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Frances Woolley
View Frances Woolley Profile
Frances Woolley
2015-05-28 8:48
Thank you, Mr. Chair.
I would like to thank the chair and the members of the committee for inviting me today and giving me the opportunity to speak about the budget.
The 2015 federal budget is intended to be a balanced budget, a low-tax plan for jobs, growth, and security. U.S. experience shows that low taxes are no guarantee of jobs and growth. In fact, a recent study by the IMF found equality matters more for growth than low taxes. I quote, “lower net inequality is robustly correlated with faster and more durable growth.”
There's nothing inherently good for the economy about low taxes. What's important is to have a well-designed tax system which raises revenue equitably and efficiently, providing both income security and the foundation for economic growth.
The question I wish to address here is this: Which of the tax measures announced in the budget help build a good Canadian tax system, and which ones fail to promote either economic efficiency or equity or both?
Two of the budget measures are particularly praiseworthy. The first are the measures taken to prevent the use of synthetic equity arrangements. The OECD, in its “Action Plan on Base Erosion and Profit Shifting” wrote:
Fundamental changes are needed to effectively prevent...cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it.
Base erosion and profit shifting seriously threaten the ability of OECD countries to tax economic activity. I'm very happy to see the budget taking steps to forestall the erosion of Canada's tax base.
The second welcome change is the reduction to required RRIF withdrawals. Life expectancies have increased and rates of return on investments have fallen. A change was needed. It's about time.
Unfortunately, the budget also contains tax measures that have more limited potential to create jobs and growth. The first is the reduction in the small business tax rate. Advocates of lower taxes on small business would have us imagine a future Bill Gates building the basis of a world-class enterprise out of his garage. Yet as University of Calgary economist Jack Mintz and his co-author Duanjie Chen have pointed out, reductions in the small business tax rate could actually discourage a future Bill Gates from growing his business by creating, as they put it, “a 'threshold effect' that holds back small business from growing beyond the official definition of 'smallness'”.
Moreover, low small business tax rates create possibilities for tax avoidance—the well-paid, self-employed professional who uses a corporate structure to reduce personal tax liabilities rather than grow an enterprise.
The reductions to the small business tax rate are projected to cost $2.7 billion over the next four years. There are far better uses for $2.7 billion, for example, reforming the corporate tax base, or raising the GST threshold so that more small businesses would be exempt from the GST under the small suppliers rule, or working with the provinces to reform and reduce provincial business taxes.
The other tax measure introduced in this budget that causes me grave concern is the doubling of the TFSA contribution limits. TFSAs were a welcome addition to Canada's saving systems. They provide tax-sheltered saving opportunities for many who are not well served by RRSPs, such as students or low-income people. However, there is no case for an increase in the TFSA contribution limit to $10,000 per year. The long-term revenue cost is too great; there is too much potential for abuse of TFSAs.
Many economists advocate consumption taxation on the grounds that taxing investment income discourages savings and has serious efficiency costs. If this government wishes to move towards consumption taxation, and there are good reasons for doing so, we'd be better served increasing the RRSP contribution limits or relying more on the GST to raise revenue and less on income taxes. At the very least, there should be a lifetime limit on TFSA contributions.
The home accessibility tax credit is one final tax measure worth commenting on. I'm not convinced that this is the best way of helping the disabled or helping seniors remain in their homes. First, it is not refundable, so it will not provide help to those who need it most. Second, I've concerns about the implementation of this credit. What kind of home renovations count? Who decides whether or not any given bathroom or kitchen renovation improves accessibility?
Furthermore, linking the home accessibility tax credit to eligibility for the disability tax credit is problematic. My own research suggests that the disability tax credit is not well targeted. Some people with disabilities fail to receive the credit. At the same time there is some evidence that it may be abused.
It would be more sensible to help seniors and the disabled through direct program expenditures on housing, on community living programs, and on home supports. Canada doesn't need a low-tax plan for jobs, growth, and security; it needs a good tax plan for jobs, growth, and security.
This budget introduced important measures that go part of the way towards building a better tax system, but there is more to be done.
Thank you.
View Scott Brison Profile
Lib. (NS)
You've echoed what other economic analysts, including the IMF, have said about how progressive tax systems are better for growth. Also in terms of inequality, we've had TD Economics and others discuss the importance of leaning against inequality.
Would you say that our tax system has become more progressive or less progressive in terms of many of the measures introduced over the last 10 years in Canada in terms of our tax system?
Frances Woolley
View Frances Woolley Profile
Frances Woolley
2015-05-28 9:29
Yes. I think the big changes are with investment income. Going outside of what we're talking about today, I think one of the big changes in this act that's not regressive is the move from.... The introduction of the family tax cut.... One of the best things this government did when it was first elected was the introduction of the child tax credit amount. I'm very disappointed to see that being replaced by income splitting. It's a very regressive move.
It's a complicated question, but yes, there are important initiatives that have made the tax system less progressive than it was.
View Joyce Bateman Profile
CPC (MB)
Thank you to all of our witnesses this morning. I very much appreciate the commentary.
I want to ask the same question to a few of you at the start. Perhaps I could start with Mr. Lavoie.
The effective tax rate by 2016 for small business people for new investment will be 9.1% in Canada. That compares with 31.7% in the United States at the same point in time and with 26.4% in Germany. Those are considered strong economic players in our global economy. How is that rate structure going to impact and perhaps help Canadian business?
Martin Lavoie
View Martin Lavoie Profile
Martin Lavoie
2015-05-28 9:32
You're right. I think Canada's is now the lowest in the G-7 by far.
As I said, I think the structure of our economy is also more dependent upon small businesses than may be the case in some other countries. We haven't seen a huge shift in our sector, but definitely the large companies that had plants in the past may have fewer plants in Canada than they used to.
To us, this measure is a no-brainer. We agree with CFIB on this. It's a stimulus. As a small business owner myself, I can tell.... Tax is tax is tax. It's the first thing you pay. This is a measure not only to help SMEs grow, but also to have more people starting their own businesses.
View Mark Adler Profile
CPC (ON)
View Mark Adler Profile
2015-05-28 10:05
Of course. When you reach out to your membership, none of them has ever asked that the government should be increasing taxes in any way, shape, or form.
Philip Cross
View Philip Cross Profile
Philip Cross
2015-05-28 10:32
I'd like to thank the finance committee for inviting me to this hearing.
Before I get started, just some background. From what I saw with the previous panellists and from this panel, I think what you're mostly going to get from them is micro-analysis of the individual proposals. I'm going to bring you some macro-analysis about the broad trends and the tax and transfer system that might help put these changes in context. The overview is based on a detailed report I wrote for the Macdonald-Laurier Institute called “Giving and Taking Away: How Taxes and Transfers Address Inequality in Canada”, which members can refer to for more details.
The main conclusion is that the tax and transfer system became markedly more progressive between 1976 and 2011. The progressivity of transfer payments had a much greater impact than taxes on the redistribution of income. The greater role of transfers partly reflects that cutting income taxes does little to help low-income people, as the lowest income quintile effectively pays no income tax, with an effective rate of 2.4%. Instead, it is transfers and government that provide over half of their tax income.
As we move up the income quintiles, taxes progressively increase and transfers steadily decrease up to the highest quintile for whom transfers are as negligible, at 3%, as taxes are for the lowest quintile, while the effective tax rate for the highest quintile reaches an average of 22%.
Looking at combining the impact of tax and transfers, it shows that only the highest two income quintiles pay more into the tax and transfer system than take out, while the other three lowest quintiles are net beneficiaries. The highest income quintile pays 80% of the total net redistribution going on within the tax and transfer system. So the system is quite progressive, even if it's not completely offsetting the growing inequality of market incomes over the last 35 years.
Despite rising incomes earned in the marketplace, net transfers to the middle class have increased. This was particularly the case for the second-lowest income quintile, where net transfers rose from 2% to 17%. Only the highest quintiles saw a net contribution increase. So overall, the tax and transfer system has become more progressive in redistributing income from the highest income earners to the lowest and middle incomes.
For 35 years Canada has moved to a system of higher transfers and lower tax rates for 80% of the population being paid for by the highest 20% of earners. We may be nearing the limits of the amount of resources that can be transferred from one quintile to the other four. As noted by Professor Kevin Milligan in a recent study for the C.D. Howe Institute, raising the marginal tax rate further on high-income earners risks reducing their labour supply and may even lead to lower tax revenues. Advocates of higher tax rates for upper-income earners should take note of the growing contribution of the tax and transfer system over the longer term. Critics of the benefit that income splitting may give to some of the highest quintiles should also be aware of this trend.
Finally, the focus of all parties on aiding the middle class at some point risks becoming either a transfer from some parts of the middle class to other parts of the middle class, or worse, from the left pocket to the right pocket of the same person.
Thank you.
Aaron Wudrick
View Aaron Wudrick Profile
Aaron Wudrick
2015-05-28 10:43
I think generally our position is that borrowing to spend is a bad idea.
View Pierre Dionne Labelle Profile
NDP (QC)
It is a very good thing that the new benefits for veterans are not taxable, but other incomes are taxables. What is the logic behind taxing some sources of income and not others? For instance, the earnings loss benefit and the permanent impairment allowance are taxable, but the two new allowances will not be taxable. What is the logic behind that?
Miodrag Jovanovic
View Miodrag Jovanovic Profile
Miodrag Jovanovic
2015-05-26 10:32
Generally speaking, if an allowance seems to replace an income, it will be taxable. If it is related to a one-time event, such as disability-related compensation, it might not be taxable.
Miodrag Jovanovic
View Miodrag Jovanovic Profile
Miodrag Jovanovic
2015-05-14 15:36
Thank you, Mr. Chair.
My name is Miodrag Jovanovic. I am director of the personal income tax division with the Department of Finance.
Thank you very much for your invitation to appear here today before the committee regarding your study of the potential for social finance in Canada.
First, I would like to speak briefly in broad terms about the Canadian taxation and regulatory framework for registered charities in the Income Tax Act as it relates to social finance and social enterprise. I understand that my colleagues from the Canada Revenue Agency will speak in more detail about how they administer the provisions in the Income Tax Act.
Second, I would also like to draw your attention to a measure in the recent budget that responds to recommendations made to this committee.
The rules that relate to charities' involvement in social finance take into account a number of different principles, policy objectives and practical considerations. These considerations include the following:
In Canada, charities are exempt from taxes and are permitted to issue tax receipts for charitable donations for which individuals may claim a tax credit and corporations may claim a tax deduction. This results in forgone revenue and a tax expenditure of about $3 billion annually. This tax expenditure recognizes the charitable sector's important social and economic contributions. The lncome Tax Act provides a set of rules to ensure that tax assisted charitable resources are used to advance the purposes for which a charity has been established. In other words, charitable resources must be used for charitable purposes.
ln this context, the lncome Tax Act aims to strike a balance between allowing charities to engage in business activities, including social enterprise, as a source of revenue while ensuring that charities ultimately remain focused on their charitable purposes and activities.
Most charities can raise revenues directly to support their charitable activities as long as their business activities are directly related to, and subordinate to, the purposes for which they have been created. Where the business activity is closely related to the charitable purpose, it can make sense to integrate the business activities into the charity.
With the exception of private foundations, charities that wish to engage in unrelated business activities can do so by establishing a separate entity, typically a corporation, to carry out these activities. This can be an attractive option for charities since there are few, if any, restrictions on how a corporation's capital is raised and how its assets and revenues are used. Having a separate entity allows the charity to maintain its focus on charitable activities and use its charitable assets towards these activities.
The rules also attempt to provide a level playing field between businesses run by charities which are tax-exempt and businesses that pay tax. Taxpaying businesses, including small and medium-sized businesses could be placed at a competitive disadvantage if charities were able to conduct tax-exempt business activities without restriction.
To re-iterate, this suite of parameters is intended to allow charities to engage in business activities as a source of revenue while at the same time ensuring that charitable resources are not diverted from their charitable purposes.
As mentioned by my colleague from the Department of Employment and Social Development, I would like to discuss briefly a measure introduced in Budget 2015.
The Department of Finance discusses policy issues concerning registered charities with the charitable sector on an ongoing basis. We have been in touch with the charitable sector on social finance for several years. A number of stakeholders have told us that, if charities were permitted to invest in limited partnerships, they would be able to make more impact investments, that is, investments that generate both a social and financial return.
Up to now, charities have not been permitted to hold interests in limited partnerships in most cases because a charity that held an interest in a partnership was considered to be carrying on a business. Charitable organizations and public foundations can only engage in related businesses, with the result that few are in a position to hold interests in a partnership. Private foundations cannot engage in any business activities that prohibited them in all instances from holding interests in a partnership.
Charities have also told us that allowing them to invest in limited partnerships would permit them access to a wider range of investment opportunities to diversify their investment portfolios.
ln light of these recommendations, budget 2015 proposed that registered charities be permitted to invest in limited partnerships subject to certain conditions. This measure is expected to have two benefits. First, in allowing charities to diversify their investments, it will provide them with the opportunity to access a wider range of private market investments, such as infrastructure investments, and by so doing enable them to obtain better returns on their investments. This will in turn increase the resources they have available to fund charitable programs. Second, since there are many social impact investments that are structured as limited partnerships, allowing charities to invest in limited partnerships will enable them to better align their investment portfolios with their charitable purposes, and will potentially make available additional funds for social enterprise projects in Canada.
I would be pleased to respond to any questions the committee might have.
Thank you.
Cathy Hawara
View Cathy Hawara Profile
Cathy Hawara
2015-05-14 15:55
Charities have to abide by a rather specific framework. Before accepting them and registering them as charities in Canada, we are required by law to ensure that they pursue activities for charitable purposes that are recognized by the courts. As you said, we are talking here about advancing education and alleviating poverty.
As far as the impact is concerned, our role as a regulatory agency is not to determine the effectiveness of charities or the results obtained within the framework of their program. That exceeds our mandate and our jurisdiction. Our role is to ensure that the organizations are obeying the rules established under the law, and to help them understand those rules, and give them the tools they need to implement them.
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