FINA Committee Meeting
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STANDING COMMITTEE ON FINANCE
COMITÉ PERMANENT DES FINANCES
[Recorded by Electronic Apparatus]
Thursday, May 18, 2000
The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I would like to call the meeting to order and welcome everyone here this afternoon.
As you know, the order of the day is Bill C-25, An Act to amend the Income Tax Act, the Excise Tax Act, and the Budget Implementation Act, 1999.
Today we have witnesses from the Department of Finance: Brian Ernewein, director, tax legislation division, tax policy branch; Monsieur Gérard Lalonde, senior chief, tax legislation division, tax policy branch; and Mr. John Hayward, chief, personal income tax division, tax policy branch. Making the introductory remarks will be the Parliamentary Secretary to the Minister of Finance, Mr. Roy Cullen.
Mr. Roy Cullen (Parliamentary Secretary to Minister of Finance, Lib.): Thank you very much, Mr. Chairman.
I'll keep my remarks brief so we can have time for questions and comments, Paul.
Bill C-25 implements many of the personal tax and other tax fairness measures from the February 1999 budget together with some additional tax changes. Each measure is designed with the government's commitment to tax reduction and tax fairness in mind.
This commitment was renewed last fall in both the Speech from the Throne and the Economic and Fiscal Update as well as in the February budget when the Minister of Finance delivered on his commitment through a five-year tax reduction plan which brings in the most significant structural changes to be made in the federal tax system in more than ten years.
Mr. Chairman, each of the government's budgets to date has included targeted tax measures. Eliminating the deficit in 1997-98 opened the door for us to begin the introduction of broad-based tax measures.
Right now I would like to concentrate on the measures in the bill before us today.
Three general tax relief measures were announced in the 1999 budget. Subject to the enactment of this bill, each took effect July 1, 1999. The 1998 budget raised the amount of money low-income Canadians can receive on a tax-free basis by $500. The 1999 budget extends this relief to all taxpayers and increases that amount by a further $175.
The 2000 budget further increases this amount, but, as I have indicated, this is included in separate legislation.
Furthermore, in the 1998 budget, the government started the elimination of the 3 per cent general surtax by abolishing it for some taxpayers and reducing it for others. The 1999 budget brings the process to a full circle by eliminating that surtax for all taxpayers.
Turning to the tax fairness measures, Mr. Chairman, I first wish to discuss those involving income-splitting with minor children, retroactive lump-sum payments, communal organizations, third-party misrepresentations, and the taxation of RRSP and RRIF proceeds on death.
First, Mr. Chairman, this bill introduces a special tax aimed specifically at structures designed to split income with minors, a technique often used by high-income individuals to avoid tax by diverting income to low-income taxpayers, usually family members. Applied to the income of individuals aged 17 years and under, this special tax will include income from taxable dividends and other shareholder benefits on unlisted shares of Canadian and foreign companies and income from a partnership or trust that is derived from a business carried on by a relative of the child.
Another measure in the bill provides for a special relief mechanism for the calculation of tax payable on lump payments such as superannuation or pension benefits, spousal or taxable child support arrears. At the present time, individuals are taxed the year payment is received, even though a significant portion may relate to prior years.
To maintain a roughly equivalent level of taxation between income earned by communal organizations such as Hutterite colonies and general farming income, section 143 of the Income Tax Act is being amended to allow allocations of income to both spouses in a family. This will reduce the tax burden on communal organizations where allocation of income has been restricted to only one spouse per family while the wages and salaries paid to spouses in farming and other businesses have been tax deductible.
Bill C-25, Mr. Chairman, also introduces two new civil penalties for third parties who make false statements that could be used for tax purposes.
The first penalty concerns the making of false statements in tax shelter and other tax planning arrangements. The second penalty addresses cases in which a person counsels or assists a false tax filing.
A “culpable conduct” test consistent with the type of conducts to which the courts have in the past applied civil penalties will be instituted. The Bill also provides a reliance in good faith exception to the culpable conduct standard.
Another area requiring adjustment relates to RRSP and RRIF income inclusions when a taxpayer dies. If RRSPs are left to dependent children and not the surviving spouse, then the dependent children, not the deceased's estate, will be responsible for any resulting income inclusions. This measure is generally of a relieving nature, because the tax imposed on the estate in these circumstances would generally be greater than the tax imposed on dependent children.
Next, Mr. Chairman, I wish to highlight changes to three tax credits effected by this bill.
First, the medical expense tax credit will be extended to cover expenses for the care of people with severe disabilities living in a group home, therapy for those with severe disabilities, tutoring for those with learning disabilities, and talking textbooks required by people with perceptual disabilities to attend educational institutions.
Second, corporations producing electrical energy for sale, or steam for use in such production, will now be eligible for the manufacturing and processing profits tax credit.
And third, labour-sponsored venture capital corporations, LSVCCs, will be encouraged to focus more on small-business investments. In addition, the bill clarifies the rules that apply when an LSVCC is part of a merger or other corporate restructuring.
Moving on, Mr. Chairman, the remaining budget measures in Bill C-25 include a relieving mechanism so that corporations facing taxable refund interest and non-deductible arrears interest calculated for the same period can request that the underlying tax amounts be offset for interest calculation purposes;
a new rule aimed at helping Canadian financial services to compete on international markets, ensures that engaging a Canadian firm to provide certain investment services does not mean that a non-resident investment fund is carrying on business in Canada; the surcharge on large deposit making institutions is extended to October 31, 2000.
Mr. Chairman, the non-budget measures contained in this bill address the issues of first nations taxation, hepatitis C compensation, and demutualization.
The bill helps to implement taxation agreements with first nations by reducing federal tax for individuals subject to the income tax legislation of certain first nations. In particular, the federal government's income-tax-sharing agreements with self-governing Yukon first nations are put into force. The legislation also ensures that the income tax burden of an individual subject to first nation taxation will be same as in surrounding jurisdictions.
Another measure exempts from income tax the income of the trust that has been established by federal, provincial, and territorial governments to provide compensation to hepatitis C victims.
The tax treatment of insurance industry demutualization is also part of this legislation. Cash demutualization benefits will be treated as dividends eligible for the dividend tax credit. There will be no immediate tax benefit for a policyholder receiving a share as a demutualization benefit, but there will be a capital gain once the share is sold.
Mr. Chairman, I have tried to give you a brief overview of the highlights of Bill C-25.
As I indicated earlier, each of these measures has the principle of tax fairness firmly entrenched in its design. As I indicated also, the tax measures that were introduced more recently in the 2000 budget will be contained in separate legislation.
I, together with the officials present, will be pleased to answer any questions that honourable members may have.
Thank you, merci.
The Chair: Thank you very much, Mr. Cullen.
We'll now proceed with the question-and-answer session. I guess we'll begin with Mr. Forseth.
Mr. Paul Forseth (New Westminster—Coquitlam—Burnaby, Canadian Alliance): Thank you very much.
This is obviously characterized as somewhat of a housekeeping bill. When we look at the summary of the provisions in the beginning, there are 15 separate items, and certainly some of them are very non-controversial, like the hepatitis C trust. And we understand the trend of demutualization of insurance companies, a trend that's happening throughout the western world. But perhaps we could get a little bit more of an explanation about why it eliminates the 3% individual surtax.
It's an interesting concept to tie that in to the phrase in the beginning of your statement: “Each measure is designed with the government's commitment to tax reduction and tax fairness in mind.” Are those separate ideas? Are those ideas that are perhaps in conflict? Is somehow tax reduction not related to tax fairness? Does tax fairness apply something different? That idea, that concept, that mindset, is right in the opening paragraph. So perhaps you could start off with that and then try to relate that to the somewhat belated—but I'm glad to see it—elimination of the 3% individual surtax.
Mr. Roy Cullen: Thank you, Mr. Forseth.
I guess one needs to step back a bit and put the economic and fiscal plan as the backdrop. Clearly our government is committed to providing Canadians with the tools, the wherewithal, and the economy to prepare ourselves for this century and the new global economy. I know those terms are overworked, but....
The Minister of Finance is clearly of the view that putting more money back into the hands of Canadians is part of that strategy. The $58-billion tax reduction package that was announced in budget 2000 and the measures before clearly have tax reduction as a very important part of that fiscal and economic strategy.
When you're dealing with tax reduction, in our view you need to deal with it in as fair a way possible. Before eliminating the deficit, we focused on targeted tax relief to those Canadians in particular need, such as people with disabilities, or in particular circumstances, such as low-income Canadians. As we balanced the budget, we were able to move into more broad-based tax relief, focusing on middle-income and low-income Canadians, and particularly Canadians with families.
So the two go hand in hand, tax reduction and tax fairness. We're committed to tax reduction, but we want to proceed with it in a fair way.
The 3% surtax was brought in by the previous government to deal with the elimination of the deficit. Now the deficit is eliminated. We started the process of eliminating the 3% surtax I think in the 1998 budget, and in the 1999 budget the 3% surtax was eliminated completely. Likewise, in budget 2000 we've begun the process of eliminating the 5% surtax, which again was a deficit-cutting measure.
The fairness on the 3% surtax and the 5% surtax is related probably to their design as well. They were temporary measures, and now we have some latitude to remove them.
Mr. Paul Forseth: I just want to say that as we eliminate surtaxes, that somewhat is a move towards flattening the tax. From our analysis, from our party's perspective, we've been able to crunch the numbers to come up with a single rate, which is a different approach. But I'm glad to see you're getting more towards the single rate. Now all we have to do is eliminate the three brackets and we're getting in the right direction.
I see the chairman wants to chime in.
The Chair: I just want to follow up. The issue of tax fairness as you define it would be what? What's tax fairness to you?
Mr. Roy Cullen: There are two perspectives on that. One is, in the context of overall tax reductions, to target initially those people who need the relief most. And the focus in the last budget has been on middle-income Canadians and middle-income Canadians with families.
But within the Income Tax Act itself there are a number of provisions that over time have created certain inequities within the substance of the budget and need to be re-balanced from time to time. So there are certain anomalies always with an income tax structure and an income tax system that need constant surveillance.
The Chair: Let me ask you a question. Perhaps a different definition of fairness.... The 5% surtax was introduced as a deficit-fighting mechanism. That's still there. What's so fair about that? What's so fair about keeping that tax there?
Mr. Roy Cullen: Well, as you know, Mr. Chairman, in budget 2000 it's eliminated, apart from incomes up to $85,000, and that will be done over the next few years. In fact as we have more fiscal room and capacity, if the economy keeps going the way it is, we might be able to bring that forward much more quickly.
The philosophical underpinning, if you like, is that as we have had the fiscal room to manoeuvre, we have focused more on middle-income and low-income Canadians. I'm sure the point you're probably leading to is that if we give more tax relief to people at higher income levels, perhaps these are the entrepreneurs who will help grow the economy. That's a state we want to move to, but I don't think we can get there immediately. We're starting the process.
The Chair: Actually, on the point you raised, that we do find greater reinvestment in higher incomes, everybody knows that, but the tax was introduced as a deficit-fighting mechanism, and the deficit is now gone. Forget about the issue of tax fairness. As an issue of governance, wouldn't it make sense to eliminate the tax right across the board and have the benefits that come as a result of that? Also, I think it would restore a lot of faith in government from the people if you said “This tax was introduced during the deficit, the deficit is gone, and now the tax is gone as well.” You have to give some premium to that as well.
Mr. Roy Cullen: Yes. As I said, in budget 2000 the 5% surtax was largely eliminated, and for incomes beyond $85,000 it's an issue moving forward for budget 2001. Can we accelerate that? Should we be looking at the different brackets, the different levels—
The Chair: There's a lot to do. What I'm saying is, as more resources become available—and I would think there will be more resources available in the coming years—the issue of governance also plays into the tax fairness and tax reduction measures of the government, because it does restore a lot of faith in governments that recognize that certain measures were taken during a certain period of time, and now that those conditions have changed, we'll move forward.
This committee has advocated the elimination of the 5% surtax for a while now, and I just hope one day it does go away.
Mr. Paul Forseth: On the issue of the general sense of tax fairness and the number of items listed in the bill, I would refer the parliamentary secretary to the speech I gave in the House on this particular bill, where I outlined a lot of the general visions and the issue of fairness.
Often there's the concept, of course, of ability to pay. Secondly, there's the concept that the person who uses should pay, or user-pay, and if someone unreasonably draws down a particular service or whatever, perhaps they should pay more.
Also we have to encourage the elimination of the complicated gymnastics that occur just because the rules are designed the way they are. That sense of fairness is the obvious inference of transparency and the appearance of fairness, of equity, rather than going through complicated formulas.
Then there's the other idea of social concern, income transfer, the idea of the social safety net we have in Canada, but still remembering that a dollar left in the hands of the taxpayer, for the multiplier effect or for the economy, is much more productive than a dollar left in the hands of a government bureaucrat. We take a dollar, we rattle it around in the system, and then we give back 50¢ or less. So in trying to provide services, sometimes the best thing to do is to not take it in the first place.
Mr. Roy Cullen: I know I'm here to answer questions, not to put questions, but if you look at solution-17 in terms of equity and fairness, how does your party rationalize what we would call a lack of progressivity? In the income tax system as it is today, there is a large element of progressivity, whereas in a flat tax or single tax system, I know you have the personal exemption at $10,000, so that provides a certain element of progressivity, but do you not buy the notion that progressivity provides equity or fairness?
Mr. Paul Forseth: I guess all good things have their limit, so you're quite right to respond with your comments, because in my speech on this particular bill in the House, in the style of comparing and contrasting what this bill does versus my critique of it, I did refer repeatedly to solution-17.
Our alternative vision is still progressive. When you think of a family of four with one income earner, they would take home $26,000 in income before they would ever be calculated to pay a single dollar of federal tax. So in that respect it is progressive. But the argument we've heard back from the Minister of Finance in the past is that when you move from one regime to another, it's a break for the rich. Especially the NDP have said that. But really that is the example of how bad the system was in the first place. When you get to the new, what I would see as more equitable and fair regime, sometimes those who benefit the most might be in a variety of tax brackets and higher, but that only demonstrates how inequitable it was in the first place.
So I again come back to the measures of the bill and challenge this whole notion of tax fairness. When we bandy these things around, we should clearly state what is meant by that. We in our party have certainly tried to do that, and it's our role to ask the questions, especially when the secretary comes speaking on behalf of the minister and talks about a commitment to tax reduction and to tax fairness. I asked a general question, “Can you just expand on that? Where are we going? How does this bill fit into the other bills and the vision of tax reduction and fairness?” And it looks as if the answer I've got so far—correct me if I'm wrong—is, “Well, we're going to go partway to the vision we've outlined, but we're not going to go all that way.” Your idea of tax fairness is different from mine.
Mr. Roy Cullen: Well, yes, I guess it is. When it comes to a single-rate tax or a flat tax, clearly that's the case.
I don't recall saying we're going part of the way. It's a process of continuous improvement for all of us, including governments. Where we see anomalies in the income tax system, we try to fix them. But the broad stroke of it is that we want to, as part of our fiscal and economic strategy, reduce taxes and to reduce them as quickly as we can and as fairly as we can.
Mr. Paul Forseth: Okay.
We'll look at the concept of income-splitting. There is a provision there for a student, and under a certain age, I think. If we're into the whole regime of income-splitting, then why can't we go the whole way and allow single-income parents with young children to simply income-split?
Part of the discussion of the subcommittee on family tax fairness was the great disparity between two families living on the same cul-de-sac with basically the same family dynamics, but one has one income and the other has two sources of income. Their obligations and their overall financial picture on the income side are somewhat the same, but their tax obligations are greatly different. So one of the discussions was on perhaps income-splitting.
Mr. Roy Cullen: I'll start, and perhaps the officials can chime in.
The intent of this particular provision doesn't deal directly with the issue you're raising, although in the context in which you're raising it, it's in that general vicinity. The intent here is to prevent....
Let me give you an example where a parent would set up a private corporation. They would give the son or daughter a certain small shareholding at a fairly nominal price, but structure the shares so the dividends could be discretionary. Then the corporation would allocate large dividends to this youth at a much lower rate of tax, of course. So it's really in the area of tax avoidance. They're trying to close that type of loophole.
On the broader issue you've raised, Mr. Ernewein, would you like to comment?
Mr. Brian Ernewein (Director, Tax Legislation Division, Tax Policy Branch, Department of Finance): I'd just like to make one point in relation to the discussion we've just had. I don't think it's necessarily the case that anti-income-splitting rules are required only in the case of a progressive income tax system. They would potentially have a place, even with a single-rate system where there was a basic exemption.
To give a simple example, if a single-rate tax were imposed to apply only to income above $20,000, but that was for income earned by a particular individual.... To take my own example of myself, my wife, and three children, if I were the only income earner, through income-splitting I could multiply that $20,000 exemption to $100,000 by channelling income to each of my wife and three children. I'd just make the point that it has a place, in any event, where you have a basic exemption, because functionally a basic exemption creates two rates.
Mr. Paul Forseth: One of the other things is that solution-17 returns the standard basic exemption of $3,000 across the board for every child. It's not income-tested, or whatever. If you have a child, you get $3,000.
I would like to get some further technical explanation about the provision under lump-sum payments, where it says it provides tax relief in respect of certain lump-sum amounts received in respect to prior years. Does this relate to the previous provision of averaging, where if someone received a large payout in one particular year, because of retirement or some other unusual lump sum, they were able to average it out over several years? The income tax department used to make those calculations for a taxpayer, if they checked a box saying they had received a lump-sum payment. There was a computer calculation, and the tax department would do it for you and apply it. It was almost like forward averaging, or whatever. Those provisions are gone now, as far as I know, and I'm wondering if this relates to that.
Mr. John Hayward (Chief, Personal Income Tax Division, Tax Policy Branch, Department of Finance): No, it doesn't. The problem would have been less severe with an income-averaging system, but the problem does not uniquely come from that. The problem here is that some taxpayers may be in a higher tax bracket when they receive a lump-sum payment for things like prior years' service. It could be as a result of a lawsuit, or whatever.
To make the system fairer for taxpayers, this measure allows Revenue Canada, in fact the CCRA, to do the calculation for them to designate whether or not it would be to their advantage to have that income taxed in the year in which they would have received it, had it not been subject to a delay because of legal proceedings or for whatever reason, or in the current tax year. It's simply a matter of fairness, to make the tax burden on the taxpayer more fair.
Mr. Paul Forseth: So we are in the same conceptual envelope of what I'm talking about.
You recall the forwarding-averaging provisions, and so on. Is there any discussion or need for the return of that provision, so it's always there and someone could declare a certain amount of income from a particular source to be subject to that kind of procedure?
Mr. John Hayward: I don't think it's directly related to that issue. The extent to which averaging is advantageous, whether it's forward or backward averaging, depends on the level of tax rates and the extent of progressivity. To the extent that the government lowers rates and raises thresholds, it becomes a smaller problem.
I guess it was decided to move away from income averaging at the time of tax reform. Part of the reason is that there are provisions now in the tax system, such as the ability to contribute to RRSPs and what not, that do have the effect of allowing taxpayers to average income to some extent. The view of the government has been that in that context, except for special situations like lump-sum payments, the system does not require additional averaging provisions.
Mr. Paul Forseth: This is what I'm saying. Right now, for the average taxpayer who may receive some lump sum, such as in British Columbia from the insurance corporation as a result of a car accident, they receive a payout as a result of damages won in court. Is that subject to tax?
Mr. John Hayward: That kind of payment would typically not be subject to tax. It's regarded as compensation for a capital loss, so it's not taxable.
Mr. Paul Forseth: Okay.
The first provision, tax credits for individuals, increases the basic and spousal amounts up to $675 and expands the list of eligible medical expenses to include certain training expenses. What is the general number for every $100 of raising the basic exemption? Does that translate at the other end as a tax expenditure to government as a whole? For every $100 that you move that basic exemption, it's worth so many hundred million at the other end. Do you have a scale of what that is?
Mr. Roy Cullen: Before we get to that, this is just to add on the lump sum provisions. It's not as though this provision is acknowledging that we should go back to forward averaging and back averaging. The kinds of transactions it's available for are very clearly defined. If it's for retroactive pay, for example, where clearly the taxpayer would have included that in their income over a certain period of time, then this is how this provision replies.
The general averaging provision was really a general provision to allow the averaging of income, which was abolished some time ago. The income didn't have to relate to previous years. It was just a general averaging provision. This is quite specific in the sense that it has to relate to income in certain circumstances that would have been earned in years prior.
Mr. Paul Forseth: Okay.
Mr. Roy Cullen: As for your question, with those numbers that are available, I've seen them often enough. They're huge.
Mr. Paul Forseth: Yes.
Mr. Gérard Lalonde (Senior Chief, Tax Legislation Division, Tax Policy Branch, Department of Finance): If you look at the budget plan for 1999, you'll see that, for example, the $175 increase in the basic personal credit yields, on a mature system, a tax cost of $525 million for 2001-02. That would imply that for each $100 of increase, it would give a cost of $300 million.
Mr. John Hayward: That's for both the basic personal amount and the spousal and spousal equivalent amounts.
Mr. Paul Forseth: That's all for the moment.
The Chair: I have a question. On the issue of a temporary capital tax surcharge on large deposit-taking institutions, is this going to be as temporary as the income tax? Do you know what I mean by that? What's the rationale behind that? Our financial institutions are trying to get stronger, from a productivity point of view. How beneficial is this tax to our economy?
Mr. Roy Cullen: First of all, let me talk about where we're going with the tax. In the 2000 budget, it was rolled over again. Right now the government is looking at the whole financial services sector. There is legislation coming forward probably next month. Whether that will be looked at in that context I don't know, but it's a tax that is always being reviewed.
As for the original rationale, I wasn't around. Maybe the officials would know what the original rationale was.
Mr. Brian Ernewein: In a word, revenue was the rationale.
The Chair: We have a surplus now, so why are you taxing these deposit-taking institutions?
Mr. Roy Cullen: Not every tax has a totally clear rationale. Look at the large-corporation capital taxes. I remember the forest industry coming to Ottawa when I was in the private sector, and it was hard to get a policy rationale for it. Some taxes are there to raise revenue, and there's not as strong a policy rationale as with others.
Mr. John Hayward: Taxes don't have economic benefits for the most part. They have economic costs. They only have economic benefits to the extent that the government provides programs with that money. The issue, as far as a tax like this is concerned, is what are the alternative sources of revenue that one might look for? I think it's a matter of judgment whether or not there are less costly ways of raising that revenue than through this tax.
The Chair: It's $100 million, isn't it?
Mr. Roy Cullen: The revenue from that?
Mr. Brian Ernewein: Actually, the revenue is $50 million annually.
The Chair: What's our surplus?
Mr. Roy Cullen: The annual surplus?
The Chair: Yes. I think it doesn't send the right signal when you have these taxes on deposit-taking institutions, the financial services sector. You're just not sending the right signal as far as I'm concerned. If it's in fact a temporary one, I think eventually you're going to run out of time. I can understand it when you're putting it in as a deficit-fighting mechanism again, but not now. Why this particular industry? Why don't you tax other industries?
Mr. Brian Ernewein: Mr. Chairman, I appreciate the question. While it won't represent a complete answer, I'd like to draw people's attention to the 2000 budget, where this issue was identified again.
It was announced in that budget that the surtax would be extended for an additional year, but the budget paper for this year's budget, that is 2000, goes on to say that a review of the application of the surcharge is underway as part of the financial sector review. An announcement will be made on that when the financial sector review legislation is tabled.
Mr. Roy Cullen: If you look at the profitability of the banking sector, that should not necessarily drive the decision, but they're doing I think 17% or 18% on equity, so I don't think it has really yet cramped their style. It's something that's under review constantly. I don't know if I could say much more at this point.
The Chair: I guess what happened was that the $50 million was required and this was a good place to get it.
Mr. Roy Cullen: Most of the large-corporation capital tax is provincial, but we're not working with the provinces to see if there's any appetite to show some relief on a large-corporation capital tax generally.
The Chair: Standard of living is the big issue we're dealing with in this country, right? One of the best ways to raise our standard of living is through productivity gains. Taxing capital does not enhance productivity, so from a policy point of view, I fail to see the benefits of taxing capital or taxing capital heavily. I just want to be on the record as saying this, and I've said it in a number of reports.
Mr. Roy Cullen: I can tell you that the whole issue of the taxation of capital, particularly in the context of the new economy, is under active review.
The Chair: I think that's the only question I had. Mr. Forseth may have a question. Do you want me to drag this out for you?
Mr. Roy Cullen: Did you want to talk about the manufacturing and processing tax on steam?
The Chair: No. I wasn't trying to be difficult. I just think that once you develop a certain direction or vision of where you want to go, then you have to be consistent with it, and I don't find capital tax to be consistent with it. I don't think it's a growth-enhancing measure. Just because financial institutions...to me it means nothing. You're saying they're making a lot of money; I'd rather have a financial services sector that makes money than one that loses it.
That kind of attitude is also very consistent with the fact that in nations like ours we tend to penalize success rather than celebrate it. I think it's a switch we have to make. Particularly when you consider the standard of living gap that exists between us and the United States, and so many other challenges that we face as an economy, I think doing these kinds of things is counterproductive.
But that's only my point of view. I'm sure Mr. Forseth disagrees with me.
Mr. Paul Forseth: We're talking about capital tax. I can give some testimonial to what that type of tax has done to the British Columbia economy. When certain business councils, chambers of commerce, or whatever, have come together to complain in British Columbia, the first thing they mention is that this has sent absolutely the wrong signal to the Pacific Rim, that business is really not welcome in British Columbia.
We've gone from number one to number ten in investment. Basically the NDP government has killed the economy in British Columbia. That is one of the things, not only in its substance but in the larger spirit of it, and the message that it sends.... Put that together with a climate that isn't particularly conducive to growth, and those are the things that I think really have to be eliminated.
Then we look at other jurisdictions that seem to be really going ahead, and there just isn't that panoply of disincentives and government interventions. There's a different attitude and mindset. Of course, from the opposition side, as we continue to pressure the government to make it explain and justify itself to the public and to explain its legislation, we keep saying please stay away from this socialist tendency that has the mindset that basically says that it's fine to transfer income and be a socialist as long as there's a capitalist around to pay for it.
Mr. Roy Cullen: I would like to, Mr. Chairman, put some things in context. When we look at the reductions in the corporate income tax rates that were announced in budget 2000 on the more heavily taxed sectors, a reduction from 28% to 21%, in fact the banking sector will benefit greatly from those measures.
If you take those measures and you use the example of Ontario, the Ontario government followed our government and introduced some of their own corporate tax reductions, and once these are fully implemented, corporate taxes in Ontario will be, as I understand it, significantly less than all the bordering states and very close to, if not lower than, the U.K. tax rates. As I say, in the 28% to 2l%, the banking sector gets a huge benefit from that.
I hear what you're saying about capital taxes. But I think we also need to look at it in the other context of income taxes and some of the major steps we're making in that direction as well.
Mr. Paul Forseth: I can accept that rationale, but then can you outline for us what is the comparative situation? We're not in an isolated situation, so we have to look at what our competition is. And because of the total intermixture of our economy with that of the United States, the situation we have to compare ourselves with must be the American economy, not the European one. So on that sector, regardless of the reductions, which you're saying are beneficial, where are we in the overall competitive context?
Mr. Roy Cullen: As I just finished saying, with respect to corporate income taxes, once fully implemented, we'll be—I can't remember the numbers offhand—I think maybe four or five points lower than the U.S. bordering states. It depends on which state, but let's say the bordering states to Canada, many of the large industrialized states. It is true that there is a differential in terms of capital taxes, but with respect to the U.S.—I don't know the equalizing number—if you look at capital taxes or the lack of capital taxes in, let's say, the bordering U.S. states, does that more or less compensate for the corporate reductions, which will put us lower?
Mr. John Hayward: If you look at it in another context, I think we agree that capital taxation can be a problem. In Canada the provinces tend to rely on capital taxes more than the federal government does. And one of the things the federal government is pursuing in ongoing negotiation with the provinces is the structure of taxation of corporations and better tax coordination for corporations across Canada. So it's not an issue that can be dealt with solely at the federal level, it's something we have to deal with more broadly in the country and on a consultative basis. And that's the direction in which we're going.
The Chair: I think that's a point worth making, and I'm fully with you. The provinces, on the capital tax front, are big players. But essentially what we're saying is that pressure should be applied on provincial governments to recognize the fact that excessive taxation of capital is inconsistent with a growth strategy. And I don't know how you do this. I know how they do it on health care with us, but I don't know how you do it with them on capital tax. I understand negotiations have begun with the provinces, so I think it's a step in the right direction.
Taxation in and of itself, the issue of composition, which sectors or individuals are you taxing, that's also very important. It's not just tax reduction, is that correct? The example I gave of a 5% surtax, this concept of giving tax cuts to those individuals who pay tax, may be a novelty, but I think we have to really give tax cuts to those who pay taxes. There's nothing wrong with that.
Everybody knows you get the biggest bang for your buck on higher income and everybody knows also that you get the biggest bang for your buck, if we can say that, on corporate taxation, from a growth point of view. I don't know how much of it is politics, but the economics arguments for reduction of corporate tax are very strong. They're very solid, as a matter of fact.
Mr. Roy Cullen: You're right. But in budget 2000—maybe you won't agree, but I hope you'd agree—the government, by announcing a 28% to 21% reduction, has moved reasonably aggressively, and the pace of that can be increased, depending on the surpluses that develop over the next few years.
You talked about the federal government putting pressure on the provinces in terms of taxing capital, and I know the Minister of Finance has communicated with the provincial ministers of finance to do just that and to sit down with federal officials and try to work towards that end.
The Chair: Let me rephrase it. In the government's strategy for growth, now there's a big shift. When we came into government in 1993, the unemployment rate was very high, so we had to deal with the actual unemployment rate. Now, as more and more people get jobs....
What happens to an individual once he or she gets a job is that the first year they're happy just with the fact that they have a job, but by the second year you can rest assured that they want to have more disposable income, a higher income. So the strategy of the government ought to shift: there has to be a tilt towards creating a higher standard of living, lowering the tax burden, and having greater disposable income for people.
Jobs are very important, no question about it—you don't want to have high unemployment—but there has to be a shift toward saying, okay now, for the people who do have jobs, is their income rising, are taxes too high? These are fundamental questions that we have to ask. I think that's what happens to people after they get a job: they want their incomes to rise.
I'm just wondering, Mr. Cullen, where do you see the government going? Has that shift happened? Or are we still going to engage in things where jobs and job creation are the raison d'être of the government?
Mr. Roy Cullen: Well, at 6.8% it's quite an improvement from when we came into office. I'm not sure that anyone, particularly someone who is part of the 6.8%, feels we can just forget about unemployment, and I'm not suggesting you're saying that. I think we still have some work to do there, but yes, I think there's more thinking now about....
We focused in the last budget on middle-income Canadians. We looked at re-indexing the tax system and changing the brackets and some of the tax rate at middle incomes. The idea of putting more in the pockets of Canadians is still of paramount importance, and how you deliver that is something that we'll be consulting with Canadians on in the fall, something that is part of the ongoing review.
The Chair: So let me ask you this question. This government has basically used the 50-50 approach, debt and tax reduction on the one hand, and government investing in so-called strategic social and economic investments. If disposable income is a key issue in this country and you want to restore some of that disposable income, would you say that effective tax cuts or meaningful tax cuts would be the route to go? Would you favour a moderate tilt away from the 50-50 towards a greater portion of the surplus going to debt and tax reduction?
Mr. Roy Cullen: Mr. Chairman, are you asking me for my personal opinion or the opinion of the government?
The Chair: I never knew they made a difference—
Some hon. members: Oh, oh!
The Chair: After you said that, as the former parliamentary secretary....
Mr. Paul Forseth: It's beginning to sound like this morning, with the industry officials.
Mr. Roy Cullen: Well, clearly in the last election campaign the government ran on the 50-50 concept. I think the government is committed to that 50-50 to the end of this mandate. Where we go beyond there would be the subject, presumably, of a campaign platform.
My own personal view is that it'll be difficult to sustain the 50-50 ratio moving forward. In fact, I personally wonder about the logic of it moving forward. I think it has served its purpose.
But the government, leading into an election, will develop a campaign platform, and that will be a major consideration of how we do deal with surpluses, so I'm not going to prejudge what the party platform will be moving into the next election.
The Chair: Can you expand on what he means by “sustainable?” Sustainable in what sense? You didn't tell me which way you'd like to go, by the way. Sustainable what...?
Mr. Roy Cullen: I don't think I'm here, Mr. Chairman, to expound on my personal philosophy. I'm here to defend the legislation and speak as best I can on behalf of the government.
The Chair: You know that this committee, for example, in its five-year tax projection and some of the other social investments we advocated, stated that our split is closer to 63-37 or 60-40 in favour of tax reduction and debt.
Mr. Roy Cullen: Let me give you an example. You asked about sustainability. If you look forward over the next number of years in terms of budgetary surpluses, again assuming that we have the kind of growth rates that...maybe not 4% but maybe 2.5% to 3.5% or whatever over the next many years. For those kinds of surpluses, I don't think there'd be much logic to devoting 50% of that to new spending. There's no point in spending for the sake of spending. We have a huge debt, we have more tax work to do, and we have important investments to make, but if you crunch out the numbers I'm not sure that....
You don't have a parallel situation, because in this current mandate we came from a period where we were in deficit and then we moved to a surplus. Moving forward, if we're in a period of sustained surpluses, I'm not sure that.... Well, it's something that the government, the party, is going to have to look at in terms of its platform, but I can't see that the 50-50 will necessarily apply in moving forward or will be sustainable.
The Chair: Thank you.
Mr. Paul Forseth: Just getting back to the overall concept of the lower taxes in various jurisdictions, I recall an article that even in the American context.... There was a study done between relatively high-tax states and lower-tax states, looking at growth over a period of time. I remember making a statement in the House about this article that was based on a study clearly showing that the lower-tax states had the greatest growth. That principle applies. You see it in article after article in The Economist magazine or whatever. That principle's fairly well accepted.
Then we look at the overall Canadian context in the global economy. I say we shouldn't necessarily be comfortable as we maybe move closer to where the United States is in its overall tax take, but why aren't we striving to be better, to take less out of the economy and leave even more in the hands of the taxpayer, the entrepreneur, the spender, and all the rest of it, to give us a particular advantage, rather than being self-satisfied that we're somewhat close?
When we change the mindset, instead of seeing a bill like Bill C-25, which is a kind of tinkering with the system.... Yet it's not really trying to blaze a trail; it's trimming the edges of things instead of trying to build a highway to unleash the tremendous potential that there is in the Canadian economy and with Canadians. This is where I find it difficult for the defence of the bill. It's a little bit here, a little bit there. Where is the vision to really get on with real tax relief so that the government, in the overall size of the economy, is not so intrusive?
I think the evidence is there, both inside the American economy and in the international context, of how we get to what is the difference between rich nations and poor nations. It generally comes down to what the government does. It's very easy for a government to come in and trash down a beautiful garden very quickly and destroy an economy. We've seen that, and we've seen that everything we have in Canada could be easily lost.
How many times has the Prime Minister has risen during question period and talked about how close we were to the edge in 1992 and 1993 and whatever? So even in our Canadian context we've had some very worrisome signs, and that doesn't mean that in the future we may not have trouble.
Getting back to the concept of the bill, how can we produce these kinds of measures that are going to be much more aggressive in order to follow the generally accepted international principle that low-tax jurisdictions in this present world economy are going to grow and be much better off than high-tax jurisdictions?
Mr. Roy Cullen: Mr. Forseth, maybe I haven't been communicating very well. First of all, if you follow through on the logic that the lower the tax, the stronger the economy, etc., then no tax would be the best state of all. Clearly, I think you'd understand that there has to be some baseline or the services that citizens expect would not be provided.
On the second point, if you look at the measures in budget 2000 coupled with the measures included in budgets 1999 and 1998, on average the personal income tax reductions will be in the order of 22%. For some Canadians with families the tax reduction will be in the order of 30% to 31%. I don't call that tinkering at the edges.
Do we have more to do? Clearly. The Minister of Finance has said that the $58 billion tax package is an absolute minimum. The way the economy is moving, I think we'll have some flexibility to bring forward some of those measures.
On the corporate tax side, it seems to me that with the measures we're announcing.... I'll use Ontario as an example because I'm more familiar with those numbers. I think I said that, once implemented, the federal combined with the Ontario tax rate will be in the order of 4% to 5% lower than the five major U.S. states bordering on Canada. So I don't think that's just catching up; that's doing better, the way I understand it.
Could we be doing more faster? I'm sure we all could. At the moment, we see some windows to do that, and we will. I think it's based on the premise that both you and the chairman cited—correctly, I think—that corporate tax reductions are not as costly as the reductions on the personal income tax side, and they do create a lot of momentum for growth and job creation. I think this government has shown some boldness and some courage in budget 2000 to announce some major corporate tax reduction moves at a time when the conventional wisdom would have said, you know, until we've totally dealt with the personal income tax side we should be leaving corporate taxes.
Now, that may not have been your position, but it was certainly the position of a lot of Canadians.
What the government has said is that we're going to take the risk of exposing ourselves to that kind of criticism because we believe reducing corporate taxes will be good for all Canadians. It's not a measure because we like corporations, necessarily. We don't dislike them, but we think that if we can attract investment in Canada, and we can keep investment in Canada, that's going to be good for all Canadians. We're going to create more jobs and more income.
So I don't think we're catching up; we're being fairly aggressive, given the fiscal room we have, and we're going to be doing more.
Mr. Paul Forseth: Maybe we could just change the tone here and get back to one of the technical parts of the bill. There's a section here that relates to communal organizations. It allows the income of certain religious colonies to be allocated for income tax purposes among all the adult members of the colony. Is it a growing phenomenon in our society that this is a problem? Is this just a very minor technical matter, or is this something of particular economic interest that we need to address because it's a growing segment of our economy?
Mr. Roy Cullen: Given that the officials haven't had much of a chance to participate, I'll ask Mr. Hayward if he would deal with that one.
Mr. John Hayward: We regard that as being a relatively minor technical measure. It affects about 15,000 people in Canada, so it's a relatively minor technical measure. The purpose of the measure is just to introduce tax fairness for people who are living in a communal environment.
Other farmers have had an opportunity to split incomes to some degree for quite some time, and this is merely allowing them the same advantages as other Canadian taxpayers are benefiting from in similar circumstances. It's a minor measure.
Mr. Paul Forseth: Can you just back it up a bit and tell me what was the problem in terms of the way it was before?
Mr. John Hayward: The way in which communal organizations are taxed is very technical.
The effect of the technical application of the rules on communal organizations was that they had a heavier tax burden than other taxpayers who were not living in those circumstances. The purpose of these changes is just to level the playing field, if you like, so that their tax burden is no heavier than the tax burden on Canadians living in more typical circumstances in a rural environment.
Mr. Paul Forseth: Okay.
I have another kind of technical question with regard to civil penalties that apply to third parties who make false statements or omissions in relation to the tax matters of others. Certainly it is a crime to swear out a false document and so on. Is there something here that's kind of extra, perhaps the long arm of the taxman with a power that maybe shouldn't be? Maybe we should get worried when the public is not paying attention to this particular term here.
Our party has certainly talked about the concept of a taxpayer bill of rights when the change was made to Revenue Canada. The government didn't see eye to eye with us on that one. I would just refer to the equivalent bureaucracy in the United States, the IRS, which Congress said had essentially got completely out of control.
There is a psychology inherent to large federal bureaucracies: they multiply. Unless the rules for a large corporation are carefully reviewed on a regular basis and are brought under political oversight, they just have a tendency to grow. It's the nature of organizations.
Can we address this issue, then, of the civil penalty? When a small-business person is in difficulty in terms of paying their GST, they can go right into the bank account of that small business and yank money out. Sometimes that whole process is not done with a lot of finesse. It's actually driven these companies out of business when they've taken it two days early, when a cheque was written to pay a supplier and all the rest of it.
Perhaps you can comment on the breadth and scope of this and why this was needed, seeing that we already have quite a high regulatory climate and a legal context.
Mr. Roy Cullen: Mr. Forseth, I'll start it off and then the officials can expand.
We want to keep in mind that when we're talking about offences in this area or individuals who act in this way and would be subject to penalties, it's referred to in the proposed act as “culpable” conduct, which is tantamount to intentional conduct. In other words, it's deliberately and knowingly evading tax or assisting someone to evade tax; showing an indifference as to whether the act is complied with; or showing a wilful, reckless, or wanton disregard of the law. If someone is practising in that context, then there would be penalties.
I should say that we have had some representations with respect to the penalties that are currently in the bill. There is some concern about no upper limits or people who are employees in big companies, etc. We're looking forward to the consultations and the witnesses who come forward. The government is open to listening and perhaps dealing with any of the recommendations that might come forward as part of that consultation process.
Brian, would you like to add something?
Mr. Brian Ernewein: I'll ask Gerry to, actually.
Mr. Gérard Lalonde: Thank you.
These matters relate in large part to some recommendations that were made to us by both the Auditor General and the Technical Committee on Business Taxation, sometimes referred to as the Mintz committee. These are measures that deal with a gap in the tax law. We have criminal penalties for both individuals and tax advisers who make false statements in filing income tax returns.
Criminal penalties are, however, a very severe sanction, as the name implies. A criminal penalty can severely affect the livelihood and credibility of professionals. They're also subject to a very difficult burden of proof. In a criminal penalty you have to prove beyond a reasonable doubt.
On the other hand, there are also civil penalties in the Income Tax Act, and those deal specifically with gross negligence on the part of a taxpayer. But until the 1999 budget, there were no measures for applying civil penalties in respect of third parties who deal with false information supplied for the purpose of any taxpayer's tax return.
This was a fair problem. Revenue Canada, as it was known at the time, did do a study, and it found there were a number of instances where tax professionals were participating in, for want of a better word, fraudulent tax filings. This is a problem not only in the micro look at it, looking particularly at the individual taxpayers and their advisers, but also for the credibility of the tax system. However, it's not likely that Revenue Canada is going to be able to prosecute on a criminal basis all of these people who have gone a little bit beyond the mark, and one wouldn't expect them to do so in some circumstances where the criminal result was inappropriate.
What these measures do is try to balance the system by providing a civil penalty for tax professionals, third parties, who provide false statements where they knew the statement was false or they would have known but for gross negligence. What we proposed in the budget was that this measure would apply only where there was gross negligence on the part of the tax adviser.
There was some concern expressed to us with regard to the use of the word “negligence”, particularly a concern that court decisions in other areas of the law, not tax law, where they interpret the phrase “gross negligence”, such as in motor vehicle liability cases or other cases of that ilk, would import a lower standard—or maybe a higher standard, depending on the way you look at it—on the tax professional than is currently in place under the tax law as interpreted for the gross negligence test that is in the act and applies for the purposes of taxpayers filing their own returns. We took that criticism to heart, and in drafting Bill C-25 we attempted to use those phrases that the courts have already used for tax purposes in interpreting gross negligence. That's how we got to the concept of culpable conduct.
There was also some concern expressed to us that tax advisers ought not to have to grill their clients or audit their clients to determine whether what is being told to them is the truth. That is why we've also imported into the rule a good faith reliance concept, such that a tax professional will not be subject to this rule if they provide information that they've received from their client in good faith and that they've passed on to Revenue Canada, or the CCRA, as it's now known.
These measures have been the subject of considerable consultation with the Canadian Institute of Chartered Accountants, the joint committee of CICA and the Canadian Bar Association, as well as the CGA and other accounting associations. We have undergone considerable consultations with these people and introduced a number of features into the rule, which attempted to resolve some of the concerns that were raised, that perhaps a CCRA official could be a little too exuberant in applying these penalties.
As well, the Minister of Finance has announced that these penalties will only be applied after a head office review at Revenue Canada, so that you don't wind up with the situation that an auditor, on his or her own volition, would invoke a penalty as a way to try to settle an account. These penalties can only be applied after a head office review at the CCRA. The CCRA has invited professional associations to help develop guidelines for the interpretation and administration of these rules.
Taking all of these developments into account, I think we've managed to come up with a rule that provides a very good balance between the interests of the Canadian tax system, the integrity of the Canadian tax system, and the protection of tax professionals.
Mr. Paul Forseth: I have a supplementary question on that aspect.
The Chair: You still have some time, by the way.
Mr. Paul Forseth: Oh, okay.
We anticipate that these penalties are going to be assessed by an official of the CCRA. Is this a new set of additional rules, in context with some that are already there? What I mean is that there's a system of appeals that the rules of fundamental justice apply. This is not a new adventure.
I can see that sometimes it's the member of Parliament who gets this individual who's all in a big brouhaha about their life entanglement with CCRA. They come into your office with a cardboard box and it's full of paper. It's all kinds of business records or whatever, and they're tearing their hair, saying the sky is falling and the evil tax man is after them and they've been treated unfairly and they've been assessed all these penalties and it's all lies and whatever. You try to help these individuals who are in a mess.
Indeed, I have had the odd case where it seemed that penalties assessed by the bureaucrat, you might say, in certain categories did seem to be somewhat unfair. I wrote a letter on behalf of that individual, and there was then some further review and some accommodation was made. A different spirit appeared all of a sudden from the revenue collector, and there was a more cooperative solution and an arrangement and a plan that was worked out.
I hope we're not getting into that context again here, that the bill not only provides for what can be done, but it's also the consideration of how it's going to be done. Is there a way of appeal?
In the comments you added at the end, you did mention oversight review before these things are put in place. I want you to comment about the operation side of how you see this. Is it an add-on to a system that's already working, with its proper checks and balances of rules of fairness and fundamental justice, or are we going into a whole new area here?
Mr. Gérard Lalonde: I'd say this is definitely an add-on. As you mentioned, there is going to be a head office overview of any potential application of this penalty. After that overview and after applying the guidelines that the CCRA has indicated are to be developed in conjunction with interested groups, the penalty is then subject to the normal review through the courts. If the particular tax professional doesn't agree that the penalty was properly assessed even after all of that administration and procedure, they're perfectly within their rights to challenge the penalty in court.
Mr. Paul Forseth: That's all for now.
The Chair: On behalf of the committee, I'd like to thank you very much, Mr. Cullen. We look forward to seeing a pro-growth agenda as a committee, but in fairness, there's no question about the fact that this particular bill certainly is going in the right direction.
Mr. Roy Cullen: I thank you. It's been a good discussion, and I'm sure the points made today will guide us in the deliberations ahead.
The Chair: Thank you.
The meeting is adjourned.