Proceedings of the Standing Senate Committee on
National Finance
Issue No. 18 - Evidence - November 15, 2016
OTTAWA, Tuesday, November 15, 2016
The Standing Senate Committee on National Finance, to which was referred Bill C-2, An Act to amend the Income Tax Act, met this day at 9:35 a.m. in public to give consideration to the bill; and in camera for the consideration of a draft agenda (future business) regarding its study on the federal government's multi-billion dollar infrastructure program.
Senator Larry W. Smith (Chair) in the chair.
[English]
The Chair: Welcome to the Standing Senate Committee on National Finance, colleagues and members of the viewing public. The mandate of the committee is to examine matters relating to federal estimates generally, as well as government finance.
[Translation]
During the first hour of our meeting this morning, we will continue our study of Bill C-2, An Act to amend the Income Tax Act.
[English]
My name is Larry Smith, senator from Quebec, and I chair the committee. Let me introduce briefly the other members of the committee.
[Translation]
To my left is Senator Ghislain Maltais. To his left, Senator André Pratte.
[English]
Senator Joseph Day and Senator Jim Cowan.
Of course, representing the ladies strength and power, from Saskatchewan, Senator Raynell Andreychuk; and to her right, a famous individual from the Rock, Newfoundland. Senator Beth Marshall, former Auditor General.
Today, to comment on Bill C-2, An Act to amend the Income Tax Act, we have invited two witnesses.
We seem to have one witness present at this time. Sir, it's great to see you. They happen to be both in Toronto today. I'm not sure where our other witness is, but we're hopeful she will get out of the subway. I heard there is a subway delay.
We welcome Jack Mintz, President's Fellow, The School of Public Policy, University of Calgary. We're awaiting, from the Canadian Association of Retired Persons, their Vice-President of Advocacy and Chief Operating Officer, Wanda Morris.
Thank you very much for being with us here this morning to speak to Bill C-2.
[Translation]
We look forward to hearing what you have to say about Bill C-2.
[English]
We would like to hear your opening remarks, and then we will have a question period.
Members, as you know, for the second part of our meeting, we will go in camera to discuss future business and future reports of the committee. Let's first get into and discuss Bill C-2.
Dr. Mintz, thank you very much for being with us. We appreciate it. You have the floor, sir.
Jack Mintz, President's Fellow, The School of Public Policy, University of Calgary, as an individual: Thank you very much, Mr. Chair. I'll give brief comments and am happy to take questions. I think I have been before this committee before on Bill C-2. I talked about the marginal tax rate changes under the bill.
Today, what I thought I would do in my brief comments is to make one particular point. Taking into account both Bill C-2 and future tax initiatives, my view is that I think we're going to be worrying about how much taxation is going to impact on middle class savings in this country. This happens in two ways. Higher taxes lead to lower after-tax income — economists might think of this as the income effect — thereby reducing both current consumption and savings needed for future consumption.
Second, high marginal tax rates on investment income make it more difficult for savers to accumulate wealth for retirement and contingency purposes, especially in the face of low interest rates and existing inflation.
On the first point, the reduction in the second marginal tax rate from 22 to 20.5 per cent will provide some benefits to middle income groups, at roughly $350 for each individual and $500 per couple. Those are individuals with incomes roughly between $45,000 and $90,000.
There is also some benefit to lower- and middle-income families with the new child tax plan in the sense that the benefits go up and their after-tax incomes will increase as a result. Those are two good things, in my view.
However, much of these benefits are routed by other tax increases, including the removal of some tax incentives. I'll talk about, particularly, the change to the Tax-Free Savings Account limits, the carbon tax beginning in 2018 and scheduled CPP payroll tax increases.
Overall, I expect taxes will, of necessity, rise over time as government spending has been ramped up, deficits enlarged and aging in society puts fiscal pressures on governments, reducing income available for households to save in the future.
On the second point, the existing tax system is highly unfair to savers. Savers have already paid taxes on earnings, yet get walloped by taxes on investment income, unless their savings are sheltered in RRSPs, pension plans and TFSAs. This double taxation results in savers paying more tax than consumers through their lifetime.
On top of this, savers pay tax on their nominal investment returns, which, in part, compensates savers for the loss and purchasing power of their wealth due to inflation. Governments also unfairly tax risky savings by taxing the gains but not fully sharing losses with investors. This increases the effective tax rate on risky investments.
Governments provide little relief for averaging except for timing RRSP deductions, and with the progressive tax system, investors with one-time receipt of income pay more tax than those who receive the same amount over a longer period.
Bill C-2 does lower the marginal tax rate for those with incomes between $45,000 and $90,000, as I mentioned. However, the reversal of the TFSA limit will result in a substantial amount of marginal savings being subject to tax on nominal investment returns. Further, increases in clawback rates for the child tax benefit plan will also increase marginal tax rates beyond 50 per cent for many income groups.
To accomplish income targets at retirement or a nest egg for contingencies, Bill C-2 will make it much harder for many savers to accumulate wealth for future purposes. Actions are needed to support savings, especially in this world with low interest rates. Once you take into account inflation, there is almost a negligible real rate of return on savings. This includes expanding RRSP, private pension and TFSA limits, and the reintroduction of averaging and some partial loss relief as in years past.
That concludes the comments that I wish to make at this time on Bill C-2.
The Chair: Thank you very much.
Senator Marshall: Thank you very much for your presentation.
I want to talk about the tax cuts. Based on the material we have been provided with, it seems like the monetary benefit is greater at the top, over $150,000 in taxable income a year. When the minister appeared before us and we asked him that question, he fell back on the child care benefit that is now being paid to families based on income.
I'm trying to look at this in a logical fashion. All of this spending is creating an increase in our deficit. We're now into deficit spending. We're borrowing money for the tax cuts because it's not revenue neutral, and we're borrowing money for the child care benefits.
It looks like future generations are going to be paying for this benefit. We're borrowing money to give to parents to raise their children, but those same children are going to be paying off the deficit. In some cases, it is going to be grandchildren, because the government is now into 50-year borrowing.
Would you have any comment on that? Am I looking at this correctly?
Mr. Mintz: I think that we have to be very concerned about where we're going with respect to public deficits and debt.
If you look at gross debt as a share of GDP for Canada — in fact, I was around the table at the Department of Finance when I was a Clifford Clark Visiting Economist in 1996 and 1997. At that time, the gross debt as a share of GDP reached a peak of over 130 per cent of GDP. Because of Canada running surpluses from 1997 to 2007, we actually brought down that gross debt as a share of GDP to as low as 80 per cent, which was pretty remarkable.
In fact, it was remarkable to run 10 years of surpluses. Not many governments have done that. I credit, particularly, the governments of Mr. Chrétien and Mr. Martin, and also the surpluses that did run under Mr. Harper prior to the financial crisis of 2008.
Not surprisingly, the global recession that happened in 2008-09, which hit Canada hard, did result in a ramp-up of deficits and debt at that point. We did start making some progress to move back to a balanced budget, which I think had actually happened in the period up to about 2015. In fact, I still think that we probably did balance by 2015 or 2014 or close to that point.
Now we're running deficits again, but if you look at gross debt — and this is all government debt that I have been talking about — it has now gone back to about 110 per cent of GDP compared to 80 per cent in 2007. Sorry; I think it was 90 per cent. My apologies on the number; I'm going by memory right now. Actually, it's now over 110 per cent of GDP, and that's moving up closer to the 135 number that we had at the height of our post-World War debt in 1994-95.
My comment about aging is very important. We do have a number of age-related expenditures: Old Age Security and health expenditures, particularly. As we know, the biggest expenditures in a person's life are after the age of 65, especially after 75 years of age these days. Also, we know that when you change the portion of the population post retirement relative to those who are working, tax GDP ratios will naturally fall over the next number of years because people pay less tax when they are retired, especially under the Canadian tax system, compared to people who are working. As a result, you will have a bigger gap between spending per capita and taxes per capita as society ages over the next decade or two.
This is going to put more pressure on deficits. That's my comment. With the ramp-up in program spending that has occurred since last year and the expected program expenditures now that the Department of Finance no longer has a fiscal anchor to worry about, we will see significant tax increases down the road or major cuts to spending as we have to deal with this deficit problem that will be looming, as well as a very high debt ratio that we will likely get back into if we continue our pace.
Senator Marshall: So we can't borrow forever. At some point and time, we will have to have some pain to pay up.
Mr. Mintz: That is correct.
The Chair: Welcome to Ms. Morris. We thank you for your presence. We heard you got caught in the subway. I hope everything is okay and that you were able to escape.
Wanda Morris, Vice-President of Advocacy and Chief Operating Officer, Canadian Association of Retired Persons: Actually, what happened is I had the Ottawa address, so I was at 140 Wellington in Toronto. I'm happy to be here now.
The Chair: That's great. That's something I would probably do. Congratulations, and thank you for being with us.
Would you like to give us a comment, if you have a quick opening statement, and then we'll get back into the discussion with yourself and Dr. Mintz?
Ms. Morris: Absolutely. I am Wanda Morris, Vice President of Advocacy at CARP.
Clearly, financial security to Canadians as we age is a top priority for our organization. We represent about 300,000 individuals across the country.
In February of 2015, we polled our members. At that point — it had not happened yet — there was an anticipated increase in TFSAs. We polled our members as to whether they would support such an increase. Not surprisingly, two thirds of our members, at that time, did support an increase. In fact, 81 per cent of them mentioned that they contributed to a TFSA.
In that survey, we asked a couple of other retirement questions. Seventy-one per cent said that they wanted changes to RRIFs to avoid outliving their savings, and over four out of five said that the government should encourage saving, not spending, in terms of government policy direction.
The trick is with a question like this: Do you want more of a particular benefit? The answer is just about always going to be yes. So we recently — it hasn't closed yet, but I have some preliminary numbers — asked a different question where we gave people six potential tax-free form options and asked them to rank them in order of interest from one to six. The most popular one, with 49 per cent of respondents ranking it as either their first or second choice, was removing the mandatory withdrawals on RRIFs. That's something that we hear from our members very significantly. The second one, with 43 per cent ranking it either first or second, was to follow through with the government's promise of a special index for seniors on OAS and CPP.
Returning TFSAs to the previous limit was tied for third, with about 38 per cent of people saying that that was either first or second. It tied right along with keeping the OAS age at 65, rather than returning it to 67.
For completeness, I'll share the two other questions that we asked: Are you interested in spousal RRSP splitting? That received 29 per cent support as either a first or second choice. Increases to the RRSP limit received 9 per cent support.
I will simply share that data and be happy to answer any questions.
The Chair: Thank you very much.
Senator Marshall: I have a brief question. When you were ranking those six items, were explanations provided? You said they would like to remove the mandatory withdrawal on RRIFs. Is that because people are living longer? Would you know why that was ranked second or third?
Ms. Morris: That was actually ranked first. Absolutely, we hear about this from our members a lot.
As you're aware, there are mandatory withdrawal rates from RRIFs. While they have been reformed recently, our members don't think that reform went far enough. They would like it to be completely removed. The reasons are two fold. One is that the returns that people can safely get on investments are getting smaller and smaller, so they want to keep money in their RRIFs longer. Secondly, withdrawal from a RRIF is often tied to spending, and there is a perception that they can safely spend the amount they withdraw. I realize that they have the flexibility to not spend what they withdraw, but there seems to be a behavioural tie-in. They are very concerned about outliving their savings.
Senator Marshall: Thank you.
Senator Cowan: Welcome. I appreciate your comments this morning. My question is for Dr. Mintz.
We know our economy is inextricably bound up with the economy of our neighbour to the South. Without commenting on the recent election results south of the border, as policymakers in Canada, as we decide on tax policy and tax rates, how conscious do we need to be of what is happening south of the border? How closely do we need to monitor, if not follow, the tax regime in terms of tax rates south of the border?
Mr. Mintz: Thank you very much Senator Cowan.
Actually, I think we will have to be on guard for two things that might occur in the United States after the recent election. The first is one that I think a lot of the people in the financial sector believe might happen, and that's possible "reflation" in the United States, as we'll see much bigger spending and deficits and tax cuts as a result of both the election of President Trump and the Republicans holding the Senate and the House of Representatives. In fact, Republicans in the past, as we saw under Reagan in the early 1980s and under George W. Bush in the early 2000s, weren't afraid to create bigger deficits, partly on the presumption that if they run big deficits and create more debt, it makes it harder for future Democratic governments to increase spending. So this is a well-known argument that goes to the past.
As a result, if there is some reflation and higher interest rates in the United States, that's going to put pressure on Canada in terms of how we respond. The good news is that any fiscal action taken in the United States that increases nominal GDP, in both inflation and real growth, will be good for Canada as we are major exporters to the United States. That will potentially lead us to eventually tighten up on our monetary policy and increase interest rates as well. Of course, that will be good for savers because they are getting badly hit by the low interest rate environment today.
On the other side of it are potential tax cuts. President Trump has talked about a 15 per cent corporate income tax rate. We have to remember that there were both Republican and Democrat proposals to reduce corporate rates to the range of 20 to 25 per cent, depending on which package one wants to talk about. This is actually an area where I could see very quick action taken, even in the next 100 days, on corporate tax reform.
Major personal tax cuts are being considered by and proposed by Trump, and they could also happen. That would potentially lead to a reduction in the federal personal tax rate, the top rate, from 39 per cent down to 33 per cent, which doesn't include the state rates, but that would bring it up another 5 or 6 points at most. If you remember, Canada now has an average marginal tax rate at the top end that is, in U.S. dollars, around $150,000 when that top rate hits. The top rate in Canada is now 53 per cent on average, which is fourth highest amongst OECD countries. This is going to have a significant impact on potential attraction of talent to Canada but also keeping our talent in Canada as the U.S. economy could potentially rev up as a result of these tax reductions.
As we saw in 1986 when the U.S. government undertook Reagan tax reform, which led to very substantial reductions in both the corporate rate and the personal tax rate, there was quite a reaction in Canada that we had to do something to deal with the competitive pressures that the tax reform would have on Canada. We already planned on and in fact implemented half of the corporate tax reform that was consistent with the U.S. reform. That pushed us to make sure we did the rest of that reform after 1986, but we then engaged in personal tax reform that was not planned in Canada when the U.S. undertook such a dramatic reduction in their personal tax rates compared to what they previously had.
We'll have to see. It's very early to tell what is going to happen. It is only speculation right now. But I think it's something we probably will need to respond to if these things do happen in the future.
Senator Andreychuk: Thank you, Dr. Mintz. As usual, I can understand what you're saying. That is helpful for someone who doesn't think about the finances but thinks about foreign policy and policy statements.
I want to clarify one point. You were saying that these moves in Bill C-2 and others would hurt what you called "risky business." I would like clarification of what you mean by that, because the debate on the other side on our trade, which we're so dependent on, is that we are risk averse or very cautious. Therefore, we are looking at ways and means to encourage business to venture out in new ways, new technologies, new inventions, et cetera.
I wondered what you meant by "risky business." Is it one we should not be supporting or something we should really pay attention to if we want to be competitive worldwide?
Mr. Mintz: Thank you very much, senator, for your question.
First of all, when you think of a risky business versus a non-risky business or something with less risk, it is a matter of the potential profitability in the future. With a risky business, you could potentially get huge gains but also incur and have a higher probability of losses. That's what is meant by a firm being more risky compared to a firm having a less risky return.
For example, if you are in telecommunications and you have rate-of-return regulation, the risk is not too large because that could be passed on to consumers through prices. You know what your price regulation will be, and that takes a lot of risk out for investors in the communications industry.
But we know when you are a start-up company and you're in innovation, in particular, the possibility of a win is pretty low. Studies have shown it could be well below 10 per cent, but it could be a big win if you do succeed and then the others tend to fail. That is a pretty risky business.
What I was referring to is that the tax system actually penalizes risk because the government is there to take a portion of the money. These days, depending on the tax rate — let's say it's 50 per cent — the government is there to take half the gain. But if there is a loss, the government is not there to share the loss at 50 per cent. They may allow some of the losses against future capital gains, if you can get that, or other income on a carry-forward basis or some carry-back provisions under the tax law, things like that. There is some loss sharing by government, but it is not full loss sharing.
That is why high tax rates, such as the new high marginal tax rates in Canada, are a major discouragement to entrepreneurship and investment in risky activities. That is very anti-innovation. If we were going to have an innovation policy in this country, we would need to look at marginal tax rates that have become far too high today, especially after the recent changes at federal and provincial levels.
Senator Andreychuk: Ms. Morris, you indicated that RRIFs are of concern to your membership because of the fact that they are pulling money out and may use it for things.
Did you factor in the fact that when we started the RRIF business, most people were intended to be retired at that time, and now they've got supplemental income? Most people are doing something else because they don't see their savings as sufficient, which penalizes them further. Was that part of the discussion?
Ms. Morris: You raise an excellent point. The other one was the longevity risk. Before, the chances of living past 80 were remote. Now we have members in their 100s.
The current regime certainly does impose some of what our members would say are significant risks. It really affects their peace of mind. Even people who have done all the right things, saved well, got good investment advice and have a nest egg, many of those individuals are facing significant anxiety at this point, worrying they will outlive their savings.
[Translation]
Senator Maltais: My question is for Ms. Morris. First of all, I want to congratulate you on your report. You are very close to the population and to the concerns of Canadian men and women. You are not in some international sphere of pension plans, you are close to the daily reality of Canadians.
I am from Quebec and I know that many people think that retirement age today is no longer 65, but that people will work as long they are in good health. That is why there are more and more people of 65 to 75 in the labour market currently.
I really like the idea of abolishing the mandatory age at which one must withdraw money from one's retirement fund. That's terrific. The government would not lose anything, since the tax is deferred and it would receive it later. However, you did not discuss the matter of contributions to pension funds for workers of more than 70 years of age. They would be very happy to be able to continue to contribute to their pension plan. I think this is discriminatory for Canadians. What do you think?
Several citizens informed me that, first, they would like the obligation to withdraw money from their retirement funds after 70 to be abolished, and secondly, they would like to be able to contribute for a few more years to their pension plan.
What do you think?
[English]
Ms. Morris: You raised a couple of excellent points, and I will speak to them in turn.
We had a demographic milestone this year. For the first time, we have more Canadians over 65 than under 15. I think the government should be focusing its attention on how we keep our older workers employed in the workplace. The idea of retirement at 65 made a lot of sense when life expectancy was in the high sixties. Now we should be looking at keeping people engaged not only for their health but for the health of the economy. Anything we can do from a government perspective to incent people and organizations to continue to work past 65 should be strongly considered.
With the mandatory RRIF withdrawal, what we have is the opposite situation. We stop allowing people to contribute to their RRSPs and force them to take money out of RRIFs instead of a whole re-look at the retirement package and how we do that with an aim to keeping people in the workplace.
My boss, Moses Znaimer, is great example. At 73, he is still running both CARP and ZoomerMedia Limited. That's what we should look for in our seniors, to be very engaged and effective.
In terms of whether it is revenue neutral, I have seen a piece prepared by the C.D. Howe Institute which argues that it is revenue neutral. There are a couple of issues.
Obviously, when the RRIF is ultimately withdrawn, when the RSP is ultimately cashed in, there is income coming to the government. What we are trading off is if it comes in later, there is a bit of a loss through the time value of money, but if it comes in a bigger sum all at once, it is potentially taxed at a higher tax rate. The C.D. Howe Institute argues it is revenue neutral.
The other piece that we need to consider is the OAS clawback. If people are keeping money in a RRIF and not taking it out, they could be potentially receive more OAS than they otherwise would. That's only a 15 per cent clawback, and I'm not sure that people's behaviour will be driven by such a small amount. Overwhelmingly, certainly in terms of peace of mind and objectives of keeping people employed, the reduction of mandatory withdrawal is a good strategy.
[Translation]
Senator Maltais: Thank you for your answer, madam. I would like to know if your report raises the situation of retired people who have part-time jobs because their retirement income is not sufficient. Did you examine whether these people could contribute to their retirement fund on that part of their income?
[English]
Ms. Morris: You raise another excellent point that ties into CARP's work on older workers. We know that two thirds of individuals who work over the age of 65 earn less than the median wage. What we see is age discrimination in the workplace around hiring older workers. If you are an executive, I think here is a sense that white hair equals wisdom and age is not necessarily an issue, but with people in junior positions, they find it incredibly tough to find new work. Statistics Canada in 2015 estimated that 160,000 people from the age of 55 to 64 lost their employment, and those people will be challenged to try and replace previous wages.
To your point, many people are finding themselves unprepared for retirement, and I'll throw out one more stat. The Broadbent Institute did a study that showed the median investment savings for individuals aged 55 to 64 without a workplace pension was $4,000. The reality is that so many Canadians are woefully unprepared for retirement and will be working in low-wage jobs. There I think the answer is not RSPs because they don't need the tax relief at low wage paying jobs. It is TFSAs. The TFSA would be the retirement savings vehicle choice for them to the extent that they are able to save when they are earning low wages.
The Chair: Dr. Mintz, would you like to add anything?
Mr. Mintz: There are some points I agree with, but I will put it on a slightly different take.
The Department of Finance said to remember that when people take money out of RRIFs they can save it, and with the TFSA increase they would still be able to earn tax-free income. In fact, now that we have taken away that TFSA increase, I would personally support a longer period in which people can hold their RRSPs through a lower withdrawal rate for RRIFs on the argument that the tax system discriminates against savers, which was the point I made at the beginning.
The other change that I think one should contemplate is increasing the age limit for RSP contributions. At one time it was 71 years of age, and then because of deficit fighting we lowered it to, I think, 69. We've now put it back up, but actually if you look at expected lives, they have increased tremendously now. People are living into their eighties. You can expect to live into your eighties if you make it to 65. Therefore, we should be trying to increase the age limit, I think, for RSPs to a higher number, like 74 or 75. In fact, interestingly, Holland actually indexes age eligibility to lifetime expected lives, so if the expected life goes up, automatically there is a change in these lifetimes.
The other point I want to make, which I think will be a point of disagreement with Ms. Morris, is that I think we also have to worry about deficits. That's another major call on the savings of individuals, which will be through future taxation. I think it was a tremendous error to reverse the age of eligibility from 67 back to 65. By and large, it went over relatively well. It's hard to make these changes. It was all phased in so that it would not hurt any existing retiree or anyone close to retirement. It would be something that would be more for the future. If you look at countries around the world, 67 has become more of a norm. As I mentioned, even in Holland it has gone up to a higher level because people are working longer.
In fact, the Old Age Security, the Canada Pension Plan and other tax benefits all at 65 — well, not so much some of the tax benefits, but those two amounts have been shown in economic studies to have one of the biggest impacts on early retirement. I think many people do want to work longer, but of course if they are able to get support at an earlier period and they make a decision to work or not work, they'll end up choosing not to work because it's beneficial for them to get their income.
We also have to remember that the less income you have, the lower your marginal tax rate. So if you do work longer, as Ms. Morris pointed out, you will end up getting higher taxes imposed on your OAS or CPP benefits. Again, you start making these calculations. What economists have shown is that you do encourage early retirement at the age of 65.
I think if I was going to make a change in the package, we really have to think about the age of eligibility for various incentives and support that we provide. In fact, I would support lower withdrawal rates for RRIFs. I would support a higher age for people to contribute to their pensions and RSPs, but I think we also have to look at higher eligibility ages.
[Translation]
Senator Maltais: I want to sincerely thank Ms. Morris for her complete and precise explanations. In invite her to come to Quebec to meet with us to continue her work, because it is very important for a large part of the Canadian population and will lighten the federal retirement plans.
[English]
Senator Pratte: Ms. Morris, in the poll you did, did I understand correctly that 38 per cent of the members you polled said that they agreed with the change in the TFSA from $10,000 to $5,500? Is that correct?
Ms. Morris: No. We polled on that specific question last year, and two thirds of our members supported the proposed increase at that point, in February 2015.
What I wanted to share with this committee is generally, psychologically, any time you ask someone if they want a benefit or not that two thirds is not surprising. I wanted to know the relative weighting of the different potential tax reforms and how much people wanted the one or the other. The poll is still open, so these are preliminary results, but by far the most significant thing that people wanted was the elimination of mandatory withdrawals on RRSPs. Forty nine percent of people who responded ranked that as their first or second choice out of six. The 43 per cent was for the special seniors' index for benefits, and then 38 per cent of our members ranked either first or second — it was a tie for both — returning the TFSAs to the $11,000 limit and ensuring that the OAS stayed at 65 and didn't go back to 67.
Is that clear?
Senator Pratte: It's clear, but I find it quite surprising that you would have 38 per cent of the people putting that first or second, since that's a negative measure; it's not a positive. It's something they would lose, and they still ranked it as first or second.
Ms. Morris: No, they are looking for the TFSA limit to go back to the $11,000 that it was.
Senator Pratte: Okay, I misunderstood. I'm sorry about that.
Senator Day: Could I have a clarification on that point for the record? You said $11,000. Were they hoping it would go up from $10,000 to $11,000?
Ms. Morris: To the indexed amount.
Senator Day: Well, $10,000 was not indexed, and it was 10 and not 11.
Ms. Morris: Okay.
I don't have the survey results with me, so I will send you the specific questions we asked and the actual poll results.
Senator Day: That would be helpful. Thank you.
The Chair: Thank you, Ms. Morris. You'll get that to our clerk, and she will follow up with you.
Senator Cools: I would like to welcome both of the witnesses before us today and thank them for their expertise and great contributions to life in Canada.
Many years ago, Canadians used to refer to the tax system as the tax man. The tax man at the time took the visible form of being a department of government. It used to be called the Department of National Revenue.
Somewhere around 1999 there was an atmosphere of change. It was decided that they would no longer have a Department of National Revenue and they brought in a statute and created the Canada Customs and Revenue Agency. In 2003 they changed that again called it the Canada Revenue Agency.
I have studied some of these issues a fair amount. There is a difference between a department of government and an agency. Great reforms and changes come through and they pass, but we never really get a report or an assessment or evaluation on the degree of the success that the changes have achieved.
Have you formed any opinions respecting the relative success of the changes in the department? The changes would have been far more fundamental and far-reaching than we think. One of the changes is that it is a more difficult proposition for a minister to control an agency of government than a department. Maybe you have not given it any thought or it has not crossed anyone's minds, but it is something that has lingered in my mind for many years. This is an opportunity to for me to get clarification.
The Chair: We have some smiling faces. Who would like to approach that question?
Mr. Mintz: I think I can. In fact, I was on the advisory committee or council when the Department of National Revenue was being converted into an agency and heard what advice outside people would give on the things to look for and motivation, et cetera.
First, the Department of National Revenue and the Canada Revenue Agency, the new agency, are not responsible for tax policy. That's the Department of Finance. The Canada Revenue Agency — and former Department of National Revenue — is responsible for administration.
There were several papers written around this time. The main reason for the shift from a department to an agency was that the Department of National Revenue was having difficulty hiring people with appropriate compensation to do the kind of difficult work that would be required for administrating the tax law, particularly in areas like international income and transfer pricing and in some of the new technologies that were coming out requiring people to work. Effectively we were moving to a more digital approach for collecting taxes and things like that. You needed a different type of worker with some technical savvy as a result.
Salaries in the private sector were much higher than what the Department of National Revenue could afford. Also, the department was actually under Treasury Board guidelines, and so that put significant restrictions on what they could do in terms of their ability to ensure that there was good human capital at the department. So those sorts of things, plus giving provinces a role through the board of the Canada Revenue Agency, were the motivations that led to the development of the agency as opposed to keeping it as a department.
Now how successful has that been? That is a very good question. In fact, that's one of the problems with governments today. There are lots of policies stating they will accomplish the following, but there is not enough post evaluation about whether we have actually succeeded in achieving the objectives that were attempted. It would be an interesting study. I haven't seen one, but that doesn't mean there is not one out there. It would be an interesting study to look at what the changes of the Canada Revenue Agency had done to have a better tax system.
It's also important today because the last budget introduced a whack of money to be given to the Canada Revenue Agency for auditing. Small business and anyone with international income, or corporations, know that the tax man or the tax person is coming more often now to audit in particular areas. We want to ensure proper oversight to make sure that people are not getting rewarded just simply because they are collecting more taxes. The Canada Revenue Agency doesn't do that, I understand, but that creates incentives that could be worrisome. If an individual's promotion and everything else starts to depend on how much money they are bringing in, as some countries have done, that can create problems for the tax system in general.
That post evaluation, senator, is an excellent idea. In fact, it might be something the Senate may want to do at some point.
The Chair: Ms. Morris, any comment?
Ms. Morris: No.
Senator Cools: Perhaps we should take a look at that. Some of these individuals have enormous powers. They can go into businesses, order their accounts closed and do all sorts of things. As a person in public life, I have a constant stream of individuals trying to talk to me about what is happening to them at the hands of the agency.
We should put it in our little pile of to-do studies and see if we can shed light on it. But at the time there was a lot of concern among many of us that it was being converted to an agency. In some instances, we still do not know what agencies are and what they do. It would be good to look at it with fresh, more mature and older, wiser eyes.
Ms. Morris: To address that last comment, let me pull on my previous role as the CEO of Dying with Dignity Canada and the idea of the autonomy of the Canada Revenue Agency. Some individuals present may know that Dying with Dignity Canada was audited and lost its charitable status. Certainly there was a perception among many that that was a politically motivated audit. I am a chartered accountant. The individuals coming in to do the audits said they had rarely seen such well-prepared working papers and that everything was in very good order. Somehow we went from that to the situation where even though the legalization of assisted dying had already been approved by the Supreme Court, we ended up losing our charitable status. That situation has not been changed. So I do second the senator's suggestion that this is an area that deserves some sober second thought.
Senator Cools: I heard quite a few reports of this sort of thing.
Senator Day: I raise a procedural matter. I interrupted Senator Pratte when he was asking questions. I don't think he had finished. I thought it was important to clarify the record with respect to the comment of $11,000, indexed. Then Senator Cools had a supplementary that has led us down the line a bit, but I yield to Senator Pratte.
Senator Pratte: Thank you, Senator Day. Yes, I was confused but I did have another question. Thank you.
Ms. Morris, you mentioned that it was difficult for elders to save money and at the same time that the higher TFSA limit was very popular. There seems to be a paradox here. Why do a lot of elders wish for a higher TFSA limit yet in many cases, at the same time, have a hard time finding $2,000 or $3,000 a year to save because their revenues, especially if they work in old age, their revenues are pretty low? Can you elaborate on that, please?
Ms. Morris: Just to be clear, when we do our polls, we are polling our membership only, not the broad demographic of older Canadians. Our members, by the fact that they can subscribe to CARP, tend to be a bit more educated than average, above average income and savings, so I would say that this could exist in our membership without saying that's a condition that exists across the country as a whole.
I think there are also those that see TFSAs as an effective estate-planning vehicle, and that's probably a benefit for some as well.
Mr. Mintz: I disagree a little about the problem of savings. In fact, Statistics Canada studies, as well as the work that I did for the federal, provincial and territorial Ministers of Finance back in 2009 and the McKinsey study that came out over the past several years — there have been several of them — show that 80 per cent of Canadians do very well to save for retirement. In fact, they certainly have good income adequacy when they retire once you look at all the assets that Canadians have, including housing equity, which is the biggest asset that all Canadians have for retirement.
There are pockets of people that don't have sufficient income, but I don't want to leave the impression that people are not adequately saving for the future. It's actually not true. That's why I worry about the tax on return to savings. What you have available for your income at retirement depends on not just what you contribute to the system or how much you put into savings, but also how much of a rate of return you get on your savings. If you're not even able to keep up with inflation because of the taxation of your investment income, then that is a real serious problem. That's why RRSPs, the pension system and TFSAs are very important because they do allow people to have sheltered income from taxation, and so they can accumulate their wealth faster and larger wealth for retirement purposes.
The Chair: In 2015, the TFSA limit was $10,000 and not indexed. In 2016, now it will be $5,500 and will be indexed. That is to reinforce a point of clarification under the present situation.
Senator Bellemare: I have a supplementary to the question that Senator Pratte asked of Mr. Mintz.
[Translation]
My question is about retirement savings. Do you think it will be as easy for the new generations of Canadians to save money as it was for the older generations?
[English]
The Chair: Dr. Mintz, did you understand the question?
Mr. Mintz: Yes, and I think this is where a number of studies have had differing results. What you have to do is project forward what you think the rate of return will be on investments, which we don't necessarily know over very long periods because even for a young Canadian, 25, 30 years of age, you're talking about 40 or 50 years hence. What will be the rate of return on savings over the next 50 years?
In their forecast, the Department of Finance uses a 3.5 per cent real return on savings, adding on 2 per cent inflation, so a nominal return of 5.5 per cent. You might argue that is too high relative to today, but is it high relative for a very long period? Especially after the U.S. election, we might start seeing higher interest rates in the future.
Some other people have taken lower rates of return and then of course you're going to have more of a problem with some people not having enough money for retirement purposes. It really varies a lot in terms of overall assessment, but the studies have shown that even when you're forecasting ahead, taking into account all assets, including housing equity, those in pensions, RRSPs and of course other financial assets and business assets, by and large, even at lower rates of returns, you're talking about maybe 75 per cent of Canadians will do just fine in terms of having enough money for retirement for their income adequacy. However, as that lower rate of return happens, that number will go down and it will go down further.
That's why I think the taxation of income outside of the RRSP and the TFSA and the pension plans is very important, because that's eroding the amount of money available for people to get a return on their savings in order to reach the target level of income that they want to have at retirement age.
The Chair: Thank you very much. We said that we would hold you folks with us for an hour and you have given us an hour and five minutes.
Thank you very much, Ms. Morris, for managing to be with us. We appreciate your time.
And of course, Dr. Mintz, an outstanding job as usual.
We thank both of you and wish you a great day.
(The committee continued in camera.)