STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, November 30, 1999

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[English]

The Chair (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I would like to call the meeting to order and welcome everyone this afternoon.

The finance committee has been travelling across the country seeking input as to what the priorities should be for budget 2000. What is interesting about this process is that we have been asking Canadians not only to tell us about budget 2000, but since we are looking at a five-year plan, according to the Minister of Finance's economic and fiscal update, which he delivered in London to kick off the prebudget consultation hearings, we also get a sense of what type of fiscal room we have and also what the priorities are within not just one but five years. Therefore, the debate becomes quite challenging.

I must say that throughout the country we have heard people defend their positions quite eloquently, and I am sure this afternoon will be no different.

We have the pleasure to have with us representatives from the following organizations: the Canadian Institute of Chartered Accountants, the Retail Council of Canada, the Canadian Automobile Dealers Association, the Canadian Association of Railway Suppliers, the City Centre Coalition, the Pension Investment Association of Canada, and the City of Moncton.

We will begin with Mr. Peter F. Wilkinson and Elaine Sibson, representing the Canadian Institute of Chartered Accountants.

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Ms. Elaine Sibson (Member, Government Affairs Committee, Canadian Institute of Chartered Accountants): Mr. Chairman and members of the committee, on behalf of the Canadian Institute of Chartered Accountants, we would like to thank you for allowing us to appear and provide input into this year's prebudget hearings.

My name is Elaine Sibson. I am a member of the CICA, the Canadian Institute of Chartered Accountants, and I am on the CICA's government affairs committee. Joining me is Peter Wilkinson, director of government affairs of the CICA.

As you have already seen, earlier this fall we submitted a brief that responded to a series of questions put forth by your committee. In putting forward that submission, we have assumed that there will be a $10 billion surplus for the year 2000-2001, including the $3 billion contingency reserve.

Against this backdrop, the CICA believes the government should put forward a budget next spring that allocates $5 billion of this amount to debt reduction, $3.5 billion to personal income tax reduction, and the remainder to increased program spending. Should the anticipated surplus be more than $10 billion next year, we would advocate that the additional revenues be directed to further debt and tax reduction.

Today we would like to draw your attention to two specific themes contained in our prebudget submission, those being debt reduction and tax cuts. We believe a stable fiscal framework must include clear plans for debt and tax reduction in order to create a solid foundation for enhanced productivity.

Although some progress has been made in reducing the debt, federal debt charges still consume more than a quarter of all federal revenues. It is essential that a portion of the revenues dedicated to servicing the debt be reduced in order to free up more funding for sustainable tax reduction and future program spending in priority areas.

By the end of fiscal 1998-99, the net public debt stood at $577 billion, or 64.4% of GDP. Next year debt servicing charges will amount to just over $43 billion. Although the debt-to-GDP ratio has begun to decline over the last few years, the government's debt reduction plan provides only for an annual payment to be made against debt each year by way of a contingency reserve.

A November 1998 economic survey of Canada carried out by the Organization for Economic Co-operation and Development, the OECD, noted that at the current pace of debt reduction, it will likely take another five years to bring Canada's debt-to-GDP ratio in line with the OECD average.

We believe the government should place a greater emphasis on debt reduction. Accordingly, we would like to see the following targets for debt reduction contained in the year 2000 budget: by April 2001 a ratio of 58.2% of GDP and a further reduction by April 2002 to a ratio of no greater than 55.4% of GDP.

The estimated cost of reaching the initial target would be $5 billion, or half of the anticipated surplus for 2000-01. A greater focus on debt reduction would provide the fiscal room needed to build the foundation for continued sustainable reductions in Canada's level of taxation.

We believe it is equally important to focus on the area of taxation as the key element in the productivity debate. Productivity is affected, in part, by investment. The higher the rate of investment as a percentage of GDP, the higher the rate of productivity growth. Investment is strongly affected by the government's tax policies, which can encourage investment through tax reduction.

With respect to tax reduction, our prebudget submission called on the government to implement $3.5 billion in personal income tax cuts in the year 2000-01. The submission noted that the CICA was conducting a study that would make specific recommendations to the government on how to implement this cut. This study has now been completed and we released the results of it yesterday.

The study concludes that the time has come for the federal government to introduce personal income tax cuts for middle- and high-income Canadians that are sustainable and fair. A $3.5 billion tax cut would create significant and positive economic results.

Economic modelling carried out for the study indicates that the macroeconomic impact of such a tax cut would increase GDP annually by an additional half percentage point beyond what the current projections are for the next five years. It would also increase consumption expenditures and business investment. It would boost personal savings rates, reduce unemployment, and improve corporate pre-tax profits.

The study examined seven typical personal income tax cuts and recommends three cuts for implementation. We bring forward these recommendations on the understanding that tax cuts have already begun for low-income individuals and it is time now to introduce tax cuts for middle- and high-income Canadians. We think it is time to recognize the contribution these taxpayers have made over the past several years to help eliminate the deficit.

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Specifically, the study recommends the following permanent tax cuts to be instituted by the government: first, reducing the middle marginal tax bracket by 2 percentage points, from 26% to 24%; second, restoring full indexation to the Canadian tax system to get rid of bracket creep; and third, eliminating the 5% surtax.

I will elaborate on each of these in a little more detail.

We recommend the 2% reduction in the middle marginal tax rate from 26% to 24% because it would provide broad-based tax relief to 7.6 million middle- and upper-income Canadians who have not yet seen any significant fiscal dividend from the elimination of the deficit. While the study originally examined a 1% reduction in the middle marginal rate, its analysis demonstrates that this tax cut could be increased to 2% without jeopardizing the sustainability of the overall target of $3.5 billion in tax cuts. The average benefit of this tax measure would be an increase of about $480 in the disposable income of middle-income Canadians.

Secondly, we recommend restoring indexation because it addresses the serious problem affecting almost every Canadian: bracket creep. Between 1986 and 1988, the consumer price index increased by 39%. However, partial indexation resulted in the tax system being adjusted for only 9% of that increase.

Since 1986 bracket creep has pushed 2.5 million Canadians into a higher income tax bracket than they would have otherwise been in. As a result of this bracket creep, by 1998 low-income earners paid $400 more per year in taxes, middle-income earners $1,373 more per year, and upper-income earners $2,086 more per year in taxes than they would have under full indexation.

Simply put, if unaddressed, bracket creep will increase the tax burden on Canadians by $3.4 billion over the next four years. Full indexation would restore fairness to the tax system and would benefit all 21 million tax filers across all regions and income levels. It would also strengthen the tax system for the future.

Finally, we recommend eliminating the 5% surtax, because like the 3% surtax, it was brought in to help eliminate the deficit. Now that the deficit has been eliminated, these surtaxes should be discontinued. The government has eliminated the 3% surtax and we believe it is time to get rid of the 5% surtax. One million Canadians would benefit from this tax cut.

Our model shows that a middle-income family of four with two adults in the workforce would see disposable income rise by $600 a year as a result of the tax cuts we have recommended in our study. We believe an overall personal income tax cut of $3.5 billion is sustainable and that it would not unduly restrict the ability to reduce debt. It goes without saying that the faster the debts are reduced, the more revenues are made available to implement further tax cuts and to deal with some of the other spending issues.

We also believe that the specific personal income tax cuts we are recommending today will provide broad-based relief and will restore some fairness to our system. The time has come to continue the trend started by the government in the last two budgets of providing tax relief to low-income Canadians. The time has come to provide relief to middle- and upper-income Canadians who, after years of deficit reduction, have yet to see the fiscal dividends that have resulted.

Further details of the tax cuts examined together with the three cuts we are recommending can be found in our study, and we would be more than happy to answer any questions you may have.

The Chair: Thank you very much, Ms. Sibson.

We will now hear from the Retail Council of Canada, Mr. Peter Woolford and Brian Rudderham.

Mr. Peter Woolford (Senior Vice-President, Policy, Retail Council of Canada): Thank you, Mr. Chairman. I must say that it is an unusual feeling for the Retail Council to find itself on the extreme left wing of the business community, but we will try to carry out our responsibilities in proper form.

The Chair: How does it feel?

Mr. Peter Woolford: It feels fine so far.

Mr. Gary Pillitteri (Niagara Falls, Lib.): You are sitting on the right side.

Mr. Peter Woolford: It depends where you look at it.

I am here this afternoon with Brian Rudderham, who is the comptroller for Wal-Mart Canada and the chair of our tax committee.

I would like to take a few moments to give the committee a bit of an overview of our submission. It was provided to the committee a little over a month ago. I will give you an outlook on where we see retail sales for this year and next, then I will give you our general fiscal position, and then I will talk about some specific tax policy issues.

Our outlook for this holiday season is fairly positive. Our members expect that the holiday season for 1999 will be another positive period of growth for retail. We are expecting sales to rise by around 5%.

Looking forward to 2000, our members are also positive. They expect that sales will track roughly in line with the economy, producing growth that will probably be a little softer than it was this year. What that means is that with the increase in productivity in the retail trade there will be in fact little or no growth in retail employment in 2000. That was the case this year. We saw very little or no growth in employment this year.

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Let me turn very quickly to our broad fiscal policy position. In principle, our members believe it is preferable to leave funds in the hands of the taxpayers and citizens so that they may decide how to allocate those moneys rather than to hand that power over to the public sector.

With that in mind, we are suggesting that the government commit itself to maintaining federal revenues at some fixed portion of the GDP over the business cycle so that the government simply retains its position in the overall mix of economic activity and does not gradually increase it, as has been the case.

We believe that the domestic economy still needs some boost, and given the constraint on personal incomes, the only place this can come from is a reduction in taxes.

Like virtually every other group that has appeared before this committee, we are recommending a minimum $3 billion personal income tax cut this year. The numbers may have changed up or down from group to group, but I believe virtually everybody you have heard from has been calling for a reduction in personal income taxes, and we would certainly join that chorus.

We believe it should be aimed at low- and middle-income Canadians, essentially the segments of the Canadian population that are in the greatest need of a boost in income and spending power. These Canadians also, quite frankly, are those most likely to spend the dollars inside Canada and thereby boost the domestic economy.

We believe the program of income tax changes should be a multi-year program so that Canadians have some clear sense over the medium term of what their prospects will be. Certainly we would echo the comments of the CICA. We believe a return to full indexation should be accomplished within that period of time.

I have a passing remark on payroll taxes. We were disappointed with the decision of the government with respect to employment insurance rates for 2000. The effect of this decision is that at a time when the government is talking about reducing the tax burden on Canadians, Canadians will wake up on January 1 paying more tax and finding their take-home pay is less.

We would remind the committee that payroll taxes are a very efficient job killer, and they will continue to do that as long as they are too high.

Mr. Chairman, absolutely no presentation by the Retail Council would be complete without some reference to GST harmonization. We have been beating that drum for some years, and I would like to remind the committee again that the retail trade is a strong supporter of harmonization of the goods and services tax with provincial sales taxes.

One thing we want to be very clear about is the nature of that support. There has been considerable discussion around how harmonization would take place, and particularly the question of whether it would be tax-in pricing or tax-out pricing.

We want to go on the record once again as being very clearly and adamantly opposed to a tax-in harmonized system in which tax rates were allowed to vary province by province. The reason is that it simply blows apart the domestic market for retailers and would undo all the efficiencies we have been building for the last 20 years.

The other area is one that is familiar to this committee, and that is the jewellery excise tax. This committee has recommended before that the jewellery excise tax be abolished. Once again we would ask you to make that request of the minister. The reasons for this are well known. This is simply a costly anachronism that should be put to rest once and for all, and we would ask that the committee again this year make that recommendation to the Minister of Finance.

In conclusion, we believe that everyone in Canada can be proud of the society we have built. International observers from around the world have identified Canada as one of the best places to live, if not the best. We believe that reflects the balance that Canadians have achieved among the roles played by the various parts of our society and our economy.

The budget for 2000-01 gives us an opportunity to reassert the genius of that balance by committing the government not to take more resources than it currently does. We believe it is time Canadians were given back some of their money so that they can enjoy living in the best country in the world.

The Chair: Thank you very much, Mr. Woolford.

We will now hear from the Canadian Automobile Dealers Association, Ms. Jennifer Thomas, a technician with the Turpin Group, Ottawa, Ontario, and Martin Smith, a technician with Park Pontiac, Winnipeg, Manitoba.

Mr. Martin Smith (Technician, Park Pontiac, Winnipeg, Manitoba, Canadian Automobile Dealers Association): Good afternoon, Mr. Chairman, honourable members of Parliament, ladies and gentlemen.

I am very pleased to make a presentation to the committee as a technician. Last night I was standing in front of the Peace Tower in awe. This is my first trip east of Kenora and it is something I will never forget.

The technicians' history and stories are basically the same across Canada. We all start in this business in the same manner. We are all cut from the same cloth. If you will indulge me, I will give you the background of my story as it pertains to the tool tax issue and how it affects us.

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Just over 18 years ago I was looking for a way to get into the mechanical field in the automotive trade. At that time, unemployment insurance was sponsoring a cooperative course through a community college. I applied for it and I got it, which means I was sponsored by Unemployment. It was 50% theory and 50% on-the-job training.

At the end of that course I was offered a job at the GM dealership I worked at, but as a condition of that employment I had to purchase tools to fulfil my job requirements. I purchased approximately $3,500 worth of tools, which does not seem like much, but at that time the expected salary was only about $21,000. For a young family just starting out, it was quite a burden. We had no choice but to do it. I could not keep a job or maintain a job without them.

Over the next four years I purchased about $3,000 worth of tools every year. To this day I have approximately $30,000 invested, and every year I purchase about $1,000 worth of tools to maintain a level of efficiency and to keep up with the changing technologies in vehicles. The tools are always changing and being updated.

To me it seems very unfair that we are not able to deduct any of these purchases from our income tax. I have recently learned of the case of musicians and chainsaw operators. I know for a fact that electricians and plumbers are able to deduct things from their income tax because they need them to operate their businesses.

We are average Canadians earning a middle income and we feel we deserve a tax break in this area. If something is not done in the near future, we are going to lose our field. The automotive trade is very highly technical, very highly advanced, and we need young, bright people to get into the field to keep up with the technologies. Training is vast and ongoing.

Enrolment in schools has dropped off. People coming out of school looking for an occupation want to go into an occupation where they do not have to incur any costs. Electricians can write off their tools, a musician can write off his instrument, and an artist his brushes. But in the automotive trade you have to purchase approximately, in today's society, $5,000 worth of tools to start. With that, we are seeing that there is not much interest in getting into the automotive trade. The rate is dropping. People are going for the easy road, where they can make more money and do not have to dish out in order to make the money.

At this time I would like to turn it over to Jennifer Thomas. She is a young technician, just in the business. She can add to this presentation with her story.

Ms. Jennifer Thomas (Technician, Turpin Group, Ottawa, Ontario, Canadian Automobile Dealers Association): Mr. Chairman, I started in the trade five and a half years ago as a lube technician. I was being paid $8 an hour. I was told in the job interview that I needed to have my own tools, but having worked on my own car for years I thought I had plenty. I walked into work that first day carrying my tool box. I quickly learned that working on my own vehicle in the driveway and working for a garage are two very different things. I needed all kinds of special tools that I had never used before, including air tools. I had no money, I had two children to support, and I badly needed the job.

Other mechanics helped me out initially by loaning me their tools, but made it clear that if I lost or broke a tool I would have to replace it. The price of the tools I needed was a definite deterrent to staying in the trade.

Slowly I began buying essential tools. By the end of that first year I had purchased roughly $1,400 worth of tools. Today I have approximately $15,000 invested. Most of them are from Canadian Tire, Sears, Wal-Mart, and Princess Auto, although I do own some Snap-On and Mack tools. I buy these more expensive tools only when I have to. Mack and Snap-On are the tool suppliers that make specialty tools. They work closely with our industry to develop tools as vehicles are redesigned, creating a demand for redesigned tools but at a premium price.

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During the course of the day I am in and out of my tool cabinet hundreds of times, choosing the right tools for what I am working on. If I do not have the proper tools, I can't do my job. Because I am paid on a flat rate system, the more time I spend searching for a tool the less I earn.

It is essential that I stay current in my trade, not only by constantly learning new designs of vehicles, but also by purchasing the tools I need to work on these new designs.

A large percentage of my tools are designed for use in a shop where compressed air is the source of power. These tools are two to three times as expensive as the hand tools commonly used by other trades, such as electricians, plumbers, or millwrights.

While our dealership provides each technician with a workbench and a hoist, it is up to the individual to supply their own tools. Dealerships are able to use their equipment purchases as a business deduction, but technicians are not.

In the 20 or so compartments of my tool cabinet, each tool has a specific use. When I pull open a drawer I am looking for a specific tool. Even with $15,000 invested, there are several tools I still need and none that I can manage without. When I lock my cabinet at night, I know if one pair of pliers is not accounted for or if even one of my more than 300 sockets is missing.

I am in and out of several vehicles every day and occasionally I lose a tool. Many of my sockets cost between $5 and $20 each. A set of pliers is easily worth more than $25. I can't continue working without the lost tool, so I have to replace it immediately. It does not matter what it costs.

As long as I work in this trade I will need to invest in tools. We need tax fairness.

The Chair: Thank you.

We will now hear from the Canadian Association of Railway Suppliers, Mr. Peter McGuire, executive director.

Mr. Peter McGuire (Executive Director, Canadian Association of Railway Suppliers): Thank you, Mr. Chairman, committee members, ladies and gentlemen. I am the executive director of the Canadian Association of Railway Suppliers.

I am here today as a last-minute pinch hitter for John Marinucci, the president of National Steel Car Limited and one of our directors, who was to be our spokesperson today. John's mother is undergoing open heart surgery today, so we trust you will be understanding of the circumstances that prevented him from being in Ottawa for this session.

On behalf of the association, may I say how pleased we are to be able to participate in the prebudget consultation process. The Canadian Association of Railway Suppliers, which was incorporated in 1991, brings together companies that supply goods and services to the Canadian railways and the export markets.

The association membership currently stands at 103, with member companies located from coast to coast in Canada, representing a wide variety of manufacturers of rolling stock, components, and other goods and services needed by the railways. Our member firms employ some 50,000 workers in communities across Canada.

As an advocacy group, the association promotes the economic viability of the rail mode within Canada, often working in close collaboration with our customers and colleagues in the Railway Association of Canada.

Canada's railways play a vitally important role in getting Canada's goods to market. This is increasingly true since the signing of the North American Free Trade Agreement five years ago. In that time period, Canada's merchandise trade with the United States has increased 80%, reaching $475 billion in 1998. Our merchandise trade with Mexico has doubled to $9 billion over the same period.

Some 40% of Canada's trade moves by rail. Clearly, if Canada wishes to increase its share of global trade, a competitive and productive railway transportation system must be maintained.

In addition to getting Canada's goods to market in a timely and cost-effective manner, the rail mode is the friendliest toward our environment. Trains account for far fewer emissions into the air than other forms of transport. Railways are, on average, three times more fuel efficient than big trucks. Each freight train can take 275 trucks off already congested roads.

With the proper public policy regime in place to encourage conversion to the newer, more efficient locomotives, which have even lower emission levels, our railways are well placed to make a major contribution toward helping Canada meets its Kyoto environmental commitments.

Your committee has wisely been focusing on productivity. In the railway context, productivity is the relationship between the output, being freight and passenger transportation, and the input, such as the equipment and services provided to the railways by members of this association.

The Canada-U.S. productivity gap remains significant. In recent years studies have pointed out that the Canadian railway industry has been unable to invest enough in the advanced technologies and new generation locomotives and freight cars that generate significant gains in productivity. Canadian railways can't compete with their U.S. counterparts with older, less efficient equipment.

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With respect to railway productivity issues, I would refer your committee to an excellent publication by the Railway Association of Canada entitled “Perspectives on Productivity and the Canadian Railway Industry”.

The private sector can only make the changes that are within its control. However, government policies impact directly on the ability of the railways to improve productivity. Where necessary changes are within the purview of government, it is government at all levels that must act to ensure that necessary improvements become possible.

One important area in which government action at both the federal and provincial levels could be taken to provide more equitable treatment among the various modes of transport concerns fuel taxes. Railways pay the same fuel taxes as their competitors, the trucking industry, but unlike trucking must pay the full costs of maintaining the railway rights of way.

Another area in need of redress that impacts significantly on many members of our association is the current capital cost allowance regime. This will be the main focus of our presentation today.

With respect to the Canadian capital cost allowance for railway equipment, a recent study conducted for Transport Canada by the IBI Group contained the following key findings. First, the Canadian railway industry is significantly disadvantaged with regard to tax depreciation compared with U.S. railroads, for whom the present value of tax depreciation is some 70% higher than in Canada.

The Canadian railway industry is also disadvantaged with respect to other Canadian transport sectors, particularly those competing with the railways. All have significantly higher CCA rates than the railways and all receive tax depreciation benefits much more closely aligned with their U.S. counterparts than do Canadian railways.

Canadian railways are also disadvantaged with respect to other Canadian capital intensive industries, which benefit from a tax depreciation treatment that is more generous than that for Canadian railways and much more closely aligned to their U.S. competitors than is the case for Canadian railways.

Another finding of the IBI study was that the disparity between tax depreciation regimes and Canada is significant. Identical rail investment projects require a 23% higher level of earnings in Canada than in the United States to yield the same rate of return. This can only retard capital spending for modernization and growth by Canadian railways as compared with U.S. railways.

The study also found that the use of the U.S. tax depreciation regime as a benchmark is appropriate because the Canadian and U.S. tax depreciation systems are closely aligned for all industries considered, except for railways. There is intense and pervasive competition between Canadian and American railways. The tax depreciation disparity makes the competitive position of Canadian railways more difficult in the pricing and supply of modern equipment.

The same is true—that is, the competitive position is more difficult—of all rail-dependent Canadian industries competing with U.S. industries in an increasingly integrated North American marketplace.

Another finding was that technical and market obsolescence rather than physical longevity has become increasingly important in the determination of the useful life of rail assets. For example, locomotives from the 1970s and 1980s are still serviceable. They are, however, technologically obsolete because today's high-output locomotives are up to twice as powerful, use less fuel, need less maintenance, and produce far fewer emissions.

Changing customer requirements are forcing freight cars built only a short time ago out of service. Today's 53-foot containers don't fit in intermodal freight cars built for 45- and 48-foot containers. Many automobile carriers can't handle the height of sport utility vehicles and vans, which are such an important part of today's automotive sales.

The overall conclusion of this Transport Canada study is that an appropriate, defensible tax depreciation regime for Canadian railways should yield tax benefits comparable to those enjoyed by their U.S. counterparts, and they concluded that a CCA rate of 30% would achieve this.

The Canadian Association of Railway Suppliers supports the request of our customers, the Canadian railways, for more equitable capital cost allowance and fuel tax treatment in Canada. We feel the case has been extremely well supported by numerous studies over the years and that now is the time for government to do what only government can do: make the necessary changes in its public policies. Otherwise the productivity gap will widen and the ability of Canadian exporters to compete globally will degrade.

To a certain extent, I think I am preaching to the converted here, because I think your committee has already heard and made the same argument in a previous study. But we urge your committee to recommend equalization of the capital cost allowance for railway investment.

The Chair: Thank you.

We will now hear from the chairperson of the City Centre Coalition, Mr. Campbell Robertson.

Mr. Campbell Robertson (Chair, City Centre Coalition): Mr. Chairman and members of the committee, I represent the City Centre Coalition, which is a grouping of nine community organizations in Ottawa.

Our mandate involves protecting and enhancing the quality of life in our communities. Our mandate is local, but I believe what we are recommending can apply to cities across Canada.

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Our coalition focuses on transportation issues in such a way as to support the quality of life in our city and a sensible, realistic, economical overall transportation system in which public transit, as well as walking and bicycling, is encouraged. We want to prevent our communities from being overrun by cars. Public transit is key to achieving this.

We agreed with the Federation of Canadian Municipalities when it said in its proposal for a quality-of-life infrastructure program that vibrant downtown cores are essential to improving quality of life and maintaining sustainable communities, and that efforts should focus on investments that enhance accessibility to work and shopping through options like walking, cycling, and public transit.

We particularly agree with Mayor Don Cousins of Markham, who told your committee that municipalities lack enough money for investment in new public transportation infrastructure. He made the point that historically most of the capital cost of subway and commuter rail systems in Canada and throughout North America has been funded by senior levels of government. He went on to describe the current funding gap, the difference between what municipalities are able to spend and what they need to spend to keep up with the expanding needs.

Public transit is a fiscally responsible and neighbourhood and environmentally friendly way of enabling people to move around urban areas. It reduces the demands to build expensive networks of major commuter roads through our cities. Building and widening major roads through city centres works to destroy the very hearts of our urban centres by swamping communities with traffic and all that means in terms of quality of life and indeed the safety of the public.

As for fiscal responsibility, I will refer to a study done for the Region of Ottawa-Carleton that shows that automobile travel in this region is subsidized much more heavily than public transit. The report on total cost of travel in Ottawa-Carleton shows that in the peak urban period, automobile traffic was subsidized to the tune of $276 million, whereas transit subsidies amounted to about $38 million. That is a dramatic difference—$276 million to $38 million. It takes a much greater subsidy to provide for cars than for public transit. Yes, it makes good fiscal sense to invest in public transit.

National governments of other OECD countries invest significantly in public transit. The United States has a national policy backed by federal government investment in public transit. We urge you to include in your report a strong recommendation for federal investment that is specifically dedicated to improving public transit in our cities.

The Chair: Thank you very much, Mr. Robertson.

We will now hear from the Pension Investment Association of Canada, Mr. Russell J. Hiscock and Mr. Donald T. Walcot.

Mr. Russell J. Hiscock (Member, Government Relations Committee, Pension Investment Association of Canada): Good afternoon, Mr. Chairman, honourable members of Parliament, ladies and gentlemen. Thank you for the opportunity to discuss our submission.

My name is Russell Hiscock and I am the manager of investments for CN Investment Division, which provides pensions to CN's retired employees across Canada. With me today is Donald Walcot, executive vice-president of BIMCOR. He is similarly responsible for the management of pension assets for Bell Canada's employees. However, we are both here today representing the Pension Investment Association of Canada, in which our firms are members and we are both active volunteers.

The Pension Investment Association of Canada, PIAC, is the representative association for public and private pension funds in Canada in matters relating to pension investment. Collectively, the 134-member pension funds in the association manage approximately $0.5 trillion in assets for over six million pension beneficiaries.

It is a pleasure for both of us to be here to discuss an important issue to everybody: managing assets for pension beneficiaries. The foreign property rule, as I am certain you all know, restricts foreign investment by tax-deferred pension plans and RRSPs to 20% of plan assets.

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The basis for our present position on the FPR is found in the paper prepared for the association by Keith Ambachtsheer in September 1995, a copy of which has been provided to you.

While many members of the association and indeed finance theory itself would argue for the complete removal of the FPR, PIAC continues to believe that a gradual relaxation of the limit to 30% is a more achievable goal and would be acceptable to the broad range of interest groups to which government must respond.

Let me turn to economic factors. PIAC was instrumental in having the FPR limit relaxed in 1990. Immediately following the 1990-1994 incremental increases in the limit from 10% to 20% and during the subsequent five years, no adverse effect has been observed on any of the following: the Canadian economy, the Canadian-U.S. exchange rate, the ability of governments or corporations to finance debt, balance of payments, Canada's equity markets, and the availability of corporate financing, including the small business sector. In fact, many of these conditions have flourished in the period following the last amendment to the FPR limit.

Although the FPR was originally introduced in 1972 by then Finance Minister Benson, no positive impact of the rule on any of the foregoing conditions has been observed.

The Government of Canada and each of the provincial governments had been net borrowers from domestic and international sources for much of the three decades prior to 1997. Subsequently, Canada and the provinces have been net redeemers of debt, resulting in the decline of the stock of outstanding debt in Canada. Most forecasts are for further declines. Clearly, any reason that may have existed to keep capital captive, at least to finance government debt, no longer exists.

Similarly, equity financing in Canada thrives. In fact, there is no shortage of capital available to competitive Canadian companies.

PIAC is aware of a great many studies on the impact of the FPR. The majority of these studies confirm that Canada has suffered no adverse effect from the relaxation of the FPR limit in 1990. Conversely, these studies demonstrate that Canadians have experienced the detrimental impact of lower returns and increased risk through limited diversification in the investment of their retirement savings.

Obviously, registered pension plans and registered retirement savings plans, RRSPs, are the cornerstones of independent retirement income, and measures ought to be in place to encourage, not discourage, the growth of retirement assets. Not only is this important for the railway workers, bus drivers, teachers, bank employees, auto workers, and many, many others who are beneficiaries of pension plans and anticipate an independent retirement, but it is also important to the Government of Canada, which provides support to retired Canadians and also derives tax revenues from the taxable income of retirees not requiring support.

PIAC assumes that the original intent of the FPR was to ensure an adequate supply of capital for domestic companies; however, in today's global environment, capital markets have demonstrated that capitalization of domestic firms has little to do with the availability of domestic capital. Rather, factors such as the Canadian corporate tax structure and the productivity and competitiveness of Canadian corporations in a global context are far more important factors in attracting domestic and foreign capital.

There are ways to artificially exceed the FPR limit that are acceptable to government. For a number of years it has been common for some pension funds to use synthetic instruments, such as derivative swaps on non-Canadian indices, to exceed the 20% limit. While the mutual fund industry held concerns that their investors would be wary of derivative products in their mutual fund investments, its participants have finally developed products using the synthetic approach to replicate their foreign investment objectives. They now offer them as funds eligible for RRSPs, despite their 100% exposure to foreign property. This aggressive response to the lack of progress in the further relaxation of the FRP limit and the public perception of the need for flexibility to seek the best returns, whether generated in Canada or elsewhere, has now rendered futile the continuation of the FPR at the 20% level.

But this strategy is not without its costs. Risk exposure is greater, management costs are substantially higher, and many foreign markets are not sufficiently developed to attract derivative trading. Our experience shows that in a number of countries stock indices simply do not reflect the successes of many attractive companies, while direct investment would be a much more suitable and effective strategy. Many investors using synthetic products are not aware of the risk management processes required for derivative products.

Despite the foregoing, many pension funds in Canada still adhere to the spirit of the FPR and do not exceed the 20% limit. Beneficiaries in such pension funds are clearly at a disadvantage because the limitation on diversification imposed by the FPR increases risk for such beneficiaries since their retirement assets cannot be allocated to markets where performance may be superior.

• 1615

Clearly the environment for investment has changed remarkably over the past two decades. Investment professionals seek opportunities worldwide, and Canada represents less than 3% of the capitalization of world equity markets. Requiring ordinary Canadians to maintain 80% of their retirement savings in Canada forces them to accept less exposure to 97% of accessible markets than might otherwise be warranted and to increase their risk. Consequently, they must accept a lower standard of living in retirement. Surely these cannot be the express objectives of a government such as Canada's.

Some principles in PIAC's position on the FPR have been criticized in the past, and we would like to address that criticism.

Some individuals and organizations have argued for the continuation of the FPR, and in some cases have suggested that rather than increasing it the limit might possibly be reduced. Such arguments largely maintain that foreign investment by Canadians results in less investment available for Canadian enterprise. In fact, modern global capital markets allocate capital to any deserving company, regardless of domicile. At the same time, the amount of investment capital in Canada is growing, and there is no evidence whatsoever that deserving Canadian investment opportunities are denied capital, whether they are in large corporations, small business, or infrastructure projects. While there might be other impediments that prevent some companies or projects from acquiring capital, they are completely unrelated to the availability of capital.

Some commentators believe that the abolition of the FPR will mean jobs lost in Canada, the premise being that money invested abroad means jobs created abroad. This argument is specious. Business activity creates jobs. Employment gains in Canada result from the impact of increased productivity and the relative competitiveness of Canadian firms. Successful companies grow, increase their workforces, and attract capital for expansion. Investment capital alone does not create jobs but supports the expansion of competitive and profitable enterprises. The economic truism that capital is invested only where it is economically warranted will never be altered by the FPR or any similar intervention.

Canada does not need the protection of captive capital, and that is why we think the FPR should be amended now. We are impressed with the economic gains made in Canada, which clearly come from responsible policies and strong fiscal management. At the same time, we are greatly concerned that an intervention such as the FPR has been allowed to outlive any usefulness it may have had in the past.

The fact is that Canada is only a small part of the global economy and Canadians are increasingly citizens of the world, but because we maintain the rule, others in the world continue to receive a message that Canada's economy and people require the protection of the FPR. They are increasingly concerned that Canada's confidence in its own capital markets is weak, and consequently their enthusiasm for Canada's investment opportunities is lessened.

If Canada is to retain its trained professionals, if it is to attract foreign investment, and if it is to be seen as a global partner, in our view, its policies must foster productivity, competitiveness, favourable tax treatment, and free flow of capital. Only in this way will other countries believe that Canada and its business enterprises are desirable places to invest. Removal of the FPR in the manner we have suggested would be a simple demonstration to both Canadian and foreign investors that Canada is moving in that direction.

We strongly believe that the FPR is accomplishing no recognizable goal and is frustrating the retirement objectives of millions of Canadians. Canada is still sending the wrong message to the global community by maintaining the FPR. It puts us in company with countries like Mexico, Argentina, and Brazil, not the United Kingdom, the United States, Japan, or Belgium.

This committee, in its report to Parliament last year, recommended that the FPR be relaxed. We sincerely hope the arguments we have presented today, together with those of others from whom you may have heard, are sufficient to permit you to make the same recommendation again this year.

The Chair: Thank you very much.

We will now hear from the mayor of the City of Moncton, Mr. Brian Murphy.

Mr. Brian F.P. Murphy (Mayor of Moncton): Thank you, Mr. Chairman. My name is Brian Murphy and I am the mayor of Moncton. I have with me in the audience Councillor Doug Pond, who is also from Moncton.

I want to thank you for fitting us into your schedule. Generally, I want to echo Mr. Smith's comment of how in awe we are of our capital, what a wonderful place it is, and what wonderful hospitality we have received here on the Hill from your colleagues in the House.

• 1620

We actually went to see Question Period, which was an experience.

The City of Moncton appreciates the opportunity to comment on the 2000 federal budget. New Brunswick is the home of the 15% harmonized sales tax. Moncton is a former railway town.

There is some discussion, as politicians, to weave all of the conversations together about tax cuts.

At the civic level you must realize, Mr. Chairman, that municipalities across Canada are in the habit, by law, at least on the east coast, of having balanced budgets. In fact, Moncton can boast that this will be the second year it will decrease its property tax rate. It is the only municipality in New Brunswick to do so. We are mindful, therefore, as administrators of public money, of the need to be careful with the public purse.

Moncton is the centre of the Maritimes. It is the natural hub of railroad and air services for Atlantic Canada. It has a population of 115,000 people. It was originally an Acadian settlement, and it is one-third francophone, two-thirds anglophone.

We come here neither seeking a handout nor a hand up. Southeastern New Brunswick is a vibrant economic region. Greater Moncton has an unemployment rate of 5.3%. If I read the Globe and Mail correctly this morning, a figure of 12% becomes quite relevant when awarding certain programs. We are not even close to that 12% barrier. We have a healthy economy. We had a population growth in the last census period of about 10%.

This is not the typical request for big government at the federal level to give us more money. We are just trying to give you some advice with respect to how to split the surplus.

We are following the dictum of the Federation of Canadian Municipalities with respect to its quality-of-life infrastructure program.

This is a way of encouraging all three levels of government to cooperate as we listen to the voices of our constituents. When the federal government cuts a program, closes a base or a railway, it has an effect. Conversely, when the federal government wisely invests in a community, it also has an effect, and a positive one. As a city member of FCM, we believe the proposal provides a coherent game plan for the federal, provincial, and local governments to improve the quality of life for our citizens.

The goals of the proposal, which we support, are clear. Investment must be made in environmental transportation and social infrastructure. We must improve the quality of life of our citizens, increase environmental and health protection, reduce levels of homelessness, address the issues of the working poor, and improve community well-being.

The production of water that meets Canadian drinking water standards is something that has been in the forefront of the news locally for us. We recently brought on line a $42 million water treatment plant through Canada's first full-scale public-private partnership. The plant will, however, add $100 to a typical family's water bill at a time when no one wants more taxes. This is not a popular move—it would not be anywhere in Canada—but we have the best drinking water in Canada. It is flowing through a distribution system with components that are, however, up to 100 years old.

It is not fashionable for any level of political system to invest in what is beneath the ground, what cannot be seen, but believe me, the $42 million invested in our water treatment plant, without assistance from other levels of government, will be nugatory if we have a distribution system that fails it. It is important to remember that when spending money on infrastructure, it is not always ribbon cutting, it is not always something that will create numerous jobs, but it is the right thing to do in many cases.

We have similar situations with respect to our waste water system moving from primary to secondary treatments. I provide these as only two examples of what are hidden in our ground, underneath our pavement, which need to be addressed.

You are probably aware that the National Research Council estimates a shortfall in investment for municipal and regional roads of up to $9 billion and in urban transport a shortfall of $8 billion. Funds are needed to bring these services up to snuff.

In addition to the need for asphalt, curbs, gutters, sidewalks, and catch basins, Moncton also feels the financial pressure of supporting our local airport. The Moncton airport, a key piece of the local infrastructure, is a major catalyst in our economic development efforts. Traffic figures indicate that Moncton is the second busiest airport, by far, in the Maritimes.

• 1625

A complete list of social infrastructure needs is well articulated in the FCM's brief on the quality-of-life infrastructure program. However, if there is a rush to have municipalities foisted into the public housing sector, it should be noted that particularly in New Brunswick, since 1967, the equal opportunity program of Liberal Premier Louis Robichaud made it clear that municipalities are not responsible for soft or human services, including housing. That distinction has been made since that time. Many provinces are now just dealing with the disentanglement issues and clarification of who does what, but it has been the plan in New Brunswick for some time that we don't do housing.

While affordable housing is a laudable goal, and while my own minister in my own riding is the minister charged with the issue of homelessness, I must say that the rush to endorse, which I hope is a rush to endorse the FCM's principles, should not be foisted on Atlantic Canada, which has a different division of powers. Care must be taken with respect to housing initiatives.

In conclusion, we feel we need federal help and we need it in a tangible way by endorsing the FCM's quality-of-life infrastructure program. We need to be sure that disentanglement issues are taken care of. In short, what we would like to say is that the last infrastructure program, while laudable, had with it some issues of implementation that led us to privately build our water treatment plant. It was not a priority in our municipality for the federal representatives.

Again, I urge you to recognize, as members of the finance committee, that the cities in which we live have some form of local government. When you hurt or help an unrepresented area or an unorganized area, if you hurt the village, town or city, you hurt many of the people who vote for you, as members of the finance committee. I don't want to get too much like Hillary Clinton in saying that we all need a village to grow up in, but the fact is that this is the base political organization. We have banded together through the FCM and have asked you to endorse an infrastructure program. We certainly need it to work for municipalities. We don't need to waste money on politically popular projects; we need infrastructure improvement all across this country, and in particular the older parts of the country, not forgetting that the maritime provinces constitute an older part of the country. We have services under the ground that need improvement, and the infrastructure program is the way to do it.

I thank you for your time. I hope you will see your way to dividing the surplus toward that very valuable aim.

The Chair: Thank you very much, Your Worship.

We will now proceed to the question and answer session. We will have a five-minute round starting with Mr. Epp.

Mr. Ken Epp (Elk Island, Ref.): Thank you, Mr. Chairman. Thank you all for coming and making your presentations today. With your permission, Mr. Chairman, I first want to have a bit of fun.

I bought my wife a car. It has a light on the dash that says “check engine”. The car is running perfectly. It starts well. It gives me good gas mileage. There are no symptoms except “check engine”. I told my wife that the interpretation of that is “bring money”. Bring money to Waterloo.

Do you guys have a way that you set it in your shop so it will come on after five days?

No, I don't want an answer.

Mr. Martin Smith: I can answer that.

Mr. Ken Epp: Can you?

Mr. Martin Smith: Based on government EPA standards, there are several things that are connected with cars. The light comes on because your gas cap is loose, or the light comes on because the air filter is dirty. Those things are regulated by government.

Mr. Ken Epp: That's good.

The Chair: I am glad to see the light goes on in cars anyway.

Mr. Ken Epp: We will keep bringing money, I know.

Mr. Martin Smith: If it is under warranty, sir, it wouldn't be like that.

Mr. Ken Epp: No, it isn't. This is an old used car. I can't afford a new one.

Mr. Martin Smith: If you bring it to Manitoba, I will fix it for you.

Mr. Ken Epp: I want to say to you, though, and I have to hurry because my time will soon be up, that there is some hope for you. In the last Parliament one of the Reform members had a private member's bill. It was drawn and debated in the House. I think most members spoke in favour of the bill. Unfortunately it was not a votable item. In this session one of the Bloc members has the bill. This time it was deemed votable. We will actually be voting on it. Members of Parliament will have a chance to stand and decide whether or not to support making tools for mechanics and other people tax deductible, which we strongly support.

• 1630

I thank you for coming today and reminding this committee of that priority. I think it has been in front of the committee for a number of years. You could maybe start heading your stuff “It's about time. Let's get this show on the road.”

I have no questions for you because I agree with you. Thank you for coming.

I want to talk a bit with the chartered accountants institute. You people must only do income taxes for rich people. You say “Target the middle- and the high-income people for tax breaks”. I hope I have this right. You said that low-income Canadians have already had their tax cuts. I can't believe you are saying that. Did I hear you right?

Ms. Elaine Sibson: Yes, you did hear us right. The feeling is that Canada is vastly overtaxed right now. Our tax rates are the highest of all of the OECD countries. High tax rates are prohibitive to investment; they are prohibitive to business growth. By making tax cuts and directing them at the middle and upper classes, it allows increased spending, it allows better growth in the economy, and in effect it rejuvenates the economy.

Mr. Peter F. Wilkinson (Director, Government Affairs, Canadian Institute of Chartered Accountants): I think it would be fair to say, Mr. Epp, that what we said was that it was started in the last two budgets when there were some income tax cuts directed to lower-income Canadians. All we are saying this time is that after two years of surpluses and a projection of surpluses to come, there should be some recognition of the effort put forward by those in the middle- and high-income levels, that they should also see some fiscal dividend, and they have yet to see that.

That is not to say that there shouldn't be further tax reductions in future years for all Canadians in all income groups.

Mr. Ken Epp: I have a quick question for you on EI. I didn't write down that you mentioned it and I don't know if you did. Do your clients not say, if you are making a presentation to the finance committee of the Government of Canada, to start bringing EI into line with reality instead of using it as a way of increasing federal revenue from a fund from which the government is not warranted to take it? I am sort of leading the question, and I know that good lawyers wouldn't do that; they wouldn't lead the witness. What is your response to the overpayment of EI premiums?

Ms. Elaine Sibson: We are looking at the tax system from a very high level. We are looking at what is the best move for Canada to promote growth in the economy and to address the unfairness of the tax system.

Although we looked at a number of different options for reducing taxes, we really directed our observations at the tax system, not at all of the individual components within the tax system or any particular interest group, such as RRSP contributions or anything of that nature.

Mr. Ken Epp: I am surprised because this is a direct payroll tax, and, as another witness mentioned—I think it was the Retail Council—payroll taxes kill jobs. I think that is a given. I am surprised, representing the group of people that you do, that you wouldn't come up with that particular one. But that's okay, you are entitled to bring whatever you see.

I would like to ask a question of the Retail Council of Canada. Mr. Woolford, you said something to the effect that you would like to bring EI rates down 30¢. They are now set at $2.40. That would bring them down to $2.10. The actuary says $2.05. Why are you so timid? Why don't you say that they should be set where they are supposed to be to maintain the level that the actuary says and that all decent mathematicians, including myself, have concluded?

Mr. Peter Woolford: We went for the art of the possible, Mr. Epp. Being a politician, you will recognize that. Our preference would be to see them come down to the point where they actually balance the outflow. That would be, I think, around $1.80 per hundred, so it is even lower than $2.05.

We opted for a level this year that would balance the tax increase that is coming on the CPP. That is why we simply chose the level we did. We felt that, at the very least, this year the government could afford to counterbalance the loss in income that Canadians will experience through the increase in Canada Pension Plan contributions by means of reducing employment insurance premiums.

But we would agree with you fully. We think they are iniquitously high.

Mr. Ken Epp: Thank you.

• 1635

Mr. McGuire, you indicated that depreciation rates for the railway are too low. What should the depreciation rates be?

Mr. Peter McGuire: The figure that was quoted in the IBI study, which would equate with what the U.S. receives and what essentially the trucking industry receives in Canada, would be a 30% rate.

Mr. Ken Epp: Please educate me. I am not certain about this. Do they have a flat rate depreciation in the States, whereas ours is on the decreasing balance? That makes a considerable difference. Am I right?

Mr. Peter McGuire: Let me point out, as I mentioned, that I am pinch hitting, so I am a little reluctant to get into very technical stuff, especially with the chartered accountants here, because it is not my field. The Canadian CCA rate is a 10% declining balance and the U.S. has a seven-year property thing, so it is gone by eight years.

Mr. Ken Epp: All right. We got your message: try to increase those rates.

Mr. Chairman, my time is up, so I am going to pass it to other members.

The Chair: Mr. Brison.

Mr. Scott Brison (Kings—Hants, PC): Mr. Chairman, I would like to thank all of the witnesses for their interventions today.

I agree with Mr. Epp that the tax deductibility of mechanics' or technicians' tools is an idea whose time has come, again, and hopefully this time the groundswell will be successful.

My question is for the Canadian Institute of Chartered Accountants. You haven't talked about capital gains taxes. First, it is great to see a plan that has a mix of substantive tax reforms and reductions, but capital gains tax reductions I didn't see as being part of the picture.

Just for your information, to reduce our capital gains tax rates in Canada to roughly the same rates as those in the U.S., on the personal side we would be looking at about $247 million per year. That would be the cost to the treasury. It is more of a perception of issues as opposed to reality. I would like your feedback on that.

Secondly, on the corporate tax side, many countries are using corporate tax reform as a vehicle to create economic growth. The Mintz report had some recommendations that in a very general sense addressed the distortionary nature of the Canadian corporate tax code. As well, the report made recommendations relative to things like the taxation of capital and profit and sensitive taxes.

Last year, Germany, a social democratic country, reduced its corporate tax rate. Last year, Germany was the second highest in the OECD in terms of corporate tax rates. We were third. This year we are second, because again, Germany, a social democratic country, is ahead of us on corporate tax reform.

I would appreciate your feedback on those issues.

Ms. Elaine Sibson: I will start and then Peter can finish, because he is more in tune with the work that was done.

On the capital gains tax side, the Canadian Institute of Chartered Accountants recognizes that there are a lot of tax reform items that need to be addressed. Capital gains clearly is one of those items. The capital gains tax rate in Canada is considerably higher than in the U.S., our neighbour to the south. It is partially addressed through our recommendations, in that at least by reducing the tax rate on middle-income earners there is some relief associated with capital gains. But again, it was not an item we addressed in the overall recommendations that we are giving to the committee.

On the corporate side, again recognizing that there needs to be corporate tax reform, the comparative balance of Canada with other countries on the corporate side is not as off the scale as it is on the personal side. We thought personal tax reform had to come first, together with debt reduction, which would free up more dollars to make the next set of tax reform cuts.

We really look at the recommendations we are giving as being fairness recommendations that also have the spinoff of providing benefits to the economy.

Mr. Peter Wilkinson: Mr. Brison, as Elaine said, we took a look at it and said “Where should we go first?” Obviously there are lot of places where the reform of taxes—corporate, personal, excise, and tax on property—needs to be looked at.

• 1640

When we look at the comparisons of where we are with the OECD countries with tax revenues as a percentage of GDP, our biggest gap is with our biggest trading partner, the U.S., and that is at the personal income level. We are saying you should start there first.

If you look at our recommendations, they say that of the $10 billion, the majority of the surplus should go to debt reduction. The reason we say that is because we are going to spend $43 billion next year on interest payments and debt servicing. If we were to start to get a big whack of that paid down, then there would be money to take a look at a lot of other matters that need to be addressed inside the tax system, as well as other priority spending issues that will come up in the future for the government.

Mr. Scott Brison: Thank you very much.

I have a question for Mayor Murphy. Welcome, Mayor Murphy. I represent the riding of Kings—Hants, in the Annapolis Valley of Nova Scotia, so we are not that far apart.

My question relates to the infrastructure program. Infrastructure programs appear periodically. I have compared them in the past to candy tosses. There seems to be a level of uncertainty until the program appears, and then there is a mad rush to develop programs to fit the criteria of the infrastructure program. Wouldn't we be better served by a stable, ongoing funding program that was not tied to four-year electoral cycles but instead was related to the real, ongoing needs of Canadian municipalities, provinces, and communities?

Mr. Brian Murphy: Yes. Infrastructure is something you have to monitor. You know that after 20 years or so you have to replace a sidewalk or a road or a pipe underground. It is not sexy and it is not politically beneficial sometimes. As I say, there are no underground ribbon cuttings for the new storm sewer system. It is not as politically flashy as doing other things.

A more steady replacement of infrastructure would be better suited to the country.

The Chair: You could always put a ribbon around a pipe, though.

Mr. Brian Murphy: We will do any ribbon cutting possible to get our share of the surplus.

The Chair: And ribbon is not that expensive.

Mr. Scott Brison: My last question is directed to the Pension Investment Association of Canada and it concerns the foreign content rule. With the infusion of capital into the Canadian equities markets from the Canada Pension Plan fund and the superannuants pension plan fund, which is coming, there will be significant chunks of capital going into the Canadian equities markets. Shouldn't we be utilizing these infusions as perfect opportunities to dramatically increase foreign content levels? Really, they will offset and ameliorate any negative impacts that could occur.

Mr. Russell Hiscock: Yes. The growth in pension assets looking forward over the next 15 to 20 years will be very substantial, and certainly a significant portion of that growth will be represented by the Canada Pension Plan. In the current regulatory environment, that will put enormous stress on all of the capital markets because it is growing much faster than the economy in general. On that basis, more diversification is needed, not only for the Canada Pension Plan but all trustee assets.

Mr. Scott Brison: Since the Minister of Finance's decision on bank mergers about a year ago, Canadian banks have lost about $8 billion of market capitalization. During the same period, American banks have appreciated by about 9%. I think if we continue to make these types of decisions relative to the Canadian financial services sector, which is a cornerstone of our equities market...the sooner we can increase the foreign content limit to enable Canadians to escape this tyranny the better.

• 1645

I would support your position to increase the foreign content limits.

Mr. Russell Hiscock: We gave a brief on our rationale with regard to the foreign content limits. All I can say is I think Canadian banks are a tremendous bargain today. I think that is all I will say.

Mr. Scott Brison: Thank you.

The Chair: Mr. Szabo.

Mr. Paul Szabo (Mississauga South, Lib.): The Canadian Institute of Chartered Accountants, of which I am a member, represents 65,000 chartered accountants in Canada. Can you confirm, Elaine or Peter, because this report isn't dated, who did the work and who approved this presentation on behalf of the CICA?

Mr. Peter Wilkinson: The author of the report is Tessa Hebb, a principal in the firm of Hebb, Knight & Associates. We also worked with Informetrica here in Ottawa.

The study has been approved by a committee of the Canadian Institute of Chartered Accountants and was approved by our governance system generally. The report was released yesterday morning at 11 a.m. at a press conference in Ottawa.

Mr. Paul Szabo: The membership at large has not opined on this or had an opportunity to comment on the general position, like the Canadian Federation of Independent Business would do a survey of its members?

Mr. Peter Wilkinson: The Canadian Institute of Chartered Accountants does not take public policy positions based on surveys of its membership, Mr. Szabo. It is consistent with positions we have taken for the last number of years in Ottawa on prebudget matters.

Mr. Paul Szabo: So if I disagree with any part of it, I am not going against something I already approved.

Mr. Peter Wilkinson: We won't ask for the designation back.

Mr. Paul Szabo: Thank you. I am off the hook.

In 1997 statistics from Revenue Canada showed that 52% of Canadians made $30,000 a year or less, basically at the lowest marginal rates. If I take that, then reducing the middle marginal rate has no impact on those people. Restoring full indexation might prospectively have some impact. For instance, the 2% inflation rate might put another $16 in their pockets per year. However, the fact that the government changed the basic personal amount by some $675 more than offsets the impact of bracket creep since indexation was taken away. In fact, they are held whole.

As well, the 5% surtax has no impact on small income earners.

That says to me, taken together, that there are 52% of Canadians making less than $30,000 a year who will not benefit in any way from the recommendations. I put that forward because in the report, and in Mr. Ashton's comments before the press conference yesterday, I think it was said very clearly. He said that low-income Canadians got their tax breaks in the last two budgets and now it is time for upper-income earners to get theirs in proportion to the tax burden they pay. That was really important. It is not in the supplementary report here.

I find there to be somewhat of a contradiction, in the sense that, first of all, low-income earners just didn't get it in the last two budgets. There was a $575 increase in the basic personal amount, plus an additional $100 in the second budget, which then extended the whole package to everybody. Therefore, every Canadian taxpayer in the last two budgets got something. High-income earners also got the elimination of the 3% surtax, which was very substantial and much larger than the adjustments to the basic personal amounts.

So your assertion that this is fair to the average Canadian, which is in your press release, doesn't square. It doesn't square with the true facts.

Let me put it to you in this sense, which I think Elaine touched on. It has to do with spending in the economy. Tax breaks really mean that people spend. If half of Canadians are going to get no benefit from your recommendations, and they are the lowest income earners, and half are going to get some benefit, up to about $600 a year or more based on your figures, who is really going to spend more and who is going to save more in terms of tax breaks?

• 1650

I submit to you that lower-income Canadians are more likely to spend their tax savings, like Jennifer on her tools and things like that, than higher-income Canadians who have retirement plans to top up, etc. I ask you whether the real intent is to have tax breaks so that we can stimulate spending, generate the economy, and grow the pie. Is that not what we should do? Therefore, the argument would be to better balance the amount of benefit to all Canadians to get more Canadians in a position where they can spend.

Secondly, in terms of fairness, is your problem really with progressivity? You have not really commented on that. I think it is progressivity, not in terms of the absolute tax burden.

Ms. Elaine Sibson: Your points are well taken and you are right. You are bang on. Part of the recommendation is to revive the economy, to have dollars go back into the economy. But a big part of the recommendation and a big part of the $3.5 billion is going to that 2% tax reduction for middle-income earners. That represents 7.6 million Canadians. Those are people who earn between $30,000 and $60,000, which is not an overly high-income level when they have families. There are only one million taxpayers who exceed that $60,000 level. We are directing most of the benefits from the tax cuts to the middle-income level to drive the economy and to return to them something that has been taken from them in the past through bracket creep.

The 5% elimination is a fairness issue. It is totally a fairness issue. If you put a tax in place and you say it is there to get rid of the deficit, then you should hold to your word and, unless you make a policy change to change it, you should eliminate it when the deficit is eliminated.

The adjustment in the personal exemption, the indexation, affects all taxpayers.

That is really how we have come at it, the three components.

Mr. Peter Wilkinson: Mr. Szabo, under the latest Revenue Canada statistics that we used to put this study together, there are 21 million tax filers in Canada and somewhere in the neighbourhood of 14 million are actual taxpayers. If you take a look at what we are suggesting, 7.6 million of those taxpayers, something like 50% of the actual taxpayers in the country, are going to get the 2% reduction in the marginal rate. Then there are the million who are also going to get the 5% surtax reduction.

I think on the issue of progressivity you are right, and that is addressed by actually having to reduce the rate from 26% to 24%, because it is of course at either end of that. That is where the people are sort of getting squeezed.

If you look at the latter part of our study, there is a table showing the differences between the effective and marginal rates and that as one makes the changes we are suggesting, you don't get those spikes. Therefore, we are going to bring back more progressivity into the system.

The other thing I would say is that the modelling certainly shows that the economic benefits derived from a $3.5 billion tax cut to the economy are pretty much the same, generally, no matter where you put them. There are some differences in the leakage, so you could assume that people in the lower income groups would probably spend more of that money on consumption than people at the higher end, but the economic benefit to the country is the same for the $3.5 billion, no matter how you put it, according to the modelling and the information we have received from Hebb, Knight & Associates and from Informetrica when doing this study.

I think that then takes you back to the issue of the 5% surtax, and what we are talking about is that there should be some fairness. That tax was brought in a number of years ago for a particular reason, but that reason is gone now, so let's move it on.

• 1655

On the issue of the people in the middle, earning between $30,000 and $60,000, they are really paying a lot of taxes. The bracket creep has really hit them hard. As you can see from one of the charts in our study, they are paying something like $1,400 or $1,500 more a year.

We are trying to bring fairness back to the whole system. I think for those people who actually pay the taxes in this country, we are hitting almost 50% of them.

Mr. Paul Szabo: Thank you.

The Chair: Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): I would like to ask a question of Mayor Murphy. You reflect a sentiment and an attitude that we heard in British Columbia and Saskatchewan. There was a lot of support for the infrastructure program and the fact that it was one-third, one-third, one-third of shared dollars going into projects. Some mayors went so far as to say that if they couldn't be represented at the table as we hammer this out, we shouldn't go there.

I am hearing in your comments that maybe the projects that got funded were not at the top of your list. I am wondering if you would agree with that attitude.

Mr. Brian Murphy: Yes. I think, though, that if the program starts out as pure infrastructure, with the three areas, then there won't be any problem. However, if it includes things like post-secondary education institutions, things that aren't pipes under the ground, the pure infrastructure, then there is going to be some dissatisfaction at the municipal level across the country.

Mrs. Karen Redman: It is interesting that you make the distinction of pure infrastructure, because you reference social infrastructure in your presentation.

Minister Bradshaw heard a lot about this issue when she went across Canada, and you seem really adamant about the role municipalities should or should not play in social housing.

I represent a community in southern Ontario, Kitchener. My municipality, like many across Canada, has really stepped into the fray. One of the things Minister Bradshaw shared with the rest of us is the fact that communities are really putting their finger on the needs and the solutions, and there isn't a cookie-cutter solution for this problem across Canada.

My question to you is, what is the appropriate role, if you see one, for your municipality in this whole issue? I am assuming it is a huge issue in your province as well.

Mr. Brian Murphy: Very much so. I guess this isn't the forum to argue about it, because we have some problems, let's put it that way, with our provincial government on what we might do with respect to affordable housing. It is a problem, but housing is a provincial and partly a federal responsibility in our jurisdiction. All I said in my comments was that if we are going to pay one-third for something, it should be something within our responsibility.

My quick answer to you is that it is a problem. We are not vested with the jurisdiction to deal with it, but we are not oblivious to it either. I think the solution is to do what they do in the United States. I don't want to sound too much like Jack Layton, but we should spend some public money on housing. Whether that money would be federal or provincial, I don't know.

Mrs. Karen Redman: Government is all about making choices and balancing needs. If it comes down to investing in infrastructure or investing—and I am not saying we are going to—the 1% solution that has been touted by people who have been studying this issue, that would mean a $2 billion investment, doubling what the federal government now spends. What would your opinion be on that?

Mr. Brian Murphy: There is only one taxpayer. You have to balance things. I will sit with it and say that I think you should split it and give us some infrastructure money. Let's put it that way. You are Solomon in this case. You have to figure it out. It is Paul Martin's fault. He created the surplus.

Mrs. Karen Redman: Thank you.

The Chair: That is duly noted, by the way.

Mr. Gary Pillitteri: I will ask a question of Mr. Walcot. You mentioned there is no need for money in Canada for businesses and so on, and therefore you need the opportunity to invest outside Canada.

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I represent Niagara Falls, which has seen a building boom in the last couple of years. I understand there is quite a lot more to come. These business people come to me and say “Gary, money is still not that loose. Money is tight. We are having a problem finding money.” I am wondering how appropriate it would be, with such large pension funds available, for you to want to look outside Canada to invest when there is a lot of opportunity for investment here.

It costs us $42 billion to service the debt in Canada. If you take a look at the liability within the total debt and if you take away $130 billion of liability, which is part of the pension funds, and it leaves another $450 million, how much of that do the pension funds own? How much of the Canadian debt do they finance?

Mr. Russell Hiscock: I don't have that statistic to give you in an absolute fashion, but I can tell you that a very substantial portion of Canadian government, federal, provincial, and corporate debt is held by pension funds and mutual funds, but pension funds would be the larger slice. Statistically, I don't have the number at my fingertips.

Mr. Gary Pillitteri: I keep asking the chairman of the Bank of Canada this question: how much is foreign debt and how much is national debt? Foreign countries own about 24% of our national debt. Before we raise the foreign content rule up from 20%, I am wondering if it would not be more appropriate to do a study as to how much we should be holding within the pension funds. Let's not forget that we are aging and that most of the liability was incurred by us. Therefore we should be taking the responsibility to own some of the debt within Canada.

Besides being a question, it is also a comment. I look forward to the next time you come before us. I hope you have that answer for us, as soon as you can get it, on the national debt, and of course on the national and provincial debts combined.

Mr. Russell Hiscock: If I understand your question, it is how much fixed income or debt Canadian pension funds should hold. Each pension fund develops an asset allocation mix that is designed to service the liability structure behind the pension fund, and some pension funds in Canada may have 60% fixed-income instruments, some may have 20%, but the fact that Canada has a certain amount of outstanding debt is an independent matter. When you say it is held by foreign countries—

Mr. Gary Pillitteri: Foreign investment.

Mr. Russell Hiscock: —by investors outside Canada—

Mr. Gary Pillitteri: They own 24% of our national debt.

Mr. Russell Hiscock: Many Canadian institutions hold foreign debt as well. It is all part of the whole asset management process.

Mr. Gary Pillitteri: I am referring to your statement that there is no need for investment in Canada and therefore there should be no change or no effort.

Mr. Russell Hiscock: I don't think that was what was said.

Mr. Gary Pillitteri: I just wonder, if we take more responsibility or percentage of our national debt, how much is owned by the pension fund. That's all.

Mr. Russell Hiscock: The statement was never made that there is no need to invest more in Canada. The statement was made that the investment opportunities have adequate sources of capital and, looking at a fixed-income instrument market, Canada now is a net redeemer of debt. It has been for the last two years, and that trend is not only at the federal level but at most provincial levels.

If you move a number of years out in conjunction with the capital accumulation of the Canada Pension Plan, which was mentioned, the potential discussion of funding the federal government pension plan, which is unfunded at this point in time, and if on the one hand we have an enormous capital accumulation and on the other hand the available supply of government debt is going down, it is clear that there have to be some places that this money has to find a home.

The Chair: Thank you.

Mr. Gallaway has found a way to ask a question. He is going to be asking Dr. Bennett's question.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): I have Dr. Bennett's question right here. She has written it out for me, so the delivery will be easy.

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The question is for Mr. Smith and Ms. Thomas and it relates to what she calls the tool tax. Now remember, she is a doctor. She wants to know, having regard to the fact that this committee has recommended this on at least two occasions, why it hasn't happened. Is there, behind all of this, the thought that some people will cheat? In other words, will they buy tools for their friends?

Doctors can deduct their tools, but they don't buy a lot that their friends would need.

Taking into account that background, how would you suggest that it be created so that it would be fair and accountable?

Mr. Martin Smith: With respect to whether you are going to use it for personal use, I believe the income tax system is based on the honour system. I believe that chapter 5.2 deals with musicians. They are allowed to claim their instruments. How do you know they are not going home or out on the street corner making money teaching kids how to play the piano or the violin?

Technicians are basically honourable people. Personally, I would not go out and buy tools for my friends. I believe there is a form, T-2200, that is a declaration. I would be expected to prove it by providing bills and being honest. Despite what public opinion is, technicians are honest people. It is not a “bring money” policy.

Mr. Roger Gallaway: Thank you. I thought that was an excellent answer, Mr. Smith. I should also say that I am taking orders for stethoscopes.

The other question is to the Retail Council of Canada. I think I am the designated questioner on this every year. I ask it for my neighbour, who is a jeweller. I wonder if you could describe to us the effect of the so-called luxury tax on jewellery sales in Canada, especially in border communities.

Mr. Peter Woolford: The tax collects for the federal government around $55 million a year. The effect of the tax is to boost the cost of jewellery to Canadians by that amount.

What a lot of people forget is that the tax kicks in at $3, so we are not talking about high-value items. It kicks in for jewellery starting at $3 and for watches starting, I believe, at $50. The great majority of the tax is paid by Canadians buying very ordinary items.

The second piece the tax catches is, typically, diamond engagement rings for young couples getting engaged. The image the tax has, of course, is that it is paid by high rollers who can afford to buy lavish jewellery for themselves. In fact, a great majority is covered off by ordinary purchases.

Mr. Brian Rudderham (Controller, Wal-Mart Inc.; Retail Council of Canada): Mostly by my daughter.

Mr. Peter Woolford: Mostly by Brian's daughter.

One of the reasons I had Brian come along today is because he is the chair of our committee, but I believe Wal-Mart is now the largest vendor of jewellery in Canada. You will not find a lot of very high-end, high-fashion, expensive jewellery at Wal-Mart stores, but they are one of the principal places where Canadians buy jewellery.

Did you want to add anything, Brian?

Mr. Brian Rudderham: I think you have covered it. Again, jewellery tends to be perceived as a luxury item. Yet in fact there is probably nobody in the room who doesn't have a piece of jewellery that has not been affected by the tax. Certainly, not all jewellery sold is at the high end, as people perceive it. Look at the higher-end items that are not subject to luxury taxes: cottages, boats, high-end cars, high-end sport utility vehicles. You can buy a BMW or a Mercedes without that luxury tax, but you can't buy a $24 gold chain for your daughter.

The Chair: Mr. Nystrom.

Hon. Lorne Nystrom (Regina—Qu'Appelle, NDP): I have a couple of questions and then I have a procedural question for you, Mr. Chair, at the end.

My first question also concerns the tool tax. I am one of several members of Parliament with a private member's bill to allow mechanics to deduct the tax on their tools. I just wonder if anybody can elaborate a bit more as to why this has not happened. This committee, as Mr. Gallaway has said, has made the recommendation. We have had several private members' bills on the issue, including mine and others from other parties, and still there has been no movement.

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Is there anything you can tell us from what you picked up in your lobbying on this issue as to why it hasn't happened, why Mr. Martin is turning a deaf ear on this particular idea, which has broad-based support from all corners of the House?

Mr. Martin Smith: As far as lobbying is concerned, I am not a lobbyist or a politician. I am strictly a technician.

We don't have a large number of technicians in this country. There are around 170,000 technicians. We don't have a unified voice. We don't stand to complain. The people who have fought on our behalf are with the local dealers' associations. The Canadian Automotive Dealers Association has acted on our behalf. This is the first chance that an actual technician has been able to come before the government to show a normal face, the average Canadian face, on this issue.

Why is it being stalled? I can't say. Possibly it is not a big issue with the government. I don't know. It is a big issue with us. We just want to be treated fairly, like other Canadians who can deduct tools or equipment or anything they require for their jobs.

Mr. Lorne Nystrom: I certainly agree with you.

Do you have any idea how much this provision would cost when it starts off and on an ongoing basis? Does anybody have any idea as to what the cost of this would be in terms of a tax expenditure?

Ms. Jennifer Thomas: I don't know how the government in the end would decide to set things up, but I certainly hope it does decide to set something up. The technicians I have talked with have told me that it is the number one concern within our trade. It costs us so much to be able to go to work every day. The technicians I have spoken to yesterday and today are saying that any amount would be a help at this point. We invest so much.

With respect to apprentices, in the first five years that you are in the trade you are paid as an apprentice. You are not making as much money and you are laying out an enormous percentage of your income just to equip yourself so that you can continue to go to work every day. During those first five years, I think we would be looking for a bigger tax break. Once you are established and once you have a fairly sizeable tool kit, you have to maintain that expenditure, but it is a lot less on a yearly basis than what you do in those first five.

Mr. Lorne Nystrom: I have a question for the Pension Investment Association of Canada.

I am not sure if you are familiar with a report done for the Canadian Labour and Market Productivity Centre by a fellow named Kirk Falconer, entitled “Awakening the Sleeping Giant”. It talks about the size of pension funds in the country, that they are now worth over $500 billion. It is the second largest pool of capital in this country, after the banks. These funds in 1998 were now some 75 times larger than they were in the mid-1960s. I don't know whether you are familiar with the study or whether you would endorse the general direction of the study.

The other question would be, would you be in favour of establishing a pension regime in the rest of the country similar to that which Quebec has, which is la Caisse de dépôt et de placement?

Mr. Russell Hiscock: With regard to the report, I think you held up a newspaper clipping. Both Don and I were interviewed as part of that report. It deals with some of the issues related to pension fund investment in the very small business sector. We discussed some of the impediments that exist today.

You are asking if we are supportive of it. I don't think any specific recommendations were made with regard to legislation, but we certainly think it is a very good report and there is a lot of very useful information that policymakers should pay attention to. We would certainly be supportive of the conclusions that were drawn.

One of the themes that we as an association have been working on in the last number of years is to try to work with the federal Department of Finance to find out how much investment is going into the small business sector and how that can be increased. But prudency is important as well.

The second question, I'm sorry, I have forgotten it.

Mr. Lorne Nystrom: The second question was about la Caisse de dépôt et de placement in the province of Quebec. Would you be in favour of a similar type of organization for pension funds in the rest of the country? Would that be a wise move?

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Mr. Russell Hiscock: The caisse de dépôt is an organization that was established to manage a number of pension funds and indeed other asset pools within the province of Quebec, but the largest single fund that is managed by the caisse is the assets underlying the QPP, the Quebec Pension Plan, which is very analogous to the Canada Pension Plan and the CPP investment board, which has recently been established. It seems to me that the CPP is proceeding on that asset-based route, which the QPP did from day one.

Mr. Lorne Nystrom: Yes, 30-odd years ago.

Mr. Russell Hiscock: Yes. Have I answered the question?

Mr. Lorne Nystrom: Yes, thank you.

The Chair: Is there anything else?

Mr. Lorne Nystrom: No. I have a procedural question, but I will ask it after we finish.

The Chair: On behalf of the committee, I would like to thank you very much. As you know, as we travel across the country we benefit from input from Canadians from coast to coast to coast, and today you certainly added value once again to the debate.

The challenge we face is that most people who appear before our committee make a very strong case for the issue they represent, which makes our job a lot harder. Essentially, we are driven by the ultimate goal of improving the standard of living for Canadians. Whether you talk about infrastructure, mechanics' tools, or any other issue, we view those things through that prism and we ensure that the views, expressed so eloquently by all of you, find their way into our report. Ultimately, as I said earlier, the recommendations we make to the Minister of Finance will speak to the reality that Canadians want a higher standard of living. Quite frankly, this committee feels that measures must be taken to ensure that becomes a reality. Thank you very much.

Mr. Lorne Nystrom: My procedural point is, very simply, the following. I was wondering if you could give the committee some idea as to when we might get the first draft of the report. I think it is very important, Mr. Chair, that we have it several days in advance so that we have a chance for input on all sides of the committee, and maybe even block out some extra time to discuss the report. The objective, of course, would be to have a unanimous report of all committee members, if that is possible, in terms of the clout we can have as a committee after all of the hearings we have held.

I just want from you, Mr. Chair, an idea of when we could get a first draft of the report, and I want to make sure have enough time to go over it and have some discussion.

The Chair: Yes, we will have enough time. I hope people will do what was stated earlier, that you forward the recommendations you would like to see in the report, as individual members, and do that as soon as you feel comfortable. They will be given to the researcher. He will provide us with areas where there may be consensus, and then we will meet to discuss the entire report.

Mr. Lorne Nystrom: Do you have any idea when the first draft will be ready? Our deadline for tabling the report in the House is December 10, which is only a week Friday, and I think we would probably want to discuss it.

The Chair: I will ask the researcher how many people have actually submitted recommendations. Have you submitted your recommendations?

Mr. Lorne Nystrom: Not yet, but I just wanted to know what the process was.

The Chair: That is the process. That has been established.

Mr. Lorne Nystrom: I am just concerned that we have enough time to look at the first draft and then make changes to the draft.

The Chair: Sure. The idea would be for everybody to submit their ideas and recommendations, and thereafter—

Mr. Scott Brison: Mr. Chair, while it is helpful for people individually, committee members, to submit their ideas to the researchers, I think it is also very important that as a group we allot a significant amount of time to study the report. We have been harping on this from the beginning. We need more than two or three hours; we need a couple of days, with no witnesses, to sit down and talk about the draft report. That is very important.

The Chair: I understand that, and we will have two days to discuss it.

Mr. Scott Brison: All right. Once we have received the draft report there will be time to review it individually and then time for discussion.

The Chair: That's right.

Mr. Scott Brison: Thank you.

The Chair: The meeting is adjourned.