FINA Committee Report
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CHAPTER 3
A. ADDITIONAL MEASURES
The Committee heard a number of witnesses' concerns relating to specific industries or economic activity. The Committee recommends that officials carefully examine the following issues and evaluate their merit.
1. Enhanced Charitable Tax Treatment
As it did in the past, the Committee continues to recognize the important role the charitable sector plays in our society. It is an important player that can provide essential goods and services to all Canadians. By doing so, it can build social capital, tighten the social fabric of this country, maintain and improve the quality of life in all our communities, and help those in need. The aid provided by the 80,000 charitable organizations is particularly essential in the context of recent fiscal restraint.
In the face of federal, provincial and municipal cutbacks, the charitable and voluntary sector faced great challenges. As governments reassessed their spending priorities, the charitable and voluntary sector was forced to absorb part of the load. Thousands of Canadians have been forced to rely on their services, putting extra pressure on the tens of thousands of volunteers working in the field. Voluntary organizations are now faced with heavier caseload.
The Finance Committee has always taken a keen interest in this sector. This Committee has always tried to find ways to encourage charitable giving. Governments, individuals and corporations have been able, thanks to more effective tax incentives, to form important partnerships in this regard. In its pre-budget consultation reports for 1995, 1996 and 1997, the Committee carefully examined the tax treatment of charitable donations. In the pre-budget consultation reports for 1996 and 1997, the Committee recommended specific measures relative to the tax treatment of charities (for example, increasing the limit on donations from 20% to 50% of net income or exempting from capital gains taxation gifts of appreciated capital property).
"It's in large measure ... to the efforts of this committee that the government has adapted initiatives in the 1996 and 1997 budgets to encourage charitable giving by all Canadians. These initiatives certainly are welcomed and appreciated by the charitable community and by the CALU members."
Mr. William J. Strain, F.C.A. (Chair, Taxation, Conference for Advanced Life Underwriters)
The government always endorsed in the following budget some, if not all, of the Committee's recommendations. For example, in the 1996 budget, the amount of donations eligible for the tax credit was increased from 20% to 50% of net income; the limit on donations on the year of death and donations carried back to the preceding year was raised from 20% to 100%. In addition, to eliminate the potential cash flow impacts arising from the donation of appreciated capital property, the general limit of 50% was further increased by half the amount of taxable capital gains resulting from the donation of capital property.
In the February 1997 budget, the government announced a new set of measures to foster charitable giving:
- the reduction of the inclusion rate on capital gains arising from the donation of publicly-listed securities from 75% to 37.5%;
- the increase to 75% of the income limit for donations;
- a level playing field between charitable donations and donations to the Crown and Crown foundations, with a new standard limit of 75% of net income;
- new rules for the valuation of easements of ecologically sensitive lands; and,
- increased resources for Revenue Canada to enhance information and compliance.
The 1997 tax measures will provide $95 million worth of resources annually in additional federal tax assistance to encourage charitable donations. Many of these measures originated in the pre-budget consultation hearings.
``We appreciate what has been done for the last three years and don't stop. Don't give up."
Mr. David Armour (President, United Way of Canada)
It is obvious that the Committee has had a positive impact on the tax treatment of charitable giving. Many witnesses appearing this year expressed their appreciation for the number of significant changes that have appeared in the last three budgets.
However, a significant number of witnesses raised the fact that the measures contained in past budgets require further action.
1.1 Resolution 21
Known as Resolution 21, this measure was announced in the last budget and subsequently included in the draft legislation amending the Income Tax Act issued on July 31. It will restrict gifts of shares and debt instruments issued by private corporations.
The last budget proposed to reduce the income inclusion rate on capital gains arising from certain donations, from 75% to 37.5%. Donations eligible for this enhanced tax treatment are securities, such as shares, bonds, bills, warrants and futures that are listed on prescribed stock exchanges only. It is believed that this measure will facilitate the transfer of appreciated capital property to charities to help them respond to the needs of Canadians. However, entrepreneurs whose wealth is held in the shares of privately-owned businesses will not get any tax credit for donations of those shares until the recipient (i.e. the charitable organization) sells them. Hence, Canadians who give such securities to support charitable organizations could end up facing a substantial tax liability (i.e. capital gains tax plus denied tax relief in respect of the gift) if the recipient does not dispose of the gift within five years.
This measure, denying all tax relief for charitable donations of securities of private corporations, is perceived by many witnesses as inequitable. They claim there will now be a two-tiered system. The practical implication of Resolution 21 is that it will prevent the donation of securities of private companies. As one witness argued, this measure will substantially reduce charitable donations of private companies' securities.
The Department of Finance is reluctant to allow tax relief for charitable donations of securities of private corporations because of perceived abuses in assessing the fair market value of those gifts. The Department believes it is necessary to postpone (up to 5 years) the recognition of such a gift until the charity disposes of it to ensure that the securities are appropriately valued. The charitable sector argued that the Department was being overly cautious. The sector argues that to deny charities the ability to hold securities of a private corporation with which the donor does not deal at arm's length, regardless of the quality of the investment, is an overreaction to the risk of abuse.
In response, the Voluntary Sector Roundtable, the Canadian Association of Gift Planners, the Conference for Advanced Life Underwriting, the Canadian Institute of Chartered Business Valuators and various other organizations have proposed to the Department of Finance a four-point valuation process for charitable gifts of private companies' securities. They believe that the valuation process will provide adequate safeguards and will ensure that tax credits and deductions are granted only in respect of real value that is irrevocably transferred to a charity.
The Committee believes that the new rules could hamper the ability of charitable organizations to raise capital and to establish endowment funds that are desperately needed to sustain long-term social and cultural programs to the benefit of all Canadians.
- The Committee recommends that the government examine Resolution 21 and develop appropriate measures to prevent abuse without introducing disincentives to charitable giving.
RECOMMENDATION
1.2 Sunset Clause
The February 1997 budget established a sunset clause for the reduction of the capital gains tax on gifts of publicly-traded securities. The reduced inclusion rate for capital gains will remain in effect until 2002, at which point the measure will be re-evaluated. After five years the plan will be terminated if it has not been effective in both increasing donations and distributing the additional donations fairly among charities.
- The Committee recommends that the government clarify how the Sunset clause will be implemented, who will be responsible for determining the distributional aspect of this measure and list the criteria that will be used.
RECOMMENDATION
1.3 Stretch Proposal
``The council respectfully recommends that the federal government consider ways and means including building on the principles set out in last year's stretch proposal, to give those with more modest means more reason to give."
Ms. Audrey Vandewater (Executive Committee Member, Council for Health Research in Canada)
For a third year, some witnesses suggested the stretch proposal as a means of enhancing modest gifts to charities. This stretch proposal would provide a larger tax credit (40%) on donations that exceed the maximum a taxpayer and spouse have given in any prior year. Revenue Canada would have to advise taxpayers annually of their threshold for this credit on their Notice of Assessment.
In the past, the Committee found this proposal appealing because it would provide an additional tax benefit only to those donors who increase their donations above previous amounts and because it would be advantageous to taxpayers of all income levels. In addition, it provided an incentive for taxpayers to contribute to charities for the first time. Last year the Committee recommended that a stretch proposal be considered for implementation. The government rejected this approach because it could create opportunities for taxpayers to maximize their credits by rearranging their donations (e.g. delaying donations over a certain number of years to make one large donation). In addition, this proposal would significantly increase the complexity of the tax system.
Typically, the combined federal-provincial tax regime brings tax assistance to 52% of the value of the donation. Hence, there is a 50/50 partnership between donors and governments. With the 40% tax credit, the combined federal-provincial assistance would reach 70% for excess contributions. The Committee also recognizes that the stretch proposals could have adverse behavioural consequences.
- The Committee recommends that the Department of Finance and the Voluntary Sector Roundtable work together to develop a feasible stretch proposal that avoids the pitfalls mentioned above.
RECOMMENDATION
B. SHIPPING AND HANDLING FOR INDEPENDENT SALES CONTRACTORS
In their testimony, the Direct Sellers Association argued that the current rules under which a direct seller must collect GST on the shipping and handling charges made to their independent sales contractors (who are usually not registered vendors) when they purchase products and sales aids are unfair. This is because GST on these costs would normally be recoverable through the Input Tax Credit mechanism were they incurred by a commerce business operating outside the direct sellers mechanisms.
- The Committee recommends that the shipping and handling charges from a direct selling company to its independent sales contractors be relieved of GST.
RECOMMENDATION
C. EXCISE TAX ON JEWELLERY
Since 1918, the federal government has been imposing a 10% excise tax on jewellery (valued at more than $3) and on watches and clocks (valued at more than $50). In 1996-97, this tax generated revenues totalling $55.9 million.
According to an Ernst and Young study, between 30 and 60% of the transactions are illegal trades
Once again, the jewellery industry testified before the Finance Committee. They argued that the high tax burden (excise tax, GST, provincial sales taxes) has driven the industry underground. Between 30 and 60% of the transactions are illegal trades. In addition, the industry claims that the tax is not a luxury tax (each household spends only $130 on jewellery per annum); it is unfair (the jewellery industry is the only one that faces a 10% manufacturers sales tax); it hurts small business (it increases the cost of financing inventories and the paper burden is expensive), it inhibits job creation and it generates little net revenues (because of the high cost of enforcement).
"We are not asking the committee to give the jewellery industry a concession. Repealing the excise tax would not provide our industry with special treatment. Instead, repeal of the tax would level the playing field and open the industry to growth and job creation."
Mr. Jonathan Birks (Chairman, Government Relations Committee, Canadian Jewellers Association)
The industry claims that the government would not lose revenue if the tax were repealed. An Ernst & Young study commissioned by the Department of Finance, however, concluded that repeal of the tax would not have a significant impact on contraband activity and would therefore not generate sufficient GST and income taxes to offset the lost excise revenue. The Committee is nonetheless sympathetic to the jewellery industry.
- The Committee recommends that the Department of Finance assess the appropriateness of an excise tax on jewellery.
RECOMMENDATION
D. PHYSICIANS AND THE GST
The Committee heard from the Canadian Medical Association, which expressed serious concerns about the way in which the GST is applied to physician services. In the opinion of the CMA, the GST discriminates against physicians because, unlike other self-employed professionals, they are unable to claim input tax credits for business expenses and cannot recoup GST expenses through other charges.
According to the CMA, the GST is fundamentally unfair to physicians and is a deterrent in recruiting and retaining physicians in Canada. This issue merits consideration and further study.
E. PRIVATE WOODLOTS
Private woodlots are a vital part of the Canadian forest sector. They are typically small, usually 50 hectares or less. They are an important wildlife habitat. In addition, woodlots are a source of specialized products such as maple syrup, Christmas trees and firewood.
"The current lack of sustainable stewardship practices cannot continue without serious economic and environmental social impacts."
Hon. Alan R. Graham (Minister of Natural Resources and Energy, Province of New Brunswick)
The industry argues that the tax system operates as a disincentive to sustainability. The tax system encourages clearcutting. This is because woodlot owners who are not classed as farmers, or whose land base do not allow them to operate on a full-time basis are not permitted to deduct business losses against income that is derived from a source unrelated to the business. Farmers can deduct the cost of planting and maintaining a woodlot against income from other sources on an annual basis. Revenue Canada argues that investments in woodlot management do not appear to meet reasonable expectations of profit requirements. It can take up between 40 to 60 years before revenues are generated and a profit is possible. Because of the irregular revenue flow, Revenue Canada considers that woodlot operators cannot be committed to a business. Furthermore, Revenue Canada fears that changing the tax regime of woodlot owners could create tax shelter for wealthy Canadians.
- The Committee recommends that the government favour sustainable management practices in this important forestry sector by reviewing the tax treatment of woodlot operators.
RECOMMENDATION
F. INCOME AVERAGING FOR ARTISTS
``To develop a knowledge-based economy, we believe that a nation has to nurture those writers, those people who are creating the intellectual property that's going to be the currency in the new information age."
Ms. Merilyn Simonds (Second Vice-President, Writer's Union of Canada)
The Committee has in the past recommended income averaging for occupations such as artists and writers whose income fluctuates. We were told by the Writers Union of Canada that authors typically receive all their income for four years of work in one year. Thus they are taxed at a marginal rate much higher than it should be. Once we recognize that less than 2% of writers receive Canada Council grants, we note that writers are penalized for being in a position that is already difficult.
The corporate income tax system allows income averaging through loss carry-overs. This is in recognition of the cyclical nature of profits. Other individuals also face such tax penalties due to uneven income patterns. For most, however, such cases are the exceptions rather than the rule.
- The Committee recommends that the government consider the introduction of income averaging for those forms of income that fluctuate.
RECOMMENDATION
G. THE CANADA TELEVISION AND CABLE PRODUCTION FUND
"Investing in the cultural sector means building a strong domestic base of creative expression and production."
Ms. Susan Annis (Director, Canadian Conference of the Arts)
The Canada Television and Cable Production Fund is a public-private partnership which provides about $200 million per year for the production of distinctively Canadian television productions, produced primarily for the domestic market. This fund helped to finance over 300 productions this year, with total spending of about $600 million. The federal government currently contributes $100 million to the fund annually but this contribution is slated to decline to $50 million next year and be eliminated after that.
"The Canadian television marketplace, particularly the English language part of that marketplace, is the most competitive on earth."
Mr. Peter Herrndorf (Interim Chair, Canada Television and Cable Production Fund)
Canadian programming faces many obstacles when competing with the American juggernaut. Our television season tends to be shorter than the American one. Only 7% of available drama is Canadian. And Canadian households can today receive virtually everything the Americans produce.
Canadian culture is subject to enormous threats from the dominance of American culture. With technology's tearing down of cultural borders, regulating Canadian content is becoming less and less an effective cultural tool. The only effective alternative is the direct subsidization of cultural productions.
- The Committee recommends that the federal government give serious consideration to maintaining funding for the CTCPF.
RECOMMENDATION
H. COST RECOVERY IN THE AGRICULTURAL SECTOR
Once again this year, organizations representing the agriculture and agri-food sector testified before the Committee. As in previous years, they expressed concerns about the proliferation of user fees. Cost-recovery program initiatives such as the Pest Management Regulatory Agency (PMRA), the Marine Service Fee and the Food Inspection System can increase their production costs.
The agri-food industry claims that these charges are not based on sound public policy. The industry argues that only services that are a direct benefit to the producer should be paid by the producer. Services that are in the public interest should be shared by the public through government expenditures. They also argue that the imposition of fees such as inspection fees on producers makes them uncompetitive vis-à-vis the American producers and producers in other trading nations.
The Committee is still supportive of the government's effort for an effective user-pay system. This approach limits government expenditures by imposing the cost on those who benefit. Recent policy development should alleviate the industry's concerns in regard to user fees.
``The federal departments have very little acumen for accountability and management of cost-recovery initiatives, as evidenced by our industry's experience."
Mr. Charles D. Milne (Vice-President, Government Affairs, Crop Protection Institute)
In April 1997, the federal government announced a new policy on cost recovery, which is based on an approach that reconciles businesses' and consumers' concerns with government policy and its responsibilities to all taxpayers. The new policy should, among other objectives, promote a more efficient allocation of resources and an equitable approach to financing government programs by fairly charging those who benefit from the services rendered. This policy should guarantee the industry that cumulative impact assessments of user fees will be undertaken and monitored.
While individual ministers are responsible for implementing user charges, Treasury Board has committed itself to review the new policy within three years of its introduction.
- The Committee recommends that the new Treasury Board cost recovery and charging policy be strictly implemented by all departments and agencies and that at no time should new user fees be charged without proper impact assessments, as required by the policy.
RECOMMENDATION
I. APPRENTICES' TOOLS
Apprentices and technicians working in the automotive industry must purchase and maintain a set of tools in order to get and keep a job. Because of that condition of employment, auto mechanics must typically invest approximately $15,000 in tools - some may invest as much as $40,000. Furthermore, they must make annual replacement purchases of up to $1,000. Entry level apprentices must purchase a starter set of tools, valued at about $4,000 before they can get their first job. Over the three- to four-year period it takes to complete their apprenticeship, they will have invested about $4,000 to $5,000 each year to build up their tool box.
The Committee believes that all Canadian employees should be allowed to deduct from their income the cost of large mandatory employment expenses. Special provisions in the Income Tax Act already apply to artists, chainsaw operators and musicians. To deny this tax treatment to apprentices and technicians in the automotive industry is not only unfair, it also imposes an impediment to employment, especially for the young who might choose to work as apprentices. Revising the tax treatment of such expenses would remove the impediment that exists under the present tax rules.
The Committee believes that allowing auto mechanics to deduct the cost of their tools would increase enrolment rate in apprenticeship programs and that it would reduce what the industry considers to be a severe shortage of skilled labour. Second, talented young Canadians would stop seeing a career in the automotive industry as something they cannot afford. Third, it would make the transition from school to the permanent workforce easier. This would reduce the high attrition rate in the industry.
- The Committee recommends that the government provide targeted tax relief for all those who must bear large expenses as a condition of employment, such as is the case with mechanics' tools.
RECOMMENDATION
The Committee believes that such a reform would promote the government's growth and jobs agenda.
J. MAJOR NATURAL CATASTROPHE
Many now predict that extreme weather will increase in frequency and severity in the future, causing large-scale damage and imposing high costs. Flood damage in the Saguenay last year and the Red River this year are the most recent examples of catastrophic weather events.
Once again this year, the insurance industry argued that Canada is ill prepared for major natural catastrophe such as an earthquake. Major urban centres in British Columbia and Quebec, as well as the national capital region, are in high risk seismic zones. The Insurance Bureau of Canada estimates that losses could well exceed $30 billion in each case.
The federal government has not budgeted for these potentially costly disasters. The government could be exposed to these losses directly through the cost of relief and damage payments, as well as indirectly via reduced tax revenues. This would threaten the fiscal position of the government and the prosperity of Canadians.
In addition, current taxation and accounting practices do not facilitate the creation of catastrophe reserves by the insurance industry.
The government introduced last summer a requirement that insurers must demonstrate to the regulator that they can measure and fund their earthquake exposure. This means that premiums will soon be set aside in order to pre-fund the ability to handle eventual losses.
- The Committee is greatly encouraged by the establishment of earthquake reserves. The Committee recommends that the government continue working with the insurance industry to determine the tax treatment of earthquake reserves.
RECOMMENDATION