[Recorded by Electronic Apparatus]
Thursday, December 7, 1995
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[English]
The Chair: Order. The finance committee is continuing its pre-budget consultations, and we're pleased to have with us this morning, from the Canadian Conference of the Arts, Keith Kelly; from the Canadian Artists' Representation, Greg Graham; from the Canadian Housing and Renewal Association, Sharon Chisholm; and from the Conference for Advanced Life Underwriting, Don Glover and Bill Strain.
We appreciate your being with us. We look forward to your brief opening remarks so we can turn immediately to in-depth discussion.
Who would like to start? Don.
Mr. Donald Glover (President, Life Underwriters Association of Canada): Thank you,Mr. Chairman. We are here today representing the Life Underwriters Association of Canada and, within our organization, the Conference for Advanced Life Underwriting.
The Life Underwriters Association of Canada has been around since 1906. Our 17,500 voluntary members across Canada are engaged primarily in the sale and service of life and health and annuity contracts, pension plans, and registered retirement savings and retirement income funds.
Within our organization we have a Conference for Advanced Life Underwriting, which is a group that specializes in the area of advanced life underwriting. CALU members provide personal financial, business succession, and estate planning services to their clients, many of whom are owners of small businesses.
With me today is Bill Strain, CA, who is the chair of the Conference for Advanced Life Underwriting taxation committee. Bill is a former co-chair of the joint taxation committee of the Canadian Institute of Chartered Accountants and Canadian Bar Association, and is the principal draftsperson for our submission.
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We believe that Canadians are justifiably proud of the fact that they have a premier rating by the United Nations, but we believe that to maintain this status we have to foster an economic climate that encourages investment, creates employment, and sustains, on a fiscally responsible basis, appropriate social programs.
We have an eight-point submission and I will just touch on the eight points.
The first one is the public debt crisis. We believe that the burden of debt should be the top priority for government at all levels. The federal and provincial government debt, estimated to be at $1 trillion, we believe is only part of the issue. The second part is the unfunded liabilities for Canada's social security programs, now estimated to be at about $1.75 trillion. We believe the government must recognize and take action to reduce the debt and the unfunded social security obligations if we're to maintain a system of affordable and sustainable programs.
With respect to retirement incomes, our retirement income system in Canada is a three-tiered system, which is comprised of public pension plans, employer-sponsored plans, and private savings arrangements, and we believe this is basically sound. But we do believe that the cost of non-contributory public pensions must be reduced over the long term, primarily through the targeting of retirement income plans to those most in need. We also think there needs to be a critical evaluation of the various forms of tax assistance for retirement savings and that certain forms of tax assistance need to be amended or possibly reduced. However, Canadians must be encouraged to save for retirement and to reduce their reliance on government plans.
In respect to the health care system, we, like the government, agree that we should have a high-quality health care system accessible to all Canadians. However, I think it's recognized that the current system is neither efficient nor cost-effective and needs to be examined with a view to reducing expenditures and attaining improved levels of cost-effectiveness. As governments decrease their public health care spending, we think the explicit and implicit responsibilities for maintaining the health care service will fall to the private sector. Governments should recognize the important role currently played by the private health plans in Canada and work in partnership with the private sector to achieve a credible, quality health care for all Canadians.
In respect to health and dental insurance plans, LUAC and CALU urge the government not to tax the employer-paid premiums as employee benefits because such action would threaten the viability of many plans and seriously undermine this critical pillar of Canada's health care system. The recent William Mercer study reinforces the importance of the role played by the private health services plans in Canada's health care system, and the present tax treatment of employer-paid premiums does not result in widespread inequities or unfairness in the tax system.
In respect to small and medium-sized enterprises, we believe that there needs to be a cooperative support of government to help transform the Canadian economy and create employment through these organizations. This support should be offered, not through government subsidies but through the removal of barriers that impede the ability of SMEs to raise capital and to compete effectively without the burden of excessive regulation.
With respect to the proposed stop-loss rule, there is a proposed amendment to the Income Tax Act that was introduced in April 1995 that will wreak havoc with the business succession and estate plans of thousands of small and medium-sized businesses. This proposed stop-loss rule undermines the principle of integration of the tax burdens imposed on private corporations and their shareholders. It will result in an indirect tax on life insurance proceeds received by a private corporation and used to fund the purchase of shares from the estate of a deceased shareholder. LUAC and CALU urge the government not to proceed with the proposed stop-loss rule.
With respect to tax reform, we believe that Canadians cannot and will not tolerate direct or indirect increases in taxation. We believe that the public's dissatisfaction is exacerbated by the perception that our tax system is excessively complex, inefficient, and unfair. Governments must regain the trust and confidence of Canadians through a comprehensive review of federal and provincial tax systems, with a view to fundamental reform.
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Finally, Mr. Chairman, we believe that governments are positioned to benefit from the understanding and goodwill of Canadians with respect to the need for deficit and debt reduction. LUAC and CALU applaud the federal government for having these formal pre-budget consultation processes. We are proud to be participating this morning.
We believe that Canadians need and want to become better informed as to the nature and magnitude of the economic challenges that face their country and to participate in the decisions that chart the course for their children's and grandchildren's economic future.
I have with me my expert, and we are prepared to try to answer your questions.
Thank you.
The Chair: Thank you very much, Mr. Glover. We will come to that as soon as we've heard the other presentations.
Mr. Graham, would you like to proceed now, please?
Mr. Greg Graham (National Director, Canadian Artists Representation (CARFAC)): I represent the Canadian Artists Representation/Front des artistes canadiens. We're a professional association of visual artists, and I use ``visual'' carefully because many artists extend beyond the traditional painting, sculpture and printmaking.
Our artists have a concern very much at a local and individual level. One way of looking at the artist is that he is essentially the ultimate small business person. They are taking materials, often of a relatively low value. They are applying through their intellectual effort and their skill the work that transforms that material into something of value, both in terms of economics and also in terms of cultural and aesthetic value. They're often working alone in every region of this country on a very small scale, and yet their output becomes something major.
When we look at things like culture, economics and politics, we have today two poles operating. Everybody talks about polarization between left and right and supply and demand and all that, but I suggest that what we're really looking at today is a polarization between that local and regional concern we all have. Believe me, your own constituents have it, and at the other end of the scale there is a global scale. We're living in an era today where the very idea of what comes between that local and that global scale comes into question.
Whether we're talking about a multiple regional government, provincial governments, or the nation state as an idea, it's relevant insomuch as it acts as a mediator between the local and the global.
I bring this up because you deal very often in the economics of how you mediate between the local and the global. But I suggest that the cultural aspects of that are also very real and they have a very real economic impact.
Today we're seeing Canadian artists, Canadian writers, Canadian film-makers, and so on, making their reputation and very often making their money outside of the country. This is nothing new. At the same time we see cultural products from other countries being purchased here. But this brings us to the point that there are more things involved than simply the government's actual investment in the cultural infrastructure. There's also the whole area of support, of regulation, of how international trade works, of whether the support systems are there for the individual as well as for the big company, and so on, when they are going abroad.
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For the individual artist there is another area of concern. As far as the economy of how an artist operates in this country goes, it is very important to maintain a certain infrastructure. The infrastructure has not always worked well, but it is important that it be maintained and that it be there. We're talking about museums, we're talking about the Canada Council, we're talking about the various cultural institutions that do play a role in promoting and disseminating Canadian art to Canadians. We feel that if those were in danger, if those infrastructures were seriously threatened because of a concern with deficit reduction, we would all lose - not only the artists, but the country as a whole.
The economy for the individual creator has changed and is changing. By chance, I have with me today two cheques for artists. One cheque is for a Quebec artist whose work was sold in Ontario when she happened to be in Europe selling other art at the time. I was given the cheque to hold in trust, and hopefully she's going to pick it up from me today. She's due back in the country at the Ottawa airport.
The other cheque comes from Quebec and it is for a copyright licence that we as an arts association negotiated with a Quebec user for an artist from Newfoundland. This did not involve the sale of a work. The artist still owns the artwork, but the work was used by an institution in Quebec; the copyright was licensed.
What's interesting in both cases is that after the dealer's commission and so on comes out, the amount of money for the sale of the Québécois work in Ontario is identical to the amount of money that has been paid by a Quebec institution to a Newfoundland artist for copyright licence. This type of thing is going on all the time.
It's not simply sales any more. It is things like copyright licences. It is things like the exploitation of ancillary rights. Those are things that we are trying to develop for the artist. It is an economy that goes beyond the traditional one. We all know that although we've got a 35% growth in the arts in basic employment in the arts and cultural field, the real amount of money that the individual artist is getting has not grown significantly. We are looking for ways to develop that.
Now what's important from a finance committee point of view is how we can be sure that those tools that allow this natural development to take place continue. What has been happening is that artists cannot at this point guarantee their income. They cannot have access to many of the programs these gentlemen speak of because they're self-employed. There's no such thing as an employers' contribution when an artist is trying to plan his or her insurance or health benefits or retirement. Their incomes are cyclical. They can be very marginal in one year, very good in another. We've lost all possibility of income averaging for the artist. It's very configurable that an artist can earn a very low income for several years, have a very good year and be taxed to the hilt. That solution to put it in an RRSP and to cash it in the next year does not work. RRSPs should be for retirement planning, not for simply averaging your taxes. There have to be some better ways.
I know Keith has a whole list of varied recommendations. I'd like to suggest that he bring them up and we can then speak to these in more general terms.
The Chair: Thank you.
We would like to have you raise them rather than bring them up, Mr. Kelly.
Mr. Keith Kelly (National Director, Canadian Conference of the Arts): I'll try to raise them.
The Canadian Conference of the Arts is a national umbrella organization that represents not only individual artists in every discipline, but also the producers of the cultural industries. Our perspective certainly includes individual artists who are represented by Greg, but it also really looks at the entire cultural sector.
When we are faced with the prospect of the 1996 federal budget, we have to take several things into account. While recent political events in this country suggest the pursuit of a lower deficit and debt load for Canada is certainly one no one would argue with, we wonder about how the cuts have affected the ability of Canadians to communicate with each other and to maintain a sense of who we are, our respective regional, linguistic and cultural differences. We wonder about the fact that every single national cultural institution is currently under review but there is no single direction that these reviews are pointed towards, apart from the reduction of the deficit and the debt.
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We also spend a fair amount of time talking about the information highway, the 500-channel universe, the new technologies. One thing is true if any of these are to succeed, and that is that they must have content. Canadian artists and producers are the people who generate that content.
How are we positioning the content production industries, the individual artists, so that Canada can gain a competitive role, not only domestically but also internationally, in the generation and sale of content?
Finally, we look at what the actual latitude of the government is. We recognize that the spending cuts are necessary to meet the deficit and the debt requirements, so we have to find other ways, except asking for more and more direct funding, to create some stability around the arts and cultural industries.
We have a number of points, and I will go over them very quickly.
The first one, dealing with individual artists, Greg has already mentioned, and that is income averaging. This is a provision that existed in the Income Tax Act until, I believe, 1972, and then it was removed. It's not just artists who are affected by this. Professional athletes, real estate salespeople, and other people with cyclical incomes face the same kind of difficulty as artists and producers. The Income Tax Act cannot currently reflect the sort of erratic income levels many Canadian artists and other self-employed individuals experience.
We hear quite often from governments at all levels that the arts must become more self-sufficient and we must attract investment and greater support from the corporate and individual community. In order to do that we have called upon and will continue to call upon the government to create better incentives for both philanthropy and investment.
Right now in this country there are really three forms of treatment of charitable gifts. If you give money to the Crown, you get a tax receipt worth 100%; if you give it to a political party, you get 75%; and if you give it to non-profit or charities, you get two marginal rates - I believe the highest is 28%.
So if government really wants to encourage the private sector and the individuals to take up some of the slack, it may be time to look in a very strategic way at increasing the benefits for giving.
We are also in a situation where there is considerable change in the corporate community. Many Canadian companies are being bought out by American companies. Recently we saw the Viacom acquisition of Paramount Canada. Investment Canada, when they considered the approval of the sale, also required an investment back into the Canadian production industry for, I think, 5.75 years.
There are many of those opportunities coming now with the imminent arrival of Borders, and Barnes & Noble, and other very large corporations. We are recommending that the kind of investment guarantees that are sought for a very short period of time be extended to be a permanent feature of good corporate citizenship in this country so that the kind of investment they return to the production community doesn't just end at 5.75 years but is a feature of what it means to be a good corporate citizen in this country.
We understand that in the next few weeks the Minister of Canadian Heritage and the Minister of Industry will introduce phase two of copyright reform. We certainly congratulate them on this initiative. This is exactly one of the pieces of legislation that is most important to us because it allows artists and producers to earn revenues from the use of their work in the marketplace. It's not a subsidy from the government; it just enables them to be paid for what they do.
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It is perhaps a controversial recommendation, but when we were looking at creative ways to generate new revenues, we looked at the old communications tax that was applied to cable to create the Canadian Feature Film Fund.
The GST, of course, was created to replace all federal taxes. We certainly agree with that. What we are recommending is that the GST that is collected on communications products and services be redirected to help the government discharge its cultural mandate. We figure that represents about $146 million per year.
Returning to the theme of good corporate citizenship, right now we have the CRTC about to license direct-to-home satellite undertakings. We know the telephone companies are about to be admitted to the family of Canadian broadcasters. We know others are experimenting with video on demand and also the information highway.
The Broadcasting Act currently requires all participants in the Broadcasting Act to make an investment in Canadian production. We recommend that this requirement be extended to everyone who receives a licence from the CRTC and participates in this development of the new technologies.
The government also announced last year that culture was going to be the third pillar of Canadian foreign policy. Right now it is just a statement. What we would like to do, and what we have indicated, is that we will work with the government to make that third pillar realistic, especially in the promotion of exports and the generation of sales abroad and cultivation of new audiences around the world.
The magazine industry is another point of concern. The reductions to the postal subsidy have weakened the magazine industry, and we would hope that in the 1996 budget no further reductions would be included in the postal subsidy.
Today, I believe the Senate is going to vote on Bill C-103. We encourage the Senate to pass the bill with that amendment, and we encourage the government to proclaim and implement that as soon as possible and to also remove the GST on books and magazines. That was a new area when the GST was developed.
Finally, returning to the theme of lack of coherence in the various instruments of government and agencies, programs and policies, I think we should really look at the development of a national content production strategy and identify what resources are currently devoted to content production and how we can best use them to gain a domestic and international strategic edge as the content-ravenous technologies continue to unfold.
The Chair: Thank you, Mr. Kelly.
Ms Chisholm, please.
Ms Sharon Chisholm (Executive Director, Canadian Housing and Renewal Association): Mr. Chair, hon. members, and members of the community, good morning.
Let me open by telling you a little bit about us. CHRA is the only national organization representing those who manage and deliver housing programs in communities across Canada. Our members include municipal non-profit housing corporations of every major urban centre in Canada, as well as hundreds of community-based non-profit housing groups, tenants' organizations, provincial officials, and individuals interested in housing issues.
Given CHRA's interest in maintaining a federal presence in the provision of affordable housing in this country, we are pleased to be invited here today to meet with this committee and discuss the important issues that face our sector. I want to thank you for taking the time to meet with us.
You are no doubt more aware than I of the incredible changes this country is facing. It is time to reassess what we have, what we value, what our options are for the future, and to carve out an appropriate role for Canada to follow, reflecting our key values and identity.
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One thing Canada has built up, along with its roads, hospitals, schools, and infrastructure, is a stock of some of the best publicly held housing in the world. The stock the federal government holds an interest in totals approximately 660,000 units. It is the future of this stock of housing on which I would like to focus my remarks to you today.
We have been building this social housing since the 1950s. Some of the mortgages are close to being paid off, which will significantly reduce or eliminate the amount of subsidy needed to maintain the housing. In many cases subsidies will be eliminated altogether. This is when the real pay-offs will occur.
CHRA is very concerned with reports of provinces offering to sell their non-profit or public housing. It makes absolutely no financial sense to do so. Putting social housing on the selling block now is comparable to selling the crown jewels at a backyard sale. Canada is no longer adding to its stock of affordable housing, yet it faces growing needs as real wages are reduced and welfare payments are eroded. In the absence of programs to build new social housing, it is more important than ever that we protect what we've put in place.
I want to mention as well the residential rehabilitation assistance program, RRAP, funding for which ends at the end of December. Not only does this program offer low-income households a chance to bring their homes up to minimum standards; it is one of the most effective ways in which this government can spend its dollars to create employment. I urge you to continue with this program, and to consider extending it to social housing providers.
It is clear that action must be taken in a number of other areas as well, despite the lack of funds for continuing with the development of social housing. The situation on our reserves, for example, is absolutely deplorable. The numbers of people living in emergency shelters, battered women who are no longer able to leave a battering situation - there are a number of very critical situations that really need some form of government address, and it's the federal government we look to for leadership.
But back to our investment in social housing. Budgets have been reduced and capped. As an organization, CHRA is acutely aware of the 1.2 million households that are unable to afford adequate housing within their financial means. CHRA still supports the growth of the non-profit sector in Canada. However, like many others, we're attempting to do more with less.
The debates we are having within our organization, and ones I'm sure the government is considering, are whether this housing is being targeted as effectively as it should be. Are there areas where cost savings are possible? Can our social housing be used as part of other national initiatives to enhance their effectiveness, for example training or child care?
These are important questions. However, the answers do not negate the wisdom of previous governments when decisions were made to build the social housing stock that exists today. Nor do these questions mean it is time to sell off our social housing. They simply reflect the changing fiscal reality we face.
CHRA recognizes government's desire to reduce deficits and, in some areas where it is no longer necessary, to reduce government. In the housing area there are tasks that can be more effectively and efficiently managed outside of government.
Today I want specifically to address the administration of social housing, since CHRA is in the process of putting together a proposal to set up a separate corporation to administer social housing. We're still in the preliminary stages of this process, so I would like to return to this committee when our ideas are more definite. But I do want to argue that the administration of social housing can be more cost-effectively delivered by CHRA.
Our plan is to set up a separate management corporation, with CHRA as the sole shareholder. The corporation would have a mandate for the effective and efficient management of non-profit housing, and the capacity to offer such cost-saving measures as bulk purchasing of insurance, major equipment, and appliances. It could investigate the possibility of amalgamations of smaller non-profits to determine if such measures would result in cost savings. It would permit the pooled investment of replacement reserves, resulting in better interest revenue for non-profits. It would encourage that training be put in place for managers and boards, to promote excellence and encourage the exchange of ideas across the country.
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The structure of this corporation would support carrying out tasks at the most appropriate level. For example, provincial associations could play a role and local experts could take on the fieldwork, such as the yearly inspections and interventions, when necessary.
Outsourcing of some of the administrative work of CMHC would result in immediate savings. Other savings would occur at a later date as some of the measures I've mentioned are implemented.
In order to bring about these longer-term savings, it is necessary to develop performance standards for the management of the operations of the non-profits. A research project to develop such standards could begin immediately with the support of CMHC and sectoral organizations. Benchmarks of successful management are essential to the success of this venture.
Why CHRA? CHRA has represented the social housing sector in Canada for over 27 years. Over that time we have acquired a good deal of credibility with our members. We represent the largest municipal non-profit groups and in so doing have a direct connection with municipal governments.
Our members represent the best expertise in the development and management of social housing in this country. They can be called upon to intervene when projects need assistance. Indeed, the experience of the managers and the commissioners who are CHRA members gives us the ability to know when it is effective to intervene, generally before problems occur. We would plan to develop an early warning system for projects, which would predict when they may experience financial or management difficulties.
The regional nature of our board of directors makes CHRA sensitive to regional differences. In fact, dealing with such differences has been part of our history. We are also in a preferred position to identify and implement efficiencies.
CHRA has been involved in researching and identifying alternative financing mechanisms. Some of these mechanisms, such as land trusts, offer the potential of increasing efficiencies. Such ideas would be more readily accepted by the non-profits when offered by a sector organization. But by outsourcing to a sector organization, the federal government can retain control of the social housing stock without needing to maintain a costly administrative function.
In closing, I want to remind members of the committee of the importance of community-based organizations, like the members of CHRA, which incorporate volunteer efforts and demonstrate the most effective way of meeting needs in their communities.
I urge this committee to recognize the important role they and CHRA play in making Canada a decent place to live.
The Chair: Thanks, Ms Chisholm.
[Translation]
We will start the questioning.
Mr. Loubier (Saint-Hyacinthe - Bagot): Good morning, ladies and gentlemen.
My question is for Mr. Kelly or Mr. Graham. You mentioned earlier a series of measures aiming to support artistic creation and the growth of artists' revenues, which you would suggest to the Minister of Finance for the next budget.
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What would these measures be, compared to what exists already? You mentioned the Copyright Act, but are there other measures you have in mind that could help to improve the lot of Canadian artists while not being too costly for the Treasury?
[English]
Mr. Kelly: I think there are a number of things we would like to see. Certainly the issue of the tax incentives for investments and donations would be one of the top ones that would allow us to attract revenue from individuals in the private sector to maintain a production of content.
The other is some common sense of direction that would emerge, both in terms of financing and mandate, for the principal agencies like the CBC, Telefilm, the National Film Board and the Canada Council. With copyright, I think we could actually continue the impressive growth rate the cultural sector has recorded over the last ten years.
[Translation]
Mr. Graham: If I can add to that,
[English]
one area where I think we could see some positive development is in relation to the whole idea of culture as a part of foreign policy.
I spent most of Tuesday sitting with artists and artists' agents who were planning a trip to sell Canadian art in the Pacific Rim countries. One of the biggest problems we ran into was simply that we could not find a private insurance company willing to underwrite. And because the Canada export committee had not been used to dealing with art, they had no rates. Well, we can't insure shipments of art. If it was computers we could insure it, but not art.
So these little things that come up, these barriers to allowing people to develop the business and to actively take part, have to be addressed. It might be simply the fact that the people working in the trade commissions and so on seem to have no notion, in many cases, of cultural product or areas to market it, whereas they would if it was another area of the economy. It might be that those things people who are in manufacturing take for granted, such as being able to get export insurance, don't exist for much of the cultural product.
Those things need to be addressed. This is something not necessarily of any particular cost to the federal budget, but something within the scope that could be addressed.
[Translation]
Mr. Loubier: Mr. Kelly, you mentioned fiscal incentives. What would be the nature of these fiscal incentives in the area of arts?
[English]
Mr. Kelly: On the entrenchment for gifts and investments, we saw in the last federal budget the introduction of the registered tax investment credit for film and video, which we appreciated. We would like to see this kind of approach broadened to include the publishing industry, the sound recording industry and the magazine industry.
We would also like to be able to offer higher levels of return on gifts to charities throughout the economy as a whole. I think you'll probably also hear this from many other charitable sectors. It would really help us attract the revenue we need to close the direct funding gap left by the recession, both at the federal and provincial levels.
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Mr. Graham: One other area where this could be increased is in the case of certain federal cultural institutions, which in turn then subsidize things like film production or the purchase of art works or the commission of art works. Although they often operate at a fiscal arm's length from government, there could be funds set up within those in which an endowment could have gift-to-Crown status. For example, a corporation could give money to be invested specifically in experimental film development, or in dance, or in my case in the visual arts.
This fund would be administered by a federal institution, whether it be Telefilm or the Canada Council. But for this fund and for donations to this fund or this endowment, you could have gift-to-Crown status.
[Translation]
The Chair: Thank you very much, Mr. Loubier.
[English]
Monte Solberg, please.
Mr. Solberg (Medicine Hat): Thank you very much, Mr. Chairman.
Mr. Glover, you made comments about the debt crisis we're in today. I am wondering what you think of the finance minister's new deficit targets announced yesterday.
The Chair: He loves them.
Mr. Glover: May I respectfully pass this question to my colleague. I am sorry. I was in a series of meetings here in Ottawa that went late into the evening and I started early this morning on another set of meetings. I have not had an opportunity to pursue the figures, but I know Mr. Strain has.
Mr. Bill Strain (Chairman, Taxation, Conference for Advanced Life Underwriting): Thank you, Don.
I have only had a very limited amount of time to review the papers. But, first of all, we are very encouraged by the fact that the finance minister believes the targets for 1995-96 will be achieved to bring the deficit down to 3% of GDP. We are encouraged by the target to further reduce it to 2% of GDP in the following year but are somewhat disappointed the targets were not more aggressive.
Granted, I have only had a quick look, but it seems to me, when one takes into account the savings that will mature out of budgetary measures already announced in 1994 and 1995, and when one takes into account even a modest improvement in revenues through economic growth, the target of 2% of GDP in 1997-98 does not appear to require any additional expenditure reductions of significant magnitude.
We believe the debt situation - not only at the federal government level, we emphasize, but also including provincial and local government debt - is a crisis.
Economists who were at this committee on November 9 were putting forward modest projections of economic growth in a sustained fashion. If those projections come through, now is an opportune time to take increasingly tough action to eliminate the deficit and to start to pay down the debt, which we believe is necessary in the longer term.
Mr. Solberg: Mr. Glover, you mentioned remarks about the retirement income system. You've talked about the need to reduce our liabilities. On page 6 of your memorandum submitted to us, you also say:
- ...there must be a critical evaluation of the various tax assistance for retirement savings and
certain forms of tax assistance amended or possibly reduced.
- However, in your executive summary, you say:
- Canadians must be encouraged to save for retirement and reduce their reliance on government
plans.
Mr. Glover: Let me make some comments and also get Mr. Strain to expand.
The first thing is we are anxiously awaiting the government's paper on preparing for the aging population. We think there will probably be a number of things surfacing as a consequence of this paper that can seriously be addressed.
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We believe we need to get Canadians to pay much more attention to building their own retirement programs. If the money is set aside, it is being set aside principally for retirement. It is not being set aside in such a way that it becomes the mechanism for averaging and splitting.
There is a whole host of things that will probably be advanced in that paper, looking at things like whether age 71 is an appropriate age to demand savings accounts be converted into income. Should it be slightly earlier? Should there be penalties for early withdrawal if the money is used for other than retirement programs, such as in the United States?
I think you would find us consistent with respect to making sure Canadians build their own retirement programs in an enhanced manner. The focus of the plan is on setting it aside, building the pension, and offloading Canadians from the public sector and the public plan.
Mr. Strain: To follow up on Don's comment, we're concerned about the profile that tax assistance for retirement savings seems to have as a result of the published enumeration of tax expenditures. I think the current estimate in Mr. Martin's papers last night was about $13.6 billion, based on 1992 numbers.
I would point out that the Canadian Institute of Actuaries and the Conference Board of Canada, in their examination of the tax assistance plans, put that number very much lower - somewhere in the $4 billion to $5 billion range - when taking all factors into consideration. They recognize that as the population ages over the next number of years, it's quite possible the tax expenditure number will turn into a positive tax revenue number as more and more people start to withdraw from RRSPs and pay tax on the withdrawal earnings.
I think it's also fundamental that we should not be looking at tax assistance for private retirement savings plans separate and apart from the overall package of government plans and private plans. We have to look at the package as a whole. We have to examine the economic impacts of the savings pool that sits there for investment in the Canadian economy into the future. We must examine that carefully and comprehensively before taking precipitous action that may well prove to be unwarranted as we go down the road.
Mr. Solberg: You made some comments, Mr. Glover, about tax reform. It sounds very much like you're almost suggesting something like a flat tax. Is that where you're headed with this?
The Chairman: You're leading the witness.
Mr. Solberg: I'm just simply responding to his comments.
Mr. Glover: I think it's fair to say we think there needs to be a complete review of the entire program and the entire system. We need to get simplicity and fairness into the system, and we need to get perceived fairness into the system by all Canadians. There's a consistent attack on the wealthy, yet the system is extracting a fair amount of tax from that group. But the major burden is still on the middle-income group.
We do not have a policy that says we are going to sign on and become advocates for a flat tax, but we certainly want to see more simplicity. Part of that would include a review at the provincial level as well as at the federal level. If you modify the federal levels of taxation, and any areas where there's a reduction are grabbed up by the provinces, the consumers or the individuals in Canada accomplish absolutely nothing. In fact, it has led to a system of increased taxation.
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Mr. Strain: I just have one or two other comments. As you point out, there's a lot of currency these days for various and sundry flat tax proposals, many of which differ quite markedly from others. Both in the United States and Canada I believe representatives from all parties have floated various versions of a flat tax proposal.
My concern in looking at these is they all seem to promise, explicitly or implicitly, a significant reduction in the amount of tax that would be paid.
I would point out that according to the numbers Mr. Martin tabled last night, total taxes in Canada are still running at 36% to 37% of GDP at all levels. Mr. Martin also said in the papers last night that GDP is a pretty good proxy for the tax base in Canada. That suggests very strongly to me that any flat tax proposal that is suggesting anything below a 37% flat tax rate is misleading at current government revenue levels.
Also, if one were to consider that, the entire tax base would have to be taken into account and taxed at one flat rate. That means tax on gains realized on the sale of homes and tax on all manner of income, whatever form it may take and whatever time it may be realized.
I think the flat tax proposal is more of a cry to the effect that people perceive the system to be unfair. They perceive it to be too high, and that's the fundamental thing that has to be addressed.
Mr. Solberg: Mr. Kelly, you mentioned that the arts or cultural industries have done fairly well in recent years. I think it's true that as government subsidies have decreased from somewhere in the range of $6 billion down to about $5 billion over the last few years, at the same time the cultural GDP has grown very dramatically. I think it's up around $24 billion now.
As the population ages it's my sense that people with more disposable income are spending more on cultural industries. I'm wondering in that context why you're here asking for more assistance for culture when the cultural industry seems to be doing quite well.
Mr. Kelly: We're not asking for more money. We're asking for structural reforms that will create some stability around tax expenditures.
We're seeing a hasty retreat by governments at all levels from the cultural arena. There's a real rush for the door, and we're sure some people will get injured - and that's us. As a transitional measure we're asking for the tools to allow us to attract the revenues necessary to continue the growth and also take advantage of new opportunities as they present themselves.
Certainly the new technologies, such as direct-to-home satellite, video on demand and the imminent entry of the telephone companies as broadcasters, will escalate the demand for content. We want to be sure we're not only in a position to fill that demand as soon as they start business, but to maintain a steady supply. We need that stability to feed the creative chain.
Mr. Solberg: Would it be true that in order to produce that content we're going to need equity in this country? For instance, I know the cable industries and the telephone industries have indicated they'll need somewhere in the range of $20 billion in new financing to provide just the physical infrastructure for their services up to that amount.
It sounds to me like we'll need to go elsewhere, probably the United States or foreign markets, to get that equity. That would mean pushing up foreign ownership levels. Are you suggesting that's a possible way to go so we can provide more funding and see the cultural industries expand?
Mr. Kelly: I would never have even vaguely suggested that. I think it is important to put on the record the fact that the Stentor beacon initiative is being wholly funded by shareholders. They are not looking for that $10 billion in the form of loans. This is going to be -
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Mr. Solberg: No, I understand it's equity, but -
Mr. Kelly: Part of that is also their commitment to work in partnership with the arts and cultural industries to generate the content. They are very candid. We have the wires and the infrastructure, but we don't have the content. That's why we need a partnership, and that's how we really see this moving forward.
As you know, harmonization of ownership levels between the Telecom and the Broadcasting Act to 66.66% was just announced. The presenting rationale was that that additional foreign investment would allow Canadian undertakings to invest in content.
One of the things we are disappointed to see is that in that statement there is no requirement that foreign investment be dedicated to content generation. It could just be dedicated to infrastructure. It doesn't advance the partnership between artists and producers and the new technologies as fully as we would like. So until we can address that issue to ensure that foreign capital is being used to support content production, we wouldn't support so much as a nano-percentage point move in the increase of foreign ownership levels.
Mr. Solberg: I'm thinking of television and film production. Isn't it true that there really is a big demand worldwide for Canadian content in film production right now and that that industry is really growing? I fail to see why you would need any kind of incentive when it's fairly obvious that industry is taking off.
Mr. Kelly: I think you have to understand that there are two forms of film production going on in this country. One is film production by Canadians that is based on Canadian scripts and uses Canadian talent, and the other is the service aspect of the film industry where we have American studios coming up and taking advantage of the infrastructure and the talent to produce American material, which -
Mr. Solberg: They get paid and are not exactly being exploited.
Mr. Kelly: Nor was I suggesting that. I was merely saying that the incredible talent in the Canadian film-making community can be used to advantage by any foreign producer, even the Americans.
There is an awful lot of film production activity in this country, but there are two sides. What we want to do is ensure that Canadian film production is as hale as the service film industry has become in this country.
The Chair: Mrs. Brushett.
Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chair.
[Technical Difficulty - Editor]...very much able to help people stay in their homes, particularly in rural areas where they have marginal income, but it certainly saves some taxpayers as well by maintaining their own homes and a happier, healthier lifestyle. So I certainly agree with some of your comments.
I have a question for Mr. Strain about the remarks he made just a few moments ago regarding the minister's directive yesterday to set the goal of $17 billion as a deficit target by 1997-98. You've made the comment that this would see no further reduction in program cuts. I am wondering on what evidence you make that statement. Are you thinking that there's going to be more than a 2.5% growth in the economy, or do you have other evidence to show that we don't need to look for further cuts? I was inclined to believe that we had a real search on our hands here.
Mr. Strain: As I mentioned, included in the papers that were released yesterday were the government's own estimates of how the measures that were introduced in the 1994-95 budgets would move forward and impact on 1996-97 and 1997-98. The indications are that in 1997-98 the measures that have already been announced would generate a further $5 billion in program reductions.
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So if we look at the deficit in 1996-97 as projected at $24 billion, we're down to $19 billion. Then if we look at even modest growth in revenues as a result of about a 2% economic growth in real terms, that will produce at least another $2 billion of revenues in excess of program expenditures and financing costs. That's about $7 billion right there.
Recognize also that Mr. Martin has included in his numbers a $3 billion contingency reserve. When you add up the $2 billion from the revenues, the $5 billion from the continuing reductions from present cuts, and a $3 billion contingency reserve, that's $10 billion, which would knock down the $24 billion to $14 billion...using all the contingency fund.
It just seems to me, on the bare facts that were presented yesterday, that doesn't mean any substantial reductions from new initiatives. It means maintaining the announcements and keeping on track with those program reductions, but no new program reductions.
Mrs. Brushett: I don't think our intention is for the contingency reserve fund to be built into operating or planning budget processes.
Mr. Strain: But even with the $7 billion I mentioned, you're down to $17 billion.
Mrs. Brushett: Thank you very much.
I do have a question for Mr. Kelly. I agree with him full-heartedly that the arts and culture sector of the economy is growing substantially. Certainly being from Nova Scotia...we're seeing a real growth phase there, and I'm very pleased, very proud of it.
You've made a comment about the GST, that we should remove it from the sale of books and magazines. Are you suggesting only Canadian publications or all books and magazines?
Mr. Kelly: No, only Canadian publications.
Mrs. Brushett: Thank you.
Another point before I turn it over to my colleague. You had gone back to something we discontinued in 1972. There was a lot of static at the time and I couldn't hear exactly what you said.
Mr. Kelly: The general averaging provisions in the Income Tax Act allowed taxpayers to average their income over a period of years. So if you spend five years writing the great Canadian novel and you've lived on lentils for four of those years, then it goes to -
The Chair: You'd be very healthy if you did that.
Mr. Kelly: If you made $500,000, you would pay the full tax burden on that $500,000, as if it were one year of income instead of reflecting the fact that it took a five-year period to generate.
That's the kind of provision we're talking about. We know professional athletes and self-employed sales persons have the same kind of trouble.
The Chair: Ms Brushett, could I piggyback...? I thought averaging allowed the purchase of an income-averaging annuity, which had the same effect. Is that true or not?
Mr. Kelly: It certainly -
The Chair: Bill, maybe you could help us on that. I want some free tax advice out of you, for the first time.
Mr. Strain: The income-averaging annuities contracts that were available in the 1970s were removed in Mr. MacEachen's 1981 budget. There were no further -
The Chair: So there are no averaging provisions whatsoever now.
Mr. Strain: No averaging provisions.
Mrs. Brushett: Just as background information, why were they removed? Were we losing a lot of money, or what was the problem?
Mr. Strain: It was a long time ago. I believe part of the reason was there were some perceived abuses with the income-averaging annuity contract rules, where individuals were acquiring the income-averaging annuity contracts and immediately borrowing the funds back from a financial institution. So they had the cash but just didn't have the tax liability, which was spread out over many years. It was because of that particular problem, I believe, that the provisions were repealed.
The Chair: So we had a really good scheme in place, but it was buggered up by the accountants and the lawyers.
Mrs. Brushett: Not for the first time.
Mr. Strain: I'm biting my tongue.
The Chair: I used to be a tax lawyer.
Mr. St. Denis.
Mr. St. Denis (Algoma): Thank you for being here.
Most of the topics I was interested in have been covered, but I'd like to ask Ms Chisholm a question or two.
Many years ago I was a municipal administrator in Ontario. There was a provincial program called OHRP, the Ontario home renewal program, which I had the opportunity to administer at the grassroots level for the senior citizens who needed repairs and to the low-income homeowners who needed a septic tank improved, for example. We could see the benefits day in and day out at that level.
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I know we're certainly struggling at the federal level with expenditures and the need to deal with those. Even though we consider it to be a very important program, I think we need to provide more effective argumentation in support of the multiplier effect of programs like RRAP. Even though you and I can see the benefits at the grassroots level, 99% of the population never sees that kind of benefit.
Does your association have any figures on how effective, in an economic sense and in a home renovation sense, programs like RRAP and their provincial counterparts have been, if there are still any left? OHRP was cancelled in Ontario a long time ago. Do you have any numbers that would support the argument that not only is it good for preserving our housing stock and for helping low-income Canadians, but it's good for the economy as well?
Ms Chisholm: The argument we've always made for RRAP, aside from the kind of benefits you've mentioned and we're both very aware of, is its employment generation ability. I don't have the figures on that with me, but I'll quote you the figures on new construction. For every new social housing unit that was produced in this country, 2.2 person years of employment were created in direct and indirect jobs related to that unit. There's a further benefit down the road in social housing in that it creates a local economy for the grocery store, the dry cleaner, the video shop or whatever, and there's an improvement there.
With RRAP funds, the percentage is actually higher because there is less material used and more time in repairing some of our older stock. The biggest argument that's always been made for RRAP is that it generates employment. It generates employment quickly. It's going to generate employment in areas where employment is really down now.
We all know about the drop in new housing starts in Canada. Over the last couple of years it's been quite incredible. It's down by about 50%. We're down to just over 100,000 units a year in Canada. So we know that's a sector that's really hurting right now.
In terms of creating employment, for every $1 that's spent, well over 50¢ goes into employment creation. I'm not sure of the exact amount. It's something like 75¢ or 80¢, but I don't have the numbers, I'm sorry. It's a really effective way of creating employment in an area where we have skilled people available and waiting for work.
Mr. St. Denis: I have a second short question, if I may.
You mentioned the case in Ontario - and maybe you can tell us if it's happening elsewhere - where provincial governments are looking at selling off the social housing inventory. With reference to Ontario, we have a specific promise to that effect in place. In many cases mortgages are almost paid off and we are suggesting that we will soon be reaping the benefits of those facilities. In your view, can a province simply sell those off without the permission of the federal government if the federal government is a mortgage holder?
Ms Chisholm: What we have to remember is that there's a whole series of housing programs that have been funded since the 1950s. Some of the programs in Ontario are directly administered by the provincial government, but they're complicated arrangements where the federal government is paying a subsidy to the provincial government in order to allow the residents to stay in place.
What the Ontario government is announcing and seeming to think it can do without looking at the legal agreements is that it will sell off the stock. If they sell off the stock, clearly one thing that would happen is that the federal government would refuse to continue to pay subsidy on a stock that was no longer held in the public hands. That was the whole intention of the subsidy. So they will lose the subsidy.
They are actually legally able to sell some units, a limited number of them, and some they aren't. On the ones they are able to sell, they'll lose the subsidy. So their immediate problem is that they then have tenants in place who can't afford to pay the kind of rent they would have to pay to a new owner, a new private sector landlord, unless the landlord bought the property at such a fire-sale rate that he could offer rents of $100 to $200 a month, a very low rate, in which case you really have to question the financial wisdom of selling at those kinds of rates. Or if the Ontario provincial government decides that it's going to provide shelter allowances instead of rent subsidies.... If they're to provide shelter allowances, they're giving up one form of subsidy that they're getting from the federal government, only to have to provide another themselves, so it's not a wise sort of financial move.
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In addition to that there are some legal problems around some of the public housing stock in which the municipalities and of course the federal government have an interest. For example, with the MTHA properties in Toronto, the City of Toronto owns the land. When those mortgages are paid off, ownership reverts to the city. So there are a number of very significant legal impediments to sale. I think what the government is announcing is its philosophical intention to sell, but I think they're going to actually find it financially quite difficult.
Mr. St. Denis: The complications that they will face may be the barrier preventing them from actually moving forth.
Ms Chisholm: We're hoping so, and we're hoping the federal government will take a strong vocal stand. We haven't heard yet from the crown corporation responsible for housing, or from the minister, but we certainly hope that the minister will speak up on these issues, because we're not hearing what the federal government's intention is with respect to protecting social housing and the investment that we've all made over the last thirty years.
Mr. St. Denis: Thank you, Ms Chisholm.
The Chair: Thanks, Mr. St. Denis.
I just have a couple of questions for LUAC. You talked about removing barriers to raising capital to help small and medium-sized enterprises. What did you mean?
Mr. Strain: Mr. Martin has commented from time to time about his and the government's frustrations with the banks and their unwillingness to provide financing to knowledge-based industries in particular that don't have the hard assets to put up as collateral security. We see a tremendous ongoing need and an increasing need for adequate financing as more and more knowledge-based industries in the small and medium-sized sector emerge.
It's not an easy problem and we don't have any magic solutions, but we are very anxious to offer our help, to the extent that we can, in working with government to come up with new and innovative ideas.
The Chair: You're saying that the life insurance industry might have that capacity, to help create equity in small businesses?
Mr. Strain: Possibly.
The Chair: Good.
Secondly, you said there should be no new taxes, that our current system is too complex, that taxes are excessive and unfair. What do you mean by unfair?
Mr. Strain: I think the comments, Mr. Chairman, were perceived to be unfair.
The Chair: Oh.
Mr. Strain: Of course, my taxes are unfair compared to your taxes, and your taxes are unfair compared to my taxes.
The Chair: You don't have suggestions, then, for creating a greater horizontal or vertical equity within the tax system?
Mr. Strain: I think there is certainly room to do that. I see the major problem as being one of perception. It's perceived in the general community that the system is unfair. Taxes are perceived to be too high, too complex. Almost regardless of whether we need tax reform or not, we almost need a reform to bring credibility back into the system to address the underground economy and what is seen to be the tremendous growth in the underground economy. We're seeing more and more comments in financial circles of moving money offshore to avoid and escape the Canadian tax net. This doesn't bode well for a system that relies substantially on voluntary compliance. Whether the solution is a flat tax or a broad-based simplification of the current system, I think that something clearly has to be done.
The legislation we're seeing coming out now on matters that seem to be very simple is extraordinarily complex. Let me give you one example.
In the 1994 budget the government removed the exclusion from taxing employer-paid premiums for group life insurance on the first $25,000 of coverage. Previously that had not been a taxable benefit, but the 1994 budget took that exemption away. I don't recall the exact number, but it took something like 18 pages of detailed legislation to remove an exemption. I found that just mind-numbing, and I think we're seeing more and more of that kind of legislation emerge out of a tax system that's running amok.
The Chair: Are you suggesting that 18 pages were unnecessary or that it was just incompetent drafting?
Mr. Strain: I would have thought one simple clause to remove the exemption would have been sufficient, and let the private sector worry about valuing the benefit that should be ascribed to each individual participant in a group plan. That would seem to me to have been the way to go.
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Instead, the government decided to legislate how the value was to be determined relative to sex and age differences and relative to all sorts of other minutiae, which in my view was completely unnecessary.
The Chair: Lastly, subsection 112(3), the stop-loss rule you're talking about. I don't whether other members at this table have been familiarized with your battle with us and the finance department on this issue. If not, I encourage you to make available to other members what your concerns are.
Let me just say this. As I understand it, in every case where you have, say, a small business owned by a family and you want to provide for continuity of ownership within the family or among employees or whatever, life insurance can play a very valuable role in assisting that transition.
You have found a way that there will be no deemed realization on death if you take one particular step, and that is to have a redemption of shares by the corporation. In all other cases where those shares are transferred or conveyed or turned over, there will be a deemed realization. The department is attempting to ``plug'' this loophole. Is that your version of it, Mr. Strain?
Mr. Strain: I think it's much broader than that, Mr. Chairman. The amendment that was proposed in the April technical bill was not, we are informed, directed at the strategy you mentioned at all. In fact, when we brought that to the attention of officials in the Department of Finance they were surprised.
Our fundamental concern with the amendment is that it destroys what's referred to as the integration concept. The integration concept, as it affects closely held private corporations, is fundamentally that when a corporation earns income and distributes that income to shareholders after paying corporate tax, the shareholder should bear no greater tax burden on the income earned by the corporation and flowed through in the form of dividends than the shareholder would have paid had he received and earned that income directly. That was a fundamental principle established in 1972.
The particular amendment that is proposed would in effect create double taxation on income that flows through a corporation, in certain circumstances. For example, in the life insurance context, apart from the strategy you mentioned, if a corporation receives life insurance proceeds and following the death of a shareholder distributes those proceeds to the shareholder, in effect those life insurance proceeds are taxed. If instead life insurance was on the life of the individual shareholder and the proceeds were received directly by the son or daughter of the shareholder, for example, there would be no tax. That is the most clear-cut example of the destruction of the integration concept as it affects this particular strategy.
The Chair: Thank you.
Does anybody else have anything they wish to add? Before we close, is there anything any of our witnesses would like to leave with our committee by way of parting words?
Mr. Graham.
Mr. Graham: I just wanted to address some of the comments Mr. Solberg made when he was sort of leading Keith into saying we don't need any more government subsidies.
There's often an impression that our artists and the cultural sector in general live on subsidies. I think if you look at the overall employment in this sector and at the amount of money flowing in, it's much lower in arts and culture than it is in things like fisheries and forestry and agriculture, etc. Besides, the individual subsidies themselves are so low nobody could live on them, believe me. An artist actually takes a cut in income when they go on a grant.
That's all. I just want to remove that notion.
What we're often talking about is those infrastructural things. I want to caution, as Keith mentioned, everybody from running for the door. When the municipalities are pulling out, when the provinces are pulling out, when everybody is seeing an opportunity to cut - until there is some coherent policy in place, don't run for the door too quickly, because the damage could be much greater and end up costing a lot more.
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I think this applies right across the cultural sector. It's not a case of saying we need more money, but I think there's extreme caution needed. Unless there's a coherent, overall policy towards cultural spending, this snip-and-cut run for the door is going to be very detrimental.
The Chair: Thank you, Mr. Graham.
Ms Chisholm.
Ms Chisholm: Thank you.
I'd like to urge the committee to consider the value that we've built up in Canada in our social housing stock. We're not spending any new money on social housing, and I guess we've come to accept that, not that we wouldn't argue the opposite. In the next few years, however, there are going to be very serious decisions made about whether or not to hold onto it and on how to protect the stock. I think the federal government has a very clear responsibility to make decisions in this area based on sound economic judgment and not simply to make a philosophical move to devolve itself of social housing. I fear we're seeing it from the provinces, and I really would like to see a clearer message come from the federal government that we have something we believe in that is of value and that is a very significant tool we can use in the future.
The Chair: Thanks, Ms Chisholm.
Mr. Strain.
Mr. Strain: Thank you, Mr. Chairman.
I'd just like to come back to the main thrust of our presentation, the crisis that I think we face in terms of national debt at all levels of government. The national debt is nothing more than a tax on future generations, on our children and grandchildren. If we're not prepared to pay for a certain level of social spending and other government programs, why do we expect our children to pay? I think we have an opportunity now to make tremendous inroads into eliminating the deficit and to start paying down the debt. I'd just leave two questions for the committee to consider. If not us, then who? If not now, then when?
The Chair: You're quoting Hillel, I know.
Ms Chisholm, if you have a written presentation outlining what the role of the federal government could be in assisting the establishment of this corporation by undertaking the measures you suggested, perhaps you could provide it to the committee. I think all of us appreciate the tremendous stock of capital that has been built up and has made us a more gentle, caring society.
As for LUAC, thank you for your support for continued fiscal responsibility. We know you represent a very important industry and we look forward to continuing to work with you.
My last comments are to Greg Graham and Keith Kelly. Once again, I think it's really important that you be a regular part of our consultation process. You represent a great number of people who do far more than GDP figures would indicate for what we consider to be our country, ourselves and our souls. You have given us some very concrete and specific ways in which we can probably assist by creating a better infrastructure without necessarily creating greater expenses. I'm going to pore over each of your ten recommendations to us, and I hope most of those can be fulfilled by us. To the extent that they're beyond the competence of this committee because they don't involve budget measures, I still think we should be prepared to work with you to understand them better and to be prepared to have an ongoing dialogue.
We look forward to the continuing presence of each of you before our committee in the days and months ahead. On behalf of all members, I thank you very much for excellent presentations.
We are adjourned.