Proceedings of the Standing Senate Committee on
National Finance
Issue 28 - Evidence - November 6, 2012 (afternoon meeting)
OTTAWA, Tuesday, November 6, 2012
The Standing Senate Committee on National Finance met this day at 10 a.m. to study the subject-matter of all of Bill C-45, a second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures, introduced in the House of Commons on October 18, 2012.
Senator Joseph A. Day (Chair) in the Chair.
[Translation]
The Chair: Honourable senators, this morning we begin our study of the subject-matter of Bill C-45, a second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures.
[English]
Honourable senators, this is our first meeting on the subject matter of Bill C-45. This bill is 414 pages in length. It is comprised of 516 clauses and amends 64 different pieces of legislation. It covers many areas of the budget of the spring of this year as well as certain other measures, as is indicated in the title of the bill.
This morning we welcome the Honourable Ted Menzies, Minister of State for Finance. The Minister of Finance is in Mexico, I believe, and Mr. Menzies won the toss and is with us this morning. He will provide us with an overview of the bill and what the executive is hoping to achieve through it.
Once we have heard from the Minister of State, we will invite departmental officials to begin explaining the bill clause by clause, which is our usual way of trying to understand such lengthy proposed legislation.
Mr. Minister, thank you for being here. We understand you have other responsibilities beginning at 11:00, so we will plan on going no later than that. We will then pause to allow officials to take your place.
If during your presentation or the question and answer period you need to have your officials sit at the table, because this bill is quite technical, other seats are available at the table.
You have the floor, sir.
Hon. Ted Menzies, P.C., M.P., Minister of State (Finance): Good morning, Mr. Chair, honourable senators. Our whip has told me that I need to be in the House of Commons at 11 o'clock. One of my colleagues is filling in for me, but I have to be back on house duty then. Thank you for your understanding and thank you, senators, for doing this good work of analyzing this proposed legislation.
I will try to keep my remarks this morning fairly brief in order to give ample opportunity for senators to ask questions.
Before starting, I would like to take a moment to welcome your new members and to thank all of you for the work you have done in examining the consumer price gap issue. That is very important and we are all anticipating your report at the conclusion of that study. You have heard from diverse perspectives in this multi-faceted discussion. As you engage in the writing of your report, we will all be looking forward to your findings and observations.
I am here today to discuss Bill C-45, the jobs and growth act for 2012, which legislates many of the key measures contained in the Economic Action Plan of 2012. As you know, our government has made no secret that our number one focus is the economy, helping create jobs, promoting growth and securing Canada's long-term prosperity. Today's legislation is a key part of that focus and it moves us forward with Economic Action Plan 2012, our plan to help support Canada's economy to grow during this ongoing global turbulence.
Bill C-45 will help ensure that our economy remains on the right economic track and secures and builds on the position of what we think is very good strength relative to the rest of the world. That position of strength includes the best job growth record in all of the G7 countries since 2009. This number cannot be repeated enough. We have put in place some policies that have helped our businesses. It is not government that has grown the jobs; it is Canadian businesses that are employing 820,000 more Canadians than they were at the end of the recession in July 2009. It is very important to note that 90 per cent of those jobs are full time and 75 per cent of them are in the private sector, which is very telling.
To quote RBC senior economist Dawn Desjardins:
Canada has experienced quite a good recovery in the labour market compared to almost every other area of the globe.
That is a position of strength that is underlined by both the OECD and the IMF, who predict that our economies will be among the leaders of the industrialized world over the next two years. It is little wonder that many around the world are looking to Canada's economic leadership as a model. We have heard that repeated from both presidential parties in the U.S. election campaign.
As well, Chancellor Angela Merkel said:
Canada's path of great budgetary discipline and a very heavy emphasis on growth and overcoming the crisis, not living on borrowed money, can be an example for the way in which problems on the other side of the Atlantic can be addressed. . . . This is also the right solution for Europe.
Angel Gurría, Secretary of the OECD, said:
[Canada is] well prepared. You have been better prepared and therefore you've weathered the storm a lot better. You are well prepared now. Your fiscal policy, your monetary policy, your financial system [is] in better shape. And therefore, you are doing better in . . . the world economy.
However, we cannot become complacent. As we watch what is happening in the United States and around the world today, we are reminded that there is great uncertainty out there. There are global challenges that will impact Canada.
As Minister Flaherty is saying, the fiscal cliff challenge in the United States is perhaps an even larger challenge now than the situation in Europe. There is no question that a global recovery is not yet complete and the economy remains fragile. In such an uncertain and fast changing global economic environment, where Canada faces increasing competition from the emerging economies, delay of any needed economic reform is simply not an option. That is why we must move forward with Economic Action Plan 2012's pro-growth measures to support the economy, including those contained in today's legislation.
This legislation includes many initiatives that will build a stronger economy, help create jobs and provide direct assistance to Canadians. Examples include extending the Job Creating Hiring Credit for small businesses, promoting interprovincial trade, improving oversight of Canada's financial system, facilitating cross-border travel and trade, supporting Canada's commercial aviation sector, helping Canadians save for retirement by implementing the tax framework required for the Pooled Registered Pension Plans, improving Registered Disability Savings Plans, expanding tax relief for investment in clean energy generation equipment, and taking landmark action to ensure the pension plans for federal public service employees are sustainable and financially responsible for Canadian taxpayers. There are many more such items in this bill, as honourable senators are aware.
In my remaining time I will highlight one of those important measures and explain how it will help grow the Canadian economy, specifically, the hiring credit for small business. As we all know, small businesses are the lifeblood of Canada's economy. They are among the most significant job creators in our entire country. In fact, small businesses make up 90 per cent of all companies in Canada and employ nearly half of working Canadians in the private sector.
In recognition of the value and importance of small businesses across the country, along with the unique challenges that they face, Economic Action Plan 2011 introduced the hiring credit for small business of up to $1,000 per employer to help boost this key segment of our economy. The Hiring Credit for Small Business proved extremely successful and popular. It provided support for small businesses and helped them to expand with new employees, allowing them to grow by taking advantage of economic opportunities from coast to coast to coast.
The Yellowknife Chamber of Commerce said:
Yellowknife has a lot of small businesses and one of the most expensive features for any small business owner is labour, and if you could cut down on that cost then you've given them a chance that they can grow their business.
As Canada continues to cope with global economic turbulence, Economic Action Plan 2012, as legislated by Bill C- 45 with which we are currently dealing, proposes to extend that temporary hiring credit for small business. Specifically, the measure provides a credit of up to $1,000 against a small employer's increase in 2012 EI premiums over those paid in 2011. This credit would be available to approximately 536,000 small businesses across the country whose total EI premiums were at or below the $10,000 level for the year 2011. This will reduce payroll costs for small businesses in 2012 by over $200 million.
I am happy to report that small businesses have greeted the extension of the hiring credit with great enthusiasm. In fact, the Canadian Federation of Independent Business said that:
. . . extending this credit makes it easier for them to continue to support Canada's economic recovery by creating jobs.
With that, thank you for the opportunity to provide a brief overview of Bill C-45, the Jobs and Growth Act and to provide some insight into how it will keep Canada's economy on the right track.
I am happy to take questions and if I cannot answer them, I am quite sure that I have officials behind me who can do a much better job of answering them than I can.
The Chair: Thank you, Mr. Minister. Before I go to my list, could you tell me when the hiring credit for small business was first introduced? What piece of legislation did we see that in?
Mr. Menzies: Budget 2011, so I think it took until the second Budget Implementation Act. Do not quote me on that, but it was last year. We heard about the success from small businesses and they have of course encouraged us to extend it.
The Chair: It came into effect January 1, 2012. You can already determine it is working well for that period of time in less than a year?
Mr. Menzies: You compare with the employers' EI contributions from 2011 up until now.
The Chair: For the record, could you tell us how long the extension will be and for what period of time?
Mr. Menzies: It will be for one year at this point.
The Chair: Until 2013?
Mr. Menzies: Yes, 2012-13. It will be the year following the budget.
The Chair: Thank you.
Senator Buth: Thank you for being here today and giving your introductory comments.
There are a couple of different areas on which I have questions. The first is the scientific research and experimental development tax credit or the SR&ED. Primarily my interest is in innovation and R&D and Canada's place in terms of innovation in the world and how we are doing. I am aware of the Jenkins report that was done in terms of innovation in Canada.
The SR&ED tax credit has been quite popular with businesses in Canada and this bill is making changes to that. Can you comment on the changes that are being made and the rationale for these changes relative to innovation?
Mr. Menzies: Thank you, senator. That is one of the places where Canada has been criticized for lack of effectiveness, but certainly not for lack of investment. We have one of the strongest research and development investments in the industrialized world. However, that is not translating into innovation that is getting new businesses up and started, and new innovative designs out there. As you said, that was highlighted in the Jenkins panel report. There are some other measures that we can reflect on in the budget that will help innovation, help new companies get started. The SR&ED program — and thank you for saying scientific research and experimental development because most people do not know what it is — has been in place and helped a lot of businesses, there is no doubt. However, even the Jenkins panel found that a lot of the money that should go to innovation was going into red tape and paperwork. We wanted to make it more effective and the Jenkins panel reflected on that.
We are reducing from 20 per cent to 15 per cent for qualified expenditures. We are moving to simplify the processes for this, simplifying the proxy method that is involved in it, and removing capital from the expenditure base. Some companies have criticized that, but others that are more labour intensive have welcomed the fact that some of the Canadian companies that will be able to use this are more labour oriented.
The other aspect is venture capital. We have funded and put $400 million aside — it is part of what we heard in the Jenkins panel — for how to better provide venture capital to these new potentially innovative companies. We are working on that and hope to roll something out in the near future.
Senator Buth: That program has not been finalized yet, has it?
Mr. Menzies: No.
Senator Buth: The other area I would like you to speak about is tax support for the oil and gas sector. Canada, along with other members of the G20, has given support to the G20 commitment to rationalize and phase out inefficient fossil fuel subsidies over the medium term. The government announced in Budget 2007 and again in 2011 the phase out of tax preferences for oil sands producers, which supports that G20 commitment and the tax treatment of both oil sands with conventional oil and gas sector.
Could you briefly outline any measures in Budget 2012 that will be implemented by Bill C-45 that will build on the action our government has taken to meet this G20 commitment?
Mr. Menzies: Thank you. There is something I would like to get on the record. I think many people assume that our government actually provided special tax incentives — it has been insinuated time and again — for the oil and gas sector. I am proud of that sector, coming from Alberta, but our government never put any special tax incentives in place for the oil and gas sector. However, as a commitment to the G20 we said we would gradually wind those down and we started to reduce those in the 2007 budget. We felt it would be too much of a shock to eliminate them all in one year so we are continuing to wind down those special preferential tax treatments, or accelerate capital cost allowance, and bring them more in line with other industries. When this is complete there will not be anything special but it will be the same tax treatment.
We must remind everyone that we continue to reduce all corporate taxes as well as personal taxes, bringing them in line. We are also phasing out the Atlantic Investment Tax Credit that was in place in days gone by to encourage the oil and gas as well as the mining sectors. Eliminating those is also a commitment under our G20 agreement, but we are putting in some credits for green energy, renewable energy and energy from waste, trying to encourage industries to utilize that, and making tax treatment fairer for rest of the industries.
Senator Buth: Can you describe what is happening for the mining sector?
Mr. Menzies: It is simply bringing their tax credits or tax incentives more in line with the other industries as well. There have always been some special incentives for the mining sector. The clean electricity generation we are talking about needs to be encouraged and we see other countries around the world doing that. There is an incentive to accelerate the capital cost allowance for electrical generating equipment that uses waste energy to create them.
Senator Buth: Is that something that is commercial now; that is, commercial systems that companies will benefit from?
Mr. Menzies: Yes. The environment will benefit as well.
Senator Buth: Thank you very much.
The Chair: You touched on two of the areas that we think will be under discussion, namely, scientific research and experimental development, as well as the tax credits. I know a number of our colleagues will be interested in the Atlantic credits for oil, gas and mining.
Senator Callbeck: Welcome, thank you for coming here today and for your presentation.
Yes, I am interested in that Atlantic Investment Tax Credit. You talked about that applying to oil and mining, but that also applies to manufacturing, processing goods, farming, and fishing, certainly a lot of things that contribute to the economy in my province.
What was the total amount last year? Maybe you do not have the figure for last year, but the figure for the year before of that total tax credit?
Mr. Menzies: I could perhaps ask one of my officials who might know that number. I do not know that number off the top of my head.
Senator Callbeck: Maybe one of them can produce that number later on.
Was this tax credit ever more than 10 per cent?
Mr. Menzies: I am not sure what it was in its beginning. I would think that would be a question that the officials would be able to answer for you. I do not even know exactly when it was put in place so I do not know what the original amount was.
I am from the agricultural sector myself. There was the accelerated capital cost allowance back in the 1980s, which sounded like a wonderful thing at the time, and farmers took advantage of it. I would buy a brand new tractor for $200,000 or for $150,000. I would use it for a year and then I would trade it in for more than I bought it for. "Accelerated capital cost allowance" sounds wonderful in principle, but in practice it actually creates a distortion. The machinery manufacturers loved it because they were selling more equipment, but for someone who was trying to buy a used tractor it was pretty expensive. That was phased out and rightly should have been.
We are trying to make sure that taxes are fair. As I said before, we have been criticized, as have other countries, for giving an unfair advantage to the oil and gas sector. Are we ramping up production of oil? Are we increasing the usage of fossil fuels through our tax system? That is what the G20 countries decided, namely, if countries were distorting excessive use of fossil fuels through government assistance, we should stop it. That is what we were doing.
Geoff Trueman, Director, Business Income Tax, Department of Finance Canada: We will get that background information on the AITC. I will be here this afternoon as well, so I will get you the amount of AITC and some of the history and rates. We do have that information.
Senator Callbeck: Was there any analysis done to show what effect eliminating this Atlantic tax credit might have on mining, or fishing, or farming?
Mr. Menzies: We do analysis at the Department of Finance as we go through budget processes. We do not take these decisions lightly because we know it can affect industrial sectors and regions as well. Those analyses are done. Perhaps Mr. Trueman has a specific answer to that, too.
Mr. Trueman: I would reiterate what Mr. Menzies said in terms of the importance of respecting the G20 commitment and phasing out the inefficient subsidies for fossil fuels.
Regarding the AITC, mining, oil and gas in the Atlantic region, certainly the metrics over recent years, whether you look at value of production, total expenditures on exploration, capital expenditures, or employment levels, all are at or near historic highs. As the resource industries benefit from strong fundamentals across Canada that does include the Atlantic region. The industries have been robust and growing.
Senator Callbeck: You are talking about mining. You have done an analysis on this about what it will do to agriculture, fishing, logging, and so on. Can this committee see that analysis?
Mr. Trueman: At the current time, and during the budget process, the focus was on mining, oil and gas, pursuant to the G20 commitment. As I said, those activity levels are robust similar to other global activity and activities across Canada. The emphasis was on looking at those industries and not so much at the other recipients of the AITC.
Senator Callbeck: Why not look at the others? Agriculture and fishing are the two major industries in my province and here you are eliminating this tax credit. Do I take from that that no analysis has been done?
Mr. Trueman: No, the credit remains in place for those other industries. It has only been phased out for mining, oil and gas. My apologies if that was not made clear.
Senator Callbeck: In 2015 there will not be a credit.
Mr. Trueman: It is only being phased out for mining, oil and gas activities, not for the other activities.
Senator Callbeck: My understanding is for mining it will be phased out right away, yes. However, before 2014 the rate will be 5 per cent; for 2014 and 2015, it will be zero. Is that not talking about agriculture and manufacturing?
Mr. Menzies: No, just oil and gas. That was my error, too. I was not sure that it was not broader than that. Do not forget the agricultural programs and support for the fishing programs as well. Those remain the same. This is specific to mining and oil and gas in the Atlantic region, if I am correct.
Mr. Trueman: Absolutely.
The Chair: We will have to clarify this because the briefing note we got from the Library of Parliament indicates that for oil, gas and mining the tax credit will be cancelled immediately while investment with respect to other sectors — that is, other than oil, gas and mining — will have the tax credit rate phased out over time. That is the information that we have and that is the reason for the question that is being asked. We will have to clarify that.
Mr. Menzies: We can certainly get you a clarification on that.
The Chair: Yes, if you could.
Senator Callbeck: The second question I want to ask is on the group sickness and accident insurance plan. As I understand this, we are going to add that if an employer pays $1,000 for sickness or for an accident insurance plan for an employee, then the employee has to add that $1,000 on to their income and pay tax on it. If they are in the 30 per cent bracket, they will have to pay another $300; is that right?
Mr. Menzies: That is my understanding. I can remember going through this as a self-employed individual. I was looking for disability insurance as well as life insurance. There are different plans that you can purchase. For some of them, if it is tax deductible up front, then it is tax claimable at payout. It is considered a benefit. We are trying to simplify it and make it fair for everybody. Some get a tax exemption from it and some do not, making it fair for everybody.
Senator Callbeck: Does this include only sickness and accident? Does it include life insurance, disability insurance and health insurance?
Mr. Menzies: I believe it does but I would need a clarification on that.
Ted Cook, Senior Legislative Chief, Department of Finance Canada: This measure relates to group accident and disability insurance. The kind of insurance it is targeting is those that pay lump sums upon a specified event, such as a heart attack or diagnosis with cancer or something like that, and accidental dismemberment-type insurance. For example, you may have an insurance policy that gives rise to a lump sum upon loss of a hand or vision in an accident. This measure ensures that employer contributions to these plans are included in the employee's income.
Currently under the Income Tax Act, where payments from these types of insurance give rise to wage replacement income, where you receive a sum on a periodic basis to replace your wages, that is already being included in the employee's income at the time they receive the wage replacement payments.
As these types of contributions were not being taxed when the contribution was being made by the employer or upon receipt by the employee, we have noticed a shift in the kind of benefits that are being offered by employers, and this measure is really to preserve the neutrality across types of insurance. This measure is targeted to a specific type of insurance that is not otherwise being taxed.
What might be of interest to the committee is that this measure does not apply to the major medical and dental insurance that most employees have as part of their plan; it is sort of that big exemption with respect to insurance.
Senator Callbeck: This is for accident and disability?
Mr. Cook: It is for accidental dismemberment and critical illness insurance, which may give rise to a lump sum upon a stroke or a heart attack, diagnosis of cancer, something like that.
Senator Callbeck: How big a thing is this? How much money does the government intend to raise?
Mr. Cook: It will apply to approximately 6.8 million employees. The federal impact per employee is expected to be, on average, about $13 per year, a combined federal-provincial of maybe $20 per year per employee. When phased in, I believe it will be in the neighbourhood of about $100 million per year.
The Chair: Senator Callbeck, can you please finish up this line of questioning? I will put you on round two.
Senator Callbeck: That is fine.
Mr. Menzies: That is what I was trying to explain, but Mr. Cook explained it much better. Mine was actually a group disability or dismemberment insurance. I remember the challenge we were dealing with at the time, but he did a much more eloquent job of describing it than I did.
Senator McInnis: Thank you, minister, for being here.
My question is general in nature, but I would like to hear your response to it. It pertains to the economy of Canada and the job growth being the best, as you said, in the G20.
Mr. Menzies: G7, not G20, unless Minister Flaherty comes back with some great news from Mexico.
Senator McInnis: Could you speak to the reasoning behind that? Also in the context that we live in a bit of a fragile global economy, where do you see Canada's economy going over the next two to three years? If you have detected that there is a growing confidence within the private sector, the business community in Canada, could you speak to that, please?
Mr. Menzies: That is a very interesting question, senator, and very pertinent. We all hear more and more about the fiscal cliff that the U.S. has brought upon themselves and the fact that no decisions have been taken. We certainly hope there will be a positive resolution because it will impact Canada and it will impact the entire world. The largest economy in the world is sitting on a precipice, if you will, and it will impact us. They are our largest trading partner. That is why we put in this piece of legislation a mechanism to hopefully get that Detroit River International Crossing going, because that is where most of our trade goes. That is where most of our automobiles go. It is very important. However, the United States is not the only country that is seized with indecision. The European Union is in that position as well. They are starting to get their act together, but they have some massive sovereign debt over there.
I sense from our Canadian companies and companies that are coming to Canada — certainly we hear a lot about the major companies wanting to invest here, but there are the smaller companies that are coming here as well. I have met with some of them in my limited international travel, and our Canadian companies are branching out, but they are also investing in this country.
Inasmuch as we talk about job growth, 820,000 net new jobs on a per capita basis is incredible growth. We lost jobs during the recession, no doubt about it. Every region of this country did, but obviously our Canadian companies are forward looking and they are looking forward to the future because they are starting to hire. In fact, in my region of the country, Saskatchewan, that is the biggest concern I hear: How do I get more employees? That is why Minister Kenney is reaching out. That is why Premier Brad Wall from Saskatchewan went to Ireland on a recruiting mission to try and bring in more Canadians.
We are seeing growth, but we are also concerned about that growth. It is not the growth that we saw pre-recession, but it is growth, and if the Americans do not make some tough decisions, they will see negative growth.
Senator McInnis: Do you have a sense that Canadians, the private sector particularly in the business community, have a growing confidence in terms of investment?
Mr. Menzies: We do see that. It is partly displayed in the enthusiasm for this venture capital we are looking at. Many beginning companies, companies that want to get up and started, are coming to us and asking, "How do I get venture capital? How do I get angel investors to look at my idea?" There is enthusiasm there, and I see it across this country. I have been to Atlantic Canada, and even some of the companies there want to grow and invest and are looking for capital. To me, that is a positive sign for these businesses that want to invest, expand and grow.
Senator McInnis: Thank you.
[Translation]
Senator Chaput: I have two questions. But I will keep the second one for the other witnesses, given the limited time that Mr. Menzies has available.
[English]
In your presentation to the committee, I think you said that Canada, or our country, is not living on borrowed money. I believe you said something to that effect. How can we say that on the one hand when on the other hand we are facing a reality where Canadian families have never been so much in debt?
There was a study that came out this week about the very high stress levels of Canadian families because of the money they owe. How can you on the one hand look at a country that is not living on borrowed money, but on the other hand see Canadians who are really living on borrowed money, which is causing so much stress? How do you put those two facts together?
Mr. Menzies: Just to be clear, I was quoting Chancellor Merkel. That was her comment, not mine. As a farmer, I lived on borrowed money. That is the way I grew my business, and most businesses do the same. My father would never have accepted that in his day and age, but we accept that.
You make a valid point, senator, that the amount of household debt that people are carrying is a concern. If they can manage that debt, then that is great.
In today's day and age, it takes borrowed money to grow your business. Not many people can come up with the price of a new home these days, so you are dealing with financial institutions and mortgages.
I will talk a little bit here if I can about financial literacy. November is Financial Literacy Month. It is very important. We are seeing so many people struggling with their household debt and their mortgage. They did not understand all of the implications of perhaps saving for a bigger down payment before they took on that mortgage. Credit cards have gotten a lot of people in trouble. We have put in place a code of conduct for those credit cards to actually make people aware of what liabilities they are taking on with that.
Financial literacy will play a major role in helping to educate people, whether they are new Canadians, children or seniors with all of the modern technology such as online banking, using mobile phones to pay for purchases and those sorts of things. We have a lot of enthusiasm about Financial Literacy Month.
We are trying to gently encourage people to look closely at what their income is before they commit to the outflow of money. We all have a finite amount of money to deal with, and we encourage people to think and invest wisely to ensure that they are protecting themselves and putting a little away for retirement.
Senator Chaput: Do you not find that this is getting to be a problem? If people are experiencing high levels of stress because of their debt levels, we will get into serious difficulties if we do not find incentives for those families to do otherwise.
Mr. Menzies: I could not agree with you more. There is nothing worse than seeing people who are in over their heads. We saw it on CBC the other day — they were getting calls from creditors that they were in over their heads.
We are encouraging people to invest wisely, and we have brought down the amortization period on mortgages to try and encourage people to save a little more for their down payment before they make that jump.
Senator Chaput: Thank you.
Mr. Menzies: That is a good point, though.
[Translation]
Senator Bellemare: I am very happy to be able to speak to you today, Mr. Minister. Let me tell you that, in my opinion, in fiscal and budgetary terms, Canada has stayed out of harm's way really well these last few years. This allowed us to escape the effects of the international crisis that a number of other countries have suffered.
My questions deal with two specific aspects of the bill we have to work on. Clearly, we will get into more technical matters in the upcoming sessions.
My first question deals with the amendments you want to make to the public service employees' pension plan. I also have a question about employment insurance.
In terms of the public service employees' pension plan, we see in the bill that the government intends to increase the employees' contribution to 50 per cent of the cost of the plan. That seems to be a very normal thing to do. Pension plans are a big problem financially. I see this as a step in the right direction.
The bill states that public service employees will be paying 50 per cent of the bill in 2017. Contributions will shortly start going up until 2017. What impact will that have on a public service employee's disposable income, his pay cheque? Is that four-year transition period quite short? Will they see a major impact on their disposable income, or will the jump be made so that there will be no net salary reduction for the employees? We might ask ourselves, if the jump is a big one, given the shortness of the transition period, whether there may be other undesirable problems. Do you have any figures in mind?
[English]
Mr. Menzies: I am not sure I actually have the figures, senator. However, we have given a transition period for something that should have been done a long time ago: Making compensation to public servants more on a level playing field with the private sector.
I hear from my constituents that they know public servants do a great job, but if we as legislators make it more attractive to go and work in the public sector, then we are putting our private businesses at a great disadvantage, and that is not fair. We are trying to level that playing field. We are trying to do bring our pensions more in line with the private sector, and Canadian taxpayers expect that.
As we said, we are not doing this overnight. We think there is a transition process in place. I will look to Ms. Gowing to give you the details on that, but we think it is only fair that we not be setting the bar higher than the private sector in compensation, whether in pensions, wages or benefits.
Kim Gowing, Director, Pensions and Benefits Sector, Treasury Board of Canada Secretariat: The increase will be phased in over a five-year period, not a four-year period. I can say that the after-tax contributions for members of the public service will increase by approximately $1,500. This is for the existing plan members who will not be subject to the retirement age of 65, starting in 2013.
For new entrants into the plan, it will be an increase of after-tax contributions of approximately $1,000. For the Canadian Forces it is $1,300, and for the RCMP it is an increase of approximately $1,700 over a five-year period.
Mr. Menzies: Can I just add one thing? This is all to ensure that the plan is sustainable. It is like the changes that we made to OAS. It is a good plan, but we need to ensure it is sustainable for the future.
The Chair: We are running a little tight on time, senators. We have four senators who have asked to intervene and we have about 12 minutes left. That is three minutes per senator.
I think what we will do is take two senators first with questions and get their questions on the record. Then if you can find a thread in your answer to tie those two together, that would be wonderful. If you cannot, then that will be too bad.
Senator Nancy Ruth: Minister, thank you for being here. I have two questions. The first your staff can hustle the answer for you. I want to know what doing gender-based analysis did when you were making all these tax and other proposals in Bill C-45. Were there any measures that were changed or tinkered with that would have an impact on women, and what measures particularly help women in Bill C-45?
The Chair: Do you have your other question for the record?
Senator Nancy Ruth: My other question was in regard to the CPP review. What are the amendments in Bill C-45 that impact CPP?
[Translation]
Senator Hervieux-Payette: I would have liked to ask a number of questions, but one particular one comes to mind. Canada's economic situation shows a gap in exports of manufactured products and also in exports of knowledge. In my opinion, two clauses in the bill go contrary to our desire to export more. One is the elimination of the overseas employment tax credit. We know that setting up a new business can be very costly, even in Europe, given the complexity of European Union rules, among other things. But we will no longer be helping our companies to set up overseas because we think that they can afford it themselves. For small and especially medium businesses, the cost of setting up an operation overseas is very often the obstacle. I find that aspect quite contradictory.
I have been part of a Parliamentary mission to Haiti. Businessmen in Haiti told us that they could not get visas because the door was locked and bolted. I am a member of a group called ParlAmericas; it is the same thing there. We have a free-trade agreement with Panama. It takes three months for a visa and they have to go to another country to get it. Travellers will provide information online, so the Immigration Act is amended. But that does not seem to improve access so that foreign businessmen can come to do business in Canada. Whether in Central America, South America or Europe, those two measures seem to me to work against our desire to do business overseas and against your government, which tells us that it is constantly entering into free-trade agreements. But people still have to keep travelling between two countries. What is the thinking behind all that?
[English]
Mr. Menzies: Thank you. Senator Hervieux-Payette, if I can address your questions first. No disrespect, Senator Nancy Ruth.
Certainly, the free movement or better movement of people back and forth, for business people, for those who want to come here and work, is very important. However, we cannot afford, nor can any country in the world — perhaps the United States has the broadest footprint in all of these countries, but we have embassies or high commissions in many countries that cover other areas. For example, Australia covers the South Pacific islands from their base in Sydney. I do not think we could justify having embassies or consular offices in every country.
To your specific question, I never dealt with that, but I am sure there is a way to access it. Many of the Eastern European countries have to go to one central community or online to a central point.
I believe it is the foreign affiliate dumping that you are referring to, or what tax provisions were you wondering about?
The Chair: A Canadian who works for a Canadian company.
Mr. Menzies: I see. I am not sure if we could have an official explain that. There is a fairly long-standing, simple mechanism of making sure that a tax is paid in one country or another. Perhaps I can ask an official to answer that more adequately.
Senator Nancy Ruth, to your question about gender, each one of the recommendations or advice documents that comes to either Minister Flaherty or to me has a specific line on gender analysis: Does this have a negative impact? How does this impact gender issues? For every decision that is taken at the Department of Finance, and I would hope in other departments as well, we actually have analysis brought to us.
Senator Nancy Ruth: How many of those lines made you change something, if any?
Mr. Menzies: That one, I cannot answer. I would have to go back and look, but we certainly take them into account.
Senator Nancy Ruth: I hope next time you will notice as you read them.
The Chair: We have all the officials here, and if any official could make note of that question, as well as the one that Mr. Cook has come forward with in relation to Canadians working for Canadian employers abroad, and if the officials could deal with that when we get to your particular spot. We have four minutes left to deal with the minister.
Mr. Menzies: If I can quickly answer Senator Nancy Ruth's other question about the Canada Pension Plan. We have a triennial review that is brought to the federal-provincial-territorial finance ministers' meeting, unanimously accepted at the last ministers' meeting, and they are simply changes to make sure CPP is protected for the long term and that it is actuarially sound for 75 years, joint jurisdiction. We are legislating some improvements to CPP, and we can provide all the details on what that was.
[Translation]
Senator Hervieux-Payette: Could I get my answer?
The Chair: As I said, you will get your answer later, because the minister has to leave us. We only have three minutes more with him.
[English]
Senator L. Smith: Thank you, Mr. Minister. The pooled pension legislation was passed in July. In terms of recognizing smaller businesses and people who are entrepreneurs, what is your expectation? What type of rollout will this legislation, the second phase, mean for pooled pensions? Will there be an education type of program so people can understand how to get involved and what it means? I am not sure that right now there is an understanding of the pooled pension concept and how it will work, other than the general global, generic description that was given.
Senator Runciman: Minister, I am curious about the Corporate Mineral Exploration and Development Tax Credit in terms of what the goal is and what the impacts will be on employment competitiveness. I am specifically interested in the so-called "Ring of Fire" in Ontario, which is supposed to be this huge area with vast ore bodies that have yet to be exploited to any significant degree. How does the Ontario mining industry itself feel with respect to these initiatives, and what do you see as the short- and long-term impacts?
The Chair: Minister, you have three minutes, so you will not disappoint your whip, before you have to leave us.
Mr. Menzies: That is always a good thing.
Thank you, first of all, for the question about the Pooled Registered Pension Plan. These are simply the tax changes that are required. I thought it was going to be very simple, until the officials came to me and said, "Anywhere there is 'RRSP' or 'registered savings plan' defined in the act, we now have to go back and add 'Pooled Registered Pension Plan' as well." I am one of these guys who says, "Let's just get it done," and then you realize there are a lot of different pieces of legislation.
This has all been broadly consulted. It was put out, gazetted and consulted on with tax lawyers and financial institutions to make sure they understood what the changes would be. It was very broadly put out.
The education portion will be my challenge. It is not the easiest thing to explain, but particularly when you explain it to a small business that has not had a simple way of offering a pension plan to their employees. Sixty per cent of the employees in Canada have not had a workplace pension plan offered to them.
The businesses are quite excited about this, and a lot of the small businesses, where they do not want the legal or fiduciary responsibility of making investment decisions for their employees. It will now be on the provider of this Pooled Registered Pension Plan, whether it is an existing pension fund or whether it is a financial institution or credit union. The small business owner has a simple way of offering this to their employees. We are looking forward to the provinces also enacting their enabling legislation, and I am working with the provinces on that.
Senator L. Smith: Is there a time frame for the rollout, Mr. Minister?
Mr. Menzies: Unfortunately, we are waiting until all the provinces have their legislation in place as well. I have been actively engaging the provinces.
Senator L. Smith: To be determined?
Mr. Menzies: Yes, to be determined, unfortunately.
In terms of the removal of the mining tax credit — and perhaps one of the officials, after I am gone, can explain the details of that — it was broadly consulted. It is always a bit of a challenge when you are reducing a tax credit to one sector or another. However, it is all with the overarching theme of ensuring that it is fair to all industries. We removed the accelerated capital cost allowance credit that was given to the oil and gas sectors and we are making it fair to everyone.
The details will be given to you by an official after I leave.
The Chair: Colleagues, the time that the minister had available for us this morning has now expired. After we have heard from the officials over our next several hearings, if there is a need or a desire to have the minister back to talk about the policy aspects of this legislation, I am sure that we will be able to work out a mutually convenient time to hear from him again.
Mr. Cook, could you answer the question posed by Senator Hervieux-Payette concerning the tax break that is slowly being phased out for Canadians working for more than six months offshore?
Mr. Cook: It may be helpful to explain a little bit about the Overseas Employment Tax Credit. This credit is currently available to employees who are working for a Canadian employer for more than six months outside of Canada. It effectively provides credit for the income tax otherwise payable on up to the first $80,000 of income earned outside Canada.
This credit started as a deduction in 1979. The genesis of it was to assist Canadian corporations, not the employees who benefit from the credit, in bidding for large-scale projects outside Canada. The credit itself is limited to certain activities such as engineering, agriculture and installation.
Over time, a few things have happened. First, the general corporate tax rates have been significantly reduced, which has assisted employers in bidding for contracts outside Canada. As well, there has been a judicial expansion of the credit. The actual law has not changed over the years, but the way that courts have interpreted it has effectively expanded the credit and now it is being claimed by people who are outside of that basic policy ambit.
The third thing to note is that in 1979, when this deduction was introduced, a number of other jurisdictions had similar credits. Over time we found that other nations no longer have the same type of credit, so as a general matter, for all those reasons, it was appropriate to phase out the Overseas Employment Tax Credit. That will be done over a four- year period with grandfathering for current projects that are currently agreed to.
Senator Hervieux-Payette: I would like to know the rationale. You said that at the beginning it was meant to assist companies and it eventually came to assist employees. I think of couples who have to move to a foreign country. They probably have to spend money for schooling, because it may not be free where they are. I have seen how difficult it is for Canadians to move abroad with their families and to come back to Canada regularly to see their families and so on.
Their salary cannot be devoted only to the costs of housing outside of the country and all the other expenses related to working abroad. This applied only to Canadians working for Canadian companies abroad. It did not apply if they were working for GE or Ford, and it was the employees who were benefiting from it.
Why would we cut that rather than encouraging Canadians to be active abroad, bringing some business to Canada?
Mr. Cook: The deduction has always been available to the employee rather than the company. I mentioned that because it is important to recognize that, while the person who directly benefits from it is the employee, the policy aim is not to support the living expenses of employees overseas but rather to assist companies in conducting business overseas.
Second, this was never a general credit. It was limited to specified activities such as engineering, agricultural and installation. Despite the fact that we think of it as a mature credit, it has actually expanded quite a bit in the last several years in a way that was not intended or anticipated, but rather just as a result of courts reading the provision very broadly.
Senator Hervieux-Payette: I guess Revenue Canada was more in line with my philosophy, which is to help people to work abroad and bring business back to Canada.
Either you or the minister mentioned that companies were paying less tax. Changing company taxes does not mean that the benefit will accrue to the employee. I have not heard that because we reduced the tax rate for companies they have automatically increased the salaries of their employees. What is the relationship?
Mr. Cook: When general taxes are lower for Canadian companies that are competing against foreign companies for projects overseas, their ability to compete is enhanced because they are factoring in a lower level of taxes.
Senator Hervieux-Payette: That has nothing to do with the tax credit. I am trying to find how you can merge these two ideas. What the employee was receiving, at least as a tax benefit, did not change the revenue for the companies or their competitiveness. I agree with you that we have to make these companies competitive. However, the employee himself and the sacrifice that Canadians have to make to live in remote countries with not necessarily the same kind of services they have in Canada, I thought this was a great idea.
The Chair: Senator Buth has a supplementary on that.
Senator Buth: What are the savings on this part?
Mr. Cook: When fully phased in, it will be approximately $95 million per year.
Senator Buth: Thank you very much.
The Chair: Colleagues, the plan we have worked out is to start at the beginning of Bill C-45, Part 1, clause 2. Part 1 deals with income tax changes. We would like to thank you all for being here, and we will try to go through this as smoothly as we can. Most of you have been through this with us before, but if there are two or three sections you want to talk about together to explain a concept, then that is the way to do it. If the concept is in one clause alone, then we would like you to explain what you are trying to achieve through the particular piece of legislation.
Mr. Cook: As I think was noted when the minister was here, for each of these amendments, there may be a number of consequential or minor technical amendments sprinkled throughout, and there is a total of 73 clauses. I will highlight the major clauses, and we can certainly stop at any clause and go into as much detail as the committee would like.
In clause 2, the major change contained there is with respect to the group sickness and accidental insurance plan we had already discussed when the minister was here. I think I largely provided what I was planning to say to the committee, that this is mainly about neutrality between types of insurance, and it will provide that employer contributions to these types of insurance will be included in the employee's income in the year in which the contribution is made.
The Chair: It is this new section, which will become a new section, part of section 6. Are there any other parts that relate to that concept?
Mr. Cook: That clause is the only one which implements that particular change.
As well, there is a small change with respect to pooled registered pension plans.
The Chair: We will get to that. That is at the bottom of page 2 of the bill. Are there any questions, honourable senators, with respect to the concept of bringing that in as a taxable benefit to the employee? In effect, that is what it is.
Senator Buth: Can you explain again the two different types of plans that you are trying to bring the neutrality to?
Mr. Cook: The two types are group sickness and accidental insurance. The group sickness is also called "critical illness insurance," which pays a specific lump sum upon a particular event, such as a stroke or heart attack. Then the accidental insurance relates to lump sum payments on generally accidental dismemberment or loss of a hand or a foot or vision or something as a result of an accident.
The Chair: The minister pointed out this would not include dental plans.
Mr. Cook: That is right. One of the concerns is how far this particular measure goes, but there is a basic exclusion in section 6 with respect to private health services plans, and those are the plans that provide the basic medical and dental coverage that employees rely on, and that is not being changed by this measure.
The Chair: The logic of not including dental and sickness, but including as a taxable benefit anything the employer pays with respect to accident is pretty close. At this time, one is and one is not.
Mr. Cook: That is correct.
The Chair: Any other questions on that particular matter? Seeing none, we will move on to pooled registered pension plans.
Mr. Cook: Regarding pooled registered pension plans, all this does is introduce one of those particular references to pooled registered pension plans in this subsection. Would you like us to discuss it more generally right now?
The Chair: The minister indicated there are many different places where this pops up, and this is one of those places.
Mr. Cook: All this does is say that in computing an employee's income, contributions to PRPP are not included in income. There is a separate regime that deals comprehensively with the treatment of contributions to PRPPs.
The Chair: Thank you. If you want to talk more extensively about it, do it at the appropriate time when you see a lot of sections there.
Mr. Cook: Clause 3 provides a consequential amendment with respect to employee profit-sharing plans. It just provides that where an employee is subject to the tax that we will be talking about later, the amount that is subject to that tax will not be included in their income for other purposes.
Senator Callbeck: It says here there is a special tax that will be put on. How much is that special tax?
Mr. Cook: Maybe I will use this opportunity to explain employee profit-sharing plans. They are a particular regime under the act to help employees align their interests with those of their employers. Employee profit-sharing plans are generally trusts that the employer makes a contribution to, and then the amount of the contribution and any income earned by the trust is allocated to the employee each year.
We found that these employee profit-sharing plans are being used for reasons that were not originally intended, for example, to split income between spouses or between parents and children, to avoid CPP and EI contributions and to defer tax. To deal with this, there is a new tax, and I believe it is in section 207.8(1). The Income Tax Act is set up so that each part of the act generally imposes a separate tax, and this imposes a tax on any contributions or any allocations made to specified employees, those who have a close relationship with the employer, in excess of 20 per cent of their salary.
When the allocation under one of the EPSPs is more than 20 per cent of the person's salary, it will be taxed at the highest marginal rate, so it will be taxed at 29 per cent federally, plus the highest marginal rate for the particular province. There is no tax imposed for Quebec; they are imposing their own tax. Then the provincial portion of this tax will be shared with the provinces.
Senator Callbeck: If a taxpayer disputes this, do they have any recourse here?
Mr. Cook: As this is part of the Income Tax Act, we have imported the general rules with respect to reassessments, appeals and going to court. The same kind of resources that an individual would have with respect to their basic income tax liability, they would have with respect to this as well.
Senator Callbeck: Thank you.
Mr. Cook: Clause 4 relates to the fact that the bill contains four measures with respect to thin capitalization. Thin capitalization relates to the rules to the extent to which Canadian corporations can borrow from specified nonresident persons. This is in order to protect the Canadian tax base from having income stripped out by way of interest deductions and interest paid to nonresident parties.
This particular portion of the measure makes sure that the thin capitalization rules apply in the context of where the Canadian corporation is either a member of the partnership that borrows money or partnerships are used to lend money to the Canadian corporation. In the case where a partnership borrows, it allocates the right proportion of that debt for the purposes of computing thin capitalization.
The Chair: It is T-H-I-N capitalization?
Mr. Cook: That is correct.
The Chair: Is that an acronym for something?
Mr. Cook: No. It gets to the notion of whether a corporation is thinly capitalized or not. The idea is that in a very thinly capitalized corporation you would have very little equity. Most of the funding of the corporation would be done by way of debt in the absence of any rules. For Canadian tax purposes, the Canadian tax corporation would have little to no profit and money would leave Canada by way of interest expense paid to a nonresident.
The Chair: Carry on.
Mr. Cook: Clauses 5 and 6 relate to the foreign affiliate dumping measures. Foreign affiliate dumping generally is a measure to address circumstances where foreign affiliates are put under a Canadian subsidiary of a multinational group in circumstances again where, to avoid part XIII withholding tax or tax on distributions to nonresident parent, that money is extracted either by way of interest paid on debt or by even cash paid to buy a foreign affiliate, a subsidiary company, in circumstances where the foreign company under Canada will not be giving rise to income that is subject to tax in Canada.
The rules, in particular, that are contained in clauses 5 and 6 relate to largely a relieving change in comparison to the original budget measure that would allow corporations to elect to be subject on amounts owing to an income imputation. An appropriate amount of income will be subject to tax in Canada.
Senator Callbeck: Will those changes affect foreign investment at all in Canada?
Shawn Porter, Director, Tax Legislation, Department of Finance Canada: That is a good question and one that we have received from a number of stakeholders. The policy intention is that it be targeted at what most people would agree to be abusive tax planning situations. As Mr. Cook alluded to, the rule in the main would apply to limit the ability of Canadian subsidiaries of foreign parent companies to deduct interest expense, as well as the ability of those foreign parent companies to extract cash surplus from their Canadian subsidiaries without a withholding tax. Those are the natural tax consequences that investee or source countries would expect to obtain. Canada is like every other country that is a destination for foreign capital. When we are the receiving country of that foreign capital, Canada's tax rules are very similar to those in other countries.
The purpose of the rule is to preserve the tax base in the Canadian subsidiaries of those foreign companies, as well as to impose our withholding tax when the profits earned here are repatriated to the foreign parent companies and viewed that way and not to serve in any way as an impediment to investment in Canada by foreign-based multinationals.
Senator Hervieux-Payette: I have a supplementary on that. Would that not apply to a Canadian company that would do the same thing? Is it just for foreign companies? I thought it was for both Canadian and foreign investors.
Mr. Porter: The rule only applies because the tax policy issue only arises when there is a foreign parent company that controls the Canadian subsidiary.
Senator Hervieux-Payette: Why were Canadian companies screaming and saying that the interest rate would not be deductible? That was sometime ago, but it seemed that Canadian companies were not happy with that.
Mr. Porter: I am not certain what exactly you are referring to in that context. This rule has no application to Canadian-based companies. It only applies to Canadian subsidiaries of foreign companies.
Senator Hervieux-Payette: I will ask Senator Buth's question: What is the saving on this? How much money will be collected if we stop that?
Mr. Porter: The estimate given in the budget plan was $1.3 billion over the five-year fiscal framework.
Senator Buth: Were consultations done with the industry on this? What was the reaction?
Mr. Porter: There have been extensive consultations with a wide range of stakeholders, various industries, professional groups and professional service firms. It was acknowledged in the budget document that it was a large ticket measure. Consultations were specifically contemplated and provided for with respect to the budget proposal. We have received and have had extensive interactions with a wide range of stakeholders. That led to the release of draft legislation. There was a detailed notice of ways and means with the budget. Draft legislation was released on August 14. There was a 30-day consultation period following the release of that legislation and, again, significant dialogue with the broader community. We have continued to dialogue with the broader community after the September 13 deadline for the end of consultation of the August 14 draft legislation, and to a limited extent we continue to have a dialogue with the community today.
However, a number of changes have been made to address the concerns that we heard post budget and post release of the August 14 draft.
Senator Buth: Thank you very much.
The Chair: Thank you. I guess we are at page 10, are we, Mr. Cook?
Mr. Cook: Clause 7 primarily contains rules relating to thin capitalization. There are two measures contained in clause 7 that we have not discussed yet with respect to thin capitalization. The first is a change of the debt-to-equity ratio used for thin capitalization purposes from 2 to 1 to 1.5 to 1. That is the debt-to-equity ratio measure of the amount of debt that a corporation can have without triggering the application of the thin capitalization rules. The thin capitalization rules deny interest expense over a certain amount, which is measured by the debt-to-equity ratio. That ratio is being reduced from 2 to 1 to 1.5 to 1.
Clause 7 also implements other parts of the partnership rule that we have talked about already and it contains a technical change just to make sure that there is not double taxation in circumstances where a controlled foreign affiliate of a corporation makes a loan to the corporation.
There were some circumstances where a corporation could be subject to thin capitalization, have interest denied, but at the same time be subject to an incoming inclusion under Canada's Foreign Accrual Property Income rules. This small change makes sure there is not inappropriate double taxation.
The Chair: I notice that sections 10 and 11 on page 13 have a lot of different times that this comes into effect. Is there an explanation for that? Typically one concept, one idea would become law at one particular time.
Mr. Cook: As I indicated, the thin capitalization rules are actually composed of two or three different measures all relating to thin capitalization. For the change in the actual ratio, that will apply on a go-forward basis to make sure that corporations are not subject to this rule.
Looking back for the actual clearing up of the double taxation, we have had some representations that this actually has affected some taxpayers, so we are going back to prior years to make it clear that they should not be subject to double taxation.
[Translation]
Senator Bellemare: Have you done any quantitative analysis of the financial impact of this clause?
[English]
Mr. Cook: There has been some analysis overall with respect to the thin capitalization rules. It is expected to impact on a very small percentage of foreign-owned corporations in Canada.
The Chair: I think we are at page 13, section 8. Is that correct?
Mr. Cook: That is correct.
The Chair: We have now run out of time, but we are back here at one o'clock. I hope you will be able to be back at that time. We will give you a bit of a break and carry on then.
Mr. Cook: Certainly. Thank you.
The Chair: Thank you. I now adjourn until one o'clock.
(The committee adjourned.)