Proceedings of the Standing Senate Committee on
National Finance
Issue 2 - Evidence - Meeting of March 30, 2010
OTTAWA, Tuesday, March 30, 2010
The Standing Senate Committee on National Finance met this day at 9:30 a.m. to study the estimates laid before Parliament for the fiscal year ending March 31, 2011.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, this morning, we will continue our study of the Main Estimates 2010-2011, which were referred to our committee.
[English]
This committee has already held two meetings in relation to these estimates and will continue to examine them over the course of this fiscal year. As honourable senators are aware, when Main Estimates are referred to us, we study them throughout the year and provide a number of reports to the Senate. We have already sent one interim report to the Senate with respect to our preliminary examination of these estimates.
A number of questions were raised in our initial meeting with respect to equalization payments to the provinces. In addition, issues surrounding the Home Renovation Tax Credit have been identified as being of interest to members of this committee. To that end, we are pleased to welcome officials from the Department of Finance Canada to help us better understand these and any other issues in which we may engage this morning.
Appearing this morning are Nipun Vats, Senior Chief, Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch; Tom McGirr, Chief, Federal-Provincial Relations Division, Equalization and Policy Development, Federal-Provincial Relations and Social Policy Branch; Gérard Lalonde, Director, Tax Legislation Division, Tax Policy Branch; and Miodrag Jovanovic, Senior Chief, Personal Income Tax Division, Tax Policy Branch.
Gentlemen, thank you for appearing. We look forward to a discussion this morning on some of the issues outstanding in the minds of honourable senators. Mr. Vats, please proceed with your introductory remarks, and then we will move to a discussion.
[Translation]
Nipun Vats, Senior Chief, Federal-Provincial Relations Division, Federal-Provincial Relations and Social Policy Branch, Department of Finance Canada: As Senator Day mentioned, I am Senior Chief in the Federal-Provincial Relations Division of the Department of Finance.
I am pleased to have been asked to appear before you today to provide you with additional information on the amounts under the equalization program presented in the main estimates.
[English]
At the November 2008 finance ministers' meeting in Toronto, the federal Minister of Finance announced that changes will be made to the equalization program to ensure that it will continue to grow on a sustainable growth path. Future payments will be based also on a three-year average of nominal growth of gross domestic product.
At the time, the minister also provided provinces with their payment amounts for 2009-10, which took into account these changes to the program. To implement these equalization changes announced by the minister, legislation needed to be passed by Parliament. The enabling legislation was included in the Budget 2009 Implementation Act, which received Royal Assent on March 12, 2009.
[Translation]
The amounts reported in the main estimates are required to be based on existing statutes at the time of tabling. At the time that the main estimates for 2009-2010 were tabled on February 12, 2009, the equalization changes announced by the Minister of Finance were still awaiting parliamentary approval.
Therefore, the main estimates had to reflect the equalization payments for 2009-2010 that would have been paid in the absence of the program changes.
[English]
As a result, the Main Estimates reported equalization payments for 2009-10 of $16.1 billion rather than the $14.2 billion announced by the Minister of Finance in November 2008. The 2009-10 Supplementary Estimates (A), which were tabled in the House of Commons on May 14, 2009, showed a reduction in equalization payments relative to the amounts reported in the 2009-10 Main Estimates. This change reflected the implementation of the sustainable growth track announced in November 2008.
However, the 2010-11 Main Estimates show a comparison between main estimates, as is normal practice — therefore, comparing Main Estimates from 2010-11 to Main Estimates of 2009-10. These estimates seem to indicate a year-over-year reduction in equalization payments. That is not the case.
The total equalization payment made to provinces in 2009-10 is $14.2 billion. Under the sustainable growth track of the equalization program, total payments for 2010-11 will increase by $187 million to $14.4 billion. This increase is as a result of growing the 2009-10 payment amount by the three-year average of GDP growth or approximately 1.3 per cent. Hopefully, that explains the apparent discrepancy.
My colleagues and I are happy to take any questions on this issue or on the tax issues that you have raised.
The Chair: Thank you, Mr. Vats. We may wish to explore that issue further, but it gives us an initial understanding of the difference. The term ``sustainable growth track'' was a reduction last year from $16.1 billion to $14.2 billion in equalization. The government reduced it by $1.5 billion and called it a sustainable growth track. Is that correct?
Mr. Vats: It could be seen as a reduction. It depends on what you compare. Year over year, there was still growth in equalization. There is growth if you compare the 2008-09 amounts to the 2009-10 amounts.
The Chair: Is that the actual amount; not the $16 billion, but the $14 billion?
Mr. Vats: That is correct. The actual amount grew, but relative to what would have been paid without the imposition of this GDP growth track, a reduction occurred in 2009-10.
The Chair: Okay.
Senator Ringuette: I think we have to go back to the basics. Was it in budget year 2008-09 that the major change was made to the calculation of equalization so that it is now calculated strictly on a per capita basis?
Mr. Vats: I am not entirely sure I understand the question.
Senator Ringuette: I am referring to the social and post-secondary program.
Mr. Vats: The Canada Social Transfer?
Senator Ringuette: Yes.
Mr. Vats: That is correct.
Senator Ringuette: Was that in the 2008-09 budget?
Mr. Vats: That is correct.
Senator Ringuette: It undermined poorer provinces with regard to the transfers they received.
Senator Murray indicated to us last week that a change occurred in the formula recently.
Senator Murray: There are two caps. I will come to that issue in my turn.
Senator Ringuette: I will wait for further information.
The Chair: A report was prepared by this committee on equalization in December 2006. It is hard to believe it was that long ago. Since then, the ministerial meeting announced the changes that were implemented in 2009. That brings us up to date.
I will call on Senator Murray who is a former chair of this committee and is knowledgeable in this area of equalization.
Senator Murray: We will see. You will correct me, Mr. Vats.
As I understand it, there are two caps or benchmarks, as you prefer to call them. One is on the total pool of money; that it will not grow faster than a three-year moving average of nominal GDP, right?
Mr. Vats: That is correct.
Senator Murray: You fix that number at 1.3 per cent for 2010-11.
Mr. Vats: That is right, for the past three years.
Senator Murray: For the past three years, and you applied that 1.3 per cent to a base of $14.4 billion, or is it $14.2 billion?
Mr. Vats: $14.2 billion, I believe. Mr. McGirr will have the exact numbers.
The Chair: For the record?
Tom McGirr, Chief, Federal-Provincial Relations Division, Equalization and Policy Development, Federal-Provincial Relations and Social Policy Branch, Department of Finance Canada: It is $14.185 billion.
Senator Murray: Yes, $14.2 billion; that is the number that Mr. Flaherty mentions in Canada's Economic Action Plan, at page 190. A table right below that shows the allocation by province; and when we do the arithmetic, it comes to $14.8 billion. A note indicates that the figure includes offsets for Nova Scotia and Newfoundland and Labrador. However, you did not apply the 1.3 per cent growth to the $14.8 billion, but rather to the $14.2 billion, is that correct?
Mr. Vats: Only the equalization amount, not the offset amounts.
Senator Murray: That is what we are dealing with here. The second benchmark relates to the relative fiscal capacity of provinces. This cap is on individual provincial entitlements.
It used to be that the cap was the fiscal capacity of the lowest non-recipient province, which was Ontario. Ontario then became an equalization recipient, and most of us thought that the cap would revert to British Columbia, which, I presume, then and perhaps now, has the lowest fiscal capacity of the non-recipient provinces. However, instead, you came up with the ingenious idea of setting the cap at the average fiscal capacity of the recipient provinces.
I do not know, and I do not know whether you can tell me now or perhaps later in the meeting, what the effect of that idea has been. For example, if the previous cap had been in place — the fiscal capacity of the lowest non-recipient province — what would the result be for the recipient provinces? I would like to see what information you have in terms of the fiscal capacity of all the provinces. You probably have that information with you, so if you can give it to us before the meeting ends, I would appreciate it.
Mr. Vats: I am sorry, I did not catch your last comment.
Senator Murray: I think we all would like to see your calculation of the fiscal capacity of each of the provinces.
Mr. Vats: Right.
Senator Murray: That is the way you calculate their entitlements. Tell me how you do that. Do you start by establishing what the overall pool will be by multiplying last year's number by 1.3 per cent and then work out the individual entitlements, or do you start with the individual entitlements and bring them down, if necessary, by virtue of the fiscal capacity cap?
Mr. Vats: It is the latter. Mr. McGirr can fill in some of the details for you, but essentially the equalization system that was put in place in Budget 2007 is still applied first to determine the fiscal capacities, the associated standard in the equalization program; then the fiscal capacity cap, which is this receiving province cap, is applied. As a last step, we take the difference between the total payout that would have been there in the absence of restraint and the actual payout based on the sustainable growth path, and apply a per capita reduction in the entitlements.
Senator Murray: You are covered two ways with these caps. This point is important because the government at the time, when it started fooling around with the social transfers, going to equal per capita cash and so on, claimed that for those provinces adversely affected, an enriched equalization program would look after those effects. The program does not look to be terribly enriched to me.
Anyway, I do not want to hold up the committee. Can you provide us with the fiscal capacity of all the provinces and the average so that we can judge what the influence of that cap was on this year's entitlements? I have done a little bit of arithmetic, but I do not trust my own arithmetic.
I also want to know what the growth of equalization is over the last five, six or seven years — you pick the period — versus federal revenue growth. I think equalization growth has lagged behind your revenue growth. As well, I want to know what it is as a proportion of federal program expenditures and as a proportion of provincial own-source revenues. I am sure you do not carry that information around in your head, or maybe you do, but perhaps by the end of the meeting or, if not, in writing to the clerk, you can let us have that information.
Chair, at some point I want to go into other transfers like the Canada Social Transfer, CST, and the Canada Health Transfer, CHT, but I will wait for a second round, if you have a list.
The Chair: Let us deal with the fiscal equalization first. Are there any other questions, any other interventions dealing with this subject? We will go to Senator Marshall, Senator Callbeck and Senator Ringuette on fiscal equalization and then we will broaden the discussion.
Senator Marshall: For the fiscal equalization, there was some confusion with regard to the $16.1 billion. Do you have the numbers for 2008-09 and even the previous year? Do you have the numbers for the last few years?
Mr. Vats: I am afraid I do not. I do not know if Mr. McGirr has them with him.
Senator Marshall: I am interested in that number. I think I have it here now. Okay, thank you very much.
The Chair: Are you able to share the information with us, to have it confirmed by Mr. Vats?
Senator Marshall: It is $13.4 billion for 2008-09, and $12.9 billion for 2007-08.
The Chair: Mr. Vats, are you able to confirm or otherwise?
Mr. Vats: They sound correct.
Mr. McGirr: Yes.
The Chair: As I understood your testimony earlier, for the next fiscal year, it would have gone to $16 billion under the old formula, but there was an adjustment that resulted in it going to $14 billion. Is that correct?
Mr. Vats: That is right.
Senator Callbeck: I have a follow-up on the questions Senator Murray asked. There is a figure calculated for the total payout, and then there are figures for every province. If the total of all the provinces is more, then the amount must be reduced to fit that figure, which is based on the growth path.
Senator Murray: That seemed to be fair. However, now you cannot have a post-equalization fiscal capacity higher than the average of all the recipients.
Senator Ringuette: That is correct. They are the poorest of the poor.
Senator Murray: We will see what that formula means. They will send us the numbers.
Mr. Flaherty tabled Bill C-9 yesterday. Part 6 of the bill is amendments to the Federal-Provincial Fiscal Arrangements Act. It indicates that an additional fiscal equalization payment may be paid for the fiscal year beginning April 1, 2010. These payments include additional fiscal equalization payments of: $250 million for Nova Scotia; $80 million for New Brunswick; $175 million for Manitoba; and $3 million for Prince Edward Island. The Department of Finance Canada document we have from the Parliamentary Library shows $14.3 billion in total.
Are these amounts in Bill C-9 in addition to the amounts we have here? In other words, Nova Scotia will receive $1.1 billion, which is a reduction of $461 million over the previous year. Will this $250 million — assuming Parliament passes this bill — be added to the $1.1 billion?
Mr. Vats: That is correct.
Senator Murray: These amounts from the Library of Parliament must be topped up by the amounts in Part 6 of Bill C-9. The original amount for New Brunswick is $1.5 billion, which is a reduction — my heavens — of $1 million. However, payments will be increased now by $80 million. Manitoba, which is at $1.8 billion, will be increased by $175 million. Quebec will not be topped up. P.E.I. will be topped up by $3 million. Ontario will not receive a top-up on its $972 million.
What is the purpose of those top-ups? Is it fair to call them top-ups?
Mr. Vats: They are being called total transfer protection payments.
Senator Murray: Oh, those.
What is the relation between that section and the next section that indicates the minister may pay an additional cash payment for the fiscal year beginning on April 1, 2010, equal to $7.3 million for Saskatchewan and $8.5 million for Newfoundland and Labrador? These provinces are not in the equalization program. Why are these payments being made through the equalization program?
Mr. Vats: I will clarify that these amounts were announced in the fall. They are meant to protect provinces from declines in total transfers specifically for one year.
Senator Murray: I want to come back to that point on the second round.
Mr. Vats: Basically, the decision was made to provide it as an equalization payment for those provinces that receive equalization. The largest decline is typically as a result of equalization for those provinces. For those provinces that do not receive equalization, the cash payments were simply provided as a separate payment.
Senator Murray: I have not done the arithmetic, but the various amounts I have indicated will be added to the $14.371 billion. Next year, when the time comes to add the three-year moving average of GDP, will it be on the $14.3 billion or the $14.3 billion plus the top-ups?
Mr. Vats: It is only on the $14.3 billion.
Senator Murray: I thought so.
Senator Neufeld: I want to go back to the changes made in 2009.
Mr. Vats: Budget 2009.
Senator Neufeld: Those changes were not made in isolation by the Department of Finance. They were made in discussion with provinces across Canada. Is that assumption correct?
Mr. Vats: Provinces were informed of the change at the finance ministers meeting.
Senator Neufeld: Those discussions on how resource revenue would be affected in different provinces probably started in 2007-08 when the government started thinking about making a change. Is that correct?
Mr. Vats: That discussion started well before Budget 2007 in terms of how resource revenues were incorporated into the program. That was a large part of what the O'Brien report addressed.
Senator Neufeld: Was there understanding amongst the provinces that there would be changes, and were the provinces consulted on what those changes would be?
Mr. Vats: For?
Senator Neufeld: I am referring only to equalization.
Mr. Vats: Are you referring to Budget 2009?
Senator Neufeld: Yes.
Mr. Vats: The provinces were informed at the finance ministers meeting in November 2008 in advance of the payment.
Senator Neufeld: I have a sheet given to me by the Library of Parliament showing federal equalization support and terms for the provinces from 2005-06 to 2010-11. Following Senator Murray's comments, I have to ask: Will the $14.372 billion in this document for 2010-11 change by the amounts about which Senator Murray was speaking? What will the total then be?
Mr. Vats: I do not have the numbers at hand, but it is the sum of the total transfer protection payments for equalization-receiving provinces.
Senator Neufeld: You must have that amount.
Mr. Vats: I may have it here somewhere.
Senator Callbeck: It is $525 million.
Mr. Vats: It is that part of $525 million that accrues through equalization-receiving provinces. There are also provinces that do not receive equalization.
Senator Callbeck: No, but that is the protection payment.
Mr. Vats: It is $510 million.
Senator Neufeld: It is $510 million in addition to the $14.372 billion.
Mr. Vats: Yes, give or take.
Senator Neufeld: That is, give or take $1 million or $2 million. That clarifies the situation to a degree.
I will listen with interest to the rest of the session. I was trying to figure out how you came up with more money than you have in 2010-11. I think I understand what you are doing.
The Chair: The President of the Treasury Board appeared before this committee last week. He talked about a one- time protection program for one year only. He made a point of saying that it was a one-year-only protection program. These top-ups reflect that particular program.
Mr. Vats: That is correct.
The Chair: That ties in that program.
Senator Callbeck: You say the protection figures amount to $510 million. Can you please give me the breakdown?
Mr. Vats: The total comes to $525 million, but the question related to the amount that counts as equalization payments. Protection payments that go to provinces that receive equalization are $510 million. The other $15 million goes to provinces that do not receive equalization.
Senator Callbeck: Thank you.
Mr. Vats: Would you still like the amounts?
Senator Callbeck: That is fine. I have them here and they indicate $525 million. I was not able to figure out the difference.
The Chair: What document are you referring to, Senator Callbeck? Is that something that was distributed to all senators?
Senator Callbeck: No.
The Chair: Mr. Vats, can you provide a document with the breakdown that Senator Murray requested earlier for us to circulate to all members of the committee?
Mr. Vats: Yes.
Senator Eggleton: Equalization is solid in principle, but it is controversial in the formulas used in its practice.
I notice that the provinces, particularly those that are in the have-not category, are complaining more and more that the services of some of the other have-not provinces are perhaps exceeding theirs; and equalization is not working to provide a similar level of government services at reasonably similar levels of taxation regardless of where we live in the country, which is the basic principle.
I think, for example, of early learning and child care. Quebec is probably the best system in the country — touted by most in that field to be the best — yet Quebec is also by far the largest receiving province under the equalization system. I know that provinces can use the money as they wish and they can put it in one area and not another, but they seem to complain more and more that a substantial number of services are not reaching that relatively equal status that they should reach.
Complaints may come from the have provinces, but also from some of the lesser have-not provinces, such as my home province. Can you comment? Is equalization falling short of its original objectives?
Mr. Vats: This debate is eternal. There are many different ways to approach the calculation of equalization amounts. However, generally speaking, provinces that have higher levels of services also have higher tax rates and higher debt loads, typically.
Equalization may be one factor among many, but I think the basket of social services that provinces provide is largely a function of provincial government decisions. Then there is a strong correlation between those services and their own revenue-raising practices and how they spend their money.
In the big picture, equalization is not an enormous component of the revenues of most provinces, but if we look at tax rates and debt loads, they are typically higher in provinces that have higher levels.
Senator Eggleton: If provinces elect to have higher taxes, should the federal treasury reward them, in effect, by giving them a higher equalization grant?
Mr. Vats: That is not how the system works. The amount of equalization is based on national average tax rates. Therefore, a single province that changes its tax rates cannot enormously alter the total payout of the equalization system.
The idea is to structure the equalization system such that it does not provide an incentive for provinces to change their own provincial tax rates so as to manipulate their equalization payments.
The Chair: I have one other point for clarification so we can have this information on record. You are talking about the top-up so that no receiving province under fiscal equalization will be disadvantaged by virtue of changes to the rules. You talked about this top-up, which is a one-time protection program that Minister Day talked to us about last week.
How is the Newfoundland and Labrador fiscal equalization offset payment calculated? In Supplementary Estimates (C) for the end of this fiscal year, an amount of $465.3 million is designated to go to Newfoundland and Labrador. Is that amount taken into consideration with respect to this top-up?
Mr. Vats: It is not.
The Chair: Is it something totally different?
Mr. Vats: The protection payment was made on the basis of the sum of equalization, the Canada Health Transfer and the Canada Social Transfer, by province. The accord offset payments are not part of those three major transfers that potentially are received by all provinces.
The Chair: I understood the Newfoundland and Labrador fiscal equalization offset payment was for losses in payments as a result of increased offshore revenue — in other words, bringing in resources.
Mr. Vats: The payment protects the province from declines in equalization payments.
The Chair: That figure is something different. It is a one-off, bilateral agreement between Canada and Newfoundland and Labrador; is that it?
Mr. Vats: That is correct.
The Chair: We dealt with the figure and I want to make sure everyone understands how it fits in.
We have dealt with fiscal equalization. Some honourable senators indicated they wanted to talk about the Canada Health Transfer and the Canada Social Transfer, the two other transfer payments from the federal government to the province. Health transfer is increasing by 6 per cent and social transfer by 3 per cent, as I recall, over a number of years. Are there any questions on these payments?
Senator Murray: Let me start with the explanation here in the budget plan, on page 172.
The Chair: Is this the budget plan for this year, 2010?
Senator Murray: Yes, it says:
The cost of decisions taken since the September Update amount to $500 million in 2010-11 and $100 million per year in 2009-10, as well as in 2011-12, 2012-13, 2013-14 and 2014-15. These costs include the Government's December 2009 commitment to provide one-time protection payments to Newfoundland and Labrador, Prince Edward Island, Nova Scotia, New Brunswick, Manitoba and Saskatchewan, totalling $525 million. This measure ensures that no province experiences a decline in its combined entitlements under the Canada Health Transfer, Canada Social Transfer and Equalization in 2010-11.
Why did you go about it in that way? I am willing to be convinced, but this approach seems to fudge a lot of issues.
Let me start with the Canada Health Transfer. It is supposed to increase at 6 per cent per year to 2013-14, is it not? Is any province due to have a decline in its CHT payments? Only a drastic decline in population would be responsible.
Mr. Vats: If your question relates to declines in the CHT and CST —
Senator Murray: Start with CHT. This is my point. We are talking about three different programs here, and I find it difficult, as a layman, to pull this information apart when I read it. On CHT, will any province face a decline in its payments under the CHT in the fiscal year that begins on Thursday?
Mr. Vats: Yes.
Senator Murray: Who?
Mr. Vats: Newfoundland and Labrador and Saskatchewan.
Senator Murray: Why is that payment declining — because of a decline in population?
Mr. Vats: It is population; the value of the tax point transfer is the other component.
Senator Murray: They calculate it when it suits them. That is fine, but I am surprised at that decline. I want to see for each of those programs — the CHT, the CST and I guess equalization — why each of those provinces needed that protection. What declines were they facing in each of those programs?
Two of them were facing a decline in CHT. How many were facing a decline in Canada Social Transfer?
Mr. Vats: No province faced a decline in Canada Social Transfer.
Senator Murray: On equalization, I guess we know; every recipient province except Ontario was —
Mr. Vats: And Quebec as well.
Senator Murray: No; the numbers that we were given indicate that Quebec would be down by $197 million on equalization, but for the provisions in Bill C-9.
Mr. Vats: They are up $197 million.
Senator Murray: Are they? I am sorry — it is my arithmetic again. Quebec and Ontario were up anyway, so they are not receiving any top-up, right? Okay.
I want to see, for those three programs, what the declines were. I do not know why the government did not simply top up the individual programs, rather than combine them, because they are three different programs. I become apprehensive when you lump them all together. You are talking about a combined total here. If a province loses something on equalization but gains something on CHT or CST, will that gain cancel out the loss?
Mr. Vats: For the purposes of this payment, yes it will.
Senator Murray: That is why it is structured that way.
Mr. Vats: I think the government stated its intention to provide a one-time protection tied to this economic downturn. Because transfers in aggregate are a large component of the federal contribution to provinces, it was decided that we will look at the aggregate of major federal transfers in providing that protection payment.
Senator Murray: You are paying it under the equalization program to the recipient provinces, and under an ex gratia payment to the non-recipient provinces.
Mr. Vats: That is correct.
Senator Murray: I know you do not have the information for my next question with you today. There are the big transfer programs — equalization, CHT and CST. There are also a million other programs in which the federal government shares program expenses with the provinces, such as agriculture and legal aid. Someone either in Department of Finance or Treasury Board must have a list of these programs and what they involve in terms of federal payout.
Mr. Vats: We do not in the Federal-Provincial Relations Division, but I assume such a list can be compiled. Are you referring specifically to cost-shared programs, or are you referring more generally?
Senator Murray: I think the regional economic agencies are transparent, say, Atlantic Canada Opportunities Agency, Western Diversification Office and the others. We can look them up. At the same time, there are other programs; for example, I think of agriculture, immigration and legal aid. God knows how many programs there are — there must be hundreds of them — in which the federal government, one way or another, pays a share of the cost of provincial programs. How much money is going out to what programs? Treasury Board must have the information somewhere.
Mr. Vats: I imagine they would be able to find that information.
The Chair: For the record, Senator Murray, our report that was adopted by the Senate last evening has transfers to other levels of government of $53.7 billion; transfers to persons of $61.5 billion; and other transfers, $43.7 billion per year. ``Other transfers'' is the one you talked about. That is in our report that is before the Senate at this time but it was adopted last evening.
Senator Murray: We have to know what ``other transfers'' refers to; if it refers to the provinces or not.
The Chair: When the amount is $43.7 billion, it might be worth pursuing.
If there is nothing further with respect to Canada Health Transfer and Canada Social Transfer, we will open up our discussion to the panel.
Senator Peterson: I was looking at the budget spending predicted for 2010-11 and, more particularly, at Canada Post Corporation. In 2009-10, spending was $72 million and in 2010-11, it is $22 million. That drop is significant. What is the background to that drop.
Mr. Vats: I do not believe we have anyone here who can speak to that particular issue.
The Chair: Is there someone you can talk to and let us know?
Mr. Vats: We can try to find that information for you.
The Chair: We cannot find it in the Main Estimates. I was talking to Senator Peterson earlier on this matter. The terminology used was ``special contribution.'' The reduction is significant. We were wondering what it might be all about.
Senator Dickson: The Income Tax Act of Canada is extremely complex and particularly at this time of year, no one likes to come to grips with some of the issues that one must face, especially writing more cheques to the federal government. Can you explain for the committee how the government is closing the tax loopholes and who, other than the government, will benefit from closing such loopholes?
Gérard Lalonde, Director, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: A number of measures in the 2010 budget deal with closing loopholes. An example is a reintroduction of a modified version for the foreign investment entity and non-resident trust provisions set out in the budget for consultation. Another item is the so-called foreign tax credit generators that the government is shutting down. Under this item, certain corporations taking advantage of differences between the characterization of corporations, partnerships and other entities as between the Canadian tax system and tax systems of other countries can essentially create the appearance of a foreign tax having been paid in a foreign country. It is done such that the Canadian taxpayer is eligible for a foreign tax credit when, in fact, there is an offset somewhere else in the foreign country.
Another example is the measures the government has introduced for consultation in the budget to require reporting of aggressive tax planning transactions. As you can appreciate, the Canada Revenue Agency is often in a catch-up situation. Taxpayers file their returns, including corporations and large businesses, and they calculate their income according to general principles of the Income Tax Act. Buried in that process may be transactions where reasonable people might disagree as to the tax effect of the transaction. Where the effect of that transaction is buried in an income statement, it is difficult for the CRA to drill down within the reassessment periods that apply under the Income Tax Act to find these transactions, properly analyze them and determine whether a reassessment is appropriate or not. The proposals that are put forth for consultation in the 2010 budget will assist the Canada Revenue Agency in arriving at this information sooner; things they should look at. The proposals will give them an opportunity to look at these things that reasonable people might disagree as to the tax effect. It will give CRA an opportunity to argue the other side. Those three examples are items in the budget dealing with closing loopholes.
The direct recipients of closing the loophole are usually not all that enthused about having their particular loophole closed. Who does it benefit? It benefits the rest of Canadians, who otherwise have to make up the shortfall. We talked about big numbers earlier on in terms of equalization and transfers to provinces. Leaving aside those amounts, the money for the rest of the expenditures of the federal government must come from somewhere. To the extent that taxpayers use aggressive transactions to push the envelope a little of what is legal under the tax system, to the extent that aggressive transactions can be detected earlier and a proper assessment of tax raised, the rest of Canadians benefit in terms of a lesser overall tax burden for all Canadians.
Senator Dickson: Will the thrust of these tax amendments affect in a positive way the competitiveness of Canadian business?
Mr. Lalonde: The competitiveness of Canadian business is premised upon the principles of the tax system as we lay it out. For example, we have a statutory corporate income tax rate. That rate is taken into account in determining the competitiveness of Canadian corporations. We have various CCA rates for types of property to recognize economic depreciation. We try to ensure that the CCA system reflects the useful economic life of a property.
The Chair: Is CCA the capital cost allowance?
Mr. Lalonde: Yes; the capital cost allowance is important in determining the competitiveness of the Canadian tax system.
What is not taken into account in determining the overall competitiveness of the tax system is the ability of taxpayers to engage in transactions that can sometimes yield a rather startling result.
For example, we do not look at the Canadian tax system overall and think maybe we can establish a foreign tax credit generator because not all taxpayers enter into those kinds of transactions. Those kinds of things are not taken into account in determining the competitiveness of the Canadian tax system. In some sense, they are a windfall gain to those who can successfully manoeuvre through what are sometimes referred to as loopholes. I tend to stay away from that term, but if they can manoeuvre through such things, it comes as a windfall.
To the extent that they can constrain those loopholes and improve the basics of the tax system that generate competitiveness, that improves the competitiveness of Canadian businesses overall.
[Translation]
Senator Ringuette: Good morning, Mr. Lalonde. It is always a pleasure to see you. You may not agree!
[English]
I have two questions. The first is intriguing. Last week, the Minister of Finance announced changes to the tax rules in regard to the financial sector that would have brought additional GST revenue of over $1 billion but a few days later, there was a flip-flop.
What was the proposed change, and was that $1 billion additional GST revenue from the financial sector a reality as quoted by the minister?
Mr. Lalonde: Senator Ringuette, we have had many discussions about income tax matters. The reason our discussion is constrained to income tax matters is because that is what I do. I am Director of the Tax Legislation Division at the Department of Finance Canada, which drafts income tax law. I tend to stay away from responding to questions about the GST because I would hate to mislead the committee with any misunderstanding I may have.
I will take your question under advisement and have the department respond. If I understand correctly, the question is about —
Senator Ringuette: The flip-flop.
Mr. Lalonde: I prefer to use different terminology: What is the difference, if any, between what was announced in respect to the GST last week and the provisions implementing the announcement? Is that correct?
Senator Ringuette: I was intrigued because I could not believe the Minister of Finance would be under such influence by the financial sector to let go of $1 billion in revenue in a situation of recession and major deficit. I look forward to the answer.
Mr. Lalonde: I cannot confirm whether that is or is not the case at this point, but we will have the department respond to the chair.
The Chair: To the clerk: I agree that probably the best answer will come if you do not use the term flip-flop.
Mr. Lalonde: Okay.
Senator Ringuette: The second question relates to another intriguing situation. Last year, both houses of Parliament received a second budget bill at the end of November or in early December that was an omnibus bill in disguise. The only budgetary item included was the Home Renovation Tax Credit.
For at least six months, the Government of Canada paid for major advertising on this program without it having been approved by both houses. When the bill was tabled in both houses, there was major emphasis on the fact that this tax credit was drastically needed to help Canadian citizens and enhance trade jobs in the marketplace. It was extremely important to Canada's Economic Action Plan to provide stimulus across the country.
In early December, when the bill was before the committee, we looked at it and established that it was probably a zero- expenditure program for the federal government — all in all — with the additional GST revenue, additional declared labour and income tax on that declared labour. As a zero-expenditure program, this program is the only one that has not been extended for a second year to create jobs and to help the economy everywhere, whether it is in rural or urban areas.
The program is a tax credit. Can you explain why the Home Renovation Tax Credit has been continued for a second year and is not being considered, therefore, as an economic stimulus program?
Mr. Lalonde: The program is an income tax credit and, therefore, something to which I can respond.
A number of questions are built into your half statement, half question. You are correct: We had a discussion last year about the cost of the program. I am not sure we had determined the program was a zero-cost program. In budget documents, we indicated that it represented a federal cost of approximately $3 billion. We will not know the exact costs until 2009 tax returns are all filed and assessed.
We regard the cost at $3 billion because we have to look at our assumptions. If we assume that Canadians will make home renovations, perhaps not this year, but possibly two or three years hence, they will pay the GST on those expenses.
The idea behind the Home Renovation Tax Credit was to advance that work into a period when Canada was suffering an economic recession. If we also discount the GST on that work, it will double count because we will provide the Home Renovation Tax Credit as well as a GST reduction.
We do not regard GST collected on goods and services that were eligible for the HRTC as being an offset to the HRTC. We take the view that those GST revenues would have been collected in any event over the period. In fact, as a result of advancing the GST revenues, they will not be collected in the subsequent years. Therefore, we regard the HRTC as a net cost to the federal government of approximately $3 billion.
Why was the program not extended? Part of the nature of an incentive such as the HRTC is to draw forward expenses that otherwise would have been incurred in future years. Consistent with that policy, the HRTC was announced in Canada's Economic Action Plan as a time-limited measure. It was stated in that budget as something that would expire at the end of January 2010.
With that in mind, the program was an incentive for Canadians to move ahead their renovation projects to take advantage of the credit. If it were assumed that such a program would always be extended, it destroys the incentive effect of moving the credit forward.
Other measures were announced in the budget as being implemented over a longer period of time. Some infrastructure measures are continuing into 2010-11, but the HRTC was expressly stated ab initio that it would apply only for one year, and the government held good on its promise. It promised to deliver an HRTC, and it did; and it promised that the HRTC would expire at the end of January 2010, and it did.
Senator Ringuette: Nice try, Mr. Lalonde, but I do not agree with you. There is no rationale and there is absolutely no difference in regard to residential infrastructure and infrastructure as described in the economic action plan.
It is still a stimulus program, and I still do not understand why the major infrastructure action plan is moving ahead to the tune of $19 billion, while the smaller residential infrastructure does not receive the same attention. The government is stimulating either home renovation or municipal or interprovincial infrastructure. It is still an economic stimulus, and the basic reasoning is the same.
The Chair: Senator Ringuette, I think you have made your point. We do not expect Mr. Lalonde to answer further in that regard.
Senator Murray: What was the cost to the treasury of this tax expenditure? Do we know?
Mr. Lalonde: We estimate it at $3 billion. Because the tax credit is claimed on the 2009 income tax return, those returns will have to be filed, assessed and dealt with by the CRA before we have a hard number as to what the cost of the program is. However, indications are that the estimate is probably close.
Senator Murray: What about the Tax Free Savings Account? I think I saw somewhere that there is $11 billion in these accounts. That is quite a take-up, it seems to me. Have you calculated the cost to the treasury in foregone revenue for that item?
Miodrag Jovanovic, Senior Chief, Personal Income Tax Division, Tax Policy Branch, Department of Finance Canada: As we indicated in 2009, the cost for 2009-10 is estimated at $50 million.
Senator Murray: That is in foregone revenue; am I right on the $11 billion?
Mr. Jovanovic: The government has not produced numbers yet because it is like the Home Renovation Tax Credit. We are still waiting for data. A survey was conducted recently at the end of December, or early in the year.
The Chair: That is the annual cost that you anticipate. That cost will continue to go up, I assume, as more and more money goes into those accounts.
Mr. Jovanovic: Absolutely.
The Chair: You are starting at $50 million.
Senator Murray: Am I speaking out of turn?
The Chair: We were on Senator Ringuette. You had a supplementary question and Senator Nancy Ruth has another supplementary question.
Senator Nancy Ruth: Mr. Lalonde, on the home renovation tax credit, here are the stories I have heard. Many underground trades who have not been paying taxes must now pay taxes because homeowners are demanding receipts so they can make the claim. Do we have any idea how many plumbers, electricians and whatever will file tax claims that may not have been filing them? It would be fun to find out in a year from now.
Mr. Lalonde: It would be fun to find out. A challenge for the tax system is always to determine the number of people that are not reporting income; but by virtue of not having reported it, it is harder to determine how many there are.
It will be interesting to see if there are increased revenues from various sectors. However, in determining our costs of a program, we assume that all Canadians are reporting their income properly. Hence, the $3 billion is based on that assumption.
Senator Nancy Ruth: Will you check on whether sectors like plumbers or electricians have an increase in new filers?
Mr. Lalonde: It would be interesting to find out. I do not know if our data is broken down that finely, but I agree it would be interesting to find out.
The Chair: It is not that the Senate is picking on those particular trades. The example was purely hypothetical.
Senator Ringuette: Mr. Jovanovic, you were about to say something about a survey regarding the Tax Free Savings Account.
Mr. Jovanovic: Yes, Ipsos Reid recently conducted a survey, and the survey showed there were about 4.7 million accounts opened in 2009 for a value of $15.8 billion dollars.
Senator Ringuette: Do we have a profile of that group of Canadians who will be granted a tax break on $15 billion?
Mr. Jovanovic: Sorry, of Canadians that what?
Senator Ringuette: A profile?
Mr. Jovanovic: Can you repeat the question?
Senator Ringuette: Do we have an economic profile of the Canadians who have been granted $15 billion in tax credits.
Mr. Jovanovic: Are you referring to the Tax Free Savings Account?
Senator Ringuette: Yes.
Mr. Jovanovic: There is no credit associated with the Tax Free Savings Account.
Senator Ringuette: They do not pay taxes on it.
Mr. Jovanovic: They have contributed to their Tax Free Savings Account, and according to the survey, the market value by the end of 2009 of these savings is $15.8 billion.
Senator Ringuette: A usual survey also asks questions of a social quasi-economic nature too — gender, age and yearly income. Do we have that information?
Mr. Jovanovic: We did not analyze that survey. I do not know whether that information is available. All I know is that the numbers I gave you are publicly available. Maybe something else is publicly available; I do not know.
The other thing is that the annual contribution limit to the TFSA is $5,000. The survey said, I think, that 4.7 million people opened an account, so that is a fair number.
The TFSA is available to all Canadians. It is not linked to income, so everybody earns, every year, $5,000 worth of room. The program is flexible. It is a great savings incentive vehicle for low-income individuals, for seniors and for all Canadians. In terms of profile, I suspect that everybody can benefit, and Canadians of all classes of income will probably benefit by using it.
Senator Ringuette: Did the Government of Canada commission that Ipsos Reid survey?
Mr. Jovanovic: No, that survey was a private survey.
Mr. Lalonde: If I can add to what you said, one of the features of the Tax Free Savings Account is the ability to contribute $5,000 a year. It is also cumulative, if you do not make your contribution.
The fact that somebody might not show up in stats as having made a contribution this particular year when, for example, they might have had other uses for their money —
Senator Ringuette: Home renovation.
Mr. Lalonde: Perhaps it was to make home renovations, yes. They will have a carry forward and be able to make those contributions in a different year.
Senator Neufeld: The Tax Free Savings Account is a wonderful implement put in by the government that helps. That fact is obvious by the amount that has been invested by a huge number of people in different cross-sections throughout the country. I believe the massive uptake is because they do not have to pay tax on their earnings at the end of the day. That money, in many cases, will be put back into the economy.
When you say that program was a loss to government of, if I heard you correctly, $50 million, how do you calculate that number? You must have used averages, thinking that tax payers would have invested it someplace else or something.
In a savings account like this one, you must have made blue-sky assumptions to come up with $50 million. I am interested in knowing how that $50-million loss was calculated.
Mr. Jovanovic: That question is an interesting one. There are two main components with which we started assessing that cost. First, we looked at individuals with savings now that are reporting taxable interest income or dividend income, and we assumed that these individuals will be able to transfer a portion of their current savings into a TFSA, up to their limits. That component is the first one. The savings will also affect their eligibility for income-tested benefits, which also has been taken into account.
The second component is that some individuals may realize that the TFSA is a better alternative for their specific purposes than let us say, the registered retirement savings plan, RRSP.
In 2009, individuals may have decided to contribute less to their RRSP and more to their TFSA, in which case there will be a lower deduction in their tax return, a lower RRSP tax contribution, which is deductible; a lower deductible amount but a higher contribution to the TFSA. As you can understand, over the short term, this decision will create increasing tax revenues because the deduction is smaller. The TFSA is not deductible.
Then, going forward, when they withdraw money from their TFSA there will not be any tax payable. If they had withdrawn from their RRSP, they would be taxed. Over the longer term then, the effect is the opposite. Compared to the benchmark, it is a decrease in government revenue. We factored in all that information: Our T1 model goes up to 2050, so over a long period of time. Over a longer period of time, of course, it is a lot more difficult to predict numbers correctly.
That is how we came up with the $50 million in 2009-10. There are offsetting factors, and the net result is $50 million.
Senator Neufeld: Will you monitor your assumptions, then, moving forward, to determine whether they were correct?
Mr. Jovanovic: Yes.
Senator Neufeld: I assume that investment in RRSPs has gone down long before the Tax Free Savings Account program came into play, simply because RRSPs were returning small amounts in many cases.
How will you calculate that effect going into the future? Will you also calculate, then, what people reported previously in dividends that they transferred out? You will then receive tax from that revenue. If they cashed out a lot of shares in some company and invested it in a Tax Free Savings Account, they obviously will pay tax on the money when they take it out. How do you calculate all that effect so you come up with a correct number?
The average Canadian wonders how you came up with the figure of $50 million. It seems like a blue-sky number to me, unless there are scientific ways to decide whether I, using me as an example, invested money in an RRSP or a Tax Free Savings Account. You do not know that information. You can only assume, right? Let us say I did not. Let us say I invested in a Tax Free Savings Account. You assume that I did. You do not know for what reason, right?
Mr. Jovanovic: No, that is true, but at the same time we will be able to look at how much interest income you reported the previous year and whether there was a direct relationship between the previous year's interest and your contribution to the TFSA. If you had interest income in the previous year and we see TFSA contribution the following year, we will do the math and assume that you have contributed the savings you had, and the savings that generated that interest income.
If no investment income was reported and you contributed to TFSA, then we can assume that you put money in your TFSA. However, that money was not invested in a taxable account in the previous year because you reported no income there. Therefore, you may have decided to pay down your mortgage at the lower pace to have more savings, and put the savings into your TFSA. That contribution comes from something that was not taxable to start with, your home, in which case there is no direct fiscal impact and we will consider that as well.
There are things we can do with the data we have to arrive at a relatively accurate figure. It will never be perfectly accurate, for sure, but it is an estimate.
Senator Neufeld: Like I say, the program is a good one, and I know that number is based on a lot of assumptions that can vary a lot depending on the individual involved.
Senator Callbeck: The total amount of equalization that goes to all the provinces is based on the economic growth you say for the last three years. This year, were the years 2009 and 2010 in that calculation? How far back do you go for those three years?
Mr. McGirr: For the 2010-11 calculation, we would take into account the GDP for 2008, 2009 and 2010.
Senator Callbeck: That protection, which is the figure we talked about, $525 million or $510 million, is there only for one year. That will make it tough on the poorer provinces because this year, if that protection figure was not there, and I know it is for the three transfers, Prince Edward Island would lose $10 million. Next year, there is no protection there whatsoever for these provinces.
When will the provinces be given an estimate of what they might expect in 2011-12?
Mr. McGirr: In terms of equalization, it is a single estimate. They will be told by December of this year what the amounts will be for the following fiscal year. The CST and the CHT are more than one estimate, but around that same time they will find out what the first estimate of the CST and CHT amounts will be for the following fiscal year.
Senator Callbeck: This protection was only for one year. Were any other measures introduced in 2009 that might take effect in the future and affect our transfer payments? That cancellation is one thing that will affect us tremendously. Is there anything else?
Mr. Vats: With respect to transfers, that was the one major federal transfer. That was the one measure there, and it was strictly a one-year measure.
If I may add something, because it is a three-year moving average of nominal GDP, regardless of your starting point, if you have a year-over-year substantial increase in GDP, that increase will have a significant impact on the size of the equalization pot for the next year. This particular protection measure was tied to a time when you had a single year nominal GDP growth that was low. We expect that in future years on the sustainable growth track, although there is no way to know, we will likely have larger year-over-year growth in the total amount of equalization, thereby making it less likely that provinces will see as big a year-over-year decline.
Senator Callbeck: I imagine that the price of oil was one reason for bringing about these changes in 2009.
Now that reason is gone. I think oil was around $150 a barrel and now it is down 50 per cent. Do you feel that you might have brought these changes in too fast?
Mr. Vats: Are you referring to the GDP growth cap or to the transfer protection payment?
Senator Callbeck: No, I am not referring to the protection payment. I am referring to the change that you made in 2009 regarding the formula.
Mr. Vats: You are referring to the GDP growth cap.
Senator Callbeck: Right.
Mr. Vats: The resource prices are extremely volatile, as we have seen. Prognosticators have gone in a number of different directions in terms of what future oil prices will be. Having a three-year growth path based on GDP growth gives both the federal government and the provinces a much better sense of what payments will be in future years. In terms of predictability and stability of payments, and predictability and stability of the impacts on the federal government's budgetary balance, it makes payments and impact much more predictable. I think we have learned a number of times that we do not have much of an idea which way oil prices will go in the future. They could go up; they could go down.
Senator Callbeck: I want to ask about another subject, the youth allowance recovery. What does that item involve and why we do we have a decrease?
Mr. Vats: It is a legacy of a tax point transfer that was made in respect of a program. I do not have the specific date off the top of my head, but I think it goes back to the 1960s. I will provide you with the exact information, if you like.
At one point in time, provinces were offered a tax point transfer as an alternative to a particular government program. That program was since cancelled, so there is a recovery of the amounts that were transferred to the provinces that agreed to take the tax point. It varies with the value of the tax point and that is why some years it will be lower and other years it will be higher.
Senator Callbeck: Can I have a breakdown of where that money goes to the provinces? Can you provide that information for the committee, please?
Mr. Vats: Sure.
The Chair: I have senators who wish to engage in discussions.
Senator Nancy Ruth: Mr. Lalonde, I want to pick up on Senator Dickson's question about loopholes. Are any of these measures retroactive?
Mr. Lalonde: No, in the 2010 budget, the measures are all proposed to be prospective, with one exception: the changes to the foreign investment entities, FIEs, and non-resident trusts, NRTs, were announced previously to be effective beginning in 2007, and will continue to be effective beginning in 2007. We do not regard that change as retroactive, however, because it is a continuation of modifications to a previously announced measure.
Senator Nancy Ruth: What kind of time have people been given to get in and out of the other loopholes before they are closed?
Mr. Lalonde: Generally speaking, the changes are applicable as of budget day. The proposed rules applicable for reporting of aggressive tax avoidance transactions are applicable as of the date of the budget, but let me confirm that date. Perhaps while we are working on the next question, I will look it up.
Senator Nancy Ruth: Okay.
Senator Murray: Mr. Vats, you described how the department first establishes the size of the pot, the nominal GDP, moving average and so on. Then, using the fiscal capacity, you establish the entitlements of the different provinces. I think you told us that if the total of the entitlements of the different provinces is larger than the size of the pot, you scale back the entitlements proportionately.
What happens if the size of the pot is bigger than the total of the individual entitlements?
Mr. Vats: There is both a ceiling and a floor on the program. If the size of the pot is larger than what would be paid out through the formula, provinces are increased by a per capita amount to that level.
Senator Murray: How does the floor work?
Mr. Vats: The floor works exactly the same way as the ceiling works in that there would be a per capita increase. They take the difference between what the pot would have grown to and what the formula would pay out, and that gives an additional amount of money, which is then distributed to equalization-receiving provinces on an equal per capita basis.
Senator Murray: Is the size of the pot the important number overall?
Mr. Vats: That is right.
Senator Murray: Mr. Lalonde, I glanced at the ways and means resolution yesterday and I thought I saw more than one measure that was retroactive. I think you were here some years ago when we had a couple of rows about retroactive legislation under a previous government. No less eminent a person than your namesake, Marc Lalonde, who was a former Minister of Justice and former Minister of Finance, and Roger Tassé, a former Deputy Minister of Justice Canada came here to denounce what the government of the day was doing. There is nothing so controversial in the present resolution, is there?
Mr. Lalonde: I do not believe so.
Before I answer that question, I can now respond to Senator Nancy Ruth's question. The measure with respect to the reporting of aggressive tax avoidance transactions is applicable with respect to avoidance transactions entered into after 2010, including transactions that are part of a series that are completed after 2010. That will be prospective and, indeed, there will be several months before it kicks in, unless it is part of a series that rolls over to the period after 2010. In this case, however, it should be recognized that because a transaction is reportable does not mean it is reassessable. It only gives the CRA an opportunity to look at it.
With respect to measures that are retroactive in effect, we try to avoid them as much as possible. There are the FIEs and NRTs, which go back to 2007. I am not sure what other measures you are referring to in the notice of the ways and means motion.
Senator Murray: I do not have it in front of me. I only glanced at it yesterday.
Mr. Lalonde: Other tightening measures, for example, in the specified investment flow-through, SIFT, trust conversions and loss trading are applicable as of budget day.
Senator Murray: I think what I saw was a 2007 one, but you have explained that was announced at the time.
Mr. Lalonde: Yes; we are, and continue to be, vigilant with respect to retroactivity. There are circumstances where the government believes that retroactivity is appropriate. You are absolutely right; there was some discussion at this committee a couple of years ago with my namesake. Indeed, I worked at the Department of Finance at the time when Marc Lalonde was the Minister of Finance. It is amusing how quickly my telephone calls were answered during that period.
As a department, we have also had our feet held to the fire in the converse, where taxpayers have managed to achieve a benefit that is considered by some to be inappropriate. There was a view that the government should have amended retroactively. In some sense, the government is caught between a rock and a hard place, but for sure, the rule of thumb is that retroactivity is not engaged in unless we have good reasons to do so.
Senator Neufeld: There has been a fair amount of discussion with regard to the CHT and the CST. Although there has been discussion about cuts, the documents I have here from the Ministry of Finance show, for fiscal 2005-06, that the CHT was $20,310,000,000. The fiscal year 2010-11 is anticipated to be $25,426,000,000. That increase of over $5 billion is significant. That number is useful for those who are watching to understand. The Canada Social Transfer was $8,415,000,000 in 2005-06, and it is anticipated to be $11,186,000,000 in 2010-11. That increase is $2.5 billion. There has been a significant increase in both those transfers to the provinces over those years.
I listened carefully to Senator Callbeck's questions. When I look at federal support to Prince Edward Island, in a receiving province, I see an increase in the Canada Health Transfer, the Canada Social Transfer and equalization over that same period of time.
I want to put on the record that a significant increase has taken place. There is probably much discussion around whether that increase is enough, which is understandable and normal, but there has been an increase over the last six fiscal years. On top of that increase, there is the anticipated top-up that you were speaking about for only the fiscal year 2010-11. Do you agree that increase is significant?
Mr. Vats: There has also been a significant increase in equalization over that period.
Senator Neufeld: Yes; if you want those numbers, from 2005-06, equalization was $10,907,000,000. The anticipated 2010-11 fiscal year is $14,372,000,000, plus the $510 million that you spoke about, which makes it $14,882,000,000. There is a significant increase in those transfers also. I want to make sure that information is on the record.
The Chair: Mr. Vats, can you confirm these figures by providing us with the list of payments?
Mr. Vats: The different transfers? Sure.
The Chair: It is also important for the record to be clarified here, Mr. McGirr. For the Canada Social Transfer, the base year being two or three years ago, it was agreed as a social contract between the Government of Canada and the provinces that there would be an increase of 3 per cent; and for the Canada Health Transfer, an annual increase on the base year of 6 per cent. Is that correct?
Mr. McGirr: That is correct.
The Chair: That agreement has not changed?
Mr. McGirr: No.
The Chair: That is really all we need to know about that point.
Senator Marshall: Can you explain the changes to section 116 of the Income Tax Act regarding foreign investors? How many foreign investors are there? How big is this issue? Does this change affect only a few investors or is it bigger than that?
Mr. Lalonde: Section 116 is a provision that bolsters, as an administrative measure, taxation of what is referred to as taxable Canadian property. Canada taxes its residents on worldwide income. Non-residents are taxable only on certain sources of income that are sourced to Canada.
For example, if a person is a non-resident but earns employment income in Canada, that person will be taxable on that employment income. If a non-resident earns business income in Canada generally through a permanent establishment in Canada, that person is taxable on that business income. If a non-resident disposes of shares, for example, of Canadian corporations carrying on business in Canada, the person may or may not be taxable on that disposition as a non-resident. Generally speaking, in the context of publicly traded shares, it is difficult to know if a non-resident is the seller of a share. As an international standard, generally speaking, only the country of residence taxes gains on such shares.
For example, Canada does not tax a non-resident on a disposition of a publicly traded share in Canada, with certain exceptions where there is a large private holding in a public corporation. Canada also taxes dispositions of Canadian real estate situate in Canada by non-residents. We also tax dispositions of shares of a corporation where the value of that share is derived primarily from real estate, and also certain resource properties and timber resource properties. All of that taxation is consistent with international norms.
Where Canada was a little different from international norms was that Canada taxed dispositions by non-residents of shares of private corporations that were resident in Canada, regardless of whether the properties were primarily real estate or timber resource properties. This taxation was achieved by including shares of private corporations in the concept of ``taxable Canadian property.''
When non-residents dispose of taxable Canadian property, they are responsible for paying tax on that disposition. In recognition of the fact that because it is often difficult to collect tax from non-residents because they are not resident in the country, a withholding mechanism was put in place. That is what the section 116 withholding obligation is all about. It says that any purchaser of taxable Canadian property is supposed to withhold a portion of the payment that they would make for the property, and turn that over to Canada Revenue Agency as a payment on account of the non- residents tax. The non-resident then calculates their tax liability and either pays the excess — although there is unlikely to be an excess — or they receive a refund of tax withheld in excess of the amount of tax owing.
The section 116 certificate process was one under which a non-resident could assess the amount of tax owing and apply to Canada Revenue Agency to say that, instead of withholding the amounts required under the act — generally 25 per cent and in some cases 50 per cent — can we deem that this is the exact amount; give me the certificate and it will be good.
In many cases, the exact amount is zero. The reason is that under most of Canada's tax treaties, we agree, on a bilateral tax treaty basis, to tax only those private corporations the shares of which are derived primarily from real estate or timber resource properties and resource properties.
In some sense, it was a tempest in a teapot. All these transactions were taking place — people were buying and selling shares, receiving these section 116 certificates, and in some cases taking a significant amount of time to receive these certificates from Canada Revenue Agency — all to show a tax liability of zero. This process became particularly problematic in the context of the high-tech sector.
The high-tech sector generally does not have corporations that derive their value primarily from real estate, et cetera, but as a result of this section 116 requirement, a case was made to the department that non-residents are loath to invest in Canadian high-tech start-up companies because of the paperwork involved.
In the 2008 budget, we introduced a measure under which we excluded from the withholding obligation shares of corporations where the vendor was exempt under treaty because this point was made to us: Why are we making them go through this process if the vendor is exempt under treaty?
The industry then came back to us and said, yes that is what they told us in their submissions, but the fact is that it is often hard to prove exactly where the vendor is resident. The vendor might be a partnership and then they would have to pierce through the partnership, find out where all those partnerships are, and, then, even though 90 per cent of the partners may be in a treaty country, that does not mean all the partners are in a treaty country. They have to prove, and have a certificate for, each one of them. At that point, it became obvious that the only way to resolve the issue of the section 116 certificates was either to insist it continue, and that is the way it will be, or to revise from a tax policy perspective what we want to tax.
The international norm is to tax real properties that are situated in the country — resource properties. It is not the international norm to tax private corporations resident in a country simply because they are private corporations resident in a country. To resolve the paperwork involved with collecting this tax, which, in many cases, does not exist, the solution was to make the tax go away which, in effect, makes the reporting obligation go away.
Senator Marshall: How many investors end up paying no tax but start by being potential taxpayers? What is the volume? How many taxpayers and how many foreign investors does this change impact? I know you cannot indicate the number of people that avoided investing because of this process, but how many were there that you are aware of?
Mr. Lalonde: I do not have the number of investors that have invested in Canadian private corporations. I am not even sure we can access that number. If your question is posed more as to whether this change benefits a small group of people or a large group of people, it is a large group of people. It is not directed at any particular non-resident. It is directed at the ability of Canadian corporations to attract investments from abroad generally. It is not directed at any particular investor. It is more pressing for the high-tech sector than others, but it is not necessarily constrained to the high-tech sector.
Senator Marshall: From what you are saying, it sounds like there will not be a loss of revenue to the federal government. It is almost a red-tape reduction initiative. Am I understanding that to be the case?
Mr. Lalonde: For the most part. Canada has tax treaties with a large number of countries. The number that comes to mind is 87, but it changes from day to day. We are active in negotiating tax treaties, as you know, and now tax information exchange agreements.
For the most part, the industrialized world is covered by tax treaties. There may be investors from some non-treaty countries that in the past would have been responsible for paying tax on dispositions of taxable Canadian property that are taxable Canadian property simply because they are shares of private corporations that will now be excused from that tax. It is estimated to be about $25 million a year. Our cut-off point for ``small'' is around $5 million, so it is not small, but it is not a relatively great amount, either.
Senator Callbeck: A statement has been made that transfers are going up, but I want to make the point that the changes that have been made in the Canada Health Transfer and in the equalization have affected some provinces, for example, my own. Starting in 2009, for the next five years in the health transfer, it is estimated we will lose $12 million. With the equalization, it is estimated we will lose $87 million. We will lose $100 million in five years because of those changes. That is $100 million less than was committed to us in the budget of 2007. The change has a tremendous impact on our bottom line.
The Chair: Is there anything in the documentation that you will send to us, Mr. Vats, to help us confirm the figures given to you by Senator Callbeck?
Mr. Vats: They probably will be able to speak to the years only between Budget 2007 and 2010-11. As for the future, I do not think we have those numbers available.
Senator Ringuette: With respect to social services and post-secondary education, after three years of having changed the formula from a capacity-based formula to a strictly per capita formula, have you completed an impact assessment on how the change has impacted negatively on the smaller populated provinces?
Mr. Vats: The short answer is no. The government had decided that going to a per capita transfer was a more equitable and transparent way to allocate the money for social services and the CST. That decision was taken in Budget 2007.
Senator Neufeld: I have one question, and I do not expect you to have the answer, but maybe we could have some information through the clerk.
We have the 2010-11 equalization payments for each of the receiving provinces. I assume you have those numbers going back as far as 2005-06 for any one of the provinces that received equalization. British Columbia would have been among those provinces during that period.
There are some left out that have paid in to equalization; is that right? How do you calculate that? We come up with a number where we give out of equalization. Is there a number that correlates to that that comes into equalization from others?
The Chair: Can you sort out that comment? Certain provinces paid into equalization?
Senator Neufeld: That is fine. Then let us see it.
Mr. Vats: There is sometimes a misperception that provinces directly pay into equalization, but it is all funded out of federal tax revenues. The idea that a province pays into the system is more than a bit inaccurate.
Senator Neufeld: Someone must pay in to be able to pay out.
Mr. Vats: As the chair said, we all pay through our taxes but we pay through federal taxes. It comes out of that large revenue pot of federal revenues, rather than a specific province being allocated an amount.
Senator Neufeld: I know it is difficult, but if we take Alberta out of the mix, we might be looking at a totally different number. That is what I am trying to say.
Mr. Vats: The equalization amounts will not change necessarily, but there would be a smaller revenue base from which to draw.
Senator Neufeld: There sure would be; a smaller pool.
The Chair: Honourable senators, that concludes this session. On your behalf, I thank Mr. McGirr, Mr. Vats, Mr. Lalonde and Mr. Jovanovic for coming here. That discussion was helpful.
The next panel we hope to have before us in the near future are your colleagues that are familiar with the Community Futures Program and the Canada Health Infoway. You will recall that questions were raised with respect to those two programs earlier on, and we were told by other witnesses that representatives of those groups would be interested in coming and talking to us, but they could not make it today. We will make arrangements to have them so we can discuss those points at a later stage.
There are, of course, many other items that the steering committee will deal with and the committee will set up the program, but we will not meet tomorrow evening. We will continue in the chamber with the two supply bills.
Senator Ringuette, do you have a final word?
Senator Ringuette: Is there any word on Atomic Energy of Canada Limited?
The Chair: We are working on AECL. Witnesses were before the House or they would have been here today.
Senator Ringuette: Also, Senator Peterson asked an important question in regard to the reduction of over $50 million for Canada Post for this fiscal year, and I would like to see Canada Post appear.
The Chair: First, we will wait for the undertaking that we have asked for here and find out that information. It was a special payment. If you look in the Main Estimates, Canada Post borrows outside of government. They are authorized to do so and pledge their assets to do so; but this was a special payment within.
I noticed one of the special payments was to help in the North. They have special activities.
Senator Ringuette: That program is a yearly one.
The Chair: There are other special payments that they receive, and this one is reduced. We will find out what it is and we will circulate that information to all members of this committee.
This meeting is now concluded.
(The committee adjourned.)