Proceedings of the Standing Senate Committee on
National Finance
Issue No. 17 - Evidence - November 2, 2016
OTTAWA, Wednesday, November 2, 2016
The Standing Senate Committee on National Finance met this day at 12:05 p.m. to examine the subject matter of Bill C-2, An Act to Amend the Income Tax Act.
Senator Larry Smith (Chair) in the chair.
The Chair: Good day, everyone. Welcome to the Standing Senate Committee on National Finance. Colleagues and members of the viewing public, today the committee is pleased to welcome the Minister of Finance, the Honourable Bill Morneau, to discuss Bill C-2, An Act to amend the Income Tax Act.
My name is Larry Smith, senator from Quebec, and I chair the committee. Let me briefly introduce the other members of the group: to my left, Senator Raynell Andreychuk, Senator Richard Neufeld, Senator Percy Mockler, Senator Elizabeth Marshall and Senator Nicole Eaton.
To my right are Senator Joseph Day, Senator Diane Bellemare and Senator André Pratte.
Minister, we thank you very much for being with us today. We appreciate that you have a busy schedule, as does the team that is with you.
[Translation]
Today, we are continuing our study of Bill C-2. We have already had three meetings on the topic, and we have heard from seven witnesses.
[English]
Minister, we are anxious to hear what you have to say about Bill C-2. We recognize that in your opening remarks you will probably give us an overview of your economic forecast, and I gather that two of your senior officials will remain with us after to further discuss Bill C-2. Sir, the floor is yours.
[Translation]
The Honourable Bill Morneau, P.C., M.P., Minister of Finance: Honourable senators, thank you for the opportunity to be here today. I am pleased to be here to answer any questions you may have about Bill C-2.
As you know, our government arrived in Ottawa just a year ago with a bold plan to strengthen the middle class and support those who are working hard to join it. That's what we have done, being aware that, when the economy is working for the middle class, the country is working for all of us.
[English]
Bill C-2 helps accomplish this objective by introducing a middle-class tax cut and raising taxes on the wealthiest 1 per cent to help to pay for it.
Specifically, this bill would reduce the 22 per cent personal income tax rate to 20.5 per cent.
To help pay for this middle-class tax cut, this bill also includes a new personal income tax rate of 33 per cent for individual taxable incomes in excess of $200,000. Bill C-2 also amends a number of Income Tax Act provisions to reflect the new 33 per cent rate, and it reduces the $10,000 Tax-Free Savings Account annual contribution limit to $5,500.
Returning the TFSA annual contribution limit to $5,500 is consistent with our government's objective of making the tax system fair and helping those who need it most. All of these changes would take effect as at January 1, 2016.
[Translation]
Honourable senators, the middle class tax cut proposed in this bill will enable 9 million Canadians to have more money to save, invest and grow the economy. In our first budget, we went a step further by ensuring the new Canada Child Benefit. Even though the benefit is part of our bill, I would still like to talk about it, because it is an essential component of our approach geared toward helping the middle class and those working hard to join it.
[English]
Thanks to the new CCB, nine out of ten Canadian families with children get even more benefits for their children. On average they will get $2,300 more for the 2016-17 benefit year. It's helping, I would want to say. For hundreds of thousands of children it could mean being lifted out of poverty. For some families it could mean more money to spend on skates this winter. For others it could mean paying down debt or saving a little more.
With the introduction of the Budget Implementation Act, 2016, No. 2, we have included measures to ensure that the new Canada Child Benefit grows in line with inflation as of July 1, 2020, so its real value is not eroded over the long term. By indexing these benefits to inflation, we have the opportunity to safeguard the gains Canadians have made through the CCB and to invest in a better Canada for the years and decades to come.
If Budget 2016 was a down payment on our plan for a stronger middle class, our fall economic statement — which I had the honour of tabling yesterday in the House of Commons — is the next big step towards middle-class progress. Slow growth here at home and around the world means our plan is more important than ever. In recognition of the long-term nature of our challenges and opportunities, yesterday I tabled measures that invest more dollars over a longer period of time so we can create good jobs now and set our workers, businesses and communities up for success in the future.
The government will invest an additional $81 billion over the next 11 years in infrastructure such as public transit, smart cities, green infrastructure, transportation and social infrastructure that supports trade and growth. With these investments comes a commitment to build up and build out Canada's rural and northern communities. The unique needs of our rural communities will be met with a more targeted approach, with $2 billion of our plan dedicated to help them succeed and share in Canada's overall success.
In all, combined with existing funds, we will be investing more than $180 billion over the next 11 years in our towns, cities and trade corridors to provide cleaner air and water, better neighbourhoods for our kids, and smarter, more connected communities.
To further leverage the building of smart growth infrastructure, the government is establishing a new Canada infrastructure bank through which at least $35 billion will flow to help us undertake transformational projects that might otherwise not be built.
This is unprecedented in Canadian history. It comes at a time when the need is great. Fortunately, we have what it takes to meet these needs and more. We have what it takes to succeed. Canada enjoys resources that other countries could only dream of, including our greatest resource, a highly skilled and educated population. We have an enviable fiscal position and the commitment to keep it among the strongest in the world. The creation of a new institution announced yesterday, the Invest in Canada Hub, will make sure the world knows this.
We need strong global partnerships to create good Canadian jobs. Our global skills strategy will further support Canadian companies by making sure they can attract top talent and have timely access to the specific skills and international expertise which will allow them to scale up and thrive right here at home.
These investments mean progress. It means Canadians will be meeting the future with the confidence to seize all it has to offer.
[Translation]
I will be pleased to answer any questions you may have about our plan to ensure the progress of the middle class and about Bill C-2.
[English]
The Chair: Thank you, Minister. We have 30 minutes with the minister before he has to leave.
Mr. Morneau: I went pretty fast.
The Chair: You did a great job.
[Translation]
I would ask everyone to ask questions that are short and to the point.
[English]
Try not to build your questions. Make sure you deliver directly what we expect. We have a group of questions already.
Senator Marshall: Minister, when we met in June, in response to a question we discussed the definition of "middle class'' and helping the middle class. In your testimony, you indicated, "The target around $45,000 to $90,000 tax bracket clearly helps anybody earning over that $45,000 mark by reducing that tax bracket.''
That tax bracket in Bill C-2 has been reduced. That's a good thing. However when the committee looked at the details, we discovered that the individuals with taxable income exceeding $140,000 actually benefit the most. It's not the group in the $45,000 to the $90,000 tax range.
In Bill C-2, the tax rate for those over $200,000 is raised, so they won't receive a benefit from the tax reduction, nor more should they. Why didn't you raise the tax rate for those over $120,000 or $140,000 so their changes in taxes was neutral and push those savings down to the lower tax bracket to help people in the $45,000 to $90,000 category?
Mr. Morneau: This is an important question for us to answer. The best way to answer the question is to acknowledge that what we're doing cannot be seen piece by piece by piece. We must look at the totality of the actions we're taking on behalf of both the middle class and those who are struggling to get there.
So we did, as you know, make a significant impact on Canadians by reducing taxes for people between $45,000 and $90,000. We know that tax break does accrue for people right up until they move into the highest tax bracket, the new 33 per cent. We did a number of other things at the same time.
The Canada Child Benefit is now means-tested, so by taking away the Universal Child Care Benefit, we've made a significant impact on lower-income and middle-income Canadians as well. We made a big impact by deciding that people in the lower tax brackets can receive a significantly greater advantage as they're raising their children.
We also made a big impact by focusing on single seniors, by increasing the Guaranteed Income Supplement for single seniors. So taken in totality, this is helping Canadians who are in a very challenging situation, Canadians raising a family who are in a low income bracket, and it's helping middle-class Canadian families to see greater returns, especially if they are raising children, but right up to a higher level of income.
There are an infinite number of ways we could decide to deal with the tax code to accomplish what we're trying to do. We chose to have the greatest impact on those people with families and to have a significant impact on middle-class Canadians.
Senator Marshall: What you're saying is contradictory to me, because with the child credit, people at the lower income scale will benefit the most. However, when you look at the tax reductions, it is people at the upper end who will receive the biggest benefit. That's the concern I have with regard to the bill.
The Chair: We had a lot of analytics done on this, so you don't get blindsided, but you understand how it works. Basically the people from $100,000 to $200,000 are the biggest beneficiaries. We understand it's a combination. The Conservative government did the same thing. They had their package of programs. We're looking at Bill C-2 and the benefit of Bill C-2, because there is a $1.8 billion deficit that comes along with this. We want to make sure we're trying to manage our money as best we can so that you have an idea.
We had the PBO, the outside tax specialist, do analytic work, so it's credible.
Senator Eaton: Relating to the PBO, they have confirmed that the wealthiest 30 per cent of the population will benefit from Bill C-2, and 65 per cent of the population will see no benefit.
No one has been able to answer the question of what constitutes the middle class. What is middle income? People refer to the middle class and helping the middle class. What is the middle class? No one can give us a figure on that. Thank you.
Mr. Morneau: Is that a question for me?
Senator Eaton: Yes, that's a question. What do you consider the middle class?
Mr. Morneau: Perhaps I can start by going back, because Senator Smith has given me this page on where the benefits accrue from our tax changes. You reference them as well, Senator Eaton.
We cannot look at this action independent of the other things that we're doing. So we have taken away the Universal Child Care Benefit, which is impacting a significant number of people in this top bracket. We've taken away a number of tax credits at the same time as we've done this. We've introduced the Canada Child Benefit in a way that has a significant impact on families in the lower levels.
Senator Eaton: Could you explain? Your new Child Tax Benefit will benefit those earning zero to $200,000?
Mr. Morneau: It gets means tested, so zero to about $150,000.
Senator Eaton: And then it begins —
Mr. Morneau: No. It's pretty well completely means tested away at $175,000, I believe, depending on the number of children.
Senator Eaton: It disappears when — $60,000, $80,000?
Mr. Morneau: No. There's a curve, and depending on the number of children you have, it declines. By the time you're at $175,000, I believe for all families it's eliminated at that stage, with some small exceptions for people who have many more children than I do. The idea is that it does get means tested away.
I suggest that looking at this in isolation does not get to the answer that we're putting forward for Canadians. We're showing significant benefit for the nine out of ten families that have children and that are getting this benefit.
It's important to focus on the numbers for a minute. We're going to bring 300,000 Canadian children out of poverty. That's a 40 per cent reduction in child poverty in 2017 versus 2014. By focusing our efforts on those who have the greatest need, we think we will have the greatest impact.
That's the totality of what we're trying to do. Of course, people who earn more, because they have greater earnings and because taxes go up in steps, they do get benefits when we take tax reductions, but they will not get as significant benefits as those who are in the lower tax bracket who are getting other things, like the Canada Child Benefit.
Your final question, if I can, around the tax bracket —
Senator Eaton: Can I ask you to clarify one thing? If I'm a single woman earning $45,000, or I'm a single woman earning $200,000, I'm still going to make more under your plan than would a woman who is earning $45,000, who is single, and who doesn't have those other things like a Child Tax Benefit and other things you're giving; right?
Mr. Morneau: If you're a single woman with a child, earning $40,000.
Senator Eaton: But no children; I have no children at $200,000 or $45,000. At $200,000 I'm going to benefit more, correct?
Mr. Morneau: You're earning more at $200,000, yes.
Senator Eaton: And I'll benefit more from your tax, percentage-wise?
Mr. Morneau: No, you won't benefit more percentage-wise.
[Translation]
Senator Mockler: My thanks to the minister for being here to answer our questions about Bill C-2.
I am very concerned when I see that 65 per cent of Canadians earn less than $45,000 a year. That's the information we have. The definition of the middle class has different meanings for various people. Here is my question.
[English]
I will go to the election platform. You criss-crossed Canada from east to west and south to north. On page 9 of what you call Fairness for the Middle Class it says you will take a little from the wealthiest and give to the middle class.
Minister, could you expand on that and also give us the definition of what is really the middle class? A lot of witnesses have appeared before this committee, and they have a hard time defining "middle class.''
Mr. Morneau: There are multiple ways, of course, that people will define the middle class in Canada. One way of thinking about it is the tax brackets we currently have in place. We have a tax bracket from $45,000 to $90,000 worth of income. The next tax bracket goes from $90,000 to $140,000 in income.
I wouldn't say that I know exactly which portion of the people in those two tax brackets would be in the middle class, but I think the overwhelming number of people you would ask would probably agree that the people who are in a higher tax bracket than the $140,000, or in the lower tax bracket than the $45,000, are probably not the target in the middle class. That's maybe broadening out an answer but not being specific and married to exactly the beginning and end points.
We recognize that there are many people in Canada who earn, as you say, under $45,000. Some of those people, of course, are married and have more than one income in their family; others aren't. Some of those individuals have children, and some don't.
Our efforts were to focus on those people who have the most significant needs as they're moving through their lives. What we've done by focusing on the Canada Child Benefit is to take a look at those individuals raising a family in low and middle income.
The Canada Child Benefit, which is benefiting 3.2 million families, is also benefiting a significant number of single- parent families. Sixty-five per cent of those families are actually single-parent families, so there is a significant impact on those that are most challenged.
We believe that, taken in totality, we've made an enormous impact on child poverty and on families that are struggling to raise their children, and we have done it in a way that also helps seniors who are most challenged, through the GIS supplement. We've done it in a way that creates more progressivity in our tax code through an increase in taxes on the wealthiest 1 per cent.
As I said, there is an infinite number of ways we could go about doing that. We think the way we've done it provides a significant advantage for those in need and does it in a way that appropriately deals with the challenges around emerging income inequality issues.
Senator Neufeld: Minister, thank you for being here this afternoon. My question focuses on TFSAs. A number of groups have come before our committee and told us that changing the rate from $10,000 back to the $5,000, indexed at $5,500 this year, will actually hurt low-income seniors in many cases. Enhanced savings are critical, they've told us, for seniors to save for their retirement. We've actually heard others say that if you can afford $10,000 to put into a TFSA, you don't need help.
I want to digress from that a little bit. Say a senior bought their house 50 years ago and is asset rich and cash poor. They have a lot of money in their house; it's paid for. The value is higher than when they bought it, yet they're still struggling. What would be wrong with those people being able to do a reverse mortgage and put $10,000 in a TFSA to save for their own retirement?
I can't for the life of me see that just because not everybody is putting in $10,000, that is a reason to reduce it. You said recently that over a million families have not saved enough, as far as you're concerned, for their retirement. So why in the world would you actually be regressive in changing it from $10,000 back to $5,500?
Mr. Morneau: Thanks for the question. It's important to think of the frame in which this question is asked. If you recall the change from $5,500 to $10,000, it was in the context of an election campaign. This was an early action taken by the previous government to raise it from $5,500 to $10,000. We had a competing pitch for Canadians. We said that what we wanted to do was to deal with the tax code in terms of the benefits that Canadians have from raising children, and in a way that increased progressivity.
Canadians voted on the latter option: the option of taking that approach. We believed that it was important to explain why we were doing this. We told Canadians that since 6.7 per cent of Canadians were using the total amount that was available to them, this was a benefit that was going to a small cohort of Canadians.
We think TFSAs are an important part of our system. The continuation of TFSAs at a $5,500 amount, which is indexed, is much closer to the original intent of TFSAs, which I'll remind you were started at $5,000 and moved up to $5,500 after a number of years, and we thought that was the appropriate way to have that vehicle.
Until now, people have had $46,000 of room in those TFSAs to use, and they will continue to build room over time. We think this is an appropriate way to deal with it and one that allows us the space to do other things that we think have a bigger impact on a broader cross-section of Canadians. We are committed to improving the lives of Canadians in the middle class and people that are striving to get there. We think the measures we've taken do that.
[Translation]
Senator Bellemare: Mr. Minister, from the outset, we have been studying Bill C-2 in a vacuum. Since the department has all the data, could it provide us with the studies on the overall effects of the budget, including the increase in transfers, the child benefit and the abolition of income splitting? It would be very useful to obtain the data and to find out the impact on the distribution of Canadian household incomes, based on whether or not they have children.
Let me also take the opportunity to ask you the following question: Can you remind us why the bill was not introduced as part of the budget implementation?
Mr. Morneau: Thank you for that question. We have a lot of information and we can forward it to you. We have conducted studies to ensure that we can help Canadian families, the middle class, with all those measures.
This means that 300,000 children living in poverty will be in a better situation after the Canada Child Benefit is implemented. We know that our tax cuts will help 9 million Canadians have more money in their pockets. We know that, on average, those tax cuts represent $330 for an individual and $540 for a family.
We have the figures and we will keep you up to date on the outcome of those changes. As for the question as to why we have it outside the budget, the reason is simple. It's because people need to understand where they stand before the beginning of the year. For taxes, it is best to start before January 1, because it's the beginning of the financial year. That is why we made that announcement in advance for families and individuals. As a result, they are able to better understand their situation.
[English]
Senator Pratte: On the point made by Senator Bellemare, I would insist it would be very useful to have data on a certain number of different families, taxpayers, the combined impact of all of those changes, because it would show us the impact of all those measures on specific types of families and taxpayers.
As you may have seen, there's a figure that impressed many senators, including myself, that 65 per cent of taxpayers would not benefit from the changes in Bill C-2. That would include, obviously, 35 per cent of people who do not currently pay taxes at all and obviously are not impacted by those changes, and people who earn less than $45,000. But still, that 65 per cent, as in the upper house, impressed a lot of senators.
Would it be possible to have the equivalent number of people who benefited from all the changes that you've introduced, including the Canada Child Benefit and the guaranteed changes in the Guaranteed Income Supplement? What percentage of Canadian taxpayers benefit from those changes, which is a larger percentage than 35 per cent? I'd be curious to know whether it's possible to compute that figure and give it to the committee.
Mr. Morneau: We will provide examples for you. I was just asking Andrew, who I've come to learn seems to know pretty well everything in his head on taxes, about the numbers, and he points out that 35 per cent, as you've mentioned, of Canadians are not filers, and 31 per cent are in the lower tax bracket.
Of course, that 31 per cent would include my four children, two of whom are in university and two of whom are in high school, all of whom earned money last year but none of whom earned enough to pay taxes. There's a vast number of Canadians for whom we were really not targeting, as you can understand.
We will provide specific examples of families impacted and how they were impacted, as well as aggregate measures on the number of people that we see having lower taxes this year and the aggregate measures on the impact of the Canada Child Benefit versus the change in tax credits that was the previous government's approach.
Having seen those numbers, I can see that for the nine out of ten families who are getting the Canada Child Benefit, including the families that are not getting means tested away, so I'm not in that nine out of ten — I'm the one out of ten — but for those nine out of ten, the average is $2,300 better off, including all the changes. That includes the taking away of the tax credits because we saw that they did not impact everyone equally, and making a simpler, impactful number. We'll get you the numbers, but I'd like the committee to have confidence we've gone through these numbers to look at the impact.
Senator Andreychuk: Your whole premise on the election was that you had one vision and the party in government had a different vision. I would suggest that most people bought into Growing the Middle Class and identified themselves as middle class and said they'd be better off.
I'm rather miffed, like the other senators, because I can't define "middle class'' because I can't judge whether there's any growth. I need the growth to find out whether more jobs are created, who is getting them and what kinds they are, to define whether I'm better off.
Citizens are coming to me asking, "Can you explain to me how I'll be better off when I can't find a job or I'm getting a part-time job? Saying nine out of ten will be better off, we need some calculable numbers to determine whether, on paper at least, there's some progress for growing the middle class. We're asking you to define your phrase, if can you factor in what Senator Pratte said. We need to get those figures to be part of the dialogue.
Mr. Morneau: We'll provide you with numbers to show how many Canadians are better off based on our tax changes, how many Canadians are better off because of our Canada Child Benefit changes, and the quantum of the impact.
I would then expect that over time you will hold us to account for the investments we're making over the long term to grow our economy because that is what we need to do to expand jobs and impact for Canadians across the country. And that is most certainly what we're engaged in doing.
The Chair: Thank you, sir.
Senator Day: Minister, we've heard from a lot of witnesses that say one of your objectives should be to simplify the Income Tax Act and how it has grown over the years. The first step I give to you is to take out these non-refundable tax credits — the boutique credits — that were in there from the previous government that you've done with the legislation. Can you reassure us that this isn't the end of tax reform and there will be a plan to simplify this so that individuals can file their own tax returns?
Mr. Morneau: Yes, I can. Let me first say that your question, from my perspective, is not a partisan issue. It's not just the previous government that made our tax code complicated. It got complicated over a long period of time, and it's something that requires constant attention. So I can tell you that we have an advisory group that's helping us to look at our tax code right now. We think we did make some simplifying efforts in Budget 2016, but we know there's more work to be done in this regard to look at things that no longer are having the desired impact to make sure that on an ongoing basis the tax code is fair and, importantly, to know that simplicity is a goal in and of itself because people need to understand the tax code in order for it to have the desired impact.
It's an effort that we're pursuing. We will make some impact this year, we hope, and it will be a continuing theme.
The Chair: From all the testimony we've heard, probably one of the major themes that comes out is we recognize the benefits of the child tax return, which is an extension of the previous government doing it in a different way, so the playing field is equal and we're adding about $3.4 billion to the deficit to fund that. I think all of us around the table would say that's good because we're helping families and we're helping bring children out of poverty.
I believe the issue for the group — and this is not a partisan issue — is that the PBO and some of the other folks who have done analysis for us have said this will cost us $1.8 billion a year. When you look at someone earning $60,000 as an individual, they're going to get a 2.6 per cent tax credit because the tax adjustment of the bracket is 7 per cent. It's not a 7 per cent tax reduction; it's an adjustment of the bracket.
At $261, that's enough to buy groceries for three people for a week or, if you're stringing it out, maybe two weeks. A married couple will get $500 from the credit. If the group that we're targeting is $45,000 to $90,000, at the top end you're going to get $696, which is a 4.2 per cent credit, and if you're a couple you'll get around $1,200, if I understand correctly, if your spouse is earning in that income bracket, but if your spouse is earning $85,000 and suddenly you go up to $180,000, you're getting $820; at $150,000 you're going to get $766.
The problem is that we take the money from the top $200,000 earners, and there are approximately 330,000 of those people, and we're supposed to be targeting it to a specific group that we call the middle class, which is really hard to find. Maybe we should call it middle income.
The question we're still wrestling with is this: Does this bill address helping the people it's intended to help? There's a lot of confusion around that.
I've been in sales all my life, and I understand you want to sell a package, which includes all sorts of components, but $1.9 billion, $1.8 billion a year over four years is $8.9 billion.
I have a simple question. Is that $1.7 billion or $1.8 billion forecasted in this year's deficit?
Mr. Morneau: Let me just again say that it's not purely sales. We did a number of things that we know have impacts for Canadians in different situations. Among the things that was referenced is we tried to do it in the simplest way possible, and that's by dealing with one tax bracket that we knew would have a big impact by simplifying the child benefits by taking three benefits and moving them into one benefit that would have a bigger impact.
There's a significant effort against simplification to help people better understand their position. And there was an effort to make our code more progressive. We're seeing a significant level of anxiety among middle-class Canadians against their opportunities, and we are working with that.
Our goal, as you know, is to invest in the future, and as you consider our investments, I know you'll hold us to making sure we make investments that are going to have the biggest impact on the economy.
What we announced yesterday was not only significant infrastructure investments but ideas on how we can amplify those investments to have the biggest impact on our economy, so crowding in private sector funding through pension funds and institutional investors and finding a way to get out and promote our country internationally to create jobs here.
As I said, there will be many different ways that people could propose to do what we're trying to achieve. We chose a way that we think is simple and easy to understand and has a really material impact on families as they're raising their children in lower and going right up until people get into much higher income brackets at a time when we've decided to increase the level of progressivity for those people.
We think it's the right thing to do; we think it's what Canadians voted for, and we remain committed to working to ensure good outcomes for Canadians who are working hard to raise their families.
The Chair: And just to alert you, on the Finance Committee very good work has been done so far on looking at infrastructure. Our initial report will probably be out by the end of November, which is still early in the process because we look at it as a two-step process. We've had mayors from big cities, medium cities, small cities; we've had associations, support groups and interest groups; and we're really trying to find ways of assisting the government in executing it a little more effectively than it's been done to this point. Because as you said, you've got a long-term plan, and it's critical that you can kick that long-term plan into operation and see results as quickly as possible so that you're going to be able to create jobs and create the spinoffs that you're talking about because people only have so much patience, and it's important that we're able to do something that contributes to making the system better.
It's a non-partisan issue, and we've had tremendous support from all sides — independents, Liberals, Conservatives — and what we're really trying to do is make sure that we can support a direction moving forward.
We thank you for your time, sir, and we really appreciate it.
Next we will have the minister's staff go over Bill C-2 with us.
[Translation]
Joining us now are two officials from the Department of Finance who will help us understand the components of Bill C-2.
[English]
Just to make sure, at the first briefing we didn't have a lot of senators participate.
Our objective is to go over this with representatives from the Department of Finance, and we have approximately a 20-minute max on this. So why don't we start. Are there questions to start from our colleagues about how we want to participate or advance in this situation? Are we okay?
Let's start at the beginning and recognize that we do have time constraints. We'll try to ask some questions, but at the same time we recognize people are on a busy agenda. Thank you, Mr. McGowan.
Trevor McGowan, Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: Perhaps a good way to go would be to go through the bill clause by clause, pausing with each topic for questions, kind of skipping over the overview because it is a little bit shorter.
The bill has three main components. The first involves the changes to the personal income tax rates, the second involves the restoring of the Tax-Free Savings Account limit to its previous index level, and the third is a number of consequential amendments to the introduction of the new top marginal rate.
Clause 1 of the bill contains the changes to the personal income tax rates and the introduction of the new bracket. That's a reduction from 22 per cent to 20.5 per cent on the second bracket. That's income around $45,000 to approximately $90,000. In addition, as was discussed earlier, a new top marginal rate for individuals is introduced, and that's on income in excess of $200,000.
It's worth noting that the dollar thresholds presented in the bill are all updated to their 2016 values, although that's not a substantive change. That's what the numbers are going to be anyway, but it keeps them all in line for the same year as with the new $200,000 threshold.
The Chair: Any questions on that particular issue?
Senator Andreychuk: I seem to recall a witness saying that your projections and everything that you're going to provide us is in the tables and so we can track it. We're targeting people over $200,000, that they would have an increase. We also heard, however, that people knew that policy was coming and they've already readjusted their income. Was that taken into account? In other words, will your projections show us the difference between what people were doing and what they will do after, or already have done?
Pierre Leblanc, Director, Personal Income Tax Division, Department of Finance Canada: There are two components of that. You can think of a very short-term timing response, just as you described, senator. People knew that the rate increase was coming in advance, so accelerating income.
That's described if you look at the government's annual financial report. The magnitude of that effect is described there. Colleagues from the Economic and Fiscal Policy Branch who just left would be best placed to discuss that.
The second is the more ongoing response, the behaviour response on taxable income. That's taken into account in the department's costing.
The Chair: Is there a possibility we could get access to those calculations?
Mr. Leblanc: Sure. If you look at the backgrounder that was released on December 7, it shows the estimated revenue gain for the 33 per cent rate is based on an assumed behavioural response. In technical terms, it's an elasticity of taxable income of 0.4, and that's clearly indicated in the backgrounder. So we've clearly stated our assumptions there.
The Chair: So that's public knowledge; we have access to that?
Mr. Leblanc: Yes.
The Chair: Can we move forward?
Senator Cools: Are we voting clause by clause?
The Chair: No, we are just getting explanations so that when we do go to clause by clause we'll all have a better understanding of what we're voting on.
So this is an information exchange, if that's okay. Can we move forward, trying to respect our time for everyone?
Mr. McGowan: Clause 2 introduces a new and enhanced charitable donation tax credit that is intended for individuals with income subject to the top marginal rate of 33 per cent, the new rate, to be entitled to a charitable donation tax credit of 33 per cent.
Subsequent to the introduction of this bill, as was announced in Budget 2016, further refinements to this measure have been made and were actually included as part of Bill C-15, which received Royal Assent this June. The measures in clause 2 have effectively been replaced by a newer and more taxpayer-favourable version of the rules, which enhance the application of the charitable donation tax credit as it applies to trusts, which, as we'll see later, are subject to, generally, tax at the top rate on all of their income.
So this clause 2 has effectively been replaced by a similar measure that received Royal Assent as part of Bill C-15, and that bill was designed so that once Bill C-2 gets Royal Assent, whatever is in clause 2 will be automatically replaced by the newer and more generous version of the rule.
The Chair: Can you give us a simple example, just a simple numbers example of how this would work in real terms? I'm an individual; I'm making a donation to YMCA, and I give $1,000. What will be the implication of the new adjustment with the charitable donation, in simple terms?
Mr. Leblanc: Sure. Just on that $1,000 donation, senator, let's say that this individual has taxable income above $200,000. Under the previous system, on the $800 a 29 per cent credit rate applied, and now it will be a 33 per cent credit rate.
You'll still get 15 per cent on the first $200. Let's assume there are no other donations. And now, instead of 29 per cent, you'll get 33 per cent on the $800.
The Chair: In terms of a deduction.
Mr. Leblanc: In terms of the credit, yes.
Senator Pratte: I'm learning so many different things every day.
So we're going to vote on something that we know is dated? So why are we voting on this clause? We're voting on it —
Senator Cools: Because it's in the bill, and if you don't vote for the clause, the bill won't pass.
The Chair: Your question was answered?
Senator Pratte: Okay.
The Chair: The idea here is we're not voting on anything. We're trying to understand what the change —
Senator Pratte: But eventually we have to vote on clause 2, knowing that clause 2 is out of date.
The Chair: We have to vote on clause by clause as we go through.
Senator Cools: It happens all the time.
The Chair: Sorry, Senator Marshall?
Senator Marshall: Can you repeat what you were saying about trust? Did you say that all income coming out of trust is taxed at the new higher rate?
Mr. McGowan: Happily, perhaps, and I don't want to get ahead of myself, but that's a good segue into clause 5 of the bill, which is on page 3. Most trusts, called inter vivos trusts, are subject to tax on income retained in the trust at the top marginal rate. Previously that was 29 per cent, and that's going up to 33 per cent as part of Bill C-2.
The idea is that if income in the trust is taxed at the top marginal rate, there won't be an incentive for high-income- earning individuals to shift income to the trust.
Senator Marshall: That's what I was getting at.
Mr. McGowan: That doesn't apply to income that is paid out of the trust, which is taxed in the hands of the beneficiaries. That's income that is earned in the trust and retained in the trust.
Senator Marshall: Okay, retained in the trust.
Mr. McGowan: There are two exceptions. I said they are generally subject to the top marginal rate. One is for qualifying disability trusts, which are essentially trusts for disabled people entitled to the Disability Tax Credit. The other is on so-called graduated rate estates, and that's a trust that can arise as a consequence of a death of an individual. Those two types of trusts are allowed to utilize the progressive income tax brackets, but in most cases they are subject to the top rate.
Senator Day: Mr. McGowan, Bill C-2 was first filed last year; is that correct?
Mr. McGowan: That's correct. It was initially tabled in December 2015.
Senator Day: If it had been dealt with expeditiously, there wouldn't be this overlap. Because it wasn't, it's almost a year that this has been around, and another bill that recognized that there should be some changes came about. What will happen with respect to this second clause is that this bill, assuming it gets passed, will become law, and then that portion is automatically superseded by another piece of legislation.
Mr. McGowan: That's correct.
Senator Day: Thank you.
The Chair: Moving on, Mr. McGowan.
Mr. McGowan: Clauses 3 and 4 of the bill are also consequential amendments to the introduction of the new top marginal rate. I'll deal with them together, because they relate to the same tax. It's called the tax on split income, or more generally referred to as the "kiddie tax.'' That's a tax that is imposed at the top marginal rate that's intended to prevent income splitting, as the name "kiddie tax'' implies, with your children, who are presumably subject to tax at a much lower rate; a three-year-old and eight-year-old are not earning much.
These rules are intended for when you have, say, a family corporation, a private company, and those small children are receiving shares and streamed dividend income that would otherwise go to the higher-income-earning parent, where that income would be taxed at the top marginal rate. That is to prevent splitting of income with your children, or to prevent the avoidance of tax through that technique. That used to be at 29 per cent, and now it's going to be at 33 per cent.
The Chair: Moving on.
Mr. McGowan: We have already discussed clause 5, which changes the tax on trusts from 29 to 33 per cent.
The next clauses — 6, 7 and 8 — all deal with passive investment income earned by private corporations. The act is a series of rules designed to prevent the potential deferral of tax by high-income individuals — that is to say individuals who are subject to tax at the top rate — by, instead of earning it directly, earning certain types of passive income — so portfolio dividends, interest, things like that — in a corporation, because corporate tax rates are lower than individual tax rates, even with or without the small business deduction.
Refundable taxes are imposed by these types of income in a corporation, and they're refundable when they're paid out to the individual shareholder, because then there wouldn't be any deferral benefit. The shareholder has the income and they pay tax on it.
They serve, in effect, to top up the corporate rates of tax to a sufficient level that they prevent any deferral of income that could be achieved by moving your passive income into a corporation.
You will see in clause 6 there's an additional tax on what's called the aggregate investment income of a Canadian- controlled private corporation. That's an extra 6.33 per cent refundable tax on investment income earned in a private company. That's been increased to 30.33 per cent, and again that 4-percentage-point increase is just moving along with the new higher top marginal rate, which is 4 per cent higher — 29 going up to 33. That is designed to maintain the purpose and effect of the rules to prevent any deferral of tax by moving your passive income to a private corporation.
Senator Marshall: These are for Canadian-controlled private corporations, right? How many of those are there in Canada? Would these be corporations set up by doctors, dentists and professionals? Does it include those corporations?
Mr. McGowan: I don't think we have the number of Canadian-controlled private corporations with us today. The examples you cited are all professional corporations. To the extent that professionals — doctors, lawyers, dentists — are allowed to incorporate to run their businesses, they would set up a company and it would presumably be a Canadian-controlled private corporation, but it could also be a convenience store or car dealership. Any sort of business can be carried on through one of these private corporations. So it's not simply for professionals; it's any sort of business.
Senator Marshall: Would you be able to get that information for us, the number? We haven't had any witnesses at this committee talk about the impact that these changes had.
I actually tried to take these changes and follow it through in the Income Tax Act. I think Senator Day mentioned simplifying the tax act. After that experience, I agree with him.
Senator Day: It's fun, isn't it?
The Chair: That's what happens, Senator Day, when you're dealing with the Auditor General of Newfoundland.
Senator Marshall: Former.
Senator Andreychuk: What is the public policy reason for all of this? We've heard from the minister, and we certainly heard through the previous period, that there should be a fairer tax, that the upper bracket should be paying more, and that growing the middle class was the object; hit the higher class. But all of these trusts and so on follow through on that, so is it still the same public policy to get more from them?
Where is the balance that they might move out of the country or move in a different way, find another mechanism, if we're trying to retain and develop business innovation? Would this not have an impact? What was the public policy? It does hit smaller and medium-sized businesses when you start into these trusts, including small law firms, et cetera.
Mr. McGowan: There are a couple of things I would like to address there. The first is the general policy behind these additional rules, as well as the one we discussed earlier: imposing the top marginal rate on trusts. It deals with one of the fundamental tax policies, which is called equity. That is ensuring that somebody who earns $100 of income, whether they earn it directly or in a trust or in a corporation, they will not be better off. What these rules do is help ensure that taxpayers can't be better off by moving their passive income into a different type of investment vehicle.
That really is the policy preventing an inappropriate opportunity for a deferral of tax through simply moving passive investment income into one of these other types of vehicles.
Senator Andreychuk: Inappropriate but lawful. How do you use the word "inappropriate''?
Mr. McGowan: As I said, inappropriate in the context of the equality principle that I mentioned earlier, that you should pay the same amount of tax whether you earn something directly, through a trust or through a corporation. The additional taxes that are imposed on corporations, these refundable taxes here — and this is getting to my second point — are on investment income, passive income; they're not on business income. So your active business income of a Canadian-controlled private corporation is still going to be subject to the lower income tax rate, which for 2016 is 10.5 per cent federally. That's the tax rate that is imposed upon your active business income.
What we're talking about here is more passive investment. This is, as I said, portfolio stocks, dividends, interest on bonds and that sort of thing, which can be easily moved into a different type of investment vehicle. It is that kind of passive investment income as opposed to active income from, to follow the earlier examples, running your law, medical or dentistry practice. It doesn't touch that. It's the passive income.
The Chair: Can we move forward? We have three minutes left before we have to let Mr. McGowan and Mr. Leblanc go.
Mr. McGowan: Very quickly, parts 7 and 8 complete the picture for the additional refundable tax.
Clause 8, which is found on page 5 of the bill, has the Part IV tax. That is ensuring that dividends paid between corporations can't be used to defer tax.
Clause 7 deals primarily with the refundable aspect of it. You pay these additional refundable taxes, and when the corporation pays them out as dividends to its shareholders, they're refunded. So the deferral is eliminated and the corporation gets the taxes back.
These are all being increased along with the increase to the top marginal rate to maintain the anti-deferral purpose of the rules.
The Chair: So your refundable dividend will go up to 38 per cent, correct?
Mr. McGowan: That's correct.
The Chair: It used to be at 33. Now it goes up to 38.
Senator Marshall: Are we still talking about Canadian-controlled private corporations? Okay. We're not into publicly traded corporations?
Mr. McGowan: No. There's a whole lot in the background there.
Senator Marshall: Thank you.
Mr. McGowan: It often takes a good month and a corporate tax course, but thanks for asking. I know I am moving through it quickly.
If we can move on to clause 9, the return of the TFSA dollar limit to its previous limit which was introduced as $5,000 and indexed to inflation, increasing in $500 increments with inflation so that for 2016 it is currently $5,500. The $10,000 limit for 2015 would remain, but going forward, the limit on how much can be contributed to a TFSA will go back on the same track that it would have been had it not been increased up to $10,000. It is $5,500 for 2016 and it will continue to grow as it is indexed to inflation.
Senator Neufeld: I'm not an accountant or a past auditor. The changes you made to income trusts and private corporations, those clauses, can you tell us how much more money was raised for the Government of Canada? You must have had a number you compared it to when you did the increases. What is the expected total taken away from all of those people that have invested in these?
Mr. Leblanc: Senator, that's in the backgrounder we published when these measures were announced on December 7 of last year. In 2016-17, this fiscal year, $210 million. In 2017-18, it was $310 million. There's a little bump with the way that corporations file their tax returns. Then for 2018-19 and 2019-20 and 2020-21 it's about $260 million in each of those years.
The Chair: Any other questions or comments?
Senator Day: The Tax-Free Savings Account is back down from $10,000 to $5,500 per year. My understanding is that the previous law will be reinforced, and that was indexed such that when the indexing amounted to $500, then the $500 went onto it. Is that correct? It was not before. It's not an annual index. It's a cumulative thing.
Mr. McGowan: That's right. The amount that was based on the initial introduction at $5,000 is indexed, and it is rounded off to the nearest $500. I believe it was 2013 when it crossed the $5,250 threshold and went up to $5,500, and then it will continue along that path.
Senator Day: Did we lose a year indexing because of the year it went up to $10,000, or we just forget about that?
Mr. McGowan: No. This really does put it back on the same path that it was on before. So actually the unrounded number for 2016 is $5,559. So it's slightly higher than $5,500. It's much more precise tracking the path it would have taken, and it means it has the potential to increase from $5,500 to $6,000.
Senator Day: Depending on the inflation over the next few years.
Mr. Leblanc: It's possible in 2018 that it will be $6,000. It's more likely in 2019, but we'll see how inflation turns out.
The Chair: We have a fact sheet for all of our members if you would like. It is just a little update on TFSAs. There are 15.1 million TFSA accounts opened in 2014. That is the CRA data. Of those, 7.3 million are held by citizens with income below $45,000 as of 2014. In 2013, 2.1 million senior citizens with income below $45,000 held accounts. A total of 3.2 million senior citizens in 2013 held accounts. Average contribution is $2,892 for all accounts.
Just for your information, we have two graphs, one at $5,500 and one at $10,000. It is the old versus the new. If you started at 18, at 28 years old, 10 years later, your contribution room would be $55,000, naturally at $5,500, versus $100,000. At 48 years old, with the old scheme at $5,500, you would be $165,000 contribution room versus with $10,000, $300,000. At 68, you would have contribution room at $5,500 of $275,000 versus $500,000 at the higher rate. So it shows you the options that you did have and the options that you now have.
One of the questions moving forward will be as people look at changing and modifying tax laws, what should we do with the TFSA, leave it status quo or do you move forward? Moving forward means what?
Mr. Leblanc: In making the comparison, the $5,500 should be indexed.
Senator Day: Yes, exactly, and $10,000 wasn't. So you were using $5,500 many years in advance.
The Chair: Excuse me; I want to show you at one level and another level. You're right, indexation is important, but you're never going to catch up to the actual $500,000 amount, at least it would appear. We need to do those numbers to see what the real comparison is. That was just to give everyone an example of what it could be and what it couldn't be.
Senator Marshall: I'd be interested in hearing from some witnesses about the impact of clauses 6, 7 and 8. We haven't spoken to anyone affected by the changes to the Canadian-controlled private corporations.
The Chair: Gentlemen, we thank you very much for your time and spending it with us — very productive. Without any other questions, I adjourn the meeting.
(The committee adjourned.)