FINA Committee Meeting
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STANDING COMMITTEE ON FINANCE
COMITÉ PERMANENT DES FINANCES
[Recorded by Electronic Apparatus]
Thursday, November 18, 1999
The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and welcome everyone here this morning.
As everyone knows, the finance committee is conducting prebudget consultations across the country. We've been out east, we're spending some time in Ottawa, and next week we will be going out west, as we seek input from Canadians from coast to coast to coast, as we get ready to make recommendations to the Minister of Finance for Budget 2000.
This morning we have the pleasure to have with us individuals representing the following organizations: the Canadian Federation of Independent Business, the CATA, the Co-operative Housing Federation of Canada, the Canadian Association of Insurance and Financial Advisors/Conference for Advanced Life Underwriting, the Canadian Wireless Telecommunications Association, and the Fisheries Council of Canada.
Many of you have appeared before the committee, so you basically know how this committee works. You have approximately five to seven minutes to make your presentation. Thereafter, we'll engage in a question and answer session.
We will begin with the Canadian Federation of Independent Business, Ms. Catherine Swift, president and chief executive officer, and Mr. Garth Whyte, senior vice-president, national affairs. Welcome.
Ms. Catherine Swift (President and Chief Executive Officer, Canadian Federation of Independent Business): Thanks very much, Mr. Chairman.
On behalf of our 97,000 small and medium-sized business members across Canada, we're once again pleased to be appearing before this committee on some matters of imminent and vital importance to Canadians in general and small and medium-sized businesses in particular.
[Technical Difficulty—Editor]...some components of which you might have seen before. One addresses an earlier survey we did on tax issues generally, called “Tax Pain, No Gain”. Another report included is called “Small is Big”, which was actually a public opinion poll on attitudes toward small business. Finally, there is some research we're just releasing here today, something that we do annually, which is the economic outlook for the next year from the perspective of small and medium-sized firms. I'll be addressing that a little bit later.
As you probably know, in the past two decades or so we've seen tremendous growth in self-employment, small business creation, and job creation as a result. Currently over 2.5 million Canadians consider themselves self-employed, more than one out of every six in the workforce. As well, there are almost a million incorporated businesses, of which 78% have fewer than five employees, and 97% of the businesses in our economy employ fewer than 50.
Some recent data from Statistics Canada show that small and medium-sized firms in Canada accounted for almost 60% of total employment, and that was in 1998, so that proportion is likely even higher today.
Small firms are well recognized by Canadians generally as playing a major role in local economic development, as in job creation. In the report we've included here, small is big. We actually did this report as part of a major international small business conference that CFIB co-hosted with Industry Canada about a month ago. It's a public opinion poll, not a poll of small businesses. The interesting finding was that small businesses were rated as the most respected group in the Canadian economy.
We actually compared some other countries, and interestingly enough, it was the case in other countries as well. Certainly in Canada, small firms, in the viewpoint of the general public, are number one in terms of respect, well ahead of other major groups in society. Other groups that were included in the survey question were the education system, the health care system, religious organizations, large business, the legal system, multinationals, and government.
We also asked why people felt they had such a high level of respect for small firms, and the reasons were principally that they were viewed as having a very positive effect on the economy, on job creation, and on community and social activities as well. I think this is what distinguishes the small business sector from the large corporate sector, in many ways. Canadians generally relate to the very positive community-level contribution small firms make.
This is, of course, very consistent information with our ongoing assertion that the small business agenda is not and should never be pitted against some kind of social agenda of government, or any other group for that matter.
The question we'd like to put to you today at this committee is, why shouldn't the upcoming budget build on the economic growth and job creation potential that Canadian small businesses have to offer? Canadians clearly recognize the importance of small business to their community. However, another question that was included in this poll asked if Canadians felt government was doing enough to promote measures positive for small businesses, and the answer was no.
We wonder lately, in particular, why the government seems to have forgotten small businesses. A few years ago the Prime Minister, you might recall, challenged small businesses to create jobs—challenged business generally to create jobs—and the data show that small business has certainly delivered. Now often we feel we're either being taken for granted or, even worse, simply seen as a source of ever-increasing tax fees and other revenue.
There's been little or no reference to small and medium-sized firms in last year's budget, in the throne speech, or in the finance minister's recent economic statement. Why?
Has local economic development and job creation fallen off this government's agenda in its haste to look at spending surpluses? We believe small business growth and job creation has to be a key part of this government's, and of course any government's, vision for the future.
As I mentioned earlier, we're releasing some data for the first time. We do this survey of our members every year, asking about their outlook for the next year in the economy; how they feel the economy is going to grow, how their business is going to grow, and how many jobs they believe they're going to create. This last report shows that, generally speaking, small businesses are quite optimistic about the future. Naturally the economy is still chugging along quite well in North America, and this survey shows that 91% of respondents to the survey—and there were over 11,000 respondents—foresee stronger economic growth or at least a continuing of roughly the same level of growth we're seeing now.
The report also shows that overall the outlook for job creation is fairly positive, but there's a caution in here as well. Job creation expectations have increased over last year, but it is only due to strong responses in Alberta and Ontario, which are well above the national average. Job creation rates for all other provinces, except Quebec and Nova Scotia, are substantially below the national average. So it's basically these two provinces that are driving these upbeat job creation forecasts.
We heard in the economic statements the government proudly pointing to the 600,000 jobs that have been created in this past year of good economic times. We contend that with smarter tax and other policies, small firms could have created many more jobs—tens of thousands—and reduced our still too high unemployment rate of over 7%.
What this study tells us again is that lower taxes for small firms would be an enormous incentive for them to add more employees. In this particular survey the taxes they prioritized were payroll taxes and income taxes. As well, they highlighted taxes other than at the federal level.
Taxation is viewed, interestingly enough, as a larger obstacle to job creation for the firms that are planning staffing changes next year. Firms that are growing would grow even faster with some more sensitivity on the tax side.
I'd like to ask Garth Whyte now to highlight some of the other survey findings.
Mr. Garth Whyte (Senior Vice-President, National Affairs, Canadian Federation of Independent Business): Thanks, Catherine.
Mr. Chairman, I'm mindful of staying within time and I know we're going over a little. I'll go really quickly through these recommendations on the report. A lot of them have graphs attached that I'll be referring to.
I'm trying to answer the questions the committee put forward to us in late summer, so really the “Tax Pain, No Gain” report you have, which is based on 8,000 responses, was done immediately after the federal budget, and it provides the views of small employers on four of the five themes the committee asked us to address.
In addition, the “Small Business Outlook for 2000” report we're releasing, which you have, provides some pretty interesting information on small business e-commerce capability in the year 2000, which we encourage the committee to look at. We certainly will discuss it if people want to later on.
Concerning the budget-making process, rather than talking about the committee process, which we like because it's going well, I want to talk about the parameters on the budget-making process. As you can see in figure 3 in the document I'm referring to, and I'll keep referring to these figures, it shows that small business no longer supports the government's overall fiscal strategy of 50% of the surplus going to debt reduction and tax cuts and the remaining half going to program spending. They feel more focus should be on tax and debt reduction and less on program spending. They support and feel that you should legislate a mandatory debt repayment schedule of $3 billion per year.
We support the fact and agree that there should be a multi-year plan, but it has to result in real reductions in the overall level of taxes. The way to measure that—and you can see it in the second graph of “Tax Pain, No Gain”—is that budgetary revenues as a percentage of GDP must not increase. If they're increasing, that means the tax take or the overall take is increasing. They must decrease from year to year.
It was also outlined in the 1999 public accounts report that the government should justify and explain what level the EI surplus should reach to ensure there will be enough revenue over a business cycle while maintaining stable premium rates throughout the cycle. The government should plan to establish a truly separate EI fund to guard against misuse of the surplus in the future.
A further parameter is that all government cost-recovery fees should be listed and reviewed by the committee process. New fees should be reviewed by the appropriate House of Commons committee before they are adopted by government departments. An updated list of all current fees should be listed in the budget document and the overall impacts of these fees should be reviewed by the finance committee.
The second question on tax relief and reform is basically represented in figure 4, where we asked our members what their priorities are. The first priority would be personal income taxes, closely followed by federal payroll taxes and then by corporate income taxes.
When you talk about personal income taxes, graph 5 shows the priorities here, which are reduced rates across the board, increased basic personal exemption, eliminating the 5% surtax, and restoring full indexation of the tax system.
I want to make a special note concerning income tax bracket creep. The personal income tax system should be fully indexed to inflation in order to eliminate the automatic hidden tax hike caused year by year by tax bracket creep. This should not be seen as part of the surplus allocation exercise. The government has stated it is committed to not raising taxes; therefore this automatic tax increase should be stopped.
This should be treated in the same manner as the government's approach to automatically increase direct program spending. If you look at the statement on page 81, government spending is automatically increased to keep up with growth in population and inflation. Why shouldn't the same approach be applied to ensure personal income taxes do not grow with inflation?
Figure 6 shows there's strong support among the small business community to lower the capital gains tax. This is especially urgent as the United States is considering further reduction to their rate of capital gains taxation such that the Canadian capital gains tax will soon be more than twice the U.S. level.
On employment insurance, the rate has been announced, and although the EI premium rate has been reduced by 15¢, more needs to be done to offset the 40¢ Canada Pension Plan/Quebec Pension Plan increases the same year, and more substantial EI premium reductions are needed in the future.
We have listed some initiatives on EI that can be announced in the budget that further reduce the burden on small business, especially in light of the recently announced plans to extend maternity and parental benefits.
First, I would like to bring your attention to figure 7. If you look at figure 7—this is from the EI Commission—it talks about how the EI premiums will be spent. Employers pay a 1.4:1 ratio on EI contributions. We think it should become closer to a 50:50 split. Well less than 50% of EI premiums go to regular benefits and the others go to non-EI types of benefits. Why should employers pay 60% of the premiums? We want to work with the committee to deal with that, especially again in light of the parental leave extension, as it's going to get larger.
The government introduced a program called New Hires a couple of years ago. It was a very popular program that spurred job creation. We think the committee should look at that as well, and it should look at the surplus side of the ledger.
Figure 8 talks about EI/CPP overcontributions by employers. They don't get them back. We think that's wrong. Our members support the fact that they should get them back.
If you look at figure 9—and this is actuarial surpluses—and I don't know if anybody else has put this figure forward, it shows a surplus. After the 15¢ reduction this year and assuming a 15¢ reduction next year, the surplus will still grow by $5 billion per year, to $35 billion by 2001.
This EI surplus is a ticking time bomb, which may explode during the worst possible time, an economic downturn. As the government acknowledges, since the EI surplus is spent, what will happen when sooner or later a recession hits and demand for EI soars?
With corporate income taxes, you can see again in figure 10 we list them over time: raise the level of income available for a reduced income tax rate from its current level of $200,000—it hasn't been changed since 1982; reduce the federal small business rate; reduce the general corporate rate for business; and maintain the $500,000 lifetime capital gains exemption that you see in figure 11.
On social infrastructure, our members prefer spending restraint over suspending increases. However, if you look at figure 2, we and our members have been supportive. As most Canadians, they feel health care and education should receive the highest priority. Government should also continue to focus on the reallocation of a better and more efficient use of existing resources.
The committee asked what new or renewed social investment they should look at. If you look at the third area in the chart, they call it “senior benefits”; they mean retirement. We recommend that the government look at its retirement income policies.
For many Canadians RRSPs are the only hope for them to finance an adequate retirement plan. This surely is the case for small business owners. A survey of 18,000 business owners, shown in figure 13, shows that 92% of them depend on RRSPs for their pension. We think the committee and the government should focus on eliminating the disparity between registered pension plans and RRSPs.
We're members of the RRSP Alliance. This committee has a copy of the RRSP Alliance report. We list five recommendations. I'm not going to go through them all. One recommendation, of course, is to raise the RRSP limit from $13,500 to $15,500 by 2001.
On productivity in figure 14, we refer to the report we gave this committee on May 4 when they asked us to submit on productivity. That report contained figure 14, which listed small business priorities. The top five were: reduce payroll taxes, reduce income taxes, pay down the federal debt, ease the burden of some regulations, and make government fees and penalties more equitable.
We also recommend that the committee refer back to this report, Breaking Through Barriers. In 1994 Minister Manley and Minister Martin struck a committee. They submitted an excellent report to the minister. The report contains a practical list of a whole lot of things that can be done such as low-cost initiatives. This should be revisited. Very few of these initiatives were implemented. We think the committee should look at it.
Mr. Chairman, I'd like to comment on this committee's report, Productivity with a Purpose. It's a very good report. We agree with a lot of the solutions that you put forward to increase the standard of living for Canadians. However, it overlooks the importance of fixing the government's own cost-recovery program.
We're members of the Business Coalition on Cost Recovery, which represents more than 20 business groups. They're going to be presenting this afternoon, so I'm not going to dwell on those issues.
Ms. Catherine Swift: I'd just like to conclude with something interesting that I read recently. It was actually a quote from the recent winner of the Nobel Prize for Economics, Robert Mundell, who is a Canadian who lives in the States. I don't know what kind of message that sends.
He was asked what in his view was the most important thing holding back the Canadian economy from achieving its true potential. His comment was he felt that too many Canadian bureaucrats and politicians seem to view the economy as some kind of class struggle instead of something that was really of benefit to everyone. There was such a focus on the redistribution of wealth that everybody seemed to have neglected the creation of it.
We'll close on that point. Thank you very much.
The Chair: Thank you very much.
We'll now hear from CATA and Mr. David Paterson, the executive director. Welcome.
Mr. David E. Paterson (Executive Director, Canadian Advanced Technology Alliance): Good morning, Mr. Chairman, ladies and gentlemen. When the Minister of Finance made his presentation to the committee on November 2 he devoted considerable attention to the new economy and its critical importance to the economic growth of Canada in the 21st century.
The Canadian Advanced Technology Alliance is an association of the new economy. Our 500 members and 1,500 affiliates are leaders in information technology, telecommunications, aerospace, biotech, and advanced manufacturing. R and D is crucial to their success. They thrive in the highly competitive global economy, exporting much of their production. They provide a rapidly growing number of high-quality, highly paid jobs.
The distinguishing feature of the new economy is that it is dependant for its success on only a single raw material: people. Recruiting and retaining skilled personnel is the biggest problem our members face. The shortage of computer programmers in Canada is estimated at 30,000. Similar shortages exist in engineering and science.
At our annual conferences, we ask our members to rank critical issues. In 1998 the skill shortage was ranked first and in 1999 it came second. When asked whether the supply of talent or the brain drain was the more important skills issue, two-thirds of our members chose the brain drain.
I'm aware there are those who question the existence or importance of the brain drain. Most of those who say there is none are economists haggling over the statistics of emigration and immigration. It should be remembered that there are no statistics on emigration at all.
Our members who are suffering painful losses of some of their best people consider these arguments to be laughable. They're constantly faced with the global battle for talent. They're doing everything they can to compete, but they need some support from the government. As a consequence, personal income tax has emerged as the most critical issue in our member poll this year. Canada's extremely high personal income tax rates are a severe handicap when competing against American companies for talent.
Taxes are certainly not the only issue in job choice, ranking behind the quality of the job and the salary in the selection criteria. Their importance here today is the fact that taxes are the only one of these criteria over which the government has any direct control.
When we asked the members to rank the various tax reduction options, their first choice was raising the rate at which the top marginal rate applied, from the current level of $59,000. It's well known that in the U.S., the top rate applies above $250,000. Taxing the rich is all very well, but Canada's top rate hits new graduates trying to pay off their student loans and young couples saving for their first homes.
Eliminating the 5% surtax ranked next as a tax cut option. This was followed by lowering the top marginal rate, lowering income taxes across the board, and finally, a $1 million capital gains tax exemption on employee stock options.
The issue our members ranked third in importance this year is also tax related: the SR and ED tax credits. This an exceptionally popular program, an important stimulus to R and D, and one of the biggest attractions for foreign investment in Canada's high-tech industry. In recent years there have been some problems in its delivery, however. For the past year, CATA has been leading a consortium of associations working with Revenue Canada to resolve the problem. Progress is being made, and we're optimistic about the outcome of this initiative.
CATA would like to congratulate the government on its commitment to R and D. The Canada Foundation for Innovation, the Canadian Institutes for Health Research, increased budgets for the granting councils, and their recently announced funding for 2,000 university research chairs are significant measures to support scientific research in Canada. These are the types of programs that stimulate the new economy and strengthen Canada's position in the world.
Mr. Martin presented the committee with a forecast of a rapidly growing budget surplus, even after a generous reserve for contingencies. CATA urges the government to take this opportunity to reduce personal income taxes sharply and quickly. A gradual reduction will do little to fortify the competitive position of Canada's new economy.
It cannot be forgotten that the new economy evolves very rapidly, at notorious web speed. Failure to act now will inflict damage that will be difficult or impossible to repair.
The government recognizes that the new economy is the key element in economic growth in the 21st century. It must act now to support it to maximize the competitive stature of Canada's knowledge-based sector if Canadians are to enjoy personal and economic growth as the new millennium begins.
The Chair: Thank you very much, Mr. Paterson.
We'll now hear from the Co-operative Housing Federation of Canada, Mr. Thom Armstrong, director, corporate services; and Mr. Michael Shapcott, manager, communications and government relations, Ontario region. Welcome.
Mr. Thom Armstrong (Director, Corporate Services, Co-operative Housing Federation of Canada): Thank you, Mr. Chairman, honourable members, ladies and gentlemen.
We'd like to thank the committee on behalf of CHF of Canada's member cooperatives for inviting us to share our thoughts on the forthcoming federal budget. After my introductory remarks I'll ask my colleague Mr. Shapcott to provide several specific observations on the housing and homelessness crisis facing our country.
Our nearly 800 member-owned and managed non-profit housing cooperatives are located in all parts of Canada. There are 52,000 households now living in our member cooperatives, and we represent a further 13,000 co-op households in Quebec. Those co-op households play an important role in providing safe and affordable housing to Canadians.
As the committee knows, most of Canada's housing cooperatives were put in place between 1970 and 1992 under programs administered by Canada Mortgage and Housing Corporation. These programs were designed with the two main purposes of increasing the supply of affordable housing to those Canadians who do not own their own homes and providing income-tested assistance to lower-income Canadians to help meet their housing costs.
Our members are examples of the benefits of secure and affordable housing. It's a lasting legacy created by previous Liberal administrations, but many Canadians still do not have that security. We therefore believe that an investment by the federal government in a new affordable housing supply program is urgently needed.
Since the 1960s, the federal role in housing Canadians of low and moderate income has been a significant success story. More than 660,000 affordable homes—a very large number—were provided across Canada under a range of programs over some 30 years. However, in 1993, after several years of reductions, the federal government withdrew altogether from the provision of new assisted housing. With some exception, provinces have also withdrawn from new housing supply programs. So it's no surprise that less than seven years later this country is experiencing a national rental housing crisis.
The private sector is not building any new rental units and has said that will continue to be the case, so we cannot look to the private sector for a solution to this problem.
There have been more than one dozen detailed municipal homelessness studies in Ontario alone, all reporting on a deepening crisis. The Mayor's Task Force on Homelessness has produced the most detailed description ever of homelessness and its root causes in the city of Toronto.
Where's Home, a study jointly funded by CHF Canada and the Ontario Non-Profit Association, highlighted four key trends in the growing housing crisis throughout the province's heartland. First, the overall supply of affordable housing is diminishing. Second, the need for new affordable housing is continuing to grow, creating more demand for fewer units and causing rental vacancy rates to drop in many major centres. Third, rents are rising faster than the rate of inflation, even in those communities with relatively high vacancy rates. Finally, tenant incomes in real dollars are falling, which means tenant households have less money to pay those higher rents, forcing increasing numbers to turn to food banks or risk economic eviction.
I would like to ask my colleague Michael Shapcott to expand on these observations.
Mr. Michael Shapcott (Manager, Communications and Government Relations, Ontario Region, Co-operative Housing Federation of Canada): Mr. Chairman, committee members, these trends we've just heard about are being repeated in many parts of Canada. In fact, the pain of the housing crisis is being felt all over the country. Homeless shelters in Vancouver, Calgary, Edmonton, Regina, Winnipeg, Hamilton, Kitchener, Ottawa, and Montreal are all reporting significant increases, mostly among families with children. In fact, Barrie, Ontario, has set what may be a bleak record. In the last five years they've had an increase of 1,235% in the number of people going to homeless shelters in that community.
The Federation of Canadian Municipalities, which I know has already made presentations to this committee, has produced a national housing policy options paper. It provides municipal profiles of the growing housing crisis in a number of municipalities. But we want to say to you today that homelessness is only the tip of the iceberg, the most visible manifestation of a very deep and serious problem.
There are more than 833,000 households in Canada—that's more than 2.2 million women, children, and men—on the brink of homelessness. They're paying 50% or more of their incomes on shelter. They're one rent cheque away from being on the streets.
The problem is bad today, but it's going to get worse. Canada Mortgage and Housing Corporation estimates that we'll need an additional 450,000 new affordable rental units for the decade ending in 2010 to meet projected demand. The private sector, we know, can only supply a tiny fraction of those units, so Canada needs a national housing strategy to meet both current and future needs.
What has led us to this crisis? Fiscal concerns about mounting deficits and the national debt are most often cited as the reasons for the reduction and cancellation of federal housing programs. Today we simply cannot afford not to have a national housing strategy, and now surely we can't use those excuses any more.
In his most recent fiscal update, Finance Minister Martin forecast continued economic growth over the next five years and put the federal surplus over a five-year projection in the range of $67 billion. We congratulate the finance minister on his success in bringing order to our fiscal house.
But now that the nation's finances are back on track, there are no longer any excuses to provide to the thousands of Canadians who are currently on the streets or in temporary crowded shelters and hostels. There's certainly no excuse for the 2.2 million Canadians, the majority of whom are children, who are at risk of being homeless because they pay more than 50% of their income on housing. There is no excuse for the hundreds of low-income families and a thousand children who live every night in welfare motels in Toronto, or the construction workers in Calgary who are living in homeless shelters because there's no affordable housing there, or the one out of three people living in homeless shelters in Peel Region who are working but can't afford affordable housing there. And there's certainly no excuse for the overrepresentation of aboriginal people in every statistical profile of housing need. Now that we have the resources, there are no excuses.
Seven months ago the national government expressed its deep concern over Canada's housing crisis by appointing Minister of Labour Claudette Bradshaw to make recommendations to cabinet on how to end homelessness. We certainly applaud that decision. We recognize the personal commitment that Minister Bradshaw brings to this very serious issue.
In the recent throne speech the government also indicated its desire to deal with what it called the root causes of homelessness.
We know Minister Bradshaw has travelled across the country; we've met with her in a number of locations. She has heard from a wide variety of groups and individuals. There is consensus right across the country among those who met with Minister Bradshaw that the primary cause of homelessness is a lack of affordable housing.
It may seem fairly obvious to members of this committee that if you're homeless you need a home, but in fact there have been academic studies on the root causes of homelessness. One of the most important, published last fall by New York University, did a five-year study of homeless people in New York City. It's an important paper published in the American Journal of Mental Health. It found that drug addiction, mental illness, and other social problems were not the main reasons why people were homeless or why they remained homeless; it found the main cause of homelessness was the scarcity of affordable housing, and the main factor in ending homelessness was to make sure people found housing. Certainly there are other issues for some homeless people that need to be addressed, but that study underlined what we know to be the case.
So let me say that the housing crisis is severe and the federal government's response must be substantial. In their paper, the Federation of Canadian Municipalities is calling for 300,000 new and rehabilitated housing units and 400,000 rent supplement or similar units over the next 10 years. Our own analysis supports the Federation of Canadian Municipalities in this response.
We also know the City of Toronto's task force on homelessness, which released its report in January of this year, sets out a credible blueprint for addressing homelessness. Specific strategies must be developed to recognize the range of shelter options for those who are already homeless or at risk of becoming homeless.
We're not here today to advocate for any particular housing program or delivery option. The message we want to convey to you is a more general message. We want to say to you that there needs to be a significant reinvestment by the federal government in new rental housing. This is crucial.
At the Co-operative Housing Federation's annual meeting in St. John's, Newfoundland, this past June, our members from across the country unanimously endorsed the 1% solution as a strategy to end homelessness and to deal with the housing crisis. This plan, which has the backing of dozens of national, regional, and local organizations, calls on all levels of government to double their current spending on housing. For the federal government, this would represent approximately $2 billion in annual spending. We believe this investment is necessary so that as a nation we can meet the housing needs of our most vulnerable citizens, our children, aboriginal people both on and off reserve, and hundreds of thousands of Canadians at risk of homelessness.
It's time now for the federal government to signal its intention to reinvest in new assisted housing. We want you to work with other levels of government and work with us in the community and commit to immediate action. Thank you.
The Chair: Thank you.
Mr. Thom Armstrong: Thank you, Michael.
As I noted at the beginning of our presentation, the cooperative housing sector has been an active partner with the federal government over the past 30 years in the delivery and management of affordable housing to needy Canadians. Existing programs have demonstrated that the co-op model is a cost-effective means of providing housing. Co-op housing also represents people helping people, building strong communities across the nation, and we're eager to continue that historic partnership role with government.
History teaches us that government, in partnership with the third sector, plays a unique role in providing housing assistance and furnishing programs and services that will not be provided by the private sector. We hope this unique role and this unique partnership will be acknowledged in the next federal budget.
Thank you for hearing us today.
The Chair: Thank you very much, Mr. Armstrong and Mr. Shapcott.
We'll now hear from the Canadian Association of Insurance and Financial Advisors and the Conference for Advanced Life Underwriting, Mr. David Thibaudeau, president, and Mr. Ted Ballanytne, director, advanced tax policy, Conference for Advanced Life Underwriting. Welcome.
Mr. David Thibaudeau (President, Canadian Association of Insurance and Financial Advisors (CAIFA)/Conference for Advanced Life Underwriting (CALU)): Thank you, Mr. Chairman.
I want to thank this committee for the opportunity again to share with you the views of Canada's insurance and financial advisers on what the government's priorities should be for the first federal budget of the new millennium.
Our point of view on budgetary matters reflects the opinions of 18,000 insurance and financial advisers who work with millions of Canadians. Our members serve their clients by providing them with financial advice, life insurance, health insurance, mutual funds, and other financial services.
In the interests of brevity, I will not go into our submission in any great detail. I would simply like to draw the committee members' attention to our top three recommendations.
On debt reduction, we are pleased that the government's economic and fiscal update acknowledged that a war must be waged against the national debt. The resolve that was shown in battling the deficit must now be called on once again to reduce significantly this $577 billion debt. The $41 billion we spend each year servicing the debt is money that could be used for funding tax cuts or worthwhile other investments in Canada.
While we welcome the $6.4 billion reduction in the federal debt over the last two years, this cut represents an annual reduction of only 0.5%. At this rate, Canada will be in debt for another 200 years.
Instead of allocating funds first to spending and tax cuts, with what's left over going to debt reduction, CAIFA and CALU recommend that the government first allocate 25% to 50% of the fiscal dividend to debt reduction. The remainder could be used for program spending and tax cuts. We believe this pay-yourself-first method is a sounder and more realistic approach to debt reduction than trying to grow our way out of it.
For the remaining 50% to 75% of the fiscal dividend, CAIFA and CALU recommend the following.
On tax cuts, whether or not research definitely shows that Canada's brain drain problem can be attributed to high Canadian taxes, and we suspect it can, CAIFA and CALU urge the government to reduce income taxes for Canadians, especially for those we are at the highest risk of losing.
Highly skilled and high-income Canadians bear the greatest tax burden in this country, and it is these workers we cannot afford to lose. While the issue of high-income taxpayer migration warrants more research, it warrants immediate action even more. To begin with, the government should eliminate the 5% high-income surtax, whose original purpose was fighting the deficit, and that has now been served.
On the RRSP contribution limit, the limit the government imposes on how much Canadians can save tax free for their retirement makes Canada less competitive internationally and deters self-reliance. It is also short-sighted, since the limit both increases Canada's dependence on social programs and limits the government's tax revenue down the road when major demands will be made on our retirement income system and our health system.
CAIFA and CALU are founding members of the Retirement Income Coalition, which I believe you heard from yesterday. We endorse the RIC's recommendation that the RRSP contribution be doubled to $27,000 in increments of $2,700 over five years.
To keep that figure in perspective, I would note that had the current limit of $13,500 not been de-indexed from inflation since 1994, the contribution limit for 1999 would already have been $20,000.
Our full submission contains many more prebudget recommendations and more detail on the ones I chose to mention here. Taken together, I believe the recommendations that CAIFA and CALU have put forward will increase the financial flexibility and the opportunities of both Canada and its citizens as we enter the new millennium.
Thank you for the opportunity to participate. We look forward to your questions.
The Chair: Thank you very much, Mr. Thibaudeau, Mr. Ballantyne.
We'll now hear from the Canadian Wireless Telecommunications Association, Mr. Peter Barnes, president and chief executive officer. Welcome.
Mr. Peter Barnes (President and Chief Executive Officer, Canadian Wireless Telecommunications Association): Thank you, Mr. Chairman, members of the committee.
The chairman has already introduced me. I'm president and chief executive officer of the Canadian Wireless Telecommunications Association. With me today are Roger Poirier, who's the executive vice-president of the association, and David Farnes, who is our vice-president for regulatory affairs at the association.
I want to thank the chair and the committee for giving us the opportunity to appear before the committee on this very important consultation. The full text of our submission has been distributed earlier through the clerk, of course, and I encourage you to read it. I'll just cover what we believe to be the overview points.
The CWTA is the voice of the wireless telecommunications industry in Canada. Our members offer an array of services to Canadians, including cellular and PCS, mobile radio, mobile satellite, from one end of the country to the other. We also represent a number of suppliers—supplies and services—to the wireless industry.
We have roughly 350 members involved across Canada in delivering and manufacturing wireless services and products. The wireless telecommunications industry has contributed significantly to Canada's economic and social fibre by enhancing the productivity of both businesses and individuals. Not only are mobile communications an important enabler of productivity, they have become an essential element of Canada's information infrastructure. One in five Canadians owns a mobile phone, and that number is growing rapidly.
We agree with the government that we must continue to improve Canada's information infrastructure to support the exchange of ideas over networks, connect Canadians to the information highway, and accelerate the adoption of electronic commerce in this country. Wireless is emerging as the premier means to stay connected worldwide.
The International Telecommunications Union forecasts that toward the middle of the next decade there will be more mobile telephone users than users of landline telephones. During the coming millennium, wireless transmission of data, access to Internet from mobile units and wireless e-mail will be the catalysts for a remarkable growth of the wireless industry.
One of our members, Nortel, predicts that wireless will quickly become the dominant method of access to the Internet and a major force in its ongoing growth. According to Nortel, it is survival of the fastest, not the fittest, that will determine winners and losers in the new economy. We therefore recognize and embrace the Prime Minister's challenge to work together towards the goal of capturing 5% of the world's share of e-commerce by the year 2003. For our part, we've already begun to deliver the tools that are required to reach this goal. The major mobile phone manufacturers are delivering Internet-ready phones that will allow Canadians to browse the net, purchase airline tickets, take care of their banking needs, and conduct other forms of e-commerce while they are on the move.
Canadian wireless telecommunications specialists have devised services to allow Canadians to access the Internet anywhere and any time.
Yet in the midst of these successes, in a period of dynamic growth and innovation, the mobile carriers lost over $1 billion last year. Those losses came out of revenue of $4 billion, so $1 in $4 is a loss. Disturbingly, many of the costs contributing to these losses, such as taxes, fees, and the cost of regulation, are beyond the industry's control.
All levels of government seem to have their eyes fixed on our industry as a potential source of revenue. By way of example, CWTA members contribute more than $130 million annually in spectrum licence fees. This money goes to the government's general revenue fund, and that amount grows each year. We therefore support swift action by the government in implementing its tax reduction strategy. In addition, we urge the government to not lose sight of cost recovery and other fees when it formulates its tax reduction strategy. We recommend a moratorium on cost-recovery programs, at least until Treasury Board completes and acts upon a comprehensive review of the current programs.
Moreover, I must stress the importance of a skilled work force for the wireless industry. We concur with the government's view that a skilled work force and a capacity to innovate continuously are crucial building blocks of a successful 21st century economy. In fact, one is impossible without the other. Access to a highly skilled work force is critical to the promotion of innovation.
In closing, I believe wireless telecommunications can give Canada a competitive edge as we strive to excel in the world of e-commerce. However, an onus must also be placed on policy-makers to monitor the tax and fee burden on the wireless telecommunications industry. In our view, this current tax and fee burden is both excessive and inconsistent with government's initiatives to reduce taxes and build a dynamic economy for the 21st century.
Thank you for listening.
Thank you for your time. Along with my colleagues, I'd be most pleased to answer any questions you may have.
The Chair: Thank you very much, Mr. Barnes, and thank you to all the panellists.
We'll now go to a question and answer session. Our first round will be seven minutes, not to be mistaken for seven CFIB minutes.
Mr. Monte Solberg (Medicine Hat, Ref.): Thank you, Mr. Chairman, and thank you to all of the witnesses who have presented so far this morning.
I have to say just at the outset that I'm pleased to hear that there seems to be a consensus that it's important that we do reduce debt and that we reduce taxes. I've also heard reference to user fees. They're a personal interest of mine. I have a private member's bill that would call upon Parliament to bring before the appropriate committee any request for user fee increases so that they can be scrutinized. I'm therefore happy to hear that people are still raising that issue. Rest assured that the official opposition is going to try to do something to help deal with that issue.
I want to ask a question of the CFIB with respect to the list of different issues you've brought forward. You've mentioned that we should reduce taxes in a number of ways, or that your membership would like to see taxes reduced in a number of ways, and that debt should be paid down. There was certainly no emphasis on increasing spending. However, as you know, in the context of this debate about the surplus—a $95 billion surplus over five years—the government has a commitment to spend about 50% of that surplus on new program spending. I'm wondering if you've tallied up the tax expenditures from your list of desires, and whether or not the surplus would cover all of those tax expenditures given the government's current formula?
Ms. Catherine Swift: Certainly I would hope that the magnitude of the surplus we saw illustrated in the economic statement would cause a rethinking of the spending of the 50%. Let's face it, the government revenues have been robust beyond belief for a number of reasons, including a stronger than expected economy and all kinds of tax increases inherent in our system, with things like tax bracket creep and things not indexed to inflation and so on. As a result, these riches were not foreseen when the 50:50 formula, the 50:25:25 formula or whatever you want to call it, was first devised. Any intelligent government would hopefully change its plans as circumstances change and not blindly stick to some formula that clearly is foolish in light of these surpluses, should they materialize. We all hope they will, obviously, and for all kinds of good reasons.
One thing that needs to be noted in the economic statement is that the five-year forecast was predicated on pretty decent economic growth for five years. Again, we hope and believe that should be achievable, but I think we have to realize that if we do bias ourselves toward the spending side, we're probably going to forfeit that growth that's inherent in the forecast and therefore question the numbers down the road.
In terms of estimates on the types of things we suggested, we lay out priorities, obviously. We want to convey to you where our members think the most good can be done, and that's why you may see proposals for possibly half a dozen tax cuts. But we know things are going to be phased. Obviously, if we prioritize job creation, personal income taxes and payroll taxes are neck and neck in the views of our members, the job creators.
Certainly, in terms of putting a price tag on it, it is eminently affordable given the magnitude of the surplus numbers we have seen. We're looking at tax reductions probably in the neighbourhood of $4 billion to $5 billion on an annual basis. Again, if the numbers are achieved, that's eminently doable.
I think one point, which Garth briefly alluded to, is worth remaking. Seemingly, there is no question of indexing the expenditure side to inflation. We're just building in an inflation component to spending. Why should it be different for the other side of the equation?
Naturally, the debt issue also needs to be reiterated. A number of people have mentioned it here. With the massive debt we still have, we don't really have a surplus, if you want to be technical about it. So it shouldn't be neglected.
Mr. Monte Solberg: Thank you.
Mr. Paterson, Canada already has very generous R and D credits. They're some of the most generous in the world, but for reasons that may not be apparent to everyone, they still don't seem to attract enough research and development to Canada and hold the R and D that's currently here. In a lot of people's minds, I would think, combined with the low dollar, that would give the high-tech industry a big leg up. Why isn't that enough? Why doesn't that attract people?
Mr. David Paterson: The combination of the low dollar and the generous R and D programs in Canada has done a pretty effective job of attracting investment into Canada, into the high-tech industry. You only have to look at some of the new entrants who are building large-scale facilities around Ottawa, like Cisco, for example. Three years ago, they had nothing in Canada except a couple of sales operations. They now have a large research and development facility out in Kanata.
Other high-tech companies have done similar work. Ericsson is one of our members, and it's an outstanding example of that. It started off with a very small research shop in Montreal a decade ago, I believe, and it now has over a thousand people doing very sophisticated research in the telecommunications field.
The high-tech industry has been successful in attracting foreign investment because of the attraction of the research, the generous research programs.
The Chair: Mr. Garth Whyte.
Mr. Garth Whyte: I have two other reasons or issues to support what Mr. Paterson said. One is the fee issue. If you look at pharmaceutical and drug R and D, I think the presenters this afternoon—the ones from the coalition on fees—will say there's a disincentive to do your R and D in Canada. Because of the delay and the fees that occur, you might as well do it in the United States or somewhere else and then bring it in. That's a big issue.
The second big issue that we've found, if you'd like the committee to pursue it, is the R and D tax credit. Although it's seen favourably, it does not get down to the small firms. I'll tell you the reason it doesn't. We've been talking to a few accountants. It's not worth doing if it's below $10,000, because for the paperwork and everything it costs $5,000 to get the advice needed to get it done. It's not worth doing it below a certain level. So that's another area. There, you're missing 78% of all businesses because they have less than five employees, and there are a lot of neat little things that could be going on. They can't even access the credit, though.
Those are two other observations.
Mr. Monte Solberg: I have a question for the Co-operative Housing Federation, if I could. I've noted that you say in your presentation:
The private sector is not building any new rental units
and has said that will continue to be the case. We
cannot look to the private sector for a solution.
I'm wondering why that is. Off the top, I can see why there might be some concerns from the private sector about building rental housing. We have big capital gains taxes in Canada. We have rent controls. We have all kinds of laws that are very onerous on landlords when it comes to dealing with tenants. I'm wondering why you haven't laid out some possible solutions on the private sector side and are instead just coming to government looking for money from this upcoming surplus.
Mr. Michael Shapcott: Thank you, Mr. Solberg.
The private sector is not building for one very simple reason: tenant incomes are dropping in this country. All the studies show that tenant incomes are dropping. Tenant incomes are not sufficient to provide private landlords with the level of rent they need in order to recover their investments in terms of land costs, construction costs, financing, and so on. It's a very simple equation.
You mentioned rent controls and things like that, and it certainly was an issue raised in some provinces. Take Alberta, for instance, which hasn't had rent controls for a good 20 years at least and where the private sector is not building affordable rental housing. It's not because there are any constraints, if you like, in terms of rent controls or so on. The constraint there is that tenant incomes are not sufficient to allow the private sector to recover what they need to get.
If you look at Calgary—and I mentioned this briefly in the presentation—homeless shelters in Calgary are waking up the men in the morning and sending them off to construction jobs. One would think construction jobs would pay enough money to allow someone at least to have a modest rental unit, but not in Calgary. The private sector is not building in Calgary.
So it's not an ideological issue. It's not an issue where there's an abstract policy debate. It's a simple issue of economics. Tenant incomes are not sufficient to allow the private sector to recover what it needs in rents.
Dr. Golden in Toronto calculated the gap between what tenants can afford to pay and what the market needs in order to recover as about $40,000 per unit. This is a substantial amount of money that is needed to bridge that gap. And that's what the private sector would need, a subsidy of $40,000 a unit, on average, in order for it to be able to bridge the gap between what tenants can afford to pay and what it needs to recover.
Mr. Monte Solberg: What about the capital gains issue?
Mr. Michael Shapcott: I don't know that the capital gains issue is a serious issue. I haven't heard of it being a concern.
We can nibble around the edges. There have been some suggestions, for instance, about things like waiving the GST or in some provinces waiving provincial taxes on new construction. That will certainly take up a few dollars here and there. But in terms of the big items, there's a huge gap. We can't nibble around the edges. That's the reason why the federal government in 1973 decided it had to go with a program that seriously addressed the reality of the housing market, as opposed to trying to hope and pretend that maybe they could convince private developers...who are not interested in charity, who are interested in recovering from their tenants a sufficient rent to allow them to cover their costs and make a reasonable profit. We don't disagree with that. That's why the private sector is not building, or not building very much, anywhere in this country.
The Chair: Thank you, Mr. Solberg.
Ms. Carolyn Bennett (St. Paul's, Lib.): I think Mr. Shapcott just answered the question.
In the supportive nature of housing, I think there are two issues. One is how many actual boxes there are and the other is support for the difficult-to-house. I would just like you to do a small commercial for how that middle group actually is supported in a cooperative movement.
Mr. Michael Shapcott: There's no question there's a minority of Canadians who, in addition to needing a decent place to call home, also need additional supports to deal with physical issues in their life—mental issues and so on.
Since you asked for an advertisement in the cooperative housing movement, we are member-owned, member-controlled, small businesses. I'll say that in deference to other witnesses today. We certainly know what it means to meet the mortgage obligations at the end of the month. We know we have to recover from our members, in terms of rent, and from our lower-income members in terms of the support we receive from government, enough money to cover our costs and to meet our bills, pay electricity, hydro, municipal taxes, and so on.
We also realize it's important to provide a caring community, especially for that minority of people—and I emphasize “minority”—who require something in addition. So many of our co-ops provide special shelter within our co-ops for people who have different sorts of needs. Certainly we in other forums make presentations to government saying those needs should be addressed in terms of special programs and so on, and we recognize those issues have been brought to the forefront.
But I would say to you, Dr. Bennett, that one of the things we are most concerned about in the current debate is that sometimes the special needs of a minority of people overshadow the reality of the big problem. And the big problem across this country is not that we have all of a sudden been overwhelmed with people who are alcoholics or drug addicts, or all the other myths people have about people suffering in the housing crisis. That's not what's happening. We have families with children who cannot pay their rent.
Five hundred applications for evictions are being filed by landlords in Toronto every week, and 77% of them are because the tenants are one month behind in their rent. That's the reality of the housing crisis in the biggest city in Canada. But it's also reflected right across the country. So, Dr. Bennett, that's the need we would like to see addressed.
Ms. Carolyn Bennett: There has been some criticism in terms of the market rent people and whether that's actually a subsidy, and I have been impressed that in the mixed-use co-ops where you have the single moms with a teenager, there's a family there who can afford to pay a babysitter so that.... I've been very impressed with the community aspect, which isn't in the old-fashioned social housing ghetto.
Mr. Michael Shapcott: That was a feature of the reforms of 1973, where a specific policy decision was made by government, which we certainly embraced in the cooperative housing movement, as they did in non-profit housing as well, to create communities where there are a variety of people who are living together and supporting each other in very tangible ways.
The Canada Mortgage and Housing Corporation in the early 1990s—and Tom may remember the exact year of this—did a very detailed review of the cooperative housing sector and found in fact, Dr. Bennett, exactly what you said, that in addition to value for money by which we certainly are the most cost-efficient form of social housing in Canada, there are many non-financial benefits that accrue to people who are living in housing cooperatives, including developing very practical skills, not just in coping with life but in terms of dealing with workplace issues and so on.
The Chair: Thank you, Dr. Bennett.
We have approximately 27 minutes before we go to vote, so let's see if we can get the preambles shortened and the questions a little quicker.
Mrs. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chair.
I would like to go first to Mr. Whyte and Ms. Swift. I'm wondering if you have an opinion, or if you have a stand, or if you have surveyed your membership. I have many members of your organization in Kitchener Centre, and they appreciate being plugged in and being surveyed the way your organization does. I also take note that Kitchener is one of the centres that was noted in the co-op housing issue. It has a great resonance with me, so I'm wondering if you have a stand on it and how that reconciles with the fact that in one of your points under the research paper it says it's vital that the government in new expenditures...that this be accomplished only through reallocation and better or more efficient use of existing government resources. How do you reconcile this kind of need with that kind of sentiment from your membership?
Mr. Garth Whyte: There are a couple of things. First, one of the four principles or issues was lower disposable income for tenants. Our first recommendation, and one of the ones we emphasize, is income tax bracket creep, indexing taxes. Who benefits the most from that? The answer to that rhetorical question is the people Mr. Shapcott is talking about. That's number one.
Second, I couldn't agree more that when you have a sense of community, that's what helps. When we did the study on polls, again what they looked at was, for example, why did you view small business as such a high credibility? One, they create jobs and have a positive effect on the economy, and two, they have a positive effect on the community social activities. That sense of community is incredibly supportive in the same type of approach. Three, when we say reallocation of resources, take the health care. Our members support the health care system but we don't necessarily support new initiatives. We support shoring up the current system and finding ways to reallocate it.
Having worked in Saskatchewan, and having worked under an NDP government in Saskatchewan and a Conservative government in Saskatchewan, and having been in Saskatchewan and talking to Mr. Romanow when he had a triple-B credit rating, for the founding party of health care, it wasn't very much fun to all of a sudden have to deal with the health care issue, which is the biggest expenditure. So you don't want to get back into the same level.
When we say reallocating resources, we don't say take away from co-op housing. We say look at other areas perhaps that you may want to reallocate on a priority so that things don't just automatically go up because they're in existence today.
We don't have a direct vote or survey on this particular issue, but we've been listening very carefully and it's one we'd like to look at in the future.
Mrs. Karen Redman: I notice one of the gentlemen is wearing the 1% solution button, and I know it's something that is commonly advocated by people involved in the need for more money going into social housing. That means doubling the federal contribution to social housing. Again, to reconcile that view.... Certainly in regard to poor people paying tax, this government has gone on the record saying the first place we want to look at is people who ought not to be paying tax, and we have provided relief for 600,000 Canadians.
However, this is talking about an expenditure. My question would be this. If we're going to commit—and I'm not saying we are—if we're going to contemplate that kind of expenditure, and you're advocating reallocation, where would we take that money from?
Mr. Garth Whyte: I have to get that figure.
Ms. Catherine Swift: From business subsidies for starters. We're against subsidies to business. Several billion dollars go into that. There's one example.
But given that the key problem is income...we know the latest Statistics Canada data show that currently the largest income expenditure for Canadians is tax. It's 21¢ of every dollar. That's more than food, clothing, and shelter. We think the answer is pretty clear as to what we have to do to give more disposable income to all Canadians and help them with their expenditures.
Mr. Garth Whyte: Also, we deal with the municipal level, and the other issue is that municipal taxation is quite high. Being in Winnipeg—and I've lived there several years—I can see what happens when small business leaves a community.
When you look at spending priorities in figure 12, one of the areas is infrastructure development. We haven't asked specifically in that particular area, but there are things that we will ask for in the future. We're trying not to box everybody in, to say thou shalt do this or that. I guess the response would be that the government isn't looking at reallocating resources; they're just adding. That would give us some concern. We think you want to do both.
To say that every program...and being responsible and looking at developmental uses and training allocation dollars out of the EI fund, and you don't even measure the effectiveness of it, and does it create a job...? Yes, we would have some concerns if you didn't want to look at reallocating resources and perhaps putting it into higher-priority areas.
The Chair: Thank you, Ms. Redman.
We'll now hear from Mr. Nystrom and Ms. Davies.
The Hon. Lorne Nystrom (Regina—Qu'Appelle, NDP): Thank you, Mr. Chairman. I want to share my time with Libby Davies and just ask one quick question myself.
I welcome everybody here, of course, and will ask one quick question of Catherine Swift, if I may.
You said that you would like to limit the spending side to the increase in the cost of inflation. You saw no argument not to do that—
Ms. Catherine Swift: No, I didn't actually say that.
Mr. Lorne Nystrom: At least I thought that's what you said.
Ms. Catherine Swift: Okay. Go ahead.
Mr. Lorne Nystrom: There's been a tremendous cutback in social spending in the last few years, a really radical cutback in transfers to the provinces and so on. My question is whether or not you would support the idea of the injection of a fair amount of cash into a children's agenda. There's a lot of talk about a children's agenda. I don't think it's in your brief: would you be supportive of that? I think it's very important—
Ms. Catherine Swift: I think we mentioned it in our brief, but we didn't verbally because we didn't mention every single item in our brief. The point we were trying to make—and maybe we didn't make it clearly enough—with respect to the indexing was that the economic statement implied an automatic indexing of a baseline level of expenditures to inflation of roughly 3% a year and then incremental whatevers, as priorities dictate, on top of that.
The point we were trying to make is that if it's assumed that we automatically index a baseline level of spending at 3%, which is in the statement—and then again, priorities, spending perhaps above that in selected areas and so on—why can we not do that for the flip side of the equation, i.e., debt repayment, tax reduction? We still spend over $40 billion a year on debt service, as you probably know. We could certainly buy an awful lot of co-op housing and children's agendas for $40 billion a year. That's the point we're making.
Also, in the throne speech this concept was alluded to: that any tax reduction and debt reduction is predicated on growth of the economy. But we don't predicate the expenditure side, so all we're saying here is that we think even-handedness would make sense. If we're building in expenditure growth, and then, like I say, on top of that, perhaps other spending, depending on priorities that are decided, why do we not get a baseline for tax reduction and debt reduction as well?
Mr. Lorne Nystrom: How much for kids? What are you advocating? Are you advocating a fair amount for children?
Ms. Catherine Swift: We think the bottom-line, sustainable area for kids is employing their parents in a decent job. We still have just under twice the U.S. unemployment, for example. This is unprecedented in history. Our unemployment rate has usually tracked the U.S. rate. We're very interdependent economies, of course, within a percent or so through the years. We feel the job creation agenda is the children's agenda. All the government programs in the world, as we know, have not done away with a lot of these poverty issues. We feel that job creation—
A voice: Is one of the answers.
Ms. Catherine Swift: —across the board is a key answer. It's obviously not the only answer, but it is a key answer.
The Chair: Libby Davies.
Ms. Libby Davies (Vancouver East, NDP): If I could just follow up, I wanted to come back to the housing question. It seems to me that there is a growing body of opinion, even from the business community, that the government must reinvest in housing programs. I think there's sort of a moral obligation that's very compelling. I don't think anyone wants to see more and more people destitute on the street. So I think the need for social investment in housing to meet what really has now become a crisis in Canada is very evident.
Mr. Shapcott, a number of groups, as you said, are calling for this 1% solution, which is about $2 billion. I just wanted to ask you a couple of questions.
First, in terms of the economic investment that it would signal, could you speak about that a little? We've heard about the real estate market. In my opinion, the private market has always failed the bottom levels of income. They're more interested in condominium developments and the high end of the market. In terms of an investment in social housing as an economic stimulant, in terms of jobs, I don't know if you have any information about what flows from that, what benefits there are.
Secondly, if there were this kind of investment, how would you see it working? Could you just elaborate a little on that? I assume you're talking not about a unilateral decision by the federal government but that somehow we would work with the provinces to develop a housing supply program. Could you just respond to that as well?
Mr. Michael Shapcott: Just very quickly in terms of the preamble where you mentioned the growing consensus, Ms. Davies, there certainly is a consensus. However, I also have to say to this committee, with great respect, that there's a growing anger about the lack of action on the part of people who are directly experiencing homelessness and the housing crisis.
To underline that, in Toronto, where I live, an average of two homeless people are dying every week. Dr. Steven Hwang from St. Michael's Hospital recently published a study on this. In the last nine days in Toronto, three homeless people have died.
This is a serious issue, and while it's gratifying that there's awareness and a consensus that's building, people are dying. Yesterday, just outside the doors here, we saw a manifestation of the very real anger that people are feeling when their brothers, sisters, fathers, mothers, and children are dying on the streets. While there's a lot of talk and growing consensus, there isn't action.
Specifically around the 1% solution and what that would buy us in terms of housing, we don't have exact numbers. It obviously depends on a number of factors. We do know from economic studies that we've done...we did the study back in 1991, for instance. The Co-operative Housing Federation of Canada hired an economic consulting firm, Clayton Research, who often work for the private sector. We hired them to do a study of the economic impact of investment in social housing and they found—this is just a general formula—that every 1,000 units of new cooperative housing generate 2,210 person-years of employment and $45 million in tax revenues for government.
Now, eight years later, those numbers may have changed somewhat in terms of the jobs impact and in terms of the tax revenue impact on government, but certainly the basic equation is there.
All the studies I've seen that look at the economic multiplier of investment in housing show that it's one of the single best things government can do—not simply to build housing that's urgently needed for people who are dying on our streets, but also because it's good for the economy. It creates jobs. It creates tax revenues. It gets people to work, and not just in the short-term jobs in the construction sector—although those are very important and construction workers need to get jobs—but also in the long-term jobs, jobs in furniture manufacturing, and obviously jobs in management and maintenance of the housing, etc. We think all of that is very critical.
The Federation of Canadian Municipalities have done their work in terms of their targets of 700,000 units over 10 years, again, on an annual basis, about 20,000 new units, 10,000 rehab units, and 40,000 rent-assisted units. They've put a rough price tag of about $2 billion on theirs, which, coincidentally, is about the same as the 1% solution.
That's the scale of the response. When you start doing the math, you begin to see that we're talking about tens of thousands of person-years of employment, substantial tax revenues, and most importantly, I think, to the people who most need it, desperately needed housing for people who are on the streets or close to the streets.
The Chair: Thank you, Ms. Davies.
Mr. Scott Brison (Kings—Hants, PC): Thank you, Mr. Chairman.
Thank you for your interventions.
My first question is to Mr. Whyte or Ms. Swift relative to the capital gains tax issue. Capital gains tax is having a particularly negative impact on the growth sector, the high-tech sector, for instance, where increasingly companies are using stock options as compensatory assets. I'd be interested in your views on this.
The fact is we can reduce our capital gains tax burden to that which would be equivalent to the U.S. capital gains tax regime for about $250 million per year, in terms of personal capital gains tax. The difficulty with Ottawa is that often we deal, particularly with tax policy, with perceptions as opposed to reality. And the reality is that capital gains taxes could be reduced significantly without a significant impact on revenue. In fact, they would potentially have a positive impact. So I'd appreciate your feedback on the capital gains tax issue.
Ms. Catherine Swift: There are many ways the system could be fixed. You're absolutely right. This was my allusion to the class struggle. Capital gains tax is a great example of perception versus reality. We seem to want investment, but we don't want to reward it. You're not going to get it unless you do. We've seen foreign direct investment in Canada drop for the last number of years. That means fewer jobs, and there are key problems in our economy, less growth than we could have, and so on.
Just to give you a couple of examples, certainly the inclusion rate could be changed. The actual rate of taxation could be changed. If we get too far out of whack with the U.S.—and we're already quite out of whack.... Again, our accident of geography is that we do have to look at their rules and how they compare to ours. And they look like they're lowering theirs even further. This is what is alarming. I think for this committee, and anyone generally looking at the tax system, capital gains is going to have to be a component of it, because we're going to get into even worse problems there down the road.
Another suggestion just in passing is that right now there's a $500,000 capital gains exemption for small businesses and farmers, as we know. Because those groups in the economy do not have access to pension plans and so on, that's their pension plan. That $500,000 rate has not been changed in a very long time, as we know. It's another example of bracket creep in reverse, if you will. We could change that level. Change it to $750,000, or whatever. This is a debate I think we need to have.
So we know this is a hugely important issue to our members, both from a standpoint of investment—investment in the economy generally—and also from a standpoint of a decent retirement for small business people who keep ploughing their money back into their businesses and need something down the road, some kind of tax-assisted vehicle, just like most Canadians have through other means. There are a number of ways to skin the cat, and we think this should be prioritized as a key component of any kind of tax reform initiative that may be looked at.
Mr. Garth Whyte: We're trying to come up with some low-cost initiatives. Let's say someone invests in a firm and that firm does well. Then they take their money out and want to invest it in a new firm, because there are angels in a different community. If you want to do that, you get taxed first, and then you have less money to put into the next firm. In the United States that's not the case. There's a 90-day rule or whatever where you can roll that money over into a new investment, so you keep investing in the firm. I think the committee should look at that. That is a disincentive for people to take their money out of a firm that they've made successful and put it into another firm that needs money.
Mr. Scott Brison: It's very distortionary, because in Canada, I understand from the investment community, there are a lot of people, for instance, who have owned bank shares for 30 years in the same bank and are reticent to part with them because they don't want to pay capital gains. So it's very distortionary and it creates a scarcity of capital for new ventures.
Mr. Garth Whyte: There was no capital gains tax in—
Mr. Scott Brison: We could reduce our inclusion rate from 75% to 50% for about $140 million in Canada.
Ms. Catherine Swift: It's not a big-ticket item. You're absolutely right.
Mr. Scott Brison: It could be done and would have an impact.
The Mintz report on corporate taxation was laudable in that it addressed the distortionary nature of our corporate tax system. Currently our corporate tax system does tend to favour resource-based sectors, which is kind of perverse given where the world is going in terms of technology sectors. The difficulty with it from a political perspective was that it created winners and losers because it was in a revenue neutral plan. If combined with tax reduction, the Mintz report recommendations could actually be implemented and create winners on the service and high-tech sector sides without having any commensurate loss to people on the resource-based side.
I would appreciate your feedback on whether or not we should be revisiting the Mintz report now in the context of a surplus, where we could actually provide tax reduction combined with tax reform, eliminate the distortionary nature of our corporate tax system, and have a more competitive one without creating the negatives for one sector or another.
Mr. Garth Whyte: We were critical of the Mintz report for a couple of reasons. One, it was revenue neutral. It didn't look at the overall impact. It tried to trade off between winners and losers. It didn't look at the overall effect of tax rate between large, small, and medium-sized firms. It just said, let's look at business taxation. Imagine having a report and then saying “It has to be revenue neutral. We can only look at federal taxes, and we've decided we're not going to look at EI at all. Let's look just at business taxation.” We don't think that's very credible.
We've gone to the Department of Finance and asked them to do a study like the Province of Quebec and other provinces have done to look at the effect of tax rate between small, medium, and large firms. That means looking at municipal, federal, and provincial taxes, before-profit taxes and after-profit taxes.
Last year we presented to this committee the mix of taxation. The mix has changed on the corporate side before profit taxation. It goes back to co-op housing and everything. It's gone up like this. And on profit taxation it's gone down. If we want to look at just one isolated example, we'd be concerned. We want to look at the overall tax mix. That doesn't mean we don't support lowering the overall business tax rate, but we think that to not look at the overall effect of tax rate on business generally is not appropriate.
Mr. Scott Brison: One of the things the Mintz report addressed was the issue of profit-insensitive capital taxation, which I think would be on the same page—
Ms. Catherine Swift: Yes. We were very glad to see that, because we believe the severity of the early 1990s recession was in part a result—more so in Canada than elsewhere—of the fact that all of the taxes were levied regardless of profit. If you're making money, you pay taxes. But if you're not making money, if in fact you're losing it, you're laying off people, you're going bankrupt, and you're paying an ever-higher burden of taxes, that doesn't serve anybody in the final analysis.
Mr. Scott Brison: My last question has to do with monetary and fiscal policy. We've lost 10¢ on the Canadian dollar since 1993. It seems the Bank of Canada is using monetary policy to compensate for weak fiscal policy on the government's side. Our taxes as a percent of GDP now are at 38%, and in the U.S. it's down to about 28%. There was a time when they were roughly equivalent. For 20 years we had marginally higher interest rates than those in the U.S.—a positive yield—and we still had a relatively good economy. Now we have lower yields without a commensurate increase in growth, and part of that is due to the tax disparity.
Have you polled your membership relative to the dollar issue? I don't know whether it's on the radar screen of Canadians, but it does represent a significant loss in terms of long-term standards of living for Canadians. I'd be interested to note whether it's on your members' radar screens, and also any other comments relative to the issue.
Ms. Catherine Swift: Yes, it is on their radar screens. It is of considerable concern for exactly the reason you mentioned: it means a significantly lower and declining standard of living for Canadians. Right now, a lot of people think we have a relatively good economy, and again, in a relative sense, I guess we do. But we see disposable incomes of Canadians flat. Why? In part because our currency is cheapening what we can do with our money as consumers, as investors, or whatever. So how that can't be of concern is a little esoteric, but I think it is seeping into the consciousness of a lot of Canadians. Even if Florida is more expensive, the lower dollar means more than just problems with tourism.
The Chair: Thank you, Mr. Brison.
Mr. Roy Cullen (Etobicoke North, Lib.): Thank you, Mr. Chairman.
Given the limited time, I just wanted to, first of all, thank all the witnesses for your presentations.
I just want to pick up on a point by Ms. Swift in terms of the assumptions and the way the numbers were developed for the economic and fiscal update. Eight of Canada's leading economists ran the numbers, and hopefully, as you say, they're pretty good. You never know in this tumultuous world.
But in terms of reindexation, I just wanted to clarify one thing. What happened is that in putting the numbers forward, we had to work on a certain assumption in terms of expenditure, so it just went in relation to inflation and demographics. On the revenue side, basically all the tax policies that have been announced in the budgets are carried forward there. So if we look at, let's say, re-indexation, the last three budgets have much, much more than compensated to re-index the whole tax system by an order of magnitude of about three.
The question, I suppose, is a good debate. Should we re-index moving forward completely—but I'm sure we're looking for more than that. In terms of the existing tax policies it covers re-indexation by a magnitude of about three to one. That's already reflected in the revenue projections for the next five years.
Mr. Garth Whyte: To reply, I think the issue, Mr. Cullen, is that right now we are all handcuffed by a 50:50 policy. There are two issues. Change that 50:50 policy or change how that surplus is determined. That's what we are putting on the table.
You're right, I agree with what you're saying, but you may say, okay, we're going to make an assumption of growth, and let's make that an assumption of growth on the expenditure side, then we'll divvy up the deficit. Inherently what you're saying is we want that outside the surplus. As far as the guidelines are concerned, we're saying if you won't increase the amount you can reduce taxation, then you should at least look at not allowing inflation to increase the overall tax load.
Mr. Roy Cullen: No. Maybe I didn't make myself clear. A 50:50 debate is another debate, certainly beyond this mandate. In terms of the re-indexation issue, the tax policies reflected in the five-year update—in other words, all the tax policies reflected carrying forward five years would more than treble the effect of a full re-indexation. It's already more than covered.
Now, as to the technical question of whether you would re-index moving forward, we've already done more than that and I suspect we're looking for more in terms of moving forward. I just wanted to clarify that. I hear your point that if we are inflating the cost curve, what about the tax policy curve? As I say, it's already reflected in terms of existing tax policy moving forward by an order of magnitude of about three to one.
Ms. Catherine Swift: I guess we're saying the 50:50 debate should be part of this debate, because I believe nobody foresaw the magnitude of the surpluses. The 50% might have looked reasonable if you're looking at a much smaller surplus. Now it looks absurd, frankly—absurd.
The Chair: Thank you, Mr. Cullen. I think, Ms. Swift, you raise a very interesting point. Things have gone better than expected—for example, balancing the budget one year ahead of time, which of course creates an amount of money we weren't counting on.
My sense is, as we travel the country and listen to people, that the tax issue is really becoming a very, very important issue in this debate. People are talking about the fact that if you want to reward effort, if you want to have incentives to invest, if you want incentives to work, to increase investment, then you need to look at the tax issue very seriously—personal and business.
This raises the issue of the 50:50, of course, and that's the question I want to ask the panellists, all of them. What do you think of the 50:50 split now, with the changing conditions? Things don't always remain the same; changes occur, and if you live in a new era with new choices, you have to have a new plan. Since we have to report to the minister on a five-year plan rather than a two, I want to get a sense from the panellists if in fact we ought to be thinking about a new split between debt and tax and social and economic investments.
We'll begin with Mr. Barnes.
Mr. Peter Barnes: Thank you, Mr. Chairman. Certainly we would support a wholesale, detailed re-examination of the 50:50 policy. We think the circumstances have changed considerably, and as we see the growing disparity between Canada's ability to compete internationally in attracting capital and keeping high-tech employees and the like, I think we would favour a review of the rule, and frankly with a strong bias toward a linkage to reduced taxes as predominantly weighting in the effort. We think that certainly our industry is seeing tax creep in many, many forms—taxes and fees—and we would encourage a weighting of the 50:50 predominantly toward tax reductions.
The Chair: Thank you.
Mr. David Paterson: I would agree with what Mr. Barnes said. Arbitrary allocations of funds do very little except create opportunities for people to put forward proposals that, because the funds are available, can be approved without necessarily being appropriately vetted as to their real value. Mr. Shapcott mentioned the stimulative effect of government spending. I've never been persuaded that government spending is more stimulative than private spending. If the funds were returned to the taxpayers and they were given the decision on how to spend them, I think the results would be much more beneficial to the economy.
Lastly, there's been great concern over the fact that disposable income in this country has gone nowhere for a decade. Reducing the tax rate as rapidly as possible will create disposable income and provide Canadians with a stimulus to boost their spending.
The Chair: Thank you.
Mr. David Thibaudeau: I really think that whether it's a percentage you're talking about, whether it's 50% or 48% or 32%, or whatever it might be, as far as we're concerned the key issue here that we have to remember is we're not isolated. We're in a competitive world. We must demonstrate what I would call a commitment to dealing with our debt. What that number comes out to be is something that needs to be worked on, but if you're in a position of surplus and you don't address that issue, you will not be taken seriously out there. That's number one.
The second thing is, and I think everybody here pretty well is suggesting it, you must reduce taxes. In our submission, as you know, we had a number of suggestions, which went all the way from the 5% to the reduction in capital gains inclusion, the 50% to full indexation of the tax system, and decreasing the middle bracket by 1% a year for three years. Obviously that may mean more than 50%, or whatever that number is. We just looked at the total surplus, and if we took half of it and used that to take care of the debt and we used what was left over, we had enough to do all these things and still more.
The Chair: We have to go and vote, so I'm going to make it real quick here.
Mr. Michael Shapcott: Positively quickly, our membership on our national board have actually given us direction on the 50:50 issue.
I would say two very quick things. First of all, it is the position of our organization that the budget-making process has to take into account the realities that exist outside of this room and outside of the rooms of these buildings. There is in fact a housing crisis across this country that's very real, and the government needs to address that, and that's the basis for our presentation; it's not based on some formulas or theoretical calculations but on the real needs of Canadians. So we urge this committee to do that.
I would just say very quickly to Mr. Paterson around the stimulative effect of government spending versus private spending that it probably is true that if a private builder builds an apartment building that creates jobs and does all the other benefits.... The problem is, however, the private sector is not building rental housing, so therefore it falls to others to do that.
So we say to this committee, please, take into account the real needs of Canadians in your report.
The Chair: Thank you very much.
We'll wrap up by saying this panel doesn't really care too much about the formulas. What it wants this committee to do is to recommend the type of policies that will generate the type of economic growth that will address the issues you have raised, obviously, and ultimately improve the standard of living for Canadians.
Thank you very much. The meeting is adjourned.