Proceedings of the Standing Senate Committee on
National Finance
Issue 10 - Evidence - Meeting of February 13, 2007
OTTAWA, Tuesday, February 13, 2007
The Standing Senate Committee on National Finance, to which was referred Bill C-28, to implement certain provisions of the budget tabled in Parliament on May 2, 2006, met this day at 9:34 a.m. to give consideration to the bill.
Senator Joseph A. Day (Chairman) in the chair.
[English]
The Chairman: Welcome, everyone. Welcome, minister.
[Translation]
I call to order the 27th meeting of the Standing Senate Committee on National Finance. My name is Joseph Day. I represent the province of New Brunswick in the Senate, and I chair this committee.
[English]
A field of interest is government spending, either directly through the estimates or indirectly through bills that provide borrowing authority or bear upon the spending proposals identified in the estimates.
Today we begin consideration of Bill C-28, the government's second bill implementing certain provisions of the budget tabled in Parliament on May 2, 2006.
Last year, this committee examined and reported on the government's first bill dealing with the budget, Bill C-13.
Appearing before our committee this morning is the Minister of Finance, the Honourable James M. Flaherty. He is a first-time member of Parliament and was elected to the House of Commons in 2006 for the riding of Whitby-Oshawa. As a member of the Ontario legislature under Premier Harris, he served as the deputy premier and Minister of Finance as well as holding a number of other portfolios.
Mr. Flaherty is a graduate from Princeton University and has a law degree from Osgoode Hall Law School. He was called to the bar in the Province of Ontario in 1975 and practiced law for more than 20 years before entering politics.
The Honourable James M. Flaherty, P.C., M.P., Minister of Finance: I will touch upon the primary items in the budget implementation bill, the second bill arising out of the budget of May 2, 2006.
[Translation]
Thank you, honourable senators. I appreciate this opportunity to appear before your committee to discuss Bill C- 28. This bill proposes certain tax relief measures that Canada's new government announced in Budget 2006, but which were not included in the initial budget implementation bill that received royal assent last year.
[English]
As I have said on many occasions, Canadians pay too much tax. That is why within the first 100 days of taking office we moved swiftly in Budget 2006 to lower taxes. We proposed numerous personal and business tax reductions in order to reduce the tax burden on Canadian families and students, workers and seniors.
Tax relief for individuals alone amounts to almost $20 billion over two years. I say this to those who say there were not substantial tax reductions in Budget 2006. They should read the budget; there was $20 billion in tax reduction. That is more than the four previous federal budgets combined. There were also corporate tax measures introduced to help businesses grow and succeed.
Last fall we introduced our economic plan document called Advantage Canada, which shows that we want to create a real tax advantage for Canada. A key element of our economic plan is to provide a tax-back guarantee to Canadians by dedicating all interest savings from reducing the federal debt to personal income tax reductions.
Last week, in Ottawa, the Prime Minister announced that we plan to legislate our tax-back guarantee, ensuring that it becomes a benefit Canadians can count on long into the future.
This measure is straightforward. Lower debt means lower interest payments for the government and that will mean lower taxes for hard working Canadians, and that starts now. These tax savings are substantial. We made a payment of $13.2 billion against the debt in the last fiscal year. Personal taxes will be reduced by almost $700 million starting in 2007, and with future debt reduction, tax savings will rise to $1.4 billion by 2011.
[Translation]
This tax back guarantee will give Canadians a direct stake and a direct benefit in how this government manages Canada's finances on behalf of Canadians.
[English]
We have also taken action not just to reduce taxes but to improve tax fairness. This is a fundamental concern of mine. That is why I announced the tax fairness plan last October. It will restore balance and fairness to the federal tax system by creating a level playing field between income trusts and corporations. This plan also builds on the tax reductions I announced in Budget 2006. It proposes significant positive measures to provide financial assistance to Canadian seniors and pensioners.
The bill we are discussing today is an integral part of this government's plan to make a difference in the lives of Canadians. This bill provides tax relief for individuals and for small business and provides incentives to encourage employers to hire apprentices. It gives Canadians a tax break on work-related expenses. It helps families who are encouraging their children to be physically active and fit.
I will touch on some of the measures in Bill C-28.
[Translation]
One of the measures in this bill, the Canada Employment Credit, recognizes the incredible contributions made to this country by working Canadians. Those hard-working Canadians often incur expenses that are not covered by the employer, expenses such as uniforms, home computers, or stationery supplies.
[English]
Starting last July 1, the credit will allow every working Canadian to claim an annualized credit on employment income in 2006. As of January 2007, the annual amount of income eligible for the credit will be $1,000. That is the Canada employment credit.
Working in tandem with that credit is the new deduction for tool expenses. This measure provides for a deduction of up to $500 to tradespeople for the cost of tools in excess of $1,000 that they must acquire as a condition of employment. This new tools deduction, when combined with the Canada employment credit, will provide tax relief to about 700,000 Canadians employed in the trades.
Honourable senators, recent growth across Canada, particularly in urban areas in provinces like Alberta, has led to a shortage of skilled workers. This bill contains measures that help respond to this situation by proposing the new apprenticeship job creation tax credit. As a result of this proposed measure, eligible employers will be able to receive, to a maximum of $2,000 per apprentice per year, a tax credit equal to 10 per cent of the wages they pay to qualifying apprentices in the first two years of their contract. This new credit will encourage employers to hire new apprentices, so that they can learn a trade and help make Canada's economy even stronger.
This bill also contains a measure that will encourage Canadians to leave the car at home and use public transit. It will provide tax benefits to the 2 million Canadians who make a sustained commitment to use this environmentally friendly mode of transportation.
For example, an individual who purchases passes costing $80 per month throughout the year will receive up to $150 in federal tax relief for the year. That means about two months free commuting on public transit each year. The total savings for Canadian transit users is expected to be $370 million for this fiscal year and next. Increasing public transit use will help reduce traffic congestion in our urban areas and improve the environment.
This bill also includes a new, non-refundable tax credit to help cover the cost of textbooks for students. This measure is another way we are providing our future leaders with financial assistance. The bill also proposes a measure to provide tax relief on scholarship, fellowship and bursary income.
We are seeking excellence in Canada and are encouraging our students to excel. Before this budget, we were taxing bursaries and scholarships. We will not do that anymore, assuming that this bill passes. Currently, only the first $3,000 is exempt. Once passed, this proposed legislation will fully exempt from tax that income received by a qualifying post- secondary student. This measure will provide tax relief to more than 100,000 post-secondary students.
Helping students with their education is a key component in securing Canada's place in the world. So, too, is helping to look after the health of our young people; that is why this bill contains a measure that will assist parents in starting their children down the road to what we hope is a lifetime of healthy, active living.
The children's fitness tax credit will help make it possible for more young Canadians up to the age of 16 to be involved in sport and physical activity while giving parents a financial hand. In addition, substantial additional support will be provided to children eligible for the disability tax credit to recognize the unique barriers children with disabilities face in becoming more active. For these children, the credit will apply up to the age of 18.
[Translation]
Honourable senators, this government has not forgotten the Canadians who have helped build this country, our seniors. This bill contains a measure that will provide greater tax assistance to those who have saved carefully for their retirement.
[English]
It proposes to double the maximum amount of eligible pension income that can be claimed under the pension income credit, from $2,000 to $4,000. Senators, this is the first time the credit for seniors has been increased in more than 30 years in Canada. This action will remove approximately 85,000 pensioners completely from the tax rolls in Canada, which is significant.
The tax fairness plan I mentioned earlier also contains a major positive change in tax policy for pensioners and seniors. The government will permit pension income splitting — that is, joint filing — beginning in 2007. That is something that has been sought for more than 40 years here in Ottawa and resisted for more than 40 years. We are now going forward with that for seniors and pensioners.
This measure, to be introduced in upcoming legislation, will enhance the incentives to save and invest for family retirement security. This is another significant step forward in the strengthening of our social security system for pensioners and seniors.
For Canadian businesses, you will recall that the budget bill that received Royal Assent last year introduced a number of tax reduction measures. Bill C-28 provides further tax relief for small businesses beyond what the budget bill provided.
The proposals in this bill will increase the small business income threshold to $400,000 from $300,000, effective January 2007, and will reduce the small business income tax rate to 11 per cent from 12 per cent by 2009. Under the tax fairness plan, a further one-half percentage point in the general corporate income tax rate will come into effect starting January 1, 2011.
[Translation]
In summing up, honourable senators, the measures in this bill will make Canada a better place for today and into the future.
[English]
Let me re-emphasize that Canadians still pay too much tax, in our view, and Canada's new government will continue to look for ways to reduce the tax burden as we develop Budget 2007. I can assure you we are fully engaged in that process now and have been for some time.
I now invite questions, Mr. Chairman, which I will try to answer as best I can.
Senator Mitchell: Thank you, minister, for attending. It is always very interesting for us. I have two areas of questions I would like to address in the first round, and a third if there is more time.
The first is the relationship between the environment and the economy and the economic potential of doing the environment properly. The second question is the productivity implications of this budget.
I was struck by a comment made by Minister Baird last week, when he said that were we to pursue greenhouse gas emissions and other environmental implications of Kyoto, our economy would collapse like Russia's. It underlined the point that is being missed, which is that there is a huge economic opportunity in doing environmental programs properly.
The analogy that is beginning to emerge more and more is the Second World War. That was a huge effort on the part of Canadians. Had people, at the outset, really imagined what it would require, they would never have thought they could do it. However, we did it, and, in fact, it did not destroy the economy. For all the wrong reasons, unfortunately, it actually stimulated our economy dramatically. It would be encouraging to see a government that embraces the environmental challenges facing us in the same context.
With that in mind, I will ask you several questions, which I will bundle together. First, have you considered tax incentives for CO2 capture and storage — for example, for electrical power generation, coal-fired plants and the other large emitters?
Second, many Albertans, and probably Canadians as well, are interested in knowing what the government's intentions are for the accelerated capital cost allowance for oil sands development. Some think it is essential that it continue and others think it is essential that it not continue.
Third, much of your environmental initiative embodied in this budget comes down to transit. The former environment minister indicated that already this transit pass initiative has taken 56,000 cars or the equivalent off the road.
I am struck by the emphasis that is placed on reducing the cost of transit to get people to stop driving cars. People have enough money to drive cars, so they have enough money to take the bus. Reducing the bus fare would not be much incentive. Would it not be more productive to apply that money to a strategy of enhancing public transit access and efficiency rather than to take this piecemeal approach?
Could you address those three points: tax incentives for CO2 capture and other environmental initiatives, the accelerated capital cost allowance, and how you get the equivalent of 56,000 cars off the road with the bus pass initiative.
Mr. Flaherty: I will try to be as succinct as I can be in my reply, Senator Mitchell. In response to your first question, we are preparing a budget and are in consultation with many people, including today when I will meet with municipal leaders and others. A number of environmental initiatives and possible incentives are on the table for consideration. I am sure you do not expect me to offer today my personal views with respect to one over the other; and I will not do so. In response to your second question about ACCA in the oil sands and in the Canadian manufacturing sector, the Standing Finance Committee in the House of Commons heard strong representations during its pre-budget consultations. These items are being considered.
In terms of transit use, the pass system is significant. In my community of Whitby-Oshawa, where we have GO Transit, the transit pass has been a most welcome initiative. GO Transit in Southern Ontario and in the GTA, the Greater Toronto Area, is overburdened by tremendous usage, which has grown since the advent of the transit pass. I agree with you, senator, that we need better public transit and we need to encourage people to use it. I have witnessed the requisite change in mindset to accomplish that over the last twenty years in my community where more and more people are availing themselves of GO Transit trains and buses to commute daily in the GTA, which is a major commuting region in Canada. Any additional steps that we can take, like the one taken in the last budget to let people know that there is a financial benefit to them when they use public transit, will be good.
Already we have capacity problems, so we need to expand public transit opportunities. For example, the Canada Line Rapid Transit Project in Vancouver is under construction toward the airport in Richmond. That is a major improvement. Other announcements have been made and I look forward to more such cooperative announcements between the provinces and the Government of Canada with respect to public transit.
Senator Mitchell: My second area of questions is productivity. There is a great deal of concern that the GST reduction, which was the flagship tax reduction of this government, does not contribute to productivity at all but does quite the contrary. I would like to question several other initiatives in that context.
First, income splitting likely will not contribute either to economic productivity. Apparently, the government is continuing with the seniors' retirement income splitting. Is it simply the doubling from $2,000 to $4,000 or will seniors be able to split incomes 50/50?
Second, the government has not ruled out completely the possibility of income splitting for people other than retirees. Is that still on the table? I want to confirm that you have not ruled it out entirely. It is a question of whether it would contribute to productivity.
Third, the tax back initiative — reducing income taxes in accordance with reduction in interest payments — could enhance productivity. What would happen should those interest payments increase because the interest rates have risen? The government would not tax back people's tax-back, I would assume.
Fourth, the government promised the capital gains tax reduction during the last election. I will explain how I believe that works. If you booked a capital gain and reinvested that money within six months, as complicated as that would be for accountants and individuals to track and administer properly, it would reduce capital gains tax payable. Is the government still considering that? Would it not be easier to do an across-the-board reduction in capital gains tax rather than involve all of the red tape, paperwork and calculation?
Mr. Flaherty: I agree with you wholeheartedly on the need for government to be as simple as it can be in respect of our tax system, which, as you know, is anything but that these days. Perhaps a topic for another day could be what government could do to simplify the Canadian tax system to make it more user-friendly.
I will address first the issue of income splitting. In effect, couples are permitted to file a joint income tax return. This is done in the United States and in other countries. It is rather common throughout the world and will be in Canada as well, assuming the tax fairness plan becomes law so that seniors and pensioners will be able to jointly file their income tax returns. Under such a system, eligible couples will be able to split income to a maximum of 50 per cent per person. In particular, it will be important for a generation of Canadian couples where it was not common for both partners to work outside the home. I am sure the senator is as familiar with that as I am in my family. It is different today because in well over 70 per cent of Canadian families, both partners work outside the home, at least on a part-time basis. The change is in recognition of developing a fairness in the tax system by permitting joint filing of tax returns.
Are we considering extending it? The item is on the table for Budget 2007, but it is very expensive. The justification for seniors and pensioners is to create income security by encouraging people to save for retirement. That is a compelling justification in the view of the government. As well, we are looking at other tax policy items on the table. As I mentioned, the income splitting tax policy will be expensive and government has to be balanced in what it does and what it can afford.
Similarly, with respect to the capital gains issue, I have heard many suggestions from various sources on how that could be structured. I accept your suggestion, senator, that government needs to look at the possibility of an overall reduction in the capital gains tax rate rather than looking only at a tax policy that might be as complicated as six months in retrievals, et cetera. I appreciate your comment. That item and others are being reviewed in terms of tax policy options for Budget 2007.
Senator Mitchell: Might the government not fulfill that promise?
Mr. Flaherty: Over time, the government intends to keep the commitment, but it was not time limited. People understand that the government has to be prudent and cannot do everything at once.
The Chairman: Could we have clarification, Mr. Flaherty, on the expense for income splitting? Do you have an estimate of that cost?
Mr. Flaherty: There are various estimates, but if we were to implement income splitting across the board, it would be in the area of $4 billion.
The Chairman: Is that exclusive of income splitting for seniors?
Mr. Flaherty: Yes. It might be greater, but not be less, than that amount.
The Chairman: Government will move ahead with income splitting for seniors and pensioners.
Mr. Flaherty: Yes, the tax policy will apply to both.
An Hon. Senator: Will it include RRSP amounts or pension amounts only?
Mr. Flaherty: It will include all income of retirees, who are entitled to the income credit. They will be eligible, and the government made that clear in the announcement on October 31, 2006.
I have the expense figure from one of my officials. It will cost $700 million for joint filing for pensioners and seniors, which the government announced, and a minimum of $4 billion in addition for full joint filing income splitting in Canada, to a maximum of 50/50.
Senator Mitchell: Is it on RRSPs and pension amounts and all income?
Mr. Flaherty: For seniors and pensioners? No, they have to be entitled to the pension tax credit.
Senator Mitchell: Which is just on pensions?
Mr. Flaherty: No, no. I want to get it correct for you.
Senator Mitchell: Yes, I would like to get it correct too because that is critical.
Mr. Flaherty: It is RRSPs if you are over 65 and then other pension income.
Senator Ringuette: I quote from page 3 of your presentation: ``We have also taken action not just to reduce taxes but to improve tax fairness.'' On the fairness issue, I have two questions.
The first question is how is the $80 per month public transit tax credit fair? Workers in Toronto or in other major communities that have public transit are allowed this credit, which comes to roughly over $900 a year; they benefit from having access to public transit, plus they have a federal tax credit to go to work. The other side of this coin is that people who live in communities that do not have access to public transportation have to invest in the capital and operational costs of a vehicle and have to buy vehicle insurance, which in some regions of the country, especially Atlantic Canada, is phenomenally expensive. Just like Canadians in Toronto, they need transportation to go to work and for them, supplying it themselves is the only option. Those workers bear a much bigger cost than urban Canadians using public transit, which is already in good part paid for by the federal and provincial governments. Why is it not possible for workers using their own vehicles to have the same tax credit as those living in downtown Toronto, Montreal or Vancouver? This is absolutely not tax fairness.
Mr. Flaherty: Thank you, senator. The purpose of the public transit tax credit is to encourage the use of public transit and to help our environment by taking more cars off the road when people are commuting. Transportation is the largest contributor to that type of pollution. Yes, the credit applies to more urbanized areas of Canada, because that is where we have those challenges and that is where we have public transit. Canada is an increasingly urbanized country. We are one of the most urbanized countries in the world.
There are other tax advantages to persons who live in less urbanized or non-urbanized areas of Canada. The federal government invests in highways, waterworks, sewage projects and transfers to municipalities, which arguably disproportionately benefits lower-population areas, particularly the national highway systems. There are also deductions available for people who use their vehicles for business purposes necessary for employment.
We have a national goal here. We have major pollution challenges in Canada — CO2 emissions and also air pollution. We need to act together to encourage people to use public transit and to enhance public transit availability and convenience. We know that if you increase availability and convenience then more people will use public transit. Ottawa is a pretty good example of that.
Senator Ringuette: The additional funding for convenience and so forth is already in process. But you are not addressing the unfairness of this tax credit for workers who have no other option than to use their own vehicle to go to work. I truly believe that this is unfair, that all workers having to go to work outside their household should have access to this credit. I guess we agree to disagree. I certainly see this item as not being fair to the workers in Canada who do not have access to public transit.
My second question in regards to fairness is about your apprenticeship job creation tax credit of $2,000 for employers. There is no doubt, all the data show that in regards to apprenticeship, the problem is not for employers to hire them, the problem is that Canadians do not go into apprenticeship programs at the rate that employers need them. Therefore, this credit that is directed to employers really does not address the current apprenticeship problem we have. The current apprenticeship problem is to get young Canadian workers to go into apprenticeship programs, because employers out there are seeking apprentice trades people.
In regards to your statement about improving tax fairness, if you want to look at the apprenticeship program, this $2,000-a-year tax credit should not be for the employer but should be for the employee in an apprenticeship program, if you really want to attack the problem where it is.
Mr. Flaherty: I appreciate that. We do have the tools tax credit encouraging people to get involved in the skilled trades. I think the challenge you are describing, senator, is a much broader challenge. We have a shortage of labour in Canada.
Senator Ringuette: Yes.
Mr. Flaherty: As you know, we have demographic shifts in Canada where people are going to work and so on. We heard from small- and medium-sized businesses that an apprenticeship tax credit would help them hire apprentices. That is why the apprenticeship job creation tax credit is there. We will have to see how well it works. I would like to think that small- and medium-sized employers know their communities and their businesses well. I am optimistic that this tax credit will help create more apprentice jobs.
In my own community, the Durham College Skills Training Centre at Highway 401 and Thickson Road now has to have portables outside of the building in order to accommodate the number of young people who want to learn the technologies and skilled trades that they can learn there. At least in my part of Canada, there has been recognition by families and young people that you can make a good living from the skilled trades. They can do quite well and be able to support their families and have a good quality of life.
Senator Ringuette: I reiterate, and you can look at the data, that I am quite surprised this credit does not recognize the real problem, which is a lack of apprenticeship workers. It is not a lack of employers hiring them.
With regards to fairness in addressing this issue, the apprenticeship job creation tax credit should have gone towards young Canadians wanting to enter into an apprenticeship program to satisfy the thousands of jobs available and not towards the employers. If you go to the website jobs.ca, you will see there are thousands of employers out there looking for apprentices, but apprentice people are scarce.
The Chairman: Mr. Minister, do you want to comment further on that?
Mr. Flaherty: No. The big picture here is that we presently have the highest rate of employment participation in the history of Canada along with the lowest rate of unemployment in 30 years. We have challenges in terms of having enough people to keep the economy growing.
I appreciate Senator Ringuette's comments on the issue of travelling to and from work. As you know, under the Income Tax Act work travel is not deductible as an expense. Some suggestions have been made with respect to our current work on Budget 2007 about people who must travel between different workplaces during the course of a day — for example, people who work in the construction trades. Should they be treated more generously by the tax system? That is something we are reviewing.
Senator Stratton: You mentioned incentives for young people going into apprenticeship programs and about the shortage of labour. That is universal virtually across the country. In my home province of Manitoba, we cannot get workers. They are not available. It is not necessarily because they are moving elsewhere, such as to Alberta. That becomes a problem for all parts of Canada outside of Alberta.
The fundamental issue is that we simply do not have enough young people and we do not have enough workers to fill the voids that are growing. It becomes an immigration problem and a problem of how to plan for the future, particularly with the retirements of the baby boomers coming up. That will make the problem worse.
Are you looking at the potential of encouraging older workers to continue in the workforce? I think that becomes part of the question that needs to be answered. There is a gap that is becoming of crisis proportions insofar as the workforce is concerned. It will stall growth in the economy if we are not careful.
That is a loaded question, but I would like to hear what you have to say about that.
Mr. Flaherty: In response to your specific question, Senator Stratton, the answer is yes, we are looking at measures that will encourage people to continue in the workforce if they wish to.
In terms of immigration, which is another issue, we have increased the numbers. We are increasingly looking at — the proper words are always difficult in this area — economic immigrants, in the sense of people who can match the jobs available in Canada.
I compliment the governments of British Columbia and Alberta for the labour mobility agreement they have entered into, which other provinces are looking at closely and which the Government of Canada has applauded.
We are trying to match, through a foreign credentials agency, people who want to come to Canada with admission through professional or technological regulatory bodies. For example, if a person is intending to go to Manitoba and they are an engineering technologist, they know that when they get off the plane in Winnipeg they are qualified to work in their particular occupation there.
That is easier said than done, of course, because it must be worked out between the federal government and the provinces. We are working on it, and we have been since being elected. It is important to be ale to match skills.
The Chairman: We must be mindful that the minister is an extremely busy person at this time, leading up to another budget, and we are dealing with the previous budget. We have four senators left on the list, and we have approximately 15 more minutes of the minister's time. Officials from the Department of Finance will appear before us when the minister leaves, so please keep your questions to the macro level with the minister. We will save more precise, departmental type questions for the officials.
Senator Murray: I cannot forebear to comment in response to Senator Ringuette that, if I were in her position, I would be careful about commenting against targeted spending. The region where I was born and which she represents has been the beneficiary of targeted spending, including tax expenditures, for many generations. Therefore, I want to talk about fairness to Ontario.
I want to talk to you about the 2005 agreement signed by your predecessors with the Ontario government, which has been a point of contention for some time between the new federal government and the Ontario government.
I visited the Ontario government's website yesterday. They were slightly less acerbic about this than they had been, but there still seem to be unresolved issues. Of course, they point out that Mr. Harper before the election said that his government would fully fund the agreement through the 2009-10 and 2010-11 fiscal years.
The Ontario government website then states:
Unfortunately, at present, it is unclear whether the current federal government will honour all aspects of the agreement. . . . No money has yet flowed for immigration. No money has yet flowed for training. It is also unclear how the federal government intends to honour the remaining commitments such as post-secondary education.
Can you bring us up to date on this matter?
Mr. Flaherty: I am in a unique position. It has never happened in Canadian history that a finance minister in the Province of Ontario has become the Minister of Finance of Canada. It puts me in the unique position of actually understanding provincial finances, particularly the finances of the Province of Ontario, fairly well. I have engaging conversations with the current Minister of Finance of Ontario on that subject, particularly about the efforts that, in my view, need to be made by that province to balance its budget. It is entirely doable, as I did when I was the Minister of Finance in that province. Thankfully, all Canadian provinces are capable of accomplishing the same, and most have.
With respect to the Canada-Ontario Agreement, the Prime Minister committed that we would fully fund the agreement. The agreement is fully funded in the financial framework of Canada. The senator is correct that, looking at the Ontario website, there are some issues about the manner in which funding flows. I have had continuing discussions with the Minister of Finance for Ontario on that subject. The Prime Minister has had some discussions with the Premier of Ontario on that subject as well. Those discussions are ongoing, and I expect that we will get to a point where there is mutual recognition of satisfaction of that agreement.
Regarding the specific issue of post-secondary education, that of course is a major element of the transfer payments relating to restoring fiscal balance in Canada, which we have been discussing for almost a year and which will be addressed in Budget 2007.
Senator Murray: Is that agreement something other than what the Ontario government thinks it is, namely an agreement about intergovernmental transfers?
Mr. Flaherty: No. The difficulties with the agreement come in a few areas about what gets counted and what does not get counted and whether something is a national program or purely a Canada-Ontario program. As I said, those difficulties are resolvable. If Minister Sorbara were here now I think he would say so as well.
There is a commitment to fully honour the agreement and it is fully funded, so it is not a question of whether funds are available. It is a question of the manner in which funding flows.
Senator Murray: I am encouraged to hear you place the post-secondary education issue in the context of intergovernmental transfers rather than in terms of direct payments by Ottawa to individuals and institutions which are then counted as being part of the fiscal balance issue. Should I be encouraged by that, or did I misunderstand you?
Mr. Flaherty: Well no, again, that is part of the story. Part of the story, of course, is fiscal transfers to the other governments in Canada, but also the Government of Canada is the major governmental funder of research and innovation in this country.
Senator Murray: I appreciate that, minister. The fact is that the transfers to the provinces to support post-secondary education through universities and colleges and so forth have lagged very considerably behind the transfers to individuals and institutions — Ottawa sending out cheques with the maple leaf flag on them. This is a point of contention, as you know, which you are going to remedy in the next budget.
Mr. Flaherty: I take your point, senator.
Senator Eggleton: Minister, I have questions on two areas. The first is public transit. Actually, the question was asked by Senator Mitchell, so I will reframe it as a comment.
You have said today that Bill C-28 helps people to leave the car at home and encourages them to take public transit. Then, in the very next paragraph, you say that it is a benefit to the 2 million Canadians who make a commitment to using public transit. I agree with the second comment but not with the first.
Certainly in my city, which is also your city, the GTA, this will not in and of itself do very much to get people out of their cars and into public transit. There is no doubt it provides some benefit — a small benefit I would suggest — to those who are presently regular users of the system and who get the Metro pass, but the real issue for many cities, including ours, is the need to get people onto the public transit system. The system needs to be more comfortable, it needs to be maintained at a reasonable standard, which is a big issue in our city, and it needs to be expanded, which is the next level. I hope, minister, that this will not be considered to be the only way to get people out of their cars and into public transit, that something will be coming very soon that will actually help to do that by contributing to the infrastructure of transit systems in our cities.
Second, with respect to the textbook tax credit, student groups have indicated that it will not be of very much use to students. They say that their issue really is lower tuition fees and that the tax credit will not result in improved access to education. They say that in fact most students do not pay income tax, so they will not benefit from this credit.
There is also the question of why a distinction has been made between textbooks bought by full-time students versus those bought by part-time students. Should whether a student takes one or two courses in a year depend on the kind of tax credit they get? Students are saying that whether they are called part-time or full-time, a textbook is a textbook and the costs are all difficult to meet in every case.
Perhaps you could comment further on the textbook tax credit as well as the public transit credit.
Mr. Flaherty: On public transit, I take the regional view in the Greater Toronto Area, because as you know, senator, the population outside the 416 area code now equals the population within the 416 area code in the Greater Toronto Area. Therefore, a lot of the commuting pressures are outside of the City of Toronto. However, we need to support the Toronto Transit Commission, and we did. We supported the purchase of the new subway cars, which was a major investment by the Government of Canada. There have been ongoing discussions, I can assure you, about the transit systems in the regional municipalities surrounding the City of Toronto. I am hopeful that we will be able to move forward in that area quite quickly with the cooperation of the Government of Ontario.
There are some good plans in the regional municipalities surrounding the City of Toronto and some plans within Toronto itself. We need to encourage the use of public transit, make it more convenient and more available for people. I know it works. I have seen a tremendous change in my own community in the past 20 years in the number of people who now avail themselves of Go Transit because it is there and it is available and convenient. It makes a big difference for people. If that opportunity is given to people they will choose it.
On textbooks, some members in the House said to me after we introduced that credit that it is only $80 or whatever it is when they do the calculation. I wonder if they forget their time as students and how much $80 was. I do not. I worked my way through college and through law school and I remember. I remember driving a cab at night and making $80 and being pretty happy about being able to make that and have it help get me through school.
What I hear from students and families is that the cost of education is very demanding, particularly in families that have more than one young person in college or university. The cost of education is quite a challenge for families so every little bit helps.
I hear you, senator, about part-time and full-time students and about types of books, and we should and will review that.
Senator Nancy Ruth: These are questions about the next budget, minister. With respect to income splitting, you said that it is appropriate to do income splitting for women who had stayed at home. I am wondering whether in the next budget it would be possible to extend that to women who are staying at home because they have autistic children or other such considerations. That would be a great help to those families.
My second question is about child care. Is there a possibility of increasing the limit of the child care deduction that families now have? For instance, if they can deduct up to $10,000 in child care fees, could you raise the limit to $15,000 or something that would help families?
Mr. Flaherty: I will certainly take your suggestions for review, senator, and thank you for raising them. We have looked at the second item, of course, about increasing the child care deduction.
With respect to children with disabilities, I digress a bit, but in Budget 2006 I asked a panel of experts to look at whether we could create a registered disability savings plan similar to an RESP-type mechanism for families of children with disabilities. They have reported back, and the report is public. I hope to move forward on that in Budget 2007. It is always a concern for families with autistic children or other disabilities that we create a mechanism that permits them to save for the child's future after they are gone.
Regarding staying at home, that is another aspect we can look at.
Senator Di Nino: I have a question on an issue that has been talked about in the periphery but never directly: the economic benefit of tax reduction. An example would be the substantial benefit to seniors in doubling their pension income credit from $1,000 to $2,000 and, for a couple, from $2,000 to $4,000. I am not sure we can quantify this benefit, but has any formula been developed to evaluate the economic benefit to the economy in general of putting money back into the hands of Canadians so that they can spend it on goods and services and create more jobs? Is there a quantifiable formula?
Mr. Flaherty: Does anybody have a formula with them? I do not think we have a quantifiable formula, but we know that when we reduce the GST and other taxes and leave more money in taxpayers' pockets, they tend to spend and therefore generate more economic activity and jobs. The easiest correlation is with job creation in the economy. As you know, Canadian job creation has been strong. We have the lowest unemployment rate in 30 years, particularly in the services sector, despite the fact that there has been job loss in the manufacturing sector, which is true of all the Western industrialized economies with which I am familiar. We are moving to more of a service economy and less of a manufacturing economy, although we still have a strong manufacturing sector in Canada.
Thank you for raising the subject. I would like to clarify something. In my opening remarks I said that the pension credit amount would be doubled from $2,000 to $4,000 under this bill. In fact, it will be doubled from $1,000 to $2,000, but a couple could achieve doubling from $2,000 to $4,000 with income splitting.
The Chairman: There are many more questions we would have liked to asked you, Mr. Minister. We will ask the officials, and if they are not able to answer them we can send a note for a clarification of some points.
We appreciate your busy schedule at the best of times, and these are times when you are even busier, developing the budget for the coming fiscal year. We look forward to discussing that budget and the budget implementation bills in due course.
We have with us from the Tax Policy Branch Mr. Gerard Lalonde, Director, Tax Legislation Division; Ms. Alexandra MacLean, Personal Income Tax Division, Savings and Investment; and Mr. Carlos Achadinha, Chief, Sales Tax Division, Alcohol, Tobacco and Excise Legislation.
Do you have any introductory remarks, Mr. Lalonde?
Gerard Lalonde, Director, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: We left those to the minister and are ready to answer questions.
The Chairman: I have a list of senators who wanted to ask further questions of the minister. I will proceed with that list.
Senator Mitchell: I would like to follow up on the income splitting discussion from earlier. One concern that people have with income splitting is based on a cynical view of relationships to some extent, that women are often disadvantaged economically in relationships. They often work in the home for no pay, so that income splitting would at one level be seen to be a benefit directly to them. However, the argument is made that the tax advantage will go to the income earner and will not reach the partner who stays home, which is often the woman. It is likely that the government will proceed with this in spite of that issue.
Is it possible to consider that the tax saving be paid to the lower-income earner? Your famous child tax credit cheque goes to the person who stays home, again generally the woman. It would not be impossible for the financial benefit of the income splitting to be sent directly to the lower-income earning spouse. If this were to proceed, the fact that it does not help the often economically disadvantaged person in the relationship could in fact be addressed to some extent.
Second, I would like clarification on how seniors' income splitting and joint filing will occur. The minister alluded to the fact that it would apply to RRSP withdrawals after age 65. He seemed to imply that it would apply to all pension income, which can start before age 65, as can RRSP withdrawals for that matter. I am very interested in knowing the following. Is there an age limit? Is there just the fact of retirement? If one person is retired and is taking out RRSP withdrawals or pensions but they still have higher income than their spouse who is not retired but is earning less, how will that work?
Mr. Lalonde: First, it is important to understand that this particular bill does not contain any measures dealing with income splitting. The income splitting proposals for seniors were announced in the tax fairness package and that package has not been introduced in bill form.
Whether there might be other forms of income splitting announced in the next budget is something we cannot talk about today.
Senator Mitchell: I am asking about the hypothetical possibility. It would be possible to send a cheque equal to the tax savings to one spouse or the other.
Mr. Lalonde: If one were to introduce such an income splitting mechanism, it does get rapidly complicated, oddly enough. Take, for example, a spouse that has income from sources that were not subject to withholding. You have a high-income earning spouse and a low-income earning spouse and they decide to income split. In such a circumstance, it might be that there will be no tax refund at all. There would be less tax payable because the amount withheld from the higher earning spouse would be lowered. That is, less tax would be paid but not that much less to overcome the fact that he hasn't had any tax withheld at source. It becomes fairly problematic in broad-based statements about paying the tax benefit of this over to some other spouse because there may be no refund or the refund may be more or less than the actual tax savings as a result of the splitting.
Senator Mitchell: Can you give us some idea of the age of retirement pension splitting? Obviously, you are thinking about that.
Alexandra MacLean, Personal Income Tax Division, Savings and Investment, Tax Policy Branch, Department of Finance Canada: The tax fairness plan specifies that income eligible for pension income splitting will be income that qualifies for the existing pension income credit measure. Under the current rules, that includes all private pension income as well as payments from RRIFs for people over age 65 and RRSP annuity income for people over age 65. There is an age distinction, depending on the source of the income, and that is because pension income is difficult to manipulate. You are either working or retired in the context of pension income, so pension stream typically does represent retirement income regardless of age of recipient. For RRSP income, it is more malleable. People can choose to receive income from RRSPs at different ages.
Senator Mitchell: If you are receiving a pension at age 55 and you are retired, or you are taking out RRSP withdrawals at age 55 and you are retired, you will be treated differently.
Ms. MacLean: That is true.
Senator Mitchell: Someone getting a pension could potentially get a much greater benefit than someone who is limited to their RRSP for their retirement. When talking about tax fairness, that does not seem to be fair.
Ms. MacLean: We are aware of this issue.
Senator Mitchell: Thank you. I just want it to be fair.
Senator Murray: I will not pursue the 2005 agreement between the federal and Ontario governments unless there is some comment that you want to make further to what the minister said. I think I understood him correctly to say that the outstanding issues are on their way to being resolved. If not, we will hear from Minister Sorbara or Premier McGuinty. If you want to comment on that, fine; otherwise, I would like to return to a couple of items we raised with the minister when he was here on June 19.
Among other things, he spoke about the child care plan. The budget allocates $250 million per year, beginning in 2007, to create real child care spaces as part of Canada's Universal Child Care Plan. He went on to say that, ``We are working with governments, businesses, community organizations and non-profit organizations to develop a plan that works to create these spaces.''
Do you know, and if you do not, can you tell me whom I should ask, what the status of this issue is now? Where is the plan? How much progress is being made?
Mr. Lalonde: We are here for the most part to provide background information and whatever information we have on the contents of the bill.
Senator Murray: It is not a political question, Mr. Lalonde. I hope it is a factual question appropriate to put to officials. Do you happen to know what is going on?
Mr. Lalonde: I will eventually get to the answer. It will not be that long.
We are here to respond to what is in the bill. For the most part, therefore, we are tax policy people. That will explain why it is that my short answer to your question is no, I do not know.
Senator Murray: Let us move on, then. Also raised with the minister last time was the question of the harmonization of the provincial sales taxes with the GST. He told us that ``Some provinces are looking at that. Whether it will come to pass, I do not know. We will just have to see. It is a potential occurrence.''
Do you happen to know whether this issue is dead or alive as we speak?
Mr. Lalonde: The issue is certainly not dead. It is important to the government and it was mentioned, I believe, in the Advantage Canada document released in October. The state of play between various provinces and the federal government at this particular time is not something that I can comment on but it is important to the government. We do recognize the importance of that issue to the economy.
Senator Murray: Right. I do not suppose, for the reason that you enunciated earlier, there is much point in asking you about the Mackenzie Valley pipeline, is there?
Mr. Lalonde: No, senator.
Senator Murray: Or about resource revenue sharing between Ottawa and the Northwest Territories?
Mr. Lalonde: That would be another thing reminiscent of the Monty Python routine in the cheese shop. I am sorry; I cannot answer that question now. I do not know.
Senator Murray: You do not know. I will find somebody else on some other occasion.
The Chairman: The minister did indicate that, because he was under a very tight timeline, for any of the questions we were unable to ask him we could send a note along to him.
Senator Murray: As the witness has pointed out, those questions are not germane specifically to Bill C-28. I have no complaint about the answers.
The Chairman: Sometimes we stray a bit from the bill.
Senator Murray: I wanted to refer to things we discussed the last time he was here.
The Chairman: Perhaps together we could make up a list of any outstanding questions. I am sure you will let the minister know that you were not equipped to answer them. We understand your position. We asked you to be here to help us with the technical aspects of Bill C-28.
Senator Di Nino: I have a brief question on the proposed elimination of double taxation of dividends on large corporations. Hopefully, this was done to make us more competitive with countries such as the U.S. and the G8. After these measures have been placed into law, how do we compare with our major competitors of the G8 in this area?
Mr. Lalonde: In terms of the taxation of dividend income, Canada has always had an advantage with respect to double taxation. With the exception of corporations in respect of which an election is made under Subchapter S, essentially small corporations, for public corporations in the United States there is the classical taxation system which, straight up, involves double taxation. The corporations and shareholders are taxed and there is no attempt to integrate taxation between the two.
Even before these announcements were made, Canada had a tax advantage in that regard. We will continue to have an advantage, only better, now that for large corporation dividends there will be rough integration as between the shareholders and the corporation. I say ``rough integration'' because we integrate at the federal corporate rate. The system tries to integrate at a federal-provincial rate, but of course different provinces tax at different rates.
Senator Di Nino: My question was designed to reach a conclusion as to whether this would allow us to attract more investment as opposed to otherwise.
Ms. MacLean: In addition to the advantages that the Canadian integration system has over the American classical or double-tax system, straight out, the personal income tax rates on dividend income are now lower than the American equivalents in virtually all cases. The U.S. has introduced a two-rate system for personal income tax on dividends. They have a 5 per cent rate and a 15 per cent rate. The 15 per cent rate applies above about $60,000 of income.
Our top federal rate on dividends from large corporations will now be 14.5 per cent, and for the other brackets it is significantly lower than that. For example, our second bracket will be 4.4 per cent. We are now quite competitive with the U.S. in this area.
Senator Di Nino: Does that apply as well to the other G8 countries?
Ms. MacLean: I do not have those figures off the top of my head, but yes, we are competitive.
Senator Nancy Ruth: These are questions to the note taker for the letter to the minister. What would it cost the treasury if we increased the child care deduction another 50 per cent, and what would it cost the treasury if we gave all of it to them, 100 per cent? I would like to know those figures. We know it is estimated that $11 billion a year is put into the fully funded early child care education. I would like to know what the other side of that would be.
Ms. MacLean: Could I clarify your question for the record? I do not have those figures, but it would be my shop that would calculate that. Are you asking about increasing the child care expense deduction by 50 per cent or 100 per cent?
Senator Nancy Ruth: Yes. What would it cost the treasury?
Ms. MacLean: That is slightly different from being able to deduct everything. It is an increase in the child care expense deduction limits of 50 per cent or 100 per cent, which I agree would accommodate most child care expenses.
Senator Nancy Ruth: What does it cost now at the level we are at?
The Chairman: We are taking notes.
Senator Mitchell: I have another question for the list. Was one of the objectives of the child tax credit, the $100 a month, to increase child care spaces? Is that an explicitly specified objective? How many child care spaces have been created under that program? How many child care spaces have been created under the incentives to businesses program? You can write that down and get back to us.
Mr. Lalonde: There is a short answer, which has been reiterated by the government on many occasions, with respect to the $100-per-month allowance for children: it was not specifically directed to child care spaces; rather, it was directed to giving parents choice. One of those choices would be to assist in the cost of child care; another choice would be to assist in being able to stay at home.
Senator Mitchell: If there are not enough spaces, parents do not have that choice. To the extent that parents might want to have that choice, have spaces been increased by that program?
Mr. Lalonde: That would be a second-order ramification. Taking the population of Canada, with each parent having another $100 per child to be able to afford child care, the market should indirectly respond to that. I do not have figures as to the exact number of spaces that have increased over the last year or two, nor do I have a response for you on the direct expenditure program for child care spaces, that being slightly out of our bailiwick, since we are tax- policy types.
The Chairman: Could we have a point of clarification for the record. This bill provides for a non-refundable dividend tax credit. My understanding — and perhaps you could expand on it or correct me if I am wrong — is that a dividend tax credit is calculated according to the formula, the provisions that appear here, and whatever you calculate can then be applied against tax that would otherwise be payable. However, if you did not have any other tax payable, you would not get this money refunded to you. Is that what the non-refundable means?
Ms. MacLean: That is exactly right. You can apply the dividend tax credit against other taxes payable, but it is a non-refundable credit. A refundable tax credit is one where the government will pay you the value of if you cannot apply it against taxes. The dividend tax credit is not one of those.
The Chairman: There are provisions in this bill with respect to relief for Canadian manufacturers for Canadian consumption of beer and wine. When the GST was reduced by 1 per cent, excise tax was increased to make this neutral revenue from the government's point of view; is that correct?
Carlos Achadinha, Chief, Sales Tax Division, Alcohol, Tobacco and Excise Legislation, Tax Policy Branch, Department of Finance Canada: That is correct. It was offset by an amount to ensure that they would maintain the overall tax burden on alcohol and tobacco products.
The Chairman: Did the increase in excise tax for Canadian manufacturers for non-export apply to other products as well, so that the government says, ``We have reduced the GST, but we will get the money somewhere else?''
Mr. Achadinha: The offset was simply done on the excise base. Excise applies to alcohol and tobacco products. With respect to your question, there is no excise duty on exports of products for domestic production and consumption.
The Chairman: What about customs tariffs and products we bring into Canada?
Mr. Achadinha: The customs tariff applies at the same rate as the domestic duty. Alcohol and tobacco products that are imported are taxed. It is covered under the customs tariff and it applies at the same rate as the domestic duty rate.
The Chairman: What about in terms of the government trying to be revenue neutral with respect to the reduction of GST?
Mr. Achadinha: There were no changes to other customs tariffs for excise duties. It was only on alcohol and tobacco products.
The Chairman: Tobacco is not impacted by this bill, but beer and wine are, in terms of certain relief given.
Mr. Achadinha: Correct. The government announced other relief measures for brewers and vintners that are included in this particular bill.
Senator Mitchell: I have a quick technical question. Does the accelerated capital cost allowance write-off to 100 per cent instead of 25 per cent with respect to oil sands and other industrial initiatives, which the minister alluded to today, mean that there is a net tax savings to these corporations, or is it just that they get their tax savings faster? If they are going to write it off at 25 per cent a year anyway, is it not only that they get their tax savings up front? However, because it is against revenues, you would expect there would be more revenues later, so they might actually get a greater tax write-off if they waited.
Mr. Lalonde: In essence, an accelerated capital cost allowance delivers a deferral to those who claim it. It advances the tax deduction from the year in which it would otherwise occur and, having been advanced, it therefore will not occur in the later year.
Senator Mitchell: Therefore, it is not a net tax drain; it is just faster.
Mr. Lalonde: There is a time cost of money. Certainly in the way the government calculates its books, there is a cost this year with an offset later on.
Senator Mitchell: Is that the $1.4 billion? Is that just the time cost of money?
Mr. Lalonde: I am not sure where you got that figure.
Senator Mitchell: I heard that figure as being the tax subsidy. I would like to know what that is actually.
Ms. MacLean: We can put that on the list.
Senator Ringuette: I have two questions that you will probably put on the list.
The minister stated that the GST reduction had a direct link to job creation. Could you supply us with the impact on direct job creation of the GST reduction since July 1?
Mr. Lalonde: Yes.
Senator Ringuette: I would like to have the background information on the apprenticeship job creation tax credit for employers. Since its implementation, how many apprenticeship positions have been created?
Mr. Lalonde: That data is not yet available. As the apprentice job creation tax credit is claimable by the employers when they file their returns, we will not see that data for a while.
In the budget there was also a direct $1,000 grant to apprentices that is delivered to the employee.
Senator Ringuette: Could you supply me with the background information? You are in the policy side of the branch, and all this information would be required in order to elaborate on the policy for a certain measure.
Mr. Lalonde: We will relay the questions.
The Chairman: What is the estimated reduction in revenue to the government by virtue of a reduction of 1 per cent in GST?
Mr. Lalonde: The 1 per cent GST reduction amounts to, for 2006-07, $3.52 billion, and for 2007-08, $5.17 billion.
The Chairman: The minister said earlier that as a result of joint filing across the board, the revenue loss would be approximately $4 billion.
Ms. MacLean: I believe the minister said it would be at least $4 billion but could be more. The figure on pension income splitting is $700 million, and general income splitting would be at least $4 billion.
Senator Mitchell: It is $4 billion plus the seniors.
The Chairman: That is correct. He indicated approximately $700 million for seniors, which is an initiative with which we are proceeding. If there was a policy decision to go further with respect to everyone across the board, the cost would be $4 billion plus.
Mr. Lalonde: It becomes difficult to calculate because of second-order effects where, as a result of situations where one income is low and the other is high and you move them down, you have issues with income-tested benefits that may go up or down. It is not a simple calculation.
Senator Mitchell: Did you say the GST cut is going from $3.5 billion in 2006-07 to $5 billion in 2007-08?
Mr. Lalonde: It is because of the timing. It started on July 1.
Senator Mitchell: That does not account for another 1 per cent cut.
Mr. Lalonde: No.
The Chairman: That was very helpful. Seeing no other questions from senators, I would like to thank you all.
We will now proceed with clause-by-clause consideration of Bill C-28. The bill is divided into three parts; one with respect to income tax, one with respect to dividend taxation, and one with respect to amendments to excise duties on Canadian wine and beer.
After dealing with the title, I propose to proceed with the three parts rather than dealing with each clause individually. Is that agreed?
Hon. Senators: Agreed.
The Chairman: Shall the title stand postponed?
Hon. Senators: Agreed.
The Chairman: Shall clause 1, the short title, stand postponed?
Hon. Senators: Agreed.
The Chairman: Carried. Shall Part I, comprised of clauses 2 to 42, carry?
Some Hon. Senators: Agreed.
Senator Ringuette: On division.
The Chairman: Carried on division. Shall Part II, comprised of clauses 43 to 54, carry?
Some Hon. Senators: Agreed.
Senator Ringuette: On division.
The Chairman: Carried on division. Shall Part III, comprised of clauses 55 to 63, carry?
Some Hon. Senators: Agreed.
Senator Ringuette: On division.
The Chairman: Carried on division. Shall clause 1, the short title, carry?
Hon. Senators: Agreed.
The Chairman: Shall the title carry?
Hon. Senators: Agreed.
The Chairman: Shall the bill as a whole carry?
Some Hon. Senators: Agreed.
Some Hon. Senators: On division.
The Chairman: Carried on division. Shall I report the bill back to the Senate without amendments?
Hon. Senators: Agreed.
The Chairman: Honourable senators, I appreciate your attendance here today.
The committee adjourned.