Committee members know I prefer that we start on time and not punish those who are here by making them wait, so let's get started. Welcome back to the fold.
Welcome to Mr. Tweed. It's nice to have you at committee, and Madam Davidson. Thank you both for being here.
Pursuant to the order of reference of Wednesday, November 8, 2006,
the committee will now proceed with the clause-by-clause study of Bill.
(On clause 1)
The Chair: Monsieur St-Cyr.
Thank you, Mr. Chairman.
If the amendment is adopted, there will be no need for us to deal with Mr. McKay's amendment, because it involves a partial withdrawal.
In fact, we've already stated that we supported the principle of the bill which calls for making contributions to RESPs tax deductible, as is the case with RRSP contributions. However, we find the $18,000 limit provided for in the bill to be much too high. We also feel that the provision that would allow unused deductions to be accumulated is far too advantageous and that it would apply solely be the most wealthy individuals.
Aside from the amount the government contributes to a RESP—if memory serves me well, it contributes 20%—the only advantage compared to a conventional RRSP is the increase in the contribution limit.
For example, when a person contributes up to $4,000 in a RESP, the government contributes an additional 20% to the plan. That's quite interesting. Aside from that, the only reason to increase contributions would be if one had already contributed the maximum amount to one's RRSP. Therefore, most members of the middle class and lower income earners will not be able to take advantage of this new provision.
The purpose of the amendment is twofold. First, it would set the maximum deduction at $4,000 for 2005, and at $5,000 for 2006. For 2007 and every year thereafter, it would be indexed to the cost of living. The second amendment to the bill as it is now worded would eliminate the possibility for taxpayers to accumulate unused contributions, which seems irrelevant. If a person waits until his child is ready for post-secondary studies, it's already too late to invest in his RESP.
Mr. Chair, thank you for that. This is the first I've seen it, although I had a chance to talk to Mr. Paquette very briefly beforehand.
The average tuition in my province of Ontario is somewhere near $10,000 a year—not in residence—so those numbers may not be satisfied by this. I don't want to be seen as putting a stick in the mud; however, I do recognize that the government has gone one step ahead. Although the bill has not passed, I don't know if the ways and means have been proposed at this point. But clearly I would want to make this in the context of RESP regime as it currently exists.
The move from $4,000 to $18,000 was to respect and be consistent with the RRSP so you wouldn't have one switching over to the other. I'm most concerned about the number proposed. Although I understand that the proposal by Monsieur St-Cyr is a very sincere one, I also think it may fail to address the ability of people to match, in a four- or five-year period, the contributions necessary for a student to go to school.
I'm not opposed to the suggestion—it's the first I've heard of it—but I also recognize that we're all in a bit of a pickle. The entire clause 2 of my bill has been rendered, if you pardon the expression, rather moot as a result of the announcement by the Minister of Finance. What is important here is to capture a larger number of people who will be able to take advantage of RESPs before taxes, as opposed to the existing regime, which is after tax.
When we discussed the bill the first time around, we talked about associated costs. We haven't come up with a dollar amount. If we do not make any changes to the original bill and go with a maximum limit of $18,000, the only people who really stand to benefit fully from the changes and from the increased contribution room will be those who are already able to contribute $18,000 to an RRSP.
I would argue, Mr. Chairman, that very few Canadians are able to save $36,000 a year. As it now stands, this bill will benefit only the wealthiest people.
I would also point out that if the original bill is not amended, we'll not be dealing with a simple matter of deferring tax, as is the case with RRSPs, but, to all intents and purposes, with a tax exemption issue, The person who will be required to pay tax upon withdrawal will be the student, not the contributor. In most instances, students have very little income, if any, and pay little or no tax. Therefore, we could face a situation where a very wealthy person may have accumulated $100,000 in a child's RESP and, over a period of several years, will have transferred that money to a son or daughter who will pay virtually no tax.
As I see it, the bill, as it now stands, will benefit wealthier families much more than middle class ones. Our amendment would provide an additional benefit to middle class families over and above the money they already receive from the government. The government is planning to increase the limit and that is all well and good. When the ways and means are tabled, we'll have an opportunity to discuss this matter once again, but for now, we're debating the bill based on the current status of the law, not on the basis of hypotheses. We're still in the dark as to the content of the ways and means.
Therefore, I believe our amendment makes this bill very interesting for middle class families. It ensures that wealthier families do not receive any undue advantage and that costs will not be exorbitant. We still don't know how much this initiative will ultimately cost us.
: Merci beaucoup, monsieur
I would venture at this point, committee members, to again emphasize that this bill proposes to make
a fundamental change to the RRSP program.
It's not after-tax money going in under this proposal. So Mr. St-Cyr's motion quite thoughtfully attempts to address the fact that money contributed under the current program is after-tax money, and money contributed under the new proposal would be before-tax money. The money that would be contributed under Mr. McTeague's proposal, being tax deductible, would create a circumstance where before-tax money could be taken off a parent's income and be transferred to a child's name and subsequently be withdrawn in the child's name. This is a major advantage, an incredible opportunity for income splitting, that makes seniors' income splitting pale by comparison.
Mr. St-Cyr's proposal is to limit the amount that would be eligible for such treatment on an annual basis. If we disregard Mr. St-Cyr's amendment or in any way disregard our responsibility to address the issue of what would be the allowable limit for contribution on an annual basis for deductibility—because that is what Mr. McTeague is proposing—I would suggest we are not discharging our responsibilities to the Canadian taxpayer very well.
The government's proposal yesterday was not to allow one-time deductibility of $50,000, but to allow contributions up to that amount in a lifetime, per child, of after-tax dollars, not before-tax dollars. So what Mr. St-Cyr is trying to address in this amendment is both logical and thoughtful, in my estimation, and I would encourage further discussion on this issue before we move to a vote, because I'm not convinced from the tenor of the discussion that this has been well thought out by our committee members.
That's not up to me, Chair. The contribution would be rendered redundant, in my view, since you would have people making contributions anyway. They pay income tax. Therefore, there would be the opportunity for them to use that income tax designated toward a student at some point down the road. Bearing in mind, of course, that the average four-year in-college or in-university program is $100,000, I would see that a larger number would obviously catch a lot more individuals.
As proposed by Monsieur St-Cyr, at $4,000, $5,000, $6,000, or whatever number, then at $100,000, which is what we're heading toward in terms of education costs across Canada, it would be a long time before somebody is able to save up that amount in order to be able to help to offset or pay for the costs of tuition.
Mr. Chairman, thank you for that.
I'm just seeing the amendment this morning for the first time, of course, but if I'm reading it right, based on the discussion we've had so far, to resolve the issue that you portrayed and want us to give thoughtful consideration to, my problem with the bill at the end isn't the changing in the amount and all that, from the $4,000—and obviously it made it to the budget—my problem is the view that it changes from pre-tax dollars to after-tax dollars.
Based on your arguments, as long as we're taxing the parents first before they contribute to their RRSP, there is no issue, whether it's $50,000 or not. Am I not correct on that?
You got into the discussion on it, so I'm asking for clarification from your position, since I'm listening to everybody's position on this. If the bill did not include the issue of pre-tax dollars, you'd have no issue. You like this amendment, or you want us to consider this amendment, because it includes dollars before the parents pay tax on it. Is that not correct?
We have Finance officials here. Perhaps committee members are interested in knowing what the revenue implications of this particular form of income splitting are.
Theoretically, at least, I suppose we could recognize that the amount of income tax displacement or loss of revenue on these dollars could be fairly considerable, given the likelihood that the money would be withdrawn in the child's name when they are a young adult who does not have very significant additional income—perhaps summer earnings or part-time earnings. Essentially you'd be taking that amount out of the revenue stream for tax purposes in the adult's name, assuming very likely a higher marginal bracket, and moving it into the child's name, to be withdrawn at a time when there would be very likely little, if any, tax to be paid. You're talking about a major revenue implication here.
I would invite Finance officials to come forward now, if they would.
Things are a bit fluid, based on last night's budget, in terms of where we are today on the $4,000 piece. My concern is the second part of the bill, where under the recommendation of the bill's mover it becomes pre-tax, not after-tax, dollars.
If we leave it as after-tax dollars, and you are able to contribute where we indicated last night, the issue of collecting tax on it somewhere along the line is moot. Based on the chairman's perspective, likely students won't pay very much tax, so that revenue or income does get taxed at least once.
If we move to Mr. McTeague's bill, that money doesn't get taxed from me, because I have a student coming soon, for example. It doesn't get taxed from me when I contribute to my RESP. Then when my daughter goes to school, she won't be paying any tax, so it doesn't get taxed again.
Is that an accurate statement? What effect does that have in terms of money for the treasury?
Regarding Mr. McTeague's proposals, as I understand it, where contributions result in a tax deduction, there will be significant financial implications for the government during the contribution years. When the funds are withdrawn in the student's name, because students for the most part do not pay any taxes, the tax revenue would not be recovered.
Based on our understanding of the proposed initiative, we've drawn some conclusions, in terms of the bill's tax implications. Assuming that taxpayers' behaviour would not change, meaning that the new measures would not result in additional contributions, we have estimated that the financial cost of implementing the new measures would be $565 million in the first year. As I stated, these costs would not be recovered in instances where the funds would be withdrawn in the student's name, because generally speaking, students do not pay any taxes.
We could do a more detailed calculation and take into account the fact that some of these amounts could be taxable. However, it is logical to assume that most of the contributions would not be taxable when withdrawn for the students' benefit.
The costs could increase substantially, if we take into account the fact that contributors could increase their contributions to take advantage of the tax incentives.
I'm satisfied with that explanation. I think that by changing this from after- tax to pre-tax, we're creating a major tax benefit which comes very close to being a tax loophole, since young people will pay virtually no tax on these funds. I'm not opposed to encouraging parents to save for their children's education. What I'm saying—and that's the substance of my amendment—is that if we open the door to a limit of up to $18,000, that will prove to be far too costly from a fiscal standpoint, besides which only the wealthy will benefit from this measure.
The annual limit proposed in my amendment, namely $5,000, seems more than adequate. Over a period of 20 years, for example, contributions would total over $100,000. Everyone who contributes to an RRSP knows that with compound interest, which in itself is tax exempt, it is likely that the plan will grow to somewhere nearer to $300,00. Therefore, I think my amendment is entirely reasonable. I think it's a good compromise that will help the middle class without giving wealthier individuals an unfair advantage.
One more thing: earlier, Mr. Wallace stated that under the current system, money invested was after-tax dollars. Nevertheless, there is a benefit here because the value of the funds increases and the money is sheltered from tax. Therefore, more compound interest is earned. However, as it now stands, the bill provides a much bigger tax advantage and that's why we're proposing to limit contributions.
No, that's not my understanding.
Monsieur St-Cyr, I will attempt to clarify Mr. Dykstra's question on your behalf.
I believe Mr. St-Cyr is accepting the premise that there be deductibility. He is simply trying to limit the amount of deductibility by proposing these numbers. The current RESP program, of course, does not allow for tax deductibility, but rather only for tax sheltering of the money in the child's name once contributed. What Mr. St-Cyr is attempting to do is not to alter the fundamental goal of Mr. McTeague's motion, which is to allow for tax deductibility, but simply to limit the annual amount that could be deducted.
Is that correct, Mr. St-Cyr?
: Merci, monsieur le président.
I want to give Mr. McTeague a chance to comment. I agree with the principle of Mr. McTeague's bill, but I do also agree with this amendment. I agree with the principle that we encourage parents to have the opportunity to contribute, that we use the tax system to make the contributions so that they prepare for their children's future, and that we improve the system we have now. It is quite a good system, but if we can improve on it with tax deductibility, I'm all for it.
The ones that concern me out there aren't the children of the wealthy; it's the children of the less wealthy and the working class who will have real trouble financing post-secondary education. I agree with Mr. St-Cyr's contention that this is balancing in favour of the wealthier, and you could even say that the less wealthy are subsidizing the wealthier because of the half-billion-dollar cost of this program in the tax sense. From that point of view, I would support Mr. St-Cyr's amendment.
I ask Mr. McTeague if he's had a chance to consider whether the bill as it would be amended by Mr. St-Cyr would still meet the great principles that he's advancing and putting forward with this good bill.
Thank you for that, Mr. Thibault.
The spirit of this was to make sure it's consistent with RRSPs and that it would have the same benefits to encourage a greater of number of students to come in and take up—Granted, we're not going to get everybody, but we're going to do a lot better than the 27% who are currently taking advantage of this. The purpose is really to get more students into post-secondary education and then tax them down the road when they finish with that kind of higher education, which will be a boon for the treasury, no doubt, in years to come.
Something that could be considered—and I'm in no position with this bill, nor could I be without being blocked in Parliament—is to make a decision tactically on a question of budget to remove the incentive. I understand from our previous finance department that if you were to remove that 20% incentive, which might not even be necessary in most circumstances, it would in fact be revenue-neutral.
The government currently is putting $575 million out as the plan exists now. Mr. Gingras can confirm that. What this would cost in forgone revenue—and “forgone” is important since it's not cost but forgone revenue—is $565 million, by the looks of it, if that 20% were to be taken away, which is not the purpose of this bill, but it could obviously be rendered null and void, or unnecessary, considering what this would do.
Specifically to Mr. St-Cyr's comments and to his recommendation, I have no problems with the $5,000 except for one thing. He is looking at the issue of CPI; I'm interested in looking very clearly in his province, in my province, and across the country as to the level of education and the rise in tuition fees. I can guarantee you, Mr. Thibault, they are rising a lot more quickly than the index of inflation and the consumer price index—which is why, if he's uncomfortable with $18,000 and has postulated a theory that would go from $4,000 to $5,000, we're still going to wind up with a lot of students who are going to be short, and a lot of people in this country who can barely make the $100 a month and who may not even be able to take advantage of it.
I'm suggesting that perhaps somehow, in some way, someone might want to consider the $5,000 a little bit more than that. I'm not tied to $18,000, and if that's what it takes to have Mr. St-Cyr and other parties agree with it, I'm prepared to do it.
Overall, my biggest concern is that neither I nor anyone here could have predicted what happened yesterday, and I understand the Bloc Québécois will be supporting the measure of $50,000 as a complete lifetime amount. That's something they'll have to resolve. In terms of getting this bill forward, if that's what it takes, then let's do it.
First of all, the NDP has always been a supporter of RESPs and considers them to be one way in which families can help their children pursue an education.
Perhaps I move in different circles, but the parents to whom I've spoken are having trouble contributing the maximum amount currently allowed.
From what I understand of the CESG limit and judging from the government's own statistics, Canadian families are not using the total ceiling they would have access to.
We have an understanding from the financial analyst on the cost of this proposal. It was a concern that we had because it seemed to disproportionately benefit those who were already making use of this system. Is there any way he could give an assessment on what the cost would be, given the amendment that is being proposed?
I'm still concerned that we're providing a system that disproportionately benefits certain families who can already afford this. Given that there is a limit to how much we can help students, I think we should consider how much we're going to provide to those who are already saving, for example, in comparison to students who are going to university this fall and who will have no help at all in dealing with those tuition fees. We're not looking at a grant system that would apply to students when they need it, instead of 20 years later, as this whole system seems to be focused on.
Can we get an assessment on what the financial implications are in order to know what the revenue that we're forgoing is?
What we have before us is a dichotomy. Of course, on the one hand, there's likely an increase in contributions expected as result of deductibility. On the other hand, there's the argument about the class warfare issue here. The additional benefit to be derived by the families that can take advantage of this deductibility is also indisputable.
So you have a revenue loss on the one hand, which is natural as a result of a higher savings rate toward post-secondary education. There's a benefit and an advantage to be derived from the additional contributions. There's a revenue loss as a consequence of the over-contributions. This is a natural consequence of increasing the contribution.
What is at issue here, however, is Mr. St-Cyr's amendment. Mr. St-Cyr's amendment proposes to limit said contributions to $4,000 or $5,000 a year. Madame Savoie has made comments addressing this issue. It will limit the additional advantages that some families might derive under Mr. McTeague's proposal, but not eliminate them entirely. That's what Mr. St-Cyr is after.
We'll continue with the discussion. Mr. McKay.
I appreciate that your fearless leader appears to be not overly fussed about the multiple billions of dollars that were doled out yesterday. So Mr. McTeague's proposal at one level is quite modest.
Having said that, it is a very attractive proposal for those who can afford it. It is a deductible scheme, it is also a deductible scheme with a grant, and then it's a deductible scheme with a grant and an income split. So all of those things add up to a very attractive package for those who can afford the package.
Mr. St-Cyr proposes to limit the deductibility to $4,000 and $5,000. But my question is to Mr. Gingras, with regard to the BQ-1 amendment's proposed paragraph 2(1)(e), which says:
||for 2007 and subsequent years, the total of the RESP annual limit for the preceding taxation year and the product obtained when the RESP annual limit is multiplied by the average percentage change in the Consumer Price Index for the year
I'm not clear about what that means. Are we basically taking the $5,000 amount for 2006 and then adding a consumer price index multiple that will determine the amount you can deduct?
If that's correct, then my second question would be, is there any limit to the additional contributions, assuming you didn't want to take advantage of the deduction? In other words, for argument's sake, if you contribute $7,000 in 2010 but you really want to contribute $10,000, can you then deduct $7,000 and still contribute the other $3,000? That's my question.
Thank you, Mr. Chairman.
I have a quick question for the proposer of the bill.
We heard from the Finance people, who are no longer here, that we should cut it off at $550 million or whatever it was. Your response was that if the Government of Canada was not giving the grant portion of the money, and if the uptake was a certain amount, then it wouldn't matter for parents such as me. I actually have two teenaged daughters who I hope will attend post-secondary education. If the uptake were such, maybe we wouldn't need the grant portion and that would be a tax savings for the treasury.
Can I be clear that you are not proposing removing the grant portion of this in your bill?
I appreciate that guidance, and I am summarizing.
Suddenly today we talked about removing the piece that's not in the bill, in terms of the grant side, which I think even the Bloc folks would find not favourable, because I think it does go directly to help those who—It's an assistance top-up that wouldn't be there, I think, under this proposal.
If the concept is that it gets more lower-income people involved in the program—part of the bill is to make it pre-tax—I don't think that makes a significant difference. It would be interesting to see what the statistics are in terms of low-income families being able to afford RRSPs, for example. It's probably not as great as it should be, but it's because they have cashflow issues, and they need to make those cashflow determinations as a family to survive from one week to another. I think it would be the exact same argument on their RESP.
So I think the system we have now is fine. We have made some changes to it in terms of the amount you're able to contribute over the lifetime of an RESP, and I think that's really based on the cost of the education to which it has gone. That was part of the first part of the bill.
Before I call for the vote, I want to go on record with a couple of points.
I think all of us should take very seriously the recommendations that come from this committee when we adopt bills. I think this particular amendment, as I endeavoured to point out earlier, is quite thoughtful on the issues it raises and tries to address. But I will sincerely tell you, colleagues, if we proceed to this vote and it makes the subsequent two amendments irrelevant, we are proceeding to adopt the bill as amended. It will follow logically.
Here are some issues we have not addressed. We have not addressed the issue of the grant. How the current granting program will interface with this proposal certainly remains to be discussed.
We have not properly addressed the revenue impact of the amended bill as proposed. There have been a number of points raised on this, including by the proposer of the amendment.
We have not thoughtfully addressed the issue of how this will impact differentially on certain families at certain income levels, and how these changes will affect them.
We have not discussed in any way the interface between the proposal we would be endorsing as a committee, if we proceed with this, as I fear we may, and the current program, and what impact it will have on the current RESP program. And although I would agree with the mover that the current program is underutilized, it is still utilized by 27% of Canadian families right now. We have not discussed that.
We have not discussed the impact this proposal may have on the rate of contribution to RRSPs. There's only so much revenue in Canadian families' budgets; there's only so much money to go around. What impact will the application of tax deductibility to RESP contributions have on RRSP contributions, in terms of the long-term security of those who should be saving for their own retirement? What will the impact be? We have not discussed that.
And we have not examined the issue of income splitting as it relates to income splitting from parent to child—because essentially this is income splitting we're talking about. We have not really examined the impact that would have.
And we certainly have not discussed, to my satisfaction, the overall impact this proposal will have.
I agree with the sentiments of the mover, as you well know. Most of us, of course, have proclaimed our support for the importance of investing in education, but we have not debated properly in any way the proposals that are before us vis-à-vis, for example, whether money should be going generally into furthering transfers for post-secondary education, as the budget did yesterday—in other words, global increases in funding as opposed to targeted tax incentives such as this.
We have not debated these issues. So I will certainly go on record as encouraging that we do that, because I take very seriously the quality of the recommendations emanating from our group here.
It was proposed that we call the vote.
Again, what Mr. Pacetti is pointing out is quite accurate, and it's totally unacceptable for Mr. Pacetti to be talking while we're trying to have a vote.
Let's proceed with the vote, as we previously indicated.
(Bill C-253 agreed to: yeas 6; nays 5)
The Chair: Shall the chair report the bill as amended to the House?
Some hon. members: Agreed, on division.
The Chair: Shall the committee order a reprint of the bill as amended for the use of the House at report stage?
Some hon. members: Agreed, on division.
The Chair: Thank you very much, Mr. McTeague.
Could the next witnesses please come forward as quickly as possible?
We'll now continue pursuant to the order of reference
of Monday December 4, 2006 with respect to Bill
We have several witnesses with us today, including our colleague Mr. Jeff Watson, who I will invite to speak for no more than five minutes.
Mr. Watson, I'll indicate to you and to other witnesses when there is a minute remaining. Of course, I'll then unceremoniously cut you off.
Committee members may want to consider that during these five-minute presentations—I believe we have three of them—there will be a balance of approximately 20 minutes remaining for discussion and, if possible, clause-by-clause.
I welcome Mr. Masse to our committee as well. Thank you for being here.
I will invite committee members to ponder that and possibly the need to extend the time to further discuss it, if they so desire.
We go now to Mr. Watson. Welcome.
Mr. Chair, thank you very much.
Thank you to all committee members here. It is indeed a very different experience to be on this side of the microphone and not being the one grilling potential witnesses here.
I also want to thank the witnesses who are appearing here with me—Mr. Gleberzon from CARP, and Mr. Bill Thrasher from Canadians Asking for Social Security Equality. We do have one witness who apparently was unable to make it today—the Canadian Union of Transportation Workers—but I certainly appreciate their contributions to this discussion.
I have one other note of thanks on this issue, and that is to the member for Calgary Southeast, who has been a strong advocate on this particular issue since 1997.
As a brief course of history for the committee—some members may be much more aware of this bill than others—we're dealing with provisions flowing out of the Canada/U.S. Tax Treaty and its treatment under the Income Tax Act. There are three protocols I want to address.
As a brief moment of history, the second protocol under the Canada/U.S. Tax Treaty, in which U.S. social security benefits were taxed in the country of residence—that is, in Canada—and 50% of the amount was included for taxable income, existed up until January 1, 1996, when a third protocol was entered into with the U.S. whereby the benefit was then taxed in the country of source, rather than residence, and 25.5% was withheld.
That existed until 1997, when the fourth and current protocol entered into use, that is, it reverted back to residence taxation, and the inclusion rate moved back not to 50% but to 85%. This is a profound change that occurred to the income of seniors who were already retired at the time. I think some of my colleagues who are here, witnesses who are here with us, can get into some of the detail of that probably a little bit better than I can.
I know this is a committee about details. That is part of your task. I would simply ask the committee that in the consideration of this we don't miss the forest for the trees here. There are some big principles that are important in this.
For the benefit of the committee's understanding, I have a possible amendment that's being worked on by the clerk of private members' business, but I don't have it here yet for the committee's consideration. We're trying to work on that.
There may be some issues. I know one of the big issues that have been raised before is the issue of equity in how people are taxed. I will address those issues. I don't know if I have enough time in my opening statement to address them, but I may do so in the questioning round.
There's been a question of comparisons of equity between how one collecting a U.S. social security benefit but living in the United States is taxed versus someone who lives in the United States and collects a CPP or QPP benefit.
There's also been a question raised in the debate about the question of equity among neighbours living in Canada--one who collects a CPP benefit and has 100% of their benefit included for taxable income, and that constituting a benefit for a similar Canadian who lives next door and collects a U.S. social security benefit taxed at only the 85% level. I believe that argument is a bit of a red herring. I'll address that, probably in the questioning round.
The third issue around the equity question is that the Government of Canada at the time, in 1997, had never advanced the argument about the equitable treatment of neighbour A versus neighbour B in Canada. That was an argument that came later on, I think, to justify the tax increase.
So I'm pleased that we're addressing this today. I'd much rather you hear a little bit more from some of the witnesses who are here with me. I'm going to turn the microphone over to them to let them talk about some of the impacts of the bill, what it's meant to seniors, Canadian seniors particularly. We'll look forward to some discussion around the possible solutions to this.
Thank you very much, Mr. Chair.
We'll step outside afterwards.
Some hon. members: Oh, oh!
Mr. William Gleberzon: No, he's a much taller fellow than I am.
CARP is pleased to support Bill to exempt from taxation 50% of United States social security payments to Canadian residents because of the number of calls, emails, and faxes we have had from those adversely impacted by the current policy. Nevertheless, I want to propose an amendment to the bill, which I'll get to in a few minutes.
As Mr. Watson pointed out, the history of this particular change of policy between 1995 and 1997 is quite convoluted, and again you can read what I've written there. But I'll just move on, because the main point of those two years was that the taxable amount on U.S. social security received by Canadians was raised by a whopping 35% in one fell swoop. The two years of experimentation in determining the amount to be taxed caused shock, uncertainty, and consternation among the estimated 100,000 Canadian recipients of U.S. social security living in Canada.
Those affected had no time or way to prepare for the high increase in the taxation amount that was imposed on them other than to reduce their quality of life. CARP heard terrible stories of how their well-being was thrown for a loop, and spoke out on their behalf to the government at the time and to Parliament about the change in policy.
Today some of the same U.S. social security Canadian recipients who were impacted by the change in 1997 are getting older and frailer. Some are beginning to move into nursing homes or are receiving home care, both types of services being quite expensive for them, regardless of which province they live in, as more costs are off-loaded onto seniors. By restoring the pre-1995 50% tax exemption, their quality of life during their twilight years can be greatly enhanced.
Of course, today the post-1997 older Canadians who worked and contributed to social security and were taxed by the American government when they did so and came home when they retired face the 85% taxable amount of their retirement income. Some welcome for our returning citizens or those Americans who choose Canada as their home and become citizens.
The tax regime for social security is quite different in the United States compared with that imposed on Canadian social security recipients. As noted, in the United States income tax is paid when contributions are first made to social security. However, a few years ago additional taxation of social security benefits was introduced, consisting of a sliding scale, depending on income, that ranges from 50% to 85%. It is our understanding that only about 20% of seniors in the United States actually pay any tax on social security, based on income and how the taxable amount is assessed.
I ask you to turn to the appendix, which is the way in which the system works in the United States, from an expert in these matters, for expatriate Americans. By the way, I spoke to the author, and she confirmed to me that this is the way the system works today. Most telling, taxing 85% of social security is the maximum in the United States based on income, whereas in Canada 85% is the only percentage for taxing social security, regardless of income.
I'd like to remind the committee that the change in the taxable amount was introduced as part of a bundle of pension income changes at a time when the Canadian government faced high deficits. That period is long past. Indeed, on the 10th anniversary of the rise by 35% of the taxable amount of U.S. social security received by Canadians, the opposite is true. As you all know, today the Canadian government enjoys very high surpluses—in fact, a continuum of high surpluses.
Can I just say that was recognized in yesterday's budget, when the age at which RRSPs have to be converted to RIFs was raised to 71 years, which is what it was prior to 1997. Moreover, the government's coffers should not be stuffed on the backs of the retirement income of older Canadians who have already paid tax in the United States on this retirement income.
At this point I'd like to introduce an amendment to Bill regarding the taxable amount of U.S. social security received by Canadians for this committee to consider.
Thank you very much for this opportunity to tell you our story. I collect U.S. social security so I'm well involved with the facts.
During the Christmas season of 1995, residents who spent part or all of their working careers in the United States received a letter that shattered their lives. The letter was from the U.S. social security administration stating that beginning January 1, 1996, there would be a 25.5% non-refundable withholding tax applied to their benefits. Why? Because Canada and the United States agreed to a new treaty that was amended to allow the country that issues the benefits to collect the tax. For decades prior to this amendment, the country of residence collected the taxes.
Pain and anguish cut through the hearts of retired citizens like a knife. Many of these seniors never had to pay any income tax before because their income was so low. Now they had just lost 25.5% of their social security benefits. How would they pay for food, and rent, when they already lived a meagre lifestyle?
The Honourable Herb Gray, M.P., Windsor West, told the Windsor Star on December 27, 1995, that he was assured that Canadians will not pay more in tax and could pay less. There was never any hint that the government felt recipients were not paying their fair share. In fact, it was said that we just fell through the cracks and that they were really after those few who didn't report their U.S. income on the Canadian returns. CASSE, Canadians Asking for Social Security Equality, a grassroots organization, sprung to life out of desperation and anger to fight this tax agreement. Expecting 25 people to show up at our first meeting, we were overwhelmed when more than 200 people crowded into the Viscount Estates clubhouse in Essex, a little town close to Windsor.
Two more meetings were held that year, each attended by 1,500 seniors, many of them handicapped by physical impairments. CASSE is made up of ordinary people who, in spite of their ages, were prepared to do battle with big government. They passed the hat for donations to support their cause. This was not some big business that could afford to pay millions of dollars to hire lobbyists to wine and dine powerful lawmakers. This was a group of ordinary people fighting for their pensions and the right to stay in their homes, and some in their nursing homes. Only when it became evident that these seniors were ready to fight for their rights did things start to happen.
Talks between Canada and the United States treasury finally resulted in a tentative agreement agreed to April 9, 1997. That agreement came full circle to what existed prior to 1996, with one major exception. Whereas 50% of social security benefits were taxable prior to 1996, Canada now taxes 85% of those benefits. This represented a 70% increase in tax on those social security benefits.
In Canada, premiums for CPP are deducted from wages before taxes are applied. In the U.S., wages are taxed before premiums for U.S. social security are deducted. Since 1962 the premiums for U.S. social security could be used as tax credits on Canadian taxes. In the United States, less than 20% of social security recipients pay any tax on their benefits, and less than 6% pay tax on 85% of their benefits. In Canada, every person is required to include 85% of their U.S. benefits for tax purposes, regardless of income.
There are some who use the argument that they made a choice to retire in Canada and therefore should accept Canadian tax rules. They made that choice based on the rules that were in effect at the time of their retirement. Most chose Canada because of their attachment to family and country. Many wanted to be near their children and grandchildren during their twilight years.
I'm going to get right down to the end page because I want to say that in 1999 all three Windsor MPs, Susan Whelan, Rick Limoges, and the Honourable Herb Gray, all representing the Windsor area, publicly stated they favoured grandfathering the tax rules.
Prosperity in border communities is due in part to the huge workforce that crosses the border every day and retires in those communities, where they spend their salaries and pension benefits on cars, on homes, in local shops, and on charities. The economy benefits from those U.S. cheques, as do the federal, provincial, and municipal governments by way of GST, PST, and other taxes. That is another reason we support the passage of .
The present rules seem to be telling those who work in the U.S. to retire there, and those who now live over there to stay over there. Will the cities, provinces, and country be better off by telling these people we don't want their American money? Can we afford to say we don't need the $0.5 billion U.S. that they spend on goods, services, and taxes every year in Canada?
Dividend income is treated differently from interest income because it is not the same kind of income. Social security income should not have to be taxed the same as CPP income, for the same reason. They differ in country of source, in rules, premiums, amount of earnings taxable, eligibility for benefits, and so forth.
Thank you very much, Mr. Thrasher. I am sorry to cut you off, sir, but as you know, we have to have time for questions from the committee members.
We appreciate all of your presentations, and thank you.
Of course the committee is master of its own destiny, which is sometimes a good thing, committee members, but what I propose to do is allow for five-minute questioning periods, which will take us past the time we've allocated. That's how I'll proceed.
I'll begin with Mr. McKay, for five minutes.
I'll speak briefly about this. We've had some real difficulty in securing numbers from the Department of Finance about what the current status is in terms of the numbers of people affected by this change today.
Just to correct Mr. Thrasher, the original number was roughly 85,000. The number of those originally affected would be significantly lower now. Mr. Thrasher is 74 years old, and he was one of the last to retire under the old rules. You can begin to figure out, in terms of the original pool, that the number is going to be significantly lower.
In terms of the new ones who have come in over the last decade, I don't have a firm number. I wish the department could have provided that for us.
: Merci beaucoup, monsieur St-Cyr.
For the information of committee members, our researcher has prepared a paper. Unfortunately it's only in French, so it'll have to be translated and distributed in both official languages, unless we can get the unanimous consent of the committee. No.
In any case, it is helpful, and I've asked him to have it translated and distributed to you. It shows tables that compare the treatment of taxpayers. For example, if you are a U.S. resident receiving Canadian social security benefits and make $30,000, your rate of inclusion for tax calculation in the U.S. is zero, but the rate of inclusion would be 85% for that same taxpayer in Canada. If you're making $35,000 and you're in the U.S., 25% of your Canadian social security would be included in your tax calculation. In Canada, of course, it would be 85%. Once you get to $39,000, the rate of inclusion is 50% and remains at 85% in Canada.
I'll have this paper translated and distributed to you because I think it's an excellent summary, perhaps even a little better than the other summary we have. It adds some meat to it.
We'll continue now with Mr. Dykstra, five minutes.
—because it has clouded the discussion here around the bill.
Again, for any of the folks still alive who were originally affected, this would simply change the rate as they file a tax return from now, on a go-forward basis. It would mean a change for them, a positive change, but we're not asking in this bill for retroactivity. To go back and correct all the tax forms for all of these people over the years would be quite costly, I imagine, and quite significant. We're simply looking to redress, on a go-forward basis, the wrong that was done at that time.
When you think about it, these people who were already retired got three weeks' notice that things were being changed. If you want to draw a comparison with the income trust situation, for example, there's some transitional period, moving forward, for people who are going to be affected by a significant tax change. These guys got three weeks. Things changed instantly for them in a very detrimental way.
Take the example of somebody who makes just over $20,000, their gross U.S. social security benefit at about half of that. Their taxes in 1995 were just over $1,000. In 1996 that jumped to $2,600. In 1997, with the tax change down to the 85% inclusion rate, it was still at just over $2,000--a far cry from the $1,000 in taxes they paid two years before.
So this really hurts people even at low-income levels. That change on a go-forward basis would restore some of that $1,000 income back to people at low-income levels, and of course at other levels of income as well.
No, the numbers I've raised in my example compare the years 1995 through 1997. I mean, any number of tax changes since then may have affected that total, but I do that simply to show the difference between—
The argument by the Government of Canada at the time was that, as they were changing from U.S.-source taxation under the third protocol back to the fourth protocol, they would be returning to the way things were before January 1, 1996. I think many seniors were led to believe that, but that in fact was not the case; their taxes were still left, or the taxes they paid wound up still being significantly more, double in some cases, at the lowest income levels than what they were paying prior to January 1, 1996.
So we need to bring that back into line for them, I would suggest.
Thank you, Mr. Chair, and thank you to the committee for having me here.
I want to start by reading a quote from one of the debates on , a bill similar to this one proposed:
|| If the government wanted to let justice happen, it could accept the passage of this bill at all three stages here tonight and send it over to the Senate for ratification. This does not need to be held up for any prospective election. This could be passed and, indeed, the finance minister could have done right by people like Olive Smith. Years ago he could have done right by them in the budget. In fact, and I do not think I am going out on a limb here, let me say that the Conservative Party would be quite happy to accept an amendment to the budget implementation act to give effect to Bill C-265.
Now, I don't know what the problem is with regard to this, but we have $66 million basically holding up 100,000 people in terms of this particular effect that it would have.
Mr. Thrasher, I'd like you to give testimony to the committee on how this affected people in your circle, in your life, when the rules were changed from underneath their feet. What did it do to individuals? As we've discussed, some people aren't even here anymore. That's a significant problem. All that money—money that was once supposed to go to individuals, who planned their lives on it, because the rules were a certain way—has been taken from them.
What happened to the people in your circle, Mr. Thrasher? What did they experience?
One of the first phone calls I got when people found I was involved in this was from a lady in Quebec. She had worked all her life in the United States and for the U.S. consulate. She was 85 years old. She had just broken her $1,000 pair of glasses; she was nearly blind. She received this notice that tax on her social security was going to be withheld, by 25.5%.
She was absolutely desperate. She was forced to move. She moved into an apartment that wasn't really up to par with her needs, so she had some renovations done. While this was going on, she tripped on something and broke a leg. She wound up in a hospital. She had a heart attack, and while she was recovering from the heart attack her sister came in and said, you know, your ceiling fell down.
This is an unusual case, but there are so many situations when people are of that age—They just can't handle that sort of stuff. To change the rules when people are being affected like that is really immoral. It should never happen.
Mr. Chair, the quote I read was from the minister of multiculturalism and Canadian identity; it was on April 14, 2005. What's troubling, though--and I think needs to be clarified--is that there seems to be the perception that it's Americans who are going to be receiving this. But the fact of the matter is that it affects many Canadians, and not just in Windsor, Ontario; they actually come from New Brunswick and other places across the country—
Can you describe the types of people they are? These are working-class Canadians who actually contributed to the country by receiving a wage and bringing it back into Canada. Can you tell us a little bit about those individuals?