:
I call this meeting to order.
This is meeting number 83 of the Standing Committee on Finance. Pursuant to the order of reference on Monday, May 25, 2015, we are continuing our study of Bill .
Colleagues, we have two panels here this morning.
For the first panel we have Professor Frances Woolley from Carleton University. Welcome back to the committee.
From the Canadian Centre for Policy Alternatives we have the senior economist, Mr. David Macdonald. Welcome to you, sir.
From the Canadian Federation of Independent Business we have the senior vice-president, Corinne Pohlmann. Welcome back as well.
From the Canadian Manufacturers and Exporters we have the director of policy, innovation, and business taxation, Monsieur Martin Lavoie. Bienvenue.
From the Conference for Advanced Life Underwriting we have the chair of government relations, Mr. Terry Zive. Welcome to you, sir, as well.
You will each have five minutes for your opening statement. I think we're still trying to get a technical set-up for Mr. Macdonald, and hopefully we'll have that in place in time.
We'll start with Professor Woolley, please.
I would like to thank the chair and the members of the committee for inviting me today and giving me the opportunity to speak about the budget.
The 2015 federal budget is intended to be a balanced budget, a low-tax plan for jobs, growth, and security. U.S. experience shows that low taxes are no guarantee of jobs and growth. In fact, a recent study by the IMF found equality matters more for growth than low taxes. I quote, “lower net inequality is robustly correlated with faster and more durable growth.”
There's nothing inherently good for the economy about low taxes. What's important is to have a well-designed tax system which raises revenue equitably and efficiently, providing both income security and the foundation for economic growth.
The question I wish to address here is this: Which of the tax measures announced in the budget help build a good Canadian tax system, and which ones fail to promote either economic efficiency or equity or both?
Two of the budget measures are particularly praiseworthy. The first are the measures taken to prevent the use of synthetic equity arrangements. The OECD, in its “Action Plan on Base Erosion and Profit Shifting” wrote:
Fundamental changes are needed to effectively prevent...cases of no or low taxation associated with practices that artificially segregate taxable income from the activities that generate it.
Base erosion and profit shifting seriously threaten the ability of OECD countries to tax economic activity. I'm very happy to see the budget taking steps to forestall the erosion of Canada's tax base.
The second welcome change is the reduction to required RRIF withdrawals. Life expectancies have increased and rates of return on investments have fallen. A change was needed. It's about time.
Unfortunately, the budget also contains tax measures that have more limited potential to create jobs and growth. The first is the reduction in the small business tax rate. Advocates of lower taxes on small business would have us imagine a future Bill Gates building the basis of a world-class enterprise out of his garage. Yet as University of Calgary economist Jack Mintz and his co-author Duanjie Chen have pointed out, reductions in the small business tax rate could actually discourage a future Bill Gates from growing his business by creating, as they put it, “a 'threshold effect' that holds back small business from growing beyond the official definition of 'smallness'”.
Moreover, low small business tax rates create possibilities for tax avoidance—the well-paid, self-employed professional who uses a corporate structure to reduce personal tax liabilities rather than grow an enterprise.
The reductions to the small business tax rate are projected to cost $2.7 billion over the next four years. There are far better uses for $2.7 billion, for example, reforming the corporate tax base, or raising the GST threshold so that more small businesses would be exempt from the GST under the small suppliers rule, or working with the provinces to reform and reduce provincial business taxes.
The other tax measure introduced in this budget that causes me grave concern is the doubling of the TFSA contribution limits. TFSAs were a welcome addition to Canada's saving systems. They provide tax-sheltered saving opportunities for many who are not well served by RRSPs, such as students or low-income people. However, there is no case for an increase in the TFSA contribution limit to $10,000 per year. The long-term revenue cost is too great; there is too much potential for abuse of TFSAs.
Many economists advocate consumption taxation on the grounds that taxing investment income discourages savings and has serious efficiency costs. If this government wishes to move towards consumption taxation, and there are good reasons for doing so, we'd be better served increasing the RRSP contribution limits or relying more on the GST to raise revenue and less on income taxes. At the very least, there should be a lifetime limit on TFSA contributions.
The home accessibility tax credit is one final tax measure worth commenting on. I'm not convinced that this is the best way of helping the disabled or helping seniors remain in their homes. First, it is not refundable, so it will not provide help to those who need it most. Second, I've concerns about the implementation of this credit. What kind of home renovations count? Who decides whether or not any given bathroom or kitchen renovation improves accessibility?
Furthermore, linking the home accessibility tax credit to eligibility for the disability tax credit is problematic. My own research suggests that the disability tax credit is not well targeted. Some people with disabilities fail to receive the credit. At the same time there is some evidence that it may be abused.
It would be more sensible to help seniors and the disabled through direct program expenditures on housing, on community living programs, and on home supports. Canada doesn't need a low-tax plan for jobs, growth, and security; it needs a good tax plan for jobs, growth, and security.
This budget introduced important measures that go part of the way towards building a better tax system, but there is more to be done.
Thank you.
:
Good morning and thank you for the opportunity to be here.
CFIB is a not-for-profit, non-partisan organization representing more than 109,000 small and medium-sized businesses across Canada that collectively employ more than 1.25 million Canadians and represent about $75 billion in GDP. Our members represent all sectors of the economy and they're found in every region of the country.
I provided a slide deck presentation to the clerk, and I'm hopeful you can have it in front of you when I walk you through it as we go through the presentation.
Our latest “Business Barometer” was just released this morning, and it shows that small business confidence remained cool in May, essentially staying unchanged since April at 60.6, as you can see on slide 2. While things have not gotten worse, they also have not improved, and so measures that can help boost small business confidence, such as some of the measures within part 1 of Bill are welcome.
Given the important role small businesses play in the Canadian economy, it should be no surprise that small business confidence is a pretty good indicator of real GDP, which you can also see on the chart on slide 2. Measures that can help boost small business confidence should also help improve Canada's economy overall.
How do you build that confidence? You address the issues of highest priority to the small businesses. As you can see on slide 3, the top issues of concern are total tax burden, government regulation, and paper burden.
Four of the measures contained in part 1 go some way in addressing these issues and will be what I focus on today. They are the reduction in the small business tax rate, the increase in the lifetime capital gains exemption, the new quarterly remitter category for small and new employers, and providing accelerated capital cost allowance for manufacturing and processing equipment.
As you can see in slide 4, in a recent survey 83% of small business owners said that reducing the small business corporate tax rate would be an effective measure in helping them to maintain or strengthen their business performance, with almost half saying it would be very effective. This has actually grown in importance, as we've seen the value of the small business tax gradually erode relative to the general corporate tax rate, which fell from 28% to 15%, while the small business rate only fell from 12% to 11% during that same period.
We believe there are good reasons to have a lower small business tax rate, as it helps to offset some of the increased costs borne by smaller companies. These include the higher cost per capita of dealing with red tape, the more difficult and higher cost to access financing, and the more limited ability for smaller companies to access certain tax credits and tax advantages that larger firms can. As a result we're very pleased to see this commitment to reduce the rate to 9% by 2019. The only thing that might have made it better is if it could have been done sooner to help boost confidence now.
The next measure we are pleased to see is the increase in the lifetime capital gains exemption for qualified farm and fish properties. The lifetime capital gains exemption is the most important retirement savings mechanisms for all small business owners, as you see on slide 5. Most small business owners do not have pension plans; therefore, they must rely on other sources of income to finance their retirement years. In fact, the lifetime capital gains exemption is especially important for those in the agriculture sector as even more of them, close to 90%, said it is a very important mechanism for their retirement savings.
As you can see on slide 6, addressing this issue now is critical, as more than two-thirds of small business owners are planning to exit their business within the next 10 years, and most of them, 85%, are planning to exit to go to retirement. However, it not only helps small business owners with financing their retirement, but it also becomes an important tool for helping to finance the next generation of entrepreneurs. In fact, about half of the respondents in a recent survey stated that securing financing for the successor is one of the key challenges facing businesses that are going through a succession process. To overcome that challenge, some have been using the proceeds from the lifetime capital gains exemption to help finance their successor as they take over the business. Therefore, increasing the lifetime capital gains exemption will be well received, and we can encourage government to consider expanding it to $1 million for all small businesses in the near future.
A third item we welcome in the budget is the creation of a new quarterly remitter category that would reduce paper burden on brand new businesses just starting out. This may be a small measure, but it's hugely important in recognizing the increased cost that regulations and paper burden place on small companies.
Slide 7 shows that small businesses spend almost five times more per capita than larger businesses in dealing with red tape, and any measure that reduces that even just a little bit is welcome.
Even more important, when asked about the most burdensome federal regulations they face, CRA-related rules such as payroll tax remittances are at the top of the list, as you can see on slide 8. If you want to encourage more businesses to get started, we need to make the pathway as simple as possible so that they spend more time growing their business than doing government paperwork.
These small measures can have a significant impact on the ground, and we welcome more creative ways like these to reduce that burden on the smallest firms.
Finally, we welcome the extension of the accelerated capital cost allowance for investment in machinery and equipment used in manufacturing and processing. As you can see on slide 9, in a recent survey more than half of all small business owners and about three-quarters of those found in the manufacturing sector stated it would be effective in helping them maintain or strengthen their business performance. We believe this is an important measure that can help stimulate a sector that has the potential to help boost Canada's economy in the months ahead.
All the measures I have mentioned—the small business tax reduction, increasing the lifetime capital gains exemption, creation of a new quarterly remitter category, and an accelerated capital cost allowance—are welcome, as each of these have the potential to help boost small business confidence, which will ultimately be good for Canada's economy.
Thank you.
Members of the committee, I am pleased to be here with you today to discuss part 1 of the budget implementation bill.
Our organization, Canadian Manufacturers and Exporters, represents more than 10,000 companies in Canada. The companies we represent account for about two-thirds of Canada's annual exports and for more than one half of all private research and development expenditure. Our sector employs about 1.7 million people.
First of all, we want to express our appreciation to you for the support that has been shown to our sector by the government and the opposition parties over the years. The manufacturing sector is crucial for the development of our economy. Your support is important. We have covered a lot of ground since the dark years when some thought that the Canadian manufacturing sector was on its death bed. Not only is it not dead, it is back with a much more technological approach. I would be remiss not to express our appreciation for your support.
[English]
The most important measure of part 1 of the budget bill is the renewal of the accelerated capital cost allowance for the acquisition of machinery and equipment. Between 2007 and 2014, the federal government offered manufacturers a measure to depreciate their machinery and equipment over a two-year period using a straight line method of depreciation. This measure has been highly successful. By 2013, spending on machinery and equipment had reached pre-recession levels, at $14.3 billion, and has been growing since.
There are some indicators that lead us to believe the timing is right for a new wave of investments in our sector. The industrial capacity rate is now over 80%, which means many companies will start looking at investments in industrial capacity, including plant expansions, adoption of automated production systems, and so on. The question is whether these investments will take place in Canada or not. That's why it's important to keep the marginal effective tax rate on new manufacturing investments very low.
The new measures in the last budget, the ACCA, had a 50% rate on a declining balance. It might not be as generous as the previous two years' straight line rate, but at least it provided a level playing field with other countries, such as the United States, for new manufacturing investments. The new 50% rate will allow companies to depreciate more than 95% of their investments within five years, which is much better than the 30% declining balance that was previously effective before 2007. Even more important, this 50% rate will be effective for 10 years, allowing companies to plan ahead for large investments that are planned over a period of between three and five years on average.
As Corinne mentioned, the budget bill also reduces the small business tax rate from 12% to 9% over four years' time. This is good news. Approximately 85% of our members are SMEs and will benefit from this tax cut. By 2019, the small business tax rate will have decreased by 46% compared to the 2006 level, a significant reduction that will help provide a more competitive tax environment for SMEs in Canada, which make up more than 98% of all businesses in the country.
Finally, I'd like to remind committee members there are still very important challenges ahead of us if we want our manufacturing sector to grow and better compete globally. One of them is access to capital, especially for the acquisition of machinery and equipment used mostly for research and development or for prototyping purposes. For example, one of the fastest growing sectors in our sector is what we call additive manufacturing, or 3-D printing, where 80% of the activities with those machines right now are taking place in prototyping. Very few of these machines are used for end product fabrication right now, which means they don't necessarily qualify for ACCA. These machines used to be eligible under the scientific research and experimental development tax credit as a capital expenditure for the tax credit, but it's no longer the case since the government's decision to eliminate capital expenditure under the SR and ED tax credit. This is becoming a major issue, and we hear that both from companies buying these machines and also companies selling those machines, because we know that early adoption of these advanced manufacturing technologies is crucial for the future competitiveness of our sector.
Thank you very much again for inviting me, and I look forward to your questions.
:
Thank you, Mr. Chair and committee members, for today's opportunity.
I'm Terry Zive and I appear before you today as a member of the CALU board of directors and the chair of CALU's government relations committee.
CALU and our sister organization Advocis represent approximately 11,000 insurance and financial advisers, who in turn provide financial advice to millions of Canadians. We're pleased to have this opportunity to comment on elements of the 2015 budget now contained in Bill that will assist Canadians as they retire and enter their ever-extending senior years. We would also like to comment on an additional proposal that CALU included as part of its pre-budget 2015 submission, which we hope will be given consideration during the 2016 budget process. It's never too early to start.
Demographically, we can all agree it is readily apparent that the boomer generation has had, and will continue to have, a significant socio-economic impact in Canada. Notably, the first boomers turned 65 years of age in 2011, and over the next 20 years, this group will expand the number of Canadians over the age of 65 to 23% of the population. As Canadians retire and age, two of their greatest concerns are receiving quality health care and the probability of outliving their personal savings. It is therefore critically important that all levels of government focus on encouraging Canadians to be more financially self-sufficient during their retirement years, and in doing so reduce their reliance on public programs and institutional support.
CALU is therefore very supportive of the reduction in the RRIF minimum factors announced in budget 2015 and now included in Bill . These modifications, the first since the early 1990s, will help Canadians retain more of their savings and protect them from longevity risk. While CALU applauds the government for its action, we also strongly recommend the implementation of a regular review process of the payout factors, say every five years, to ensure that this important investment vehicle continues to provide the necessary financial support to aging Canadians when they need it most.
With a significant portion of the Canadian population moving into their retirement years, advancing age will drive the corresponding need for increased long-term care services. Last fall, the C.D. Howe Institute released a report that estimates that the total cost of long-term care will more than double to $140 billion over the next 20 years, leaving all of us to ask who will bear this additional cost.
The C.D. Howe report concluded that the provinces will need to shift more of the cost to those who can afford to pay. This will be an additional financial burden in retirement for which most Canadians are not currently planning. While we recognize and support the introduction of several long-term care initiatives in the 2015 budget, including the home accessibility tax credit and extending compassionate care benefits, we believe the looming funding crisis must be addressed with greater urgency.
CALU believes that long-term care insurance can play an important role in helping address this funding gap. Long-term care insurance provides a cash allowance to individuals who are unable to manage the activities of daily living. Greater ownership of this type of insurance coverage is critical to helping manage private costs associated with long-term care services. CALU therefore urges the federal government to continue to take a leadership position in preparing Canadians for what lies ahead. This can be achieved by: first of all, educating Canadians about their financial obligations relating to long-term care services; second, by working with the provinces to develop a more unified approach to determine who qualifies for subsidized access; and finally, by enacting the tax rules that will encourage more Canadians to own individual long-term care insurance.
Mr. Chair and committee members, I thank you for your time and attention. I'd be pleased to respond to any questions you might have.
:
I'd like to thank the committee for its invitation to speak today about Bill . I'd like to limit my comments this morning to the proposed increase in annual contribution room in the tax-free savings account to $10,000 from $5,500.
I'd like to start with some critical information missing from budget 2015, without which I'm afraid the committee members may draw incorrect conclusions from the benefits of TFSA doubling.
The graph on the slide is reproduced directly from the federal budget 2015, and it purports to show that lower- and middle-income Canadians may gain more than wealthy Canadians from TFSA doubling. Unfortunately, the proportion of the population contained in each of these bars is not shown or included elsewhere in the budget, and this missing critical information for context to understanding what's happening here may lead to incorrect conclusions.
For instance, if the first bar on the left—for those making under $20,000—represented only 1% of the population, but received 15% of the benefits from TFSA doubling, as shown in the graph, this would certainly be a good deal for this group. Unfortunately, those making under $20,000 represent 34% of the population, but only receive 15% of the benefits—not an especially good deal.
On the other hand, those making over $250,000, representing the top 1% of the population, receive 4% of the benefits—definitely a good deal for them. In fact, the bottom 25% of the population in this graph—those making under $10,000—receive only 8% of the benefits of TFSA doubling; however, the richest 10% of the population receive 22% of the benefits of TFSA doubling.
However, looking at the distribution of benefits alone belies a larger fact, that very few Canadians are actually maximizing the TFSA room they already have.
This slide shows the percentage of Canadians who are maximizing their TFSAs in 2013, the most recent year available. It also displays bars of 10%, or deciles of the population, so as not to under-represent low-income Canadians, as the previous graph did.
For the bottom half of the population—those making under $30,000—maximization rates for TFSAs are vanishingly small. In every decile, the maximization rates are at or under 5%, meaning that 95% of the bottom half of the population haven't maximized the room they had in 2013.
Maximization rates are predictably higher at higher income levels, and they peak for the top 1%, where roughly one-third have maximized their TFSAs.
Underlying low maximization rates are low take-up rates in opening a TFSA account in the first place, particularly for low- and middle-income Canadians. For the bottom half of Canadians, only 30% have even opened a TFSA account; in other words, three-quarters of the lower half of Canadians don't have a TFSA. In contrast, 70% of those in the top 1% making over $250,000 do have a TFSA.
The final slide shows that since 2010 maximization rates have been falling. For the poorest 10% of Canadians making under $5,000 a year, only 4% maximized their TFSA in 2010, and that's fallen to only 1% in 2015. For the middle-income earners—this is the sixth decile—the maximization rate has fallen from 12% in 2010, when the maximum was $10,000 for a TFSA, to only 5% in 2015, when the cap was the much higher $36,500. This is prior to the doubling being discussed here.
The purported purpose of the TFSA program is to help low- and middle-income Canadians save for retirement and in particular to avoid the GIS clawback upon retirement. However, take-up rates, much less maximization rates among low- and middle-income Canadians have been poor, and the program has been much more rapidly taken up by the rich.
In order that this program does not produce TFSA millionaires who are eligible for programs meant for low-income seniors, like the guaranteed income supplement, it's important that the TFSA program have two caps put in place. First, a lifetime contribution cap should be set at $150,000, and second, a maximum amount of assets in a TFSA should also be set at a cap of $300,000.
I encourage the committee to include these caps in budget 2015.
Thank you, and I look forward to your questions.
Mr. Macdonald, I have here your table showing the maximization of the TFSA.
We see that the median family income in Canada is $74,000 or $76,000. I also see that 10% of average families have maximized their TFSAs whereas households earning more than $250,000 per year are three times more likely to have maximized their TFSAs.
According to what I read in the parliamentary budget officer’s report, by 2060, high-income earners, those in the highest quintile, that is, will use TFSAs 10 times more than people with lower incomes. Those with the highest incomes will benefit from this program 10 times more than those with low incomes.
You want a maximum amount to be set for the TFSA system so that the program does not produce millionaires. How did you establish the two levels of $150,000 and $300,000 that you proposed? Can you break all that down for us?
:
Thank you, Mr. Dionne Labelle.
[English]
I just want to point out that the graphic you're referring to is not of households; it's of individual tax filers, and so there are going to be some differences there. For individual tax filers, median income is about $30,000.
That being said, I think—and others have looked at this as well—that it's very predictable that we will have TFSA millionaires, without some reform to the system, in the next 20 years.
The amounts I've chosen are for the lifetime contribution, 30 years of contributing at $5,000 a year—that's a fairly straightforward calculation—and providing people with a maximum of a doubling of that contribution, to have a hard asset cap at $300,000, whereby once people's TFSA is worth $300,000, they then have to take any excess amounts they receive in income out and hold that money in some other place.
I think this is a fair way to restrict TFSAs, such that low- and middle-income people, who should be benefiting—although the take-up rates are abysmal—can still benefit from this, but also to limit the benefits that high-net-worth individuals can make from TFSAs.
:
Yes. This is extremely important, as we've talked about. The second highest priority of small business in Canada is to find ways to reduce the paper burden. In particular, CRA and Minister Findlay have done an excellent job in trying to at least start moving the needle a little bit, because CRA really has the biggest impact on small companies in Canada.
She was awarded the Golden Scissors Award for the work on bringing more accountability so that when you actually ask a question in writing to CRA, the response you get back will be honoured, even if its later found to be incorrect. This is because the businesses have done everything they can to make sure that they're in compliance, but if CRA has given them the wrong information, they shouldn't be held responsible for that. Doing that was the first step. That's what that was about.
We'd like to see more of those kinds of initiatives take place. I think this quarterly remitter category that's being created in this budget for new businesses is really an important first step.
They're so small, these things, but they have such an impact on the ground. People feel it. Some of the biggest feedback we get is when things like reducing the number of times they have to remit payroll taxes are introduced. That's when we get the feedback that it actually makes a difference.
:
Thank you very much, Mr. Chair.
My thanks also to the witnesses for joining us today.
Ms. Woolley, when you testified as part of the prebudget consultations, you were very critical of income splitting. You said this about it:
Income splitting reduces the marginal tax rates of people who aren't very sensitive to tax changes—that's the primary breadwinner—and it increases the marginal tax rates of people who are sensitive to changes in tax rates, and that's secondary earners.
As you said later in your testimony, most of the benefits go to higher-income families.
As I understand it, that seems to suggest that one of the two spouses could quite easily exclude themselves from the workforce, which clearly would mostly involve women. So you were talking about the potential for inefficiency.
Could you talk to us about the fact that hundreds or thousands of people could exclude themselves from the workforce?
:
In terms of studies, I would be careful with that, because there are lots of studies. There are people saying if we have a high dollar, we should have a lot of investment in machinery and equipment. Well, that's only part of the story, because what's really driving investment, any investment, particularly in machinery and equipment, is cash flow.
You're going to see a lot of investment, and I'm actually expecting more investment now that we have a bit of a lower dollar and companies have better balance sheets. That's pretty much the better context for investment in machinery and equipment.
Why is it important to grow businesses? As I said, manufacturing is about 10% of our economy, but it's 63% of our exports. It's important to export because it brings foreign money into the country. We all agree we need to export more, but we can export only as much as we produce. If we don't produce more, we cannot export more. That's my point here. If you have a small food processor in your riding that can sell that much every month, and then you ask what if a billion people in China could buy your tomato soup, well, if they want to buy it, you need to produce it. That's my point. If you don't grow those businesses, we're not going to produce more. We're not going to export more. We're going to be stuck at a low economic growth level. It's as simple as that.
Thank you, Mr. Adler.
I just wanted to follow up with you, Ms. Pohlmann, on four points you mentioned on page 10 of your presentation. I'll take them in reverse order.
First of all, it's just a comment on the accelerated capital cost allowance for investment in machinery and equipment. I'm pleased you mentioned that as CFIB, and I'm pleased Mr. Lavoie pointed out that 85% of his members are in fact small and medium-sized enterprises. I think that's very important to point out.
On the third point, in terms of the creation of a new quarterly remitter category for certain small, new employers, I know your members know it, and you know it very well, but can you explain to non-small-business owners why that is an important measure?
:
I call this meeting back to order. This is meeting number 83 of the Standing Committee on Finance, and we are considering Bill C-59.
I want to welcome our second panel. First of all, we have, presenting as an individual, Mr. Jason Heath. From the C.D. Howe Institute, we have Mr. Alexandre Laurin. Mr. Aaron Wudrick of the Canadian Taxpayers Federation is here. From the Macdonald-Laurier Institute we have Philip Cross. We have, from YWCA Canada, Ms. Ann Decter, director of advocacy and public policy.
Welcome, everyone.
Each of you will have five minutes for your opening statement and then we'll have questions from members.
We'll begin with Mr. Heath, please.
My name is Jason Heath. I am a certified financial planner and the managing director of Objective Financial Partners in Markham, Ontario. I am a fee-only financial planner, meaning that I provide financial advice to clients, but unlike the typical financial planner, I do not sell investments or insurance. I am also a personal finance columnist for the Financial Post, which is the business section of the National Post, as well as MoneySense, which is Canada’s personal finance magazine.
Most importantly though, I am daddy, or dada, or much to my dismay these days, dad—which makes me feel very old—to five-year-old Joel, six-year-old Jayden, and six-year-old Mila.
The Criminal Code of Canada dictates that leaving a child under the age of 10 alone is considered abandonment, suggesting that older children are able to take care of themselves. The Canadian Red Cross babysitting course is for children age 11 and up. It therefore seems odd that a parent would be allowed up to a $5,000 annual tax deduction and a $2,500 annual tax refund for child care for a 16-year-old. A portion of private school fees for a child in grade 11 may qualify for this deduction, for example. The proposed limits for the child care expense deduction fall well short of the actual cost of child care in many Canadian cities, particularly for younger children. It would not be unreasonable to pay over $20,000 annually for infant child care in Toronto, for example.
Accordingly, I would be inclined to consider a modification to the child care expense deduction to allow up to $12,000 for children under the age of six and $6,000 for children age six to twelve. A child care expense deduction for teenage children is unnecessary in my opinion, except in the case of a disabled child. On that note, I think that $11,000 is not nearly enough of an eligible deduction for a child that qualifies for the disability tax credit. I suggest a $24,000 deduction limit for disabled children as it would not be uncommon for a family to spend this much, or more, on a live-in nanny, for example. It is also twice my suggested limit for the child care expense deduction for children under the age of six.
The cancellation of the Canada child tax benefit is a double-edged sword. It seems better to limit the administration of tax benefits for children to one single benefit instead of paying two benefits, with the resulting administrative government costs to manage both programs. On the other hand, it seems unfortunate, in my opinion, to cancel a means-tested benefit like the Canada child tax benefit in favour of a non-means-tested benefit like the universal child care benefit.
The result of the changes to these benefits may be a reallocation of tax dollars out of the hands of people who truly need and count on the money and into the hands of those who may not. The cancellation of the Canada child tax benefit also has a negative impact on single parents that is not offset in this bill by the family tax cut credit. I would be inclined to instead consider an increase in the Canada child tax benefit to provide more benefits for low-income and middle-class Canadians while reducing or negating benefits for those whose income exceeds a certain threshold. This could be done by instead cancelling the universal child care benefit and using the resulting savings to enhance proportionately the Canada child tax benefits for those whose income is below a certain threshold.
The Income Tax Act distinguishes between families that have more than one child in the claiming of tax credits like the amount for children, the children’s arts amount, the children’s fitness amount, and deductions like the aforementioned child care expense deduction. It seems odd that the family tax cut credit would not do the same. I would prefer to see it be based on the number of children under the age of 18 and suggest a limit of $25,000 of split income per eligible child.
In addition, I would prefer to see this credit even further benefit a young family contemplating having a stay-at-home parent for some period of time. This could allow a two-income family to temporarily become a one-income family and have a parent as a caregiver for a young child instead of both parents having to go to work and hiring a third party. This could be done by allowing the splitting of income for parents with children under the age of six without subjecting them to the $2,000 tax credit limit. I propose, instead, a $10,000 tax credit limit.
Finally, single parents do not benefit from the family tax cut credit. I would like to see single parents be able to claim the family tax cut credit by notionally splitting income with their youngest child under the age of 18.
Thank you, Mr. Chair.
I am very pleased to be here with you today. Thank you for the invitation to appear before the committee.
[English]
Back in 2011, following the federal election, I authored a study with Professor Kesselman of the C.D. Howe Institute on the family tax cut, or what was at the time the income-splitting proposal. Our study took place four years ago, so it was based on the assumption that provinces would follow suit, that provinces would also adopt income splitting, and there was no limitation other than the $50,000 limit to be split.
Today, I'll be very quick, and I'll simply present what were our main conclusions from that original study and what has changed since, because we now have a new income-splitting proposal that is very different.
Originally in our study we said the proposal was expensive, especially because of the cost to provinces that adds up to the federal. The benefits and the costs were highly concentrated mostly in the hands of single-earner families with a high-income earner. It created work disincentives for the lower-income spouses, so that means economic efficiency costs. We also discussed the theory around welfare and single-earner families enjoying some welfare gains by not having to pay for child care or for the value of any other family services that are provided by the at-home spouse. But those services have to be purchased by the dual-earner families, where both spouses work, so it creates gains for the single-earner families and costs for the dual-earner families. Dollar for dollar, in theory, the equality of tax burdens between single-earner and dual-earner families does not necessarily achieve tax fairness. That's the theoretical principle that we discussed in that study.
Finally, for families with children, we calculated that after-tax economic resources available for consumption, factoring in the cost of child care for any families that incur child care costs, and EI and CPP contributions, too, which are often forgotten, on average, across a wide range of family incomes, there was no obvious horizontal fairness problem to be solved. I can elaborate later what I mean by horizontal fairness, but I want to keep going because I only have five minutes.
The new provisions, the provisions in this bill, are significantly different. It's a different kind of income splitting because, first, it's a tax credit, so provinces don't have to participate. It changes a lot. The value is capped at $2,000, which is critical. These new provisions do mitigate many of the drawbacks we had originally identified. First, it is less expensive, and it still has that benefit of making the system fairer for one particular case: those dual-earner families that are identical in many or all respects but for their income splits—one is earning more than the other, and so they have different tax burdens. This new income-splitting provision will address that fairness problem, obviously. The tax savings are very spread out across eligible families, now that we have a cap, since the cap greatly—and I say greatly—limits the gains at the top. Before, in our original study, when the provinces were included in the calculation, the maximum gain for a single-earner family in Ontario was $11,000. That's much more than $2,000.
Tax benefits now being capped also means that single-earner families will still pay more taxes than dual-earner families when they have identical levels of income. That's consistent with the principle that I mentioned before: single-earner families enjoy welfare gains that dual-earner families do not.
Finally, the work disincentive problem is substantially mitigated with the $2,000 cap, since the lower-income spouse can now earn up to $22,000 in income before any disincentives kick in.
In conclusion, there are still some drawbacks, but the new provisions are better than the original proposal.
Thank you.
:
Good morning, Mr. Chair and committee.
My name is Aaron Wudrick, and I'm the federal director of the Canadian Taxpayers Federation. Thank you for the opportunity to appear today to speak to part 2 of Bill , the provisions of which the CTF is generally supportive.
CTF is a federally incorporated not-for-profit citizens group founded in 1990 and with over 84,000 supporters. We are dedicated to three key principles, those being lower taxes, less waste, and accountable government. Perhaps unsurprisingly we appear today largely pursuant to that first principle of lower taxes.
I did want to take a very brief moment to commend the government on balancing the budget this year. We at the CTF have been very critical of the many years of deficits, so we only feel that it's fair to also give credit where it's due and applaud the government for having the discipline to get back to balance. We do wish it had done so at a lower level of spending, but we're content to leave that debate for another day.
With respect to the measures in part 2 of Bill , first is the increase in the child care expense deduction. We are strongly in favour of this measure. lndeed, we proposed an even greater increase in the deduction last fall. We also believe the government should consider modifying this deduction to allow a parent to pay a stay-at-home partner and claim that deduction in the same way.
With respect to income splitting, one of the CTF's guiding taxation principles is advocating for broad-based tax cuts. Our first preference is always cuts to the general tax rates so all Canadians who earn income can benefit. That being said, income splitting is not a terrible second best. What it adds in complexity—and as very diligent observers of the ever-expanding size of our tax code, I can assure you it is already very complex—it compensates for in equity.
We believe it is entirely reasonable to ensure the tax codes treat like as like, and a household that, for example, earns $80,000 a year should not pay vastly different amounts of tax depending on how that earning is divided up among spouses.
This government first introduced income splitting for seniors and has now done so for families. We would hope the next objective would be to introduce income splitting for everyone else in order to broaden the benefits of such a policy, including possible provision for single persons to split income with dependants in certain circumstances.
With respect to the universal child care benefit, it is again no secret we at the CTF prefer tax relief instead of entitlement programs. Taxing citizens and then returning the money with a bow-wrapped cheque courtesy of the Government of Canada is not our preferred model. Having said that, we are in agreement with the government that parental choice is paramount, and putting money back into the hands of parents to spend on the form of child care that works best for them is better than a policy of creating, as some have proposed, a large government-run day care system.
In summary, with the caveats we've already identified, we are generally supportive of the provisions contained in part 2 of Bill . While we will never stop pointing out that complex boutique measures clutter up the tax code, raise administrative costs, and generally confuse Canadians when not necessary, the fact remains overall the federal tax burden faced by Canadians continues to go down, and we welcome that development.
Thank you. I'm happy to take any questions.
:
I'd like to thank the finance committee for inviting me to this hearing.
Before I get started, just some background. From what I saw with the previous panellists and from this panel, I think what you're mostly going to get from them is micro-analysis of the individual proposals. I'm going to bring you some macro-analysis about the broad trends and the tax and transfer system that might help put these changes in context. The overview is based on a detailed report I wrote for the Macdonald-Laurier Institute called “Giving and Taking Away: How Taxes and Transfers Address Inequality in Canada”, which members can refer to for more details.
The main conclusion is that the tax and transfer system became markedly more progressive between 1976 and 2011. The progressivity of transfer payments had a much greater impact than taxes on the redistribution of income. The greater role of transfers partly reflects that cutting income taxes does little to help low-income people, as the lowest income quintile effectively pays no income tax, with an effective rate of 2.4%. Instead, it is transfers and government that provide over half of their tax income.
As we move up the income quintiles, taxes progressively increase and transfers steadily decrease up to the highest quintile for whom transfers are as negligible, at 3%, as taxes are for the lowest quintile, while the effective tax rate for the highest quintile reaches an average of 22%.
Looking at combining the impact of tax and transfers, it shows that only the highest two income quintiles pay more into the tax and transfer system than take out, while the other three lowest quintiles are net beneficiaries. The highest income quintile pays 80% of the total net redistribution going on within the tax and transfer system. So the system is quite progressive, even if it's not completely offsetting the growing inequality of market incomes over the last 35 years.
Despite rising incomes earned in the marketplace, net transfers to the middle class have increased. This was particularly the case for the second-lowest income quintile, where net transfers rose from 2% to 17%. Only the highest quintiles saw a net contribution increase. So overall, the tax and transfer system has become more progressive in redistributing income from the highest income earners to the lowest and middle incomes.
For 35 years Canada has moved to a system of higher transfers and lower tax rates for 80% of the population being paid for by the highest 20% of earners. We may be nearing the limits of the amount of resources that can be transferred from one quintile to the other four. As noted by Professor Kevin Milligan in a recent study for the C.D. Howe Institute, raising the marginal tax rate further on high-income earners risks reducing their labour supply and may even lead to lower tax revenues. Advocates of higher tax rates for upper-income earners should take note of the growing contribution of the tax and transfer system over the longer term. Critics of the benefit that income splitting may give to some of the highest quintiles should also be aware of this trend.
Finally, the focus of all parties on aiding the middle class at some point risks becoming either a transfer from some parts of the middle class to other parts of the middle class, or worse, from the left pocket to the right pocket of the same person.
Thank you.
Good morning. I'm Ann Decter. I am the director of advocacy and public policy at YWCA Canada.
As the country's oldest and largest women's multi-service organization with member associations serving women and girls in nine provinces and two territories, YWCA Canada is pleased to share its remarks on part 2 of Bill , which will implement the provisions of the budget tabled on April 21, 2015.
In our brief to this committee during pre-budget consultations, we recommended policies to support women, girls, and families, including a national child care system and increasing the national child benefit to reduce poverty. We specifically urged the federal government not to adopt income splitting in federal budget 2015 or at any time in the future as the benefits of this policy do not flow to vulnerable families. Our point of view has not changed.
According to the summary of Bill , division 1 of part 2 implements income tax measures that introduce the government's family tax cut, known more commonly as income splitting.
Supporting women, girls, and families requires adopting policies that work for women, policies that are based on women's present-day lived realities, including high workforce participation rates. With a 65% employment rate of women with infants and toddlers—that would be a youngest child under three—and two-thirds of mothers with a youngest child in preschool or kindergarten, access to affordable quality child care would be a key support for families. Instead, it remains a social policy gap unaddressed by the federal government, and provincial governments struggle to offer a patchwork of responses across the country.
Families need child care, and child care needs federal government leadership.
According to a range of sources, the family tax cut as implemented by division 1 of part 2 will cost between $2 billion and $3 billion per year and will disproportionately benefit families with higher incomes. YWCA Canada would recommend withdrawal of this measure, maintaining the federal tax base, and using those tax dollars to increase the availability of affordable quality child care for Canada's families.
There are currently about 450,000 regulated child care spaces in Canada and 2.1 million children under six years of age. Increasing child care spaces will reach a greater number of families in need of support. It will support working mothers, who are the vast majority of mothers, and single mothers in particular.
Analysis of Quebec's low-cost, broad-based child care system has confirmed that child care is a social policy that strongly supports mothers, and single mothers in particular, to move out of poverty by dramatically increasing their access to employment. Between 1996, when low-cost child care was introduced in Quebec, and 2008, almost 70,000 additional mothers joined the workforce; employment rates for mothers with children under the age of six increased by 22%; the number of single mothers on social assistance dropped from 99,000 to 45,000; the after-tax median income of single mothers rose by 81%; and the relative poverty rates for single-parent families headed by women declined from more than a third to less than a quarter.
YWCA Canada would add that the mothers fleeing domestic violence with their children—who use our services across the country—can land on their feet in the community much more quickly when they can access affordable child care.
Division 2 of part 2 of Bill retroactively amends the Universal Child Care Benefit Act effective January 1, 2015, to increase the universal child care benefit to $160 per month for children under six and to create a new benefit of $60 per month for children from six to seventeen years of age, inclusive.
YWCA Canada's presentation to this committee during the pre-budget consultations recommended that the federal government streamline tax system supports for families into a single increased national child benefit with a maximum of $5,400 per year. Along with our partners, Campaign 2000, we recommended that the universal child care benefit be absorbed into the national child benefit. Bill does the opposite.
Nineteen per cent of families in Canada live in poverty. Campaign 2000's proposal focused this investment where it is most needed: on lower-income families. According to the Parliamentary Budget Officer, 51% of universal child care benefits will flow to “families with no child care expenses and families with older children”.
On behalf of the women and children who turn to the YWCA for help and support on a daily basis, we would encourage the government to reverse their thinking, increase access to affordable, quality, regulated child care, and focus transfer payments on families in financial need.
Thank you.
Ms. Decter, thank you very much for joining us today.
You've referred to the Campaign 2000 analysis of the importance of investing in helping families with children and lower-income families, and you took a $5,900 figure. Our plan, the Liberal plan for a new Canada child benefit, would actually provide $6,400 per child and it would be income tested. It would continue to be received up to $200,000 per year of family income, but it would be more generous to those in the lower income brackets.
Do you believe that addresses what Campaign 2000 has been calling for, progressive support for families with children?
Ms. Decter, I appreciated your testimony a great deal.
I am going to share my experience with you. I feel it may be helpful for everyone here who may have not lived in Quebec.
I have been in two different situations with this issue. In the first, there was no daycare service and we had to find people to look after our child in a basement. We did not know whether we were going to get daycare at the right time. My wife was incredibly stressed because she did not know whether she was going to be able to work or not.
With my daughter, the experience was the opposite. There was a daycare in the early childhood centre, the CPE, as we call it in Quebec. It had set hours and the people who took care of my daughter were college- or university-educated. The groups were set up in an intelligent way. The hours allowed my wife to work and then to come back to pick up our daughter in safe places that were designed for the purpose.
It is pure ignorance to think that a daycare system like that is not superior to having to chase around in a way that undermines the confidence of parents looking for support.
In your testimony, you mentioned some figures that showed the impact that the daycare system had on women in Quebec. For those listening to us, and even those not listening to us, I would like you to repeat those figures, because they illustrate the positive impact of that daycare system.
:
Thank you, lady and gentlemen, for being here this morning.
My first question is for Mr. Laurin, just following up on the issue of child care. I am the father of three adult daughters and have three grandsons now ages eight, three, and one. Two of my daughters are married. This aspect, child care, is an issue for all of us.
We respect the jurisdictional aspect of the social transfer payments to the provinces. Transfer payments, as Mr. Cross and others alluded, are at record highs.
I am just wondering, Mr. Laurin, whether from your experience and research you find that providing funds to families for their child care needs is the most efficient way to help alleviate the cost of having children.
:
Child care is one of the costs of having children. There are other costs.
I tend to agree that the UCCB is not going to cover the cost of child care for even one kid. It's not enough, but it's a benefit. It helps.
Quebec has gone a totally different way, whereby child care is almost totally subsidized by taxpayers, and that has led to some economic benefits. I don't think it's self-financing, but the evidence is there.
Quebec also started at the low point, when mothers had one of the lowest participation rates in the country, so Quebec had some catching up to do.
Now, if you're asking me whether the UCCB is a support to families with children, obviously it is.
:
Totally. It's a balancing act, and I respect.... It is the freedom of democracy. We can agree to disagree on the fact that parents have a choice, we believe, of how they would like to raise their children.
Moving on, another section of the budget implementation act concerns the Canada Small Business Financing Act. It's something that's very important to small business owners. We had the Canadian Federation of Independent Business, in the panel before, say that small business is the economic engine that drives our communities across the country.
In the bill, we're proposing, within small business eligibility criteria, to increase the limit for purchasing or building real property from $500,000 to $1 million, of which $350,000 could be used for leasehold improvements or equipment. These measures are expected to enhance the ability of start-up entrepreneurs and small businesses across Canada to secure much-needed capital, generating economic growth and job creation.
I wonder whether you've had a chance to look from a small business financing perspective at whether that's a positive initiative.
I'll start with Mr. Laurin and then go across the panel.
:
Thank you very much, Mr. Chair.
My thanks also to the witnesses for joining us today.
Mr. Cross, you heard me laughing just now when we were talking about the bill on balanced budgets. I gather that we somewhat see eye to eye on that. In my opinion, that bill demonstrates a lot of hypocrisy on the part of the government. However, that is not the subject I want to raise with you.
I was sitting on the Standing Committee on Finance in 2013 when we passed Bill C-48, which expanded the Income Tax Act by 1,000 pages. Canada’s tax system is quite staggering in its complexity. This is nothing more than fiscal clientelism, the effect of which is a huge fragmentation of the real clients. Tax breaks for families is one example of that. Unfortunately, they make things more complicated.
One phenomenon that I find disturbing is that fewer and fewer individuals are doing their tax returns themselves. I do not know which organizations measure that, but the fact remains that only a third, a little less than 40%, of individuals prepare their tax returns themselves. The rest go to professionals or to family members to do those returns.
Could you talk to us about that complexity and what families lose as a result? Canadian households actually often have to pay for their taxes to be done.
Mr. Cross, I want to tell you that I really appreciate your testimony. You've been here a number of times and you've always had some great testimony for us.
Mr. Wudrick, you were a little critical on the balanced budget.
Mr. Wudrick, wouldn't you agree that if in my household I had an unbalanced budget and if I was spending more money, you really wouldn't care if you were the bank? You would say, “Balance this thing”. Sometimes we might not agree with how people do it, but at the end of the day, if I'm taking in $1,000 a month and I'm spending $1,200, I have a problem, and I have to address that.
Would you address that about the balanced budget?
:
Thank you to all the witnesses for your presence today.
Mr. Wudrick, I want to begin with you. We as a government have lowered taxes 180 times since 2006. We've lowered the corporate tax rate, lowered the small business tax rate, lowered the GST, and lowered EI premiums. All of these measures we've undertaken empower individuals and businesses to make decisions to either spend or save. It gives them a choice.
For business, what they primarily tend to do with the added money is expand and create more jobs and employment and more economic opportunity for Canadians.
We've heard from other quarters that when we cut taxes as our government has been doing, it is a cost to the government, which to me is a little puzzling, and I hope you can clarify this. When we as a government cut taxes, is that a cost to the government, as in the government owns that money, or is it just putting more money back into the pockets of hard-working Canadians?
:
I'm in favour of it. I think it's a good policy.
TFSAs have great benefits for seniors and also for people at lower income levels who would like to save for their retirement—I'm sure there are some—and right now they don't really have the incentives because the benefit they will get in retirement from those savings that are tax deferred will be greatly clawed back, so they basically don't really do it.
What the TFSA does is that, if there is a big chunk of money coming their way, it could be an inheritance or anything else, they will be able to put it in there and have a tax-efficient retirement. I don't see why that's a bad thing.
Another thing to consider is that the interest rates right now are extremely low, and if you want people to be able to save and earn in safe financial instruments and earn a decent income, then TFSAs are a great way to do that.
I'm going to take the next round as the chair.
Mr. Heath, I appreciate your columns. I read them quite regularly.
I want to get you to respond to Mr. Cross's analysis, though, because I think you and others on the panel are suggesting we should not move to more programs or benefits that are universal in nature, that we should means test them.
One of your statements was, “I would be inclined to instead consider an increase in the Canada child tax benefit to provide more benefits for low-income and middle-class Canadians while reducing or negating benefits for those whose income exceeds a certain threshold.”
How do you respond to Mr. Cross's analysis, which says that the progressivity of transfer payments and taxes has led to a situation whereby the top two quintiles are putting more in than they're certainly getting out, and the bottom three are certainly receiving more benefits than they pay in taxation.
He has launched a fairly substantive analysis here. Do you disagree with his analysis, or do you think we should go even further in terms of...