THE STANDING SENATE COMMITTEE ON BANKING, COMMERCE AND THE ECONOMY
EVIDENCE
OTTAWA, Wednesday, April 17, 2024
The Standing Senate Committee on Banking, Commerce and the Economy met with videoconference this day at 4:14 p.m. [ET] to study matters relating to banking, trade and commerce generally.
Senator Pamela Wallin (Chair) in the chair.
[English]
The Chair: Hello to everyone here and online, and welcome to this meeting of the Standing Senate Committee on Banking, Commerce and the Economy. My name is Pamela Wallin and I serve as the chair of this committee.
I’d like to introduce the members of the committee with us here today, Senator Loffreda, the deputy chair; Senator Bellemare; Senator Marshall; Senator Martin; Senator Massicotte; Senator Miville-Dechêne; Senator Petten; Senator Ringuette; and Senator Yussuff.
Today, we are continuing our conversation on many topics, the topic of the alternative minimum tax, or AMT, and we have been looking at the impacts specifically on charities. In the week when we’ve had a federal budget, I can’t imagine that there won’t be questions on all manner of issues, including that, the ongoing discussions over the carbon tax and proposed legislation.
So we have the real pleasure of welcoming in person the Parliamentary Budget Officer, Yves Giroux. He is accompanied today by Matt Dong, Analyst; and Katarina Michalyshyn, Senior Analyst in the Office of the Parliamentary Budget Officer. Welcome to you all. Thank you very much for joining us today. We’ll begin with your opening statement, Mr. Giroux.
[Translation]
Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer: Honourable senators, thank you for inviting us to testify today. I’m happy to be here to discuss the alternative minimum tax or other topics you may choose.
In September 2023, my office published a report on changes to the alternative minimum tax proposed in the 2023 budget. I’m here with Katarina Michalyshyn and Matt Dong, who are the two analysts responsible for this report.
The changes to the alternative minimum tax were designed to increase its revenue and ensure that taxpayers with the highest incomes pay a greater proportion of the total alternative minimum tax revenues. According to the analysis conducted by my office, the net revenue generated from these changes is estimated to be $2.6 billion over five years.
[English]
The majority of this increase in revenues would come from individual taxpayers rather than from trusts. Among individuals, more of the tax burden would be expected to shift to higher-income earners than before the changes. The reverse would be true for trusts; trusts with lower incomes would face a higher burden.
Under the new rules, the number of individuals paying the alternative minimum tax would decline drastically. By 2028, approximately 29,000 individuals would pay the alternative minimum tax, compared to the 78,000 that would have paid in 2028 under the previous rules. Most of the reduction would be concentrated among those with total incomes under $200,000. There would be an increase in the number of individual payers with incomes over $400,000. Due to a lack of data, it was not possible to calculate the change in the number of trusts that would pay the alternative minimum tax under the new rules.
After the publication of the report, some parliamentarians expressed interest in learning about how the changes to the so-called AMT may affect charitable giving. My office investigated whether undertaking this type of analysis would be possible. Unfortunately, because of insufficient data, it was not possible to create an estimate for the effect on charitable giving.
We will be happy to answer any questions you may have about our analysis of the changes to the AMT or any other work of my office.
The Chair: Thank you very much. Yes, we heard that from testimony last week because the impact is not actually felt yet. It’s just the fear of the chill effect on all of that. So thank you for those remarks, and we’re going to go right into questioning with our deputy chair, Senator Loffreda.
Senator Loffreda: Thank you, Mr. Giroux, for being here with us this afternoon.
As you mentioned, on March 5, 2024, you released your most recent economic and fiscal outlook. Important for the benefit of Canadians listening to us, you were projecting growth in the Canadian economy to remain sluggish through 2024, with quarterly real growth domestic product — GDP growth — hovering around 1%, lower consumer spending in the first half of the year and lower residential investment over the year because of interest rate levels. You projected inflation to return to its 2% target by the end of 2024.
My question: Any concerns with the measures introduced in Budget 2024 and any impact on your projections?
Mr. Giroux: It’s a bit early to determine the impacts of budget measures on our economic and fiscal projections. Well, the fiscal is easier, but the economic projections are not. The concern one could express with respect to the budget is that it introduces further increases in government spending. As the Governor of the Bank of Canada has mentioned on a few occasions, increases in government spending — provincial or federal — can have an inflationary impact. When we see expenditures increasing in the budget — this budget, as well as provincial budgets — the concern is that the pace of increases could make the job of the Bank of Canada slightly more difficult in containing or returning inflation to its target of 2%.
Senator Loffreda: As a quick follow-up, given the latest inflation rate increase, are you concerned it will influence the rate cuts that you were projecting way back in your report? We saw inflation increase not drastically, but nonetheless, it was an increase, not a decrease.
Mr. Giroux: Yes, you’re right, it edged up a bit yesterday, on the day when Statistics Canada released its Consumer Price Index, or CPI, for the most recent data.
I’m not that concerned because it was always going to be difficult to return to a 2% inflation target. The closer you get to that target, the more difficult it is, so it’s much easier to go down from 8% to 4% than it is to go down from 4% to 2%, for example. For that reason, it was always anticipated that the last couple of decimal points would likely be the most difficult.
I’m not concerned yet because some core components of inflation are showing signs of returning to 2%, or even lower. For that reason, I’m not yet concerned, but we will be closely following the subsequent releases of the CPI by Statistics Canada in case there is a pattern of resurgence of inflation.
Senator Loffreda: Thank you.
Senator Marshall: Thank you, Mr. Giroux, to you and your officials for being here. I’m just looking at your September 7 report. With regard to the impact that the proposed changes to the alternative minimum tax, this kind of change with the budget, do you have any idea how that’s going to change the numbers in your report? Or will you be updating your numbers? That’s my first question.
Second, the government had a proposal for the alternative minimum tax, and now they’ve turned around and changed it midstream. It gives the appearance almost like the government doesn’t know what it’s doing. It had one proposal out there, and now it’s changing around to having another proposal. I wouldn’t mind your comments on that.
The first question is on the data in your report. Are you going to reissue the report with the updated data?
Mr. Giroux: Yes, there were changes in the budget yesterday regarding the alternative minimum tax. I looked at the budget and it’s 400 pages, so I don’t remember exactly all the changes, but I think in relation to the AMT, among other things, there’s a change in the inclusion rate of the charitable tax rate and the capital gains, so we will be updating our costing of the AMT to reflect the most recent changes proposed by the government in Budget 2024.
With respect to why this change is being introduced in the budget, it’s difficult to determine exactly why, but one would think that before making such an important change on a tax measure — the introduction of the AMT changes in the first place — the government would probably have considered the impacts it could have on some taxpayers.
My guess is that the government probably received negative feedback with respect to the impact it would have on charitable giving, and that’s probably why there were changes in the budget.
Senator Marshall: Thank you. Thinking about the changes in capital gains on individuals and businesses mostly as opposed to donations, do you think that’s going to impact people’s behaviour with regard to not just tax planning but moving to another jurisdiction? Do you have any comments on that?
You have the alternative minimum tax, and that’s aimed at high-income taxpayers. Now, you have the change in capital gains, which also targets high income. I think high-income earners are probably feeling they’re walking around with a target on their backs.
Do you think that some of those changes are going to have an impact on the behaviour of the taxpayers affected?
Mr. Giroux: I think so, especially when you’re looking at those who will be affected by both changes. They’re individuals in the highest income, the 0.13% for capital gains changes. And for the AMT, it’s those making above $400,000, roughly speaking, $400,000 to $450,000. These are individuals who usually have a high capacity to do tax planning, so they restructure their financial affairs to minimize their tax burden.
In the case of the alternative minimum tax, when an individual has to pay the AMT in one year, they can carry it forward in the next seven. It’s less likely to lead to significant behavioural changes, but it will probably still lead to some behavioural changes if, for example, somebody is denied charitable tax credit donations because of the AMT and they know that, then why bother. They’ll probably postpone it to subsequent years or migrate some of their income to other jurisdictions, if possible.
Senator Marshall: Thank you.
[Translation]
Senator Bellemare: Thank you for being with us, Mr. Giroux. Your insights are always very important to us. I had several questions. I’ll start with the last one because it’s about a concern of mine. I’d like to get some answers. It’s about Bill S-243, which aims to align finance, banks and financial institutions with the climate by making all sorts of modifications to change behaviours, so that the financial sector would take into account the risks associated with the climate crisis in its operations.
At first glance, as an economist, I believe that this bill does not impact direct government revenues and spending, but it does impact private companies, their spending and revenues. As a result, it will have a major impact on the economy. The objective is worthwhile, with the climate crisis being targeted, but there are other policies to do that. I’d like to hear what you have to say about this bill’s economic impact. Could it, in turn, increase government spending or reduce revenues?
Mr. Giroux: Of course, a bill like the one you mentioned, Bill S-243, aiming to make it a little more difficult to fund the oil and gas sector and the fossil fuel sector, will probably have impacts, perhaps not in the short term, but certainly in the medium and longer term, especially by making it a bit more difficult for the financial sector to fund that industry.
The ultimate goal of the bill is to make it a little more difficult to fund these sectors. If the financial institutions covered by the legislation become more reticent or there are fewer disincentives to fund that sector, the sector’s funding costs will probably increase and its profits will drop. Consequently, this could reduce economic activity or at least the federal government’s income tax revenues from these businesses.
Senator Bellemare: You say that funding oil sector activities will be slightly more expensive. What I see in the requirement for banks to hold 1,250%…. I mean, these are astronomical figures. Wouldn’t that cut off the funds completely? Would it then prevent that sector from transitioning to a green economy?
Mr. Giroux: Such high requirements could lead some financial institutions to abandon the sector altogether. I’ve talked about increasing the financing rate or the rate that banks charge to lend to this sector.
It is possible that, given other choices and other clients, some financial institutions may decide to abandon the sector altogether. Those that would remain in the sector would surely demand a higher premium.
Senator Bellemare: Okay. Potentially, if we ever needed more information, could you carry out an impact analysis of this bill?
Mr. Giroux: If the committee so wishes, through a motion, we can always do what we can to enlighten you to the best of our ability.
Senator Bellemare: Thank you very much, Mr. Giroux.
[English]
The Chair: Thank you. I would like to add, too — because we’ve had many representations to the committee from people who want to appear — that agriculture is hit very heavily by what’s proposed in Bill S-243 as well.
We tend to think about oil, gas and the energy sector, but agriculture is a very capital-intensive industry, right down to simply buying the combine you need for fall. Agriculture is about 7% of GDP; it’s huge. Are you concerned about that as well in that particular sector?
Mr. Giroux: Yes, as well, if the agriculture sector is also impacted by Bill S-243. However, the agricultural sector tends to also benefit from some government programs — so I’m a bit less concerned — as opposed to the oil and gas sector, which also has some tax preferences but is not seen in the same favourable light by average Canadians.
The Chair: I’ll return to that issue.
[Translation]
Senator Massicotte: Mr. Giroux, thank you for being with us; we really appreciate it.
You mentioned the Bank of Canada and Mr. Dodge, the former governor, who clearly indicated that the bell is ringing when it comes to anything to do with the lack of investment and productivity. The budget is geared toward consumption and little investment. It’s not being clearly stated, but there’s a real concern that we’re making a major mistake and that we’ll be paying for it for decades to come, especially our children and grandchildren. They were looking for solutions and a more serious commitment. But that is not happening. I’d like to hear your comments. Do you agree that this is a very important aspect?
Mr. Giroux: The productivity gap between Canada and other countries, especially the United States, is definitely very worrisome, as improvements in productivity are really the best way to guarantee a country’s prosperity, especially when our population is already aging.
To cope with an aging population, it is absolutely essential that those who remain in the workforce be increasingly productive if we want to be able to maintain our standard of living and, above all, not fall behind our partners, especially the United States and Europe. It’s very worrisome to see that business investment and productivity are not increasing as quickly as elsewhere. That’s why many commentators are suggesting that the government should put a lot more effort into increasing productivity.
Whether or not the budget is doing enough is a matter of perspective. We’ll take the time to analyze the budget in more detail and will publish a report on our impressions of the budget in the coming weeks.
Senator Massicotte: We had a discussion earlier about the oil sector. Considering that 7% of GDP comes from that sector, but that, in terms of investment, it’s the only one that does a lot of research and development — and it’s a sector whose importance will continue to decline — we’re really in a bad way, since we have a sector that is growing in terms of investment, but its size must be reduced. Doing nothing will make the situation even worse.
Mr. Giroux: The oil and gas sector is one of the sectors with the most capital per employee. It is also one of the sectors where productivity per employee or output per employee tends to be among the highest of all economic sectors. As part of the green transition, reducing economic activity in that sector means that productivity in the sectors that will replace it or in other sectors of the economy absolutely must be improved if we don’t want to lose a competitive advantage.
Senator Massicotte: Otherwise [Technical difficulties] if we continue along the same path, what’s in store for us in 10, 15 or 20 years? Everyone is saying that the situation is very serious. Can you give some examples of how this may affect us?
Mr. Giroux: These are purely hypothetical examples. For instance, if we don’t improve our productivity performance, we’re going to feel the pinch more when we travel. When we go to the United States, as Canadians, we’ll find that the Americans are much richer than we are because our productivity and standard of living won’t increase at the same rate or will stagnate, whereas those in the United States or elsewhere in Europe will increase. We’ll see the impact by comparing ourselves with people living in other countries.
We’ll also see the government’s fiscal capacity not increasing at the rate we’d hoped for to fund the public services we rely and depend on. We could also see a gradual depreciation of the exchange rate against other major currencies, which would make the goods we buy from abroad — which are imported — a little more expensive. I’m painting a rather catastrophic scenario to illustrate the impact of productivity stagnating while it increases in other countries. This could be an example of some of the consequences.
Senator Massicotte: Thank you.
[English]
The Chair: I want your reaction to this. I’ve been doing a lot of reading. Defunding the energy sector or capping energy sector emissions, by one account, would cost the Canadian economy $45 billion a year because of the input of tax paid, jobs generated. You know the long list.
In fact, the barrel of oil, if not produced here, will be produced somewhere else anyway. We’re not dealing with the emissions issue. There seems to be a high price tag and maybe not the perceived outcome that was desired.
Is that number anywhere in the ballpark?
Mr. Giroux: It’s difficult to assess without seeing the specific details.
One thing to keep in mind is when the economy is running close to full employment or we are experiencing labour shortages, reducing activity in one sector can be beneficial to sectors that are lacking some capital or some employees. That’s why I’m saying, without seeing the details, it’s difficult to comment as to whether it’s in the ballpark.
The Chair: Yes, because we’re not sure that oil and gas workers are going to become coders, exactly.
Senator Petten: I want to follow up on the productivity problem.
From listening to you, you say you’ll do an analysis of the problem. What role do you think the federal government should play in encouraging the business investment?
Mr. Giroux: Should or could? If I say “should,” then I pronounce on policy proscriptions, which I don’t tend to do.
But “could,” anything that enhances the productive capacity of the economy is a step in the right direction. One can think, for example, about training and education, especially post-secondary education. One can also think about infrastructure to facilitate trade and investment. The government also introduced, many years ago, the scientific research and experimental development tax credit which subsidizes or helps companies that are undertaking these activities. Those are a couple of examples of measures the government can and, in some cases, has taken on multiple occasions.
There’s also granting councils that enhance research and scientific development in Canada. These are all measures that can lead to a more productive economy.
There’s research. There’s also adapting or ensuring that these technologies are adopted by businesses and corporations. There’s a long suite of measures that can be taken.
Senator Petten: Unfortunately, we didn’t see much of that in the budget, did we?
Mr. Giroux: We saw some.
Senator Petten: Some.
Mr. Giroux: But we didn’t see everything that some stakeholders were hoping for.
Senator Petten: Thank you.
Senator Yussuff: Thank you for being here. Let me start with following up on my colleague’s question.
There have been and continue to be measures around helping companies purchase new equipment to improve the productivity in the budget. This is subsequent; the Conservative and Liberal governments have done this. Yet, businesses’ commitment to take up those measures that have been there have been really lax. One of the challenges we have is if business is not modernizing and training its people, productivity is not just going to magically come out of nowhere. It will come out of the investment that companies are making; tax remedies are there in the budget.
How do we explain this challenge we face in the country despite generous tax measures to help this happen? It hasn’t happened. Yet, when we talk about productivity, we seem to skip over this and something else magically will happen.
Isn’t this a key part for businesses to be doing? To be fair and not critical, if they want to increase the productivity — if they want to make a better product and make it faster and more efficiently — don’t they have to invest and use the measures a bit in this budget as it was in a previous budget when Jim Flaherty was the finance minister? I don’t know how many times I’ve had this conversation with him. He put those measures in and we continue to increase those measures, yet we don’t see the take-up.
How do you explain this kind of almost amnesia? When we talk about productivity, nobody seems to want to talk about this.
Mr. Giroux: That’s a very good point. If I had the answer, I don’t think I would be here. I would be so rich that I would be able to drive into the sunset.
Yes, that’s a big question that nobody seems to have a clear answer to. Maybe somebody has the answer and is keeping it quiet or I’m not aware that they have the answer. But it’s a big question mark as to why business investment is not stronger than it is right now. Because improving productivity allows businesses to ultimately get higher and bigger profits, so you would think that it’s a no-brainer.
Is it because of institutional or regulatory obstacles? Is it because labour is so cheap that it’s better to spend on employees by hiring employees rather than investing in machinery and equipment to improve productivity? I don’t think so with labour shortages in some areas of the country.
It is a big mystery to many researchers and think tanks across the country as to why, despite all of the measures, incentives and tax measures, business investment is not higher.
Senator Yussuff: Second question with respect to the metrics that we know and we have available to us, in regard to Canadians’ education level in general, skills and ability — I mean, the country has done a relatively good job in training its people to meet the job market challenge. Of course, you can always argue we could do more. But if you look at the metrics right now in regard to the Canadian population as a whole — their readiness for employment, their skill levels — we have done a relatively good job in that sense.
One area we haven’t done well in is the amount of money invested in research to develop new products in this country. Again, is this a branch plant mentality that we are seeing? Because we know some of these multinationals that operate both in Canada and the United States invest heavily in new products. The auto industry is a classic example. It continues to be very productive in this country because it trains its workforce and it invests in new technology on a constant basis to keep up with the competition.
Why is a certain sector being successful in meeting the challenge and yet we see other sectors completely laissez-faire about how they respond to the kind of challenges we are seeing? How do we deal with the productivity issue given we also have an aging workforce that will bring huge challenges to the future of the country if we don’t modernize our industries to make sure they can do better?
Mr. Giroux: You’re right that the educational achievements in Canada in general are quite good by international standards, better in some provinces than others. On the education side, we’re doing quite well.
It’s true that, generally speaking, big corporations and multinationals tend to have higher productivity than smaller businesses. So why is that? Is it because they can implement the best production methods they have worldwide in their plants domestically and they can learn from their affiliates? Maybe, I don’t have the answer to that question.
But it is indeed a very good question when we have an economy that is not just dependent on multinationals and we have lots of small and medium businesses.
Senator Ringuette: My first question is to stay on this topic. I have been at this committee for 14 years now, and for 14 years we have been asking that same question. Why aren’t Canadians investing — I will add — as much as their counterparts in the U.S.? Because that’s where the biggest difference in numbers is.
Surprisingly, Minister Champagne was here a month ago in front of us with a bill. He gave us some data in regard to the investment in Canada. Relatively, it seems to be moving forward.
My question is not a subjective one. Is there a way to analyze, in regard to productivity, the businesses in Canada that show a greater productivity and management bonuses? Is there a link there? Can you make a link with numbers? Is it possible to analyze that?
Mr. Giroux: I’m not sure if the data exists, but one theory suggests that management skills drive a lot of productivity. So it’s not just the machinery and equipment but also the management acumen of supervisors and managers. Whether that is linked to bonuses and pay, I’m not sure. I would be curious to see the data. I don’t know if there is a way to find data at the granular enough level to provide that link.
Senator Ringuette: Thank you. The next one is not a question, but it’s more of a comment because I went through your research on the minimum tax that was proposed. I was quickly trying to go to where I read it, but you said it in your speech. You said that in reality, 0.13% of the population is going to be affected by these measures.
Mr. Giroux: I was referring to the capital gains changes in yesterday’s budget when I said 0.13%. In this, it’s a decimal after “less than 1%,” but it’s not that exact number. It’s probably even lower than that.
Senator Ringuette: So guesstimate what would be the number? Lower than 0.1%?
Mr. Giroux: Yes, about 0.1%.
Senator Ringuette: Well, that answers my question. Thank you.
Senator Martin: Mr. Giroux, very nice to see you. Thank you very much for being here.
One of the main topics I have heard come up so far is Canada’s productivity deficit, and that is a growing concern. You said you’re undertaking a review, an analysis. My first question related to that is: In your analysis, will you be looking at the measures in the budget, the $52.9 million dedicated, that directly impact or address productivity?
Mr. Giroux: Thank you, senator. Just to be clear, we will be undertaking a review of the budget itself, not of the productivity issues.
Senator Martin: Is that something you can also do?
Mr. Giroux: Productivity in general?
Senator Martin: Looking at the budget with a lens of how that will impact Canada’s productivity, certain measures in the budget.
Mr. Giroux: We can certainly identify measures that are more directly targeted to increasing productivity. We can put that in our analysis of the budget.
Senator Martin: Thank you. That would be very helpful.
I have one other question. Yesterday, the CBC reported on the number of times during its reporting of the budget that the government achieved a soft landing, suggesting there is no likelihood for a recession. Do you share those sentiments?
Mr. Giroux: I would say probably not the government but the economy has achieved a soft landing. I wouldn’t want to give the credit entirely to the government, but others will probably want to do so. I do share the assessment that we are likely to experience a soft landing rather than a recession.
Senator Martin: Thank you.
The Chair: I want to follow up on that productivity issue because we keep going around and we have done reports on it.
I’m just wondering what your reaction was when the Deputy Governor of the Bank of Canada said the time had come to break the glass in case of emergency, that we are actually facing a national emergency on the question of productivity. Did that ring true to you?
Mr. Giroux: I thought that was quite an image, but it’s not inaccurate. I would not have used the same analogy, but to each their own analogy. I probably would have used something less illustrative, but yes, I share her assessment for sure.
The Chair: Thank you.
Senator C. Deacon: Thank you, Mr. Giroux, for being with us. We appreciate your work.
I’m going to stay on the same theme but look at it from a regulatory lens. One of the biggest tools the government uses to protect Canadians, to protect the environment and to achieve certain ends is regulations. Canada is an Organisation for EconomicCo-operation and Development, or OECD, leading country in terms of the amount of regulation we have in place at federal, provincial and municipal levels. Many of our regulations are command-and-control regulations, which define the outcome — not just the outcome you must achieve, but the process you must follow to achieve that outcome, which, by definition, eliminates the ability to innovate.
I think this issue is a big one, regardless of the party in power, to break through this cultural problem we have developed in Canada because it’s at all levels of government. It’s a cultural issue that we over-regulate and we don’t use other things like standards, codes of practice and other more agile tools.
Have you looked at the cost to the economy versus cost to government? It’s easy for government to put in place a regulation, but does it actually accomplish anything in the economy? Is it solving the problem, and is it solving the problem cost efficiently? That’s a hard thing to measure — I know that — but this is one of the biggest things we have to break through if we’re going to start to move the productivity needle because it’s an economic drag on most businesses.
Mr. Giroux: Very interesting question. I think the answer is in your question when you say it’s very difficult to look at. We have not comprehensively looked at whether specific types of regulations or regulations in general are cost-effective.
However, I know there is a Treasury Board directive that says exactly that — there should be a cost assessment of any new regulations to determine whether they are cost-effective. We have not seen that. We don’t get to see that, generally speaking, but I doubt that many of these regulations would pass that test if it were done.
Senator C. Deacon: Would someone in your office be kind enough to link that directive to us?
Mr. Giroux: There are many people kind enough in my office to do that, I’m sure.
Senator C. Deacon: I would be grateful if you could. That would be very helpful. Thank you, Mr. Giroux.
The Chair: We’re going to go into a second round, but before we do — because Senator Deacon and I talk about this at committee all the time, but so does everybody else here. We have heard from many witnesses that the regulations are a problem. The notion that government will solve all problems for us and we don’t need the private sector to do it, there is a whole list of things.
But what we’ve heard from people like Jim Balsillie and many others is that it’s attitude. We don’t think big enough, and when government supports or subsidizes companies, it should take them to a certain level but sort of not past, and then companies just go, “Okay, well, I have made my million bucks; now I’m going to sell and move on.”
Do you see that? Do you find that attitude? I think Senator Deacon referred to it as a cultural issue, but we keep hearing about it from people.
Mr. Giroux: We see that. We hear anecdotes about people starting businesses and wishing to get to a certain size so they can be bought by somebody else and benefit from certain exemptions.
We’ve also heard for a number of years that there is a level beyond which corporations stop benefiting from the small business tax rate, and we decided a year or so ago to look at the data. Is there such a thing as businesses refraining from growing? Apparently, it does happen. There is what is called a kink in the data where there is a clustering of businesses close to the limit of the small deduction rate and then very few after that, which is contrary to what normal distribution would suggest.
There is no reason why businesses should remain at a certain size if there is a normal, functioning economy. People behave as you would expect according to the incentives that you give them.
Senator C. Deacon: Is there a report on that?
Mr. Giroux: Yes.
The Chair: Would you link Senator Deacon to that as well?
Mr. Giroux: Yes.
The Chair: That would be very helpful because we have really wrestled with that question. It sounds like an interesting and bizarre little insight into what goes on.
Senator Loffreda: Mr. Giroux, we have an important bill to study. As you likely know, Bill S-243 is an environmental bill in the Canadian Senate known as the climate-aligned finance act. The financial impacts are not easy to determine without a deep‑dive analysis. I see you’re nodding and acknowledging that.
I put a few questions forward to gather information about the potential economic, financial and environmental implications of the bill, as well as its alignment with government objectives and international practices, which you may not answer at this point in time. But I do know in the Finance Committee, which we’ve often had the pleasure of having you there over the years, you always get back to us with answers. I think it would help our judgment on the matter because it’s a complicated issue, as you know, not easy to analyze, especially not during a one- or two-hour session with the answers we obtain.
Quickly, I would like to know about the estimated economic impact of the provisions in the bill, the effect and the overall stability of the financial sector, the potential job losses or job creation resulting from the implementation of this bill, the potential risks and benefits associated with the proposed measures to promote sustainable finance outlined in the bill, the competitiveness of Canadian businesses operating in the fossil fuels sector — because we all want a just transition, as we say — the estimated potential revenue or cost of implications for the government resulting from the implementation of this bill and, finally, the comparative analysis of similar legislation in other jurisdictions and its impact on the financial sector and on our economy.
If you can answer any of those questions at this point in time, I would welcome your comments. If not, in the future, like we’ve done at the Finance Committee, if you can take a deep dive into this and maybe enlighten us a little bit with respect to all of this.
Mr. Giroux: Thank you, senator. You’re right on one thing — I cannot answer your questions right away. Our office could maybe attempt to answer some of your questions, but given the scope of them, it’s something that would probably require a motion from a committee of the Senate or the House.
The Chair: We’ll discuss that at another point, then. Thank you. I know you keep trying on these things.
Senator Marshall: Thank you very much. I want to go back to the productivity issue because there was some discussion about why businesses aren’t investing in Canada. I think from this committee’s perspective, we’ve had a lot of witnesses who have said they provided advice to government with items of concern, such as taxes are too high or they need regulatory changes. They say the government listens but they don’t really hear or make changes.
This is putting you on the spot. To me, the productivity problem is because businesses don’t want to invest in Canada. The reason why they don’t want to invest in Canada is because they don’t have confidence in the government.
Government is imposing all of these additional taxes now, so they’re imposing them on businesses and the high-income earners. We all know there’s not enough money in those businesses and high-income earners to look after the massive debt that the government has racked up.
Don’t you think that it comes down to whether or not you have confidence in the government and whether you have confidence in your country? What I’m sensing and hearing from the witnesses is that they’ve started to lose confidence in the government. That’s why they don’t want to invest in Canada. That’s why they want to go to other jurisdictions.
Mr. Giroux: There are two things when decisions to invest are made. Hard facts suggest that Canada is a great place — stable, safe and all that. There’s also perception. That’s probably where your comment comes into play. Perception might be not as good as facts would suggest.
There may be a perception that governments — not just the federal, but other levels of government — are preoccupied with the tax burden of the middle class and not so much about those who are at the higher end of the spectrum. That may cool down perspectives on investments in the country, even though we’re talking about a few thousand individuals; they’re often the ones who make these decisions.
Perception sometimes may trump reality and cold, hard facts. That may be related to comments you made and heard from other witnesses, that there’s a perception that high net worth individuals are not necessarily as welcome or feel that Canada is such a great place; it may not be supported by facts, but there could be that perception.
Senator Marshall: Thank you.
[Translation]
Senator Bellemare: I will continue on the subject of productivity. Mr. Giroux, I’d like to hear what you have to say on what I think is the blind spot of an issue that is rarely considered. In my previous role, I looked at the issue of workforce training.
Data from Statistics Canada has shown that investment in essential skills development had a much greater impact on growth than an equivalent investment in machinery and equipment. I just did a survey that showed that Canadians are aware of the fact that they need to get training. The vast majority of Canadians want to get training, but they don’t have the time or the money to do it. In particular, they want to develop their digital skills.
In your experience, why is it that, in all our debates, we don’t see things from a training perspective? There is a link with investment in equipment. If you invest in machinery and you don’t invest in training, you won’t be able to use that machinery. What are your comments on this?
Mr. Giroux: It’s difficult for me to answer that question properly, given your expertise. I feel like I’m being asked a trick question. Here is my perspective. We tend to see training as a matter of secondary and post-secondary education. Once you’ve completed your studies, you have the skills, you’re in the job market and everything should be fine for the next 40 or 45 years. However, training is something that should be ongoing — hence the use of the term “continuing education,” although this aspect is neglected. On the other hand, if it were that easy to take part in continuing education, governments that force companies to provide training, like Quebec with its payroll tax on companies that don’t devote enough resources to training, should have higher productivity. However, I don’t think that’s really the case.
Here’s another mystery in squaring the productivity circle. As you so aptly say, it’s not enough to have machinery and equipment; without a trained workforce to operate them, those big machines and computers are useless.
Senator Bellemare: How do we proceed in Canada? That’s the whole issue.
Mr. Giroux: Yes.
Senator Bellemare: We know several avenues for improving productivity. However, the challenge lies in knowing how to put these actions and policies into motion.
Mr. Giroux: A lot of money is spent and invested in these sectors. In market agreements, hundreds of millions of dollars a year are transferred to the provinces and territories for workforce training. Tax incentives for training are provided by the federal government and the provinces. Perhaps training is not yet at the level it should be.
Senator Bellemare: The needs are still there. In the survey, it was very clear that people want training. The demand is there, but it needs to be met.
Senator Massicotte: I would like to come back to Bill S-243. I understand that the issue is very deep, but I will limit my question and be more specific to give you a chance to give your opinion.
The sector is very important and a transition will bring major changes. Should governance be tighter and more detailed than it is currently? I’ve always favoured people who propose additional measures, especially on the government side. More and more is added, and I fear that it will be the same in this case. The Bank of Canada gave its opinion, saying that changes to the governance model weren’t really necessary. Another organization said it would do it if asked, without knowing why. The competence of the banks’ boards of directors is important. No one pointed out that we had a problem. But they’re trying to make big changes because they’re smarter than the others. I have trouble with this concept. I’m throwing the ball to you to see your response.
Mr. Giroux: If your goal is to use a bill to limit or eliminate funding to financial institutions in certain sectors, in a market or in an economy like Canada’s, you can try. However, in sectors where banks would no longer be able to lend or would find it more difficult to do so, I am sure that other financial institutions would be more than happy to fill the void. Some American banks can carry out transactions and lend funds to Canadian companies without much problem. Some European banks would surely be prepared to do the same.
I haven’t studied the bill in detail, but if the goal is to limit funding or impose requirements on financial institutions that fund certain sectors where greenhouse gases are emitted, it is highly likely that this vacuum would be filled by foreign financial institutions. With electronic transactions, that is not very difficult to do.
Senator Massicotte: I’d like to change the subject a bit. One of the main criteria used to give an opinion on the budget is GDP growth in relation to the debt. The government says that this ratio is very favourable. It’s possible that GDP will grow less than the debt, but other experts have said there was a problem because, if we do nothing, the deficit will be much higher than economic growth. So we have a problem. Do you agree?
Mr. Giroux: I don’t think the diagnosis is that pessimistic. However, what we’re seeing with the current government is that, with every budget or every economic update, we’re presented with the prospect of a falling debt-to-GDP ratio or a declining deficit. However, with each subsequent update of the economic statement, the targets are revised upwards a little. Last autumn, a deficit of less than $20 billion was forecast for 2028–2029. However, the deficit for this year is $20 billion.
Every time the government updates its own outlook or forecast, spending is revised upwards and so is the deficit, generally speaking. It’s the same thing with the size of the public service: We’re told it’s going to shrink, but when the departmental plans are tabled, they’re revised, and the public service continues to grow. The figures on their own are not worrisome, as we’re in a good financial position compared with other G7 countries, but the pattern where our spending is revised upwards is recurrent. That seems to be the problem. The government’s forecasts are not being followed. The government keeps revising its spending outlook upwards.
Senator Massicotte: Thank you.
[English]
Senator Bellemare: I wanted a clarification on the fact that we use the net debt of the federal government and we compare it with other countries. I was wondering, is it a good indicator? Because we are a confederation and we have provinces. With the debt of the federal government, what’s the proper comparison?
Mr. Giroux: The best comparison is looking at the overall government sector and its debt. But to ensure that we have proper international comparisons, what is often done is subtracting the assets of the Canada and Quebec pension plans to ensure comparability with other countries. Once somebody does that, our overall government net debt goes down significantly and we’re in a very good position internationally.
Senator Yussuff: Quite often when we have this conversation at this committee I’m not sure what we’re talking about, so let me put a couple of facts on the table.
This challenge of productivity has been going on for decades. It didn’t start yesterday. I would say when you compare it to OECD countries, which is one of the measurements we’ve been using to try to gauge how well we’re doing, there was a period when we made some significant progress going back to the 1980s and 1990s and then we’re stuck.
To be fair, successive governments from different political stripes have tried many different things. We haven’t seemed to get it right because we’re still at the same place and it’s a huge problem for the country. This didn’t happen yesterday. This has been going on for a while. I want to put that on the record so we don’t have any illusion about when the problem was assessed.
Mr. Giroux: Yes, I don’t think it started in 2015.
Senator Yussuff: Exactly. That’s my point. To be fair to my friend, let’s call an apple and orange what they are.
Going forward, I do want to recognize something, which we don’t do because we say things in this committee and they get translated in the wrong way. There are some sectors in the economy that are doing really well, productivity-wise. The banking sector has innovated, and continues to show resilience in regard to how it manages its force. We see this on a yearly basis, quarterly basis what their profit margins have been. They’re doing very well. I could make the same argument for the auto sector, maybe the parts sector in the country which is highly significant in terms of our export of foreign currency — very productive. Those sectors would argue because they invest a lot to ensure they remain competitive compared to their American and European counterparts.
When we talk about this issue, wouldn’t it be fair for us to pinpoint where we have a problem and maybe what are the analyses telling us about why that problem remains so stubborn within that sector versus the way we tend to do it, where we lump it all together and it doesn’t help us politically?
Mr. Giroux: These are very good points, senator. I can’t disagree with that. I’m not sure whether the facts that you’re quoting are exact. I know some sectors are doing well. I don’t know about banking and auto in particular, but it’s true that it’s not an evenly poor performance across sectors. That’s something that does require a much more refined analysis, looking at the productivity issue. It’s something that requires a real deep dive.
Senator Yussuff: One other thing. When you started out in your opening remarks because you were attempting to answer a question we were struggling with here a week ago on the issue of what impact these tax changes would have on the charitable sector, I said then and I’ll repeat it, we don’t have enough data to tell us what we need to know. To be fair, I understand there are some concerns and I share that. The charitable sector plays an important role in the economy. We wouldn’t want to do anything to harm them.
Until we know, it wouldn’t be fair to speculate on what we think might be happening. The patient might look sick but maybe it’s not a result of being sick. Maybe they were drunk last night and that’s why they look sick.
Mr. Giroux: These are good points. However, changes made in the budget suggest that the government probably was subjected to some comments or received some representation or had a second look at the data.
Senator Yussuff: To recalibrate?
Mr. Giroux: Quite possibly.
Senator Yussuff: Eventually we’ll get you back here and you’ll tell us what the data tells us.
Mr. Giroux: If I can get my hands on enough data for that.
Senator C. Deacon: Again, thank you, Mr. Giroux. We really appreciate your work and the work of your team.
To the point of digitizing government services again and the articles in The Globe and Mail on the weekend identifying that we’re back to what it was like 30 years ago in terms of the number of federal employees per thousand Canadians. But the problem is not a federal problem. It’s a national problem of having a bigger public service than perhaps we can afford at all levels of government. That was made clear in the series of articles, I thought.
We have a challenge in getting through to digitizing government service. Rather than analog human delivery, using digital tools that we use effectively in every moment of our lives, on our phones, in our work and in every other area except for public services.
Your work is to analyze the cost of programs and government federally in Canada. How do we get a comparison to the cost of delivering X type of service in Canada to Canadians using an analog method relative to the cost of that similar service delivered in another country that has digitized that practice? How do we get that analysis to make it clear that the upfront cost and effort that will be required to make those changes, which other countries are seeing the benefit of in spades, is something that we just have to do here? Because without that, I’m fearful we’ll continue to push a string that is not going to get us very far very fast. Wherever we get to, we’re going to get there very expensively.
Mr. Giroux: I think we can look internally at different jurisdictions operating differently and delivering comparable services in a more or less digital way. We can also look at international comparisons: collecting taxes are collecting taxes. Different context, different legal frameworks, yes, but answering phone calls from angry taxpayers, a Norwegian angry taxpayer is probably no different from an angry taxpayer from Newfoundland. I would guess. What do I know?
I’m trying to say there are international comparisons that are possible to obtain. There are many countries in the OECD that make available lots of data publicly or with just a phone call are happy to share that information. It is possible to do these comparisons. But I think when you try to digitize services, you also have to make them relatively simple. Because if you look at the tax return, I’ve done my fair share of tax returns recently, and it’s very complex. It’s not easy to digitize something as complex as a tax return or filing.
Senator C. Deacon: Within that, what we found is countries that are doing this right changed their policies, their processes and their procedures to become more streamlined in order to get a digital service that is, in fact, intuitive. That is not something that Canada does well. We’ve spoken about that, the Treasury Board directive. But our regulations can’t be digitized very well if we just stick with what we have.
Mr. Giroux: Yes.
Senator C. Deacon: That is a key element of success: changing policies at the same time as digitizing.
Mr. Giroux: Yes, and making them more user-centric. It’s easy, it’s buzzwords, but designing programs with the user in mind as opposed to providing guarantees and safeguards for the administrators of these programs.
Senator C. Deacon: Every business in the world that succeeds does that. Thanks.
The Chair: I would like to follow up on our discussion about the disincentives for business investment and come back to the question of capital gains. Right now, my understanding is about half of capital gains are taxed. The budget would take it to about two thirds.
What we’re hearing from companies, even in the new digital space like Shopify, this is a real disincentive. The money they use to invest and lead to capital gains, the money they use has already been taxed. Now they feel like this money will be taxed twice. That is, in their words, a disincentive to continue to invest. Are they correct?
Mr. Giroux: The moment you increase tax rates, you introduce a disincentive to generate that type of income. The question is whether it’s too much of a disincentive and will lead to negative impacts. With the proposed changes to the capital gains, there are many things involved. There’s a $250,000 exemption. There’s also an increase in the lifetime capital gain exemption for small businesses, and there are other exemptions for other types of businesses.
It’s something that requires a careful analysis before saying, “Yes, it will have absolutely a negative impact.” It will have negative impacts for big capital gains, but whether these will be more than offset by the positive incentives of increasing the capital gains exemption, it’s hard to pronounce on them.
The Chair: Some of them are pronouncing already on that today having looked at it because they know their own books.
Senator Loffreda: We talked a lot about investment. I just want to clarify a point and a question. If I take the last OECD International Direct Investment Statistics database, the top recipients of foreign direct investment inflows worldwide in quarter three, 2023, were the United States with $73 billion U.S.; Ireland, second, with $26 billion U.S.; and Canada and Brazil equally ranked third-largest foreign direct investment recipient with $15 billion U.S.
Now, what we heard here today, you would never guess that we were third in the world with foreign direct investment into Canada. The problem lies in the domestic investment, our domestic businesses. I agree with everybody about the problems put forward.
My question is this: Why are we so successful in attracting foreign direct investment despite our tax rates? If we look at our corporate tax rates, we’re among the most competitive in the world. Even when we talk about capital gains, the first 250 is still at 50. Over 250, individuals won’t be affected because you can plan accordingly. It’s the corporations and the trusts that will be affected, and who is happy with the tax increase? Obviously, nobody will be happy.
But why are we so successful in attracting foreign direct investment yet our domestic entrepreneurs don’t invest into Canada despite the low tax rates we have on the corporate front? You’ve analyzed it, and I know you do a lot of insightful work and you know the numbers by heart. I’d like to hear your thoughts on that.
Mr. Giroux: The numbers you quoted are for one quarter, so one would need to look at the longer-term trend. You’re right, the world sees Canada as a great place to invest, but we seem to be self-flagellating a lot and not investing ourselves collectively as much as we should. There seems to be a big disconnect, which probably goes back to the question that Senator Marshall asked me. It’s an issue of perception. The world sees us in a very positive way. We don’t seem to see ourselves in such a positive light. There seems to be a big disconnect there.
Senator Loffreda: Thank you.
The Chair: Thank you very much, Mr. Giroux. We appreciate you taking these balls coming from all sides of the field and handling them. It’s always a pleasure to have you.
Our thanks to Matt Dong and Katarina Michalyshyn for being here doing backup just in case he didn’t know the answer. I guess he got most of them right. Thanks so much.
(The committee adjourned.)