Proceedings of the Standing Senate Committee on
National Finance
Issue 29 - Evidence - November 21, 2012 (Evening meeting)
OTTAWA, Wednesday, November 21, 2012
The Standing Senate Committee on National Finance met this day at 6:43 p.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 evening we are going to continue our study on 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 sixth meeting on the subject matter of Bill C-45. They were double meetings and this should really be our twelfth meeting, but there have been six meetings of four hours each in length.
In our first session this evening, we will be looking at the proposed amendments to the rules relating to Registered Disability Saving Plans, which can be found in Part 1 of the bill. We were trying to locate the various areas in and around page 53, 56 and 57 of the bill of some 400 pages plus.
From the Canadian Association for Community Living, we welcome Mr. Brandon Pooran, who is a lawyer. His firm name is Pooran Law and he is president of the board of directors for Community Living York South.
Mr. Pooran, we are pleased that you were able to be with us this evening. Thank you for coming along to help us out.
We are also pleased to welcome, by video conference, from Planned Lifetime Advocacy Network, or PLAN, Maggie Vilvang, Executive Director; and Joel Crocker, Director of Future Planning.
I will first ask Mr. Pooran for any introductory remarks he may have in relation to the initiatives in this bill. That is our primary focus, but if you would like to give a bit of context and your background, by all means do so. I will then go to Ms. Vilvang.
Brendon Pooran, Lawyer, Board of Community Living York South, Canadian Association for Community Living: Thank you for allowing me this time tonight to speak to the rule changes relating to the Registered Disability Saving Plan.
For those of you who do not know, the Canadian Association for Community Living was founded in 1958 as a family-based association assisting individuals with intellectual disabilities and their families to take a lead role in advancing inclusion in their own lives and in their communities.
I will give a brief overview of my credentials. I am an adviser to CACL on the RDSP, a disabilities rights lawyer in Toronto, professor of critical disability law at York University, and a member of the Ontario Consent and Capacity Board. As the chair mentioned, I am also president of Community Living York South and project manager of an RDSP outreach initiative with HRSDC. Finally, I am a sibling of two individuals with intellectual disabilities.
Overall, we are strong supporters of the RDSP and we welcome the changes put forth in Budget 2012. We see the RDSP as one of the most progressive income support initiatives for people with disabilities anywhere in the world. That being said, we have a couple of comments with respect to the changes.
I recognize that we are not here to discuss Bill C-38 that was already passed back in June, but I have a quick comment on that bill. We do not believe that the expansion of the definition of "plan holder" of an RDSP fully addresses the systemic exclusion of adults with intellectual disabilities in terms of benefiting from an RDSP. We were very appreciative to see the four-year window that was opened up and expanded the definition to include parents, spouses and common-law partners, but the fact is that thousands of people with disabilities do not have those people in their lives. Therefore we would have liked to see siblings included on that list. Ultimately we would like to see the federal government take a leadership role in ensuring that any adult beneficiary of an RDSP can be their own plan holder with adequate supports. Relying on the provinces to facilitate a solution will create a patchwork of approaches that will ultimately create an inequity when it comes to the civil rights of persons with intellectual disabilities across the country.
CACL has taken a lead in facilitating conversations with both the federal and the provincial governments, with the National Association of Public Trustees and Guardians, NAPTG, with all of the big five financial institutions, as well as other disability organizations, and we are committed to working with those groups in finding an adequate solution.
In relation to Bill C-45, we welcome the changes in this bill. We have only one comment relating to the proportional repayment rule outlined in the bill. Again, we appreciate the added flexibility that this proportional repayment rule will bring to beneficiaries of an RDSP. However, even with that added flexibility, we do believe that the measure is still quite punitive and that ultimately it does little to address the systemic poverty that many individuals with intellectual disabilities face.
The feedback we receive is that given the 10-year waiting period between the time of the federal government's last contribution and the initial withdrawal from the RDSP, which could ultimately be up to 30 or more years, coupled with the lower average life expectancy of some individuals with disabilities, the change will do little to facilitate financial security for some people in the community. Ultimately, we will see a lot of next of kin benefiting from this financial support because we have intestacy laws in each province that generally recognize next of kin as inheriting from one's estate if there is no valid will in place.
Although we do not have a definitive proposal here tonight on how to address this issue, I will throw out or suggest a number of different ideas that may be helpful.
First, the RDSP seems to be modeled a bit on the Registered Retirement Savings Plan legislation. Perhaps we could look at a penalty that is more in line with the RRSP, such as a withholding tax payable.
Second, perhaps we can consider a rolling measure. For example, let us say year 1 contributions become accessible to the beneficiary in year 11. There is still that 10-year period but it is implemented on a rolling scale so that beneficiaries are able to access money a little bit earlier.
Third, perhaps beneficiaries can access even just their own private contributions in a reasonable time frame. I think one or a combination of these proposals may be a more effective solution to the intents and purpose of this provision in the bill.
In conclusion, we are strong supporters of the RDSP. We very much welcome the amendments put forth in Bill C- 45, but we ask you to recognize the inexcusable poverty rates that people with intellectual disabilities face. Almost half of this population is relying on provincial or territorial social assistance programs. The employment rate for working- aged people with intellectual disabilities is 25 per cent compared to 75 per cent of those without. The average income for people with an intellectual disability is less than half than those without a disability. We see the RDSP as serving a critical role in addressing these inequities and are committed to working with the federal government on continued enhancements to this exceptional plan.
The Chair: Thank you very much. I am sure some senators will wish to engage with you on the points that you have made, but we will first go to Ms. Vilvang from Planned Lifetime Advocacy Network.
Maggie Vilvang, Executive Director, Planned Lifetime Advocacy Network (PLAN): Mr. Chair, honourable senators, fellow witnesses, we would like to thank committee members for inviting us to speak here today. It is an honour to address this assembly. I am the co-executive director of PLAN, Planned Lifetime Advocacy Network. With me is Joel Crocker, Director of Planning.
PLAN is an organization that was started back in 1989 by a group of families who asked themselves a very important question: What will happen to my son or daughter with a disability after I die? In the 23 years since, many interesting responses to this question have emerged, including our unique approach to network building, the Representation Agreement Act in British Columbia, and of course the Registered Disability Saving Plan which began as an idea and plan in 1997. All of these innovations were meant to help build a safe and secure connected life for our family and friends with a disability and to elevate all of Canadian society as a result.
After many years of effort, PLAN was pleased to see the RDSP finally come into effect in 2008. Its realization was a result of numerous meetings with three different PMOs as well as multiple consultations across Canada, including a 1,200-person public outreach public opinion poll, 15 separate focus group round tables, various research papers and extensive collaboration with 24 different disability and national social policy organizations, including the Canadian Association for Community Living, who is represented here today by Mr. Pooran.
When the Registered Disability Saving Plan was announced in December 2008, it actually exceeded our expectations. Two years prior, PLAN had presented a list of recommendations to the expert panel on disability savings of the Department of Finance, Tax Policy Branch, suggesting modelling the RDSP on the Registered Education Savings Plan with a similar grant and bond being made available, only to learn that the government contributions in the RDSP would be virtually 10 times that of the RESP. The federal government was truly recognizing the issue of poverty among the nation's disability community and was willing to do something powerful to change it.
Since the RDSP came into effect, PLAN has vigorously been working to promote the savings plan to Canadians, including through our website rdsp.com, which trades back and forth for first place with government RDSP websites on the Google search list. We have also been consistently gathering feedback from families across Canada and working with the government toward making the RDSP increasingly accessible and useful for people with disabilities. Time after time the federal government has exceeded our expectations on making plan improvements, for example, last year's approval of a 10-year carry forward on unused grants and bonds.
The three-year RDSP review conducted by the Department of Finance last December was no exception. In preparation for this review, PLAN compiled the thoughts and experiences of thousands of families, including those who attended our HRSDC-funded RDSP education sessions. We hosted an online dialogue on rdsp.com regarding the top 10 barriers to the RDSP, receiving hundreds of thoughtful responses. We also launched two independent national surveys on people's understanding, satisfaction and possible solutions for improvements with the savings plan. From the data we received, we used key plan criticisms to focus on which areas to improve, and after reviewing the many innovative submissions from individuals and families, PLAN presented our findings to the Department of Finance.
Our four key recommendations were: First, reduce the holdback amount from 10 to 5 years; second, increase flexibility on payments and allow for emergency withdrawals; third, integrate financial literacy in the administration of the RDSP; and fourth, create a national mechanism that allows all eligible people to open an RDSP, falling in line with the UN Convention of Persons with Disabilities, without having to be declared incompetent and passing all their decision-making rights to another person.
We all know the measures proposed in Budget 2012, the economic action plan. These are what we are reviewing today, save for the one provision that was passed on June 29 to temporarily expand the definition on who may be an adult beneficiary's plan holder to include the beneficiary's spouse, common law partner or parent.
Joel Crocker, Director of Planning, will now read to you what we wrote to members of Finance shortly after the federal budget was released in March.
Joel Crocker, Director of Future Planning, Planned Lifetime Advocacy Network (PLAN): Good evening.
It is apparent there has been a great deal of effort from many sides put into seeing the RDSP become as effective as possible for Canadians. We recognize the incredible amount of work that the minister, the team at Finance and others in government have put into the review, the federal budget and the changes to the RDSP.
As they are written, we believe the improvements the government has decided upon are solid and we support them. Certainly plans for recommendations as well as some of our other suggestions have all been acknowledged. We applaud the federal government's strategy of using a temporary measure to put pressure on the provinces and territories to find solutions to the guardianship issue, and we hope to be able to continue working with these jurisdictions on this.
Regarding the other improvements mentioned, it seems clear that the RDSP will become even more attractive to a wider segment of Canadians, including an older age bracket, people with lower incomes and those with more cyclical disabilities.
Finally, the RESP rollover and the streamlining of transferring RDSPs to other banks and financial institutions will be sure to help all families and self-advocates better manage their finances and accounts and therefore be able to save more in the long run.
Overall, it has been a pleasure working with the team at Finance on these efforts and we found the three-year review process and the correspondence between our organizations to be well organized and professional, yet transparent and amicable. We look forward to possible more collaboration in the future as we all work towards keeping Canada at the forefront of innovation, growth, equity and quality of life.
That is the end of that email.
Since that time, March of this year, over the last eight months we at PLAN have continued to receive regular feedback from individuals and families as well as organizations and businesses on all the proposed changes. We would like to make the following statements.
As an organization that represents families, as Mr. Pooran has said, there could have been a stronger federal solution made regarding the issue of capacity. As for the temporary measure that was put in place, we feel it would have been better if the definition of the "plan holder" was also extended to siblings, as we heard from CACL, but we know that is not a specific issue in today's bill.
Moving on, we have also heard back from a number of families that we as an organization should have been more adamant in our recommendations about increasing the age restrictions on opening an RDSP. It was one of the major feedbacks we received. People feel the 60-year-old age limit and the 50-year-old limit of receiving grants and bonds are a little too young. Some have suggested that the RDSP age qualifications should be in line with the OAS program so that an RDSP could be open by anyone under the age of 65, shifting eventually to 67, and that the grant and bond be available 10 years prior.
Other individuals have reiterated their concern that the lifetime disability assistance payment formula is based on a life expectancy of 83, which may be accurate for the general population of Canada, but it is not in line with the disability population.
Ms. Vilvang: We at PLAN mentioned these potential issues as the voice of many with a disability, but we want to state that overall we have heard mainly gratitude and support for a great program and for the proposed improvements. PLAN is in agreement with the RDSP legislative changes being reviewed today in Bill C-45, and we back their approval fully.
Thank you for this opportunity to appear before you and for all the work you have done on behalf of Canadians living with disabilities.
The Chair: Thank you very much, and thank you for going over the various recommendations for other improvements that have come through your members and other people with disabilities. It is very helpful for us to have that information.
Senator Buth: Thank you very much for being here. It is a real pleasure to hear from you how much this plan essentially means.
I would like to hear a couple of stories, if possible, about the type of flexibility that this will provide to families. I then have another question in terms of federal and provincial responsibilities. Can you share with us some examples of the flexibility in this plan and what it means to families?
Mr. Pooran: As many of us are aware, provincial income support programs for individuals with disabilities have quite a few limitations on them, especially with respect to rules relating to income and rules relating to asset limits. Often if someone with a disability has to rely on one of these programs, it is very difficult to lift themselves out of poverty because in a lot of cases they cannot accumulate any assets.
With the introduction of the RDSP, it gave this community a vehicle with which to save. It facilitated long-term savings. It addressed that issue of individuals with disabilities not having the ability to build up a decent sized asset base.
Most of the provinces have exempted the RDSP as an asset within the eligibility criteria, so this provides individuals now with the flexibility of owning their own home, of making withdrawals to go on a vacation, even of buying a birthday gift for a friend to attend a party, which they have limitations on due to the impositions of rules relating to their provincial income support programs. Those are just a few examples.
Senator Buth: Are there any examples from Burnaby? Do you want to comment?
Ms. Vilvang: One of the most compelling things I heard a younger mom talking about with respect to the Registered Disability Savings Plan was that her child was still in elementary school, and she said that when you are a parent of a child with a disability, of course you love your child, and your instincts to protect and take care of them are extremely strong. You recognize their vulnerabilities, but there is a lot of bad news that comes along the way, such as all the things that your child cannot do, all the special requirements they will need around education, living their life, therapies and that sort of thing.
She said that when she first heard about the Registered Disability Saving Plans, it took her a few minutes to realize that this was the first piece of good news she had heard about her son's future, that poverty and disability did not have to go hand in hand anymore, and that the crippling effects of poverty and how it leads to isolation and dependence on the service system for the rest of her young son's life were things that she and her family struggled with far more than the actual effects of her son's disability. She could strike one of those things off the list in that he could actually start to dream and save and plan like her other children. The RDSP provides for her much more than just a financial savings instrument; it provides a different focus and the freedom to dream and to save within her own means and power to make those dreams come true. It was a life-changing tool for this family.
Senator Buth: Thank you to both of you for your comments, especially to PLAN for the amount of consultation you have done and being the driving force behind making the RDSP as flexible as it is and providing as much assistance as possible.
I would like to go back to your comment, Mr. Pooran, in terms of the guardianship issue. You made a comment about putting temporary pressure on the provinces. Can you describe for the committee the split between federal and provincial responsibility and what your comment was related to?
Mr. Pooran: I think, actually, Mr. Crocker was talking about the pressure on the provinces. I did speak about the four-year window that the federal government sort of opened up to allow provinces to amend their legislation.
We did have a national working group that both Mr. Crocker and I were part of that developed what we thought would be the optimal what we call supported decision-making solution to this issue. It was with developed and submitted quite late in the game, I think, close to budget time earlier this year.
I think there was some concern around the federal government overstepping its jurisdiction when it comes to addressing consent capacity issues that are typically administered within the provinces. We had presented some compelling research that showed both case law and legal doctrine would actually allow the federal government to implement such a solution. Unfortunately, it was not accepted, and we did get a little bit of an expansion.
PLAN does a lot of these RDSP seminars as well. I do quite a few each month. Individuals and families are amazed at this program; they really are. However, we are sort of standing up there giving them this great news, saying the RDSP is the greatest thing since sliced bread, but your adult son or daughter, or you as an adult individual with a disability, cannot open the plan without being declared incapable.
Senator Buth: Mr. Crocker, did you have any other comments?
Mr. Crocker: No. That was basically well said. We can speak on behalf of our province. What has been enacted in British Columbia is the Representation Agreement Act that we referred to earlier, which allows a person to have a representative with them at the table at a bank, and that person assists the person with the disability in making important decisions around their finances and whatnot. That is a legal capacity we have within our province.
As the working group that Mr. Pooran was speaking about, we considered seeing if we can get every province to roll the same thing out, and we have been trying that for a number of years. As he mentioned earlier, we have seen some provinces and some territories take on something similar, more or less, but it is turning into what he referred to as a patchwork of different legislation in place. It just inhibits families with disabilities from moving from province to province. There are different rules in place. We feel as a country there should be consistency on that. We are hoping for more work with the federal government on this.
Senator Callbeck: I want to thank all the witnesses for their presentations and also for the work that you do.
You will be able to roll money from the RESP into the RDSP. What is the main advantage of that?
Mr. Pooran: The feedback we get from a number of families is that when their child was born, they opened up an RESP for him or her, and this may have been pre-diagnosis. As time evolved, the diagnosis was made, and in some cases it became evident that there were not any post-secondary education options available for the individual. What this rollover will allow is the accumulated income payment from the RESP to flow tax free to the RDSP so that the growth that has accumulated in the RESP over the years can be more effectively used.
Senator Callbeck: The advantage in having it is that government put in some.
Mr. Pooran: Yes. I do not think the RESP rollover will attract any government contributions on that accumulated income payment, but at least the growth can be transferred tax free, or at least tax deferred, in many cases. Contributions would be returned to the contributors. Any unused RESP grants and bonds would be returned to the federal government, but the growth could be rolled over on a tax-free basis to the RDSP, which would be helpful for many families.
Senator Callbeck: All of you agree with the changes to this legislation. I was interested in the 10 barriers that PLAN mentioned on the RDSP. Regarding financial literacy, how do you suggest that could be improved?
Mr. Crocker: The government does a number of financial literacy programs. We found that one of the biggest barriers to the success of the RDSP is that a lot of people still do not know about it. Of course, we know that HRSDC is funding a lot of education programs, and we are part of that. Mr. Pooran is part of that. In terms of when people walk into a bank, they are often not made aware of the RDSP. The general lack of knowledge about it in the country involves regularly coming across families — well-educated parents with a child with a disability — that have never heard of it. There is that level of education.
The second level of education is the fact that people with disabilities themselves are often operating in a different social class because they are excluded in many cases from walking into a bank because they do not have contractual capacity. They are dealing with cheque-cashing institutions and street-level financing that is happening, and not operating within the mainstream Canadian society. It is PLAN's belief that we would like to see those barriers taken away.
Anything the federal government can do to increase financial literacy among people with disabilities, targeting that, education programs specifically for people with disabilities, and, of course, that includes a way that they would be able to have representation, perhaps, at a financial institution, depending on the disability. It is an overall package of raising the bar on education in the understanding of finances within this population.
Mr. Pooran: I do not think I have anything more to add on that.
Senator L. Smith: I have a question for the group. You talked about a lot of the elements of the RDSP. From a simple business perspective, what are the top three improvements you want to see implemented in the system over time. From that top three, as they would be prioritized by you, what is your number one request for improvement?
Mr. Pooran: Number one would most definitely be addressing the barrier that adult beneficiaries face around what I call the "consent capacity issue," or the guardianship issue, as it has been referred to. We would very much like to see a national solution that would allow any adult beneficiary to be the holder of their own plan, with supports. We recognize that people's abilities vary and that some people will need more support than others, but what we are looking for is a supported decision-making solution that would allow any adult beneficiary of an RDSP to be a plan holder of their own plan.
Senator L. Smith: Do you have a specific methodology?
Mr. Pooran: We do. We worked on it quite extensively and collaboratively with PLAN, CACL, the financial institutions and NAPTG. We held a series of meetings over the course of the last year and we came up with a fairly detailed methodology which has been presented to Finance.
Senator L. Smith: That is number one.
Mr. Pooran: That is number one.
Senator L. Smith: Is that your number one priority?
Mr. Pooran: By far.
Senator L. Smith: Is that the same for you?
Mr. Crocker: It is, absolutely.
Mr. Pooran: We would like to see everyone benefit from the RDSP. It was designed for a specific population, and we would like to see everyone in that population benefit from it.
Senator L. Smith: Number two?
Mr. Pooran: Number two would be the point I made earlier, which is that the intent and purpose behind the RDSP is very strong. It is to address the systemic issue of high levels of poverty being faced by individuals with disabilities. The problem that arises with the RDSP is that beneficiaries may not be able to make use of the funds in their plans because of the combination of the formula used to calculate payments and the 10-year repayment rule.
For example, if someone is 30 years old when they open up an RDSP, or let us say 29, they could accumulate $90,000 in federal government grants and bonds. They could accumulate an additional $200,000 in private contributions, plus growth. Depending on how well their investment does, that could be $350,000. They cannot access that money until age 59. That is 30 years after they have opened this plan. Depending on their disability and their condition, they may not make it to age 59. If they do, there is a high probability in some cases that they may not be able to exhaust all of those funds.
Moreover, there are legislative thresholds that individuals have to meet in each province in order to give a will. I will use Ontario, as I practise here in Ontario. In Ontario you have to understand the information relevant to making a will and appreciate the foreseeable consequences of making that will, so that excludes a high number of people with intellectual disabilities. Not only can they not use the money in the RDSP, but they cannot even determine where the money will go.
In those situations, the money will end up going to next of kin in a specified order, some of whom may not have been part of that person's life at all.
Senator L. Smith: Your solution is what?
Mr. Pooran: We could look at a number of different things. We could look at reducing, as I think Mr. Crocker mentioned, the 10-year repayment to possibly five, or something like that, or at the proposal that I made around a rolling mechanism.
Let us assume that I open up an RDSP today. In 2012, the government contributes $4,500. Instead of having to wait until 2052, if I did my math right, to access that $4,500, I could actually access that portion of the government contribution in 10 years, so in 2022. It could be something like that.
It could be that we allow beneficiaries to access their private contributions. The government contributions are locked in for a period of time, but at least they can access the private contributions or even the growth within a reasonable time frame. An RDSP is supposed to be a long-term savings plan. If an RDSP was opened up today and a private contribution was made tomorrow, I do not think we would want to see private contributions come out the next day, but perhaps in two, three, or five years, it could be accessed. Maybe it is like an RRSP, where withholding tax is applied.
Senator L. Smith: Do you have a third solution?
Mr. Pooran: I do.
Senator L. Smith: How are you on number two? Do you agree with number two in terms of the suggestion of opening up a method of access?
Mr. Crocker: We have a good list of six or seven ideas. Yes, we definitely support what Mr. Pooran mentioned. It is hard to pick a top three, but it would be in our top five.
Senator L. Smith: Say you have to pick a top three.
Mr. Crocker: For the sake of the community, we will back that one. It is definitely an important one. I can add a third one, if I could.
Senator L. Smith: That would be great.
Mr. Crocker: Right now, one of the measures we are using is the fact that your disability tax credit can remain open for a number of years if you have a cyclical disability. Normally the plan would collapse if you do not qualify for the disability tax credit and you pay back all your grants and bonds. For those who have disabilities that come and go, perhaps bipolar, it was problematic in the sense that it would recur with their disability and they would have to reapply for the RDSP all over again. We found that people in that category would not bother with the whole thing at all.
What was passed, which we support, is that the plan can remain dormant for a few years if a medical practitioner agrees in writing that it will likely return. We support that, but what we would have liked to see, and still would like to see at some point, is if a person were able to gain those grants and bonds due to a disability in that year, then that should not be taken from them. They had a disability at that time. With the RDSP, even if you cannot contribute again because you no longer apply, you would never lose the grant and bond, no matter what, if you gained it during a period of disability. Eventually, you would have to withdraw from the plan. If you, say, only had a disability for two years and you received two-years' worth of grants and bonds, you got off your DTC and resumed a typical life, eventually at some point you would be able to take all that money that had been contributed.
Senator L. Smith: If you had to summarize that in 30 words or less for your third recommendation, how would you state it? I do not have the same experience as you do.
Mr. Crocker: Let plan participants always keep the RDSPs open. Only new contributions would be disallowed on failure to re-qualify for the disability tax credit. A person could always keep their RDSP open, but they would not be allowed to contribute unless they had a valid disability tax credit.
Mr. Pooran: Let me add to that one more implication. I support what Mr. Crocker is saying.
Currently, if the RDSP or if the beneficiary or if the plan holder is forced to collapse the plan due to loss of eligibility, the federal contributions received within the previous 10 years are returned and everything else is transferred to the beneficiary himself or herself and taxed accordingly. The implication that could have on many individuals is that they will end up becoming disqualified or losing eligibility for provincial social assistance programs because all of a sudden they will be receiving a lump sum that they may not be able to spend. I wanted to add that.
The Chair: Thank you. I was hoping we would go further than 3:00, but that is helpful for you to list them like that. I think PLAN was very clear on the consultation aspect of this. You seem to be very positive on good consultation.
Mr. Pooran, do you feel as well that there has been good consultation with the government on this program?
Mr. Pooran: It has been excellent consultation. The consultation was built right into the legislation. As with Mr. Crocker at PLAN, we work closely with HRSDC and we were very appreciative of the process that took place last year and the resulting enhancements that were made to the RDSP in Budget 2012. The consultation process was excellent.
The Chair: You have all had an opportunity to look at the consultation in 2011. There was a report developed from that consultation process.
Mr. Pooran: We did.
The Chair: Are there any outstanding recommendations or initiatives in that that have not been discussed here tonight that you would like to have seen implemented?
Mr. Pooran: I cannot remember if it was in the consultation paper or not. The one other issue that we hear a lot is when the government in Budget 2010, I believe, introduced retroactivity, the community was extremely excited. That meant that individuals did not really lose out on government grants and bonds. They could now go retroactively back to 2008 to attract those benefits.
What was a bit surprising, however, was that the beneficiary could not make the claim to go retroactive back to 2008 unless they were in their forty-ninth year. They had to make the claim by the end of the calendar year that they turned 49, which I think may be — and I am not sure what the reasoning was behind it — a bit inconsistent with the legislation. The legislation says that the government will contribute up until the end of the calendar year that a beneficiary turns 49.
Let us say we have a 51-year-old today who did not know about the RDSP and has just become aware of it and wants to open up a plan. That person can still open up a plan, but they cannot go retroactively back to when they were 49 to attract grant and bond. It would have been nice to have seen that availability.
The Chair: Anything from the border between Vancouver and Burnaby?
Mr. Crocker: We had hoped that we would be able to see a rollover in RDSP from one beneficiary to another between RDSPs, which can happen with an RRSP or even an RESP, where you can have a group plan. That is not available whatsoever. There could be a parent who has two children with a disability and one passes away. That whole plan collapses. The combination of those two RDSPs to the surviving child with a disability, just in line with the other registered savings plans.
The Chair: This committee has been dealing with Registered Disability Saving Plans for the last three or four years.
Mr. Crocker: Great.
The Chair: The concept is one that we all find to be very worthwhile and appealing, but it looks like we just do not seem to be getting down to it. We keep making step improvements, as opposed to saying, "This is the plan," and then people would develop a confidence and appreciation of the plan rather than expecting to see another amendment in six months.
Mr. Crocker: A lot of times we are responding to the request for a review and you are asking us: Are there things you would like to see? I think we are down to a very solid plan, and these little tweaks often involve opinion. A lot of people feel put out that they are too old for the plan. The same thing happened when the Registered Education Savings Plan took effect. In fact, I did not benefit from it; my younger sister did. I understand that. I think as time goes on it is a good plan.
The biggest concern that I could say in general that the disability community has is that they are skeptical; they are afraid that the RDSP will affect their other programs. They are afraid that it will cause clawbacks provincially and federally. There is some fear there. Even around the Guaranteed Income Supplement, it is not really made clear on the CRA, Finance or HRSDC websites. People who want to see that in writing, it is on the one form. It is on the application form for Guaranteed Income Supplement. We have had families call the government and be given misinformation, "Oh, yes, that will affect it and you have to declare that income," which is not true.
There is uncertainty about what will happen in the future. Will this money really be mine to spend on whatever I like, or am I just saving now only to be penalized later? That is the biggest concern. These other details are sort of like bringing up ideas and suggestions that people have. I hope that is helpful.
The Chair: That is very helpful.
Mr. Pooran, do you wish to comment on that?
Mr. Pooran: From our standpoint, CACL serves individuals with intellectual, developmental and cognitive disabilities. I would not want to diminish the importance of universal access to the RDSP for people who qualify for the plan, because currently, again, I cannot overemphasize that there are thousands of people out there who qualify for the RDSP, who cannot open up the plan due to the legislative barrier.
Second is access to the funds. Many individuals and families that I have come across may open up the RDSP, but they are not making full use of it because they are not making their own contributions, and thereby not receiving any grants, because they do not believe that they, themselves, or their son or daughter will live long enough to benefit from the proceeds of the plan. From our standpoint, those are the two key issues that could be addressed.
The Chair: The legislative barrier to which you are referring, let us put it on the table so everyone understands.
Mr. Pooran: The legislative barrier to which I am referring is that the way the Income Tax Act is written when it comes to defining a plan holder for an adult beneficiary is the following. I do not know if you have your Income Tax Act open in front of you, Mr. Crocker. The beneficiary of the plan can be a plan holder; someone who is legally authorized to act on their behalf can be a plan holder; and as a result of the amendment passed on June 29 in Bill C-38, parent, spouse or common-law partner can now be a plan holder. I think I left out that there are public entities as well that can fulfil that role.
The implication, then, is that we really focus on "legally authorized." Who is legally authorized to act on the person's behalf? That varies from province to province. In most provinces — B.C. is the exception — legal authority or legal representation means someone has been appointed by a power of attorney for property or the equivalent — I am using Ontario jargon here — or someone has been appointed as a guardian.
If someone is deemed, as identified in the legislation, as contractually incapable — unfortunately, we have the word "capable" written right into the act — chances are they will not be able to meet the legislative threshold to give power of attorney for property, so they cannot appoint anyone to be their legal representative that way. Therefore, what they are forced to do is to succumb to a capacity assessment, give up all their decision-making rights, and have a guardian appointed to make all their decisions on their behalf, just to open up an RDSP.
The Chair: Just so they can get in the plan?
Mr. Pooran: Yes. We have developed a very innovative solution collaboratively, which we have submitted to Finance, that we would request perhaps another review.
Senator Chaput: Is this a taxable income?
Mr. Pooran: When the money comes out, only the proportion of the withdrawal that is made up of growth and government contributions is considered taxable in the hands of the beneficiary.
Senator Chaput: Not the money that has been put in by —
Mr. Pooran: No. It is after-tax money.
Senator Chaput: That means that that portion is added to the income of the person, right?
Mr. Pooran: That is the income of the person. Let us say that the sole source of income of the beneficiary is social assistance, which is generally considered non-taxable income across the country. There may be a minimal tax implication or a minimal tax liability, depending on the size of the withdrawal.
Senator Chaput: However, it is usually not much?
Mr. Pooran: It should not be, unless they are making a lump-sum payment, let us say $20,000 or $30,000 for a down payment on a home or something like that.
Senator Chaput: Then it is taxable?
Mr. Pooran: The proportion of the withdrawal that is made up of the growth on the government money would be.
Senator Enverga: I was listening to the whole discussion. By the way, thank you for the great presentations.
I do not know if this was answered already. It is about siblings. Can you give me examples that could help the disabled individual if we include a sibling as one of the beneficiaries?
Mr. Pooran: We saw the amendment to include parent, spouse or common-law partner as sort of a temporary, band-aid solution. It has been put in there for four years so the government could amend their legislation. What is happening in the meantime is that either parents have passed away or they are passing away. If the parent is the holder of the plan and they have now passed away, then the plan is in limbo. The sibling does not have any legal authority — barring provinces like British Columbia, which has the Representation Agreement Act — to become the plan holder. They may be forced at that time to declare the beneficiary incapable and then go through the time and expense of applying for guardianship, or the Office of the Public Guardian and Trustee may have to step in and become plan holders. If "sibling" was included in the temporary measure, it would have allowed many more people who do not have a parent, or who are not married, or do not have a common-law partner, to open up an RDSP.
Senator Enverga: To manage the account?
Mr. Pooran: To manage the plan, yes.
The Chair: Colleagues, on your behalf I would like to thank Mr. Pooran for being here and helping us, and thank Ms. Vilvang and Mr. Crocker from Planned Lifetime Advocacy Network. Mr. Pooran is from the Canadian Association for Community Living.
Thank you all for being here and helping us understand this worthwhile project for the disabled.
Mr. Pooran: I very much appreciate your time. Thank you.
Mr. Crocker: It was our pleasure.
[Translation]
We are going to continue our study on 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]
In our second session this evening, we will be looking at the proposed amendments to the Scientific Research and Experimental Development Tax Credit, which is known by its acronym SR&ED. These amendments are found in Part 1 of the bill at clause 9, page 14, amongst others.
We welcome Mr. Martin Lavoie, Director of Policy, Manufacturing and Competitiveness and Innovation with the Canadian Manufacturers & Exporters. We also had intended to have here this evening Mr. Russ Roberts who has been unable, for personal reasons, to attend. We will continue to try and arrange a time for him to come and talk on the same issue, but he has provided us with a written submission which is being translated and will be circulated to each of us in due course.
We are pleased that Mr. Lavoie is here. You have the floor.
[Translation]
Martin Lavoie, Director of Policy, Manufacturing Competitiveness and Innovation, Canadian Manufacturers & Exporters: Thank you for inviting me to appear once again before the committee, this time to discuss Bill C-45, A second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures.
I am going to make my remarks in English, but please feel free to ask questions in either of the two languages.
[English]
CME represents about 10,000 manufacturers and exporters across Canada who account for 82 per cent of Canada's manufacturing production and 90 per cent of all exports. More than 85 per cent of our members are small- and mid- sized enterprises. The rest are multinationals.
Innovation and productivity are two increasingly important drivers of manufacturing growth in most industrialized countries, and probably more so in Canada. In the last 10 years, Canadian manufacturers had to cope with increased competition from developing markets, combined with a rapid depreciation of the Canadian dollar. In our view, the only sustainable strategy in the long term is a strong focus on innovation and productivity.
The Canadian manufacturing sector, despite representing less than 14 per cent of Canada's GDP today, accounts for 55 per cent of all business, research and development expenditures in Canada year after year. It is by far the most R & D intensive sector in our economy, and roughly half of SR&ED claimants are manufacturers.
Two weeks ago, CME, our organization, published a special report on the economic impact of the proposed changes to SR&ED on business innovation in Canada. I circulated copies in both languages before the meeting.
I will talk about the conclusions of that study. The first conclusion is that proposed measures will result in a net diminishing of R & D in Canada. We estimate that all proposed measures by the government in the budget will reduce R & D tax incentives in Canada by roughly $750 million a year starting in 2016-17. To give you an idea of the size, this amount represents 5 per cent of all business R & D spending in Canada last year, which was about $15.9 billion. According to our latest management issues survey, which was published last month, 69 per cent of Canadian manufacturers said they will reduce R & D spending in Canada as a result of these changes, while another 20 per cent will start looking at other jurisdictions to conduct R & D activities. As a result, we estimate that the full impact of these changes on actual business R & D expenditures will be approximately $1.5 billion a year.
The second point is the elimination of capital expenditures from the tax base for the tax credit. The budget proposes to completely eliminate capital from the tax base. No other sector of our economy will be as impacted as the manufacturing sector, which tends to have more capital-intensive R & D activities. While on average in the overall economy only about 5 per cent of all R & D expenditures are related to capital, in our sector it is more than 30 per cent. Our report compared the fiscal treatment of capital expenditures related to R & D in other countries. The vast majority of countries under the study provide either a tax credit, as it stands in Canada now before the budget proposals, or a rapid depreciation rate, such as the United Kingdom, for example, which allows a depreciation of machinery and equipment used for R & D within one year. Again, the international attractiveness of Canada as a destination for R & D will decrease.
The third important measure in the budget is the reduction of the proxy used for claiming overhead costs under the SR&ED program. By proposing to reduce the proxy from 65 per cent to 55 per cent, the government estimates that the proxy is too generous and that reducing it would best reflect the actual overhead cost of companies. We have not seen any evidence or analysis provided by the Department of Finance to suggest that this is the case. In fact when the Director of Business Taxation appeared before the House of Commons Finance Committee on November 1, he was asked the question and said that they never conducted this analysis so they did not have the data. We rather believe that the use of the proxy has to do with the simplification of the claim process as suggested by the Jenkins panel in their report. Therefore, the government should proceed with a full analysis before making a change that will make more companies turn to the traditional method of claiming the overhead cost. This traditional method will in turn increase compliance costs for companies and will additionally burden CRA's auditors. That was also a key recommendation of the Jenkins report.
The fourth element is the government wants to remove the profit element from arm's length third-party contracts for the purpose of the calculation of the SR&ED tax credits. Under Bill C-45, arm's length third-party payments for SR&ED are limited to 80 per cent of such payments for expenditures incurred after December 31, 2012. This change applies to payments for SR&ED made on behalf of the taxpayer — the subcontractors — and payments for SR&ED carried out by third parties, which includes corporations resident in Canada, approved associations, universities and colleges, research institutes and not-for-profit R & D corporations. This measure will reduce the spillover effect of the SR&ED program into, for example, collaborative research between business and universities and other research and academic institutions.
In conclusion, there are three ways, in my view, to look at the impact of these proposed changes on business R & D. In terms of actual dollars, as I said, changes will reduce business expenditures in R & D in Canada by about $1.5 billion a year once the measures are implemented. In terms of the taxation of large companies, our report found that the negative impact of the 5 per cent reduction of SR&ED far exceeds the benefits of the CIT cuts that have taken place at the federal level since 2008. I am talking only about large manufacturers here.
In terms of international competitiveness and our capacity to attract foreign investment from large R & D performers, our ranking will decrease from number 13 to 17, according to our study, and the major developing countries, such as India, Turkey and Brazil, will now offer a more advantageous R & D tax credit for large, global corporations.
CMA recommends that in order to mitigate the impact of these changes on the Canadian manufacturing sector, the government should provide more direct support to large companies by way of a partially refundable tax credit. It could be targeted at projects related, for example, to enhanced productivity, which is also an area where Canada is experiencing a gap in comparison to other countries. The government should also allow companies to more rapidly depreciate the cost of machinery and equipment used for R & D purposes and conduct an analysis of the overhead cost before implementing the 10 per cent reduction.
I will stop here. I would be happy to respond to questions. I know that some of this is a bit technical.
The Chair: Thank you very much. I want to confirm that the report that you indicated you had circulated is dated November 2012. This is the report?
Mr. Lavoie: Yes.
The Chair: We have also been provided with a copy of a letter from the Canadian Manufacturers Coalition, CMC. That is dated September 12 and is to Minister Flaherty. There is another from May 7, 2012.
Mr. Lavoie: Right.
The Chair: We are in possession of all of those documents. Your position is the same now as it was in relation to what is expressed in these letters?
Mr. Lavoie: Generally, yes. It is definitely more detailed now.
The Chair: Thank you.
[Translation]
Senator Hervieux-Payette: I am reading your English text almost word for word, and what you are saying is that you do not agree with the Jenkins report. I say that the Jenkins report was commissioned by the minister and it was prepared by a panel of experts and people from financial settings only, but who were not experts.
I remember very well that there was a kind of tax credit that banks took advantage of and made huge amounts of money, which they eventually had to pay back because that was not the government's intention in the slightest. As a result, the government had to put a stop to that, saying that the tax credit was not intended for banks to change their electronic systems.
With some exceptions, your brief does not show the industries or sectors that could be better targeted and that could have a particular focus. Perhaps it would be a good idea to develop specific programs for major manufacturers. You are saying that we need to have some measures in place to allow small- and medium-sized businesses to grow.
Are there specific sectors in which we are champions or that we should continue to support?
Mr. Lavoie: Are you talking about the subsectors of the manufacturing sector?
Senator Hervieux-Payette: Yes.
Mr. Lavoie: If you look at the ten largest companies that do R&D in Canada, they are in the automotive, aerospace, telecommunications and natural resources sectors. Take Imperial Oil and Rio Tinto Alcan for example.
Most of those sectors, with the exception of telecommunications perhaps, are very capital-intense. Why? Because developing software requires more people than capital, but inventing a new way to extract ore requires a lot more capital.
I talk about "capital" because you need a pilot plant with equipment and also people to operate it. There is the labour force but there is a lot of capital. I would say that those sectors do exist in Canada, although people say that Canada generally has a poor performance in R&D compared to other countries.
For example, in the aerospace industry, Canada's performance is better than that of a lot of countries. That sector benefits from a good SR&ED tax credit. It also benefits from special support through the strategic aerospace and defence initiative.
Those direct support programs are not available to everyone. What Mr. Jenkins ultimately said was that businesses in Canada should receive more direct support. He said that this could perhaps explain why we had a poor performance compared to other countries.
Not everyone agreed and said: "Yes, we are all in favour of providing more direct support". But let us not rob Peter to pay Paul by taking money from SR&ED and reinvesting it in direct support. There are 2,600 companies that will be negatively affected by the 5 per cent tax credit cut, dropping from 20 per cent to 15 per cent. Those companies are not necessarily just big multinationals. Under SR&ED, a company is considered to be big if it generates over $400,000 in taxable income and a minimum level of capital.
It is not true that those companies will necessarily have access to direct support. How will they manage to have direct support that will pay for or perhaps even improve innovation in Canada? No one has yet come up with an answer.
Senator Hervieux-Payette: Who will make the decision to provide direct support? Which companies and which sectors will receive it? Without specific objectives, we are likely to see bureaucrats scratch their heads in their offices and say: "We will do this one today and that one tomorrow".
You need to have a specific plan in those sectors so that you start with a good foundation and build on it. The situation has to be analyzed. I am telling you this because I have worked with an engineering firm that did a lot of research. And very often, by the time we had finished setting up the project to go and apply for a grant, the program no longer existed. We had spent a fortune without getting a subsidy, so the project was nipped in the bud. We had worked for a long time, which did not cost the government a lot, but we should not make those same mistakes again.
Since your sector is extremely strategic and very important for Canada in terms of job creation, you must first make sure that you do not get arbitrary about specific projects and that you do not end up with no guidelines on where those amounts of money will be invested.
Mr. Lavoie: If you provide direct support, that means that you are creating an agency or that you are taking an existing agency and making investments. Program managers receive applications and make choices based on criteria x, y and z.
What we like about SR&ED is that it is democratic. Anyone who can prove to an auditor from the Canada Revenue Agency that they came up with a technological advancement that meets the criteria will be eligible. However, the direct support will depend on a host of factors that, as you said, are more arbitrary than in the case of a tax credit.
[English]
Senator Eaton: This is just to educate me a little bit. They have really cut the investment tax credit available from 20 to 15 per cent. Is that right?
Mr. Lavoie: Yes, for large companies.
Senator Eaton: Yes. They have cut it 5 per cent.
Mr. Lavoie: Right.
Senator Eaton: Is spending on innovation not good for your business? Surely, to survive in a marketplace, manufacturers have to innovate all the time.
Mr. Lavoie: The expression we use is "do or die," like in many sectors. If you do not make that much profit in a year and you make your RIM, you cannot just say you will not do R&D this year.
Senator Eaton: If you are a healthy manufacturer, surely you can afford to do your innovation.
Mr. Lavoie: Right.
Senator Eaton: For a 5 per cent drop, I cannot understand why you are as upset as you seem to be.
When you made the point that Canada is not going to attract foreign investment, I believe you said companies would be less likely to come here. We have one of the lowest corporate tax rates in the world. Will that not offset? Is that an attractive point? It is much lower than that of the U.S. right now.
Mr. Lavoie: I would say that if you look at the corporate income tax, you have to look at the combined federal and provincial rates. I understand you are saying that the federal income tax rate is the lowest in the G7. That being said, if you are a company, you are also in a province and you pay taxes in the province as well.
Senator Eaton: That is not the federal.
Mr. Lavoie: From a company perspective, you still pay tax. A tax is a tax.
Senator Eaton: Yes.
Mr. Lavoie: If you combine two, if you take federal and some national corporate income taxes and compare that in the OECD, we are not even in the top 10. We are right in the middle. We are on the average, at 24 per cent, like the U.K.
Senator Eaton: Provinces are not all the same. There must be bad provinces and good provinces.
Mr. Lavoie: Higher and lower, yes.
Senator Eaton: Are Quebec and Ontario the worst?
Mr. Lavoie: No, because they have lowered the carbon tax. However, you cannot just look at the tax rate. The 20 per cent is 20 per cent of what? It is 20 per cent of the taxes you pay.
The way we have looked at it is to go back to 2008 for large corporations only, not small corporations, because they have access to a 35 per cent tax rate. SR&ED is really two different rates; one for small corporations and one for large corporations. We only look at large corporations. For every dollar spent by a large corporation in R & D in Canada in 2008, the subsidy rate from the federal SR&ED program was 18 cents for every dollar. The 20 per cent tax credit decreased by the corporate income rate companies were paying. In 2012, with all the CIT cuts that have taken place, it is true that the rate of subsidy has gone up.
Senator Eaton: What will it be now?
Mr. Lavoie: It went to 18.4; by 0.4 cents on every dollar.
Senator Eaton: What will it be now?
Mr. Lavoie: With the proposed changes, 13.6 cents.
Senator Eaton: Can you survive on that?
Mr. Lavoie: I am not saying we cannot survive. I am saying these changes will reduce the attractiveness of Canada as a destination for R & D for large corporations. In the case of one of our members, Magna International, which is one of the top 5 R & D performers, they have 84 R & D engineering centres in 18 countries. I am not saying the R & D tax credit is the only factor but it is one of them.
Senator Eaton: There is the skilled labour force and stable government. There are a lot of things.
Mr. Lavoie: Right, but definitely the tax credit is one of them. We are saying that it is an important one. Most of the major R & D performers are members of CME and they all expressed their concern. Some have sent their own letters. Some have just expressed their support for our recommendations as well.
If you are headquartered outside Canada, then the Canadian CEO has to attract these R & D global mandates within the company. Even if you are a company headquartered in Canadian, you may have the capacity to go someplace else. Next year the United Kingdom will start giving a refundable tax credit for large corporations. If you are a company that is not in a profitable situation, you are better off going to the U.K. if you do have this capacity. I am not saying everyone will go there. However, based on our survey, 20 per cent of our members said that they would start looking at other jurisdictions just to see what they look like.
Senator Eaton: There are other factors.
Thank you, Mr. Chair.
The Chair: Thank you, Senator Eaton. I was close to asking you to be a witness here; however, I resisted.
Senator Callbeck: Eighty-five per cent of your members are small- and medium-sized businesses. What is your definition of small- and medium-sized business?
Mr. Lavoie: We usually use the number of fewer than 500 employees. That is the one that is used for some funding programs as well, like the NRC-IRAP. However, that does not apply to SR&ED, as I said before.
Senator Callbeck: In your recommendations, you want more direct support to large companies, yet 8,500 of your members are small and medium. Are most of those small and medium members getting the 35 per cent?
Mr. Lavoie: Not necessarily, no. What the SR&ED program uses to differentiate a small and a large company is the Canadian control private corporation threshold. It does not have to do with the number of employees. It has to do with your taxable income and the capital you have within your company. For taxable income, it is $400,000. We have members that have fewer than 50 employees, so small companies that are considered under SR&ED as a big company. Therefore they will only access the 20 per cent tax credit.
Senator Callbeck: I was just wondering why you want more direct support for large companies. Why would you not want that for all of them?
Mr. Lavoie: They are the only ones impacted by the rate reduction. The 35 per cent for small companies remains the same.
Senator Callbeck: Some of the small companies you say are under the 35 per cent. Is that what you just said? Do they get that 35 per cent?
Mr. Lavoie: They get the 20 per cent. We are saying the difference between the 35 per cent and the 20 per cent is that the 35 per cent is refundable and the 20 per cent is not refundable. It means that if you are a company that does not make profit, does not have to pay taxes, you have to carry these credits forward. For small companies, they get a cheque and they do not need to carry them forward. They need the R & D, they get a cheque and they spend it. Therefore we are saying that you should implement that refund. If it is good for small companies, it is certainly good for medium-sized companies and for large companies as well.
Senator Callbeck: You talk about the elimination of capital expenditures from the tax base and refer to a rapid depreciation rate. Then, in brackets, you say ". . . allowing depreciation of M&E used for R&D within one year." In other words, you write the whole thing off that year.
Mr. Lavoie: That is it; a write-off within a year or within two years. In the United Kingdom it is one year. In South Africa it is 2.5 years. We believe it is an alternative to the elimination of capital from the tax credit, which would still give an incentive for companies that are capital-intensive to invest in capital machinery and equipment used for R & D purposes.
The Chair: Is there logic in the 35 per cent for that group not being reduced, whereas the other percentage of 20 per cent to 15 per cent is reduced? What is the logic here? Is it the refundable, non-refundable issue?
Mr. Lavoie: If you look at the OECD report on Canada's innovation that was issued just before the summer, I think it was around April or May, they actually recommended that we reduce the 35 per cent and use that money to provide more direct support for small companies only. If you look at the Jenkins report, he said we should eliminate capital. That is true. However, he also said to keep in mind that the elimination of capital will particularly hurt certain types of companies that are capital-intensive; therefore you should find a way to compensate them.
The government is actually eliminating capital and reducing the rate at the same time. Most of the small companies under SR&ED are not very capital intensive. I would say it is mostly concentrated in large corporations, in sectors such as natural resources, aerospace, automotive and so on.
Senator Callbeck: In your conclusions you talk about international competitiveness and your capacity to attract foreign investment from large R & D performers. You say that your ranking will decrease from 13 to 17.
Mr. Lavoie: Right.
Senator Callbeck: Why is the government doing this? Why are we not trying to attract more R & D?
Mr. Lavoie: If you want to know the answer we heard from the government — because we asked the question — on the rate reduction, they said that because they cut the CIT rate since 2008, they had to reduce the SR&ED tax credit to reflect the new rate. As we state in our analysis, I think the 5 per cent was a bit arbitrary. They have not really looked at the impact. We said that 5 per cent exceeds the benefit of the CIT cuts.
On the elimination of capital, they are saying that it will simplify the claims process. It is true that Jenkins said that as well, but I have read probably 45 submissions to the Jenkins panel and I have not seen one submission that says capital is so complex, eliminate it. I do not think there will be fewer consultants making SR&ED claims because capital is no longer part of the tax credit. I certainly do not buy that argument and our members do not buy that argument.
In terms of the proxy, as I said before, they have no evidence that the proxy is actually too generous now. As I said in my notes, by making companies turn to the traditional method, you will actually add complexity to the claims process. If your objective is to make it simpler, you will not make it simpler with that measure.
On the third-party payments, it is very arbitrary that 20 per cent of all contracts are just pure profit for the subcontractor, so they cut it. Again, if you give the University of Guelph a contract to conduct R & D, are they putting 20 per cent of the money in their pockets? I do not know.
[Translation]
Senator Bellemare: Mr. Lavoie, I have a question about methodology, because, in your conclusion, you have said that the changes made can reduce R&D expenditures by $1.5 billion per year. Could you tell me how you have calculated that cost, because it is rather significant?
Mr. Lavoie: I used the fact that 55 per cent of applications came from the manufacturing sector. We applied the 5 per cent to the large corporations and we applied the other measures to all the corporations, and then we came up with those figures. Also, as I said earlier, we conducted surveys and we tried to figure out the average. Let us say that companies said that they were going to reduce their R&D budget by 15 to 30 per cent, we would calculate the average, which would give us an idea of the amount. It might not be to the nearest penny, but the formula is based on a rather common methodology.
Senator Bellemare: I will continue along the same lines as Senator Eaton. How would you compare the R&D tax credit program for big businesses to a tax credit program for workforce training?
Let me take you back to a program that used to exist in Quebec, a tax credit program for workforce training costs. At a certain point, the government scrapped that program because, as it became better known, it became more costly. It was not expensive because it was encouraging companies to have training, but because those that had training benefited from the tax credit. That was not a strong incentive for companies to do more training. I am not sure if you understand the point I am trying to make. A good company that wants to be competitive in this day and age, as Senator Eaton said, has to do R&D, so is the SR&ED program comparable to a training tax credit or are there other incentives for businesses to do more training?
Mr. Lavoie: I understand. The SR&ED program has often been criticized for that. It is not incremental. In other words, you get a tax credit for what you did last January, although we do not know whether that was done or not. Is that what you are trying to get at?
Senator Bellemare: Yes, that is exactly it.
Mr. Lavoie: I would personally say that it is neither black nor white, but it is true that this criticism gave me something to think about and made me look at the American model. In the U.S., they have a 14 per cent tax credit, but it is not really 14 per cent; you have to take the average of R&D expenditures for the three previous years and, if the R&D budget has gone up, you get closer to 14 per cent. In other words, if the R&D expenditures have gone up in the three years prior to the request, the tax credit will be more substantial. There is a ripple effect that makes companies want to invest in R&D.
Our recommendation to make a portion of the 15 or 20 per cent refundable does not prevent the Department of Finance from saying that it will be 15 per cent from now on, but 5 per cent to 15 per cent will be refundable. So, if you are not making profit, you will still get a cheque. Nothing can prevent the Department of Finance from saying, okay, what we want, for example, is a commitment that, next year, you will reinvest all that money in R&D or you will invest a percentage of your revenue in R&D. Nothing would stop the department from doing that. I do not see how cutting the tax credit by 5 per cent will make the program more incremental. It has not really changed from that point of view, compared to the changes proposed in the budget.
Senator Bellemare: So you are open to a discussion with the Department of Finance.
Mr. Lavoie: Yes. Basically, if you look at our recommendations, we are not asking the government to change its budget. Those are all measures that could very well be adopted in the next budget without necessarily having to change what is in this year's budget. If we are talking about making a portion of the tax credit refundable, it does not have to be done in the 2012 budget. If we are talking about providing an accelerated capital reduction, that too can be done outside the budget. Perhaps, except for the proxy — we may be able to live with it — we tried to be as constructive as possible. We did not say that the 15 per cent made no sense, that the government should review its budget or that there is a mistake; we recommended keeping the 15 per cent, but that other alternative compensatory measures be taken.
Senator Chaput: Let me go back to a number of questions that have already been asked. I want to make sure I understood correctly. When you talk about the negative impact of the proposed change to the SR&ED tax credit, could that include the fact that some companies in Canada might be tempted to conduct business in another country?
Mr. Lavoie: Yes.
Senator Chaput: That might be the case?
Mr. Lavoie: Yes.
Senator Chaput: Is that because they could make more money in a country other than Canada?
Mr. Lavoie: Absolutely.
Senator Chaput: If that is the case, what would the impact of those measures be on university research centres? That is a rather important question, after all.
Mr. Lavoie: Yes, in fact almost half of our members have joint research activities with universities. Perhaps half is not enough and we should have more, but we do have half. So there is no doubt that, if a company moves its R&D centre, there would be a spill-over effect.
I actually think it is ironic that the Department of Finance officials tell us — and the minister himself says it too — that the SR&ED program is not working because it is not incremental and so on. I also heard the comment "You don't have a bang for a buck". Yet, in our brief, we are referring to the SR&DE program assessment made by Finance Canada in 2008 — I am not the one saying this, it is a quote — that says that there is "$1.11 returned for every dollar spent in the SR&ED". That is probably what you are referring to when you talk about companies that are using SR&ED as an incentive to award a contract to a university, a college or a laboratory.
Senator Chaput: How many of these Canadian university research centres could be affected? Do you have an idea?
Mr. Lavoie: There are over 1,200 academic research centres in Canada, but I would not be able to tell you how many there are in the manufacturing sector.
Senator Chaput: Thank you very much.
[English]
Senator McInnis: I think I understood you to say you are not expecting these changes in this budget. Did you say that?
Mr. Lavoie: Our recommendations?
Senator McInnis: Yes.
Mr. Lavoie: No.
Senator McInnis: That is good.
Mr. Lavoie: It would be a bit late anyway.
Senator McInnis: Yes, it would. I look at your recommendations, and I am not sure if you have had access to the CMC's.
Mr. Lavoie: The manufacturing coalition?
Senator McInnis: Yes. Have you seen as their recommendations?
Mr. Lavoie: Yes. I should point out that the Canadian Manufacturing Coalition is a coalition of 50 business associations like ours. We are part of it; that forms the question. We are part of it, and I was actually involved in drafting these things.
Senator McInnis: Have you costed it? I am looking at six recommendations here, and then there are your recommendations. I do not see a dollar figure on the two or three that you have. There are six recommendations here.
Mr. Lavoie: Right.
Senator McInnis: Has anyone costed this out?
Mr. Lavoie: On the refundable tax credit, we did. We can only cost it based on the information we have access to. I am not at CRA or Finance, but we do have access to Statistics Canada's business expenditure in research and development and so on. In terms of the refundable tax credit, based on the actual business expenditure in R & D last year, we know that a 5 per cent refundable tax credit would cost approximately $470 million to the government. The rapid depreciation rate is difficult to cost because it would have a cost up front because companies would deduct more rapidly. However, there would be a lot of benefits as well because companies would be replacing this equipment faster, and they would not depreciate it over 10 or 14 years.
The most important is the 5 per cent refundable tax credit. It is $470 million. You can even reduce that amount, for example, because under SR&ED it is very large. The kind of project that can be eligible must be proven to be a technological advancement. There is product and process innovation. The government could decide that only projects related to productivity enhancement, for example, are eligible for the refundable tax credit. You would reduce the cost of that measure even more. You could also think that you could target only certain sectors, for example, manufacturing and information, telecommunications equipment. Together, these two sectors are 88 per cent of all R & D expenditures.
I am just thinking out loud. If you reduce it to these two sectors, you would reduce that amount by another 12 per cent. You could implement that measure for between $200 million and $300 million, which is less than the $663 million that will be saved by the government with these changes. They still have another $400 million to spend in other kinds of programs, direct support mechanisms.
Senator McInnis: I am not sure I understand, but you are tossing a number of figures around. At one point, I thought you were approaching a billion dollars in total.
Mr. Lavoie: There is the impact on government revenues, and there is the impact on business expenditures. The number will be different. The reason it will be different is that large companies will claim SR&ED but will not necessarily use the credit the same year. If they are not in a profitable situation, they will carry the credits on their books. They have 20 years to claim them. Every year, about 30 or 35 per cent of the total claims are earned but not used, and that, in terms of government revenues, is money the government does not have to spend that year. They will have to spend it over the next 20 years. The way the government calculates the impact on the revenues will be different. Whether the company claims it and uses it the same year or not, it is still an incentive, and they base their investment on that incentive. That is the only difference.
[Translation]
Senator Chaput: It is not a follow-up question, but it is a very quick question.
I would like to go back to the university research centres. You talked about university research centres in the manufacturing sector that could be negatively affected. Could you give me some examples in the manufacturing sector?
Mr. Lavoie: For example, I am sure you have heard of CRIAC in Quebec. Those are joint projects between research centres, universities, companies and any centre of excellence you can think of, such as AUTO21. You probably have a number of centres in Manitoba. You also have a number of aerospace companies that are probably using university laboratories.
Senator Chaput: Thank you, that is what I wanted to know.
[English]
The Chair: Colleagues, seeing no other indication of questions to be asked, on your behalf, I would like to thank Mr. Martin Lavoie.
Mr. Lavoie: It is always a pleasure. Thank you for having us.
The Chair: We appreciate the Canadian Manufacturers & Exporters being here and the work you are doing to help with public advocacy, and we look forward to seeing you again.
Tomorrow, colleagues, we will have one session of two hours at 2 p.m. Just so you can get yourselves ready, we will have people from Lloyd's Register Canada Limited. They will talk to us about the initiative with respect to shipping; the second one is the Hazardous Materials Information Review Commission people whom we talked about this morning. We are right on top of our material. We are moving along very nicely.
(The committee adjourned.)