[Recorded by Electronic Apparatus]
Friday, December 1, 1995
.0935 
[Translation]
The Acting Chair (Ms. Brushett): Good morning. My name is Dianne Brushett, and I am the Member for Cumberland - Colchester, Nova Scotia. Welcome to the House of Common's Standing Committee on Finance. The Vice-Chairman, Barry Campbell, who should be chairing this session, has been held up in traffic. He should be here soon.
[English]
We have with us this morning Mr. Jean Précourt, from the Certified General Accountants' Association of Canada.
It is my understanding that some witnesses have to leave early. I would ask that if you are in that group and if you're not able to stay for the later discussion, you present all your statements with the opening remarks.
The presenters this morning are Faraj Nakhleh from the Canadian Advanced Technology Association; Claude Bismuth, making an individual presentation; Mr. Jean Précourt and Joanna Leduc-Dallaire from the Certified General Accountants' Association of Canada; Jean Lapierre, but he is absent; Yvon Caron, President and CEO of the Association de planification fiscale et financière; Michel Audet -
A voice: The presenters for the Association de planification fiscale et financière are Yvon Caron and Denis Lacroix.
The Acting Chair (Mrs. Brushett): All right.
To continue, Ghislain Dufour from the Conseil du patronat du Québec; Emile Vallée, who is absent; and Pierre Akkelian from the Canadian Jewellers Association. The others will come shortly.
Please take your places.
Mr. Raynold Langlois (Chairman of the Board, Quebec Chamber of Commerce): Madam Chairman, you skipped over the Quebec Chamber of Commerce. I presume we will be heard. We are Raynold Langlois and Michel Audet of La Chambre de commerce du Québec.
The Acting Chair (Mrs. Brushett): Okay.
Maintenant we will make our opening statements. Please keep them brief, less than five minutes.
Following that we will have a dialogue among the presenters and then an opportunity for questions from the members of Parliament.
Welcome. We will begin with Mr. Faraj Nakhleh.
[Translation]
Mr. Faraj Nakhleh (Director General, Canadian Advanced Technology Association): Thank you, Madam Chair.
[English]
I will make my remarks in English. If there are any questions, I can take them in French or English.
The Canadian Advanced Technology Association has 450 members across Canada, 105 in Quebec. We are responsible for promoting our small and medium-sized companies, as well as our large companies, all of them operating in the technology sector. We help them in financing, global competitiveness and definitely in promoting their success and wealth.
I would like to make 12 recommendations. Some of them were made last year. I understand none of them were incorporated in the budget of Mr. Martin for this year. We're hoping some of them will be in next year's budget.
First, I recommend revamping Canada's tax laws to provide healthy incentives for patient venture capital. We're advocating that a capital gains tax on patient venture capital be reduced inversely proportional to the length of the investment. If you invest for two years, then you pay a capital gains tax - if you realize the gain, of course.
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If you invest for 5 years, you should pay, let's say, 50%, and if you invest for 8 or 9 years, you should not pay any capital gains tax.
Why are we doing that? Because when people invest in creating jobs, the people who are employed end up paying taxes. They make the economy turn, and they pay GST on purchases. When the people have worked, an investment has an opportunity to succeed, to grow. We're only talking about growth capital gains, as I'm sure you understand. It is an investment and not an expense.
By the way, a copy of my notes was delivered to somebody this morning.
The second recommendation is to protect existing R and D tax credits. As I'm sure you recognize, there's not a lot of money to go around these days, and there have been abuses in R and D tax credits. We acknowledge this.
Non-allowable application development R and D tax credits were claimed. Expenses were claimed as support, as manufacturing, an abuse of expenses. All that has happened in a minority of the companies.
We're saying, do not punish the majority because of some abuses. Instead you should have better rules to control that.
We have talked to Revenue Canada. We have met the minister, David Anderson. We were involved in making sure that these tax credits were protected.
Once again, if they're allowed, the tax credits come between six and eighteen months after the expenses are incurred. We only have five minutes, but we can prove to you that by the time the tax credits are claimed, more money has come into the government's pockets from taxes and projected taxes, income taxes and other taxes.
CATA strongly recommends that in the medium to long term a process-certification system be adopted for that so we're really working with the government to make sure the practice is done well and there is no abuse, but the program remains intact.
Our third recommendation is to encourage public financing of technology companies with a national stock-saving plan. There will be an improved version of Quebec's QSSP over the 1980s. As you know, the QSSP didn't have stringent rules for reimbursement of shareholder loans, escrow conditions, training requirements, multiple-holding shares, and so on. We're looking at more stringent rules, but it's a very good approach.
The fourth recommendation is to eliminate the fiscal hurdles that prevent small technology companies from expanding. For example, a small company receiving venture capital from a public company may lose its reduced tax credits, and so on.
Our fifth recommendation is to offer tax credits to companies hiring recent graduates. There is a program in Quebec doing that, the PSS, Programme de soutien de l'emploi scientifique. This is effective in helping to hire new graduates or new graduates who are unemployed.
As I'm sure you know, it is an investment. In Canada we have tens of thousands of jobs that are available, but there is a shortage of qualified people who can fill these jobs. The more we train our people, the more marketable they are.
A set-aside program should be established to help small companies sell to the federal government. The U.S.A. has that. NASA allows for this.
This is a program that will set aside a certain amount of government purchases to small and medium-sized companies. In the U.S.A. this is set aside for minority-controlled companies and small companies, SMEs. In Canada we do not need the former; we just need the latter.
The seventh recommendation is to provide incentives to small companies to invest in manpower training. Do not make it a law, but just provide incentives. You can tie them to tax credits, you can work out the formula. We're not here to work out formulas.
Our eighth recommendation is to simplify GST filing. The business number that just came out recently is a good start, but it should be simplified. It is very onerous for small companies to do that, and we just did ours on November 30; I know how long that took. We've been doing it for several years and it still takes a long time.
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Before I get to number nine, I just want to remind you that numbers one and two are investment recommendations and not expense recommendations.
Our ninth recommendation is to cut most programs that are meant to encourage SMEs through small contributions. These are difficult to measure, difficult to control, difficult to monitor and they don't always have the desired effect. Instead of having a lot of small programs that are very difficult, very heavy to manage and may not be easy to control, we're saying invest in the first and second recommendations we have.
Encourage alliances, technology transfers: we need that. There is technology in universities and there are market requirements. We can combine the two.
I can't leave without saying one or two words about Mr. Axworthy's upcoming reform - or whatever you call it. This is controversial, but sooner or later we're going to have to see whether it's in one year or ten years or twenty years that we'll see user fees, more stringent rules regarding unemployment insurance benefits, welfare benefits and so on. Since there is not a lot of money to go around, we can either keep on indebting ourselves or come up with more stringent rules for these things.
Unfortunately, a lot of people are in need of these moneys, of these governments handout revenues. It's tough but we just can't keep on doing that. We have to figure out better ways of creating wealth in Canada.
Thank you very much.
[Translation]
Mr. Claude C. Bismuth (Partner, Caron Bélanger Ernst & Young): I am here as a partner in the firm Caron Bélanger Ernst & Young. I am a chartered accountant and management consultant, and have 25 years' experience in Canada with various companies, most of which are in high technology and manufacturing.
I'll be talking about the situation in Canada today. Since I had the opportunity of appearing here last year, I've tried to update my remarks so that I don't repeat what I said then.
Our first question should be to ask ourselves what kind of government intervention works. I would say that centres of excellence are working very well. There is a peer evaluation at the very start, while both the industry and researchers are happy to avoid duplicating research infrastructures when they recognize the centres are doing good work - producing good science - and that the science can be concentrated in a recognized institution.
I think the government should stress good science and its results, and continue providing support for centres of excellence. Let me give you an example. The centre of excellence for neuroscience has not only succeeded in gathering together the biggest R & D names in the field in Canada, but has also succeeded in convincing investors - through the Royal Bank of Canada and the Caisse de dépôt et de placement du Québec - to support the researchers collectively so that the fruits of their labours can be marketed more quickly.
Another very important factor we should think about is the virtual aspect of a company. We should try to stress that aspect and keep people in their strongest area of expertise. That said, we should avoid duplicating investments in infrastructure, equipment and highly trained staff, and even in buildings and laboratories.
Some institutes, like the Biotechnology Research Institute, have succeeded in attracting many stakeholders in the industry worldwide. For example, the work being done now at the Joint Structural Biology Centre involves such stakeholders as Merck Frosst, Bio-Mega and Astra Pharma Inc., of Canada.
.0950
Let me give you a brief overview of the problems facing the high technology industry, whether the companies concerned are in biotechnology, aerospace, defence, electronics or information technology.
It is very important that we in Canada do not pay higher taxes than our competitors elsewhere. This is extremely important, because if the economic model holds true, it won't be enough to develop the research and development aspect and subsidize it as we do or should be doing. We must recognize the proven fact that research and development create high value jobs, and that this added value provides enormous impetus for a country's economic development.
However, we should ask ourselves whether we aren't running the risk of losing manufacturing to other countries and exporting jobs in marketing. Personally, I don't think we should worry to much about that. I think that those jobs which are created with very little added value can easily be exported. It is much more important for us to ensure that profits remain in Canada. For that to happen, companies must be encouraged through a tax system which is not too heavy a burden.
[English]
It's very important that we keep track of the profit element arising from transactions and keep our businesses competitive on the global basis by having tax rates that are commensurate with our competitors. We will then be able to keep the profits in Canada, which in turn create investment and increased GNP.
If were to do a balance sheet on where we stand today, one of the drawbacks is that we have tremendous R and D tax credits that have been in place and tested and are being fine-tuned. I can think of a couple of amendments that were introduced in February 1995, such as the contracts payments and non-arm's length transactions as they pertain to R and D, where I see absolutely no problems in the amendments. I think they're well placed and righteous in terms of the application of the intent of the law.
Where I see problems is in the way the administrative policies and the application of the intricate complex rules are being conducted through the audits of Revenue Canada. In the last nine months we have created I would say a very high level of uncertainty as to how the rules work. What are the new guidelines? This does not sit very well in terms of business people who have to make long-term investments and long-term strategy decisions. Similarly, making changes in tax rules that are too drastic and not recognizing grandfather clauses tend to make us look like people in crisis. Once again, this does not help us attract long-term investment.
A good example of that is when somebody has to make a structure that fits current tax laws and make decisions on investments based on an R and D tax structure and a rebate. He is definitely counting on that for a number of years. He cannot turn around six months later and change his approach to investments.
The Acting Chair (Mrs. Brushett): Mr. Bismuth, I would like to ask you to conclude, please. We have some other participants who have to leave early. Maybe you will have an opportunity at a later time to continue your discussion.
Mr. Bismuth: Another point I'd like to make on the R and D tax credit is that there has been a tendency to ask for tremendous documentation, which is not that easy, especially for the smaller and medium-sized companies. It's creating an undue burden. In the end, if we're looking at deficit reduction, I think we should be looking at simplifying program administration and program administration costs. I would venture to say we're much better off beefing up our tax credit than having subsidies and grants.
Thank you very much.
[Translation]
Mr. Jean Précourt (Chairman and Chief Executive Officer, Certified General Accountants' Association of Canada): First I would like to thank you and all members of the committee for giving CGA Canada an opportunity to take part in the prebudget consultations.
Canada today must meet two major challenges. The first is to renew the Federation so that it can better serve Canadians by promoting our common values and by contributing to ensuring our future in an increasingly competitive universe.
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We need a new constitutional framework that will enable us to better meet the political and economic challenges of the 21st century. To achieve this, Canadians will have to be thoughtful, reasonable, and above all, show goodwill in a spirit of accommodation.
The second major challenge is to foster real economic growth which will provide Canadians with sustainable employment and greater prosperity. An unemployment rate of 10% or more is an unacceptable situation.
Through this brief, we wish to contribute to the search for solutions to meet the second challenge, in the context of the preparations for the budget that will be tabled by the Minister of Finance in 1996.
[English]
As executive and financial advisor managing many of Canada's key industries, CGAs are well-positioned to understand the complexities of Canada's fiscal problems. With strong links to small and medium-sized enterprises, CGAs are especially attuned to the needs of this important fixture of Canada's economy.
As a regulating professional body that represents over 47,000 certified general accountants and CGA students, CGA-Canada is also recognizant of the sensitivities of balancing fair and reasonable social programs with the fiscal realities of today.
[Translation]
CGA Canada supports the four fundamental principles underlying the 1995 budget.
First of all, the government must start by putting its affairs in order and concentrate its efforts on reducing expenditures and not increasing taxes.
Secondly, our national priorities must reflect the needs of the population. Canadians need an economic plan that promotes job growth.
The third principle is that of frugality. Every dollar counts.
Lastly, we have to have some sense of justice among the regions and among Canadians.
These principles must also guide the next budget. Therefore, CGA Canada submits the following recommendations to the government:
- balance the budget by the year 2000 through a rigorous program of spending cutbacks and not through tax increases;
- further reduce the regulatory burden that slows down business, discourages investment and eliminates jobs;
- in the case of business subsidies, eliminate all those that are not cost effective;
- fourth, replace the GST with a new consumption tax that is simpler, harmonized, independent of income and multitiered, one which would apply to all products and services, and provide an input credit so as to keep our exports competitive and prevent cascading of consumption taxes;
- fifth, together with the provinces and territories, undertake an in-depth reform of social policy so as establish a social infrastructure that is affordable, sensible, efficient and based on those fundamental Canadian values of justice and compassion.
[English]
CGA-Canada believes that addressing the deficit should still be the highest priority for the government. The government must first and foremost get its fiscal house in order and it must do so by cutting spending, not raising taxes. High debt and continued deficits are a contributing factor to the weak economic growth Canada continues to experience.
While reducing the deficit to 3% of the GDP is a laudable goal, it still leaves the government a long way from generating surpluses and paying off the debt. At the current rate it could take another 10 years before a balanced budget is achieved. During that time, close to $200 billion more would be added to the debt. Canada cannot afford to incur this additional burden. As such, the government must accelerate the deficit-cutting timetable so the balanced budget is achieved by year 2000.
This target can be achieved by examining all current tax expenditure, undertaking regulatory reform, further reducing business subsidies, further streamlining the operation of the federal government, continuing the privatization efforts where it's cost-effective and maintains an appropriate level of service for the public, and undertaking with the provinces and the territories meaningful social policy reforms.
.1000
By the government's own admission, the debt burden is already exceedingly high when compared with the G-7 countries. However, no policies have been announced with respect to the ratio of debt to GDP and what is a sustainable level.
According to the Auditor General of Canada, a determination must be made of just how much debt can be sustained over the long term. CGA-Canada supports the Auditor General's statement and recommends the government undertake a study of the issue of the sustainability of the debt through consultation and with all stakeholders.
Recently, the Ontario government promised a 30% cut in personal income tax over three years. The measure is intended to stimulate the economy and create more jobs in Ontario. Other provincial governments may well follow suit. Similarly, a federal income tax cut could provide a much needed stimulus to the Canadian economy. At the very least, the federal government must not move into the tax base created by any provincial government tax cuts.
[Translation]
In closing, Canadians clearly want change. They want change that will give them a strong, united country that is well positioned to meet the challenges of the 21st century.
But first, we must free ourselves of the unbearable burden of the current debt. We can do so through spending cuts, greater efficiency, and economic growth that generates permanent well-paid jobs.
Parallel to this, the social infrastructure must be rethought so that Canadians continue to receive essential social and health services that make Canada the envy of the world.
Compassion has a price. It would be much easier to balance Canada's books at the expense of the well-being of certain categories of citizens, but such simplistic solutions must be avoided.
The budget must be balanced without depriving the public of vital services. The winning formula that will keep Canada together in years to come will include sound financial management and an effective social infrastructure. Thank you.
[English]
The Acting Chair (Mrs. Brushett): Thank you very much. It is a policy of this committee to allow only one member from each group to speak, but you will have opportunity to join in the dialogue when we have questions.
[Translation]
Mr. Yvon L. Caron (President and Director General, Association de planification fiscale et financière): In order to respect your policy, Madam, I will immediately give the floor to Mr. Lacroix, who will speak on behalf of the Association.
Mr. Denis Lacroix (Chairman of the Board, Association de planification fiscale et financière): Ladies and gentlemen, in preparing our comments, we have attempted to answer the questions that have been asked by the Standing Committee on Finance as precisely as possible.
The first point raised is the target the government must set regarding the deficit. In this regard, it is absolutely essential that the government respect the commitment it made during the last budget to bring the deficit down to 3% of the gross domestic product by fiscal 1996-97. We feel this is a minimum requirement.
We also think that in the next budget, which will come very quickly, perhaps in three months, we should try to see immediately what will happen after fiscal 1996-97. Three percent of GNP is still a considerable deficit and we will have to work toward reducing the deficit even more substantially in the future.
The government will have to tackle that issue and give us indications about deficit reduction in the next budget. As a minimum target, we must reduce the rate of growth of the public debt to a level well below the growth rate of the economy in general, which has not been done to date. The rate of growth of the economy is still lower than the rate of growth of the debt.
Another issue we would like to broach is that of the public's perception of any measure that may be taken by the government and acceptance of these measures by the population. We are convinced that the public believes that there's still a great deal of waste within the government and that the management of public funds is not as efficient as it could be in a number of situations.
.1005
In many cases, these are simply perceptions. The government apparatus is not what some people say it is. Many corrective measures have been introduced over the years, but there sectors remain where we must absolutely intervene. But whether this is a matter of perception or reality, the result is the same.
As long as we haven't convinced the public that the government operates as effectively as possible and without waste, it will always be reluctant to accept changes and cutbacks that may affect individuals personally.
It is therefore essential that this problem of perception be corrected if we want to have any chance of having the public accept these measures.
This brings us to the productivity of the government. Where is the scope that will allow a reduction of the deficit? Part of this scope resides in increasing the productivity of the government apparatus.
Whenever possible, under acceptable conditions, the government must withdraw from certain sectors of activity or share certain sectors with the private sector. We are firmly convinced that the private sector is more efficient and more productive than the public sector. Therefore, except when absolutely essential, the public sector should withdraw from certain spheres of activity. We encourage the government to pursue privatization initiatives that had been announced in the 1995 budget.
There should be discussions in order to avoid any duplication of expenses with the provinces. We have a federal system. We don't want to get into a political discussion, but simply note that in all circumstances where there are several levels of government, it is important to avoid duplication of expenditures among these various levels. We can no longer afford such duplication.
Lastly, management of the public sector must be changed in order to achieve savings and increase productivity. And certain labour relations must probably be redefined in order to allow for improved management and to create more room to manoeuvre.
Is it possible to find further leeway in order to reduce the deficit substantially? There may be certain items that merit a closer look, for instance at National Defence, where cutbacks have not been as large as they could have been.
With regard to transfers to provinces, extremely serious cutbacks were done in the past two years. It is doubtful that the provinces can be subjected to substantial cuts in the short term.
It's easy to walk around the garden and decide that we can't cut anywhere, but we will have to cut somewhere, and it may be in the area of transfers to individuals that we will have to start taking a closer look at the situation.
Of course, we are waiting for the presentation that Mr. Axworthy is to make today to see what will happen to unemployment insurance. There are other transfers to individuals that will have to be reassessed, not with a view to making savage cuts or casting aside the truly needy who require government assistance, but with a view to making these programs more effective and thus obtainaing the necessary leeway.
I thank you very much.
[English]
The Acting Chair (Mrs. Brushett): Thank you, Mr. Lacroix. I think you will have the opportunity a little later in the dialogue to tell us how those cuts should be made and just how rapidly so we can set a course.
We will now turn to our next speaker, from the Quebec Chamber of Commerce, Mr. Langlois. Please proceed.
[Translation]
Mr. Langlois: I'm accompanied by Michel Audet, who is President and Chief Executive Officer of the Chamber. We have tabled a brief that I don't intend to read.
I simply want to remind you, since you are politicians, that we represent 225 chambers of commerce throughout Quebec, 4,500 corporate members and 55,000 individual members through our local chambers. Therefore, we represent the entire range of the Quebec business community, from the largest corporations to the smallest businesses in the tiniest villages of Quebec.
In its brief, in answer to the question: ``What should our deficit reduction target be and what is the best way to achieve it?'' The Chamber answers very firmly that the 1996-97 deficit must be brought down to under 20 billion dollars and that spending must be cut in accordance with this objective.
We firmly insist on the fact that under no circumstances must we increase the tax burden on citizens and especially on business. There is already a morose climate in Quebec as we are faced with the wait-and-see attitude of Canadian business circles following the last referendum. The tax system should be made more attractive in order to stimulate investment and employment.
.1010
I will speak again later of the impact that the current constitutional climate has on the federal government's capacity to achieve its objective of improving public finances.
With regard to the second question: ``How can we use budgetary measures to establish a climate that will foster job creation and growth?'', we make two recommendations:
- first of all, that the federal government consider its budgetary statement vis-à-vis the 1996-97 deficit as a firm commitment; in other words, we should be confident that you will respect your commitments, and that these will not be empty promises;
- secondly, that the federal government commit itself formally to reducing regulations and the paper burden; this is a promise that has been bandied about for years and yet very little has been achieved in that direction.
I would add another recommendation: that the business community receive a clear and immediate signal that the Canadian constitutional problem will be settled and that it can be settled. This is necessary for the confidence of the Quebec and Canadian business communities and their willingness to invest in Canada and Quebec. Otherwise, our American friends will profit from the situation and your tax base will take a beating.
Concerning the third question: ``In which sector of federal activity should we consider cutbacks, commercialization, privatization or devolution to other levels of administration?'', I will simply remind you that last year, we had stated a few principles: first of all, set an example; secondly, proceed with cuts in transfer payments that spare no one; thirdly, bring in greater decentralization; and fourth, inform the public and be consistent in your actions.
These principles are just as current today. The federal government must commit to finding the necessary means to provide services at the best possible cost, while at the same time ensuring greater transparency in its public spending decisions by getting more citizens to participate in the decision making process.
[English]
I will complete my presentation, Madam Chair, by saying that once again I come back on the point I made earlier concerning the solution of the Canadian constitutional problem -
The Acting Chair (Mrs. Brushett): Mr. Langlois, would you speak a little more slowly. They are having a difficult time keeping up to you in translation.
Mr. Langlois: In view of the urgency of the problem, I thought it would be better if I spoke fast.
The Acting Chair (Mrs. Brushett): We do appreciate your consideration.
Mr. Langlois: It's not the first time it has happened, Madam.
I wish to conclude by saying that the issue of constitutional reform in Canada converges with your priorities in terms of solving the deficit problem. We feel very strongly, among our membership and also among the other business communities with which we are associated through the Canadian Chamber of Commerce, that a great deal of uncertainty exists out there. A lot of decisions that should be being made are being withheld and that could prejudice your fiscal base, the prosperity of Canada.
It's urgent to show the business community that the federal government is able and willing to take whatever means - and I insist on the words ``whatever means'' - to resolve the constitutional problem or else you'll have a serious difficulty with your tax income and your tax base.
Thank you.
[Translation]
Mr. Ghislain Dufour (Chairman, Conseil du patronat du Québec): I have with meMr. Jacques Garon, Research Director at the Conseil du patronat. He will take part in your discussions because unfortunately, I will have to leave.
I'll answer the three questions you asked of us. First of all, there is the deficit reduction objective and the best way to meet it.
Mr. Martin's commitment to reduce the deficit to 3% of GDP for 1996-97 is, of course, a good objective, but to our minds, it is not nearly enough. Why? Mainly for three reasons. There is, first of all, the growth of the national debt over the last few years. We must keep in mind that the debt will go over 600 billion dollars on the 31st of March, 1997, which will mean interest payments of more than 50 billion dollars.
Secondly, there's currently a downturn in economic growth, a dip which can be attributed to a whole series of factors. Expenditures increase, particularly because of the cost of interest, and you can't say that they will necessarily create the revenues the government expected.
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Thirdly, real interest rates remain very high and are stopping consumer spending.
There are many other reasons, but those three seem essential to us and lead us to suggest to you, if you seriously want to act, that you bring the budget deficit down to 20 billion dollars by March 31, 1997, rather than the projected 25 billion dollars.
We go much further. We would like a zero deficit in 1998-99. If the economists of the Finance Department can't manage to convince themselves that that is essential, they only have to think of the round table mentioned in the Globe and Mail on the November 10, 1995, where ten of Canada's greatest economists stated that it was necessary to aim for a zero deficit in 1998-99.
How do we get there? That is the question. We have three proposals. Firstly, cut government expenditures. It's already well under way. Many people wonder how we'll be able to accomplish what's being announced. The machine really has to be streamlined, and we suggest - it's a bit singular to suggest to the Liberal Party an initiative undertaken by the Progressive Conservatives - a second Nielsen committee.
You'll recall that in 1986, the Conservatives set up a committee to study overall government spending, and the results were positive at the time. Nine or ten years later, this exercise could be tried again.
I must also say, as Mr. Précourt did previously, that we are ready to do our share. We're against business subsidies; we've said that many times and we repeat it. We aren't recommending a gradual phase-out of subsidies, but rather their straight elimination, except in certain areas such as research and development. You can't give up research and development subsidies unless there are other ways for the government to help businesses, and the same thing applies to exports and job training. But that assistance is minimal compared to overall subsidies.
Obviously, this is not to all businesses' liking. And yet, we represent them. But it is one of the ways to cut government expenditures.
How can we use budgetary measures to create an auspicious climate? That's your second question. I repeat that we are convinced that spending cuts are the best way to accomplish this. My colleague Raynold Langlois, from the Quebec Chamber of Commerce, also touched on this question. There are many statements and lots of lip service concerning the regulations and laws that should be reviewed, but it never gets done. And yet this burden is very costly, and not just for businesses. When you need 3,000 or 4,000 public servants just to manage a counterproductive program in the private sector, it's obviously a useless expenditure.
We must also reexamine payroll taxes. We're losing jobs in Canada because of payroll taxes, and the Bank of Canada has just said that they're absolutely counterproductive. We will not be very pleased, today, with the mere 5¢ reduction of unemployment insurance premiums, from $2 to $2.95. It would have been possible to further cut those premiums.
I'd like to call to your attention, particularly Mr. Loubier, the well-known problem of the non-deductibility of payroll taxes and of taxes on capital in the provinces, a measure announced by Mr. Wilson in the 1991 budget.
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Since 1991, we've managed, with almost all the political parties, to put off this decision stated in the Wilson budget.
If non-deductibility comes into force on January 1, 1996 as projected, that would mean about 150 million dollars for Quebec businesses alone. We'll have the opportunity of discussing this with Mr. Martin, but we hope that in his next budget, he strikes this provision from the Wilson budget forever, instead of letting it hang over the heads of businesses.
Lastly, we do not want to go into constitutional matters, but one of the ways to cut federal government spending is to decentralize and harmonize with the provinces. It's not just a matter of harmonizing at the program level, but also at the level of funds used for the programs. There's a lot of duplication. I feel all the more comfortable saying this to you because you know the political option of our organization. There's room for decentralization and harmonization. Mr. Loubier knows this very well.
We hope that, through a better harmonization between the provinces and the federal government, it will be possible to reduce the federal government's budget.
The Acting Chair (Mrs. Brushett): Thank you, Mr. Dufour.
[English]
We will now turn to Dr. Gordon Edwards from the Canadian Coalition for Nuclear Responsibility.
Dr. Gordon Edwards (President, Canadian Coalition for Nuclear Responsibility): Thank you very much. I appreciate this opportunity to contribute to the discussion.
I'd like to call attention to a concern we have, which is the lack of accountability of the Canadian nuclear industry, and also the extent of the future liabilities that could be involved in connection with this industry.
I'll just draw a parallel. In the United States, they have recently received cost estimates in excess of $200 billion to clean up the radioactive contamination at the military sites around that country.
Luckily, in Canada, we do not have a military program, and our problems are not as great as that. Nevertheless, we have very serious problems that are going to cost billions of dollars. As the Auditor General of Canada noted in his last report, Atomic Energy of Canada Limited does not even carry liabilities on its books that are going to cost taxpayers hundreds of millions, or possibly billions, of dollars, in waste disposal, decontamination, and decommissioning of facilities.
In the current environmental impact assessment statement of Atomic Energy of Canada Limited, they give cost estimates ranging from $8 billion to $17 billion to build a high-level waste repository in Canada. The Department of Transport has commented on that environmental impact statement, pointing out that the funds are simply non-existent.
Although Ontario Hydro has said it has put aside funds for this purpose, in fact there is a non-existent fund. Ontario Hydro does have an accounting practice whereby they deduct so much for waste disposal, but in fact that money is not secured; it's been spent on other operations. So when it comes time to actually do the job, they're going to have to borrow that money.
Of course, that's also assuming that $17 billion is a realistic price. AECL has, for example, in Quebec, New Brunswick, and Ontario, traditionally underestimated, by a factor of three, the cost of building nuclear facilities. So that could be $54 billion, if we just go by that.
I think it's extremely important that accountability be established with regard to the nuclear industry. I think it's scandalous that it is now being considered at the ministerial level to give another $300 million to Atomic Energy of Canada Limited to build yet another facility, a new reactor, at Chalk River.
It's my belief that the Parliament of Canada has to take control of what's going on in the nuclear industry. It's my belief that successive ministers of energy have really been captives of the nuclear industry. All of the senior advisers on nuclear policy matters are drawn directly from the nuclear industry. The Government of Canada has absolutely no independent advice on nuclear matters.
I think it's absolutely important for this to be opened up to public scrutiny, and that the extent of subsidization and future liabilities is looked at very closely.
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As well, there's the question of expanding the industry at this point in time. Since there hasn't been a new reactor ordered anywhere in North America since 1978, that seems foolish. And it seems foolish to talk about subsidizing a sale to China, for example, or building a new reactor here at Chalk River without looking at the entire picture and what this really adds up to.
What if the nuclear industry were given a new mission to focus on the problems, the clean-up, and on developing decontamination and decommissioning technology to demonstrate that they know how to decommission an existing defunct reactor such as the Gentilly-1 reactor here in Quebec or the Douglas Point reactor in Ontario? This would be a much more constructive approach.
What's more, the skills of decommissioning and dismantling are, in fact, marketable. This could be a more profitable direction for Atomic Energy of Canada Limited in which to be moving than in trying to expand an industry that really has no good markets available. There is a market worldwide for cleaning up the problems. There's no market for new facilities.
The nuclear industry has been functioning in secrecy without parliamentary debate or proper accountability for basically 40 years. I, as a Canadian, think it's high time that this accountability is put in place.
I'll just mention one final point. There are senior people in South Korea who were put in jails for bribery. One of those persons was an agent of Atomic Energy of Canada Limited. There has been absolutely no investigation whatsoever in Canada as to the propriety of Atomic Energy of Canada's use of taxpayers' money.
The Acting Chair (Mrs. Brushett): Thank you very much, Dr. Edwards.
We will now turn to Pierre Akkelian from the Canadian Jewellers Association.
[Translation]
Mr. Pierre Akkelian (Vice-President, Canadian Jewellers' Association): Good morning, ladies and gentlemen.
[English]
I'm the vice-president of the Canadian Jewellers Association. I'm also extending the Quebec Jewellers Corporation's views to this presentation.
First, I'm an owner of an enterprise in Montreal called Canadian Gem, or Gemme canadienne. We import close to half the pearls that come to Canada, but, most importantly, we export Canadian hand-made jewellery to all over the world, especially Japan.
The Canadian Jewellers Association was founded in 1923. It's a national trade association for companies concerned with all aspects of the jewellery industry. With few exceptions, every significant firm engaged in the manufacture, distribution or sale or jewellery is a member of our association.
The jewellery industry in Canada consists of precious jewellery, costume jewellery, watches and silverware, and provides over 55,000 full-time jobs. There are approximately 6,000 companies, the great majority of which are privately-owned businesses that employ fewer than ten people.
The industry has the dubious reputation of having a black market estimated at 30% to 50% of the total sales. The hub of this activity is right here in Montreal. The total retail value of this jewellery is more than $1 billion.
I will go on to respond to your second question, which is how budget measures may be used to create an environment for jobs and growth. In order to discuss job creation and a healthy business environment, you must address these inequities created by excessive taxation.
Our industry is a good example. Since 1918 jewellers in Canada have been burdened with a hidden luxury excise tax. Most politicians and consumers are not aware of this. All similar products that were subject to this tax have, over the years, been exempted from it, with the notable exception of jewellery, which remains the only product in Canada that is subject to this luxury tax.
Unlike the excise tax levied on cigarettes, which helps defray subsequent health care costs to society and excise tax on gasoline, which is used to offset road and pollution-related expenses, the excise tax on jewellery is a pure luxury tax, which only jewellery manufacturers are subject to. Luxury, as defined in 1918, when this law came into effect, was for items over $3. Ironically, the same definition still holds today. So if the other industries are complaining, please have pity on us.
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Could anybody here explain how the Canadian government could justify subjecting a $10 gold-plated earring or a $100 gold wedding band to a luxury tax of 10% when, on the other hand, a $5,000 wedding gown, $25,000 fur coat, or $150,000 Mercedes Benz is exempt?
Please consider the fact that the general perception that jewellery products are luxury items for the rich is totally false. The average sale in jewellery stores is less than $100. Most of the jewellery customers or the recipients are females. Consumers Distributing is the number one seller of jewellery in Canada. This is hard to believe, but Wal-Mart is the number one seller in North America.
The jewellery industry supported the revamping of the manufacturers' sales tax and the elimination of this antiquated luxury tax. We advised the government then, and we can confirm today, that since the introduction of the GST, the Government of Canada, through the GST, has collected far greater revenues than the old manufacturers' sales tax and the excise tax combined.
So the old tax was revamped. The excise tax wasn't taken out of this formula. Still, the Government of Canada made about 25% more tax revenue than with the two taxes combined.
Moreover, by retaining the excise tax, they have annually collected an estimated $50 million of luxury tax from our industry. What happened to tax fairness and revenue neutrality? It's really, truly absent from our industry.
Members of this committee, some of you are well aware of the facts concerning this excessive taxation of jewellery. I just would like to mention a few of the facts we presented to you last year.
The jewellery excise tax was first introduced in 1918. It was last modified in 1964. Like the old federal sales tax, it is flawed in its structure, it creates competitive distortions in our industry, and it is a major factor for the existence of a vast underground economy.
The availability of large quantities of cash in circulation strongly contributes to the avoidance of sales taxes, corporate taxes, and personal income taxes, due to cash payments of salaries and so on. Over time, bonuses all could be paid in cash without attracting any taxes. It also contributes to unemployment insurance abuses.
The excise tax used at the manufacturing level is overwhelming. Generally, the proportion of tax surpasses practically the entire cost of the labour for production.
I will make it very short. There are three other points I will cut.
The elimination of the tax will greatly contribute -
The Acting Chair (Mrs. Brushett): Mr. Akkelian, do you have specific points to the questions we asked?
Mr. Akkelian: I have two more points.
The Acting Chair (Mrs. Brushett): But do they relate to the specific questions regarding pre-budget preparation?
Mr. Akkelian: Yes, this is part of it. We met with the minister. We told him to eliminate this tax. But we were told clearly by the bureaucrats in government that this tax will stay on. It's a question of perception.
The Acting Chair (Mrs. Brushett) Okay, we'll hear your final statements. Please proceed.
Mr. Akkelian: We do have a problem with the bureaucrats in the federal government.
The elimination of excise tax will greatly contribute to the development of the Canadian jewellery manufacturing industry. A better-organized domestic jewellery market will create the proper environment for increased productivity, efficiency and employment, due to improvements in financing - nobody can get money from the banks if half the business is cash - modernization, computerization of business, and a better-trained and skilled workforce.
The Acting Chair (Mrs. Brushett): Perhaps you can leave your final comments for the dialogue. We'll exchange dialogue in just a few moments.
Mr. Akkelian: There's one sentence -
The Acting Chair (Mrs. Brushett): Okay, very quickly.
Mr. Akkelian: Last year we presented all of these facts to you during the reform of the goods and services tax consultation process. This committee's response to our concerns were pathetic, to say the least. Our pleas merited only a passing remark in your comprehensive report. We weren't even mentioned in the Bloc's dissenting opinion of the report.
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[Translation]
I'm sorry, but we weren't even mentioned.
[English]
How many budget measures do you need to create an environment for jobs in the jewellery industry? The answer is quite simple: eliminate the discriminatory luxury excise tax.
Thank you.
The Acting Chair (Mrs. Brushett): Thank you very much. We will now turn to Geoffrey Johnston from the Ecumenical Justice Coalition.
Mr. Johnston.
[Translation]
Mr. Geoffrey Johnston (Board Member, Ecumenical Justice Coalition): Thank you, madam Chair. My name is Geoffrey Johnston. I am a Protestant pastor in Montreal and a professor of pastoral studies at the Presbyterian College. I've been a member of the Coalition oecuménique pour la justice économique (ecumenical coalition for economic justice) for about 20 years. Even though I am totally responsible for my comments today, they represent the overall tendencies in the coalition.
It is a coalition of the main Churches of Canada: the Presbyterian, the Lutheran and the United Churches, as well as the Roman Catholic Church and the Anglican Church.
[English]
It would be preferable if I spoke in English - easier for me and easier for you, I'm sure.
I find it difficult to respond to the discussion here. I feel rather like a lamb among wolves, because our philosophical differences with this government and the preceding one on fiscal matters are very profound.
I would say, however - I think I can say in the context of this discussion - that the budget is only part of a much broader mix of economic policies that are beyond this budget or any other budget. The budget must be seen in the context of the unleashing of capitalism that has taken place over the past 20 years and that we do not believe will lead to the kind of just society we all seek. That's what I mean by saying we disagree fundamentally with the tendencies of this government and the previous one.
To deal more specifically with the question of debt, which is the one on everybody's mind, studies have indicated that the reason for the debt is not program spending but the debt itself. The principal reasons for the growth in public debt in the federal sector over the last 15 years or so have been, on the one hand, an inequitable system of taxation and, on the other, very high interest rates.
It is our view, therefore, that the best way to deal with the debt is by tackling the reasons for it directly - that is to say an inequitable system of taxation and the extremely high real interest rates.
These things, of course, are not entirely within the power of the federal government or any other government. Partly, the folly of previous governments has tied the hands of governments to deal with public affairs in a way we haven't seen for many, many years.
There are, however, some things that can be done. There are proposals that are on the table and that we tend to support. One is the domestication of the debt. The portion of the public debt that is held outside Canada is 25%. There are ways and means of returning this debt to within Canada by placing it in the hands, for example, of the Bank of Canada by the greater use of Canada Savings Bonds.
Such a policy change would enable us to be freer of the ``cybernetic buccaneers'', the so-called hot money people, who move money around the world at the speed of light.
A second possibility, also in the same vein, is active encouragement of the establishment of something like the Tobin tax, which would encourage a more stable and constructive kind of investment. Mexico has been described as the first casualty of the new international economic order. Unleashing capitalism has created a class of rentiers, and the effect of rentier capitalism has been seen recently in Mexico.
The first time Mexico was in trouble, it was bailed out for $6.5 billion. The second time was for $50 billion. I shudder to think what will happen the third time, and I fear we may not be all that far away from the same conditions that prevail in Mexico.
Thank you.
The Acting Chair (Mrs. Brushett): Thank you, Mr. Johnston, for being brief.
Our final presenter this morning, who arrived a little out of sequence here, is Ms Judith Berlyn from the Canadian Peace Alliance.
Ms Judith Berlyn (Co-Chair and Co-ordinator, Quebec Section, Canadian Peace Alliance): Thank you very much, Madam Chair, and I apologize for being late. I appreciate the opportunity to be here and appreciate the process. We learned of it only a few days ago. I gather it's the second year, and I'm very much in favour of all consultative processes.
If I can be permitted, I'd like to use a few seconds of my time to comment on the gender balance I see in this room. It's roughly 10% female and 90% male, and I don't think in Canada in the 1990s this is really an acceptable proportion.
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I'm glad to see that at least the chair is the same gender as I am, but Canadian society, as with all human societies, is 52% women. I think we have to do a little better than this. I know the government tries but other organizations should find some women to represent them.
The Acting Chair (Mrs. Brushett): On that point, this format will be an annual event in pre-budget consultations, and next year we'll try to bring more women along.
Ms Berlyn: The Canadian Peace Alliance shares some of the concerns that have been expressed around the table. However, we see things a little bit differently. One of the fiscal realities in Canada today is that military spending in this country remains almost as high as it was during the Cold War - somewhere between $11 billion and $12 billion a year. Project Ploughshares, a research group based in Waterloo, and others have estimated that roughly half that amount is still going to measures and equipment that were part of the government's Cold War programs and policies. If we cut out the part that no longer seems to apply to the world situation, we could save probably $6 billion a year. Of course this would have to be over time, as you can't do it all at once. But we should be moving in that direction, we feel.
We think subsidies to military industries should be totally eliminated, and some of that money could be used to convert those industries and convert military bases to civilian production and uses. Economic studies have been done on this, and information is available. We know that military industry creates very few jobs on the whole, because it's high-tech rather than labour intensive. For years the U.S. Bureau of Labor Statistics and other groups have had studies that show the same money invested in almost any other sector of the economy creates far more employment. So we would like to see the government really pare down on the....
Canada's participation in the international weapons trade is something that we also find troubling, and that is very much supported by the government. It's one area of exports that we don't endorse because a lot this weaponry finds its way into situations like the Iran-Iraq war, which lasted for eight years. Industrial countries were supplying both sides in that war. So there's an ethical question as well as an economic one in that type of export. It costs us billion of dollars to be involved in that trade.
Last May The Globe and Mail referred to Mr. Collenette's rich shopping list. It's a big shopping list, and there have been no real cuts. What happens is that a wish list is drawn up and then some of the things get crossed out. They say that's cutting, but it's not really cutting. The actual level of spending has come down very little, so we'd like to see that much more seriously addressed.
So the message is reduce military spending in Canadian budgets.
The Acting Chair (Mrs. Brushett): Thank you for being brief.
This is the point in our session where we have dialogue between presenters, where you link ideas and look for resolutions. Most of you around this table have agreed that 20 years of spending has been counterproductive in some ways, and maybe the lessons we've learned from it can be discussed and shared, and we can look at real ways and how fast we deal with our deficit this year.
At this point I'm going to turn the chair over to the vice-chair, Mr. Barry Campbell. Thank you for your patience with me this morning. I'll have an opportunity to ask questions too.
[Translation]
The Vice-Chairman (Mr. Campbell): Hello. My name is Barry Campbell and I'm the Deputy Chairman for the Finance Committee. I'm sorry I'm late this morning, but winter has come even to Montreal. I'd like to welcome you to the committee.
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The roundtable setting will allow you to make comments on the budget, but also to hear comments from other interest groups. As you can see, there are amongst us people with different opinions on the budget and different answers to the questions asked. So now is the time to make comments on the others' presentations. Does anybody want to answer? Mr. Akkelian.
Mr. Akkelian: I have a question. Ever since I've been in business, there's been a limit of $200,000 for small businesses concerning taxes. I was wondering if it wouldn't be useful to increase this limit. It's like the tax you pay on jewels: in 1918, the ceiling was $3 for the luxury tax and it is still $3. Don't you think this $200,000 limit should be increased? Does somebody want to answer?
[English]
Would anybody support raising the $200,000 limit for small enterprises? It seems that a lot of the small companies, as soon as they reach $200,000, all the profits are hidden. It's just my idea.
[Translation]
The Vice-Chairman (Mr. Campbell): Does somebody want to answer? Does somebody want to comment on this morning's presentations? Mr. Langlois.
Mr. Langlois: Mr. Chairman, I'd like to answer Mr. Akkelian by saying that in Quebec, job creation and economic activity are particularly sensitive to the creation of a tax setting which favours small and medium-sized businesses. Statistics show that over the last few years, those most responsible for job creation, particularly in Quebec, are small and medium-sized businesses, and that they make up a growing part of Quebec's economy. This element should therefore be considered insofar as the changing of this ceiling would create a tax incentive in a more interesting tax environment for these businesses. Moreover, such a measure could also increase the tax revenues of the government, insofar as it would limit the underground economy.
Mr. Michel Audet (Chairman, Quebec Chamber of Commerce): Recently, I had the opportunity to submit to the Quebec government, with our tax committee, proposals to simplify the GST and QST, particularly for small and medium-sized businesses. In my opinion, we should not only consider profit levels, but also the complexity of taxes for small and medium-sized businesses. There's certainly a way to simplify the paperwork, particularly for small and medium-sized businesses, and that is our concern. When you only have a few employees, you can't have an employee who uses most of his or her time working for the government. So we've suggested that, for instance, when the annual report is filed, a self-employed worker or someone who has few employees fill out at the same time, once a year, the forms for paying GST and the QST. In that way, contract employees could collect the GST and the QST in one shot for the Quebec government. It would be easy to do, and that was the proposal we made.
The Vice-Chairman (Mr. Campbell): Does anyone else want to take the floor?
[English]
Mr. Bismuth: I'd like to make a couple of points. In search of trying to balance the budget and changing the programs to which the government lends support, one of the changes we've seen, for instance in the space agency and the funding for the space activities, it is undeniable that in Canada we have an advantage over countries our size in terms of space technology, and it's added tremendously to our well-being in terms of jobs. The average employment income in this sector is extremely high, because it is a sophisticated type of job.
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As we enter this new era where the government is seeking industry co-partners in further development of radar sets, for instance.... As an observer of the industry, I welcome this. In the end I think it will give more focus to the cost control of the project, and will lend itself well to commercial afterthought, rather than only having single use or individual sales.
I think bringing in the private sector as a co-partner will in many ways give a good, objective review of what we are conducting. At the same time I am concerned that if we end up trying to partner with offshore countries in order to pursue this activity, we may end up losing a lot of jobs because each country will try to do as we do - ask to have some of the jobs repatriated elsewhere.
When we look at biotechnology, as an example in the high-tech area, next week we have the advantage of an NRC-sponsored conference that will bring 400 or 500 people together, not only industrialists, researchers and government representatives, but also investment people who will be there to listen to what good signs we may have to offer.
Today it costs over $300 million to develop a new drug and takes over 12 years. Whatever rules we set out, I think it's important that we keep on track and not change rules every year or six months. It is impossible to make decisions when the rules and the playing field are constantly being moved.
[Translation]
The Vice-Chairman (Mr. Campbell): If you don't have any other comments before the MPs' question period, I'll give the floor to Mr. Loubier.
Mr. Loubier (Saint-Hyacinthe - Bagot): Mr. Chairman, I see that you've experienced one of our Quebec winters.
I find our discussion this morning very interesting and I would like, something which doesn't happen to me very often, to congratulate, first of all the Conseil du patronat du Québec, for expressing, in these last years, its desire to get rid of all subsidies to business, without conditions. We crossed Canada last year and this year, and I can tell you it's the only organization that has firmly requested that we immediately get rid of the 3-billion dollar subsidies directly paid to Canadian businesses.
I would also like to congratulate the Quebec Chamber of Commerce, which clearly indicated that it was for a serious examination of tax shelters, particularly as regards business contributions to private investment and employment.
Compared to last year, you've expressed even more clearly the need to consider the overall Canadian tax system and tax loopholes, as much for individuals as for businesses, and I'd like to congratulate you.
On the other hand, I wouldn't congratulate the Canadian Association of Chartered Accoutants as heartily. I listened carefully to Mr. Précourt making his speech previously and I took some notes. He said, for instance, that we should concentrate our efforts on cutting expenditures.
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He also said that each dollar counted in cleaning up public finances, and that you had to be fair. In conclusion, he stated that an in-depth reform of social policy was necessary, and that there was nothing else to be done.
I'm a bit disappointed, without being surprised, to see that the Association of Chartered Accountants is not asking for a reconsideration of the corporate tax system. I would have liked to know its opinion on the matter. Is the only conclusion to be drawn from your presentation that we must only consider social programs, cutting social programs to improve public finances, or, as with the two previous associations, would you accept that we reconsider business taxes so as to favour greater justice and allow Quebeckers or Canadians, be they individuals or businesses, to shoulder their fair share of the streamlining of public finances?
Ms Joanne Leduc-Dallaire (Member of the Tax Policy Committee, Certified General Accountants' Association of Canada): I will speak on behalf of Mr. Précourt, who had to leave us. You are focussing on just one of our conclusions, the one dealing with reform of social programs. Yet in his presentation, Mr. Précourt talked about reducing subsidies that were unprofitable; he wasn't necessarily saying that they should all be done away with, but there does have to be a clean-up. The brief we submitted does cover the effort that companies should make. So I think we can see that our presentation did not just target social programs.
Mr. Loubier: When I talk about a quality review, I'm not talking about plugging holes, as has been done over the past 15 years. I'm talking about a true review, like the one that began in the United States five years ago. On the one hand, this review is making it possible to simplify the corporate tax system, which is a good thing,...
Ms Leduc-Dallaire: And which would be very much appreciated.
Mr. Loubier: ...and to simplify rates, while on the other hand, such a review would make the corporate tax system more transparent, so that the general population - individual taxpayers, among others, are very sensitive about this - has the impression that they are not the only ones tightening their belts and helping to get the government's finances back on track. The corporate tax system has to be so transparent that individual taxpayers have the impression that companies are also doing their part. I'm talking about a true reform, a review of Canada's tax laws that would do away with loopholes. Even CA Magazine favoured these loopholes, in an article written by two specialists. I must say that the article did not do credit to accountants.
Ms Leduc-Dallaire: That's not our association.
Mr. Loubier: I know it isn't. But since you are among the specialists in this field, I'm asking you the question. Would you be willing to recommend to the Finance Committee, which in turn would pass on the recommendation to the Minister of Finance, that in order to clean up the government's finances, a broad and complete review of the corporate tax system, and even the personal tax system, be held so that Quebeckers and Canadians have the impression that the tax system is fairer?
Ms Leduc-Dallaire: Yes. I think that the Certified General Accountants' Association of Canada would support such a reform, as long as... You must realize that such a reform would have to result in the system being simpler, not more complicated. It's already incredibly complicated. With the current Income Tax Act, it's practically impossible to achieve transparency.
Mr. Loubier: One last question about this topic, and then I have one more question, a good one, after that. If you agree that tax legislation in both Quebec and Canada must be reviewed, would you be in favour, right from the beginning, of amending tax legislation so that companies are treated in exactly the same way as individual taxpayers when it comes to income from outside of Canada. In other words, companies would have to declare their income from outside of Canada, as individual taxpayers must do. At present, tax legislation allows Canadian companies a rather debatable privilege, i.e., they do not have to declare income from countries such as Barbados and other Caribbean countries.
Ms Leduc-Dallaire: That provision is for income from subsidiaries, because a company or corporation that has income from outside of Canada must declare it. So what you are saying is that income from subsidiaries or other sources should be included. We would have to look at that. I don't believe that our association would object to it, but is it possible in practical terms? It could be very awkward. Our association would like the tax system to be simpler. Your suggestion might be incompatible with that.
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Mr. Loubier: I am asking your association this question because I'm thinking of the article that was published this summer in CA Magazine. The article said that the law allowed trusts to be set up outside of Canada by Canadian companies, without having to declare income, which enables Canadian companies to avoid paying federal taxes.
It seems to me that this would be an improvement that would show all individual taxpayers that there may be fiscal justice in Canada in terms of what we ask of individual taxpayers and what we ask of companies.
Ms Leduc-Dallaire: You must also realize that thing would be better if all transactions that are carried out outside of the country were reported. Some transactions are not declared, not because the legislation does not require it, but because the person does not intend to declare the transaction. There are some nuances there.
The Vice-Chairman (Mr. Campbell): Given that it's already eleven o'clock... Do you have another question, Mr. Loubier?
Mr. Loubier: I do have one small question for Mr. Garon from the Conseil du patronat du Québec.
The Vice-Chairman (Mr. Campbell): I thought it was a big question.
Mr. Loubier: Earlier Mr. Dufour was mentioning the non-deductibility of payroll taxes. For the benefit of everyone around this table, and for the benefit of the entire population, since this round table is being televised, I would like to ask you to explain first the concept of non-deductibility, secondly the consequences of not extending this deductibility, and thirdly, the impact that this change would have on Quebec firms in comparison with other Canadian firms.
Mr. Jacques Garon (Director of Socioeconomic Research, Conseil du patronat du Québec): As we mentioned earlier, the federal government has allowed this deduction ever since Mr. Wilson's 1991 budget. Initially, this was possible in three provinces: Quebec, Ontario and Manitoba. I think it has been extended since then to other provinces.
Capital taxes paid to the provincial government and certain payroll taxes can be deducted from a company's federal tax return. Not all payroll taxes can be deducted, but the taxes that companies pay to the health services fund can be deducted, which particularly affects us here in Quebec. Of course, this is the heaviest tax, because the government of Quebec set it at 4.26% in its last budget, which will bring in more than three billion dollars to the Quebec government's treasury.
So this tax benefit is to the advantage of companies, because they can deduct these two kinds of taxes that they pay to the province of Quebec from their federal tax return. The problem is that every year, people have argued - quite rightly, I think - that it was absolutely necessarily to continue this, even though Mr. Martin said that at a certain point, since the federal government too has deficit problems, which we acknowledge, taxes should be frozen at the previous year's level. This would be 3.75% for payroll taxes, and I believe 0.56% for capital taxes. So the federal government will still allow these deductions, but they will be subject to review nearly every year, as he said.
We have been fighting for five years to get rid of this sword that has been hanging over the heads of Quebec companies, and of course, the other provinces have been doing the same thing. If this provision were done away with, it would cost Quebec companies between 150 and 200 million dollars. It would be a very heavy tax to bear indirectly, at a time when economic growth is rather weak and we need everything possible to try to get investment going again.
Time and time again, we have asked the government to get rid of this sword hanging over our heads so that we don't have to worry about this threat on January 1st next year. Both the previous government and this government, Mr. Martin in particular, have complied with our request.
The Vice-Chairman (Mr. Campbell): Thank you, Mr. Loubier. I have to go around the table now.
[English]
I'm going to turn questions over to Mr. Solberg.
Mr. Solberg (Medicine Hat): Thank you very much, Mr. Chair.
I'd certainly like to welcome everybody to the roundtable discussion today.
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I want to follow up a little bit on remarks from Monsieur Lacroix with respect to perception. I think he made a very good point about the need to change the perception with respect to waste in the public service and that sort of thing. I think that politicians themselves have to lead the way by doing what they can to cut back with respect to the frills and that sort of thing. Certainly, we have to root out some of the waste in the public service. I would argue that there is still lots there. There is lots of overlap and duplication, and many have referred to that today.
I also think it's important that business do their share as well by indicating that they are willing to give up their subsidies, because I think I can speak for the whole committee when I say that everywhere we've gone many people who were opposed to taking cuts, for instance, in social programs, point to business subsidies and to what's perceived to be, at least, unfair tax loopholes that benefit business.
I just wanted to say that as an opening remark. I think it would be very good to make this system a lot more transparent. I certainly appreciate that corporations pay by and large their fair share. They paid somewhere in the range of $50 billion of taxes overall, I think, in 1993 if you include property taxes and that sort of thing. It's very important that business speak with one voice with respect to getting rid of business subsidies, because it is a target and it's very difficult to go ahead and make cuts in other areas.
That really leads me to my question. People have talked about social program reform and the need to have social program reform. Certainly, it's a big part of the budget. It constitutes somewhere in the range of 70% of the operating budget. But the question is, how do we do it? Perhaps the place I would start is with unemployment insurance, which certainly is not insurance when you have people planning to use it every year.
I would ask people who have spoken if they have thoughts on what could be done to maintain a program that is there for people who truly need it, but also reform it so that it doesn't become something that people count on every year and is not really a form of insurance but is actually a form of income support.
The Vice-Chairman (Mr. Campbell): Who would like to answer?
Mr. Bismuth: I'm thinking more in terms of understanding by the general public as to what constitutes a subsidy and what doesn't.
A very good example of that we find in the aerospace and defence sector, where you have the DIPP program, which is, as you know, under serious attack and revision under the federal budget that was tabled in February last year and where the cuts are going to be quite significant over the next three years. That program, in fact, is almost placing the federal government as a ``patient capital'' to help develop R and D types of projects that are towards commercialization and that come with a royalty payment returning to the Canadian government.
In fact, if you look at the models we have in Quebec, for instance, two years ago Quebec instituted a number of venture capital-type funds under the name of Innovatech, and we now have three such funds in Montreal, Quebec and Sherbrooke. They have had the benefit of being able to trigger co-investors. They managed to get, for every dollar they invested in technology-oriented projects, $3 being raised by various partners who say, hey, because Innovatech is in, we'll go in as well.
I think there's a misunderstanding. The common folk think a DIPP program or a program like Innovatech might be considered a subsidy. I don't think they are. I think the government is in fact in a position where it can demand a royalty and long-term get some of the dollars to flow back.
This is where the tax credits are so important. The tax credits, if they are well-administered, well-programmed and not too complex in their application, lend themselves to co-venturing because the fellow has to spend a dollar before he gets his 38¢, 39¢ or 40¢ back through tax credits.
In my mind, what better way to do it than to have the common marketplace determine whether a project is useful or not? Because the fellow at the end of the day is still going to have 52¢ at stake.
Mr. Solberg: I'd be interested to know if people have any comments with respect to social program reform. Certainly that's something that's happening today. I'd be very interested if people actually had some specific ideas on what should happen with social program reform.
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Mr. Johnston: Mr. Chairman, it sounds something like a fiscal heresy; I would certainly agree with Mr. Solberg when he says unemployment insurance was not meant to be a form of income support, but the way you move from one job to another.
The people who worry me are people like my wife, who unfortunately is a seasonal worker. She works on contract as a teacher, and when the job's not there, the job's not there. If there are no students, there's no teaching. If there are no fish, there are no fish. You can't fish in the wintertime.
Obviously, the way around the kind of abuse to which Mr. Solberg refers - and I must confess I only know how to do this in theory - is the development of alternative employment. Years ago I went along the coast of the Gaspé, and it just hit me that on my right were the boats in which men went fishing, on my left were the farms, and farther away on the left were the hills. You put in the crops, you went fishing, you took the crop off, and then you went into the forest. We probably can't return to that kind of thing; I don't know. It's that kind of alternate employment in the off season that seems to me to be an essential part of social program reform. The best social programs are the ones you don't need. They're like hospitals.
The Vice-Chairman (Mr. Campbell): Mr. Solberg, do you have another quick one or is that it?
Mr. Solberg: No, I think I'm going to pass it on to the other side of the table.
The Vice-Chairman (Mr. Campbell): Thank you very much.
Mr. Pillitteri.
Mr. Pillitteri (Niagara Falls): Thank you, Mr. Chairman.
Welcome, everyone. I think a lot of people have left already. I'm just wondering whether they'd want to participate in the table discussion. First of all, I want to make a remark.
We've been on this trip here already for a week, and it amazes me that Mr. Loubier - not to be offensive in any way - has constantly made the same remarks, always trying to get consensus around the table to scrap the present tax system. He's talking about tax savings abroad, he's talking about trust funds, and he's talking about corporations not paying their fair tax. It almost makes me believe it is wrong to be a business person, it's wrong to be a person to create jobs, and it's wrong to be a person or business in the present system, which is not working and everyone is abusing.
I'm wondering whether this is the case of salvation - how he's going to be solving this present budget we are against. I wanted to make the remark that this is always - and I've heard for the last four days.... It's not enough talking about what's happened in the House of Commons in round-table discussions. I'm talking about what has been happening over here and trying to get a consensus across the table to ask whether you don't think everybody should pay their fair share.
I'm pretty sure every Canadian and every person sitting around this table and making comments would surely agree with him, because everybody wants to pay their fair share. But the way the questions are put it almost makes me believe the system does not work and people are getting away with a lot.
The Vice-Chairman (Mr. Campbell): Mr. Pillitteri, just before you proceed -
Mr. Pillitteri: I had a question.
The Vice-Chairman (Mr. Campbell): - I think in fairness I have to let Mr. Loubier respond.
[Translation]
Mr. Loubier: Thank you, Mr. Chairman, for being so concerned about fairness. Our guests weren't there at the beginning of the week, so they did not hear the remarks I made. Fortunately those remarks were televised, because Mr. Pillitteri completely twisted the meaning of my remarks.
Ever since the beginning, and that's why we members of the Finance Committee are here, I've been trying to arrive at a consensus on several aspects of cleaning up the government's finances. The first aspect is that we have to stop targeting just the social programs, and in order to be fair to all Quebeckers and Canadians, we have to look at the entire tax system, which hasn't been reviewed in depth for about 25 years. There have been a few small reviews, a few things added or taken away, but there has never been a true review of the tax system, review in the positive meaning of the word. A few moments ago I was saying just how complex the corporate tax system is. Such a review could be a good thing for companies.
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On the other hand, I mentioned the holes that exist in the tax system, and Lord knows that it does have holes in it. If the people around this table aren't convinced of that, we have a problem, because even the article that I mentioned earlier, which appeared in CA Magazine, demonstrates this.
I am offended by Mr. Pillitteri's remarks this morning, and rightly so, because they are unfair. I never put down Quebec companies or Canadian companies. They play an essential role in the economy, and they are absolutely necessary to create employment. I never cast discredit on business.
However, we have to maintain a spirit of justice in the review of the tax system and in the expenditure reduction measures that will have to be taken in the years to come, and I think that it's entirely to our credit to consider the entire problem, not just one part of the issue.
If Mr. Pillitteri has personal interests, that's another matter. If he doesn't want to talk about the corporate tax system, that too is another matter. But no one is going to keep me from asking questions at this round table, and above all, no one is going to twist my remarks around as my colleague just did. It's unacceptable, Mr. Chairman.
The Vice-Chairman (Mr. Campbell): Thank you, Mr. Loubier. As usual, the committee members hear the same witnesses, but they get different ideas and responses from the testimony, as is the case for Mr. Loubier and Mr. Pillitteri.
I'll now give the floor to Mr. Pillitteri, who may ask his question.
[English]
Mr. Pillitteri: I have no personal interests as far as corporations are concerned. Just to state this clearly in this committee, I do not own a corporation, and I do not have any shares in corporations.
But my question was to the chartered general accountants. They are certainly not going to be able to answer it, because it had to do with what they meant by the changes to the GST, and the harmonization, if they had any intentions.... They did make mention of changing the value-added tax, the GST, and I was wondering if they were talking about BTT. I wanted to clarify that. Since they're not here, I don't have a question for them.
The Vice-Chairman (Mr. Campbell): I'm sorry some of the witnesses have had to leave, and are not able to respond. Did you have another question, Mr. Pillitteri?
We're going to turn then to wrap up the panel. Mrs. Brushett had a question for some of the witnesses.
Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chair, I have two questions. I'll ask the first one, and I'll let any of the panellists answer.
Early this morning we heard that we should reach our balanced budget by the year 1998-99. If anyone is remaining, could you indicate how we should reach that goal, either through cost-cutting or revenue generation? Do you have any ideas? It's open; tell me how we get there. Some people have suggested that should be the goal. We're here to solicit ideas on how to get there.
Mr. Bismuth: Your best solution is going to come from a combination of both. One of the things we've heard this morning from a number of the participants is that unless the economy is buoyant, the revenue base is going to decline.
If we look at the political problems we've had recently, if you look at the economic situation since 1989 throughout the world, if you look at the global competition and the position of Canada, then you have to say we are suffering like other countries. That's the starting point.
So we're not really singled out, and I don't think we should all be sitting here with our heads between our legs saying, this is really Canada's problem only. There are world problems that affect us.
Let us take, for instance, some of the industries where we have quite a number of subsidiaries in Canada. We've seen it felt mostly in Ontario, in southwestern Ontario especially, where you have a number of subsidiaries that were set up in Canada by U.S., European and other firms.
They operated in Canada under a certain jurisdiction, and they had different rules of play. The incorporated companies had tax situations that didn't allow for the consolidation they have in the U.S.A., for example, and so on.
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When the crunch came, and these people had three or four plants or organizations in the States, and one in Canada, it was really out of proportion, because in Canada, in true representation of size and geography, etc., we would normally have one out of ten. This is what you would come to expect in terms of the size of the American market-place. This is probably one of the biggest reasons Ontario and Quebec have suffered the most from this last crunch. Some of the foreign companies have had an easier time closing down their subsidiaries abroad because politically it's much easier to do that than to do it in your own riding.
As such we've now had to face the fact that we are now part of a global family and a global environment. One of the things we have to look at, for instance, is the cost-benefit of having a regional incentive program. We have a regional benefits program in some industries, for instance, where we want to give equal chances to everybody.
I know you come from the Maritimes, and I would not want to single out the Maritimes, the west or whatever. It seems to me we're going counter to the globalization impact, which is really to try to build champions rather than dilute them by artificially saying, well, we have to have some from here and some from there. Instead we should be building stronger firms that are going to be able to compete worldwide. That will help your revenue line.
I hope I'm answering your question, in a roundabout way. In terms of the expense side, the grants and subsidies have been acknowledged by most people in various ways and forms.
When it comes to taxation, if we set up a taxation system that is too onerous, all we're going to do is drive out jobs. We're also going to drive out companies. We see that in the kind of work I do, where we're sometimes helping various levels of government with their initiatives to bring in foreign investments to Canada.
In some cases we have very advantageous corporate structures for Canadian-controlled private corporations. These structures tend to disappear if you're foreign-owned. If you bring in the R and D tax credits, for instance, we're very competitive.
As I said earlier, it's important for us to keep that in place, and not change it.
The Vice-Chairman (Mr. Campbell): Thank you, Mr. Bismuth.
Ms Berlyn wanted to comment. I don't know if it's in response to this specific question. We're going to have a chance in about -
Ms Berlyn: Mr. Bismuth has made two interventions. I'd like to -
The Vice-Chairman (Mr. Campbell): Excuse me for a moment. The witnesses who remain will have a chance to have a final wrap-up, a last word.
If you're not responding specifically to Ms Brushett's questions, you might want to save your observations for the wrap-up, as you wish.
Were you going to respond to Mrs. Brushett's question, or pick up on something Mr. Bismuth said?
Ms Berlyn: I was going to pick up on a couple of things, including what -
The Vice-Chairman (Mr. Campbell): Please proceed. We're over time, Ms Brushett had a second question, and I want to give everybody a chance to wrap up.
Ms Berlyn: I was fairly quick before, and I'll try to be again.
The Vice-Chairman (Mr. Campbell): Yes, you were. Thank you.
Ms Berlyn: I want to concur that seasonal unemployment is a reality, and people should not just condemn out of hand people who are therefore obliged to go on and off UI. That comment has already been made, but I think it's important.
In particular, in his previous intervention Mr. Bismuth mentioned - and I'm grateful to him - the fact that the aerospace and military industries are very closely linked. I didn't specifically mention aerospace, but that also should be mentioned. It's not something that's very useful to most people.
In our view the DIPP program he mentions, the Defence Industry Productivity Program, is precisely one that should be eliminated totally. It certainly is a subsidy. Furthermore, it is a subsidy of the very worst kind to a trade that is as morally unacceptable as the slave trade; namely, it's a subsidy to Canada's involvement in the international weapons trade.
I would just like to repeat a comment that is often made. There are four trades that create human victims in this world: the slave trade; the drug trade in illicit narcotics; the sex trade, child prostitution, etc.; and the weapons trade. They are all in the same basket. The Canadian government should not be involved in subsidizing, supporting or promoting any of them. The military industry falls into that category.
The Vice-Chairman (Mr. Campbell): Thank you, Ms Berlyn.
Ms Brushett had a last question.
Mrs. Brushett: I would like to see a very brief answer from those interested in small business. On several occasions it has been brought to our attention that if we increase the ceiling before corporate tax is levied on small business, if we take it from $200,000, where would we take it to, $400,000, $500,000? What is the magic number that would increase jobs through small business growth?
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Mr. Lacroix: We can't propose an answer to that. What we've seen recently is that not only haven't the levels increased to more than $200,000, but the small business deduction has been taken away from some taxpayers, such as big taxpayers and corporate taxpayers.
If you have taxable capital, the LCT, the large corporation tax, is a federal capital tax. If your capital is between $10 million and $15 million, which is not a great deal, your small business deduction is completely cut. I suggest that measure, which was designed to remove certain advantages for certain corporations, perhaps should be removed. A corporation with only $15 million of capital is not a big corporation. It's still small.
So instead of raising the ceiling to more than $200,000, one answer might be to remove that limit of $15 million of taxable capital.
Mr. Bismuth: In response to -
The Vice-Chairman (Mr. Campbell): I'll make a suggestion. We're going to wrap up now with some final words. So with a view to incorporating your response in your final words, we'll go around the table for le mot de la fin.
Mr. Bismuth: In answer to Mrs. Brushett's question, I think what's important is that if we were to raise it to $500,000, we know the people who benefit from the small business deduction are in fact in business and have all their marbles at play every day. I can see this being very beneficial in terms of stimulating the economy, because if somebody has dollars that only cost him 18% or 20% in taxes and he can reinvest 80%, it's much better than being able to reinvest only 53% or 54%. So if we're trying to stimulate the economy, I think it's a very good way of doing it.
However, I am concerned that unless your tax model is all-inclusive and integrated right down to the individual, it doesn't work. Making patchwork changes only makes people go to a lot of effort finding new ways to beat the system.
I think you need to look at personal income taxes as well. If we are, as I believe, among the most highly taxed people worldwide, this is a real disincentive. I think we have to keep the personal tax and corporate tax integrated so that we get the best.
The Vice-Chairman (Mr. Campbell): Ms Berlyn, do you have any additional closing remarks?
Ms Berlyn: Can I briefly comment on the process?
The Vice-Chairman (Mr. Campbell): Yes.
Ms Berlyn: I think the budget impacts on all facets of Canadian society and I think in future there should be greater representation from the NGO sector. Apart from business and labour, I don't see many Canadian NGOs here, and those that are here probably only learned of it in the last day or two. There are all kinds of -
The Vice-Chairman (Mr. Campbell): Many were invited, but not everyone who was invited accepted the invitation. Let me use this opportunity to tell you and ask you to inform your colleagues that pre-budget consultations will now be a permanent feature of budget-making in this country every fall. You should be badgering your MP to have information about our hearings as they take place across the country.
Ms Berlyn: Thank you.
Mr. Lacroix: I had one issue in my notes that I forgot to talk about, because we talked about it quite a bit this morning. The issue is subsidies to businesses, and I would like to give our association's position on that.
Unless the subsidies are strategically necessary, we believe they should be removed, and similar subsidy programs should be abolished.
The Vice-Chairman (Mr. Campbell): Thank you.
[Translation]
Mr. Caron, would you like to add something?
Mr. Caron: No, not really.
The Vice-Chairman (Mr. Campbell): On behalf of my colleagues and myself, I would like to thank you for this interesting discussion.
[English]
We've gone over our time. It's almost 11:30 a.m. Thank you for staying with us. It's been very helpful to us and we look forward to seeing you in future consultations and in hearing any additional comments you may have.
[Translation]
Thank you.
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[English]
I'll acknowledge one other colleague who just arrived - Mr. Nunez.
Mr. Nunez, thank you for joining us. We look forward to your participation in this afternoon's panel.
We will adjourn until 1:30 p.m.