Proceedings of the Standing Senate Committee on
National Finance
Issue 10 - Evidence - December 6, 2011
OTTAWA, Tuesday, December 6, 2011
The Standing Senate Committee on National Finance met this day at 9:34 a.m. to give consideration to Bill C-13, An Act to implement certain provisions of the 2011 budgets as updated on June 6, 2011 and other measures.
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honourable senators, this morning we will continue our consideration of Bill C-13, An Act to implement certain provisions of the 2011 budgets as updated on June 6, 2011 and other measures.
[English]
Colleagues, this is our third meeting on Bill C-13. Up until now, we have been dealing with witnesses from the government who have been explaining to us the policy decisions made by the government and what the government is hoping to achieve with the various initiatives in Bill C-13, which is referred to as the second budget implementation act for this year.
The meetings this morning and tomorrow are set aside for those impacted by the legislation. We will be speaking to witnesses from outside government. We then anticipate that, with those two hearings, we will have had enough meetings on this bill to proceed with clause-by-clause consideration of the bill.
I am pleased to welcome this morning, in our first panel, Susan Eng, Vice President, Advocacy, Canadian Association of Retired Persons; Rob Simonds, Fire Chief, President, Canadian Association of Fire Chiefs; Jean-Michel Laurin, Vice President, Global Business Policy, Canadian Manufacturers and Exporters and Martin Lavoie, Director of Policy, Manufacturing Competitiveness and Innovation, Canadian Manufacturers & Exporters.
Perhaps each of you would like to make a five-minute presentation on the section of the act that is of concern to you. We can then go into general questions and answers.
Susan Eng, Vice President, Advocacy, Canadian Association of Retired Persons (CARP): I am Vice President, Advocacy, for the Canadian Association of Retired Persons, CARP. We are a national, not-for-profit, non-partisan association with 350,000 members in 50 chapters across the country. We advocate for public policy changes that improve the quality of life for all Canadians as we age.
Health care remains a top priority for our members. It is for all Canadians, but it matters more as we age. Despite the fact that today's generation of older Canadians is living longer, healthier lives, the Canadian health care system services Canadians well for acute care but is not mandated to provide continuing care, especially for those with chronic diseases for whom medicine has no cure. That responsibility falls to family, informal caregivers and the home care sector, which is at present, at best, a patchwork across the country.
CARP's particular focus today is on clause 23 of Bill C-13, which provides for a non-refundable caregiver's tax credit. CARP is recommending that the tax credit be made refundable and increased in amount.
The vast majority of Canadians want to stay in their own homes, meeting their medical challenges for as long as possible in those homes. Not only does this improve their health outcomes, but it keeps them among family and friends, which adds to their quality of life and health outcomes. This good social and health policy is also good fiscal policy. A well-integrated and successful home care strategy has the potential to divert massive amounts of demand from the formal health care system. Home care is estimated to be about 40 to 70 per cent less expensive than institutional care.
Finally, not only is a comprehensive home care and caregiver support strategy good public policy, but it also makes good political sense.
CARP polls its members regularly on our advocacy proposals, and they consistently rank caregiver support as a top priority. They were appreciative of the attention that the role of family caregivers was given in the recent federal and provincial elections. They said that they appreciated the acknowledgement of family caregivers with the specific non- refundable tax credit proposed and now passed in the recent budget, but they preferred the refundable tax credit and specific allowances that were in the other platforms.
In our poll last month, 50 per cent of those polled thought that the best way to support caregivers was an income allowance or refundable tax credit. Only a small portion thought the non-refundable credit was adequate. A refundable tax credit, in the amount set forth in the budget, would be welcome by the 2.7 million Canadians now providing care to older loved ones. There should also be a focus on those providing heavy care, those who are likely reducing their work hours or even quitting their jobs altogether to look after loved ones. I think that such people would not benefit from a non- refundable tax credit unless they had other sources of taxable income. Not only should they receive a refundable tax credit, but the amount needs to be increased well beyond the $300 in the budget changes. It is possible to limit the budget expenditure for such a measure. One in five Canadians over 45, or 2.7 million, is a caregiver to an older person. Of those 2.7 million Canadians, some 25 per cent provide what is considered heavy care, defined as 30 hours a week or more. That brings us down to about 675,000 people.
Of the full range of 2.7 million caregivers, 25 per cent are themselves seniors, and 30 per cent of them are over 75 years of age. That is some 200,000 older Canadians who are providing care for older loved ones.
A modest $1,500 a year for those heavy caregivers would cost about $1 billion a year. That, of course, is a great deal of money, but one of the things we must recognize is that their unpaid services are estimated to be worth some $25 billion a year. There are also models in the provinces that provide allowances for caregivers. Nova Scotia, for example, targets low income care recipients; and Manitoba also provides a means- and income-tested refundable tax credit.
Also, we have a German example that I commend to you. They have a form of long-term care insurance that is constructed much like our CPP. Benefits are paid to the care recipient in amounts dependent on whether they are paying for home care workers or in an institution, depending on the level of need. The tradeoffs are there. The value of the unpaid labour, as I mentioned, is some $25 billion a year. Informal caregivers provide 70 per cent of the home-based care for seniors and home care is 40 per cent to 75 per cent less expensive than institutional care. The potential for savings is in the billions of dollars. Others can calculate it more accurately for you but it is in the neighbourhood of $10 billion to $16 billion a year in savings if home care is fully rolled out.
Rob Simonds, Fire Chief, President, Canadian Association of Fire Chiefs: The Canadian Association of Fire Chiefs is a non-partisan national association formed in 1908. Our 1,000 members include fire chiefs and other chief fire officers from every Canadian province and territory and from Canada's First Nations, industry, airports, sea ports, major health care facilities and Canadian Forces establishments. Our national board of directors includes the presidents of each provincial and territorial association of fire chiefs. Clearly, the CAFC is in the best position to speak on behalf of all elements of the Canadian fire services.
As part of Budget 2011, the Government of Canada introduced a $3,000 income tax credit for volunteer firefighters who perform more than 200 hours of service in a year. Canada's fire chiefs have been advocating for tax relief for volunteer fire services since 2003. The proposal adopted by the Government of Canada in Budget 2011 was the proposal that the CAFC presented to the federal government as our budget priority during last year's pre-budget consultations. In our view, tax relief for Canada's volunteer fighters is a key part of the solution to addressing the recruitment and retention challenges facing Canada's volunteer fire services. We would like to recognize the government for its commitment to pass this initiative into law. We are also grateful for the work of members of Parliament from all parties who have supported us in our campaign for tax relief for volunteer firefighters. This measure will help with the recruitment and retention of volunteer firefighters across the country, which, in turn, will help protect Canadians in our communities.
I would like to provide you with some clarification of Canada's volunteer fire services. Volunteer firefighters are unique, even amongst other volunteer emergency first responders. The vast majority of Canadian communities are protected by volunteer firefighters. Of Canada's 3,492 fire departments, more than 91 per cent are volunteer departments and four out of every five firefighters are volunteers. In many of Canada's rural and remote communities, volunteer fighters are the only emergency first responders. In no other emergency first responder service do volunteers play such a significant role.
I can assure you that while they are volunteers in name, their training and the services they provide are highly professional. Volunteer firefighters are trained in the same way as career firefighters. Once recruited, it takes approximately three years to properly train a volunteer; and sadly many do not stay past five years. The lack of reimbursement for out-of-pocket expenses, inadequate equipment and resources, and the time spent away from families and paid employment make it difficult to attract new volunteer firefighters and to keep those already trained. It is worth noting that other volunteer emergency responders plan or choose when they want to volunteer, whereas volunteer firefighters are often on call all the time. These brave men and women leave their full-time jobs to attend to emergencies, losing wages and incurring personal costs in the process.
In terms of who will qualify for this tax credit, to help the federal government understand this issue, the CAFC conducted a survey of Canadian fire departments to determine how many volunteer firefighters would qualify under our proposal. Our research showed that between 45 per cent and 65 per cent of Canada's volunteer firefighters would meet the 200-hour threshold to qualify for the tax credit, which means between 40,000 and 55,000 volunteer firefighters. From this information, we calculated that the cost of providing this tax credit would not exceed $25 million a year. To put this tax credit in perspective, it would cost $3.8 billion a year to replace Canada's volunteer firefighters with paid full-time firefighters.
Perhaps you may be wondering how the volunteer firefighter tax credit compares to the existing $1,000 tax exemption. The Government of Canada currently allows volunteer firefighters to earn $1,000 from their fire department tax-free. This measure only benefits some volunteers as most fire departments do not provide stipends. For example, stipends are almost unheard of in Atlantic Canada. The $1,000 tax exemption is of limited value because few volunteer fire departments have the fiscal capacity in which to provide stipends, and those that do have the capacity, usually provide less than $1,000. The volunteer firefighter tax credit creates a national standard for Canada's volunteer firefighters by providing tax relief to those who do not receive a stipend.
In closing, on behalf of the Canadian Association of Fire Chiefs, I would like to thank members of the Standing Senate Committee on National Finance for the opportunity to appear today.
Jean-Michel Laurin, Vice President, Global Business Policy, Canadian Manufacturers & Exporters: Thank you for inviting us to appear before the committee as part of your consultations on Bill C-13. I am pleased to be here today with Martin Lavoie, Director of Policy, Manufacturing Competitiveness and Innovation.
I would like to say a few words about the association that Mr. Lavoie and I have the privilege of representing. Canadian Manufacturers & Exporters is Canada's leading trade and industry association and is the voice of manufacturing and global business in Canada. The CME directly represents more than 10,000 leading companies nationwide. More than 85 per cent of our members are small- and medium-sized enterprises representing every industrial sector and every sector of export activity in the economy. As Canada's leading business network, the CME, through various initiatives including the establishment of a Canadian manufacturing coalition, touches more than 100,000 companies from coast to coast engaged in manufacturing, global business and service-related industries.
We like to remind people that manufacturing remains the single largest business sector in this country — $534 billion across Canada. Companies that make things in Canada account for 13 per cent of Canada's total economic output. Manufacturers employ over 1.7 million Canadians in highly productive well-paying jobs. They pay one third of the taxes levied on Canadian business. Their contribution is critical for the wealth generation that sustains the standard of living of each and every Canadian.
Today, we would like to address one aspect of Bill C-13: the two-year write-off for manufacturing and processing of machinery and equipment investments. This important tax measure would expire at the end of this month had Bill C- 13 not extended until the end of 2013. This is something that the CME strongly supports; and we congratulate the government on this year's budget because it is critical to stimulate further investments in Canada's manufacturing sector. We have circulated some materials that summarize our analysis with respect to the two-year write-off.
As you know, manufacturing and exporting business sectors have been faced with several major challenges over the last few years, including an appreciating and volatile Canadian dollar; rapidly rising costs; and a recession that, within a six-month period, took out 30 per cent of production in manufacturing. We are slowly regaining this, but we are still more than 10 per cent below where we were mid-year 2008 before the recession hit us.
We have learned a few things from this recession. First, you do not create wealth in the economy by spending other people's money around and around again. You create wealth by producing real products and services that customers value and buy. Second, we cannot continue to borrow our way to economic growth. We have to focus on two main areas for growth: business investment and growing our exports. The two are interlinked because the investments improve productivity, competitiveness and innovation; and ultimately, they drive export success.
We also have to realize that we are facing some long-term challenges in terms of demographics, health care and environmental issues. We will have to depend on innovative companies, manufacturers in particular, that bring 82 per cent of all new products to market to solve these important problems that our economy and our country face.
It is also important to point out the importance of cash flow and profitability in boosting employment and in generating investment growth. In fact, part of our analysis shows exactly that. The arguments we brought to the Minister of Finance and his department around the two-year writeoff were based on the importance of boosting cash flow in order to encourage or allow manufacturers to invest in productive assets.
In fact, as our analysis shows, there is a strong correlation between after-tax profitability of Canada's business sector as a whole and the unemployment rate. In fact, the data shows changes in profitability before the unemployment rate — in other words, when businesses have money, they make investments, grow and ultimately employ more people.
Moreover, there is a strong correlation between the after-tax cash flow, defined as before-tax profits minus corporate taxes, and capital consumption allowance. In fact, after-tax cash flow is driving investment activity.
CME believes that Canada's tax structure must be geared toward leaving more money in the hands of companies that are making investments in productive assets, in technologies, in new production technologies, in research and development and new product development and upgrading the skills of its workforce. Those are the investments that will make a difference for the Canadian economy going forward.
The budget that was introduced in March was important, in part, because it included the extension of this two-year write-off up to 2013. For a manufacturing company, it moves cash flow up front and provides all manufacturing companies that make these investments with about a 12.5 per cent additional return on investments in the first three years of that investment in new production equipment.
That is why it is so important today, when we need to replace technologies quickly. We are competing with the rest of the world to attract investment to our manufacturing facilities. This measure was a badly needed infusion of cash, especially in the midst of a recession. Extending it for a two-year period gives companies a period of certainty so that they can make investment decisions. That is also why manufacturers have chosen to invest in modernizing their Canadian operations. That is also why this tax measure was supported by the 47 associations in the Canadian manufacturing coalition and why the Canadian Labour Congress supported it.
We definitely support this measure in the bill. In our view, it should be made a permanent feature of the tax system because it supports exactly the type of investments we need in order to grow the economy.
I will stop there, and Mr. Lavoie and I will be pleased to answer any questions that you have.
The Chair: Could you elaborate on that last issue, the initiative that appears in the bill. A number of us have been on this committee for a number of years, and this is not the first time we have seen this temporary, one-time-only extension that is happening again.
Mr. Laurin: The tax measure was first introduced in Budget 2007, if my memory is correct. It was put in place for a 22- month period. Since then, I believe it was extended for an additional year in the 2009 budget, and then, in the 2011 budget, which is the budget we are looking at right now, it was extended for another 22-month period, which takes us to the end of 2013. That is certainly something that we see as positive. Ultimately, we would like this type of measure to become a permanent feature in the tax system. Capital investment planning cycles, especially for larger companies, are typically done over a multiyear period. In some cases, they go up to five years. The manufacturers are saying that the more you can provide predictability, the better. Ultimately something like five years would be better for our members, because that predictability is what drives investment. Two years, which is what we have right now, is certainly better than nothing, but I think the more you can provide predictability, the more companies will use this tax measure as a way to boost investment.
The Chair: It is an accelerated write-off of machinery and investment.
Mr. Laurin: Yes. Without this measure, manufacturers can depreciate 30 per cent of the declining balance of the equipment every year. Effectively, it takes 14 years to depreciate about 99 per cent of the value of the asset. Every year, you depreciate 30 per cent of the residual value. With this measure, we call it a two-year write-off, but it is actually 25 per cent the first year, 50 per cent the second year and 25 per cent the third year. It is actually over three years but, because of the half-year rule, and accountants can explain this to you, it is basically over a two-year period, which is effectively three years. Basically, you can write off your asset much more quickly. You do not necessarily have to pay as much tax up front because you are depreciating the equipment right at the beginning of the investment project, and our analysis shows that it boosts return on capital investment by about 12.5 per cent.
Senator Marshall: Ms. Eng, your presentation was focused primarily on the family caregiver tax credit, but you talked about a number of other things, like home care.
I worked with the Department of Health and also Social and Community Services in Newfoundland and Labrador, and we had a home care program. It seems that the biggest factor for implementing home care and also the refundable tax credit would be the cost. Could you talk about the constraints that the costs impose on some of these programs?
I would also be interested in hearing what jurisdiction has the best model. Apparently, each jurisdiction has its own program, and you would be familiar with them. What jurisdiction has what we would call a model program that we could strive toward?
Ms. Eng: We always look for best practices to present whenever we bring something to the House of Commons or the Senate. Frankly, we did not find one that was fairly comprehensive. There is certainly a patchwork of good programs across the country. However, if you take the model of a family with average income that needs this kind of support at home you find that, across the country, they do not have adequate access to professional home care workers. They are worried about the professional qualifications of those home care workers. There is certainly a shortage, and no supervision. They do not even get the number of hours, even of people they are not sure about being qualified.
In addition, they also need the help of family members, who have to take time off work and are not trained. They care, and they want to put in the time, but they do not really know how. The system needs to assist them with some training, information and so on.
In addition, there is still a need for the formal medical system to interact, so they provide some supervision, direction and navigation and respite care so that you ease or bridge the transfer from acute care into home and continuing care. In order for that to happen, you need the entire package. It also requires you to start thinking about how your homes are constructed and the kind of renovations that you need in order to make all this possible.
If you do this properly, and this crosses many jurisdictions, from municipal to provincial to federal, all of those jurisdictions have a responsibility for making this hope a reality across the country. Yes, that costs money. However, it is our position that, if we do this correctly, then not only are people aging well where they want to be, but the system will save massive amounts of money.
Senator Marshall: Is there any jurisdiction that is further along the spectrum than other jurisdictions? You do not have to confine yourself to what is happening provincially, but even in other countries?
Ms. Eng: In fact, Germany has a good system, not the least of which because they are funding it. People can participate in a long-term care insurance scheme which provides funding. With that funding, you are able to pay for all of the elements that I just discussed. That gives them certainly an important threshold to start with.
In Denmark, they have made a real point of not building any more long-term care homes. Obviously, they put their resources into constructing all of these other pieces.
British Columbia is not bad in creating affordable housing associated with assisted living services so that you never get beyond that difficult stage.
In Ontario, there are bridging programs that assist people bringing people home from hospital. They actually send out the hospital workers to create a virtual ward in the homes, so you make that transition much safer and create an opportunity for the family to stabilize at home rather than being readmitted.
There are many pilot projects across the country. I am not saying nothing is being done. We probably need a comprehensive national strategy with participation at all levels of government.
Senator Marshall: Mr. Laurin, I interpreted from your comments that you like this tax amendment, but you would like to see it made permanent.
Mr. Laurin: You understood me correctly.
The Chair: That is the way I understood it as well.
Senator Callbeck: Ms. Eng, you talked about home care and the potential savings that are there, and certainly I agree with you, as well, if a person is able to stay at home. The figure is 2.7 million caregivers, or people who are involved with care in Canada; 675,000 are in heavy care. Do you have any idea of how many of that 2.7 million or within that, the 675,000, who can take advantage of this non-refundable tax credit?
Ms. Eng: That is an essential point. The people providing heavy care, if they have a lot of income, then, of course, they will be able to take advantage of it. However, persons who have had to cut down their work hours — which is frequently the case, otherwise, they would hire someone, if they could afford to do it — or providing 24/7 care, even with a home care worker, will not have employment income against which to use the tax credit. That is our point. For people, especially those who are providing the heavy care, this help, while welcome by many, will not be useful to others.
Senator Callbeck: Right, it is mainly the low-income people.
You mentioned a couple of models in other provinces, for example, Nova Scotia and Manitoba. They are geared toward the low income, whereas this is not. If you do not pay income tax, you get absolutely nothing.
Ms. Eng: Correct.
Senator Callbeck: On the firefighters' credit, you say that 45 to 65 volunteer firefighters will meet the 200-hour threshold. That leaves many volunteer firefighters outside that. First, if you do not pay income tax, you do not get anything., I am concerned about the rural and remote areas. Will they be excluded from the 200 hours?
Mr. Simonds: That is a good question. Let me provide some clarification. When we were meeting with our provincial presidents and seeking clarification, we identified that 200-hour threshold and did significant analysis. When we provided those numbers, they were conservative in nature. There are a number of other firefighters on the cusp of maintaining that 200 hours and achieving that objective.
As recently as last week, when the CRA provided us further clarification, recognizing this is the first time we are migrating into the application of this provision, we also have come to realize that the interpretation they are providing us will enable more volunteer firefighters to become qualified for this. That was as recently as the end of last week. Therefore, for volunteer firefighters on call, poised to respond, all of their hours will be recognized, which is an enhancement to what we initially contemplated. When we put together our statistical information, we had surveyed our provincial presidents. We made sure our numbers were conservative, and they were based on information we received. However, based on the information we received last week, it provided us greater comfort in knowing we will have even more of our volunteers that will qualify now for this benefit.
Senator Callbeck: The firefighters who will not qualify because of that 200 hours will generally be from rural areas. Is that right?
Mr. Simonds: No. It is a by-product of the amount of time they are actually spending. For example, I am a former president of the New Brunswick Association of Fire Chiefs, which is a predominantly rural service throughout New Brunswick. I can speak unequivocally to the profile of the volunteer firefighter service. By example, when you look at that and the amount of time those individuals are putting into training, responding, maintaining equipment, and also now that their on-call time will be calculated, I would suggest to you that they are better positioned today to receive it than they were before we received the further clarification from CRA.
Senator Callbeck: I understand that, but I come from a rural area, and I am well aware of the valuable work that these volunteer firefighters do. My concern is the 200 hours, and my other concern is if they do not pay income tax, then this is worthless to them.
Mr. Simonds: That is a fair comment. The Canadian Association of Fire Chiefs has spent close to a decade trying to move something forward in order to address the retention and recruitment of our volunteer firefighters. The position we put forward to government was gleaned as a result of surveying all our members from all of our provincial presidents, for example, in your jurisdiction, Chief Rossiter, who was front and centre and spoke to this issue for us. It was determined that tax relief would be the most viable means by which to move this forward. We have been trying to remain mindful of the fiscal capacity of government. We recognized for close to a decade that we were unable to move forward on this. While we acknowledge there are limitations with whatever we will present to government, we believe that as a result of surveying our members across the country, this was the most viable option to bring forward at this time to address the recruitment and retention issues for our volunteers.
Senator Callbeck: It is great to see tax relief in here, but as I say, my main concern is the people on low income.
Mr. Simonds: Indeed.
Senator Callbeck: They are the ones really that should be getting it the most. It is just the opposite, in fact.
The Chair: On this non-refundable tax credit, you refer in your presentation — and we see it regularly — to a $3,000 income tax credit. Does that mean that all volunteer firefighters who work more than 200 hours would get $3,000 back if they pay any income tax at all?
Mr. Simonds: I believe the calculation is based upon the lowest threshold. If you look at percentages, the actual amount of money that would be retained by those volunteers would be in the vicinity of 450 to $500. The $3,000 threshold is what allows you to achieve that amount. We had done a significant amount of work at the request of the Department of Finance to do assessment, because clearly there is sensitivity to the overall cost to the budget in terms of a cost avoidance perspective.
As for the 200 hours, we had received that direction from our board of directors and our provincial directors, and we looked in consultation with the finance department. When we moved forward on that $3,000 threshold, it was a stake in the ground, if you will, at a value that would allow our members to receive that tax relief in the amount of about $450 in terms of tax relief. That emerged as a result of a significant amount of surveying of our members and consultation with the finance department.
The Chair: When we look at your income tax return, you have X dollars on which you are paying income tax; let us say at the lower level of 15 per cent. That X amount is being reduced by $3,000, and you apply 15 per cent of that. That is the actual saving to each firefighter.
Mr. Simonds: Yes.
Senator Callbeck: Do you have a breakdown by province as to the firefighters' departments that will qualify for that 200 hours?
Mr. Simonds: We had provincial and territorial surveys that went out to all of the presidents of those associations. We had the fire chiefs within each of those respective provinces undertake the survey on our behalf.
With no stipends being offered throughout Atlantic Canada for the most part, for example, a higher percentage would qualify in that area than perhaps in some other jurisdictions where they are paid on an on-call basis or something of that nature. Different pockets of our country have different applications for their volunteer firefighters, the majority of which would benefit from this, based upon the various funding models that are presented. Currently I am now residing in Ontario, in the city of Hamilton, and we provide a payment to our volunteers within the city of Hamilton. Again, when you look at the divergence of the Canadian fire service, it has varying applications across the entire country. This information was synthesized from all of the information from all of the provinces. This is how we found that one option that would benefit the most.
Senator Callbeck: Could you send the committee a copy of that research?
Mr. Simonds: We could, indeed.
Senator Ringuette: You mentioned the CRA interpretation. I assume that the on-call time of the volunteer firefighters, and probably also their training time, were unknown. Is that where the clarification of the interpretation comes?
Mr. Simonds: We always knew that the training component, the time spent training, would absolutely be a calculation. We knew the time maintaining equipment, responding to calls and conducting in-service inspections and in-service public education initiatives would all be counted. The clarification provided most recently by CRA is that when you are not engaged in any of those functions but still available to respond, you are now credited for that. We are pleased to see that interpretation. That actually enhances the numbers we had provided. As a former president of the New Brunswick Association of Fire Chiefs, I knew specifically how much that would enhance those of us who came from rural areas of the country.
Senator Ringuette: I also come from a small New Brunswick community, and volunteer firefighters are there to support the community. When you add all of that — on call, maintenance, equipment, training and so on — I am surprised we are only at a maximum of 65 per cent of the volunteers.
Mr. Simonds: Actually, that number predates the information we just received last week, so that would be at the lower threshold of what I would offer to you. We had prepared this in anticipation of our appearance before you today. As of last Friday, we got further clarification, so you will see an enhancement of that number.
Senator Ringuette: I still would like to voice my concern with regard to low income. From what I have witnessed in my small community, those on low incomes are the ones who put more time into volunteering, on the one hand. On the other hand, this non-refundable credit is not really recognizing the time and effort that they are providing. However, I agree that it is a start.
Mr. Simonds: I appreciate your comments. I can tell you that what brings us great comfort is the unanimity that exists amongst senators and parliamentarians relative to support for the Canadian volunteer firefighters. While there might be a divergence in views relative to what the most optimum solution is, there seems to be great unanimity in terms of the value of the service provided by those volunteers. For that, we are very appreciative.
Senator Ringuette: Ms. Eng, when you use the term "heavy care," what do you mean? Can you tell us more? You seem to distinguish between care and heavy care.
Ms. Eng: Statistics Canada has come up with the number of 2.7 million Canadians, people over 45, who are providing some care for an older loved one, and that is excluding child care giving. There is research that estimates that about 25 per cent of all those people are providing what is considered "heavy care," which they define as 30 hours or more per week spent in care giving. What that usually entails is a person either working only part time or quitting their job altogether in order to provide this care for a family member. That would be the category that we would distinguish from the general population of people providing care.
Senator Ringuette: What is the average cost for a senior citizen, or any needy citizen, for heavy care? What would be that cost in a government institution?
Ms. Eng: Of course, the government institution itself is providing funding for the nursing care, but the individual also has to co-pay. We had numbers that are dated; the ones that are official came out of a research program in B.C. They indicated that, in heavy care, the cost was something close to $45,000 a year. However, the co-pays today and the nursing envelope that the provincial government pays in Ontario is about $55,000, on top of which the family has to pay between $1,500 and $2,000 a month as a co-pay. You are looking at $75,000 to $80,000 a year for a person who is in heavy care. Obviously, if they need to be there, that is, we hope, money well spent. Oftentimes, there is no filling in of the gap between people who can stay at home on their own and those who need help with many medical challenges, which can now be done at home, whether it be dialysis or even cancer care, to some extent. With visiting nurses and home care, it is possible to deal with a great deal of chronic disease at home, in a much more comfortable setting.
Senator Ringuette: The cost factor is huge.
Ms. Eng: Yes.
Senator Ringuette: I look at the figures that you have provided in your statement. I certainly think that we should be providing a refundable tax credit, at a minimum, for the people providing home care for their family members. Just look at the savings to government if we do so.
Ms. Eng: Absolutely.
Senator Ringuette: Thus, we leave a lot of money in the Canadian economy.
My last question is for Mr. Laurin. I certainly can understand that extending for two years, along with the previous extension of 20 months, is not helping with the planning aspect for the manufacturing sector. From studying the efficiencies and profitability of a new piece of equipment, to making the decision, to ordering the equipment, to the equipment being installed and put to work, we are looking at four or five years.
Those incremental steps that have been taken with regard to providing this tax credit have not, I gather from your earlier statement, given the manufacturing sector the advantage? As well, they have not taken the expected advantage in 22 months' to process the decision and put things in place.
Mr. Laurin: That is a good point. We have several members who went on record saying the two-year write-off was critical to getting them to invest further in their operations in Canada. We can certainly forward you some cases of members all over the country who are saying this is really making a difference. It really helps in the short term to make those investment decisions. We are also hearing from some of our members that if you want a tax measure to really have the strongest impact, it would be critical to have it for a longer period of time. In other words, having it for two years does have an impact; but having it for five years or permanently would have an even greater impact. The reasons are as I outlined earlier.
As you mentioned, a capital spending cycle can be multi-year. Earlier this year I was in Calgary doing consultations with our members. The owner of a mid-sized company was opening up a plant on the outskirts of Calgary. He said that it would be great if it were for five years because they made the decision five years ago and could not factor it in because they knew it would take some time. In that case, they were building a new plant from scratch, which takes a few years. When you already have a plant in place and you are trying to modernize equipment, two years is quite good; but five years would have a better impact.
Senator Ringuette: Is the tax credit applicable at the time of purchase or when it is operational?
Mr. Laurin: When the equipment is operational.
Senator Runciman: You will have the tax credit for seven years; is that correct? I think you said at the outset that it was introduced in 2007. In essence, you are getting what you want, plus.
Mr. Laurin: You can make that case, but in 2007 we knew only that it would be in place until the end of 2009. We never had that multi-year certainty. The longest we have had is two years, and it continues to be extended. To be honest, our main goal in the federal budget this year was to get that measure extended. We were on record saying that we would support two years. We understand that government purse strings are not what they used to be. Two things will get our economy to grow sustainably in the next few years: business investment and exports. Investment in productive assets, whether plant and equipment, R & D, or the skills of a workforce, are the three things government can do. Ultimately, it is up to companies to make these investments. We are telling the government that the more you leave money in the hands of those companies making those decisions, the more you will end up with a type of economic growth and the high-paying jobs you want to create going forward.
Senator Runciman: Clearly this government agrees. Mr. Simonds also talked about recognizing the fiscal capacity of government, and I thank him for raising the fact that the CAFC has been pursuing this issue for about a decade.
Mr. Simonds: We have indeed.
Senator Runciman: The proposal you made in the committee's pre-budget hearings last year completely, I believe, addresses the question.
Mr. Simonds: It does indeed.
Senator Runciman: All provinces across this country are supportive of the measure that has been implemented.
Mr. Simonds: They are indeed.
Senator Runciman: Now that it will occur, what do you do? I can understand the retention element. What is the process, especially in rural areas, for recruitment? What happens? Where do you draw from in terms of potential volunteer firefighters while making them aware that this is perhaps an added benefit to getting involved in your community?
Mr. Simonds: Given the close-knit nature of rural communities across the country, the networking that goes on in those areas is significant. Often we rely on existing members of the fire service in order to recruit future members of the fire service. Sometimes it is just that informal networking, while other times there are absolutely defined recruitment processes used by many fire departments. They go out to rural fairs and other events and set up a booth where they communicate this type of information. We are targeting the shrinking numbers of our population relative to the availability of volunteers. We are also modifying in terms of ensuring that as we welcome people in the fire service, we are trying to be flexible in terms of how we are scheduling our training initiatives and the types of training that we are providing. We are trying to ensure that it is a most positive experience. The feedback that I am receiving from the chiefs of our association, who have undertaken a variety of initiatives to get that information out, is that they try to ensure that potential members of the fire service understand it is a very rewarding and positive experience for them.
It is situational across the country. There are some that, because of the community profile, lend themselves more to that informal recruitment, while in other parts of country, it is more formal. For example, they develop leaflets and speak to students graduating from high school and at community colleges. The chief in Wolfville, Nova Scotia, does a presentation each year to new students at Acadia University. It is a diverse approach. My good friend, Vince Mackenzie, from Newfoundland and Labrador, has many initiatives that he undertakes in that province and area to ensure that the fire departments continue to recruit good people.
Senator Runciman: I can speak to my region, where Highway 401 cuts across, and the terrific job done by first responders to accidents and other emergency medicals.
Ms. Eng, you talked about broad appreciation of the need to extend home care for the aging population. The Drummond report coming out in Ontario next month will probably emphasize that in terms of trying to get health care costs under control going forward. You mentioned a potential savings of $10 billion to $16 billion. Where did those numbers come from?
Ms. Eng: They came from a rough calculation of numbers from a B.C. research project that indicated the costs of care at home and care at an institution for moderate and heavier care. Using the numbers in terms of heavy care and the estimated 600,000 people who would provide it, we see a magnitude of some $6 billion in savings at that level. If you take 1 million of the remainder who provide moderate care and that potential for savings, there is a potential to bring it up to $16 billion. That is just a range in magnitude and is not meant to be an accurate calculation.
Senator Runciman: Has anyone done a calculation on the other side of the ledger in terms of initiating these changes and what the costs would be? Is it suggested that this would be a wash or has anyone done an assessment? Putting it in context, health transfers have been about 6 per cent for almost the last decade. We know that health care is the biggest cost to factor in provincial budgets. This seems to be to be a provincial responsibility. I understand the national approach you are suggesting, but I have been down the road on a lot of these potential savings projects, which are tough to quantify. The actual costs to initiate it are quantifiable. I would hope that your organization would look at the current envelope in health care, because we have the talks coming up for 2014, and at the 6 per cent envelope and ask: How can we address what is being spent in health care to accommodate this kind of need in the future?
Ms. Eng: You are completely right on that point. We are an advocacy organization and it is difficult for us to get right down to the facts and figures. However, we raise the issues more than we get exact examples. We have hunted for that research, but it has not been done.
Frankly, there has not been a national focus or strategy dealing with home care and caregiver support, so that is why those numbers are not readily available. We are pulling pieces out of that. I know that your minister for seniors has her research staff, a person that did some of this research that we are quoting to you. There is certainly work being done that will get you those exact trade-offs.
We also poll our members. They are not interested in paying more taxes. They believe that the funding for this kind of initiative can come out of redirecting the funds you already spend in the health care envelope. We recognize that seniors are being blamed for escalating health care costs, which, though untrue, still persists as a myth. Nonetheless, there is an opportunity in this category to divert billions of dollars of demand from the formal health care system. Yes, there is an expenditure required both at the federal and especially at the provincial levels to provide, for example, for publicly funded home care workers, but it is at a cost far less than what you are paying in emergency rooms, in acute care and in nursing homes.
Senator Lang: Like some of the other members around here, I am from rural Canada. We have other problems that some other areas of the country do not face.
I want to follow up on Senator Runciman's question, because I am concerned with respect to, at the end of the day, who pays for the services that are being provided. Like Senator Runciman, I spent many years in the territorial legislature and the cabinet there. I understand what the provincial-territorial responsibility is versus that of federal. We are talking about a staggering amount of money here if we were to go as far into a program as what you and your organization recommend. I am not saying that we should not go there. We all need to understand that there is a significant problem out there, and it would be much better for our seniors if they can stay at home. No one would argue that general premise.
With respect to the talks that are proceeding now between the provinces, territories and the federal government, will your organization be presenting a position in respect to, within that health envelope, what kind of money should be diverted? Also, if that is done, what is your organization prepared to recommend that maybe you forgo?
In this past budget, you are talking about an increase to the Guaranteed Income Supplement for seniors, providing a caregiver's tax credit, removing the cap on medical expenses, eliminating mandatory retirement and advancing on providing a retirement savings vehicle. What is not mentioned is the fact that, in the budget today, you are forgiving a portion of Canada student loans for family physicians and rural nurses. When you start adding these up, it is a huge financial commitment and benefits, either direct or direct to seniors. I am asking you how that relates, if we go into a real national program vis-à-vis what you are recommending. Perhaps you could comment on that.
Ms. Eng: We were grateful for the response to our call for increasing OAS and GIS for the poorest of seniors. The $600 million that the government has set aside and has already rolled out the cheques for will help countless seniors in the worst circumstances. Of course, that is welcome. We would never put that on the table.
I think what we will be focusing on here when the health accords come forward is that there is an opportunity now to restructure how we spend the estimated $193 billion a year in health care spending in Canada. There are opportunities to make massive changes in how we actually spend that money. That is where we would be going with our recommendations, namely, to restructure how you provide services and how people look after their health. Individuals are partners in looking after their own health, but the system needs to restructure itself not to constantly provide a doctor in hospital but to provide care to include family caregivers, to provide support for the home care sector, which, of course, admittedly is a provincial jurisdiction. Of course, the health care transfer has paid for a lot of that. Ontario alone spent over $1 billion in support of the Aging at Home strategy. All of these expenditures are meant to shift how we spend those dollars rather than spending more.
In fact, over time, there is a potential for providing much more of what people need and getting rid of some of the wastage and providing better health outcomes. That will be our direction. We will put a heavy focus on home care and aging at home, in all its complexities, from the health care system itself, home care workers and for pay as well as people who are privately engaged, but also how homes are constructed, where you put doctor's offices and whether you put public health offices in abandoned schools that are emptying of students. There is an opportunity here to change how we look after our health. I think that should be an essential part of the health care accord discussions.
The Chair: On behalf of the Standing Senate Committee on National Finance, I thank each of you for coming here and helping us with the part of this budget implementation bill that relates specifically to your areas of work and interest. It has been very helpful.
[Translation]
This morning we are continuing our consideration of Bill C-13, An Act to implement certain provisions of the 2011 budget as updated on June 6, 2011 and other measures.
It is those other measures that are of interest to our committee.
[English]
In our second panel this morning, we welcome Susan St. Amand, Chair; and Jillian Welch, Lawyer and Tax Consultant for Conference for Advanced Life Underwriting. We welcome also Dale Koeller, Vice President, Calvert Home Mortgage Investment Corporation; Barbara Amsden, Director, Investment Industry Association of Canada, accompanied by Debbie Pearl-Weinberg, General Tax Counsel, CIBC.
Each of you will have five minutes to make some introductory remarks. We are interested in knowing what initiative in the budget and the budget implementation act relates particularly to you and your position in relation to that initiative.
Susan St. Amand, Chair, Conference for Advanced Life Underwriting (CALU): Our concern relates to Bill C-13 and the individual pension plans.
I am Chair of the Conference for Advanced Life Underwriting. Joining me is Jillian Welch, who is CALU's tax consultant and a partner with Wilson & Partners.
Our brief provides more information on CALU and our sister organization, ADVOCIS. Our 10,000 members are largely self-employed, independent small business owners spread out across Canada. Each one of us advises approximately 300 families, many of whom are owners of small and medium size businesses. We spend much of our time assisting business owners with personal retirement planning and succession planning as well as providing advice on employer-sponsored retirement programs for their employees.
When the new IPP rules were first introduced last March, it was our understanding that the proposed changes were directed at a small group of business owners who were obtaining unintended tax benefits from their IPPs. Since then, many of our members have contacted us expressing concerns that the proposals result in some unintended consequences. These unintended consequences negatively impact the ability of small- and medium-sized business clients to participate in defined benefit style pension plans as a tool for their retirement and succession planning.
Based on that feedback, CALU decided it was an important issue and we provided a submission to Finance, noting a number of issues with the proposals and requesting more time for consultation. In spite of the short period of time for consultation, we were pleased to see the final IPP regulations contained a change designed do mitigate the impact of at least one of the proposals.
CALU, however, continues to have a fundamental concern with some of these proposals. We believe the IPP legislation challenges the ability of business owners and key employees to participate in retirement programs with similar terms and conditions available to employees in large private and public companies. This appears to be contrary to the government's intent on encouraging individuals to save for retirement. We also see this as a dangerous trend that seems to assume that small business owners will abuse employee benefit plans. We do not believe most of our clients or their professional advisors design these plans with the intention of "taking advantage" of the rules. We are concerned about this perception and the role it may play as a basis for the development of tax policy.
Jillian Welch, Lawyer and Tax Consultant, Conference for Advanced Life Underwriting (CALU): I wish to highlight one of the negative effects of the proposed IPP rules as they relate to the RRIF minimum withdrawal requirement.
As you are likely aware, some taxpayers, typically members of large defined benefit pension plans, have formed corporations as a transfer vehicle for the commuted value of their pension benefits. In doing so, they are able to create a pension surplus that is not subject to any withdrawal requirements, creating a tax deferral opportunity. The RRIF minimum payout requirement is being imposed on all IPPs in order to minimize this tax deferral opportunity.
It bears noting that this specific planning is not being undertaken by small business owners but by employees who create an arguably fictional employment relationship with a newly incorporated company that has been established for this purpose. However, the RRIF minimum withdrawal requirements will apply to any defined benefit plan with less than four members, regardless of how the surplus arose. We believe this provision could be better targeted to prevent the abuse while not affecting all IPPs.
It must also be appreciated that these rules will apply retroactively to any plan meeting the definition of an IPP. Whether the plan has been created to facilitate the transfer of pension benefits or one that had the good fortune of being in a surplus position due to strong investment performance, it will now be governed by these rules. Further, these rules will apply even to plans that were previously not treated as IPPs simply because one or more members of the plan have terminated their participation and the number falls below four. We believe this concern needs to be addressed.
As our brief also notes, the Canada Revenue Agency, which reviews all newly created defined benefit pension plans already has the power in the legislation to deny registration or even deregister a plan that is formed for the purpose of sheltering a pension surplus. There have been two Federal Court of Appeal decisions that support the CRA's position. We query whether these new rules are necessary given the courts have confirmed the CRA's ability to challenge these types of plans.
The RRIF minimum withdrawal rules can also lead to a situation where an IPP goes from a surplus to a deficit position, thereby requiring a small business to make additional contributions to both fund the promised benefits and to meet its obligations under provincial pension legislation. We believe this runs counter to recent federal initiatives designed to prevent pension shortfalls by allowing the retention of higher surplus levels in a defined benefit plan.
Finally, the use of the RRIF minimum rules as a basis for determining the payout of any surplus under an IPP is a significant concern. These rules were last updated in 1992. Over the past 20 years, there has been significant change in both interest rates and life expectancies that influence that legislated formula. We find it disconcerting that this rule is now also being imposed on IPPs. If the government feels there is a need to apply a minimum payout rule to IPPs to address the surplus issue, we believe there are better ways to do this.
Ms. St. Amand: We have a request we hope you will support. We think it is quite appropriate that the government proceed with passing this budget bill. However, we would like to ask the committee to strongly urge the Department of Finance to consult with CALU and other interested parties to see if additional regulatory changes could be made to address the unintended consequences the new provision might have on tax payers.
We thank you for your time and attention, and we would be pleased to answer any questions you might have at the appropriate time.
The Chair: The unintended consequences are something we always look for. We appreciate your bringing that matter to our attention.
Dale Koeller, Vice President, Calvert Home Mortgage Investment Corporation: Mr. Chair and senators on the Standing Senate Committee on National Finance, good morning.
[Translation]
It is a great pleasure for me to speak to you today.
[English]
I consider it a great opportunity to speak about a matter that affects many honest Canadians, not just business people but also the thousands of people who rely on the specialized services of mortgage investment corporations. A mortgage investment corporation, known as a MIC, is a business structure created by an act of Parliament in 1975 to increase investment in the mortgage sector and to make home ownership more accessible to Canadians. MIC shares have been eligible for registered accounts, RRSP and RRIFs since their creation. We represent a billion dollar plus industry in Ontario, British Columbia and Alberta alone. Our mortgage funding supports and creates jobs, from plumbers to builders to entrepreneurs in other industries.
The Income Tax Act outlines stringent criteria to maintain eligibility as a MIC. Among the rules is an ownership limit of 25 per cent for a shareholder. The related parties counted together in this 25 per cent include a spouse and minor children. These rules were legislated in the 1990s.
Bill C-13 will limit ownership from 10 per cent to 25 per cent in order to maintain registered account status. In addition, the related parties counted in the new ownership cap will be extended from spouse and minor children to any blood relative.
Let me assure you that, firstly, MICs are not tax-avoidance schemes. Secondly, there is no relationship between ownership of more than 10 per cent of a MIC and tax-avoidance schemes.
The proposals in Bill C-13 do not effectively target the tax schemes that the Department of Finance and Canada Revenue Agency are concerned about, but they will definitely affect legitimate business and investment. It is as if we will be failing an entire classroom of students due to the cheating of a small number of students in the school. We cannot be certain that any or all of the cheaters will be in that classroom at all. However, we can be certain that honest and productive students will be.
I am not alone in these concerns. I have gathered a list of over 65 MICs that are seriously concerned about the effects of Bill C-13. Perhaps more convincing, the Joint Committee on Taxation of the Canadian Bar Association and the Canadian Institute of Chartered Accountants have written to the Department of Finance to express, "serious concerns that the scope of the proposed changes go far beyond what is needed to prevent the abuses and will have adverse implications on what have, until now, been long-standing, acceptable investments for registered accounts. We also seriously question the impact that the proposed rules will have on the ability of taxpayers to rearrange their existing business arrangements and investments acquired under clear and unambiguous rules on a timely basis . . . Moreover, we are quite concerned about the future impact that the proposed changes will have on the ability to promote private investments with funds in registered accounts and that this may curtail what has been a significant source of capital growth in the Canadian economy."
In their letter, they go on to point out a number of difficulties with the proposed legislation and offer over 15 recommendations.
I am not a tax professional, nor am I a lawyer; however, the top associations of these professions have serious concerns about the proposed legislation. Their respected opinions underline my concerns, and they are worthy of the government's careful review.
Punishing those who own more than 10 per cent of a MIC is not productive. There will likely be MICs that will be shut down as a result. Some are already declining mortgage transactions based only on these proposals. Affected shareholders will be subject to punitive taxes where no tax-avoidance schemes are present. Some will have to deregister their entire retirement savings due to these rules. I assure you that these include Canadians at all income levels, including low.
Particularly disconcerting is the effect on regular related parties of counting a broader group in the related-party ownership cap. This change in policy direction with regard to MICs punishes small investors and small companies. As with the ownership cap by percentage, there is no inherent relationship between broader related parties and tax- avoidance schemes.
MICs have no objection to targeting tax-avoidance schemes. In fact, we applaud it. These kinds of schemes do no favours for legitimate lending businesses like ours, and we applaud the government for the intent of Bill C-13. However, we lament the adverse effects it will have on productive and legitimate businesses. We have suggestions to help you prevent schemes, without negative and undue effects on MICs. We can help you make this work more fairly. Again, thank you for the opportunity to share this information with you, and thank you for your leadership in the Senate. I look forward to any questions you may have.
The Chair: Mr. Koeller, are you able to provide us with a copy of that joint letter so that we can see your quotation in context?
Mr. Koeller: Certainly.
Barbara Amsden, Director, Investment Industry Association of Canada (IIAC): It is an honour to appear before you on behalf of the Investment Industry Association of Canada, IIAC, and our 180 members, to provide comments regarding Bill C-13's RRSP and RRIF rulings. I do not think there is much that overlaps Mr. Koeller's comments, but I will try to avoid anything that does.
[Translation]
My name is Barbara Amsden, and I am Director of the Investment Industry Association of Canada. I am accompanied by Debbie Pearl-Weinberg, General Tax Counsel at CIBC.
[English]
Ms. Pearl-Weinberg is here representing the IIAC's tax committee. Our comments reflect our members' experience with the needs and concerns of Canadians and Canadian companies with respect to retirement savings.
Our members agree with Department of Finance and Canada Revenue Agency concerns over the past use of registered plans in a way that the government did not intend, and we agree with the need for anti-avoidance rules. We believe, however, that the measures taken to prevent those who deliberately try to take advantage of the tax laws beyond what was intended, should not be implemented at the expense of honest taxpayers who are holding $700 billion in RRSPs and RRIFs.
Before going into specifics, I would like to correct a possible misconception that may have arisen from earlier testimony to this committee. Last week, Senator Runciman asked whether there was anything that could be done to deal with the inappropriate tax results that the legislation was to address, in a retroactive way. The reply was: "Certainly the rules that are in Bill C-13 apply on a prospective basis."
First, the 2011 budget said that the government had successfully challenged a number of these schemes under existing rules of the Income Tax Act.
Second, some measures in Bill C-13, which took effect as of March 23, 2011, will have an impact on people with certain holdings acquired before that time. Some investors will view other changes as retroactive to March 22, due to delays in finalizing and publicizing the new requirements.
One of the new rules' transition periods was almost over by the time the budget passed. As of yet, while we have been working with the Department of Finance and the CRA, there has still been no public communication, that we are aware of, by the government, regarding the anti-avoidance proposals that will affect Canadians. As will be appreciated, there are public relations issues to be dealt with, associated with RRIF and RRSP holders and with companies relying on private placement and public funding.
We have three areas of concern. The first one is prohibited investments.
Some of the qualified investments that Canadians held in their RRSPs and RRIF's became, as of March 23, prohibited investments. While the harsh penalty tax on the acquisition of a prohibited investment only applies to assets acquired after March 22, the tax on income and gains earned on prohibited investments applies even to assets held prior to this.
This will affect, in certain cases, shares of small businesses whose owners have risked their savings to fund their companies from their RRSPs, under a long-standing, government-sponsored tax initiative to promote investment in small business. Some of these individuals now find themselves subject to tax on income and gains earned on those investments in their RRSPs. Although transitional rules may reduce the rate of tax for a period of time, that is not a satisfactory result for someone saving for their retirement.
Some RRSP and RRIF holders have no reasonable method of getting prohibited investments out of their RRSPs without incurring a large tax liability, as they do not have sufficient assets outside the registered plan to conduct a swap, and there may not be a willing buyer. Where they are personally involved in those companies, they way not wish to find an outside buyer or be forced by a sudden change in tax policy to rearrange their long-term plans for their business's development.
Bill C-13 will also affect some mutual fund investors. In some situations, it will be impossible for RRSP and RRIF holders to know if they are offside of the new rules, as they can become offside and then go back onside as individuals purchase and sell the units or shares. Draft income tax regulations will not help in all situations, and investors are unsure, without seeing the final versions of the regulations, if they should redeem units or not.
The second issue is nonqualified investments. Bill C-13 changes the penalty tax regime applicable to nonqualified investments in a registered plan. One change impacts investments that were qualified investments when purchased and become nonqualified later, such as by becoming delisted. Where this occurred prior to March 23, a 1 per cent per month tax applies until the security is removed. Under Bill C-13, where this occurs after March 22, the RRSP or RRIF holder will be subject to a one-time, refundable tax of 50 per cent of the value of assets acquired after March 22.
Now, nearly nine months after the budget, with the tax year-end less than a month away, we believe that neither financial institutions nor the CRA itself are ready for some of the changes required by Bill C-13, due to outstanding questions on complicated rules, hoped for amendments to the proposals, and the extent of required systems and procedural changes. For instance, financial institutions essentially continued to charge the 1 per cent penalty tax even when a security became nonqualified after March 22, as the draft legislation was not introduced until August, and systems and operational changes could not be made without clarification from Finance and the CRA. How can reimbursing the 1 per cent charged, advising the CRA which Canadians have such investments and having the CRA charge the penalty tax of 50 per cent of the fair market value of the non-qualified investments to the investor, be rectified efficiently?
A third issue is swaps: transfers of securities between registered and non-registered accounts. Proposed changes to the existing rules will subject RRSP or RRIF holders to a penalty tax of 100 per cent of the fair market value of any future increase in the value of assets swapped or income from such assets. That is an important change.
We believe and understand that staff of the Department of Finance agrees that the majority of swaps would not be considered offensive. However, Finance and CRA are concerned about the ability to identify and stop unacceptable swap transactions from occurring. As the vast majority of swaps are likely to be legitimate, preventing them altogether will be problematic for many Canadian investors. For example, it will be no longer possible for a senior to swap to get emergency cash from a RRSP or to make the minimum required cash payments from a RRIF, both of which are immediately taxable transactions, without selling a security that has dropped significantly in value. This has been particularly relevant in the past couple of years and could be relevant again depending on what happens in Europe. It will not be possible for a small business owner to use a swap so that he or she does not have to sell a share of a private business.
In conclusion, we know it is late in the process to make changes to this bill. We have been working, and are continuing to work, with Finance for some changes by regulation and with the CRA for some administrative relief. However, this is not enough. If the recommendations included in an attachment to my remarks cannot be made at this stage in the legislative process, we respectfully request that the committee, as a minimum, seek Finance's immediate public notification of retroactive relieving changes back to March 22, or in slightly different cases as you will see in the attachments, that can be shown to be in the interests of honest taxpayers. Changes could be added to a draft technical bill legislation issued on October 31.
Why we believe the intended changes and, in particular, reasonable grandfathering periods, need to be announced quickly is simple: If Bill C-13's RRSP and RRIF provisions are implemented as drafted, it will confusing and costly for investors, the CRA and financial institutions; and investors in the CRA will have to deal with numerous refund requests. In contrast, at a time of considerable pessimism about the global economy, the changes proposed to address unintended consequences, as the chair made reference, of the RRSP and RRIF provisions will be welcomed by honest Canadians looking for some good news this holiday season.
The Chair: You provided us with a sheet of recommendations. Is that a repetition?
Ms. Amsden: The recommendations are covered in the submission we made to the committee. We have refined a few of them. I apologize for not having the entire remarks available in French, but we continued to work through the night and the morning on some of them. The attachment is in French, and we will be sending the full document in French, probably by the end of today or early tomorrow.
Senator Marshall: I would like to start with a question to Ms. St. Amand and Ms. Welch. You talked about corporations formed as a transfer vehicle and about the pension surplus created and the tax deferral opportunity. You said that you believe this provision needs to be better targeted to prevent abuse, while not impacting other IPPs. Is that difficult to do? It seems that there has to be a conscious effort to identify who is bona fide and not avoiding taxes and who falls into the other category. Could you talk about that? Would that be difficult to do?
Ms. Welch: No, I do not believe so. In fact, the CRA has been doing it, which resulted in two court cases where CRA's ability to deregister a plan where they thought inappropriate planning had occurred was supported and confirmed by the courts.
Ms. St. Amand: That is a good question. Each pension plan has to go through a process to be approved. There is an opportunity each time to look at the pension plan to be registered and to say whether it is legitimate. It is actually not that difficult to determine.
Senator Marshall: It is black and white, is it? I would have expected more shades of grey and that various subjective decisions would be made as you go through the list of questions. You are saying that it is not subjective at all.
Ms. Welch: The particular instance of inappropriate planning that was the intended focus of the rules would be identified easily when you look to the source of the funds being moved to the IPP. Typically, the inappropriate planning occurs when a pension transfer is affected from an existing defined benefit pension plan that provided benefits at a certain level and the amount that is able to be transferred out to the newly established plan. The newly established plan has different benefit levels that create a significant surplus immediately. By understanding the source of funds, the CRA would be able to identify easily any instances of inappropriate planning.
Senator Marshall: You talked about families and said that each of you advises approximately 300 families. How many families would be impacted? That is your group, but how pervasive is this problem?
Ms. St. Amand: There are about 16,000 individual pension plans, which is not a huge number. In our remarks, we note that it changes whether you have three people involved in the pension plan or four people involved. That number varies. If you had four people and you dropped down to three, you are caught now by the regulations. However, if you go back up to four people you will not be caught by them again. It is difficult to determine the exact amount.
Senator Marshall: You said in your concluding remarks that you would support the passing of the budget bill and that the clarification could be made through the regulations?
Ms. St. Amand: Yes. We believe that the fix for these unintended consequences could be relatively easily dealt with through the regulations.
Senator Ringuette: I am trying to envision the different scenarios in your comments. My first question is: What event has triggered this proposed legislation?
Debbie Pearl-Weinberg, General Tax Counsel, CIBC, Investment Industry Association of Canada (IIAC): The tax avoidance legislation that is now applicable to RRSPs and RRIFs essentially maps what was done previously with TFSAs. It was meant to address some abuses that they were seeing quickly happen within TFSAs. The difference between TFSAs and RRSPs is that there were such small amounts in TFSAs that the effect is not as harsh to people. As well, you can always take an asset out of a TFSA without tax consequences and put something else in at a later date, perhaps the next calendar year. Taxpayers are not subject to the same negative tax consequences with TRSAs.
The Chair: To clarify for the record, a TFSA is a tax-free savings account.
Ms. Amsden: With the tax-free savings accounts, as Ms. Pearl-Weinberg said, you can put the money back in. With Registered Retirement Savings Plans, one of our examples was a person needing to take out cash from a RRSP for an emergency of some kind and not being able to gain back that deduction room. It is difficult for people who have been out of work during the past couple of years. For them, it is almost like a triple whammy. They have to take money out, cannot put it back in at that level and they do not have the protection. That is probably an issue for this committee or the House of Commons committee to consider at a later time. That part of the difference is behind one of our particular concerns in this area from a retirement savings perspective.
Senator Ringuette: My other question is: I assume, maybe wrongly, that the Canada Revenue Agency and the Department of Finance have been consulting with you with regard to how to address this issue. Have they been discussing this for a while? Since when? Have you put your recommendations forward to them?
Ms. Pearl-Weinberg: Yes. One of the problems is that the legislation was first introduced I believe mid-August, and there was a very short time period for comment — not the budget, but the actual legislation where you could read the fine details of the rules. People started seeing the fine details of the rules in mid-August and had to digest those, and then we started entering into discussions with the Department of Finance and made submissions. Various organizations made submissions. There was insufficient time for most of the suggestions, submissions and discussions to be implemented in the next round of the draft legislation, and then certainly not in Bill C-13. Some things were implemented, and we definitely thank the Department of Finance for those. There are ongoing discussions with the Department of Finance on this even within the next week with various organizations.
Senator Ringuette: I have been a member of this committee for quite a number of years, and we have seen our share of grandfathering clauses. We have also seen our share of retroactive application. I understand your request. Is it possible, in the interim of changing the legislation, to have a CRA interpretation?
Ms. Amsden: With some of the issues, it is not possible. Some things may be able to be cured or helped by regulation, but there are some, such as implementation dates — in fact, this issue came up sometime last year as well, as to whether Finance or the CRA had flexibility in terms of a date. We understood that the answer on the date ones is no.
Senator Ringuette: We have seen otherwise in other instances.
Ms. Amsden: If we could ask them to take a look at that, it would be helpful.
Senator Ringuette: I certainly think that the minimum would be a grandfathering of this entire issue.
Ms. Amsden: It actually came up in another matter looked at by this committee last year, I think Bill C-9 on the GST, where there was quite a discussion on retroactivity. In that case, again, it was not for relieving purposes, which we do understand can be acceptable in government. We will talk to the government again about the possibility of an interpretation in that regard.
The Chair: You will appreciate that we do not have staff to help us go through these various proposals and determine all the unintended consequences. That is why we rely heavily on you to help us with this. I note the presentation by Ms. Welch and Ms. St. Amand. Last March you thought that the initiative looked fairly good, and then you started hearing from your members about the impact this measure might have. Then you went on and had further discussions with Finance. Do you have enough lead time before this bill becomes law to think about how the measure might impact your particular industries?
Mr. Koeller: I would comment first, if I may. First, with regard to the legislation that was coming down in June, I would argue that many of my competitors, the people in my industry, do not yet understand how it will impact them. When we understood that there was a time for consultation, we quickly gathered as much as we could to respond appropriately, and again the consultation period was very short. Post-consultation, one amendment was made, which increased the transition period time but did not deal with the heart of the matter for us, which was that an unintended consequence was an impact on legitimate business when we understood that the legislation was simply to deal with anti-avoidance of tax.
The Chair: When we get our briefing from government, we do not get unintended consequences, as you will appreciate, so we do have to rely on you.
Ms. St. Amand: As we noted in our comments, they actually called for consultation I believe around the middle of August, which gave a little bit of time after that, and then I think it was first tabled the beginning of October. It was a short period of time. I indicated that our members started contacting us. When we got the fine details of everything, one of those fine details was, in the transfer of funds that move over, your RRSPs have to move over before you can take any money out of your business to make past contributions. We started looking at client situations where that could be detrimental. For example, my husband might pass away and his RRSPs might roll into my name, and if I wanted to start an IPP in ten years, I have to use his RRSP contributions that were rolled to me to put into my past service contributions. These are the types of things that take a little longer than a few weeks before we can discuss all the issues with the Department of Finance.
The Chair: I am intrigued by your comment that you had some concerns and at least one of those concerns was dealt with by regulation. Even before the legislation was passed, there is regulation being generated that makes you feel better. Could you explain that?
Ms. St. Amand: I may not have been clear on that. I am not strong with the technical terms. My understanding is that one of the changes was made to the legislation before it was tabled, so before October, one of the opportunities we had.
Ms. Welch: We were able to obtain a helpful change between August and October, and I think that is also the case with the prohibited investment rules. Bill C-13 contains legislative amendments, but the proposed regulations are also included in there.
The Chair: It is those proposed regulations that you were commenting on at page 2 of your report when you say the final IPP regulations contained a change designed to mitigate the impact of at least one of these proposals.
Ms. Welch: Yes, that is correct.
The Chair: It is not a regulation that is in force yet, but a regulation that may be forthcoming.
Ms. St. Amand: That is contained in it, yes.
Ms. Pearl-Weinberg: I would say that, in the October through now period, I think most of the issues with the draft legislation and problems that taxpayers and financial institutions are encountering have surfaced by now, but I cannot say everything, because all of a sudden you get a call about, "We just realized that this could be a prohibited investment," and it turns out to be something that no one would have thought would be a prohibited investment.
The Chair: If tax regulations are being abused, we understand the government's desire to get that rectified as quickly as possible, but it is also very important that industry have an opportunity to react to the proposed changes. That is what I was getting to. Please do not hesitate at any time if something comes up that you want to contact us on in the future. We are here and working away, in the interests of producing the best legislation we can.
Senator Peterson: Does the government concur with your findings that there are problems and issues to be dealt with?
Ms. Pearl-Weinberg: In discussions with the Department of Finance, it is difficult for them to agree with us. They have said they understand our concerns. We do have another call for probably next week with the Department of Finance. It is difficult for them to come out and say to us, "We agree with you," although we must say that some of the problems that we did point out to Finance and that were easily rectified were actually pushed through.
Ms. Amsden: The other challenge is that because Finance has not finished its job, CRA cannot finish its job, so we do not have some of the details needed to make systems changes to address these issues. I suspect it may be the same for you. Usually, the government does try to make an effort to take into account implementation timelines, but this has been a particularly challenging situation.
While there are draft regulations or regulations with the tax legislation that were issued, not all of the regulations are there. We can say, though, that the woman we are dealing with in Finance, who has been very good, did agree with our industry that it is likely that a small minority of people are abusing it. As Mr. Koeller said, it is like punishing everyone for the sins of one, who may not even be in the room.
Senator Peterson: Is there a drop-dead date on this where nothing more can be done, or will there always be some hope?
Ms. Amsden: We can work on regulations after the fact, because they are easier to put in than a change in legislation. There is also one issue that we might want to have addressed. There is a 10-year period and we might be able to address it in another way, but there are a number that need to be addressed. We need an answer right away on some of the ones that are supposed to have been implemented for effect either earlier this year or by the end of this year, because you cannot turn the Queen Elizabeth on a dime. I think I have mixed my metaphors there, but you need to put systems in place.
The tax season, for us, has actually already started. It started because you already acted on a system and put them in place to take effect January 1, which is when you will start the tax reporting.
Ms. Pearl-Weinberg: For certain individuals who are impacted already by these rules, if further grandfathering is not instituted, or some grandfathering is not instituted, essentially they are subject to tax already in 2011, and they probably have no idea about it; or if they are finding out about it, then they need to decide quickly whether to dispose of an investment now, before the end of the year.
Senator Peterson: Could those people negotiate individually with CRA to extricate themselves from this problem?
Ms. Pearl-Weinberg: Perhaps, but whether or not they would have the individual ability to be able to negotiate on their own with CRA or whether they would have the means to engage someone to negotiate on their behalf is another question, because applying for some sort of administrative relief may or may not be that easy.
Ms. Amsden: As an example, with the 1 per cent monthly being changed to 50 per cent, the CRA will have to send them notice. They will have a chance to take it out, but most people will receive something from the CRA and think, "I have to pay this" or "I have to do this." I believe that the people who are most sophisticated may be able to get something addressed, but those who may be most in need of relief may not be able to because they may not know about it.
The Chair: All this uncertainty and lack of finality seems to suggest that a lot more money will be spent by taxpayers in trying to adjust to the situation, and I guess we have to think about it in terms of the taxpayer, your clients and customers. You are working hard to try to bring clarity to all of this and we commend you for that.
Senator Callbeck: On the recommendations of the investment industry, under "Prohibited Investments," number ii is "Exempt National Instrument (NI) 81-102 funds." What do you mean by that?
Ms. Pearl-Weinberg: Many of the common retail mutual funds are regulated under securities law — I am not a securities lawyer, so I may not be saying it correctly — under a national instrument called National Instrument 81-102. It provides strict regulations and rules that these mutual funds have to abide by in order to be covered by this regulation. For instance, they have to be issued by prospectus and they have limited concentration limits, no more than 10 per cent in any particular security.
One thing that has been discussed with the Department of Finance by IIAC — and the Investment Funds Industry of Canada has also been discussing this with Finance — is exempting these types of funds from the prohibited investment rules because we honestly cannot see any way that these types of funds could be used in an abusive situation. There are many other types of funds that we also agree should be out of the scope of the prohibited investment rules, but specifically the immediate bang for the buck would be the National Instrument 81-102 funds, because some of those funds that people invest in, they would have no idea that they now have a prohibited investment.
Senator Callbeck: Are there mutual funds that are not under that national instrument?
Ms. Pearl-Weinberg: There are some mutual funds that could be, for instance, offered by prospectus exemption, by offering memorandum.
Ms. Amsden: Closed-end funds are not considered 81-102 funds. There are different types of categories.
The Chair: Honourable senators, we have been hearing this morning from Conference for Advanced Life Underwriting, Calvert Home Mortgage Investment Corporation, and the Investment Industry Association of Canada. We thank each of you for being here and for helping to bring some clarity to these challenging sections of this act that we have to deal with.
(The committee adjourned.)