that really kickstarts it — so that there is an asset that builds. The equity builds up. Someone else can contribute to it, but whatever benefit accrues to the contributor accrues to the contributor on the basis of his or her financial position. The account itself continues to build up the asset value, and the interest accrues to that account.
For simple minds like mine, it is once the $100 is in and the Canadian government continues to put in that $100, everyone else is encouraged to amass it.
Ms. Lenore Burton, Director General, Learning and Literacy, Human Resources and Skills Development: The minister did not make any errors, but to clarify, because we are income testing, it is the income of the primary caregiver that matters, and in most cases that is the mother. If a grandparent wants to put in a contribution and the mother consents, we can test her income and it is her income that will determine the grant in the grandparent's account at the end, yes. Therefore, it is possible that a grandparent could have an RESP for a grandson, and if his mother is in the lower income bracket, that contribution will attract the higher grant.
Senator Robichaud: That was my question. Thank you.
Senator Forrestall: I will be brief. I wonder about programs like this, as I have for several years now. Is there any demonstration you can leave with us that programs such as this one, particularly, are on the surface very attractive? How do you demonstrate to me that it does not encourage non-marriage or separation, in fact if you are married, in order to qualify with respect to the family income?
The Deputy Chairman: There is a challenge, Mr. Minister.
Mr. Volpe: It is an interesting question, senator. If the policy-makers do not really envisage that there would be that kind of an action for the purposes of gaining a $500 bond to kickstart a project, I can see that the attraction might be much more significant if we were talking about a much more significant amount, but our policy-makers came forward.
Senator Forrestall: No such thing as a little bit of sin.
Mr. Volpe: You are right, and we are not in the business of encouraging them even a little bit. However, if the $500 is there, we are trying to get people to become engaged. We are trying to attract people who have not been engaged in that exercise in the past. You still need to be in that income bracket in order to take advantage of it. Those who have gone beyond that, those who are in the $35,000 and up bracket, remember that the RESP program provides them with a different benefit that proves a disincentive to the scenario you just suggest. Ms. Thivierge may provide the senator with greater assurance.
Ms. Thivierge: Senator, you were speaking of separation and divorce. The only thing I would add is how would all of this play out? As Ms. Burton indicated earlier, this is an income based program. It is very much ruled by the Income Tax Act, and I do not pretend to be an expert in that area. Our colleagues from the Department of Finance could probably shed light on that, but there are rules that govern the Income Tax Act and how incomes are to be addressed in the context of eligibility.
Mr. Volpe: Before we take that exercise too far, perhaps we can ask Mr. Beaulieu, who is a lawyer, how much would it cost to initiate the paperwork to get into a separation agreement or divorce, and whether that amount will exceed the $500 grant?
Senator Forrestall: One good fight.
The Deputy Chairman: I do not think we need to go there. Senator, are you comfortable with that?
Senator Forrestall: That was all.
Mr. Volpe: I want to give you a sense of the thinking from a financial perspective.
The Deputy Chairman: We are running up against our rules of time slot, but I would like Senator Tkachuk to have a chance here, and it will be the final question.
Senator Tkachuk: I have a few questions. I am not well acquainted with the RESP, and the bill was introduced in the Senate and was spoken to today, so we are caught in a bit of a rush here. I am trying to acquaint myself with the bill while the minister is here, at the same time. Take me through this thing.
I understand the questions that the other senators were asking in regard to other people contributing, but you do not care about how the money gets there, as long as the person meets the income requirements. Whether a grandparent or uncle gives, it does not matter to the tax department because it is after-tax paid money. That is a wash, so that does not matter.
Let us say that I make $24,000 a year. I open an account at a bank or whatever. Do you send the cheque? What is that $500? Where does that come from and how does it arrive at that account?
Mr. Volpe: You squeeze it out of the Minister of Finance, literally.
Senator Tkachuk: It could go through a lot of ways, from CPP to UIC to income tax to squeeze it out of the minister, but let us just deal with this one.
Mr. Volpe: You take the birth certificate of your child. Get a SIN for the child, then go to the bank and set up the account. The banker does the paperwork and sends it over to the Government of Canada. The Government of Canada issues forth a cheque in that account so, now that the account is established with that $500 Canada Learning Bond, the money is established and it stays there.
Senator Tkachuk: When the person files their income tax return the following year, how is the matching amount of money distributed to that account? Is that a tax credit?
Mr. Volpe: Assuming you file your income tax return, and the Government of Canada determines that you are still a family and in receipt of the tax benefit, what happens next is that they say, “Send them another $100.”
Senator Tkachuk: It is a lot of work for $100. That is a lot of administration for $100. How much does it cost do give that $100 to that person?
Mr. Volpe: It costs very little. The money is wired into the account. It is not that we issue a cheque, which costs $60 now. We do not do that. Okay, there it is. Bang, let us put the money in. It is all done electronically. The banks have assured us that the $25 up-front amount will be enough. They will not ask for any more money to administer that account. If the extended family wants to make contributions into that account to amass the equity, they are judged by their income position and what accrued to them would be the benefits that accrue to someone who makes a contribution into an RESP. This too is an RESP, but it is kickstarted by the Canada Learning Bond.
Senator Tkachuk: You have a figure that 26 per cent of families earning $25,000 or less are saving for their children's education. That was according to the mover, Senator Moore today, in the chamber, but only one third of those were taking advantage of the RESP program. How do you know that those 26 per cent were saving for their children's education?
Ms. Burton: We did a survey of approaches to education plans with the knowledge of people's income levels. We asked them if they were saving for post-secondary education, and 26 per cent in the lower income category said yes. We asked if they were saving in an RESP, and 8 per cent had opened RESPs.
Senator Tkachuk: If a comsumer went to a bank to open a savings account, would the banker advise that consumer about the RESP program and the cash given by government? Bankers obviously did not advise two-thirds of them.
Ms. Burton: Perhaps they have saved in a place other than a financial institution.
Senator Tkachuk: Senator Moore also said that a family contributing $10 per month to a child's RESP could see it grow to $7,000 in 18 years. How is that number arrived at?
Mr. Volpe: An amount of $10 per month is $120 per year over 15 years which equals $1,800 plus the $500.
Senator Moore: It is $500 plus $100?
Mr. Volpe: Yes, it is $100 also. That comes to $2,400 plus accrued interest, which would come out to about $7,000 over the 18 years. It would easily double.
Senator Tkachuk: It would not double at the percentage rates we have now. I did not put this number of $7,000 down; I am asking how it was arrived at.
Mr. Volpe: I do not want to be argumentative.
Senator Tkachuk: You are, though.
Mr. Volpe: You are making contributions over 15 years, starting with $500, adding $100 per year, assuming you are adding another $2,000. When you factor in the compound interest, even at today's rates, you will, over a 15-year period, come up to $7,000 and change.
Senator Tkachuk: That is your math, not mine.
The Deputy Chairman: I said Senator Tkachuk would be the last questioner, but Senator Plamondon has a question and has promised to be brief.
[Translation]
Senator Plamondon: I would like to know what happens with the amounts that are invested if the child does not go on to a post-secondary education.
Mr. Volpe: That would be too bad. In that case, the funds belonging to the government would be given back to the government but all the interest accumulated goes to the family, in other words the taxpayers.
[English]
The Deputy Chairman: Minister and officials from the department, as Senator Tkachuk pointed out, we are bending over backwards to help this bill in the spirit of its intent. It is pretty evident that it is a wonderful proposition. I want you to know that tomorrow we have seven witnesses appearing before the committee. At least half of them have indicated quite strong opposition to the bill. In preparation, and to help us to do the job properly, I have one concluding question. It was posed in the Senate this afternoon at second reading and I quote Senator Kinsella:
...the bill was born of best intentions, and I commend the government for beginning to address a problem that has been increasing exponentially in this last decade or so....
Bill C-5 was drafted in an attempt to offer assistance to those Canadians for whom a post-secondary education is becoming less and less affordable. In my opinion, it falls short of the mark. The government is saying that it wants to achieve one thing but it is not implementing means that are specific enough to achieve that end.
If that comes to us in the form of a question, as I suspect it will tomorrow, what is your answer? Earlier you said that we are trying to engender a culture of saving amongst lower income families, especially for these laudable ends. Is that it? We may be starting dei minima but there is a huge surplus in government. This might be a wonderful opportunity to make the bond $1,000 and the annual payments $200.
Mr. Volpe: I appreciate the opportunity to answer the questions that might come forward because I will not be there to address them. Some of these questions have been raised by at least one party in the House of Commons and, of course, the debates that occurred at second reading, at report stage and at third reading. I want to reinforce what you finished off with: The intent of this legislation is to create a climate of investment in the future of one's children. One needs to judge this legislation not on a basis of what it buys today but on what we intend to accomplish for tomorrow. If it involves people beginning to think of availing themselves of the instruments by which they can create wealth for a particular purpose — education — then that is how this has to be judged.
We can always say $500 is too much or too little. We could have said that, but we said $500. Could I improve it by referring to whether there is a surplus? I could probably make an argument that there are other partners in this venture that we are encouraging, such as Alberta, who have said that they want to be a partner. They are offering more money than the Government of Canada. The Government of Canada has no intention of being the sole source for everything, but it does want to be a partner that shows what it is willing to put up and ask other governments if they will put up an equal contribution. Some people would say that the state of education is such today that this might not buy us many years of education. I have a list of all universities across Canada, their tuition fees and room and board rates, to determine how much $7,000 might buy. It buys from two years to one full year.
The Deputy Chairman: In today's figures; not 15 years from now when, we are told, it will cost $87,000.
Mr. Volpe: I can remember when I paid $400 for tuition, which was a princely sum in those days. When I look at how much it costs me to send my children to university, I realize that it cost my dad a mere fraction of his salary for me to go to school. I am not as taken by the issues of relevant projections of costs for universities. We do have a series of programs, legislative interventions and projects that address the issue of cost today. Presumably those items will also be in place 15 years from now or some similar programs.
The government, over the last couple of months, has signed agreements with the provinces that have resulted in health agreements plus equalization agreements. Both of those have led to the transfer, over a 10-year period, of some $73 billion. Presumably the provinces will have access to an additional $7 billion per year for health and education issues. They will be able to partner up much better than they have been able to do in the past.
We should not get into a discussion today about whether some people are right or wrong. I do not want this bill to be a cause for finger-pointing, because it is entirely too easy to engage in that from a partisan perspective. I thought that all parties save one in the House decided that they wanted to capture the opportunity to make an investment in a culture change for the future; and that is what this bill represents. All the rest are valid observations but are for a different program, for a different project and for a different initiatives of governments. This one is an initiative of the Government of Canada for the future, and that is the way it should be seen.
The Deputy Chairman: Minister, thank you. That was a very good presentation by all. I am hopeful that tomorrow will go smoothly now that you have laid such fine groundwork.
The committee adjourned.