Chapter 3: Budget Recommendations
The record until now and the background analysis and assumptions set out above provide the context for the Committee's recommendations for the 1997 budget.
This chapter deals first with the issues related to the Government's deficit reduction program. These include the Government's targets and its deficit reduction approach.
It turns then to measures the Committee recommends to deal with specific matters placed before us since we began pre-budgetary consultations in October. These measures deal with particular hardships, anomalies and inequities that have been brought to the Committee's attention. They also include recommendations based on the need to ensure that, as fiscal health returns, we do not find we have created other deficits -- in social policy, in research and development and in our capacity to compete in the future.
A. The $9 Billion Deficit Target
The deficit target for 1998-99 of $9 billion represents a deficit-to-GDP ratio of 1 per cent. This would follow annual targets progressively lowering the deficit-to-GDP ratio from nearly 6 per cent for the fiscal year in which the Government assumed office, to 5 per cent in 1994-95, 4 per cent in 1995-96, 3 per cent in 1996-97, and 2 per cent in 1997-98.As set out above, the targets have been exceeded in the two fiscal years completed and on the basis of performance so far in 1996-97 will likely be exceeded in the current fiscal year.
As has been made clear by the Minister of Finance and endorsed by the Committee since the Government began setting out its budgetary assumptions for comment by the public through the Committee, these are interim targets, with a new target as each one is met.
"...lower interest rates are likely to create jobs in the hundreds of thousands in the next couple of years. So one would not want to jeopardize those hundreds of thousands of permanent jobs by a fiscal stimulus that would bring benefits measured, at best, in the tens of thousands of jobs."
Mr. John McCallum (Senior Vice-President and Chief Economist, Royal Bank of Canada)
They have also been measured and reasonable targets. Restoring the credibility of the Government's forecasts and its capacity to set targets and hit them is a part of the reason for this orderly progression toward a one per cent deficit-to-GDP ratio in 1998-99.
In addition, it has been clear from the outset that for the Government to reach these targets it would have to rely on the support of Canadians. They would have to be willing to accept the challenge and, at times, the pain and dislocation of adapting their lives, their businesses and their expectations to an era of more affordable efficient government and an era of sustainable government programs.
With the Government exceeding its targets, arguments have been advanced that the Government should move more quickly toward a balanced budget and a budgetary surplus that could begin the process of debt reduction, not simply reducing the deficit relative to the size of the economy.
"There is a great deal of debate within this country and in all industrial countries about the aging profile of populations. They are going to put enormous pressures on governments and the working population to meet the needs for pensions and health care and related aging issues. All of these risk ballooning the debt structure unless we bring it down ..."
Mr. Josh Mendelsohn (Chief Economist and Senior Vice-President, Canadian Imperial Bank of Commerce)
The Committee believes that as much prudence is needed in establishing targets as in establishing the assumptions that underlay budget preparation.
Deficit reduction has been difficult for Canadians, requiring of them both considerable forbearance and a willingness to sacrifice to achieve the shared goal of restored fiscal health. The pace of deficit reduction has been sufficiently rapid to make the Government's commitment clear, but sufficiently measured to allow Canadians to adjust to immense changes in their lives brought on by the new economic imperatives.
If current trends continue, the one per cent target will be hit. But if events conspire against a continuation of the trends now in place, further budgetary measures may be required to hit the target. It is more important to hit every deficit target than to set more ambitious targets and miss them.
The Committee recommends that the 1 per cent deficit-to-GDP ratio or $9 billion deficit target for 1998-99 proposed by the Minister of Finance be adopted.
B. Two-Year Deficit Reduction Targets
The reasons for the shift from five-year rolling deficit targets to two-year targets have already been explained.The Minister of Finance has recommended that this approach be continued by adding the year 1998-99 to the two-year planning horizon.
"We feel it's time for the government to stop focusing exclusively on the deficit. The situation is well under control and low interest rates are certainly the government's best ally. What we need now is an obsession, really, for creating jobs in Canada."
Mr. James A. McCambly (President, Canadian Federation of Labour)
The Committee believes this approach has contributed in an important way to preventing the delay of needed fiscal reforms and recommends that the two-year rolling targets continue to be the basis for establishing and achieving deficit targets.
The Committee also believes that the deficit target of $9 billion can be met without further fiscal measures, provided there are no unexpected surprises. The Committee underlines, however, the importance of the Government continuing to meet or surpass these new targets, as it has in the past.
C. The Prudence Factor
In the Minister of Finance's first pre-budget presentation to the Committee in October, 1994, the proposed prudence factor was 50 basis points on top of the private sector average forecast for interest rates. The Committee recommended, and the Government has adopted in all subsequent budget forecasts, a prudence factor of between 50 and 100 basis points. For the next budget, the Minister has proposed a prudence factor of 80 basis points on the T-Bill rate and 50 basis points on the 10-year benchmark bond rate.For planning purposes, this provides a short-term rate of 5.3 per cent and a 10-year rate of 8.0 per cent. These interest rate assumptions result in nominal growth 0.2 per centage points lower than the private sector average forecast, or nominal growth of 4.4 per cent. Because interest rates have declined since the private sector forecasts were made, growth should be even higher.
The 80 basis point assumption for the T-Bill rate is higher than the Minister of Finance has used in the past. The Committee believes that added caution is entirely appropriate because of the risks ahead. After twenty interest rate reductions in twenty months, rates may go up. U.S. inflation could spill over into Canada in the form of higher rates. Some experts have predicted that the efforts of the European Community to achieve monetary union by 1999, whether successful or not, could produce monetary turbulence. Other international financial crises that could impact Canada are always possible. As well, the question of Quebec's status in Canada still remains unsettled.
"Monetary shenanigans in Europe are going to be on too large a scale not to have an impact on international capital markets, generally. So I would also be doing a little bit of quiet contingency planning for that eventuality."
Professor David Laidler (Faculty of Economics, University of Western Ontario)
In October 1996, the Finance Minister revised the prudent economic assumptions previously outlined in the February, 1996 budget. The Government now expects the following for 1997:
- real GDP growth will be 3.0 per cent as opposed to 2.6 per cent; and
- nominal GDP growth will be 4.4 per cent rather than 4.3 per cent.
The Committee recommends that, subject to updating, the Government base its pre-budget planning on the above assumptions which incorporate a prudence factor of 50 to 100 basis points.
D. The Contingency Reserve
As stated, the contingency reserve is to ensure that deficit reduction targets can be met in the face of unforeseen events. It is not a pool of funds for discretionary expenditure.The Minister of Finance has recommended that the contingency reserve be established at $2.5 billion for 1997-98 and $3.0 billion for 1998-99.
A year ago, in light of volatile monetary conditions in the previous year and a high degree of uncertainty, the Committee recommended that the Minister consider whether a reserve of $3 billion might not be more appropriate for each year.
"It's clear that the expectations for T-bill rates have come out much better than anyone expected. If that kind of difference from reasonable expectation six months ago can occur, then it's equally likely in my estimation that something will happen in the next twelve months that would give us a reversal of that good fortune."
Mr. Leo de Bever (Vice-President, Research and Economics, Ontario Teachers' Pension Board)
This year, in light of the Government's strong deficit reduction performance since 1993, the level of interest rates and the signs of growing economic strength, the Committee believes that the Minister's proposed levels for the next two fiscal years represent an adequate and prudent provision against the unexpected.
As well, the past record of the Government not having to use any portion of the contingency reserve to meet its deficit targets, gives the Committee confidence that the proposed levels are sufficient.
The Committee recommends, as proposed by the Minister, that the contingency reserve be set at $2.5 billion for 1997-98 and $3 billion for 1998-99.
E. Scope for New Measures
The Committee has made clear its belief that the best interest of Canadians lies in continuing on the path to fiscal health and prosperity and our recommendations are aimed at this goal.
"Generally there are two main extremes that we are hearing, both in the press and on the Hill. One is the temptation to swing open the doors of the candy store and a return to prodigal spending. There is another extreme, which is advocating the continuation of massive cuts, and continuing and new cuts to our social safety nets. It's equally damaging to Canada."
Ms Debra Ward (President, Tourism Industry Association of Canada)
We need to hit each deficit target as it comes due. We need to avoid the extremes of slash-and-burn spending cuts, unaffordable overall tax cuts or expensive new programs that would undermine the new confidence in Canada built up at such sacrifice.
But the Committee does not believe that the Government's only responsibilities lie in getting the big numbers right and avoiding fiscally dangerous ideas.
Within the bounds of the Government's broad fiscal policy framework, it also has a responsibility to help Canadians adjust to change and to confront the difficulties they face in their daily lives.
"Deficit reduction that creates a sick society is something we cannot afford... over time, the system is going to fall apart in terms of universal quality access. We're going to end up with two-tier health care by default, by stealth."
Mr. Michael McBane (Coordinator, Canadian Health Coalition)
The Government must ensure that we are building a country that is more than just a clean set of books. Its responsibility is to nurture those forces which will stimulate economic growth, create high-skill and high-wage jobs and increase the opportunities for all Canadians to participate to their fullest potential in the life of our nation.
The Committee believes that, because of the Government's success in exceeding its targets and restoring confidence in the Canadian economy, it has some room, albeit very limited and subject to financial market expectations, to target specific priorities today in order to create even greater opportunities for tomorrow.
The Committee believes that these opportunities should include support for children, far too many of whom are in poverty and in danger of being denied, at a critical time in their lives, the chance to develop in a healthy and stimulating way so that the future that should be theirs will not be denied to them.
"We believe Canadian science is at risk as ... We ask for the next budget that the federal government invest in science, reinvest in its scientists, and reinvest in its scientists of the future. These dollars will lever key funds from industry. They will create new industries, rather than go across the border along with our talented young people."
Dr. Connie Eaves (President, National Cancer Institute of Canada)
They should include assistance for those with disabilities whose capacity to meet their own needs, contribute to their country and enrich the lives of their fellow citizens depends on a measure of public investment.
They should include special initiatives to ensure that education will increasingly be a Canadian strength, that the literacy skills of Canadians will be enhanced, that research and development in Canada can expand both as a basis for new enterprises and as a magnet capable of holding the best-and-brightest Canadians against the recruiting blandishments of other countries.
Also, they should include strengthening Canada's charitable and voluntary sectors, an extraordinarily dynamic and growing force in the lives of Canada's communities, to ensure that the Canadian social union can attract the investments necessary to create new solutions to the problems of everyday life in a time of profound change.
F. Areas of Priority Concern
This section of our report is focused on both the immediate problems and new possibilities that arose during our hearings throughout the country. The Committee underlines, however, its conviction that action in these areas must take place in the next and subsequent budgets within the context of the on-going commitment to meet and surpass our deficit targets, deal with the issue of our enormous debt, restore our fiscal health and finish the job we have begun.
(a) Children in Poverty
In November 1989, the House of Commons unanimously approved the following motion:"That this House express its concern for the more than one million Canadian children currently living in poverty and seek to achieve the goal of eliminating poverty among Canadian children by the year 2000."
That goal is still a long way from being achieved and we do not have policies in place to meet the goal. Indeed, to quote Professor David Laidler, "Child poverty, in my view, is the major social problem in Canada. We have just about wiped out poverty among old people, and we visit it upon children. That is a catastrophically stupid thing to do, because old people die and poor young people grow up to be poor working age people."
"I believe there is a very strong public appetite for investment in children and for investment in education and social services."
Mr. Harvey Weiner (Deputy Secretary General, Canadian Teachers' Federation)
While the federal Government delivers some indirect child benefits through the Canadian Health and Social Transfer, its direct income support to families with children is delivered almost exclusively through the Child Tax Benefit, an income tested program providing a basic benefit of about $1,000 per child. Its annual benefits total $5 billion.
Part of the CTB is the Working Income Supplement (WIS) designed to help low income parents meet extra costs associated with having a job. This refundable tax credit is also designed to take into account the fact that a variety of in-kind benefits are available to families receiving social assistance but not to those in the work force, even though they have similar standards of living. Families with net incomes between $10,000 and $21,000 per year earn the maximum supplement, which is now $500. The WIS accounts for approximately $250 million of the total cost of the Child Tax Benefit.
Ken Battle of the Caledon Institute described the existing system of child benefits as an "unbelievably entangled system". Children in welfare families receive a higher level of benefits than do children of working poor families with similar standards of living. He presented figures for Ontario showing that a two-parent, two-child family on welfare receives over $3,000 more in child-related benefits than does a working poor family. This creates a welfare wall, making it more advantageous to stay on social assistance than to work.
He told the Committee that several provinces are now implementing integrated child benefits programs that deliver benefits to all children in low income families. British Columbia has a program in place that is delivered by Revenue Canada. Alberta, Saskatchewan and Quebec are moving in the same direction. The Minister for Human Resources Development is currently discussing the integration of all federal and provincial child benefit programs with all provinces.
Meanwhile, the federal Government plans to double the WIS benefit to $1,000 in July, 1998 at an added cost of $250 million. The Caledon Institute asked that child benefits be increased over three years by $1.2 billion.
The Institute also asked that ways be found to speed up the process of getting resources to those needing them. WIS benefits are based on the previous year's income, and are therefore not responsive to the changing circumstances. For example, a low income family entering the work force in January, 1997 would not see any WIS payments until July, 1998.
"I wouldn't be the first to characterize Canada's child welfare system, a system administered by the provinces but partially funded by the federal government, as dysfunctional and abusive. It shares all the characteristics of a typically abusive parent."
Mr. Brian Raychaba (Former Research Officer, National Youth in Care Network)
At the same time, it is important to note that the Working Income Supplement is better than the Child Tax Benefit in targeting help to those most in need. Any increase in the basic CTB, for example, would deliver a large part of its benefits to middle-income families rather than the lowest-income families. In contrast, the WIS delivers maximum benefits to working parents with family net income between $10,000 and $21,000; families with incomes above $26,000 receive no WIS. In brief, while an enhanced WIS can be precisely targeted, a similar enhancement of the Child Tax Benefit would deliver far less to the same families.
The Committee believes that helping children in poverty should be a main priority of the Government.
The Committee recommends that the Government enhance the Working Income Supplement beyond what was announced in the 1996 budget, but not so as to increase marginal tax rates and thus become a barrier to work.
The Committee recommends that Revenue Canada seek ways to make the Working Income Supplement more responsive to the changing employment circumstances of parents and more capable of delivering support when it is needed.
(b) Canadians with Disabilities
The Federal Task Force on Disability Issues released its report in October. It was chaired by Andy Scott, Member of Parliament for Fredericton-York-Sunbury. Its other members were Clifford Lincoln, Member of Parliament for Lachine-Lac Saint-Louis, Andy Mitchell, Member of Parliament for Parry Sound-Muskoka and Anna Terrana, Member of Parliament for Vancouver East.
"When someone who is learning disabled goes to university, they've already beaten the odds by actually getting into the institution.
If the government were to ask us what one thing it could do for us, we would ask you to look at the disability tax credit and recognize that expenses incurred by parents of children with learning disabilities are legitimate."
Mr. James Horan (President, Learning Disabilities Association of Canada)
The Task Force made over 50 recommendations based on consultations with more than 2,000 Canadians with disabilities from across the country and on research and analysis done by independent experts in the field of taxation and social policy.
The key message of the Task Force was that living with a disability almost always entails additional costs. Where the federal Government has jurisdiction such as in the area of tax policy, it should take action to address this issue, at the same time recognizing the interrelationship of taxation to issues of income support and labour market integration, all of which are critically important to Canadians with disabilities.
The Task Force cautioned, however, that the federal Government must minimize the risk of provincial governments neutralizing the positive impact of tax changes by reducing, for example, provincial income support by a comparable amount. This would simply lead to the federal government picking up a larger share of the cost rather than disabled Canadians having more resources to overcome the barriers they face.
A wide range of witnesses before the Committee expressed their strong support for the recommendations in the Task Force report. They noted that there are many practical and constructive ways in which fiscal policies and programs can help people with disabilities to lead more productive and rewarding lives, and to make a greater contribution to their community and country. Tax policy can and should support the social policy objectives of inclusion, independence and productivity.
The Committee commends the Task Force for its excellent work and recommends that the next budget contain measures to recognize the additional costs borne by Canadians with disabilities.
The Committee supports the Task Force recommendation that the Government work toward putting in place a new disability expense tax credit that would both recognize the costs of disability and more accurately reflect the actual monetary costs to an individual. It would combine the best features of the current Disability Tax Credit (DTC) and the Medical Expense Tax Credit (METC).Meanwhile, the Committee supports the Task Force recommendations that the DTC be amended to offset the erosion due to inflation and fully index it, to allow it to be transferred to any supporting person and to expand the list of para-medical professionals who are able to certify eligibility for the credit.
The METC should also be amended by adding to the list of eligible items all necessary medical expenses, including nutritional supplements for those with HIV, air conditioning, vans, lifting devices and attendant care. The $5,000 limit on claims for attendant care should be removed, as should the $1,614 limit on net income exemption.
(c) Literacy
The economy of the future will require workers, managers and executives with higher skills than now and the capacity to constantly update skills and knowledge. Literacy is an essential tool in a knowledge-based economy.Compelling statistical data from the OECD and Statistic Canada's International Adult Literacy Survey was provided to the Committee, showing that 42 per cent of working age Canadians have varying degrees of difficulty reading and understanding material as basic as a newspaper. Even worse, only 22 per cent of Canadians have the highest levels of literacy skills required for the high value, high knowledge jobs of the future.
Witnesses testified that the changing economy is demanding ever higher levels of literacy for all working Canadians. The Committee also heard that intergenerational patterns of weakness in literacy skills are of profound concern. Literacy skills are developed at an early age. The role of the family in fostering these skills is fundamental.
"There is a widespread misconception that health and education are essentially consumer goods.
Given the massive evidence - and I think this sort of evidence is not commonly known outside of academia - that investment in human capital is one of the major sources of growth, this sort of thinking is clearly mistaken and is downright dangerous."
Professor Kanhaya L. Gupta (Department of Economics, University of Alberta)
To the extent that Canadians already in the workforce are weak in terms of literacy, investing in building up these skills by an individual worker or as a matter of company policy is a high-payoff way to create the tools that will provide access to a world of changing and expanding knowledge. Lacking these tools, workers and employers alike can only fall behind competitors in the workplace and in the marketplace.
The challenge today is to provide literacy and learning for all. The Government's recent decision to provide a GST rebate on books purchased by schools, public colleges, universities, public libraries, and groups promoting literacy was recognized as a very positive step.
The National Literacy Secretariat, under the leadership of Senator Joyce Fairbairn, was recognized for its role in supporting the literacy community with research, infrastructure and learning materials as well as its ongoing financial support. Even so, the demands on literacy organizations and their large number of volunteers far exceed their resources.
The Committee believes that we must tackle the problem of literacy through partnerships with every sector of society. Our economic future depends on it.
The Committee recommends that support to the literacy community through the National Literacy Secretariat, currently $22.3 million per year, should be significantly increased.
(d) Student Educational Costs
Students across the country are facing higher education costs. The Canadian Federation of Students estimates that the level of debt of graduating students rose from $16,000 in 1990 to $24,000 in 1994.In the last budget, the Government provided tax assistance worth over $80 million a year to help students and their families deal with the increased costs of education. The Government increased the amount on which the education credit is based from $80 per month to $100 per month for the 900,000 students claiming it. In addition, a student with insufficient income to take full advantage of the education and/or tuition fee credits may transfer the credits to a supporting spouse, parent or grandparent up to a maximum of $850, an increase from $680. In total, a student may now transfer $5,000 in tuition fees and education amounts, up from $4,000.
The Government also increased the annual contribution limit to registered education savings plans (RESP) from $1,500 to $2,000 and the lifetime limit from $31,500 to $42,000. In addition, the eligibility for the child care expense deduction (CCED) has been broadened to include parents who are attending school full-time.
"...It appears to me that we have to free up some capital for the young people of this country because they're our hope."
Mr. Al Dredge (President, Edmonton Real Estate Board
The Committee was advised that under existing rules, the tuition expenses credit is deductible only in the year in which those expenses are incurred. In addition, student union dues and ancillary fees are not treated the same as tuition fees for tax purposes. The student federation also asked that the exemption for scholarship, fellowship and bursary income be raised.
The Committee recommends that students be able to carry forward the tuition fees credit as a deduction against future income, rather than being limited to one year. Education, like saving for retirement, is a long-term investment and the tax treatment of students should reflect that reality.
Second, the Committee recommends that ancillary fees receive the same tax treatment as tuition fees, and that the $500 exemption for scholarship, fellowship and bursary income be doubled.
"... many of these people are having increasing difficulty in returning to learning, not because the facilities aren't there - they are there and they're working well - but because of a simple inability to finance their return."
Mr. William Day (Chair, Association of Canadian Community Colleges)
Third, the Committee recommends that special opportunity grants be provided for students with parental responsibilities and that these grants be modelled on the existing grants for students with disabilities and for women in non-traditional fields.
(e) Research and Development
(i) Granting Councils
"When we say that these are strategic investments, we really mean it... people who are trained through the science and engineering research that goes on in our universities are highly employable. They find themselves in high-impact jobs. A recent survey that we did shows an unemployment rate of only 2% among former holders of NSERC scholarships."
Mr. Steve Shugar (Director of Policy and International Relations, Natural Sciences and Engineering Research Council of Canada)
If Canada is to compete in the new global economy, Canadian universities and colleges must be involved in basic scientific research. If these institutions cannot compete, they will be unable to attract and hold either the scientists and teachers or the students and graduates Canada needs to compete in a high-knowledge world economy.
The granting councils, the Natural Sciences and Engineering Research Council (NSERC), the Social Sciences and Humanities Research Council of Canada (SSHRC) and the Medical Research Council (MRC) perform an excellent role in promoting university research and graduate education. They have been cut from a total of $958 million in 1994-95 to $867 million for 1997-98.
The Committee recommends that priority be given to increasing the funding of the granting councils.
(ii) Networks of Centres of Excellence ProgramThe Networks of Centres of Excellence (NCE) Program was begun in 1988. Today, there are 14 research networks working in the fields of health and biotechnology, information technology, natural resources, infrastructure and human resources. University researchers are linked to one another and to partners in business and government.
"The training of a clinical scientist takes about ten years after he or she receives a first university degree.
Without clear evidence that this country is interested in the development of innovative health care solutions, it is hard for us to encourage young people to take up medical research as a career. It is often difficult for us to attract young faculty members to fuel and rejuvenate our university-based research system and our internship-based research system."
Dr. Victor Ling (Vice-President, Research, B.C. Cancer Agency
The aim of NCEs is to take the best in academic research and commercialize it. Out of 300 projects undertaken, 130 have gone into production and 19 new companies have been formed. Over 400 companies, 48 universities and 38 hospitals, as well as government departments, non-profit and international agencies have been partners, and over 5000 students will have been trained on these projects by 1998.
The NCE Program is unique to Canada. As George Connell said: "It is the most effective instrument yet discovered for capturing the benefits of academic research for the advantage of the Canadian economy."
The Committee agrees with Mr. Connell and recommends that the NCE Program be renewed for the third phase of research for the period 1998-2002, that funding be comparable to the original funding level of $240 million over four years and that a number of new networks be established in areas of national importance.
"This is not a time for disinvestment in the universities. We are in a knowledge-intensive, competitive global time, and surely the universities are a key to the future of this nation. Yet we see disinvestment going on at rates that are unbelievable and, compared to the other sectors, very differential and discriminatory."
Mr. David Strangway (President, University of British Columbia)
The Committee recommends that a Phase III of the NCE program (1998-2002) be announced in the next budget, along with the provision of adequate multi-year funding.
(iii) Infrastructure InvestmentMany witnesses before the Committee addressed the issue of whether Canada should institute another national infrastructure program.
Under the program promised by the Government in the last election and launched in 1994, the three levels of government each contributed $2 billion for infrastructure investments.
The Committee considers that Infrastructure I was highly successful. It helped to rebuild traditional infrastructure throughout Canada. It provided an example of co-operation and partnership among the three levels of government. It put 100,000 Canadians to work at a time when the economy needed a jump start. It was not surprising that many witnesses called for a second infrastructure program similar to the first.
The Committee does not believe that the Government has sufficient funds for a second infrastructure program of the same scope. In addition, the Committee heard proposals for other approaches that might be desirable in that they hold out the promise of long-term employment, as well as short-term jobs, and will enhance our country's competitiveness over the long term.
"One of the important things an infrastructure program would do is to allow the universities to play in the larger leagues, in which they ought to be playing."
Dr. Art May (President, P.J. Gardiner Institute, Memorial University)
It would be directed, in part, to providing new infrastructure for research and development through our public institutions such as universities, colleges, hospitals and research facilities. As part of this, it would underpin the national effort to ensure Canada's capacity to make the best use of the information highway technologies that are transforming science, health, engineering and virtually every aspect of national life. This, in the Committee's view, would represent a long-term contribution to enhancing both Canada's overall level of productivity and our long-term prospects for high-level, high-knowledge jobs.
The infrastructure program should be directed as well, in part to traditional infrastructure projects, including waste treatment, water supply, transportation and environmental protection and enhancement. This second part should also be available for health care and educational institutions.
The Committee recommends that a second infrastructure program of more modest scope be undertaken.
"As for the infrastructure program, we would be in favour of a Phase II, but we would want it to be more targeted. The Government of Quebec has already made a commitment, but we feel that the federal government could provide more targeted and more equitably funded support."
Mr. Pierre Paquette (Corporate Secretary, Confédération des syndicats nationaux (CSN)
The Committee recommends that the federal government finance one third of the program. The remaining two thirds could come not only from other levels of government, but from the other public institutions as well as private donors in whatever measure might be arranged. Local partners should continue to have the deciding voice in selecting projects. The Committee believes that partnership arrangements of this kind represent one of the more promising ways to help build the infrastructure needed for the twenty-first century.
(f) Charities and the Voluntary Sector
(i) The Need to Support Volunteers
"There is an opportunity here for a different kind of leadership. I think in a period of insecurity what people look for is a new kind of anchor, some sense that we are going to hold onto basic values that are Canadian, that there will fundamentally be an effort on the part of governments and citizens collectively to create a shared community."
Mrs. Judith Maxwell (Chairman, Canadian Policy Research Network)
The Committee heard compelling evidence that charities require more resources if they are to fulfill the larger role that is expected of them and has been forced on them by government restraint. Charity representatives testified that the growth in charitable donations is very modest, however, and is being outstripped by reductions in direct government support to charities.
The Committee believes that the programs and services offered by Canada's charities contribute immeasurably to the quality of life in communities from coast-to-coast. The Committee recognizes that, without a vital voluntary sector, public sector responsibilities and costs would be much greater. The spirit of voluntarism is widespread among Canadians. We need to find new ways to tap into that spirit to meet growing needs, encourage social innovation and strengthen the country.
Charities and other voluntary groups constitute an important part of our nation's social capital. In any given year, six million Canadians volunteer about one billion hours of service to others. This is equivalent to the work done by 617,000 full-time workers, or 5 per cent of all jobs in Canada. Much of the work of volunteers is done through charities. Together, they enable Canadians to help and support one another outside of the framework of government.
(ii) Better Tax Incentives are Needed
Members of the Committee were impressed that almost all charity and voluntary sector witnesses expressed the belief that their resources can be expanded substantially through fundraising. They argued, however, that they need better "tools" to do the job in the form of larger tax incentives for donors. Again this year, the Committee supports their argument.
Two years ago, this Committee's pre-budget report strongly urged the Government "to undertake a comprehensive review of the fiscal incentives for the charitable, voluntary, non-profit and cultural sectors". Last year, the Committee's pre-budget report recommended three specific measures "to give Canadian charities the opportunity to make up for lost public funds with private donations."
In the 1996 budget, the Minister of Finance implemented one of the Committee's recommendations in its entirety, and another in part. Most significantly, he said:
"Clearly, a case has been made that more can be done. Therefore, over the next year and in consultation with the charitable sector, we will examine ways of further encouraging charitable giving and charitable activities."
"I think the reduction in government funding, ...cannot be replaced with voluntary sector funding. It cannot be replaced with charitable funding. I don't think today is about finding a way to replace government dollars, but... how we can work as a charitable sector with the federal government ...to do as much as we can in changing times."
Mr. David Armour (President, United Way of Canada)
Representatives of the Voluntary Sector Roundtable described to the Committee the extensive consultations that have occurred since the 1996 budget between their Charitable Incentives Review Task Force and officials of the Department of Finance. This consultation process was, in the Committee's view, a model for the public policy partnership that should evolve between the federal government and the voluntary sector as Canadians strive to enhance their quality of life while containing taxes and government spending.
Through this consultation process, five criteria were identified to guide decisions about tax incentives for charitable giving: encouragement of incremental giving; non-susceptibility to abuse; affordability; integrity of the tax system (including equity, efficiency and simplicity); and recognition of charities' need for stable funding. These criteria have helped to shape the Committee's recommendations.
The Committee recognizes that charities' fundraising revenues come from a combination of small donations, large gifts, bequests, corporate contributions and grants from foundations. This diversity calls for a balanced approach to tax incentives that recognizes both the different types of donors and the different financial needs of small and large charities. The Committee believes that the level of donations required to support the work of Canadian charities cannot be reached without significant new tax incentives for donors.
(iii) Current Laws
"We pride ourselves in Canada on being a kind, generous, and gentle nation, but you can't say that if you look at just the dollar amounts of our giving. One of the main reasons is the fact that we tax gifts."
Hon. Henry N.R. Jackman (Lieutenant Governor of Ontario)
Currently, taxpayers who submit official receipts for their charitable donations are entitled to reduce their federal tax payable by 17 per cent of the first $200 donated, and by 29 per cent of any donation amount above $200. When the impact on provincial taxes and surtaxes is included, the total value of these tax credits is approximately 25 per cent of the first $200 and 50 per cent of amounts beyond the first $200 (total value varies somewhat by the donor's marginal tax rate and province or territory of residence). Donors may not claim any credit for donation amounts that exceed 50 per cent of their income, although they may carry excess amounts forward for five years.
(iv) Charitable Giving in the United States
A comparison of taxation data regarding charitable giving by individuals in Canada and the United States reveals that Americans give approximately 1.9 per cent of their personal income to charity, whereas Canadians donate only 0.7 per cent.
The gap is greatest for high-income individuals: Canadians with incomes between $100,000 and $150,000 give 1 per cent of their income to charity, while Americans at that income level donate 3.6 per cent. If charitable giving in Canada increased to the same per centage of income as in the United States, charities would receive an additional $5.8 billion annually from individual donors.
(v) Appreciated Capital Property
The Committee is convinced that a significant part of the giving differential between high-income Americans and Canadians arises from the preferential tax treatment available to Americans who donate assets to charity.
"Our position is very focused. If you're going to provide further incentives, they should go to those charities that are feeling the impact of cutbacks in government. The charity sector that deals with the spiritual well-being of the community should not receive inducements at all."
Mr. Ron Knechtel (Senior Adviser, Canadian Council of Christian Charities)
Unlike Canadian donors, Americans are exempted from capital gains tax on gifts of appreciated securities or real estate. This exemption encourages wealthy Americans to contribute their appreciated assets for charitable purposes instead of keeping them for personal use.
The report Giving USA 1995 (published by the AAFRC [American Association for Fund-Raising Counsel] Trust for Philanthropy) describes the importance of gifts from the assets (as opposed to the incomes) of wealthy donors: "Households with ... net worths of $50 million or more made average contributions of ... 17.8 per cent of their income ... Wealth makes a greater impact than income on the amount given and on the per centage of income given." The same report links the dramatic growth in American charitable foundations during the 1980s with the 1984 introduction of the exemption from capital gains tax for gifts of appreciated securities.
In its report last year, the Committee recommended that appreciated capital property donated to charitable organizations be exempted from capital gains taxation. Its chief advocate, Donald K. Johnson, appeared before our Committee this year, again advocating this approach. He was supported by many representatives of charities involved in health care, education, social services and the arts. The Voluntary Sector Roundtable also supports this measure.
Finance officials pointed out that exempting gifts of appreciated capital property from taxation would mean that the Government would be providing tax assistance for up to 91 per cent of the value of the donated property (the 52 per cent tax credit plus the 39 per cent capital gains tax otherwise payable were the property disposed of). Mr. Johnson and others correctly pointed out that the 52 per cent tax credit for cash donations is not in dispute; it is the up to 39 per cent in foregone tax on the capital gains. This 39 per cent, however, assumes that the donated asset has a zero cost base, whereas the American experience shows the cost ranges from 25 to 50 per cent of the fair market value. They also pointed out correctly that the capital gains might not otherwise be payable for many years. Donors sixty years of age can be expected to live for a further 20 or 25 years, and can transfer assets tax free to a spouse who might survive even longer. Accordingly, the 91 per cent tax assistance for such gifts would seldom, if ever, apply.
The Committee recognizes that this proposal would place the tax assistance level at something greater than 52 per cent but less than 91 per cent. It recommends, nevertheless, as it did last year, that gifts of appreciated capital property be exempt from capital gains taxation. It sees this as the single best means available to help charities carry out the added responsibilities that have fallen to them because of government spending cuts.
We are recommending a complete capital gains exemption. However, should the Government be concerned that the amount of the tax assistance might in certain cases be excessive, as a transitional measure, it could consider limiting the amount of the capital gains exemption to 75 per cent or 80 per cent of the value of the property. In this way, it could monitor the actual impact of the tax measure and make changes as required based upon the actual experience
Should the Government's concern be that such a provision could lead to valuation abuses, even though the Committee believes such concerns can be dealt with in other ways, the Committee would be prepared to limit the exemption to gifts of publicly-traded securities until valuation standards for other property can be put in place.(vi) Endowments
"Those are the three proposals we put forward: tax incentives for endowment-building, the stretch credit, and the exemption of capital gains tax on appreciated property. We believe these would stimulate increased philanthropy and are critical to encouraging individuals to transfer their personal wealth for the benefit of the public good."
Ms Janice Loomer Margolis (Jewish Federation of Greater Vancouver)
The Committee is concerned about the "uneven playing field" created by the existence of Crown Agency Foundations. These provincially-created bodies enable donors to claim their gifts to some charities (notably, many universities and hospitals) against 100 per cent of their income, whereas gifts to other charities (including most social service, health and arts groups) may be claimed against only 50 per cent of the donor's income.
This inequity was lessened by measures in the 1996 budget, but remains an impediment for those charities in the latter group that wish to achieve some financial stability by building endowments.
Endowments, in which the principal of the donation is invested rather than spent, provide a predictable and permanent source of income for charities, benefiting Canadians today and into the future.
The Committee recommends that any gift of a permanent endowment be claimable against 100 per cent of the donor's income.
(vii) BequestsThe actual and potential importance of bequests to charities is evident from the considerable growth of planned giving in recent years. The Committee heard evidence that tax considerations have a substantial and apparently growing impact on both the number and size of bequests to charity. The 1996 budget increased the claimable amount for bequests from 20 per cent to 100 per cent of the benefactor's income, but left the allowable carry-back period for excess amounts unchanged at one year. The amount of a bequest that is eligible for tax relief is therefore substantially less than the eligible amount of an equivalent inter vivos gift, which can be claimed against 50 per cent of the donor's income over six years (the year of donation and five years forward).
The Committee recommends allowing claims for bequests to be carried back for two years against 100 per cent of the benefactor's income.
(viii) Corporate DonationsCorporate donations to Canadian charities account for only one to two per cent of total charity revenues, and one-tenth of all donations. Corporations may deduct their charitable donations from income, similar to other business expenses, but there is no additional tax incentive to encourage corporate giving to charity. Approximately 95 per cent of Canadian corporations claim no charitable donations at all and, overall, reported corporate giving of less than one per cent of pre-tax profits.
The Committee is concerned that the tax deduction for corporate donations is worth less to small businesses than to larger companies that pay the basic federal corporate tax rate. Small companies get less in tax savings when they deduct their donations because their tax rate is lower. In fact, small business proprietors receive a significantly better tax incentive for any personal donations over $200 than for their corporate donations. This inequity disadvantages smaller charities that typically look to small, local businesses for donations.
The Committee recommends that a tax credit for corporate charitable donations be introduced at a rate that, for large corporations (i.e. those that pay the basic federal rate), would be of equal value to the current deduction. The new credit would provide the same tax incentive for small and large businesses.
(ix) Stretch ProposalAlthough a relatively small number of large gifts account for a significant portion of charities' fund-raising revenues, larger numbers of small donations are also needed to provide more financial stability and broader accountability. The Voluntary Sector Roundtable put forward an innovative proposal to provide a higher rate of tax credit on donations that exceed the maximum a taxpayer and his or her spouse have given in any prior year. Revenue Canada would advise taxpayers annually of their threshold for this credit on their Notice of Assessment, as they now advise regarding RRSP contribution limits. The proposed credit rate of 40 per cent against federal tax would reduce the donor's cost for the excess contribution by approximately 70 per cent once the effect on provincial tax and surtaxes is included.
The Committee finds this proposal appealing because it provides an incentive only to those donors who increase their donations above previous amounts and because it would be accessible to taxpayers of all income levels. This incentive would encourage some taxpayers to contribute to charity for the first time and would encourage others to "stretch" to higher levels of giving.
The Committee believes in providing incentives to encourage additional giving, and recommends that a stretch proposal, the details to be worked out by Finance and the Voluntary Sector Roundtable, be considered for implementation, it should not apply in respect of appreciated capital property which benefits by receiving the recommended capital gains exemption.
(x) Withholding TaxesWhen a taxpayer withdraws funds from an RRSP or pension plan to give to charity, between 10 per cent and 20 per cent is witheld as payment of income tax, although it can later be claimed back by the individual through the charitable donations tax credit.
The Committee sees no need for the withholding and recommends it be abolished for gifts to charities.
(xi) Community Economic Development
"We in Canada need to reassess the role the community sector will play in a renewed Canada. If the social housing sector is to be a true partner, an important first step will be to gain control over social housing assets so they can be used as leverage for more social housing in the future."
Ms Sharon Chisholm (Executive Director, Canadian Housing and Renewal Association)
Calmeadow, other charities and foundations, and others involved in community economic development have expressed concern about their on-going charitable status for tax purposes. Activities such as micro-lending to help welfare recipients start businesses is obviously charitable. The concern, however, is that other activities which benefit a community by fostering economic development may be considered commercial rather than charitable, even though funded in whole or in part out of charitable donations.
The Committee recommends that consultations be undertaken by Revenue Canada and that clear guidelines be established to ensure that support for community economic development is considered a valid charitable purpose.
(xii) Program Related InvestmentThe Committee understands that United States foundations can make low-interest-rate loans out of their capital for projects such as housing and community economic development.
The Committee recommends that consideration be given to permitting Canadian foundations to make program related investments.
(xiii) Taxpayer AwarenessThe current tax rules for charitable giving are complex and will become even more so should our proposal be enacted. The Committee believes that many Canadians may not be aware of the tax incentives available for donations, but if they were, would give more.
Accordingly, the Committee recommends that clear information about the actual value of these incentives be included in the Tax Guide.
(xiv) ConclusionThe Committee believes that the partnership between charities and governments includes the provision of financial assistance from tax dollars in exchange for the pursuit of charitable purposes.
Charities are not only an efficient mechanism for delivering public services. They are the guardians of the values of compassion and philanthropy in our society. Charities are where we work with each other to improve our quality of life by building healthier communities.
Helping charities get the resources they need, through a fiscally responsible balance of direct funding and tax expenditures such as incentives to donors, is a vital role and obligation for government.
The Committee believes that its proposals for increased tax incentives for charitable giving will help redress the imbalance caused by cuts in direct funding and recommends their enactment.
G. Other Fiscal Measures
(a) Tax Levels in General
All Canadian governments raised about $270 billion in taxes in 1994, or about 36 per cent of GDP.This placed Canada in the middle rank of the G-7 nations. (See Table 1). The United States and Japan imposed substantially lower taxes while Italy, Germany and France imposed substantially higher taxes. Britain's taxes were modestly lower than Canada's as a percentage of GDP.
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as a percentage
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Canada
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United States
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Japan
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France
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Germany
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United Kingdom
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| Corporate Income
Tax
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| Sales & Excise Taxes
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| Property Taxes
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Since 1980, Canada's total tax burden has grown by over 20 per cent in relation to GDP while the American tax burden has grown only slightly. The Canadian tax burden today is about 30 per cent higher than the American. While this also reflects differences in the way Canada and the United States provide for medical care, pensions and other services, the tax differences and how they are presented are of unquestioned importance to Canada's ability to compete for investment and for the people with the skills and knowledge Canada needs.
"The proposed regulations for full disclosure of global assets should not be implemented without a full understanding of the impact. These regulations could drive away many talented international business people from Canada."
Mr. John Hansen (Assistant Managing Director and Chief Economist, Vancouver Board of Trade)
Not only do overall tax burdens differ, but the relative importance of individual taxes varies among countries. Canada, for example, relies more heavily on the personal income tax than other countries to finance public expenditure. Personal income taxes represent 13.4 per cent of GDP in Canada, versus only 9.8 per cent in the United States, 6.4 per cent in Japan and 6.2 per cent in France. The Committee heard from a number of witnesses who told us that personal income taxes, especially for high income earners are a significant deterrent to attracting and keeping highly-skilled executives, professionals and scientists.
Canada, like Britain, stands apart in relying less on payroll taxes than on other forms of tax revenue. While the Americans impose slightly higher payroll taxes, the levels for the other European G-7 countries are two to three times as high as Canada's. In France, for example, payroll taxes are 19.1 per cent of GDP compared to Canada's 6.1 per cent.
"Some tax incentives in Canada have economic merit and we recognize that fact, but others should be reviewed. If a certain amount is exceeded, corporations may arrange matters so as to avoid any minimum tax that must be paid for the year."
Mr. Sylvain Charron (Université du Québec à Montréal)
Canada's corporate income tax burden is comparable to that of the United States, both about 2.5 per cent of GDP. Germany's corporate tax burden is 1.1 per cent of GDP and Japan's is 4.1 per cent.
On the other hand, we rely much more heavily on sales and excise taxes than do the Americans (9.5 per cent of GDP versus 5 per cent of GDP) but the Canadian burden is still lower than the 11 per cent to 12 per cent of GDP absorbed by sales and excise taxes in the European G-7 nations.
"I believe major tax cuts should prudently await strong evidence that substantial debt reduction can in fact be effected.
I believe that highly visible but minor tax cuts should be made now and be widely publicized for psychological reasons. They would not have any great effect on our debt situation or on the present debt."
Mr. John Ellis (Member of the Advisory Board, Marsh & McLennan Limited)
In its pre-budget consultations over the past three years, the Committee has consistently taken the position that Canadian tax levels must be competitive on an international basis, particularly with respect to the United States, or Canada will lose the capital and the people it needs for durable long-term growth and job creation. Canada's overall tax burden is high compared to the United States; Canadian personal, sales and excise, and property tax burdens are significantly higher, while corporate taxes are comparable, and our payroll taxes are lower.
The Committee recommends, as it has consistently done in the past, that overall tax increases would be counterproductive and would cost us jobs and investment. With regard to personal taxes, Canada is at or near the tax ceiling. While the Committee cannot recommend personal tax cuts at this time, it believes that these taxes are out-of-line with our competition, especially the United States.
If across-the-board tax cuts are to be considered when circumstances allow, the Committee recommends that the government look first to personal taxes.
However, within the broad constraint formed by Canada's competitive position and our fiscal circumstances, the Committee believes that other targeted tax measures are possible and desirable.
(b) Payroll Taxes
The Committee heard many witnesses from business, labour and others who argued for reduced payroll taxes.
"Quebec is at a distinct advantage relative to the rest of Canada and other North American jurisdictions. When you also include all the para-fiscal charges that U.S. businesses have to pay in order to fund health and social programs in the United States, the Quebec tax environment is even more favourable."
Mr. Richard Langlois (Economist, Centrale de l'enseignement du Québec)
In terms of federal responsibilities, payroll taxes are made up of Employment Insurance and Canada Pension Plan premiums. The provinces, however, use payroll taxes to finance a number of other programs such as medical care and worker's compensation. The recent Quebec economic summit endorsed a $250 million fund to be financed on a payroll basis to deal with high unemployment in the province.
As changes to the Canada Pension Plan are under negotiation between the federal Government and the provinces, and the overall shape of the retirement system is a matter of intensive study, this section of the Committee's report is primarily concerned with Employment Insurance.
In discussing Employment Insurance, many witnesses said that payroll taxes are "silent killers" of jobs; employers hiring new workers know they must pay the taxes regardless of whether they can make a profit and this locks them into costs unrelated to success in the marketplace.
"On sales tax harmonization, we encourage the federal government to continue to dialogue with the non-harmonized provinces to achieve a multi-stage national sales tax. This tax should have one base, one rate, few exemptions, and one simplified compliance and administrative process.."
Mr. Don Lewis (Manager, Taxes, B.C. Telecom Inc.)
The rate of Employment Insurance premiums was a particular target because after several years of deficits in the insurance account, the deficit has been eliminated and the Employment Insurance fund in the budgetary accounts has moved strongly into surplus. With still larger surpluses in prospect, the pressure has been on the Government to reduce premiums for both employers and employees.
The overall burden of payroll taxes in Canada, including all governments, is set out in the preceding section and the accompanying table (Table 1). With Canada's payroll taxes absorbing the lowest proportion of GDP in the G-7 countries, the case is not clear that payroll taxes are the killers of jobs. With our corporate tax rates being comparable to the U.S. and our payroll taxes being significantly lower, Canada's unemployment rate is nevertheless higher than the U.S.
Far more decisive, in the Committee's view, has been low confidence among consumers and employers. With confidence now rising, businesses are expected to hire more people. Confidence may well be the "silent creator" of jobs. New-found confidence in Canada's fiscal prospects should not be threatened by any policy that would sidetrack deficit reduction.
The Record of Payroll Tax Cuts
In considering payroll taxes, the Committee has been influenced by the Government's record since 1993 in reducing the burden of Employment Insurance (EI).
- The three-year statutory average formula established in 1971 would have required the employee premium to be set at $3.30 per $100 of insurable earnings for 1995. Instead, the Minister of Finance set it at $3.00. The overall benefit to employees and employers was $1.9 billion.
- The rate for 1996 was reduced to $2.95, a further benefit of $350 million.
- Effective January 1, 1997, the rate will be reduced to $2.90, another $350 million benefit.
- Maximum insurable earnings were reduced from $875 to $750 a week, a benefit of $900 million.
- Premium relief of $5,000 was announced in December of 1995 for businesses that paid less than $30,000 in employer premiums, a benefit of $150 million.
- For 1997 and 1998, the Government will provide businesses that pay less than $60,000 in EI premiums with an enhanced refund of up to $10,000 based on the difference between premium payments in those two years and payments in 1996. The overall benefit of this is estimated at $315 million.
The Employment Insurance Surplus
The overall surplus in the EI account could reach $5.7 billion as of the end of calendar year 1996 and $10.7 billion by the end of 1997.
The Committee fully endorses the concept of a strong surplus in the EI account. Absent such a cushion, the employees and employers alike would run the risk that unemployment in a future recession would coincide with increases in premiums, just when the broader interest of the country argued for stable or reduced premiums. This was the situation the Government faced when it came to office; a deficit of $6 billion in the EI account had forced an increase in premiums, creating high payroll costs just when it was least opportune.
The Committee believes that a prudent EI surplus will better guarantee stability in premiums over a full economic cycle.
That does not mean the Committee believes the surplus should continue to build in an unlimited way. To the contrary, the record suggests that the Government, in a reasonable and measured way, has been reducing the burden of EI even as the fund has gone from deficit to surplus and the Committee anticipates this will continue to be the case. But the Committee is firmly of the view that the most important thing the Government can do for the economy is to allow confidence to continue to increase the momentum of economic growth.
The Committee recommends against any measure, including a substantial cut in Employment Insurance premiums, that would destroy confidence in the Government's commitment to restored fiscal health. It recommends, rather, that the Government continue the reasonable, balanced and gradual approach it has taken to reducing the burden of EI premiums and payroll costs in general, and expects such cuts to continue at an accelerated pace in the future.
(c) Tax Reductions
(i) Artists and WritersAn individual whose income fluctuates widely from year to year (an artist or writer, for example) will often find one year's income taxed at top marginal rates, even if he or she had no income in a previous year. If the total income had been earned equally in those two years, a lower rate would have applied.
The Committee recommends, as it did last year, that the Government consider an income averaging measure which would reduce the overall tax burden on generally low-income earners such as artists or writers to ensure that they are not unduly taxed because of wide income fluctuations from year to year.
(ii) Medical and Dental BenefitsStudies undertaken by William M. Mercer Limited indicate that there are 3.6 million Canadians who are not covered by supplementary private or government health and dental plans. They fall into three groups:
"Tax incentives encourage Canadians to seek necessary treatment on a timely basis. Over 25 million Canadians, through this benefit, have experienced dramatic improvements in oral health. We feel the unincorporated self-employed and their families should have an equal opportunity."
Mr. Barry Dolman (President, Canadian Dental Association)
- - 2 million Canadians to whom employers could offer coverage under group plans subject
to the prevalent tax treatment but currently do not;
- - 1 million unincorporated self-employed entrepreneurs and their dependents whose
health and dental coverage costs are not deductible business expenses; and
- - 600,000 Canadians who are not employed, not eligible for special government plans and
not covered as dependents under public or private plans.
The Committee again asks the Health Benefits Coalition to complete its studies and find ways to bring more employed Canadians under employer-sponsored plans that are currently eligible for tax deductibility.
The Committee again asks the industry to find ways to extend coverage to the 600,000 who have little connection to employment and are not covered by existing public or private programs.
The Committee again recommends that the cost of supplemental medical and dental plans for unincorporated self-employed Canadians and their dependents be made deductible from income. The cost would be about $35 million.
(d) Tax Increases
(i) Tobacco TaxesIn its last two reports, the Committee recommended tax increases on tobacco products as quickly as circumstances related to the containment of smuggling would permit. The federal excise tax on cigarettes products was increased in February 1995 and again on November 28 of this year.
The Committee welcomes these increases and still recommends increasing further the excise tax on cigarettes by as much as circumstances related to smuggling permit. An increase of $1 per carton (0.5 cents per cigarette) across all regions of Canada would increase annual government revenues by $150 million.
"We also want to ask the government to be prudent in its policy development, not just fiscal policy. We are currently facing a decision by cabinet tonight about a proposed ban on tobacco sponsorship, which, if it goes through, will cost arts organizations in this country $76 million a year."
Mr. Keith Kelly (Executive Director, Canadian Conference of the Arts)
As it did last year, the Committee still recommends that the Government, subject to smuggling considerations, consider tax measures to equalize federal tobacco taxes as much as possible across all provinces and territories. Under the current regime, the tax level varies from $7.15 per 200 cigarettes to $10.85 per 200 cigarettes, depending upon the province of residence.
As recommended last year, the Committee suggests that the Government consider increasing taxes on "roll-your-own" tobacco to a level closer to the tax on manufactured cigarettes.
Finally, the Committee recommends that the current manufacturers surtax, scheduled to end in March 1997, be extended indefinitely.
Increasing the taxes on tobacco products, while a revenue measure, is primarily to curb smoking, especially among the young for whom price is often the most effective deterrent.(ii) Lotteries
The Committee recommends as it did last year, that winnings of $600 or more from government-run lotteries be taxed at a flat rate of 15 per cent by way of withholding at source.
This tax would not affect lotteries run by charities and would not, in our view, be so high as to adversely affect sales of lottery tickets. It would raise $200 million per year.
(e) Further Tax Considerations
(i) Excise Taxes
- Jewellery
"Luxury boats costing millions of dollars, $250,000 Ferraris and Mercedes, $20,000 for coats, hotel suites, golf clubs, designer clothing, cosmetics or perfume that can cost $250 per bottle are not taxed as a luxury. Yet a $10 earring for a baby ... is taxed as a luxury item and subjected to a 10% excise tax."
Mr. Pierre Akkelian (President, Canadian Jewellers' Association)
The Committee heard again this year from representatives of the jewellery industry who object to the 10 per cent excise tax imposed on jewellery, which the GST was supposed to replace. They contend that the tax has driven such a large portion of the jewellery trade underground that Canada loses more revenue than the $52 million brought in by the tax. An Ernst & Young study commissioned by the Department of Finance concluded, however, that repeal of the tax would not have a significant impact on contraband activity and therefore would not generate sufficient GST and income taxes to offset the lost excise revenue. However, the jewellers indicated they would guarantee that the Government would not lose revenue if the tax were repealed.
The Committee is sympathetic to the jewellery industry and believes that the 10 per cent excise tax is an anachronism. If it is to tax luxuries, it should not apply to inexpensive jewellery but should apply to many other items such as yachts, estates, mink coats, caviar, and champagne. The tax should be abolished.
- Beer
- Spirits
"My mother told me if I don't have anything good to say, I shouldn't say anything.
But our industry has shut down 19 distilleries over the last 20 years. Only a dozen or so are left, and those are working at 50% to 75% capacity. I cannot offer you any solace in the job area."
Mr. Doug Rubbra (Vice-President, Operations, Association of Canadian Distillers)
Federal taxes account for 23 per cent of the retail price of spirits, while provincial taxes and markups account for 60 per cent. A strong case was made to the Committee on behalf of the Canadian distillers that the high taxes were leading to smuggling, lost jobs and lost tax revenue. The industry proposes that all alcoholic beverages be taxed on the basis of alcoholic content, which would result in a 40 per cent decrease in the federal excise tax on spirits.
Officials are currently undertaking a major overhaul of Canada's excise tax system.
The Committee recommends that officials take the above concerns into consideration.
(ii) Mechanics' ToolsAs a condition of employment, auto mechanics must typically purchase tools costing up to $16,000 and make annual replacement purchases of up to $1,500.
The Committee recognizes that tax relief should be available to auto mechanics in these circumstances but recognizes as well that other employees might also be "required" by other employers to purchase tools or equipment such as computers which could also confer significant personal benefits.
The Committee recommends that the Government consider measures to provide targeted tax relief for large expenses incurred as a condition of employment, such as mechanic's tools.
(iii) Taxation of Woodlot OperatorsWoodlot operators who are farmers are able to deduct on an annual basis the cost of planting and maintaining a woodlot against income from other sources, subject to the hobby farm loss rules. However, woodlot operators who are not farmers cannot deduct such costs except against the income from harvesting the trees. For both farmers and non-farmers, immovable assets such as roads or bridges with a useful life of less than three years can be fully written off and other assets are eligible for capital cost allowance rates ranging from 4 to 30 per cent.
Woodlot operators have requested that they be permitted to write-off the costs of planting and maintaining their woodlots against any other income from any source without restriction. They feel that they should be encouraged to build woodlot resources for the future. The Finance Department is concerned that extending such deductions to woodlot operators, which are now available only to farmers and fishers, would result in a new tax shelter.
The Committee is concerned about the revenue implications of creating new tax shelters, especially those that would benefit wealthy owners.
"The bulk of the funding we have received from the government has been in the form of R and D tax credits. That program has worked well for us in allowing us to reinvest the tax credits into R and D and to perform more R and D to leverage that. In terms of how that relates to return, in Newbridge we now have over 3,000 high-technology jobs in four different provinces ... Export revenue is over $3.1 billion ... We have 600,000 hours of annual workforce development training."
Mr. Jeff Laks (Vice-President, Research and Development, Newbridge Network Corporation)
The Committee recommends that the Government seek ways to enhance Canadian woodlots without creating undue tax shelter opportunities. It also recommends that Revenue Canada issue an interpretation bulletin to clarify the already complex issues concerning the taxation of woodlot operators.
(iv) Research and Development Re-assessmentsSome witnesses complained that tax re-assessments involving research and development expenditures can go back as many as five years. It is often difficult and costly to reconstruct what took place, and the uncertainty can jeopardize current R & D programs.
The Committee recommends that Revenue Canada, through consultations with the private sector, develop procedures and rules to provide greater certainty and finality in the assessment process.
"The terminal loss provision of the Income Tax Act is, in the estimation of the Heritage Canada Foundation, the greatest and most compelling argument against preserving a significant and highly visible class of heritage buildings. Currently, the federal government is sanctioning the destruction of heritage and is working against its own stated heritage policies ..."
Mr. Brian Anthony (Executive Director, Heritage Canada Foundation)
(v) Heritage Properties
Heritage buildings are part of Canada's cultural identity. All levels of government should have a role in protecting heritage property, but the Heritage Canada Foundation indicated that federal tax provisions can have the opposite effect by allowing a person who purchases a heritage building to obtain a write-off for its book-value if it is demolished. This encourages the destruction of heritage buildings.
The Committee recommends that the law be reviewed with a view to eliminating tax incentives for the demolition of heritage properties.
(vi) Taxation of Low-Income CanadiansIncome tax thresholds for individuals are low, being about $6,500 for a single individual, $11,800 for a one-earner couple and $13,000 for a two-earner couple. This tax burden on low-income Canadians is among the disincentives to moving from welfare to work, and can offset benefits such as the Child Tax Benefit and the GST Credit. Partial indexation for only that portion of inflation which exceeds 3 per cent has been the major factor in lowering the tax thresholds.
The Committee recognizes that any measures designed to take low-income Canadians off the tax rolls would be expensive and may not be possible at this time in light of deficit reduction priorities. Other recommendations in this report, including targeted assistance to families in poverty and those with disabilities, may be a partial solution to this problem.
The Committee nevertheless recommends that the Government consider measures to begin removing the poorest of low-income Canadians from the tax rolls as fiscal conditions permit.
vii) Taxation of High-Income CanadiansSome witnesses told the Committee that upper income Canadians do not pay their fair share of taxes and that substantial amounts of revenue could be gained by increasing tax rates on higher incomes. Others, especially from the scientific and high-tech sectors, told us of the increasing difficulty they face in attracting and keeping skilled scientists and executives, largely because of high marginal tax rates.
The personal income tax system is already progressive. In 1993, taxfilers with incomes over $100,000 were only 1.44 per cent of all taxfilers but paid 18.5 per cent of all federal personal income tax. Those with incomes over $50,000 were less than 11 per cent of all taxfilers, but paid just over 50 per cent of all federal personal income tax.
For the 1996 taxation year, the top marginal tax rates in Canada (taking into account federal and provincial basic taxes and surtaxes) range from a low of 46 per cent in Alberta to a high of 54 per cent in British Columbia. Alberta is the only province with a top rate below 50 per cent. The top federal marginal rate comes into play with a taxable income of about $59,000.
The Committee recommends against personal income tax increases. Rather, as deficit conditions warrant, the federal Government should, in concert with the provinces, work towards combined top marginal personal income tax rates of less than 50 per cent.