THE STANDING SENATE COMMITTEE ON NATIONAL FINANCE
EVIDENCE
OTTAWA, Tuesday, November 22, 2022
The Standing Senate Committee on National Finance met with videoconference this day at 8:46 a.m. [ET] to study the subject matter of Bill C-32, An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022.
Senator Percy Mockler (Chair) in the chair.
[English]
The Chair: I wish to welcome all the senators as well as the viewers across the country who are watching us on sencanada.ca.
[Translation]
My name is Percy Mockler, senator from New Brunswick and chair of the Senate Committee on National Finance. Now, I would like to do a round table and ask my colleagues to introduce themselves.
Senator Gignac: Clément Gignac, Quebec.
Senator Loffreda: Tony Loffreda, Quebec.
[English]
Senator Bovey: Patricia Bovey, senator from Manitoba.
Senator Duncan: Pat Duncan, senator from the Yukon.
Senator Pate: Kim Pate from the beautiful shores of the Kitchissippi of the unceded, unsurrendered territory of the Algonquin Anishinaabeg.
[Translation]
Senator Moncion: Lucie Moncion, Ontario.
[English]
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
The Chair: Thank you, honourable senators.
This morning, we begin our study on the subject matter of Bill C-32, An Act to implement certain provisions of the Fall Economic Statement tabled in Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022, referred to this committee on November 17, 2022 by the Senate of Canada.
[Translation]
We are pleased once again this morning to welcome Mr. Yves Giroux, Parliamentary Budget Office. On behalf of the Senate Committee on National Finance, many thanks to you and your team for accepting our invitation once again, as you always do, to illustrate to Canadians the transparency, accountability, reliability and predictability of budgets.
[English]
He is accompanied by Ms. Kristina Grinshpoon, Director, Fiscal Analysis. Welcome to both of you, and thank you for accepting our invitation to appear in front of the Standing Senate Committee on National Finance. It is always very enlightening, Mr. Giroux, to welcome you and your team. Your testimony always helps us, on behalf of all Canadians, to focus on the main principles of transparency, accountability, reliability and predictability.
[Translation]
You now have the floor for your opening remarks, and then the senators will have some questions. Go ahead, Mr. Giroux.
[English]
Yves Giroux, Parliamentary Budget Officer, Office of the Parliamentary Budget Officer: Thank you, Mr. Chair. Honourable senators, thank you for the invitation to appear before you today. We’re pleased to be here to discuss our analysis of Bill C-32, the Fall Economic Statement implementation act, which we published in our report titled Fall Economic Statement 2022 — Issues for Parliamentarians on November 15, 2022.
With me today, I have Kristina Grinshpoon, Director of Fiscal Analysis.
In accordance with the PBO’s legislative mandate to provide impartial independent analysis to help parliamentarians fulfill their constitutional role, which consists of holding government accountable, our report on the Fall Economic Statement highlights key issues to assist parliamentarians in their budget deliberations.
In terms of funding and new budgetary measures, revisions to the private-sector economic outlook and fiscal developments in the Fall Economic Statement provide a total of $81.2 billion in new fiscal room, which finances $52.2 billion in net new measures over 2022-23 to 2027-28. Of note is the government’s $4-billion enhancement to the Canada workers benefit, which will automatically provide advance payments to individuals who qualified for the benefit in the previous tax year. The substantial cost of this measure is largely due to the government’s policy decision not to recoup these advance payments when recipients’ incomes rise and they become ineligible for benefits or eligible for lower benefits. Not requiring repayment of federal benefits for ineligible individuals is a pronounced departure from the existing federal tax and transfer system.
[Translation]
Further, the Government identified $14.2 billion in new measures without providing specific details on this spending. This spending represents 27% of all new measures, $52.2 billion, in the Fall Economic Statement 2022. This lack of transparency creates challenges for parliamentarians and members of the public when reviewing the government's spending plans.
The timeliness of financial reporting also continues to present challenges. This year, the Public Accounts of Canada were tabled on October 27, seven months after the close of the fiscal year. Canada continues to fall short of the standard for advanced practice in the International Monetary Fund’s financial reporting guidelines, which recommends that government publish their annual financial statements within six months. Parliamentarians may wish to request that the Government publish the Public Accounts and Departmental Results Reports, which have not yet been published, within six months of the close of the fiscal year.
Finally, the government highlighted that it exceeded its first spending review target of $3.0 billion by achieving savings of $3.8 billion from lower-than-anticipated spending on certain COVID-19 support measures in the previous fiscal year, 2021-22. However, the source of this savings is inconsistent with the intention and timing that was announced in Budget 2022. The Fall Economic Statement provided no explanation for this discrepancy.
This puts into question the credibility of the yet-to-be-launched Strategic Policy Review supposed to generate savings of $6 billion by 2026-27 and $3 billion in annual savings.
Ms. Grinshpoon and I will be pleased to answer any questions you may have regarding our analysis of the Fall Economic Statement or other PBO work.
The Chair: Thank you very much, Mr. Giroux.
[English]
Honourable senators, now we will proceed to questions. I would like to share with you that you will have a maximum of five minutes each for only one round of questions. We do have another panel appearing at 10 a.m.; therefore, please ask your questions directly to the witnesses. Please respond concisely. The clerk will inform me when the time is over.
Senator Marshall: Thank you, Mr. Giroux and your staff, for being here this morning, and thank you for all the excellent reports you’re producing.
My first question is on Indigenous-related spending; it’s mentioned in Annex 1 of the Fall Economic Statement. Is there any way to track that funding when you look at the estimates for the two Indigenous-related departments? There are quite a few claims and different kinds of treaties. The list just goes on and on.
Is there any way that parliamentarians can track that money? Some of the amounts are quite large — $20 billion, $5 billion. They show up as quite large items. Is there any way to track that?
Mr. Giroux: That’s a good question, because we sometimes struggle to track the money ourselves, given that the reconciliation between the budget, the Fall Economic Statement, the Main Estimates, the Supplementary Estimates and the Departmental Plans is quite a difficult and complex exercise. The best way to ensure that you can track that spending is probably to have the departmental officials — the deputy minister and his or her officials — appear before the committee to provide you with a clear reconciliation and provide answers to specific questions you may have.
Senator Marshall: In your report, you talk about the $5.7 billion and the $8.5 billion. You’re questioning it with regard to fiscal transparency. Is that a problem as you look at other financial documents? I know in the estimates of Treasury Board, or maybe it was Supplementary Estimates, there was a reference to “contingency fund.” Is that an issue just for the Fall Economic Statement, or is it more pervasive than that?
Mr. Giroux: I would say it is more pervasive than that; it is not just specific to the Fall Economic Statement. Every time there is a budget, a fall statement or any other government document, there is not full transparency, especially when it comes to contingent liabilities or funding set aside for future spending decisions. So we are left with, on the one hand, having that line appear — contingent liabilities — or upcoming decision pressures.
But when funding related to these set-asides is announced, it is rare that we will be provided with that connection by the government. They will rarely say that funding for this was provided in a particular line, the set-aside for upcoming decisions or pressures that are known, so we are left with the issue of finding the exact source of funds. The government will often say that it was provided for in the budget — Budget 2021 or Budget 2022 — but it is not always transparent exactly which line.
Senator Marshall: To go back to a problem we saw last year, is it possible the funding is being used as duplicate funding; is that a risk?
Mr. Giroux: It’s always a risk when we don’t know the exact source of funds, but I would not suggest that it leads to any misappropriation of funds. It’s rather a question of transparency and figuring out which line —
Senator Marshall: Trying to follow it.
Mr. Giroux: Yes.
Senator Marshall: Okay.
My next question is about the tax on shares buybacks — the buyback of shares. Have you done any work there? It seems the government is going to increase taxes on corporations to encourage them to invest, which seems to be counterproductive. Have you looked at that area at all? For example, why 2% and not 1%?
Mr. Giroux: The question as to why 2% versus 1% is probably a question best addressed to the minister herself.
We have looked at estimating the revenue generated by this. I’m not sure whether we’ll be able to provide an accurate estimate, because it’s difficult to have reliable data on share buybacks, especially the behaviour of firms after the tax comes into effect. We suspect that there will be a lot of advance share buybacks before the provision comes into force so that fewer share buybacks are subjected to the tax.
Senator Marshall: Are you aware of any target the government has set with regard to the level of investment they would like to see as a result of imposing this tax?
Mr. Giroux: No, I am not aware of any specific target. In fact, I would be surprised if there were any specific target. My personal suspicion is that it is probably a statement of intentions rather than having a specific target in mind.
Senator Marshall: Mr. Giroux, I have a problem with all of these programs that the government is funding to help people cope with inflation. A pot of money is given out for the GST rebate; a pot of money is given out for something else; different groups are being impacted. Is there any way to assess who is receiving this funding? Is it the same groups always receiving the funding, or is it spread around more than that? Is there any way to determine if there are groups of people who are in financial need who aren’t really receiving anything or a very minimal amount? I’m looking at it from an overall perspective as opposed to just individual programs.
Mr. Giroux: That’s an interesting question. Given that most of these programs that are providing relief for inflation are directed at those at the lower end of the income scale, I would think that several of these recipients get more than one type of benefit. For example, because of the income threshold, the amount of $500 for rent is probably going to the same people who will benefit from the doubling of the GST credit. There will probably be a lot of recouping between these benefits, given that they are concentrated at an income level that’s below the cut-off for the GST credit.
Senator Marshall: Is there any way to assess that?
Mr. Giroux: Yes, it’s certainly possible. If the committee wishes us to do that, we could certainly look at it.
Senator Marshall: Thank you.
[Translation]
Senator Moncion: Welcome to you both. It is always a pleasure to see you. My page pertains to page 7of your report, where you state:
Of note is the Government’s $4 billion enhancement to the Canada Workers Benefit . . . .
The last sentence reads as follows:
Not requiring repayment of federal benefits for ineligible individuals is a pronounced departure from the existing federal tax and transfer system.
Can you explain this variance and the measure?
Mr. Giroux: The measure that is not spelled out in the economic update is intended to provide the Canada Workers Benefit in advance, based on what is known about workers’ income profile. If a worker qualifies for the Canada Workers Benefit, the government would pay that person a larger share of the benefit in advance for the current year.
In terms of tax benefits, under normal circumstances, when a person submits their income tax return, if their income exceeds the eligibility threshold, the government would recover part or all of the excess amounts paid. Paying certain benefits in advance is not out of the ordinary or unprecedented in the tax system.
What is unprecedented is allowing people to keep those amounts if they were not eligible, for instance because their income exceeded the thresholds. This can give rise to situations in which a person’s income increases from $20,000, and is therefore eligible for the Canada Workers Benefit, and earns $50,000 or $70,000 in a better year. One can imagine all kinds of scenarios with higher amounts, but the government considers that you received a few hundred dollars of extra benefits to which you were not entitled, but lets you keep that money.
That is what the sentence means. This is a significant departure from the tax system and it explains why all of this costs $4 billion over five or six years, which unfortunately was not explicitly stated in the fall update. The fall update referred to the advance payment of the Canada Workers Benefit and indicated a cost, but did not indicate anywhere that the government would not try to recover those amounts for people whose income was above the maximum income threshold.
Senator Moncion: You are saying this is unprecedented?
Mr. Giroux: To my knowledge, it is unprecedented in the federal tax system. It might have happened with some COVID-19 benefits, when the government changed the rules after the benefits were introduced to avoid unfortunate situations, but yes, it is unprecedented in the tax system overall.
Senator Moncion: Thank you. My second question pertains to page 9. The last sentence says:
Moreover, the Government has provided $2.25 billion in additional funding over 6 years for more effective service delivery, rather than reducing spending by reviewing the effectiveness of its operations.
I really like that sentence, because it seems that the government somehow forgot to rejig its operations. But I am trying to understand. In the context of your report, you are suggesting that the government is investing more money and doing less work to modify its operations. Do you think those are real savings?
Mr. Giroux: What I was referring to in this sentence is that the government is behind schedule in delivering several types of services. We saw the catastrophe with passports, for instance, the delays at airports, and delays in processing immigration applications, Old Age Security, employment insurance. The problems seem to be generalized, not to mention access to information.
Rather than making adjustments to service delivery or the method of delivery, the government seems to be more inclined to increase resources without reviewing productivity. All the while we have been told for nearly two years that the public service is more effective with telework or hybrid work. I wanted to point out that there seems to be a disconnect between reality and what we are being told.
Senator Moncion: Thank you very much. That is an excellent explanation, and it would have been interesting to see it written that way. I understand though that some things cannot necessarily be put in writing. It is unfortunate because I had other questions.
Senator Gignac: Welcome once again to our committee, Mr. Giroux. Your presence is always appreciated. I really like the title of your report, Fall Economic Statement 2022: Issues for Parliamentarians. We will certainly see our fair share in reviewing Bill C-32. I have three questions in five minutes. The first is that an incredible amount of fiscal room has appeared since the spring budget. We are talking about roughly $82 billion in fiscal room that has suddenly appeared and that suggests that inflation is a valuable source for the government. Can you explain where this fiscal room comes from? Is it simply because the government underestimated inflation?
Mr. Giroux: We estimate that about half comes from inflation, which is higher than expected. The other half of this considerable fiscal room comes from economic growth, which is also stronger than expected. It is a combination of higher inflation and a stronger economic recovery than was anticipated a number of months ago.
Senator Gignac: Here is my second question. You said that of that $81 billion in fiscal room, the government actually used $52 billion in new measures, and you pointed out that close to 40% of those new measures are off cycle. Can you please explain what you mean by “off cycle”?
Mr. Giroux: It is a common term in financial planning. The government has a big opportunity every year to make announcements or make funding decisions for various programs or make decisions regarding taxation: that is the budget. It also has a second opportunity, which is the fall economic statement, which was traditionally just an update on the economic and budget situation, but which has evolved over time to become another opportunity for governments to make announcements on spending or taxation.
These are the two key events in the year when governments make announcements. Announcements or decisions that are off cycle are those made outside of those two events. For example, the government tabled a budget in April, but in May, June, July and August it continued to make decisions and spend money. It also published a list that we believe is exhaustive at the end of the economic update of all the decisions made for which no funding had been earmarked in the budget. That is what off cycle decisions are.
Senator Gignac: [Technical difficulties] regarding increases in tax credits, for instance. In short, the government has $80 billion more in fiscal room than it did in the spring, and more than $50 billion has been used, $20 billion of which was spent between the spring and the Fall Economic Statement 2022. Thank you for your explanations.
My third question is that you are somewhat critical on various aspects. Your role is to inform us and we thank you for that. When the government says it has already achieved its spending reduction target of $3 billion, it is talking about $3.8 billion in savings, but you said that is not exactly the same definition it used in the spring budget. Can you clarify that? Did they really save that money or is it because COVID-19 did not cost as much as had been expected?
Mr. Giroux: It is because COVID-19 did not cost as much as expected. These are not real savings. In the 2022 budget, the government committed to reducing expenditures in 2023-24; that was in April 2022. The fiscal year was already over, so in November the government looked at what had happened during the year and realized that it had spent a bit less than expected for the COVID-19 pandemic. So the government said, “This has already happened, so we will take credit for not reviewing expenditures for 2023-24 as we had promised to do a few months ago.” The government relied on what had already happened to avoid reducing expenditures for the coming year as it had promised.
Senator Gignac: I think we will have some good questions for the minister if she appears before the committee.
The Chair: Yes, we will certainly be seeing the minister.
[English]
Senator Smith: I would like to follow up on some of the questions in terms of the speed with which you get information compared to the government getting it out in time. In your analysis of the Fall Economic Statement, you noted a sizable difference in the budgetary balance between the government and your office projections for 2027-28. From 2022-23 to 2027-28, your office suggests that the additional spending in the Fall Economic Statement would make the PBO-projected deficits on average $4.3 billion higher than the government outlook. Can you comment and help us understand why there would be such a discrepancy between the projections of your office and the government?
I recognize your job is to monitor what is going on in the government. Is the government privy to information that your office does not have access to? The government projects a budgetary surplus of $4.5 billion in 2027-28 while your office projects a deficit of $11.7 billion. I’m trying to understand. Is there a communication issue? Do they withhold information? Is it part of the way the government works? Is there anything that can be done to change this behavioural attitude?
Mr. Giroux: I don’t think it’s something that the government is hiding. It’s probably related to differences in assumptions regarding future growth. Kristina, who is the expert in fiscal analysis, will probably be able to answer in more detailed ways than I can.
Kristina Grinshpoon, Director, Fiscal Analysis, Office of the Parliamentary Budget Office: As Yves mentioned, it’s not related to the government withholding certain information. A large portion of it is related to revenue assumptions — the government assuming higher tax yields. In the last few years, they’ve been able to collect a lot — mostly from corporations — whereas we’re not carrying as much of those higher yields into future years.
Another portion of it is related to information they had that we really didn’t have. Public Accounts had information with regard to personal income taxes, and those came in a lot higher than we were anticipating. They also had a few higher expenses than we did. We have lower expenses than they do, mostly related to re‑evaluations of some pension assets. We didn’t have access to those. So those are really the differences between our projection and theirs.
Here, we’re trying to highlight the fiscal outlook comparison. If we were to put our outlooks on an apples-to-apples basis, where are the differences coming from? I wouldn’t really interpret the adjusted budgetary balance as our revised projection, necessarily, but rather a means to compare the two outlooks and draw conclusions from where the differences are coming from.
Senator Smith: I don’t want to be critical, but could it be that the government tries to use buffers or timing to enhance their position in terms of the forecast they make? Is that an unrealistic thought? I’m just wondering what you think.
Ms. Grinshpoon: They have their own internal models for how exactly they make decisions with regard to how much income to carry forward. That’s their own personal and professional judgment. In our professional judgment, we wouldn’t have carried as much forward as they have.
Senator Smith: Do they ever discuss the differences between your projections and their projections? Are there meetings at all?
Ms. Grinshpoon: There are meetings, but they’re more general and very conceptual. We don’t have access to their own specific modelling.
Senator Bovey: Thank you both for being here. I have to admit that this is my first time going through this as a member of this committee, so I’m jumping right in with both feet at the deep end.
I’m interested in taking a look at everything you’ve presented in relationship to climate change. As my colleagues know, I’m just back from COP27 where the big international question was ending support for oil and gas or phasing out oil and gas completely. So my question is really twofold. I would like to know about the impacts of the proposed tax credits for clean technology and clean hydrogen as well as the proposed ending of federal support for oil and gas across the country, which I understand is to end in 2023. I think that was proposed in 2009 in the G20 commitment. I’m sort of confused about the definition of an inefficient fossil fuel subsidy. How does that relate to all fuel subsidies? Which of them are really being phased out next year and how does that tie in with the investment credits for clean energies?
Mr. Giroux: There’s lots to unpack in your question, senator. You say you are jumping in with both feet at the deep end, and you’re doing the same thing with me with your question.
We have not looked at the impact of the credit for clean tech and hydrogen. Of course, one can suspect that providing tax credits will accelerate the adoption of these technologies, but it depends on how much these technologies cost in the first place. However, they should be providing a little kick to these technologies, probably more for clean tech than hydrogen because hydrogen is still significantly more expensive than comparable fossil fuels. That’s probably as much as I can say on the credit for clean tech.
When it comes to ending support for oil and gas, there is an issue of definition when it comes to government support for oil and gas. Are we talking about tax credits and subsidies that are purely or solely available for the oil and gas sector or more generally all the tax credits that are available to businesses, generally speaking, including those involved in the oil and gas? Right there is a debate that can go on and on.
That being said, we did try to estimate the cost of ending tax credits that are specific to the oil and gas sector. I don’t have the numbers off the top of my head, but it is certain that this will contribute to, all other things being equal, making this sector slightly less competitive and less likely to be flourishing.
Beyond that, it’s very difficult to determine the specific impact that ending oil-and-gas-specific tax credits will have on the sector, because it’s dependent much more on the overall price of oil and gas than it is on tax credits themselves.
Senator Bovey: Is this something that you’re going to be monitoring going forward?
Mr. Giroux: Depending on the interest of parliamentarians, it’s certainly something we can monitor going forward.
Senator Duncan: Thank you, Mr. Giroux and Ms. Grinshpoon, for your presence here today. It is much appreciated.
There are two themes I’d like to follow up on. Mr. Giroux, in your report, you say: “ . . . not due to a specific review of spending plans” without providing specific details on spending. In the Fall Economic Statement, there’s a phrase “tighter fiscal ship.”
This committee has struggled to obtain the departmental results plans, as you noted earlier as well. Have you any input or have you been invited to provide the government with advice on the role of the Parliamentary Budget Officer in any kind of program review?
Mr. Giroux: I can say clearly, “no.” The government very rarely, if ever, seeks the Parliamentary Budget Officer’s advice on anything it does, so it’s a clear “no” on that one.
Senator Duncan: I will ask you for that information.
I’d also like to follow up from a regional perspective, which I tend to continually bring to this table. There are specific measures in the document before us, such as the Mineral Exploration Tax Credit, and there are also references in your report to the unemployment rates across the country. The unemployment rates across the country are incredibly different, and the Mineral Exploration Tax Credit, for example, makes a huge difference to the Yukon Territory and our employment rate.
Is there an ability of the Parliamentary Budget Officer to look at specific measures with a regional lens?
Mr. Giroux: Whether we could do that is something we would need to look at. I think we probably could, but that would be contingent on getting substantial information from the Government of Canada and specific departments. When it comes to looking at the Mineral Exploration Tax Credit, or METC, for example, we would need information from NRCan as to the location of projects and active mines.
That’s one example. We need to get substantially more information than what we have asked for so far. It’s something that we could do; however, it would have a certain level of uncertainty.
Senator Duncan: Aside from the Mineral Exploration Tax Credit, what about other specific measures like the fiscal relief to Canadians that Senator Marshall was speaking about? Could you apply a regional lens to that as well?
Mr. Giroux: We probably could. The regional differences would, I assume, not be marked. Given that the relief for inflation and all these measures apply generally evenly across the country, there would be regional differences to the extent that there are income variations across the country.
But we could probably have a look at that, if the committee wished us to do so.
Senator Duncan: And the effectiveness, then, of that relief. Thank you.
Senator Pate: Thank you, Mr. Giroux and Ms. Grinshpoon, for coming. Your work is incredibly valuable to all of us, and we appreciate all of your reports.
I want to pick up on the fact that the government has characterized, in particular, the assistance to students and the housing assistance as targeted toward some of the most vulnerable in Canada; yet my read of your report and that of the Auditor General reveals a slightly, or perhaps significantly, different picture. I’m curious as to how you see that the measures being introduced in Bill C-32 could make any difference or a significant difference to the vulnerable populations who rely on housing support.
Then, for students, the number crunching of this shows that it’s not a great deal of relief. When I graduated, it was 18%, but right now, the relief of the interest rates is not insignificant for some but it’s nominal for others. It’s been characterized as being something that will assist people to get an education, but my read of this is that, unless tuition rates are impacted and other access‑to-education issues are impacted, it won’t actually increase the access for some of the most vulnerable groups, particularly in regions like Quebec or the Northwest Territories where access to these loans programs is limited.
Could you please elaborate more on how you see this impacting the most vulnerable populations, if at all? What are the measures, if you’ve been approached for advice — I think I may know the answer to this — but if you were approached for advice, what advice would you provide to the government as to how best to address those issues?
Mr. Giroux: I’ll probably address the student financial assistance and the relief or exemption of interest on student loans.
There are currently several programs that provide relief for former students or those who have recently graduated and find themselves in difficult financial circumstances that allow them to avoid repayment of their loan. There are a variety of programs under their repayment assistance program that already assist recent students or recent graduates with relief for those who have low income.
The government announcement of eliminating interest on student loans will probably benefit at least, in good part, those who have good jobs, because those at the lower end of the income scale already benefit from student loans. In fact, when we saw this announcement in the Fall Economic Statement, we wondered how many students are left paying interest, because there are so many programs already to provide relief of that nature.
So the announcement in the Fall Economic Statement is probably a good thing for students equally, I would say, irrespective of their income. It will benefit people who find themselves with good jobs. We’ll be providing our own cost estimate of that in the coming weeks.
With respect to housing, I haven’t looked in detail at the specific measures in the budget or in the Fall Economic Statement, but we have released a few reports over the years with respect to housing. We find that the definition of “affordable housing” is often not what we would normally think of as affordable. For example, the Canada Mortgage and Housing Corporation, or CMHC, is often using the median rent and anything below that as affordable, when we know that the median rent can be quite expensive, especially in Vancouver and Toronto.
Senator Pate: Are you comfortable going to the next step of what advice you would give to the government to address the most vulnerable and marginalized populations in both of those areas?
Mr. Giroux: It’s probably not something that I’m comfortable doing, but if the government were to ask for advice, it’s something we could do. But it’s not clearly part of my mandate.
Senator Boehm: Thank you very much for being with us. I apologize for arriving late, and I understand that certain elements of what I will be asking may have been asked earlier by Senator Marshall. Senator Marshall and I often think alike on such matters as fiscal transparency and timeliness of reporting.
On transparency, your report states that the government identified $14.2 billion in new measures, for which specific spending details aren’t provided. So 27% of spending on the new measures outlined in the statement is basically unaccounted for, and the $14.2 billion is the largest amount announced without specific details since 2016; that is my understanding.
Historically speaking, has this been a long-standing problem? This is the highest non-itemized amount since 2016, but do you consider these to be isolated incidents? Is the lack of transparency at this level part of a trend? How would you recommend the government reach the presumed goal of full fiscal transparency?
Mr. Giroux: That’s an interesting aspect. It’s not a one-off, and it’s not the first time we’ve seen that. In fact, it’s been the case for several years now. The rather precise number seems to suggest the government already has a very good idea as to the specific items that will be funded by this line item.
It’s not easy to respond to this one because, on the one hand, the government has a pretty good idea as to what it wants to do with this money, but on the other hand, it’s not ready yet to make the announcement.
At the very least, I think when the government does make public the announcements on these items that are buried in that line, it should clearly connect it to that specific line so that you as parliamentarians know where it was funded in the Fall Economic Statement or in the budget. Then you can more clearly see where the money comes from, as opposed to just being told it was funded in the fall statement or in Budget 2022.
Senator Boehm: Your report also states that Canada continues to fall short of the standard for advanced practice in the IMF’s financial reporting guidelines, which recommend that governments publish their annual financial statements within six months. Again, is this a more recent trend? Is it a long-standing problem? I’m not sure what accounts for it. I would ask you, in terms of the surveying you may have done globally, specifically among G7 partners, are they doing a better job than Canada in this regard? Why is that six-month mark so important? Beyond parliamentarians asking governments to respect that time frame, as you just said, what else can be done to ensure it?
Mr. Giroux: I would say this is a worrying trend that we’ve seen relatively recently. There seems to be a certain level of nonchalance about tabling the public accounts late and providing the departmental results reports late, as if it didn’t really matter to provide those when the fiscal year is very well advanced. This means that you, parliamentarians, are asked — in fact, more than asked, pressured — to vote on appropriations before having even the slightest idea as to what the results were for the previous year, not only in the public accounts but in the Departmental Results Reports. I think that’s why it is becoming a problem. Because you don’t know and we don’t know where the fiscal year that ended led in terms of total spending. Not only that, but we don’t know how departments spent and how they performed for the year that ended in March. At the same time, the government is saying we need to get this funding soon, otherwise programs will grind to a screeching halt. That is why it’s a problem.
When it comes to other countries, I know that other countries are doing a much better job of providing these specific, end‑of‑year results in a more timely manner, but different countries have different accounting and governance systems as well. Looking at provincial reporting systems or provincial reporting timelines is probably a better way of comparing the federal government to other governments. Provincial governments, generally speaking, do a much better job. I often hear the argument that provinces are smaller. Well, if you’re administering a health system and an education system, it’s a lot of constituent parts, and it’s not necessarily simpler just because it has smaller overall amounts.
Senator Boehm: Thank you very much.
The Chair: Honourable senators, Senator Loffreda is the sponsor of Bill C-32.
Senator Loffreda: Thank you, Mr. Giroux and Ms. Grinshpoon, for being here this morning. The government has to preserve some fiscal firepower heading into what many expect will be a mild recession in 2023. We all know that projections are important, so I’ll question some of your numbers there. More importantly, my question is about the effects of Bill C-32 on inflation because there will be a lot of argument. I’ve seen some reports saying that it’s green, but it’s not lean. However, I feel there is some fiscal responsibility there. I’m satisfied with what I see, but I’d like to question it because the government finances will be affected.
Taking a look at your Table 1-1, the economic outlook, there are three numbers I’m looking at. The 2023 real GDP growth is at 0.7%. Your numbers are very similar to the Fall Economic Statement. Yours is at 1.2%; the Fall Economic Statement is 0.7%. Some experts are forecasting as low as 0.2%. I’ve seen a downside economic scenario at minus 1% for next year; that could send the government finances sideways if that does happen. So I’m a little concerned.
Inflation, on the other hand, may fall drastically from 8.3% in 2022 to 1.9% in 2023. Historically, there’s always been a strong link between inflation and unemployment. We all know that. I have some numbers here I can share with you if time permits. With past recessions, that percentage is drastically high. We all know we have scarce resources, and we’re predicting low unemployment. But some experts, despite those scarce resources, make that link much stronger. We’ve heard it in our banking committees lately that reducing inflation always increases unemployment. Some suggest a two-to-one ration, that every 1% drop in inflation leads to a 2% increase in unemployment. That won’t be the case, I feel, because of the scarce resources.
My concern is that I assume, based on your projections, that you do conclude that Bill C-32 won’t affect inflation. Can I just have your comments on that? Do you really feel that those projections, given what we’ve seen lately and what we are seeing at this point in time, are still realistic, given the many projections that I’ve seen calling for flat growth or negative growth for next year?
Mr. Giroux: Thank you, senator. To go back to the last aspect of your question, we still believe that our October economic and fiscal outlook is the most likely scenario, which calls for very modest to no growth in the last quarter of this year and early in 2023, but overall growth of about 1.2% for the entire 2023 year, with a marked reduction in inflation in 2023 and the following years.
That’s premised on the assumption that the bank and major central banks will not overtighten when it comes to monetary policy. For Canada, that would mean going to a Bank of Canada rate of about 4%, not significantly higher. However, if central banks around the world, for whatever reason, went significantly above what we think is necessary — for example, in Canada that would mean around 5% — then we could enter into a recession.
We still believe that a slowdown in 2023 is likely. Recent numbers from Statistics Canada, notably on jobs from the labour force survey, tend to confirm our view.
That being said, you also asked about the link between inflation and unemployment. Two to one could be possible in normal circumstances, but what we’re seeing in terms of inflation is that it’s not entirely domestic; in good part, it’s due to external factors, such as supply chain disruptions and the war in Europe. So as you mentioned — and I agree with you — I don’t think it’s necessary to see a two-to-one relationship between inflation and unemployment.
We looked at the inflationary impact of the inflation package that the Deputy Prime Minister announced in September, and we found it will have a minimal impact on inflation; I think it’s a 0.01% increase in inflation resulting from that package of measures: the GST credit, the housing benefit and dental.
Senator Loffreda: Thank you for that. I’m satisfied, and, as we did mention, maybe the impact on inflation, we hope, won’t be there with the Fall Economic Statement and Bill C-32. Hopefully, the interest-rate increases will cease and the economy will get back online.
I want to come back to the timeliness of financial reporting, because given my experience, it was always very important to have timely financial statements. You did mention we should question the government on that. Senator Boehm did bring up the question.
I see a note on your page 11, which I’ll quote:
. . . On average, over the past decade, the Public Accounts have been tabled more than two months after the conclusion of the Auditor General’s audit.
Why has this been going on for so long? Are there no consequences to reporting late? In a sense, the perception we have with the international community and everything that surrounds late reporting, why is the government reporting late? Why has it been going on for so long? Is there a solution, based on your experience, going forward?
Mr. Giroux: I think the simple answer to why it has been going on is because they can. That’s the only valid reason I see. Is there a solution? I think it’s a legislated deadline for tabling the Public Accounts and, I would also add, the Departmental Results Reports. Departments know and can predict that next year, by March 31, 2023 — or 2024 or 2025 — they’ll have to report on their activities. The government will have to report on its financial situation. So if they don’t have a deadline, they don’t tend to be very seized with it.
There is nothing that focuses the mind like a deadline. Imposing a deadline on the government would probably focus the great minds at Treasury Board and in the public service who have to work on Public Accounts and Departmental Results Reports. In the absence of a deadline, what’s the rush?
Senator Loffreda: There are no consequences internationally or a perception in the economic world. If they’ve done it for over a decade, I assume those consequences are nominal, and the deadline would be more or less for timeliness on parliamentarians and our study of . . .
Mr. Giroux: Yes, your question probably relates to whether there is a financial consequence; are markets punishing the Government of Canada for tabling its financial reports late? No. There would be consequences if they were cooked or if the books were arranged in some unorthodox way, but given that the Public Accounts are appropriate and they’re sound, there is no consequence. There are consequences for parliamentarians and for the public in terms of timeliness and depriving them of a very useful piece of information, but there is no financial consequence.
Senator Loffreda: Just to complete that thought and to continue what Senator Boehm was saying, on an international front, are you aware of other countries that do the same? Are we unique?
Mr. Giroux: I don’t think we’re unique, but I haven’t done an exhaustive study as to the timeliness of other countries.
Senator Loffreda: Thank you.
The Chair: On the weekend, I entered a McDonald’s. A question was asked to me, and I said I would ask the question this week. I think I have the opportunity to ask it to you today, Mr. Giroux.
[Translation]
The question was as follows — among workers earning the lowest wages — there were four people at the table and this was the question: among workers earning the lowest wages in Canada, what percentage of them will receive the financial assistance proposed in Bill C 32?
Mr. Giroux: I would have to check the exact income threshold at which families or individuals stop receiving the GST credit. As to the Canada Workers Benefit, I know that in most provinces the amount starts to decline below $23,000, so at $22,900.
As to the GST credit, I don’t know the exact amount, but I think it is about $30,000. I would have to review the figures in order to answer.
The Chair: Could you please review the figures and send an answer in writing to our clerk?
Mr. Giroux: Of course.
[English]
Senator Marshall: Mr. Giroux, both you and Ms. Grinshpoon spoke about the increase in tax revenue. I’m specifically interested in the corporate taxes; there has been a significant increase. Can you tell us why it has increased significantly? Is there a change to the Canada Tax Act, or is it just an increase in profitability?
Also, what sectors of the business community are contributing to this increase? I’m specifically interested in the oil and gas sector.
Ms. Grinshpoon: That’s a great question.
In terms of corporate profitability, the large increase in income taxes is coming from higher profits. It’s coming from two sectors really. So in the 2020-21 Public Accounts, you saw a big jump in corporate profitability, and a lot of it was coming from the financial sector, whereas in 2021-22, a lot of the corporate profitability is also coming from the financial sector, but now it’s also coming from the oil and gas sector.
There are higher profits across sectors as well. It is not only concentrated in those two, but those two sectors are large contributors to why corporate profitability is higher.
Senator Marshall: Is your analysis detailed enough that you would be able to look at, for example, if it went from $58 billion to $78 billion, could you isolate and note that $5 billion came from the financial services sector, $5 billion came from somewhere else? Is your analysis that detailed or is it more general?
Ms. Grinshpoon: For historical perspectives, we’re using Statistics Canada’s data. They publish corporate profitability by sector, so we use that data specifically, where they detail each sector and the profits in that sector.
However, in terms of the projection and things forward, we do that on an aggregate basis.
Senator Marshall: So the information is with StatCan?
Ms. Grinshpoon: Yes.
Senator Marshall: Thank you.
Senator Moncion: My questions have already been asked, so let someone else have my place.
[Translation]
Senator Gignac: As I said earlier, your Fall Economic Statement: Issues for Parliamentarians does indeed raise some issues. You said there were $21 billion in off cycle announcements, that is, announcements made between the spring budget and the Fall Economic Statement 2022.
The Fall Economic Statement 2022 lists the strategic measures that were taken between the spring 2022 budget and the economic statement in early November. They add up to $21 billion, $7 billion of that for the current year.
I note, however, that the $1.2 billion represents compensation related to supply management, but that announcement was made 10 days after the economic statement. Yet it is included in the measures announced between last spring and November 3. I am not opposed to this, because I am the son of a dairy farmer, colleagues, and I think farmers deserve to be compensated for the losses incurred as a result of the Canada-United States-Mexico Agreement.
How can we make sense of this as parliamentarians? For example, in the list of measures taken between the budget and the economic statement, footnote 6 at the bottom of page 66 of the statement indicates that the details of the measures will be announced in the coming weeks. I am lost. Is this the first time you have seen this kind of thing? What criterion is used to say that this had been announced before? I did some research and found nothing about it before mid-November, when the announcement was made, which was 10 days after the economic statement.
Mr. Giroux: Senator, it is not unusual for you to have difficulty figuring it out because it is very difficult, even for people like us, and it is our job to do this. Unfortunately, I have no idea why it was done this way, except perhaps for practical reasons. That is no doubt the case for communications or strategic decisions. That is a good question to ask Finance Canada officials.
Senator Gignac: We are talking about $1.2 billion, and I do not see anything about it in the economic statement from early November. There was nothing about this previously. Very briefly, does this happen often? I did not see that in the decades that I was a financial analyst myself reviewing public finances. That $1.2 billion is a considerable amount.
Mr. Giroux: Generally, we see this for small measures, for items where the interest is very localized or for a particular group. For such large amounts, unfortunately, it is not rare. Unfortunately, we see it a little too often. We shouldn’t see this, but unfortunately, these things happen for such large amounts.
Senator Gignac: Thank you.
Senator Boehm: My question has already been asked.
[English]
Senator Pate: I think you know the sorts of areas I’m usually interested in with your department. I’m interested in getting a more general description. You’ve given us some ideas of the things we should ask departmental officials.
With respect to these estimates in particular, are there additional questions that you would suggest we ask as we meet with departmental officials going forward that would help us understand and also perhaps provide you with additional information?
Mr. Giroux: I think the issues have mostly been mentioned in the note itself. I would probably add the timeliness of the Departmental Results Report. I think that is something that would clearly help you understand the performance of various departments, and that would allow you to focus on areas that are of specific interest to you individually, as parliamentarians.
Also, who are the laggards in terms of departments that have not yet submitted their Departmental Results Report? I know some departments take these more seriously than others. We heard from Treasury Board Secretariat officials yesterday in House committee testimony that some departments have still not provided their Departmental Results Reports, so that could be an interesting question to get the answer to. Asking the question is one thing; getting the answer is a different aspect, I understand.
Senator Pate: Thank you very much.
Senator Duncan: There is reference to timeliness of results, and I’m interested in those results measures as well and references that we see in mandate letters and by officials to a whole-of-government approach.
I’m wondering if there are areas that have come to light, questions that you might suggest in terms of performance measures, but also, are there areas of duplication that have come to your attention?
Mr. Giroux: That’s probably something I would need to reflect on in order to provide you with an intelligent and interesting answer because there could be lots of areas.
One thing that comes to mind is the strategic policy review that’s mentioned in the Fall Economic Statement and was mentioned in the budget. The experience of the past review suggests that the government could be less than serious in really finding savings and reviewing its ways of doing things to really generate savings.
Senator Duncan: If it’s less than serious, then are there suggestions you might have as to how it might be more seriously thought about?
Mr. Giroux: Yes, I would have suggestions on that.
Senator Duncan: Thank you.
Senator Smith: You’ve done a great job giving us information, Mr. Giroux and Ms. Grinshpoon. I always go back to thinking about the years when I started on the Finance Committee and working with Senator Marshall. Poor Senator Marshall has been after this transparency issue for as long as I’ve known her, and I’ve known her for a few years. We were young people when we started asking these questions. We’re still young in our minds.
Going over the transparency issue, page 10 is quite a powerful page when you look at it. Point 1, the government identified $14.2 billion in new measures without providing specific details. Point 2, the government has been quantifying non‑announced spending decisions that could relate to confidential planned spending or provisions for anticipated cabinet decisions. The government has an additional $8.5 billion in spending over 2022-23 to 2027-28, and there is provision for anticipated near‑term pressures.
Could you help me understand what would constitute near‑term pressures that would have at least some form of better disclosure and better credibility for simple people like myself to understand?
Mr. Giroux: When I was in the public service, near-term pressures often referred to infrastructure that was in need of urgent repairs, so it could be a national park with a building that was housing visitors that needed repairs. It could also be airports that were in need of repairs. It’s difficult without having specific details in the Fall Economic Statement as to what the government means by “anticipated near-term pressures.” It could be what we call program integrity, such as the examples I just provided, or it could be other types of pressures, such as provision of compensation for specific groups.
It’s very difficult to provide examples of what the government means by near-term pressures without knowing what’s in there. It could be occupational health and safety or financial pressures. There’s really no way of knowing.
Senator Smith: If you could give us three recommendations that could help us deal with the various departments in Finance — this is something that we did about four or five years ago. We started saying if you don’t send decision makers, then don’t send us people who give us nice looks and figures; give us people who can make some decisions. That worked for quite a period of time, and I think it was a positive situation for us.
Is there anything else we can do to try, not extract, but to get information on a more — I’m not going to say a willing or less controlled basis — What can we do as a committee? Are there a couple of ideas you could give us to help us in our pursuit of better and more timely information?
Mr. Giroux: I think that as parliamentarians, you could certainly ask for a breakdown by department of these near-term pressures, planned spendings or provisions for anticipated cabinet decisions. If the government is not willing to open its kimono entirely for future cabinet decisions, which is understandable, it could at least disclose which departments — or, at the very least, which areas — it plans to spend these significant amounts of money on, especially when we’re talking about near-term spending pressures.
I see no obvious reasons why the government would not be able to give you, as parliamentarians, a breakdown by department.
Senator Smith: If you could give us just two or three suggestions in writing so that we could discuss this among ourselves in terms of when people from the various financial departments come and present to us, I think that might be helpful.
The Chair: Any comments, Mr. Giroux?
Mr. Giroux: We’ll be pleased to provide you with suggestions — yes, in writing.
The Chair: Honourable senators, this brings us to the end of the first panel. Mr. Giroux, as always, this was very informative and enlightening. Before we move on to the second panel, I would like to remind Mr. Giroux to please submit your written responses to the clerk by the end of the day on Tuesday, November 29, 2022, due to the fact that we have a time frame on reporting to the Senate.
Honourable senators, we will now continue with our second panel.
We have officials from the Department of Finance Canada with us today to speak to us about Part 1 only of Bill C-32. Honourable senators, please keep this in mind when asking questions. Other officials from Finance Canada and other departments will be with us later today to discuss the other parts of Bill C-32.
I am told and been informed by the clerk that Madam Lindsay Gwyer, Director General, Legislation, Tax Legislation Division, will offer opening remarks and will then be supported by her colleagues during the question period.
[Translation]
Welcome to all of you and thank you for having accepted our invitation, through Ms. Gwyer, to testify before the Standing Senate Committee on National Finance on Bill C-32.
[English]
Before we begin, I would like to ask all the other witnesses that I did not name to please introduce yourselves should you be called upon to answer. I want to thank you in advance.
Before giving Ms. Gwyer the floor, I would like to inform the senators that her opening remarks will be longer than the usual five minutes. I’ve been informed they will be approximately 15 minutes because, as we know, Part 1 of this bill includes over 20 income tax-related measures.
Ms. Gwyer, The floor is yours for your comments, please.
Lindsay Gwyer, Director General, Legislation, Tax Legislation Division, Department of Finance Canada: Thank you, Mr. Chair, and thank you for having us here today. As mentioned, there are 21 measures in Part 1 of the bill. They are all income tax measures, although there are also some related amendments to other statutes.
All of the measures in Part 1 of the bill were announced in Budget 2022 or earlier. Some were announced in Budget 2021, and a few were announced at other, earlier times. I will go through all the measures and give just a brief overview of each measure, and then we would, of course, be happy to provide more detail during the question portion of the meeting.
I’ll go through the measures in the order that they appear in the summary at the beginning of the bill.
The first measure is an anti-flipping measure. It would deem individuals who sell residential properties within one year of owning them to be carrying on a business. The consequence of that is that they wouldn’t be able to benefit from the principal-residence exemption or from the 50% inclusion rate for capital gains. There would be exceptions to address situations where the property is sold as a result of certain life events.
The next measure is the creation of the Tax-Free First Home Savings Account. This is a new tax-free account, which was announced in Budget 2022. It would allow individuals to contribute up to $8,000 per year towards saving for a first-time home. The maximum contributions to the plan would be $40,000. Contributions to the plan would be deductible, similar to an RRSP, and withdrawals from the plan would be tax-free as long as they are made to purchase a qualifying home.
The next measure, measure (c), relates to the phase-out for flow-through shares for oil, gas and fossil fuel sectors. This amendment would phase out flow-through shares. It would prevent flow-through shares from being issued for expenditures incurred with respect to oil, gas and fossil fuel sector activities. It would apply to flow-through share agreements entered into on or after March 31, 2023.
The next measure also relates to flow-through shares. It’s the creation of the Critical Mineral Exploration Tax Credit. This is a new credit that was also announced in Budget 2022, and it’s a credit that could be flowed out to individuals through the issuance of flow-through shares. It’s very similar to the existing Mining Exploration Tax Credit, except that it would provide a 30% credit rate, instead of the 15% credit rate, and it would apply in lieu of the Mining Exploration Tax Credit, so someone could not claim both credits. The new Critical Mineral Exploration Tax Credit would be available for exploration costs for certain critical minerals that are listed in the legislation and budget. Generally, they’re minerals that support the creation of clean technologies.
The next measure was also announced in Budget 2022. It’s the creation of the Canada Recovery Dividend. This measure would create a one-time extra tax of 15% on banks and life insurer groups. The tax would be payable on the average of 2020 and 2021 taxable income. There would be a $1-billion exemption, which would need to be split between the members of a related group. That tax would be payable over five years, starting in 2022.
The next measure is closely related. It’s the additional tax on banks and life insurers, which was also announced in Budget 2022. It would create a permanent additional 1.5% tax on the income of banks and life insurers above $100 million. Again, that $100-million exemption would need to be split between the members of related groups. That new tax would start to apply to taxation years ending after April 7, 2022. For that first tax year that does end after April 7, 2022, the tax would be prorated, so it would only apply to the portion of the tax year ending after April 7, 2022.
Next, measure (g) deals with income tax reporting requirements for trusts. It would amend the reporting requirements for trusts in two ways. First, it would broaden the test to determine whether a trust is required to file a tax return. Certain trusts that previously didn’t have revenues and were not required to file tax returns would now be required to file tax returns. In addition, it would create a beneficial ownership reporting requirement. Certain trusts would be required to file information with the Canada Revenue Agency, the CRA, regarding the identity of their beneficiaries, settlers and trustees or people who control the trust.
Next, measure (h) relates to mutual fund trusts that are traded on stock exchanges, typically referred to exchange-traded funds, or ETFs. This measure would limit the ability of an ETF to allocate excessive capital gains to redeeming unit holders. This measure is intended to prevent the inappropriate deferral of tax through the excess allocation of capital gains.
Next, measure (i) relates to the Underused Housing Tax Act, but it involves amendments to the Income Tax Act. The Income Tax Act currently includes a rule that requires a non-resident who is selling Canadian real estate to obtain a clearance certificate from the CRA prior to the sale, stating that no taxes are owed by the non-resident or would become owed as a result of the sale. If that clearance certificate is not received by the non-resident seller, then the purchaser has an obligation to withhold Canadian tax on that sale price. These existing rules would be extended so that the CRA could deny the issuance of that certificate in situations where there has been non‑compliance with the Underused Housing Tax Act.
Next, measure (j) changes the First-Time Home Buyers’ Tax Credit. It was announced in Budget 2022. The First-Time Home Buyers Tax Credit is currently a $5,000 credit available to individuals who purchase a first-time home. It’s calculated at a 15% rate. The credit would be doubled from $5,000 to $10,000, still calculated at a 15% rate. It would apply to home purchases made in 2002 and onward.
The next measure is a change to the existing Medical Expense Tax Credit. The definition of medical expenses under the Medical Expense Tax Credit would be extended to allow expenses related to surrogacy and to obtain sperm, ova or embryos.
Measure (l) is another tax credit which was announced in Budget 2022. It’s the Multigenerational Home Renovation Tax Credit. These amendments would create a new tax credit that would apply to expenses incurred to create a legal secondary unit in a house in order to allow a senior or an adult with a disability to live with a family member. It would be a 15% refundable credit, which would apply to up to $50,000 of eligible expenses incurred to create that legal secondary unit, and it would apply to 2023 onward.
Measure (m) is a change to the phase-out rate for the small business deduction. The small business deduction is a rate reduction on the first $500,000 of active business income of a Canadian-controlled private corporation. There are rules that may phase out the availability of that $500,000 deduction. One of the phase-outs relates to whether the corporation has a certain amount of taxable capital employed in Canada. Under the current rules, if the Canadian-controlled private company has taxable capital employed in Canada of $10 million, the small business deduction begins to be phased out. It’s fully phased out at $15 million of taxable capital. This measure would amend that phase‑out range to increase it. It would still begin at $10 million of taxable capital, but it would end at $50 million of taxable capital. The phase-out rate would be much lower, which would allow more Canadian-controlled private corporations to qualify for the small-business deduction, and it would increase the amount of the deduction for corporations that are currently within that existing phase-out rate.
Next, measure (n) relates to a change in International Financial Reporting Standards 17, or IFRS 17. This is a change to the financial reporting standards that impacts insurers. A number of technical amendments are being made to the Income Tax Act to ensure, taking into account these changes in reporting standards, that the timing of when tax is paid under the Income Tax Act continues to properly coincide with the timing of when profits are earned by insurers.
The next measure is (o). It relates to registered charities and the disbursement quota that registered charities currently need to comply with. There are existing rules that require a charity to disburse a certain percentage of its assets that are not used in charitable activities or administration, so typically that means investment assets.
This measure would change the disbursement quota, which is currently 3.5%. It would change it to apply on a graduated basis, so for any of those assets that are subject to the disbursement quota, generally for those investment assets, the rate would be 5% on those assets in excess of $1 million.
The next measure is (p). It relates to the General Anti-Avoidance Rule, or GAAR, as it’s typically referred to. It is a rule that allows the Canada Revenue Agency to re-determine tax consequences in situations where a tax benefit has been obtained through an avoidance transaction that abuses the Income Tax Act.
The General Anti-Avoidance Rule would be amended to allow the CRA to apply it in situations where there are tax attributes that are created in an abusive transaction but those tax attributes have not yet been used. This measure is a response to a 2018 Court of Appeal decision which determined that the requirements to satisfy the General Anti-Avoidance Rule could not be satisfied where the tax attributes have not yet been used. This rectifies the consequences of that decision and will cause the General Anti-Avoidance Rule to be applied by the CRA in the same manner as it was applied prior to that 2018 decision.
The next measure relates to the avoidance of tax. There is an existing rule under the Income Tax Act that prevents a person who has a tax liability from seeking to avoid the payment of that tax liability by transferring assets to a related person for less than fair market value. For example, in the context of a corporation, this rule would apply to prevent assets from being removed out of that corporation in order to strand that tax liability and make it uncollectible by the CRA.
Amendments are being made to strengthen that rule. This is to address a court case and certain very specific, complex, aggressive planning that is being promoted by certain people as a way to try to avoid the current rule. Corresponding amendments would also be made to the similar rule that exists in the Excise Tax Act, the Excise Act, 2001 and Part 1 of the Greenhouse Gas Pollution Pricing Act.
The next measure, (r), relates to registered investments. It’s a measure from Budget 2021 that would change the rules for the calculation of tax payable by a registered investment that holds property that is not a qualified investment.
Measure (s) relates to interest coupon stripping, which is an arrangement that is engaged in by non-residents who lend money to non-arm’s-length Canadian corporations. They engage in this practice of sometimes transferring the right to receive interest to another person who is subject to a lower withholding tax rate. It’s a structure that is used to try to either reduce or eliminate Canadian withholding tax on these payments of interest that would otherwise be subject to Canadian withholding tax.
Certain technical amendments are being made to address that planning and to effectively recalculate the withholding tax to ensure that those interest coupon stripping arrangements don’t allow Canadian tax to be avoided.
The next measure is (t). It relates to the CRA’s audit powers. It would amend the Income Tax Act to change the CRA’s audit‑related powers in order to allow CRA to require people to answer all reasonable questions and provide all reasonable assistance for any purpose related to the administration or enforcement of the Income Tax Act. These are amendments that are also being made in response to a court decision.
Corresponding amendments would also be made to similar rules in the Excise Tax Act, the Excise Act, 2001, the Air Travellers Security Charge Act and Part 1 of the Greenhouse Gas Pollution Pricing Act.
Finally, the last measure in Part 1 relates to air-source heat pumps. There are a number of incentives in the Income Tax Act that exist for green technologies. Amendments would be made to allow air-source heat pumps to benefit from some of these same amendments. In particular, the capital cost allowance rules that apply to certain green technologies would be amended to include air-source heat pumps. The existing rate reduction for manufacturers of zero-emissions technology would also be extended to allow the manufacturing of air-source heat pumps to qualify for that rate reduction.
Mr. Chair, those are all of the measures in Part 1. I and a number of my colleagues who are here would be happy to answer any questions.
[Translation]
The Chair: Thank you very much for this information, Ms. Gwyer.
[English]
Now we will proceed to questions. I would like to share with senators that we will have five minutes each on the first round. Therefore, please ask questions directly. To the witnesses, please respond concisely. The clerk will inform me when the time is up.
Senator Marshall: Thank you, Ms. Gwyer. That was an absolutely excellent presentation.
When I look at all of those changes to the Income Tax Act, there are some there that will result in increased revenues to the government, and then there are others that will increase the cost to the government.
Can you tell me, for those that are going to increase revenues, what is the total impact on revenues for those items?
Ms. Gwyer: On a net basis, taking into account the measures that have costs and then the measures that have revenues, the total impact of the bill over six years is net revenues on an accrual basis of just under $4.2 billion.
Senator Marshall: That’s the net number, but I would be interested in the two numbers you net to get the $4.2 billion. I’d like to get a handle on exactly how much the government is increasing tax revenues.
Ms. Gwyer: Sure. I don’t have those two numbers in front of me. I’m just looking at a chart that has all of them, but we could provide you with a chart that shows —
Senator Marshall: So could you provide those two numbers?
A lot of these items were included in Budget 2022, so the revenues and costs are outlined in the budget document. Why wouldn’t they be included in the economic statement document also so that parliamentarians don’t have to be going back and forth between several documents to try to figure out what is going on?
Ms. Gwyer: In terms of why they’re presented separately in those documents, I don’t know the answer to that, but that’s something we can consider.
Senator Marshall: Could you bring that back? I think that would be very helpful next year. You’ve got the previously announced measures listed on page 81, but we do have to go back and forth between several documents. I’d be interested in seeing them expanded on and given dollar amounts in this document.
My last question: You’re saying that it’s a net of $4.2 billion in extra revenues for the government, but I’m interested in the debt that the government is going to incur as a result of, I guess, all of their expenditures. I’m looking for the Debt Management Report. We’ve seen the two strategies last year. Now we have a strategy in Budget 2022 and another strategy in the Fall Economic Statement, but we don’t even have the actual Debt Management Report for last year. When are we going to see that; when is the government going to release the Debt Management Report for 2021-22?
Ms. Gwyer: I don’t know the answer to that, senator. That is outside my area of expertise.
Senator Marshall: Is there anyone there who can help us?
Ms. Gwyer: I don’t think there is. Everyone on the line is a subject matter expert.
Senator Marshall: Can you get back to us on that? We’re waiting and looking.
[Translation]
Senator Moncion: My first question is about part 1(f), which talks about increasing the business income tax rate on banks and insurance companies. Why is the proposed additional tax on banks and insurance companies permanent rather than temporary? Why is it only targeted at banks and insurance companies when we know that this cost is passed on to consumers?
Pascale Dugré-Sasseville, Director, Financial Institutions Taxation, Department of Finance Canada: Thank you for your question, senator. As you can see, these new taxes have two parts. One is the Canadian stimulus dividend, which is a one‑time tax payable over five years. The other is the additional tax, which is a permanent measure. They are really two separate measures.
You asked why this sector was targeted and your question is relevant to both measures. It is a sector that is considered by the government to have done well and, therefore, it is thought that it can contribute to the economic recovery efforts of the Canadian economy.
Senator Moncion: These costs are nevertheless passed on to consumers. Service fees are charged to their customers by financial institutions. The same applies to insurance companies. So it’s a bit of a disguised way of getting that revenue.
Why are only these two types of companies being targeted, when the same pricing could apply to many others?
Max Baylor, Director General, Business Income Tax Division, Department of Finance Canada: My name is Max Baylor. I work with Lindsay Gwyer and Pascale Dugré-Sasseville in the Business Income Tax Division. You ask why we target financial institutions. As my colleague said, it’s a sector that did very well during the pandemic and recovered faster than other sectors. It is also a question of putting things into perspective in terms of the support that was provided to individuals and businesses to help them turn their financial situation around. That’s kind of why we’re targeting this sector, because its situation is pretty unique.
Senator Moncion: I understand, but the oil sector has also done golden business and is not affected by this measure.
My next question is about the $8,000 a year for those who want to buy a house. Let’s take the example of a couple where one spouse is working and the other is not, but is taking care of the children at home. Is the tax credit available to both? Can the $8,000 be used by both people? Would that be $16,000 per family, for a total of $40,000 per person? Or does the credit only apply to those who are working? Are we talking about a total of $80,000 or $40,000 for a couple where one spouse is not working?
Yves Poirier, Director, Economic Development, Department of Finance Canada: Thank you for the question. I am Yves Poirier, Director, Economic Development, Tax Policy Branch.
To answer the question, in fact, each individual can have his or her tax-free first home savings account, or FHSA, provided that he or she meets the other conditions, in particular that they have not owned a home in which they resided for the last four years. Thus, each would be entitled to $8,000.
In addition, certain attribution rules are suspended under the bill. Under the general approach of the tax system, where one spouse makes a gift of property to another spouse, attribution rules normally apply and result in the income on that property being attributed to the original spouse. In the case of the FHSA, these attribution rules will not apply. It would then be possible for one spouse to gift certain funds to the other spouse to contribute to their own FHSA. In any case, each individual would have their own FHSA with their own limits, which must comply with the different rules to qualify for the program.
Senator Gignac: I thank Ms. Gwyer and her colleagues for being with us this morning. In her opening remarks, Ms. Gwyer alluded to the fact that there would be exceptions. I am talking about the rule against flipping, i.e., someone who would dispose of their property within 12 months. If I understand correctly, in such a case, the sale would be taxed as business income. You talk about exceptions. Can you tell us more about these exceptions?
Mr. Poirier: Thanks, again, for the question. The exceptions are found in the legislation and will be subject to interpretation by the Revenue Agency. These exceptions include the death of the taxpayer or a person related to the taxpayer and the addition to a household — for example, if an elderly person wants to move and join another household, such as that of one of their children. There would be cases of marriage breakdown or common-law relationships. There would also be cases relating to safety, for example if a person faces safety issues. There are cases of illness, cases of moving for work — for example, if one has a new job in another city and has to move. There are cases where there is destruction of property or loss of employment.
Broadly speaking, this is the list that the legislation contains. Again, in all of these cases, an interpretation will have to be made by the Revenue Agency as to whether a person qualifies for an exception.
Senator Gignac: Thank you. Since this announcement was made in the last budget, the world has changed. Interest rates have risen dramatically. At the time, the measure was intended to prevent speculation. However, property prices are changing.
In the case of a forced sale within 12 months, either because of a change of job or city, why is there not symmetrical treatment? Why shouldn’t the loss incurred by the person who has to sell his house in a hurry within the next 12 months — there is a downward trend in the volume of transactions and there are far fewer buyers — be deductible as business income? Your intention was to tax the profit as business income rather than as a capital gain. In other words, is this symmetrical, or will the loss that might be contemplated not be deductible?
Mr. Poirier: Indeed, the rule only applies to profits that are made in the case of a flip. Companies that routinely do flips, i.e. hurried buying and selling, are treated as companies. These companies are taxed on their gains and can deduct their losses from their gains when they routinely do this. Here, the issue that had been identified by the government was that people who are in this business and do flips, even though it may not be frequently, can get around the rules by passing it off as something other than business income. The problem that was identified was really on the earnings side, and that’s what this rule addresses. On the loss side, in the case of someone who sells their house, who is not really in that kind of business and only does it once, it is their house, not a business. These gains are not taxable, generally speaking, because of the principal residence exemption. These losses would not be deductible.
Senator Gignac: Okay, I understand, thank you. I have a quick question. I’m changing the subject. I’d like to address the issue of the elimination of flow-through shares for oil and gas activities. How many oil and gas companies rely on flow‑through shares as a source of financing? Is this major or minor? Do you have any figures you are willing to share with us?
Mr. Baylor: With respect to flow-through shares for oil and gas and coal activities, if you look at the numbers, you will see that the revenue generated by the elimination of this measure is relatively minor. The reason is that over the last few years there has been a fairly gradual decline and a trend towards less use of this type of transaction. To answer your question, basically, in terms of numbers, in terms of issuers, we’re talking about 30 issuers for this type of vehicle that could be affected. About 100 investors would be affected by this each year.
Senator Gignac: Thank you.
[English]
Senator Smith: I want to go back to Senator Gignac asking about flipping houses within the first year of purchase.
In order to implement this change, the government would need to collect various pieces of data, including purchase and sale dates and the price at which the unit was purchased and sold for, to determine whether the sale meets the criteria. What kind of reporting standards are going to be implemented to ensure the federal government is properly taxing these types of sales?
Mr. Poirier: Thank you for the question. There is already some reporting required when a home is sold, including when it can qualify for the principal-residence exemption. Because of this measure, it would be to the CRA’s discretion, but it’s possible there would be additional reporting required because of that measure.
I would note, though, that, in general —
Senator Smith: I’m sorry to interrupt you, but you said “at the CRA’s discretion.” Would there not be a set of rules and guidelines that would be inclusive so that a variety of situations would be looked at? You make it sound like the CRA will determine that, but that means they have unique powers to do anything they want.
Is there not going to be sort of a full description of what the rules are going to be? That’s what I’m really asking.
Mr. Poirier: There is nothing in the legislation describing exactly what they need to collect. It’s in their purview to administer the tax system and decide what information they require for that purpose.
Senator Smith: Okay. I find it a little strange that this would possibly be a good opportunity for the government to manage a situation in terms of the integrity of purchasing and it being a dream for young Canadians to have a home. I’m a little in awe that there wouldn’t be more of a description of what the formal rules will be.
Will there be formal rules, or will it be at the discretion of CRA to make that determination?
Mr. Poirier: No, there are formal rules that are included in the legislation. It is normal practice for the CRA to publish guidelines to make sure Canadians understand what the legislation is saying and to interpret the legislation.
Senator Smith: Would there be exceptions in the legislation that would exempt people with exceptional circumstances, or would the change be applied universally? For instance, you lose your job or someone dies. Would these be just be universally accepted, or would they be a part of a group of exceptions that would be outlined in the legislation?
Mr. Poirier: Yes, the exceptions are included in the legislation. Usually the CRA would publish information to make sure Canadians understand the legislation. They do so typically on their website. They would generally list the exceptions.
That’s what I would expect in terms of what would qualify as an exception.
Senator Pate: Thank you to all of the witnesses for appearing. My question has to do with the housing as well as the student loan benefits.
As you’re no doubt aware, The Ubyssey has recorded that the typical repayment period for students using the federal Canada Student Financial Assistance Program is now between 9 and 15 years. In addition, we know that the rates — the housing affordability issues — RBC released a report in June talking about the housing trends and affordability. They found that the current market was “ . . . the worst level of affordability since the early 1990s.”
These two combined add to the current rising cost of food and the other necessities of life.
I’m curious how you see these benefits actually assisting young Canadians. In particular, which young Canadians will they assist? In particular, I would like a breakdown in terms of region but also demographics in terms of who you’re looking at who would benefit from these initiatives.
Ms. Gwyer: Senator, regarding the first part of your question on the student loans, that’s in Part 4 of the bill. There are people here this afternoon to speak to that. There is no one here to speak to that portion of the question.
In terms of the housing measures, Yves, I don’t know if you have that kind of information in front of you that you would be able to provide. If not, we can look at what sort of information we can provide in terms of whom the housing measures would impact.
Senator Pate: Thank you very much. That would be incredibly useful if you have the information, because I presume you made those cost estimates on the basis of some idea as to whom you would be providing resources to.
Ms. Gwyer: Yes, that’s right. Yves, I don’t know if you have anything to add. If not, we will come back with what we have.
Mr. Poirier: We can get back to you.
Senator Pate: Thank you.
Senator Boehm: I’m going to go into the same line that my two predecessors did in terms of asking questions about housing. This committee recently studied Bill C-31. There was a lot in there on rental housing. We heard about the unaffordability crisis for renters across the country and that the government estimated in Budget 2022 that Canada is short 200,000 homes. That’s where I’m coming from in asking these questions.
How would the Tax-Free First Home Savings Account proposed in Bill C-32, which is meant primarily to increase housing demand and improve housing affordability for Canadians, close that 200,000-home gap? As well, how long does the Department of Finance expect it will take to close that 200,000-home gap? I realize this is a projection.
Given that it would slightly increase housing demand, in what ways would doubling the First-Time Home Buyers’ Tax Credit increase housing affordability for first-time home buyers?
I guess there is another aspect here, too, and that is the uniformity of the top-up. That was discussed in this committee before. The value is different in Toronto and Vancouver than it is, for example, in Atlantic Canada or other less expensive places for renters. Given the reality of the widely disparate house prices across the country, why is the First-Time Home Buyers’ Tax Credit in the statement being applied uniformly? Is the government taking a one-size-fits-all approach here? Why is there no consideration on housing measures for where the home is being rented or purchased?
This series of questions is, unfortunately, for Yves Poirier, I think.
Mr. Poirier: The question of why the First-Time Home Buyers’ Tax Credit is a flat amount is a very good question. The objective of the tax credit is to help offset some of the closing costs associated with buying a home. To some extent, these costs do not always correlate with the value of the home. Making it variable by region would certainly add some complexity to the legislation. It’s a policy choice that was made by the government to make it a flat amount, which makes it easier to administer for everyone.
On the other measures, on renters, I think that would be more a question for the government. Certainly, what they have done here is to provide more support to individuals who would like to buy a home. Measures like the Tax-Free First Home Savings Account could provide some benefits to renters because if someone opens a First Home Savings Account and they don’t buy a home, they’re not penalized. They can transfer the amount tax-free, for example, to an RRSP. So there is that. Obviously, the amount required for a down payment could vary based on the value of the home being purchased, which probably means more savings being funnelled through the First Home Savings Account.
I had difficulties, initially, hearing the question because of technical difficulties. I’m not sure if I answered all of them. If not, sorry for that.
Senator Boehm: Well, I started with the gap. How will this address the 200,000-home gap? I realize that’s asking for a projection and maybe that’s not quite the fairest question. But I did want to emphasize that not only do we have regional disparities, we have urban disparities within the regions as well.
I can appreciate that it’s difficult to adjust amounts across, but if you’re doing a projection in terms of how this is to address the housing and rental market crises that we have, I would think you would want to put a bit more research into it — or at least research that parliamentarians could see.
Mr. Poirier: Noted, yes.
The Chair: It’s noted?
Mr. Poirier: Yes.
Senator Boehm: There was a question in there, but it was also a bit of a statement, and that’s what I had started with. I think if we note it as we go along, that’s an important point.
Mr. Poirier: Thank you.
Senator Duncan: Thank you to all of the witnesses that have appeared. I would like to explore the Mineral Exploration Tax Credit, if I might. First of all, this particular tax credit — the METC — has been around for a very long time. I believe it’s in excess of 25 years. Is there a document available to parliamentarians that reviews the effectiveness of the Mineral Exploration Tax Credit? I would like to start with that.
Ms. Gwyer: Max or Oliver, I don’t know if you’re aware of any document. If not, we can see what we have.
Oliver Rogerson, Director, Business Income Tax Division, Department of Finance Canada: I’m not aware of any.
Senator Duncan: Thank you. I can assure you that as a one‑time former finance minister, the tax credit is incredibly important to Canadians and to the industry, and it is a very effective program.
This budget measure or tax measure doubles that tax credit if you’re looking for strategic minerals, and the strategic minerals are spelled out in the document. Natural Resources Canada, or NRCan, will have a regional map of where those minerals currently exist. My concern is that in doubling the tax credit for the strategic minerals, there may be an unintended consequence in some regions where perhaps these minerals don’t exist. The increased tax credit will drive the exploration industry to certain areas and lessen their economic contributions in other areas. Has that analysis been done in implementing this tax credit?
Ms. Gwyer: Max or Oliver, is that something you can speak to?
Mr. Rogerson: I’m Oliver Rogerson, Tax Policy Branch.
In developing the list of critical minerals that would be included in the tax credit, we did discuss with Natural Resources Canada the critical minerals list that NRCan previously developed for Canada. From that list, we received information on what is most likely to actually be found in Canada in quantities that could turn into a mine. This measure only supports exploration. It’s looking for mineral deposits that could at some point in the future be mined or extracted.
We were looking at what is actually likely to be found in Canada, and certainly NRCan is aware of the regions in which it’s most likely to find certain minerals. The minerals that the measure supports are those that are particularly used for the development or production of clean technologies such as batteries and permanent magnets for zero-emission vehicles. Since those are the materials that are required, those were the minerals that were included in the list.
Senator Duncan: Thank you.
Yes, I appreciate what the minerals are for, but was that regional map applied in developing this tax credit? We could see a real regional disparity in the exploration industry and an unintended consequence of the exploration industry going from one region to another, which would have an economic consequence for that province or territory. That was my question.
Mr. Rogerson: Thank you for the question.
The measure is really aimed at supporting exploration for the specific minerals. It’s not a regional development measure. So wherever the minerals can be found, the exploration for them would be supported.
Senator Duncan: I understand that, but if you’ve applied the information from NRCan, you know where this is likely to be an effective tax measure. Because it doubles the regular exploration tax credit, I’m asking if an unintended consequence is that we are going to have a regional disparity. Is that in your information?
Mr. Rogerson: That’s not something that I have information on right now, no.
Senator Duncan: Thank you.
Senator Bovey: I’d like to thank our witnesses.
My questions are around measure (o) set out in the summary of the bill, the new graduated disbursement quota rate for charities. I appreciate that the government did consultations last year on this issue, and a number of key issues rose to the surface.
I’ve got a number of questions. First, can you tell me what you mean by “charities in our communities”? Are you talking about the large city foundations, like the Vancouver Foundation or the Winnipeg Foundation, or are you including in this endowment funds within specific not-for-profit organizations, such as arts organizations and other not-for-profits?
When I’ve got that answer, I have some other questions.
Blaine Langdon, Director, Charities, Department of Finance Canada: Thank you for the question.
To answer your question, maybe I will describe, generally, how the disbursement quota works, and that might make it clear whom it impacts. The disbursement quota is the minimum amount an organization needs to spend each year on charitable programs or grants to other organizations. It’s based on the percentage of their investment assets.
So this is primarily going to impact foundations, private foundations and public foundations, such as the Vancouver Foundation, one of the examples you mentioned, and also a whole host of other foundations in Canada. It would tend to have less of an impact on operational organizations like arts groups. So while the disbursement quota would apply to any of their endowments that they hold, those organizations are typically already spending most of the money they bring in, so they would be easily meeting their disbursement quota. It would generally have more of an impact on foundations than operational organizations.
Senator Bovey: To follow that along a bit, organizations raise money for their operations. They also raise money for their endowments, which have, over the years, been treated like foundations, with rules as to what they can expend out of their endowments. That’s part of my question.
In the consultations a year ago, how many and what kinds of organizations were involved in the Department of Finance’s consultations, and how extensive were the responses? Is this change in the disbursement quota rate based on the consultations you held a year ago?
Then I’ll move on after the answers to those. But I think in operations, you have to understand that there’s a difference between the operation of an organization and their foundations, and some organizations have very rich foundations.
Mr. Langdon: Maybe I can be clear on the first part. If you take an arts organization, and they have cash in the bank and investments, there would be a disbursement quota obligation on those amounts; there would be a 3.5% or 5% disbursement obligation based on the value of those investments. That organization would have to spend an equivalent amount on charitable activities. Typically, with an operational organization, be it an arts group or a hospital, they would already be meeting the disbursement quota.
As it applies to, for example, a parallel foundation, there would also be a disbursement obligation on that. Those would be the organizations that, by and large, would be required to spend more on their programs.
With respect to the second part of your question, the consultations that we held were largely run over the summer of 2021. It was primarily online. We were planning to do more proactive engagement, but because of the election, we needed to step back somewhat.
We received about 100 what I would call unique submissions from a variety of organizations, foundations, umbrella organizations for the charitable sector, tax professionals, et cetera. Most of those were fairly comprehensive in nature, and we largely based our analysis on those. We also received a number of what we would refer to as write-in campaign-style letters. We got well over 100 of those as well, so there were about 200 in total.
By and large, we looked at the data from the T3010s that are filed by charities for the annual return. We did our analysis over the last decade and further back as to what the investment returns of foundations and charities are. We put forward our recommendations on that basis. Of course, we also took into consideration the submissions of, as I said, charities, foundations and umbrella organizations. It absolutely formed an integral part of our analysis.
Senator Bovey: The charitable sector can see an increase of $1 to $2 billion annually as a result of this. What was that data based on?
Mr. Langdon: I think the billion-dollar figure comes from the Budget 2021 announcement. When we did a bit of a deeper dive into those figures, we had to scale that back. We currently estimate that the increase in charitable expenditures would be about $400 million annually, based on the proposed rate. That looks at the foundations that are currently spending either at 3.5% or below and that would have to increase their expenditures to 5% in order to meet the new disbursement quota.
So as I said, it’s primarily based on the annual information returns from charities.
The Chair: As chair, I’ll ask Ms. Gwyer if you can follow up if there are any additions to that last question asked by Senator Bovey. Follow up in writing, please.
Ms. Gwyer: If there’s anything additional, we can follow up.
The Chair: The sponsor of the bill, Senator Loffreda, will have the last question.
Senator Loffreda: Thank you, Ms. Gwyer and all of our witnesses, for being here this morning. Maybe the written response won’t be necessary, because I’ll follow up now. Based on my experience and interactions with numerous philanthropists, measure (o), set out in the summary, which introduces a new graduated disbursement quota rate for registered charities, is very welcome — going from 3.5% to 5% to assets exceeding $1 million.
Senator Bovey covered a lot of ground. There have been, as she mentioned, consultations on boosting spending by charities in our communities, which was a very relevant consultation. Many key issues were raised and discussed.
You did mention, in Budget 2021 we were talking about $1 billion to $2 billion annually. You’ve mentioned it’s now $400 million per year. Based on your consultations and on the documentation you may have, why not a higher percentage, given its significant impact on those who rely on its services and the economy as a whole? Why is Canada’s percentage rate so low?
Mr. Langdon: Thank you for your question. Just to situate the Department of Finance, obviously we would have done our analysis and made recommendations to the government. The government is obviously the decision maker, and they would have chosen the rate that they wished to set the disbursement quota at. I can speak to some of the figures and the analysis that we looked at.
As we mentioned in our consultation paper on the disbursement quota, we looked to strike the right balance between ensuring that there’s an appropriate level of funding for charities and ensuring the long-term sustainability of funding for the charitable sector. Part of that is ensuring that foundations, which are a primary source of funding for charities, are able to provide funding over the longer term.
When we did look at the figures, we estimated that foundations were receiving interest and investment income to the tune of about 5% annually. That rises to about 7% when the total returns or realized gains on investments are included. Foundations, of course, are making gifts and grants to other organizations out of that. They’re also incurring administrative expenses associated with that.
In terms of the long-term sustainability of funding and to prevent organizations from having to unduly encroach on capital, we believe that 5% would be an appropriate rate. Anything higher than that, you start to see foundations actually having to encroach on the capital, which results over the longer term in a potential decrease in funding for the charitable sector.
Just on the last part of your question, if I may, the 5% rate set here in Canada, there aren’t a lot of comparable jurisdictions that have an expenditure rate for charities. The best example would be the United States. Their rate is also 5%, but they include management and administration expenses in that, so in fact, at 5%, we’re a little bit higher than them.
Senator Loffreda: Wasn’t it 9% a few years ago?
Mr. Langdon: Sorry, 9% . . .
Senator Loffreda: The disbursement quota?
Mr. Langdon: No. The disbursement quota at its highest in Canada was 5% in the 1970s, and it’s been between 3.5% and 4.5% over the last number of decades.
Senator Loffreda: So there was never discussion about bringing it close to 9% or 10% or increasing it? I understand it’s a government policy decision, but I’m interested in your consultation and what you would have recommended.
Mr. Langdon: Well, again, I think our role is to provide advice to the government. We presented a range of options and the economic impact that those would have resulted in. Obviously, increasing it to 7% or 10% increases expenditures in the short term but could have a detrimental effect on the ability of foundations to fund charitable programs over the longer term. This would particularly affect organizations that don’t solicit new donations. There are a significant number of foundations that rely on legacy endowments to fund charitable programs.
The Chair: Thank you, Senator Loffreda. Ms. Gwyer, thank you very much for appearing today with your team.
Before we adjourn, I would like to remind the witnesses through you, Ms. Gwyer, that written responses to the clerk should be sent by the end of the day on Tuesday, November 29, 2022. Do we agree on that?
Ms. Gwyer: Yes. Agreed.
The Chair: Thank you. I would like to inform senators that our next meeting is this afternoon, from 3 p.m. to 5 p.m., in this room, W-120.
Before closing, honourable senators, on behalf of all senators, I would like to thank the entire support team for this committee, those in the forefront of the room as well as those behind the scenes who are not visible. Thank you for all your work, which contributes enormously to the success of our work as senators for all Canadians.
On this, I declare the meeting adjourned.
(The committee adjourned.)