STANDING COMMITTEE ON FINANCE
COMITÉ PERMANENT DES FINANCES
[Recorded by Electronic Apparatus]
Tuesday, May 2, 2000
The Chair (Mr. Maurizio Bevilacqua
(Vaughan—King—Aurora, Lib.)): I'll call this meeting
to order. As you know, the order of the day, pursuant
to Standing Order 81(4) and the order of reference of
Tuesday, February 29, 2000, is a study of the main
estimates for the fiscal year ending March 31,
2001—votes 1, 5, 10, and 15 under Canada Customs and
Revenue Agency; and votes 1, 5, L10, 15, 30, and 35
under Finance. These are the ones we'll be dealing
We have the pleasure to have with us, from the Department
of Finance, the parliamentary secretary to the finance
minister, Mr. Roy Cullen; Don Drummond, associate
deputy minister; and Guy Bujold, assistant deputy
minister, corporate services.
You'll have five to ten minutes to make your
introductory remarks, and thereafter we'll engage in a
Mr. Roy Cullen (Parliamentary Secretary to the
Minister of Finance): Thank you
very much, Mr. Chairman and ladies and gentlemen. I
appreciate the opportunity to speak and exchange views
with you today, and with the officials here, and respond to
your questions about the 2000-2001 main estimates of
the Department of Finance.
As you know, the department's fundamental purpose is to
assist the government in developing and implementing
economic, social, and financial policies and programs
that foster growth, create jobs, and promote a secure
society. This means that the analysis and advice
provided by Finance draws on and ultimately touches on
the interests and concerns of every Canadian.
Departmental priorities, of course, are shaped by the
government's agenda—to enhance the standard of living of
Canadians—and by the department's analysis of the strengths and
weaknesses of the Canadian economy.
As we all should recognize, one of those weaknesses, a federal
government deficit, has been decisively overcome.
The deficit is behind us and we are now in an era of budget
A balanced budget or better is again expected for
1999-2000, for the third consecutive year. Further,
the government is committed to balanced budgets or
better in 2000-2001 and 2001-2002—the first time in 50
years that the budget has been in surplus or balance
for five consecutive years. This means that
underpinned by the work of the Department of Finance,
the federal government's economic and financial
policies brought Canada to the point where it entered
the new millennium equipped with renewed economic
strength and confidence. Building on that foundation,
with a growing economy and our nation's finances in
order, this February budget 2000 charted a course to
greater prosperity for all Canadians in the 21st
The annual budget is perhaps what first comes to mind
when Canadians think about the Department of Finance,
and yes, it is the department's most visible
accomplishment each year. But preparing the federal
budget is but one of the department's responsibilities.
Its other equally tasking responsibilities include:
providing analysis, advice, and recommendations on tax
and trade policy and preparing tax and trade
legislation; providing analysis, advice, and
recommendations about the management of the federal
financial assets and liabilities, including the
management of federal and crown corporations borrowing
on financial markets; managing transfers and fiscal
relations with the provinces and territories;
developing financing and investment policy for the
Canada Pension Plan in conjunction with the provinces;
representing Canada with international financial
institutions and international economic and trade fora;
and developing policies for and advising on the
financial sector and financial markets.
In addition, Finance operates two statutory spending
programs, the public debt program and the
federal-provincial transfers program, and has the
responsibility for the delivery of payments to major
international financial institutions such as the IMF,
the World Bank, and the European Bank for
Reconstruction and Development, and for the
domestic coinage program.
Mr. Chairman, I indicated earlier that the work of the
department touches directly on the lives of every Canadian in each
province and territory.
As the Minister has said:
We recognize that the only true measure of long-term success for
our fiscal and economic policies is their ability to generate jobs,
secure social programs and growing real incomes that deliver the
quality of life all Canadians deserve.
Because its work directly affects all Canadians, the
department emphasizes active public consultations—through its own
initiatives and the work of parliamentary committees such as
yours—on policy directions and options.
While the department has an annual budget this year of
$64.9 billion, an increase of just about $1 billion
over last year, the vast bulk of this funding goes to
the public debt program and the federal-provincial
transfers program. On an internal operating basis the
department is actually one of the smallest in the
government, with a staff of approximately 750 people,
half of whom are economists.
The explanation for the department's year-over-year
increase rests with the three programs delivered by the
department and includes a $300 million increase in the
economic, social, and financial policies program; a
decrease of $500 million in the public debt program;
and a $1.2 billion increase in the federal-provincial
The $300 million increase in the economic, social, and
financial policies program can be attributed for the
most part to increased payments to the International
Monetary Fund's poverty reduction and growth facility.
It reflects anticipated payments under a
new loan commitment announced on March 25, 1999 by the
minister as part of the government's debt strategy to
help the poorest countries.
The $500 million decrease in the public debt program
reflects a lower stock of public debt.
The $1.2 billion increase in the federal-provincial
transfers program is due to increases in the Canada
health and social transfer and equalization.
The 2000 budget announced a $2.5 billion increase in
CHST payments to help the provinces and territories
fund post-secondary education and health care—the
fourth consecutive federal enhancement to the CHST.
Starting in 2000-2001, CHST cash will reach $15.5
billion—a 25% increase over the last two years. Total
CHST, cash and tax transfer combined, will reach an
all-time high of almost $31 billion in 2000-2001.
Moving on, Mr. Chairman, as in past years, the Department of
Finance continues to undertake projects that have significantly
increased its workload. Time precludes discussing all of these
projects but I would like to highlight two of them.
First, the department is developing a new policy framework for
the financial services sector that responds to the challenges posed
by new information technology, increasing globalization and a
rapidly changing marketplace.
Second, the department is planning an important new
international role in supporting the G-20, the recently
instituted forum of finance ministers and central bank
governors, representing 19 countries, the European
Union, the World Bank, and the International Monetary
Fund. Finance Minister Martin currently chairs the
Its purpose is to ensure broader participation in
discussions on international financial affairs and to
help achieve a more stable global economy.
Mr. Chairman, I could go on and on, but I feel that
your committee's interests and concerns will be best
served by letting you focus on the issues and questions
that most concern you. I simply wanted to highlight
the scope and volume of work undertaken by the
department and the increased workload it has undertaken
and will continue to undertake in the future.
These facts, I believe, are important to your
Together with the officials
with me, I will be happy to answer your questions at this
Thank you. Merci beaucoup.
The Chair: Thank you, Mr. Cullen.
Mr. Paul Forseth (New
Westminster—Coquitlam—Burnaby, Canadian Alliance):
Thank you very much.
Looking at the Department of Finance 2000-2001
estimates, section III, on page 17 there's a reference
at the bottom of the page that says:
Global economic and financial volatility may affect the
Canadian economy, and thus the government's revenues and
program expenditures, as well as the costs of servicing
the government's debt.
The point I'm talking about there is mainly
servicing the government's debt.
On page 18, also under “Risks”, it says:
Economic and financial volatility, globally or within
Canada, could affect the government's revenues, program
expenditures and the cost of servicing the debt.
Relate those two comments to the comment in your
dialogue that the $500 million decrease in the public
debt program reflects a lower stock of public debt.
Perhaps you could discuss in a little more detail
what that phrase means, and why in the last budget
there was no specific line item that particularly sends
a message to the international community that we have a
specific plan for retiring debt, rather than it being
somewhat nebulous at this point, as whatever happens to
be left over.
Mr. Roy Cullen: Thank you. Maybe I'll start off,
and Mr. Drummond or Mr. Bujold might like to add.
The reduction in the estimates flows from the
decreased amount of public debt and the decreased cost
of servicing the debt. The department has been on a
program of replacing, let's say, shorter-term floating
debt with more longer-term, fixed-interest rate debt.
That has been very beneficial and will actually make us
less sensitive to changes in interest rates, up or
down, into the future.
Why the amount was not disclosed separately in last
year's estimates, I'm not sure. Perhaps Mr. Drummond
or Mr. Bujold would like to expand or comment on that
Mr. Don Drummond (Associate Deputy Minister,
Department of Finance): Just in terms of your
question about the lower stock of debt, the particular
numbers show the total stock of debt, the net public
debt, is down $6.4 billion, and that is from the
surpluses recorded in 1997, 1998, and 1999. If we look
at the marketable debt—what we have outside of the
public sector pension plans—that's down $16 billion to
the end of 1998 and 1999, and of course that's what's
leading to the lower interest rates.
Despite flagging the potential impact of the
volatility in world markets, I think we'd have to say
the economy came through that quite well. As we know,
we had 4.2% growth in 1999. So we had that plunge in
commodity prices at the beginning of 1998, but it
seemed to have a fairly short impact on the overall
national economic performance. That's not to say it
didn't hurt some regions and some sectors quite badly,
particularly British Columbia. But overall, the
economies remained quite strong.
On sensitivity to the interest rates, as Mr. Cullen
noted, when we first published these sensitivities back
in 1994, we indicated that a 100 basis point—a 1%
interest rate increase—increased our public debt
charges by $1.8 billion in the first year. That is now
down to $900 million, so we've actually cut the first
year's sensitivity to a change in interest rates in
half. That is because, as Mr. Cullen noted, we've been
moving more of our debt into long-term issues. We used
to have roughly 65% of our debt turn over within a
365-day period. Now it's really the inverse of that. We
have only about 35% of it turning over in a one-year
period. So our sensitivity to the type of volatility
we saw in markets over the 1998-99 period is greatly
In terms of the specific debt reduction plan, we do
have one, and we put it out in the budget. We've put
aside $3 billion of contingency reserve in each year's
budget plan, and if that's not needed for unforeseen
reasons, it goes entirely to pay down the debt. In
1997-98, $3.5 billion went to paying down the
debt—in other words, $500 million on top of the
contingency reserve. In 1998-99, we paid down $2.9
billion, so only $100 million of the contingency
reserve was needed for unforeseen reasons, and almost
all of it went to paying down the debt.
Going forward and calculating the public debt, we've
always assumed the contingency reserve is needed, but
it's very much part of the plan that if it's not
needed, it will go to pay down the debt. At worst,
we'll have a budget balance, but if we don't need the
contingency reserve, we'll have that $3 billion surplus
per year that will go toward paying down the debt.
Mr. Paul Forseth: Okay, I have one supplemental
Can you just again briefly describe the phrase
“public debt program”? Essentially, what is the
program? Then just give us the rounded-out figures of
what our debt is, both short-term and long-term.
Mr. Don Drummond: Well, when we're referring to
our public debt, it's really the distribution of that
debt across the different term maturities. There are
many different ways of measuring that. We have 90-day
treasury bills, 30-year bonds, and real-rate return
bonds. I guess one of the key indicators that
observers use is what percentage of your debt turns
over within one year. That is one of the driving
features of our public debt program, and we try to keep
about 65% of our debt longer than one year and 35% or
less for less than one year.
As I indicated,
that's virtually flipped from what we had about five
That 65%-35% is quite traditional in other countries.
When we were running our debt program in the early
1990s, we had the shortest stock of debt of all the
major countries, whether you compared it to the United
States or the European countries or Japan. Our program
is much more similar to others at this time.
Mr. Roy Cullen: Maybe I could just respond to
that. The number we're focusing on as a government is
the debt-to-GDP number. When we came into office, I
think the number was about 71%. We're down to 63%, and
within the next two or three years it'll be down to
50%. So that really recognizes the capacity of the
economy to support a certain debt load. We think
as long as the economy keeps moving at the rate it
is—it has been performing very well—that debt-to-GDP
ratio will continue to come down. That's really the
number we should be focusing on.
Mr. Paul Forseth: What is the debt?
Mr. Roy Cullen: It's $570.8 billion.
Mr. Paul Forseth: The servicing of that debt is
still rising, though, is it not? You talked about a
reduction in the interest rates, but it looks like
interest rates are actually going to go in the other
direction in the next year—up.
Mr. Don Drummond: In the last budget we had, the
public debt charges were estimated at $41.5 billion for
1999-2000, with a slight increase to $42 billion in
2000 reflecting that modest increase in interest rates,
and then back to $41.5 billion in 2001. So it's
essentially flat over the coming period, which is a mix
between a slightly lower stock of debt and a slightly
higher average interest rate.
Mr. Paul Forseth: That's fine for now, Mr. Chair.
The Chair: Mr. Loubier.
Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): I'm interested
in the same issue: the management of the debt, the plan for paying
down the debt, and so on. I would like you to provide us with more
details on that. I do not know whether Mr. Cullen, Mr. Drummond or
Mr. Bujold could tell us more about how the Department of Finance
manages the debt. Is there a specific management plan in place, and
do we have objectives for paying down the debt? For three years
now, it seems that the amount of debt repayment is dependent on the
surplus that is not forecast at the beginning of the year by the
Minister of Finance. This surplus is deliberately understated so
that at the end of the year, when we have this huge surplus that
had not been forecast, accounting conventions are such that it goes
to pay down the debt. I would like you to tell me a little bit
Mr. Roy Cullen: In general terms, of course if the
contingency reserve is not needed then clearly that
goes to pay down the debt. To the extent that there
are surpluses available, they go to pay down the debt.
I think rather than focusing on the absolute
amount of the debt.... In fact, if there is a huge
amount paid against the debt, there is the distinct
possibility that it could actually create a drag on the
economy. Clearly you can go beyond $3 billion a year,
but what the magic number is.... It starts to create a
drag when we have this incredibly strong growth in the
economy. That's certainly something we don't want to
slow down, but perhaps—
Mr. Yvan Loubier: That means you've paid much more than
$3 billion in the last three years. One year—I think it was
A voice: [Editor's note: Inaudible].
Mr. Yvan Loubier: Yes, but there was more than that. Clearly,
even last year, you put the contingency reserve toward the debt.
Then there was an amount of 4 or $5 billion in surplus that also
went to pay down the debt, because this surplus had not been
forecast in Mr. Martin's second to last budget. So my question is
this: do you always operate in this erratic way?
If the contingency reserve is not used, it automatically goes
to pay down the debt. That is correct. The surplus that was not
forecast at the beginning of the year is automatically used for the
debt. Is that how you manage the debt, solely according to the
unforecast surplus, or do you have a specific management plan and
even a plan for paying down the debt?
What I really want to know is whether you have a specific
plan. Whether you have one or not, I would like you to tell us more
about this. If there is some documentation available on this, I
would like to know about it, because I think this is one of the
rare areas of public finance where there is no documentation that
is as specific as that available on revenues, expenditures and
issues of public finance management generally.
Mr. Don Drummond: In fact, the Department of
Finance does have an annual publication on the public
debt program. I'd be happy to provide the committee
with a copy of that list released just shortly after
Our plan has a number of steps, as Mr. Cullen
indicated. Our primary focus is on getting the
debt-to-GDP ratio down. It's the same for any of us. If
you have a mortgage, the absolute amount of the
mortgage doesn't make a lot of sense; it makes a lot of
sense if you put it in the context of the income you
have. In Canada, we peaked out at a debt-to-GDP ratio of
71% in 1995-96. We're down to just about 60% right
now, and by 2004 we should be at just around 50%.
That's still too high, but you can see that with the
sustained growth in the economy, it will continue to
We're very explicit in all the budget documents. Our
objective is to reduce the amount of the debt by $3
billion per year. That's why we set aside the
contingency reserve. As you indicated, as we're coming
towards an end of the year and it looks like the
surplus might be higher than that, we have to make a
decision. Is the best use of those surplus funds to
pay down the debt further or are there other uses for
In the example you gave, in 1998 we decided at the end
of the year to put $3.5 billion into the Canada health
and social transfer because there was a need and a
willingness on the part of the provinces, and they sent
the letter to the Prime Minister that they would invest
that in health care. So in a sense, as you noted, we
paid down $2.9 billion of the debt, but on top of that
$2.9 billion, $3.5 billion went to CHST.
Similarly, at the end of this year, right now it looks
like we will again pay down that $3 billion. We won't
need the contingency reserve. We don't have the
results yet, but that's what they would suggest so far.
But on top of that, we put another $2.5 billion into
the CHST. That $2.5 billion, instead of going to the
provinces in CHST, could have gone to paying down the
debt, but a choice was made there. A decision was made
that the better use of those funds was to provide that,
which the provinces have indicated is going to be
invested in the health care systems again.
Mr. Roy Cullen: There are also the two documents prepared
every year by the department. Perhaps we should also give them to
the committee chair. They are referred to as the Debt Management
Report and the Debt Management Strategy. These two reports are
published every year by the department and we will provide them to
the committee chair.
Mr. Yvan Loubier: I am familiar with the existence of these
two documents. But that does not answer my question. We find
ourselves in a time of budget surpluses. Since last year the
Minister of Finance has been announcing that there will be five-
year planning for budgets, in other words that an attempt would be
made for a period of several years to determine what the income and
expenditures would be. It would be an attempt to portray the
overall fiscal situation of the government.
I wonder whether there is such a long-term debt management
plan with precise objectives and targets to be met. It would give
us some idea of the efforts being made by the government to reduce
the debt burden.
I know these two documents. After seven years in finance, you
get a pretty good idea of what all the documents are. But so far I
haven't seen any real strategic planning for long-term reduction of
Mr. Roy Cullen: Mr. Loubier, the Minister also presented the
committee with the economic and fiscal plan. I don't know what
exactly its name is in French but it was presented last November.
It contains a plan to bring down the debt by $3 billion every year
and it is included in the five-year plan.
The Minister also made a comment on the debt-to-GDP ratio but
we have not set any precise target for that.
Mr. Yvan Loubier: A target...
The Chair: Mr. Brison.
Mr. Scott Brison (Kings—Hants, PC): Thank you,
Thank you to the parliamentary secretary and the
associate deputy minister for meeting with us today.
My first question is related to personal capital gains
taxes. The most recent budget addressed the issue
partially by reducing the inclusion rate from 75% to
Why wouldn't the government have moved further to, say, a 50%
inclusion rate, which would have reduced
the effective rates to those of the U.S.?
Currently, we still have a 13% disadvantage over the
U.S. Why that level of incrementalism when it's such a
fundamental issue to the new economy, whether in
e-commerce or biotechnology?
Mr. Roy Cullen: I'll just start it off, and then
Mr. Drummond can comment further. In
preparing a budget it's about choices, and we elected
to do a number of things in the budget. The
predominant theme, of course, was general tax relief
for Canadians, with a particular emphasis on Canadians
with families and children.
There were other initiatives in the budget
in terms of the tax-free rollover of capital gains for
start-ups, where we know there is clearly a gap in
access to capital for small businesses. There were a
number of other measures in terms of the stock options,
as you know, so that the capital gain will only accrue
when the option is exercised.
When you start moving the inclusion
rate down, at some point you run into the
balancing of how we treat all types of different
income, because there is a balancing of a taxation of
capital versus salaries versus business profit, etc.
With that, I'm sure Mr. Drummond can comment further
on some of the policy aspects.
Mr. Don Drummond: Further on that latter point,
one thing we did take a very close look at was the
relative tax treatment of different forms of income.
Some people have a choice on how they take it and others
don't. You can have employment income, interest
income, dividend income, or capital gains. So you have
at least four different sources of income. We are
quite concerned about not having a large differential
in the taxation of those. The number with the current
dividend tax credit system that gave a neutrality
among those different forms of income was 66 2/3%.
If we went to 50%, we would
have a much lower taxation regime on capital gains than
we would on those other forms of income. What was cited
to us in a number of cases is that you might get more
capital gains revenue if you lowered the capital gains
inclusion rate and didn't necessarily think of it as a
cost. That may be true in the first instance, but you
would get that additional revenue from the capital
gains because there would be an incentive for
employers to shift their compensation for employees
out of employment income into capital gains. We're
quite worried that we would then have to add hundreds,
if not thousands, of pages to the Income Tax Act in
It's difficult to pick one aspect of the United States
and try to achieve parity when other aspects aren't in
parity. It's regrettably true that the overall
employment taxation, interest taxation, and dividend
taxation in the United States are all lower than they
are in Canada at the moment. We hopefully are moving
toward theirs. But it would be difficult to pick the
capital gains and match that up when we're not matched
up on the other sources of income.
Mr. Scott Brison: I appreciate that.
You could take steps to address the issue on the
dividend tax credit side, which would reduce the
resultant draw toward capital gains. You could do
that. That is more of a technical issue.
My point is that in one area of taxation it would be
great if we were significantly ahead in terms of the
type of taxation that has the most deleterious impact
on areas in the new economy. I see capital gains tax
as being not just in reality an impediment, but also
symbolically as being a significant impediment to
I would argue as well that with the volatility of the
markets currently, particularly in the area of
technology stocks, you would not see a wholesale
movement from salary to stock options as a compensatory
asset. I don't think people would have been as likely to
have been drawn to that in recent weeks as they may have been
a couple of months ago.
So I don't think that fear is as
Often we talk about tax reduction, debt
reduction, or health care investment almost like a
zero-sum game. It's one or the other.
You can't have tax reduction and significant
reinvestment in health care and a lot of these other
things unless you're willing to take baby steps in
If you look at the huge differences between the U.S.
and Canada in terms of where we're spending money,
government money to business,
whether through HRDC, ACOA, or any other development
program, as a percent of our GDP, grossly exceeds what
is spent in the U.S. I'm not speaking specifically
about employment insurance. I'm talking about some of
the more general government-to-business spending
through vehicles such as HRDC.
The recent budget increased HRDC's
budget by $1.5 billion. I think that was the
amount. Instead of
providing increases or in fact reducing the
investment in that department in real terms,
why aren't we using that money
to reduce taxes or to make a greater level
of commitment to debt reduction?
Mr. Roy Cullen: Thank you, Mr. Brison. You talk
about subsidies to business. In fact, our government
launched a major program through program review, and
in the case of Industry Canada, for example, which
was heavily into business subsidy
programs, those were completely slashed.
the role HRDC plays with business has been somewhat
overstated in the partisan zest of debate.
The reality is that in Canada we have some fairly
significant regional economic disparities. We don't
have the population density and the richness of the
capital markets that are available in the United
States, so I think Canada sometimes requires unique
Clearly, we could do better, but with
unemployment being the lowest it has been in a
generation, maybe these programs have had some
I'd like to come back to a point and then
turn it over to Don. On the issue of capital gains and
the role of the government in assisting access to
capital, Michael Porter did his report about ten
years ago, which was entitled Canada at the
He looked at
Canada's competitive positioning. Ten years later he
did a retrospective on how we were doing. His comments
generally were that although it was not all done yet,
we had done a very good job on the macroeconomic side.
There was a lot more that local governments and
governments generally could do with regard to
supporting clusters, etc.
But he also said that the
business community needs to sharpen its business
strategies. We tend to be a little risk averse in
Canada. I don't think it's all dependent on the tax
treatment. For example, we have R and D provisions
that are the most progressive in the world, and still
the take-up is quite low.
The government can provide a certain policy framework,
but ultimately business.... Let's look at e-commerce.
Business as well has to step up to the plate at some
Having said that, Mr. Drummond, would you like
to add something on the latter point that
Mr. Brison made?
Mr. Don Drummond: Vis-à-vis the HRDC program, I
wouldn't want to leave the inference that the bulk of
that grant money is going to business. In fact, little
of it is going to business. There has been a lot of
discussion about the Canadian Jobs Strategy, but that's
just over $100 million. Four of the biggest programs
under the HRDC grants would be the Canada student loans
program, the Canada study grants, the Canada education
savings grants—that's the top-up for RESP money—and
the initiative on homelessness that was announced in
December 1999. That alone is $432 million, which
is being administered from HRDC. There's
the disability Opportunities Fund, as well as
support for literacy.
So a lot of those programs within that fund
you've mentioned are not going to the business
Mr. Scott Brison: We were talking about the
regional development programs. A lot of times people
compare the Irish example to Canada, and that's
probably not the best comparison. But if you compare
Ireland's relationship with the EU to Atlantic Canada's
relationship with the rest of Canada, you can see some
parallels in terms of equalization systems and
Mr. Cullen, has the government investigated the notion
of an aggressive tax strategy of equalization, in
Atlantic Canada or in recipient provinces, as a means
by which regions could grow out of the traditional
equalization system, which feeds us a cycle of
Mr. Roy Cullen: My first comment would be that you
can't really have a differentiated federal tax regime
through tax policy that would look at that sort of
Mr. Scott Brison: But you could create incentives
through equalization for provinces to adopt more
aggressive provincial tax policies.
Mr. Roy Cullen: Maybe I'll ask Mr. Drummond to
comment on that further.
With respect to Ireland, if we look at going into
this particular budget billing exercise, initially
there was some reluctance to look at business taxes
until we had significantly addressed the personal
income taxes. I think there is more of an acceptance
now that business tax reduction can play a powerful
role in attracting investment and jobs. So we've
started the process. Some have called it timid, but I
don't see it that way. We are moving the tax rate from
28% to 21%, admittedly over five years, but that can be
brought forward. As the minister has outlined, the $58
billion tax package is an absolute minimum.
If you look at Ireland, it's a unique success story in
a sense, but I understand, as you've implied, they've
had some huge subsidies from the EC, and I gather
some of their tax rates may now be going up again.
Certainly it's a benchmark we should be looking at and
are looking at, but I'm not sure whether that's the
solution for Canada.
Mr. Scott Brison: Sure. I think a lot of people
point to Ireland and compare it to Canada in totality.
I don't think that's a fair comparison, but I think
some elements of the example might be applicable. If
we were able to engage the provinces in a realistic
discussion on regional development, there might be some
Mr. Cullen, you mentioned that reducing the debt could
create a drag on the economy. Could you explain that?
Mr. Roy Cullen: I guess the point is it's the
order of magnitude. At the level of about $3 billion a
year, that's clearly not an issue. For example, in the
five-year economic forecast we predicted surpluses of
$95 billion gross or $62 million net. If you took the
bulk of that and just applied it to the debt, as I
understand it—and maybe Mr. Drummond can expand on
it—that could create a drag on the economy. We're
really striving to keep the growth and the performance
of the economy going at the rate it is at right now,
which is parallel or exceeds that of the industrialized
world, and is projected to continue that way.
Mr. Scott Brison: Wouldn't it apply that the
growth in the economy currently is due to government
spending or investment as opposed to private sector
development? I guess I'm concerned about the
current upward pressures and indicators
on interest rates.
In that context, I don't see where reducing the debt
or having firmer debt reduction targets and plans would
have a drag on the economy. Quite the contrary, a
large government debt has the capacity to create a
crowding-out effect on private markets, if the
government debt is particularly out of whack, as a
percent of GDP, with those of other countries. It's
not something we can afford to maintain when we're
north of the greatest capital markets in the world and
a country with a debt reduction plan that could
potentially eliminate the debt in the U.S in 15 years.
Mr. Roy Cullen: I think there's a report just out
that really makes the argument that to slow the economy
down and avoid future industry rate hikes by the Bank
of Canada, it may be smart to pay off huge amounts
against the debt. But I'm not an economist, so maybe
Mr. Drummond would care to expand on this.
Mr. Don Drummond: I guess my perspective is not so
much whether debt reduction would slow down the
economy. I think it's clear that if the only
difficulty we encountered on the economic and fiscal
front in Canada was our debt burden, that's clearly
where we would put all the emphasis, but unfortunately
that's not the only difficulty we encounter. I think
we all accept that our tax burden has become too high.
You do have to make choices. I take very much your
point that you don't want to look at it as a zero-sum
game, but I don't accept the notion that tax reductions
pay for themselves. I think there is a return from the
tax reductions, but there is still a net cost. So to
the degree you allocate money for tax relief, as we've
done in the last couple of budgets and on a fairly
significant scale in the 2000 budget, it takes
away from the amount we can put into debt relief.
We've done substantial amounts of both. We certainly
could have done more on debt relief, but that would
have meant doing less on the tax relief side. That
would have left both our personal and corporate tax
burdens quite high, from an historical perspective and
vis-à-vis our major trading partners—not just the
United States, but many other countries as well.
So it's true, and it does dilute the effort in both
directions, but we felt it was necessary to move on
both the debt and the tax relief sides. As I said, to
the degree you do one, there are less resources you
have available for the other.
The Chair: Thank you, Mr. Brison.
Mr. Paul Szabo (Mississauga South, Lib.): Thank you,
We're talking more about the budget than the
estimates, but they're related, to some extent.
I want to just pursue a couple of things. First of
all, on the national debt, we had a forum with some
economists last year about the size of our debt, the
debt-to-GDP ratio, and the various scenarios
approaching it. I guess by simply looking at the
mathematics, paying down debt, starting with $3 billion
and moving up, will do very little in terms of
adjusting the debt-to-GDP ratio. It's not a big bang
for the buck, but the question does come up—I think
the Auditor General has commented on it—about an
appropriate level of debt to GDP.
Mr. Drummond, you commented that even a 50%
debt-to-GDP ratio, which is what we will be approaching
in the next short while, might still be too high. I
wonder if you could elaborate, on the basis of the
statement that a 50% debt-to-GDP ratio may be too high,
on the context or the consequence of staying at that
Mr. Don Drummond: I guess one would have to start
by saying that one of the great failures of the
economic profession is to establish what an appropriate
debt-to-GDP ratio is. There are a variety of views on
it, but I would say there is no consensus on what it
is. There was certainly a consensus—I don't think
anybody would disagree—that when we hit 71% it was too
high. I conjecture that at 50% we would still be
somewhat uncomfortably high.
One of the ways of looking at it is that when we hit a
71% debt-to-GDP ratio, it meant that out of every
revenue dollar we were collecting from Canadian
citizens, we had to allocate 36¢ to pay interest on the
public debt. So that's not helping anybody get any
current goods and services or investments from the
government; it's entirely paying for past consumption.
We're still at 27¢, and that's quite a high number.
When we're down to a 50% debt-to-GDP ratio, we'll still
be allocating almost 25¢ of every revenue dollar. So
that's one perspective where I feel one could argue
that's probably too high.
A second perspective is that at 50% debt-to-GDP, that would
put us back to where we were in the mid-1980s. I know
if you look back at budgets, if you look back at
private sector commentary, if you look back at the
statements made by opposition leaders at that time,
there was a feeling that 50% was too high at that. I don't
know why anything would have changed since then.
I think also you want to look at the levels of debt in
other countries. At 50%, that would also put us not as
far out of line as we have been in the past, but still
somewhat higher than most of our trading partners. And
we have to keep in mind too that many of our trading
partners are moving down their debt-to-GDP ratio.
But unfortunately I can't tell you.... If 50% is too
high, is 40% the right number? Is 30% the right
number? I think one still wants to continue moving
towards those numbers.
Mr. Paul Szabo: I tend to agree with you that
there are many opinions on the discussion, but as for
your comment that there's no current benefit, I'd
probably be able to find someone to debate that with
you, because debt is an accumulation of past deficits,
which were incurred for certain reasons, not just
thrown out the window. It was to sustain health care.
It was to sustain social programs. It was to make sure
there was that buffering when the economy was going
through some very severe periods. We were buried in
the deepest recession we ever encountered, and yet
Canadians continued to have the protection. Debt was
incurred to make sure the country wasn't going to have
to take draconian steps simply to keep out of going
Strategically and over a longer term, there's nothing
wrong with having debt. The issue probably for a lot
of people is a sustainable level of debt, and even from
the standpoint of explaining to Canadians whether or
not there is a need to eliminate the national debt.
What would be the consequences of that, when you think
of the magnitude?
It's not a bad thing to have debt when in fact it's
been for protection against severe swings in economic
situations and when it provides the leveraging you need
to be able to take advantage of opportunities when they
come up. That's primarily what happens in the
The reason I wanted to talk about the debt side is
that last month, for the first time in 19 months, there
wasn't growth in the economy. The consecutive string
of economic growth has now been broken, and I think it
was a surprise to a number of people. It probably is a
good point at which someone has to ask the question,
how have we responded in terms of preparing ourselves
for a downturn in the economic cycle?
You can throw the economic textbooks out in terms of
having low interest rates and low inflation all the
time, but the issue for me is, what is the finance
department doing to prepare strategy or prepare for
that economic downturn, again to ensure Canadians
continue to enjoy the benefits and the protections we
continue to offer now?
Mr. Roy Cullen: To start off, as I understand it,
in the fourth quarter the economy grew 4.6%, the 18th
consecutive quarter of growth.
Mr. Paul Szabo: I talked about last month.
Mr. Roy Cullen: Last month? Oh, okay.
My other comment, before I turn to Don, is about the
notion of the traditional business cycle, where we've
seen these sharp peaks and valleys. I'm not suggesting
it's a thing of the past, but with the tools at the
disposal of governments and other institutions, other
stakeholders, it's possible we won't see those kinds of
swings. Nonetheless I suspect there could be peaks and
valleys, but maybe of a different magnitude. But your
point is a good one.
Maybe, Mr. Drummond, you could pick it up from there.
Mr. Don Drummond: If I could, I'll return just for
a moment to the debt issue. When I was saying there
were no benefits, I was trying to distinguish between
current and past benefits. What we're now allocating,
27¢ for every revenue dollar for interest on the public
debt, is not paying for any current goods and services
the governments are providing.
As you point out, there are benefits from the past
expenditures of the government. That's why it really
wouldn't be a sound proposition to contemplate
eliminating the debt. To the extent that
there's capital formation and forward-looking spending
from the government, that's quite a legitimate reason
to borrow against, because there is a rate of return in
First, on the one negative month, as you pointed out,
we had 18 consecutive positive gross domestic product
numbers and then that one negative. I don't
attach a huge amount of importance to that. In fact,
if you look back at any of the periods of long
suspensions we've had before, what was the exception
was not the one negative but that we had 18 positives.
If you look back at the latter half of the 1980s, when
the economy was growing very strongly, there were all
kinds of negative months. If you go back further, into
that long period of expansion we had through the 1960s,
there was a fair bit of volatility. Now when you look
back on the average, it looks as though it was all on a
straight upward trend, but there was fair bit of
Remember, even right in the midst of that expansion
in the late 1980s, we had that stock market crash in
October 1987. At the time we were living through it,
it seemed, if anything, like a long, sustained
So I don't attach a great deal of
importance to this. Nonetheless, it is important to
look forward and try to mitigate, to the extent we can,
the possibility of having a downturn and be prepared
if we do have one.
We've done a number
of things on that. I think the most important is
what we've been doing on the low inflation management.
If you look at why we had the severe recessions in
the early 1980s and the early 1990s, it was because
inflation got out of hand going into those periods.
There was not only a move to reduce the cyclical
upswing in inflation but to reduce the
underlying rate of inflation. So there was a need for
quite a strong monetary response.
At worst, we're in a situation right now where we have
to deal with a cyclical pickup of inflation. We don't
have an underlying inflation problem.
Secondly, the experience of certainly the early 1980s
and 1990s was exacerbated by the fiscal management
side. Again, there, we have gotten rid of the deficits.
We're getting the debt burden down quite strongly.
As well, as we pointed out at the beginning of the
session, we have insulated the government to a much
greater degree from the effect of higher interest rates
on the debt program by increasing the term maturity to
So I think a number of very important and
positive steps have been taken not only to mitigate the
possibility of having a downturn in the
economy, but to mitigate the effects that might feed
through to the Canadian population.
Mr. Paul Szabo: I did notice that we've locked in
a lot of the debt to take advantage of the low interest
rate scenario, which is exactly what Canadians would
hope we had done.
I would finally turn to this capital gains issue,
even though it's more a budget item than an estimates
item. Have we done an analysis of the impact of the
$100,000 capital gain exemption that was introduced in
the mid-1980s, how many people took it up, and what
impact it may have had on the economy, as almost a
study that could give us some wisdom with regard to the
anticipated benefits of making some modifications to
It seems to me, from what I am aware of, the
problem with that first go-round was that when it was
introduced, it was not a prospective provision but
was available even for holding gains, so that much of
what was taken up in the $100,000 was in fact of no
benefit. On top of that, it was also available for
gains that were incurred in offshore investments and
so on, which would never have any direct benefit to
Canada, like vacation properties, or even artwork, for
It is a very serious question, as far as I'm
concerned, simply because there are many equity
instruments within the public marketplace that have
developed strategies in terms of their dividend policy
and reinvestment policy—that balancing. It seems to
me that for companies that pay very poor dividends and
allow or promote growth within their business and
therefore capital appreciation in stock prices, all of
a sudden those kinds of companies would be
significantly impacted in terms of their attractiveness
for the public investor.
To make a
change in terms of the taxability or the percentage of
capital gains that are actually taxable would have an
enormous impact within the marketplace and in fact
vis-à-vis one company to another, depending on their
strategy and their segment and whether or not they are
blue chip high-dividend-paying stocks. Do you agree
that this is a very complex and sensitive issue to be
dealt with and that it should not simply be focused on,
that, oh, there are some high-tech companies out there that
give stock options and we should try to spur them or
target them very narrowly without worrying about the
impact on anybody else?
Mr. Don Drummond: You began with the $100,000
exemption. A number of studies were done. There was an
evaluation done by the Department of Finance. A
number of evaluations were done by academics. I can't
remember if any of them were favourable, but I think
it's fair to say the majority of them were not
As you said, a large number of people took advantage
of it, but it was largely around things like secondary
properties; that is to say, cottages. The way we
closed it down—and I think it was the only way we
could do it in fairness—was to allow people to
re-evaluate those properties at a certain valuation
date, and we know a large number of people did that.
But again, it was largely not what you would think as
being productive investments in the economy; it was
largely on secondary residences of people.
I think we're in a better regime right now, where the
incentive is on the margin for every dollar as opposed
to capping a certain limit on it. I certainly would
not disagree in the slightest that the whole capital
gains, the whole capital income thing, the treatment of
gains, the treatment of losses, is very complicated. As
I was trying to explain in the context of the answer to
Mr. Brison, I find it's difficult and potentially
harmful if we just pull out one issue of capital income
and treat quite differently the taxation on one source
from all the other sources. Our objective is to try to
bring down the tax burden on all the sources. Whether
they all have to come down exactly in parallel is an
open issue, but I find it difficult to open up a huge
gap where we have quite a different taxation regime and
one form of income versus the other forms of income.
The Chair: Thank you, Mr. Szabo.
I have a question.
Mr. Paul Forseth: I have one too.
The Chair: Okay.
I think the minister last year, in addressing this
committee, stated that the world has sort of an
outdated version of the Canadian economy. In fact,
we're not as reliant on resources and commodities as we
once were. It's more diversified.
If there's a view of Canada that is outdated, who
takes responsibility for that? What is the department,
the minister, the parliamentary secretary, or in fact
the government doing to change that view?
Mr. Roy Cullen: I remember when the Prime Minister
was in Davos at the World Economic Forum, not this last
year but the year before. In this encounter with some
groups there, he was trying to ascertain why the
Canadian dollar was getting hammered the way it was. A
noted world market player said, well, the problem is that
Canada is too much of a commodity player. To that, the
Prime Minister replied, or subsequently followed up,
“Look at the amount; the commodity play in the
Canadian economy has really shrunk.” I don't know what
it is now, but it could be 15% to 20%, or
something in that order.
As far as I know, there are
efforts being undertaken with Team Canada, with
Industry Canada and other departments, to try to get the
word out internationally that we're not just hewers of
wood and drawers of water. A lot of these countries, as I
understand it, are quite amazed when we trot out the
high-tech companies. So my response would be that we need
to do more of that and get the message out. That's being
done, and maybe we need to move even more aggressively
The Chair: I'm also struck by the fact that—and
correct me if I'm wrong here—I remember during
the years we were fighting the deficit, on budget day
you would get a number of ministers travelling abroad
to tell the Canadian story.
I'm wondering why, at a time when we are in a
surplus position, we have made not.... We've made some
steps towards developing an internationally competitive
tax regime, and I say “some steps”. Why would we
not, as a government, engage in that type of exercise
Mr. Roy Cullen: I'll get Mr. Drummond to expand on
this, but certainly officials went to New York and
London to spread the word.
Mr. Drummond, do you want to expand on that?
Mr. Don Drummond: I absolutely agree that as the
news gets better there's even more incentive to do
those visits. I must say from the other end of it that
there's a slightly less receptive audience than there
was five years ago when these countries had huge
exposures to Canada and were deathly afraid of what was
happening to their investments. We had a keen audience.
It wasn't the type of environment you might have wanted
to go to speak to them in, but if you went at that time
to London or Tokyo, you had hundreds of people, all
worried about their investments.
We find that right now most of those investors have a
certain percentage allocation in Canada. They're very
confident in what it is. They feel positive about it.
Certainly the onus is upon us to try to encourage them
to increase their stake in Canada, but they're not
sitting on the edges of their chairs wondering what's
going to happen to their money. They're quite
confident; hence there has been a little less interest
in those types of sessions.
That being said, as Mr. Cullen noted, we did have
officials go to all the major centres after the budget.
We certainly didn't have the type of turnout that we
had six and seven years ago, but we had a reasonable
turnout and reasonable interest. It's something that I
think is a longer-run program to try to sustain the
interest in Canada, as opposed to dealing with a crisis
environment where we do these types of things.
I would note something. What's often highlighted in
Canada when we talk about the commodity base, the
figure many people point to, is that a number of years
ago 60% of our exports used to be commodity-based and
now it's less than 30%. But I think it goes further
than that. That sort of denigrates the importance of
commodities in Canada. I think we should note that
commodity production in Canada has totally changed. In
fact, the commodity-based industries are amongst the
most developed in terms of using the latest technology.
I'll just cite one example of that. When the oil
sands developments began, they used to need, in U.S.
dollars, about $25 a barrel to break even. Now,
through the technological improvements, they're
breaking even in the low tens, and at $11, $12, and
$13. So there are huge changes even in that.
I think the case for Canada is even stronger. There
are two worlds, a commodity-based world and a
non-commodity-based world. Even in the commodity-based
case, I think, we are very much a modern economy in
The Chair: On the issue of standard of living, I'm
going through some of this on pages 20 and 21 where you
talk about reducing the tax burden. The “planned
results” are “better incentives for economic growth,
entrepreneurship and productivity”. How important is
the issue of productivity in your department?
Mr. Don Drummond: It is extraordinarily important.
It is something we live and breathe. The word
“productivity” also often takes a negative
connotation, so sometimes we might not use that precise
word, but the standard of living and the quality of
life ultimately do rest on productivity. In the longer
run, that is what's going to determine the wages and the
income compensation, and it's what's going to determine
the employment level.
We just got a reasonable number for 1999. We had 1.4%
growth in productivity. That was better than we've had
in the previous couple of years. It wasn't as strong
as that of the United States, though. Certainly our
perspective is that we can do better than that.
But I think if you look at the foundation of virtually
everything that we've attempted to do over time, it has
been geared to getting that productivity number up.
Whether that was free trade or the tax reforms we've
done or the changes in regulations, they're geared
towards that, but not to productivity as an end in
itself. It's very much because productivity is what's
ultimately going to drive the standard of living in
The Chair: I don't think you'll get any kind of
disagreement from this committee. As you probably
know, we published a report a year or so ago,
Productivity with a Purpose, in which we
advocated certain issues to resolve the productivity.
The challenge is a very complicated one, but I don't
sense that it's.... While I agree with you that when
you analyse each point, it is directly related to a
standard of living issue or productivity, I'd like to
speak to you as chair of this finance committee and say
that there isn't the passion, I guess, that was
associated with the issue of the deficit, for example.
I think that standard of living and productivity are
the issues. There's no question about that in my mind.
I'm convinced a hundred times over
that if we don't deal with this issue, we're going to
have some serious challenges in the future.
I'm just wondering why, from a communication point of
view, since you also addressed it in this report on plans
and priorities communication, that issue isn't more
in the forefront of the communication plan of the
Mr. Don Drummond: Again, I would say
there is as much passion within the department on
productivity as there was on the deficit. In fact, I
would argue that the primary reason why we were so
passionate about reducing the deficit wasn't to reduce
the deficit per se, but that there would be an
improvement in productivity and hence the standard of
living. In some sense the deficit was an input into
the standard of living as opposed to an end in itself.
I think you would probably not likely expect a huge
effort on the communication side geared around
productivity per se, because, as I said, there tends to be a
bit of a negative connotation about that term and
some people interpret it as meaning working harder for less.
That's why I think you will see that many of our
communications, as the one you just cited from the main
estimates, are couched in terms of the standard of
living. But we
have not done well in Canada on the standard of living
in the last ten years, and it certainly is the primary
driver of all of the work we do in Finance, by every one
of the employees and the minister and Mr. Cullen. It is
the number one objective, to bolster that.
I think we'll have to try harder in the
communications, because that's not coming through, but
I think all of the policies we've got, if you look in the 2000
budget, are all geared toward that objective of raising
the standard of living.
The Chair: That's my beef. I think you're
moving on these particular points but I get the
impression as an elected official, when I go back to my
riding, that in fact the standard of living issue is an
issue for the electorate, but they sense that.... Why isn't
the government talking about it? There are certain
levers we have, quite frankly. It's fiscal, monetary
policy, taxation. You've got investment in people. I
mean, there are seven or eight levers really that we can
deal with to improve the standard of living. I
just think the message is not getting out to the
people. I think it ought to get out in a more aggressive way.
I think I've made the point.
Mr. Don Drummond: We find this a more difficult
one to communicate. Although the government can
certainly not control the deficit, you do have a strong
influence on it. You have levers that influence the
deficit fairly directly. If you do a program review,
as we did in 1995 and 1996, you can be reasonably
confident that's going to have a certain impact on the
deficit. You can say we did such and such and you can report
On standard of living, as you've indicated, you can do a
variety of policies to influence the standard of
living, but in a fairly indirect fashion. It's not as
though you can say we're going to do X and the impact
on the standard of living is going to be Y. So it
tends to be a little bit more difficult to communicate
to people and a little more difficult to monitor the
progress of the policies you've implemented.
The Chair: My experience has been that....
You're right about the word “productivity”. I mean, once
you say “productivity”, you're going to lose quite a high
percentage of Canadians in the sense that I think there
is a negative reaction to it. I think while you can't
sell productivity, you certainly can sell its benefits:
higher incomes, higher wages, better opportunity,
that kind of thing.
I think we ought to perhaps be concentrating a
bit more on the actual benefits rather than the
Mr. Roy Cullen: With productivity, too, people tend
to relate it as labour productivity, output per worker
or something like that, where we know it's much
more complicated than that. It's how we use all the
resources, capital, people, technology, etc., to further
improve the quality of life. Then, when you're looking
at quality of life for Canadians, do you measure that
strictly in economic terms? How do you value the health
care system, or access to education, or crime—
The Chair: Yes. In fairness, I think quality of
life is an issue, but, quite frankly, people deal a lot more
with income. They say, well.... Say the gap
between the United States and Canada is widening. It concerns
them if they're making $7,000 less. You've got to get
practical about these things as well.
Having said that, should we be working toward
narrowing the gap or not? Sometimes I think we
ought to just try to be the best we can possibly be,
because there are different dynamics that work in the
United States that don't apply in Canada.
But if in fact the gap has been
widening over the past two or three decades, then I
certainly think it becomes a bigger and bigger
issue as the gap continues to widen.
Mr. Paul Forseth: Looking at our order of the day,
we're actually supposed to be focusing on the Canada
Customs and Revenue Agency and the votes associated
with it. I have some specific and pointed questions
It's interesting that the individuals in the Ottawa
area who have recently filed their income tax
returns have noted that the address on the envelope is Shawinigan.
I've had some people telling me the trouble people
in the Ottawa area have in trying to communicate with this
centre. The poor English competency they get on
the end of the telephone or even a refusal to
accommodate an English speaker as almost a political
statement are among the complaints I've had. I hope
that management message gets through.
Also, there have
interpretations of tax law related to Quebec that are
inappropriate for Ontario, and there has been a real difficulty there.
I wanted to ask, first of all, how big is this
processing centre? How many employees are there? Then,
from that I want to talk about what the plans are for tax
return processing centres. What is our growth plan?
Where are we going? As a subset to that, I want to ask
where is the emerging e-filing centre? Where is that
managed, and what are the plans there? Now,
instead of paying someone to e-file for you,
a significant number of Canadians have been personally
invited to go to a website and file their returns directly.
My question is around the substance of the Canada
Customs and Revenue Agency concerning tax collection,
looking at some of the numbers around Shawinigan, and
also the larger scope of the plan of where we're
going, and then also some questions around the e-filing
The Chair: Before you attempt to answer that
question, I would clarify for your information that
while the order of
the day actually reads that votes 1, 5, 10, and 15
under the Canada Customs and Revenue Agency are included
in the order, as a committee we're actually
only dealing with votes 1, 5, L10, 15, 30, and 35 under
Finance. That's why we have the Finance officials here.
I'm sure you have other questions they can
Mr. Roy Cullen: Yes, we'll let the other questions
suffice. I suppose we could take them under advisement
The Chair: No. The committee decided to deal with
votes 1, 5, L10, 15, 30, and 35, so there's no need
to. If you want to answer them, you can go ahead.
Mr. Roy Cullen: No, I'd prefer not to, because I
don't know if we have the answers at this table in any
Mr. Paul Forseth: Okay. May I ask another
The Chair: Absolutely.
Mr. Paul Forseth: There was the comment about the
relatively low take-up on R and D, even considering
that it's seen as a very generous measure by international
comparisons. This has come up a number of times,
certainly from the government side, where it's seen as a
bragging point of the government as to how good we are in that
area. But then we scratch our heads and wonder why the
take-up is so low. I'm suggesting to you it may have
something to do with the reasonable estimation, from
those who might take up, of what comes afterwards,
related to other taxes and regulatory climate. Have
there been any studies looking at this question?
Certainly, the thought has been mentioned by
many government officials about the low take-up in the
R and D, even though it's very generous. Why is that? What's
going on here? Can you give me any answers about why
that might be so?
Mr. Roy Cullen: Maybe I'll start it off.
A number of theories espouse—and perhaps
there are some studies Mr. Drummond can talk
about—the fact that there's a tendency for us to be
suffering from the branch plant economy syndrome, if I
could use that term. I think
that for some small businesses, frankly, there have been
some administrative challenges, paperwork and so on, that
the revenue agency is continually trying to improve on.
But I can tell you that in my experience from
talking to companies that might be interested in
locating in Canada, for some companies this is a
very big deal.
Don, do you have any work on
Mr. Don Drummond: Yes, sure. There have been a
number of studies both in the department and by
academics. The two most common findings, the first
of which was mentioned by Mr. Cullen, are that they're branch
plants. A lot of the R and D is
done in the home office of the company, often in the
United States, and is the reason why we tend to be quite high in Canada
on the adaptation of new technologies and less so on
the development that tends to be done in the
The second factor is, as in many other
things, we tend to compare ourselves with the United
States, and our overall R and D is so much less than
theirs. A huge chunk of the R and D in the United
States is connected with the defence industry, much of
it done either directly or indirectly through
financing of the federal government. Of course, we
have very little of that. And if you take out the
defence component of the two countries, it doesn't look
quite as unfavourable to Canada versus the United
It would not surprise me if a third factor was the one
you pointed out, that with our higher corporate income
tax rates—the general corporate income tax rate being
higher in Canada—you have less of an incentive to do
that. The payoff is not quite as much, and I would
say that was very much one of the reasons in the budget
why we proposed to reduce the general corporate tax
rate from 28% to 21%. That would put us, combined with
the average provincial rates, about on a par with the
average rate that confronts companies in the United
States. So at least there will no longer be a bias to
doing something in the United States rather than
in Canada because of a better after-tax rate of
Mr. Paul Forseth: On a comparative basis, first of
all in absolute numbers, how much does it cost us to
collect our taxes? Certainly, we must be doing some
comparative analysis about how we are doing as a
nation, a productivity number about how much it costs
versus what we raise, the use of technology and so on,
and certainly trying to get down to the computer filing and
so on. How are we doing in that regard? First of all,
do we have some numbers about how much it costs us to
collect our federal tax? And how are we doing on a
productivity basis compared to, say, G-7 or OECD
Mr. Don Drummond: Again, you might want to
come back to the agency for more details, but the
budget of the agency is around $2 billion and the total
revenue collection for the federal government is $160
billion. But we have to keep in mind that the agency
also collects most of the revenues for the provinces,
and also that the agency does much more than just
revenue collection. It actually administers many of
the social benefit programs as well, such as the child
tax benefit and the GST credit.
So if you put together
what it does on the social policy front, what it
collects for the federal government, and what it will
collect for the provinces, for about a $2 billion
budget they're probably involved in about $300 billion
worth of activity. So the administrative overhead cost
is very low. That budget, despite the increase in
their workload, both in terms of collecting more money
and also in terms of the huge increase of things like
the cross-border traffic, has hardly changed
in recent years. This is because they're taking
advantage of efficiency gains that have been made
In particular, one of your questions was on e-filing,
and of course the
shift to that in the last couple of years was no
doubt going to increase over time, again driving down
costs. So relative to other countries, it's a
very low-cost operation, and its efficiency has been
increasing quite markedly in the last number of years.
The Chair: On behalf of the committee, I'd like to thank
you very much, Mr. Cullen, Mr. Drummond, and Mr.
Bujold, for answering our questions and for your presentations.
For the members of the committee, this afternoon
we'll be dealing with the votes on the estimates at
Thanks again, Mr. Drummond.
Mr. Roy Cullen: Thank you very much.
The Chair: The meeting is adjourned.