FINA Committee Report

Turning the Northern Kitten into a Northern Tiger

Supplementary Opinion
Progressive Conservative Party of Canada

Canada has all of the ingredients, save one, to truly turn itself into an economic northern tiger. As a nation, we have the resources, the people, and the knowledge to turn Canada into a world leader. However, the one missing ingredient is federal leadership. Leadership is required to enhance and implement a bold agenda to strengthen the standard of living of every Canadian.

The Progressive Conservative Party believes that bold action should be taken to strengthen productivity and ultimately improve the Canadian standard of living.

Canada’s effective corporate tax rates are among the highest in the OECD. This creates a competitive disadvantage between Canada and our international competitors. In today's global economy, it is clear that competitive tax rates are essential. Tax reduction combined with meaningful tax reform will help create a more prosperous Canada.

The Canadian dollar has lost 20 per cent of its value against the U.S. dollar since the Liberal government was elected in 1993. Since 35 per cent of everything Canadians consume is from the U.S., a 20 per cent reduction in the Canadian dollar’s relative value represents a massive drop in the standard of living for all Canadians.

Canada’s poor productivity performance has been a major contributing factor to the decline in the value of our dollar. This low productivity growth leads to a vicious cycle as our low dollar decreases the incentive to innovate and increases the cost of production enhancing tools and technology. This in turn reduces productivity further and drives our dollar lower.

“When the Canadian dollar is weak the cost of capital goods is higher, since typically they are imported from the U.S. Therefore, Canadian companies will not invest as much in machinery and equipment, and we will not get the productivity growth that we otherwise would get.”

Gordon Thiessen
Former Governor
Bank of Canada

The weak Canadian dollar both reflects and serves to foster Canada’s lagging productivity levels. Specifically, the PC Party urges the government to take action to reform Canada’s antiquated tax system, reduce Canada’s regulatory burden, and strengthen Canadian productivity.

1.         Tax Reform

Canada’s productivity growth has lagged behind that of other industrialized nations in recent years. Canada’s productivity growth over the past two decades has been slower than every other G7 country. We have one of the worst growth rates in the OECD. A look at the impact of innovative public policy in other countries will highlight why Canada is falling behind. Ireland, for example, has utilized aggressive tax reform to encourage knowledge-based industry. From 1988 to 1999, Ireland had a real GDP per-capita growth rate of 92 per cent. For the same period, Canada’s GDP per-capita growth was an anemic 5 per cent. By cutting taxes, especially business taxes, Ireland attracted significant levels of foreign investment. Clearly, there is a direct correlation between levels of investment and levels of productivity.

Canada has a “branding” problem in the international investment community. Branding is especially important as today’s capital is highly mobile. Capital can move unimpeded to friendlier jurisdictions. Investors do not feel Canada provides the best investment opportunities. Even Canadians look elsewhere for investment and employment opportunities. Perception is reality. Canada can only alter the opinion of foreign investors through significant improvement of the real and perceived business environment. Small incremental changes will go unnoticed by investors. Bold tax reform would symbolically and substantively help improve Canada’s future prospects in the new economy.

If we are to keep and attract talent, our fiscal environment must be more competitive with our neighbours. Changing times requires a changed approach. In the past, high taxes redistributed income. Today, high taxes redistribute people. If we fail to reform our tax system, our best and brightest will continue to move elsewhere and become our competitors instead of our assets.

The PC Party believes that Canada needs productivity focused tax reform. This would include reducing high marginal tax rates, eliminating capital gains tax, eliminating capital tax, and reforming the corporate tax system.

The government should address pernicious marginal tax rates in Canada, which discourage work and pummel success.

In terms of the impact of the new economy, there is probably not a more negative tax than our capital gains tax regime. Capital gains taxes lock up capital that Canada’s growth industries sorely need. Part of the solution would be to completely eliminate capital gains tax.

We strongly support the committee’s recommendation to eliminate the remaining capital gains tax for gifts of listed securities. This is the single most important step that government can take to improve funding for the charitable sector, and in doing so strengthen Canada’s social support network. This is the second year the committee has made this recommendation and the minister should implement it in the next budget.

The PC Party also supports the committee’s recommendation to eliminate capital taxes. The new economy depends on mobility of investment capital and human capital. With the emergence of the new economy, technology has become essential to wealth creation in Canada and the world. High taxes are a clear barrier to investment in this new economy.

The government should fully implement the corporate tax reform recommendations of the Mintz Report. Tax reduction combined with tax reform can ensure that all sectors benefit from corporate tax reform. Corporate tax reform should seek to reduce the distorting nature of our tax policy, further reduce profit insensitive taxes, and in general strive to build one of the most competitive tax systems in the world.

2.         Regional Development

Ottawa collects about $380-million in corporate taxes in Atlantic Canada, an amount that is less than the budget for the Atlantic Canada Opportunities Agency (ACOA), which is $447-million. The government should consider using most of this ACOA money to eliminate federal corporate taxes in the region, leaving ACOA with enough cash to carry out useful programs, like administering the infrastructure fund and supporting innovation. Similar reforms could be implemented in other parts of Canada.

3.         Regulatory Reform

Canada needs significant regulatory reform focused on productivity enhancement. Regulations are a form of hidden taxation. They raise the cost of doing business with the result that Canadians end up paying a relatively higher price for goods and services. They also kill jobs by making Canada less competitive. Small businesses have helped maintain Canadian employment levels and we owe it to them to take leadership in creating a more vibrant economic environment.

The PC Party recommends implementation of an annual “Red Tape Budget” in addition to the annual spending budget. This would afford Parliament the opportunity to debate the regulatory burden on both Canadian businesses and individuals. The regulatory budget would detail the estimated total cost of each individual regulation, including the enforcement costs to the government and the compliance costs to individual citizens and businesses. A regulatory budget would help hold governments accountable for the full costs of their regulations and could prevent the current patchwork of redundant regulation that can stifle Canadian enterprise.

Furthermore, productivity growth is stifled by the large number of regulations that Ottawa creates each year. Some estimates suggest that federal and provincial governments have passed over 100,000 regulations in the past two decades. Compliance with these regulations may have cost Canada $103 billion, that is, 10% of our $1.1 trillion annual economic output.

The Progressive Conservative Party, echoing the sentiments of many commentators, believes that ultimate productivity can improve if unnecessary and costly regulations are removed and if a prohibition is in place to on the creation of unnecessary new regulations.

The use of sunset clauses can help ensure that the raison d’être of a regulation is reviewed periodically. Currently, once a regulation is on the books it is there forever, even after it has ceased to provide a public benefit.

4.         Parliamentary Control over Estimates

The PC Party endorses a system, as it existed prior to the late 1960s, whereby a certain number of departments selected by the Opposition would have their Estimates scrutinized by Parliament, without a time limit. This would force Ministers to defend their departmental estimates in the House of Commons, improving parliamentary scrutiny of government spending, and strengthening the role of the individual Member of Parliament.

5.         Student Loan Financing

A tax credit should be introduced based on the repayment of the Canada Student Loan principal, to a maximum of 10 per cent of the principal, per year, for the first ten years after graduation provided the individual remains in Canada.

Additionally, the federal student assistance program should move to a system where student loans are repaid as a percentage of net after tax income starting the first full working year after graduation.

6.         Agriculture

Between 1993 and 1999 federal agriculture program payments decreased by over $1 billion. This reduction has lead to a disintegration of current farm safety nets, which fall significantly short of meeting the basic needs of Canada’s agriculture industry. The federal government’s inability to properly support farmers has been compounded by serious weather related disasters, which have lead to a reduction in overall farm production and income

The PC Party supports the need to restore the $600 million delivered under the Canadian Farm Income Protection program to a dedicated Natural Disaster Relief program. Furthermore, current safety nets fail to address the negative impact of foreign subsidies on Canadian farm incomes. These subsidies costs Canadians farmers $1.3 billion a year in lost income.

There are serious problems facing Canadian farmers today and the current safety nets’ inability to meet the needs of Canadian farmers requires further action. The PC Party calls for a renewed approach to provide Canadian farmers with the tools to adequately deal with the most serious threats to the industry. Additional support is required and should be one the top priorities for the federal government.

7.         Military Spending

In the fiscal year 1993-1994, our national defence budget was $12 billion, but by 1998-1999 that total was down by 22% to a mere $9.4 billion. This is despite the fact that in the same period the operational tempo of our Armed Forces — the ratio of time spent by our military in deployed missions — rose almost 400%.

If we were to calculate our military spending as a percentage of our national Gross Domestic Product, a non-partisan “conservative” calculation would show that it hovers between 1.1% and 1.2% of Canada’s GDP, whereas the average among NATO countries is roughly 2.1% of GDP. Thus, Canada’s is the third-worst record in all of NATO — better than only Iceland and Luxembourg, two nations with populations of roughly 275,000 and 450,000 respectively.

The Conference of Defence Associations has called on the government to make an annual $2 billion increase in the defence budget in order to ensure that the Canadian Armed Forces are able to implement our national defence policy. The Council for Canadian Security in the 21st Century has similarly called for a $1.5 billion increase.

The Standing Committee on National Defence & Veterans Affairs has called for an increase from 1.1% to 1.6% of GDP over the next three years, plus an immediate investment of $4 billion. The Senate Defence Committee more recently advocated an immediate $4 billion increase to the baseline DND budget with a “future annual increases that are realistic, purpose-driven, and adjusted for inflation.”

To encourage reservist service in the Canadian military, the Income Tax Act should be amended to exempt military reservists from paying tax on their “Class A” income. “Class A” training refers any activity other than full time work with the reserves.

As Canada expands its international commitment we will become more reliant on our reserve forces for “Homeland Defence.” This exemption will provide an incentive for people to become part of the military reserves. This will need to be accompanied by new legislation protecting the jobs of reservists who are called to active duty.

The PC Party recommends that the government immediately significantly increase sustainable funding to the Canadian military.

8.         Environment

The Progressive Conservative Party does not want the Canadian government to ratify Kyoto if there is no implementation plan in place derived from meaningful consultations with the provinces, industry, environmental organizations and the public at large.

The government should be encouraging sound forest management practices. The government should allow forest maintenance expenses to be deducted against income. Private woodlot operators should be provided with the same capital gains tax exemption currently available to farmers.

The federal government has created a class of depreciable capital assets specifically designed for new energy efficient or environmental friendly technologies. The government should improve the tax treatment of alternative energy sources such as biomass, biogas, fuel cells, wind power, small river hydroelectric and photovoltaic technologies as an incentive to encourage energy efficiency and the use and development of environmentally friendly energy sources. Specifically, changes to expand Class 43.1 of the Capital Cost Allowance schedule should be implemented to ensure that emerging energy efficient technologies are included.

9.         Air Security Tax

The government should reconsider the wisdom of applying a dedicated security tax to one of Canada’s most vulnerable industries, the struggling airline industry. Furthermore, this air tax places a disproportionate burden on discount, short-haul, and regional carriers. The government should meet the promise made by both the current and former minister of finance to review the tax by November 2002.

Therefore, the PC Party recommends that the government immediately review and reduce the amount of the air security tax. Enhanced airline security is a concern of all Canadians, not just airline passengers, and therefore the cost should not be borne strictly by air travelers.

10.       National Securities Commission

Canada remains one of the few industrialized countries without a national securities regulator. The Canadian market represents only a tiny proportion of global capital markets and therefore it is nonsensical to divide our relatively small market into 13 regulatory jurisdictions.

Proponents of a national approach to securities regulation have emphasized the advantages of a more efficient capital market and reduced costs to market participants such as investment dealers, bankers, brokers and issuers. In addition to these advantages, a national securities regulator would supply big benefits to national retail investors by providing a uniform national approach as well as resources to provide improved investor protection.

Clearly, one set of rules would make it easier and less costly for issuing companies to raise capital. This would also facilitate Canadian entrepreneurs’ entry into the capital market to start new businesses, commercialize recently-discovered technologies, or fuel the growth of existing businesses and, by extension, the economy. For existing issuers, streamlining the securities regulatory system would enable them to raise capital to invest in productivity-enhancing technologies. Again, this would impact favorably on Canada’s overall productivity and ultimately our standard of living.

In response to public reports of corporate malfeasance in the U.S. and the resulting plummeting stock prices and current malaise, the American Congress has acted decisively by approving the Sarbanes-Oxley Act. In Canada, the government has not acted as decisively.

It is important to note that a national securities regulator does not mean a federal securities regulator. The best proposals so far include inter-provincial cooperation and the sharing of the costs and revenues. It is also important that a national regulatory framework reflect the realities of small-cap, mid-cap and large-cap markets.

A national securities commission would serve the interests of investors by reducing the costs of raising capital and increasing market efficiencies.

Therefore, the PC Party would immediately start a well-reasoned, well-informed directional policy push towards instituting a national securities commission.

Scott Brison, M.P.

PC Finance Critic