[Recorded by Electronic Apparatus]

Tuesday, July 30, 1996

.1003

[English]

The Chairman: The finance committee of the House of Commons is continuing its hearings into the economic and compliance costs of our taxation system as it applies to corporations. This is our second round table. We're very pleased to have with us nine different groups or witnesses this morning.

Our format will be a five-minute initial presentation by each one of you, followed by questions from members. I will try to ensure that each of you has adequate time to put your case forward fully. We thank you for being with us.

Our witnesses this morning are, from the Chamber of Commerce, Peter Harris and David Brown; from the Alliance of Manufacturers and Exporters of Canada, Brian Collinson, Ross Graham, George Penna and Jayson Myers; from Coopers & Lybrand, Rob Spindler; from the Canadian Bar Association, Don Watkins; from Shell Oil, Drew Glennie; from the Canadian Federation of Independent Business, Catherine Swift and Garth Whyte; Professor Paul Boothe from the University of Alberta; from the Canadian Centre for Policy Alternatives, President Duncan Cameron; and from the Canadian Bankers Association, Tim Morris and Barbara Amsden.

We thank you for being with us. Perhaps we could start with the Canadian Chamber of Commerce.

Mr. Peter Harris (Chairman, Taxation Committee, Canadian Chamber of Commerce): Thank you, Mr. Chair. The areas I'll focus on very briefly in my formal comments will be high compliance cost, which has a direct impact on business, and other areas of the tax system that affect the economic performance of our members.

.1005

At a time when government is in many areas attempting to reduce the paperwork and compliance burden on business, new income tax legislation continues to generate costly new reporting burdens that will have a negative impact on business, particularly in the example I'll give on Canada's international competitiveness. This occurs in an area in which corporations are generally getting smaller in response to forces of technological change, economic circumstances and globalization. Under these conditions, compliance costs, like any form of overhead cost, become an even bigger threat to competitiveness and jobs.

The recent reporting requirement for offshore assets is laudable in the sense of its attempts to get at income tax evasion and non-reported income. As it relates to foreign affiliates, however, we ask that it be recognized that many of the requirements do not necessarily relate to the actual reporting of income in a given year. These are onerous reporting and information-gathering requirements that in many instances will require extra staffing and in many instances will not necessarily improve the information system or ability of Revenue Canada or the Department of Finance to monitor these offshore active business affiliates.

With respect to the corporate income tax system itself, one of the major compliance costs to our corporate members and our members is multi-jurisdictional filing, particularly where we have Canada's federal and provincial corporate income tax systems generating requirements for filing that are duplicated, often with differences based upon the same types of legislation.

For example, between the federal and provincial situations, there are differences even as to the definition of an employee. This of course has tremendous impact on income tax and other source withholdings versus the payroll taxes generated by other provinces.

These particular complex filing requirements add substantially to the cost of doing business. There are separate allocations of income and separate allocation rules from province to province. There is no particular standardization. Indeed, viewing one of the major taxes levied by the provinces and by the federal government, there is no particular interaction between the large corporations tax and capital tax between the provinces. Indeed, in many instances there are different inclusions in each. I raise that as an example because that is a profit-insensitive tax on a corporate entity.

With respect to audit procedures generally, we would urge that audit procedures should be more efficient and done on a more timely basis. Audits are now going back to 1991. With a rapid changeover in corporations both technologically and from an employee situation, the resurrecting or the archiving of those records, together with the personnel who are able to answer questions with respect to those particular years, adds a very large burden, particularly when the information, given the change in the particular organization, may well be out of date in many instances.

Another area would be the pace of change in tax legislation. There is an enormous compliance requirement on every taxpayer in Canada, not just on our members but on all taxpayers. With that change comes a tremendous burden on compliance.

The health of a tax system, both from an investor's point of view and with an incumbent taxpayer's point of view, is dependability. When changes come rapidly, not only do they change the tax system, but by their very nature they lend complexity to the tax system. The very strength of the tax system is one of dependability. The rapid pace of change, and indeed the delay of the implementation of many of the changes, leads to an uncertainty as to compliance as well as to investor confidence.

In many general respects, the federal income tax system is a patchwork that can influence business decisions that are unrelated perhaps to economic fundamentals in many instances. We would expect variations in policy across the federal system, but with various overlapping sections that have occurred under the Income Tax Act that relate to the same situation, the complexity of many pieces of legislation that have been introduced recently and the overall system itself leads to artificial decision-making policies rather than policies based on the fundamentals that one should approach when operating a business or when investing in a business.

.1010

Of course, the concern here is not just what I talked about earlier - overlapping jurisdictional situations - and it's not just about choosing from province to province. The real concern is choosing Canada at all.

We laud the government's efforts on the attempt at harmonization with the GST system. However, the fact that GST harmonization hasn't spread to every province means that many Canadian companies are making locational decisions and are beginning to factor in those interjurisdictional differences like never before. When they're in particular jurisdictions, no longer are many Canadian companies able to credit their inputs to their outputs when they're in a non-harmonized system.

The one regrettable aspect in the harmonized agreements with respect to the Atlantic provinces is the mention in those provinces that if there is a revenue difference, payroll taxes may have to be rendered to make up that difference. In our view, that would not be a beneficial effect because in many respects that would render the harmonization an isolated benefit, not an overall one. We would discourage any taxes that are profit insensitive.

We have a similar comment with respect to capital taxes. They too are insensitive, and the problem is exacerbated with respect to the cap now being put on the deductibility of payroll taxes and capital taxes at the federal level.

Thank you, Mr. Chair. That ends my formal comments.

The Chairman: Thank you very much, Mr. Harris.

Next is Mr. Myers, from the Alliance of Manufacturers and Exporters of Canada. Mr. Myers, will you be taking the lead?

Mr. Jayson Myers (Vice-President and Chief Economist, Alliance of Manufacturers and Exporters of Canada): Mr. Chairman, thank you very much.

I'm going to ask George Penna from Noranda to talk about some of the technical aspects of the corporate tax system, but I'd like to make a couple of remarks.

First of all, there's no free ride in terms of taxation when it comes to business in this country. In 1995, businesses across this country paid $32 billion in payroll taxes, $15 billion in property taxes, $4 billion in capital taxes and an estimated $5 billion in retail sales taxes. On top of that, Treasury Board estimates that businesses paid between $30 billion and $50 billion in compliance costs in terms of regulatory compliance. The Government of Quebec estimates that it could be as high as$65 billion.

There's certainly no free ride, and the cost in terms of jobs and lost investment is increasing steadily. Since 1989, payroll taxes alone, on an hourly rated basis, have increased by 85% even though in industry selling prices have increased by slightly more than 10%. That 85% increase represents the equivalent of 250,000 jobs or about 2% of the labour force.

The chamber has already referred to the increasing tax burden in terms of the operating taxes. In terms of the problems companies are meeting when it comes to higher and higher personal income tax rates, it makes it difficult to attract well-qualified people into business today. And there are problems in terms of escalating effective tax rates when it comes to the treatment of corporate income. These are all problems that affect both the employment situation and investment.

When we look at cost, I think it's not only important to look at the economic and compliance costs in terms of direct costs, it's also important to look at the opportunity costs of the existing tax system. We have to look at restructuring the tax system to make it competitive and also to provide incentives for innovation, for growth, for export and for development. Without this, the true opportunity costs will not be fully calculated.

I'll say one more word in terms of competitiveness. When we're looking at competitiveness today, we're not talking about simply emulating the United States. We're talking about structuring a tax system that makes it attractive for businesses to locate in this country, to invest in and export from and produce in and employ in this country. I think that's incredibly important. We're not looking at simply emulating the tax system of our largest trading partner. In fact, we are competing today against jurisdictions around the world that offer far more competitive tax breaks than this country does at the present time.

.1015

I'd like to turn to George Penna for an overview of some of the technical issues that are particularly troublesome.

Mr. George Penna (Alliance of Manufacturers and Exporters of Canada): Many of the points I will be making have already been alluded to, both in yesterday's session and in the comments of Peter Harris. We will break down our comments first with respect to factors affecting economic costs and then factors affecting compliance costs.

The alliance notes that in recent years the trend has been to lower the statutory tax rates, and this is noted. But our view is that effective tax rates have gone up. This has come about because of the higher incidence of indirect taxes and the broadening of the tax base. Our point is that when we evaluate investments, the statutory tax rate means nothing to us. The effective tax rate is what's important.

The next two points are interrelated. Canada is one of the few countries that do not have a loss transfer system or a system of consolidated returns. We think this causes significant extra economic costs.

The third point is that tax-free reorganizations in Canada are unnecessarily complex, and they're probably complex because we lack a transfer system. We should be focusing our attention on ways to simplify those procedures. Taxpayers and corporations shouldn't always have to seek advance rulings when they are considering a reorganization.

In terms of factors affecting compliance costs, my friend has alluded to the problem of closure on audits by Revenue Canada. We feel this is a significant factor affecting our compliance costs. There are simply too many years that are open, and we have too much difficulty reaching closure on open years.

The next point I would like to make is that the incidence of penalties is increasing significantly. We don't quite understand the reason for that, but we think that in terms of achieving compliance it's probably having the reverse effect. Higher penalties will encourage taxpayers to move to less costly jurisdictions. We also think the governments of the day are relying more on penalties to raise revenues rather than increasing the tax rate.

We note an inconsistency in the treatment of interest expense on tax deficiencies and tax refunds. This is an age-old problem, but we'd like to reinforce that comment. Interest rates on tax deficiencies are high and they're non-deductible. Interest received on tax overpayments is taxable. We see no particular reason why those two shouldn't be consistent.

I'd like to comment on the large corporation tax. We regard this as a corporate minimum tax in a different form. Our view is that it simply raises the cost of compliance. Together with the broad array of provincial capital taxes, it simply increases the compliance burden.

The point has been made of tax Balkanization. With Canada being the size it is, we feel it's not necessary to have so many levels of tax administration. We would certainly endorse the harmonization of both income and capital taxes.

In terms of factors in the tax system that affect international investment and export activity, we point to two things here. On the withholding tax on dividends, we note that the movement has been to reduce those taxes. They are now 5% on direct investment. We would encourage the government to move towards 0% in order to encourage further investment in Canada.

.1020

In terms of our export business, Canada is an exporting nation. We have to compete with the United States with respect to their FISCs, which encourage exporters. We have been saying for many years that Canada should have something similar to the FISC. We agree that Canada has done things in the past to be competitive with the U.S. exporters, but we think that whole area has to be re-examined.

Thank you.

The Chairman: Thank you very much, Mr. Myers and Mr. Penna.

From Coopers & Lybrand we have Rob Spindler.

Just before we go on, we have a slight technical glitch and our technical people have asked us if we could give them about two minutes to try to correct it. I understand Norman Jewison wants to syndicate our hearings, so we'd like to just wait for a couple of minutes until we get the word.

.1021

.1023

The Chairman: We'll come back to order. I'm sorry I cut you off, Mr. Spindler.

Mr. Rob Spindler (Partner, Coopers & Lybrand): That's all right. Don Watkins did me the honour of suggesting that I was a bit like Donovan Bailey; a few false starts and... I don't think I'm in the same league.

The Chairman: You will not be disqualified.

Mr. Spindler: You've asked me to speak today on the topic of the features of the tax system that affect economic and compliance costs. At the risk of repeating what some of the other people have said yesterday and today, I'd like to review a few factors just to try to establish some common ground.

There's a direct correlation between the economic and compliance costs on the one hand and the number of taxes, jurisdictions, and dollars involved on the other. For example, a typical Ontario business faces CPP, UIC, employer health tax, provincial income tax, provincial capital tax, federal income tax, federal capital tax, alternative minimum taxes, GST, sales tax, import duties, export duties, property taxes, and sundry local business taxes. All of this combines to impose a significant burden on companies doing business in Canada. This is multiplied when a company expands internationally and has to deal with foreign jurisdictions.

So what does this mean? A business that's looking at any opportunity must look at two basic things: first, the best way to make money; and second, the best way to keep as much of it as possible. How does this affect the analysis you're performing of economic costs and compliance costs?

.1025

The most significant factors affecting economic costs are the relatively high rates of tax in Canada and the differing rates and incentives between provinces. I would cite Quebec as an example of the influence tax rates can have on economic costs. Quebec's relatively low corporate tax rates mean there's a very strong incentive for businesses to take measures to shift income away from other provinces and into Quebec. It's a natural reaction to improve the bottom line.

If you take that domestic example, which is quite readily apparent, you can extrapolate it to the international context, where businesses looking at Canada versus other jurisdictions are encouraged by the systems, by the tax rates, to shift income to the lowest-rate jurisdictions.

With respect to compliance costs, they are directly affected by the number and complexity of filing requirements and the number of different revenue authorities involved in the process. This situation suggests at least two possible responses, as referred to earlier - simplification and harmonization.

Much has been said about simplification. I think it's a noble goal, but unfortunately, in a complex world I think complex legislation is an inevitable result. I think the system we have could stand improvement and streamlining, but we will always have complex tax systems. We live in a complex world. Don Watkins remarked to me yesterday that it would be a wonderful world to live in if we had simple instructions for programming VCRs. Well, if we can't make that simple, I doubt we can make a tax system simple.

I'm picking on you a lot today, Don. I'm sorry.

I think the greater opportunity - and it's been alluded to here - lies in harmonization. If we can reduce the number of tax authorities involved and as many as possible of the differences, then the compliance costs will be reduced.

I guess these are global, sweeping statements. They're very difficult to deal with in the abstract. I'd like to finish with just two comments or suggestions on things that are readily achievable that could improve or reduce compliance costs. One relates to Revenue Canada and the other relates to the Department of Finance.

With respect to Revenue Canada, I think there's an overwhelming impression, and an accurate impression, that Revenue Canada is operating with severely and inappropriately constrained resources. Their ability to deal with the ever-increasing complexity of business and legislation is adversely affected by these constraints, with both government and business suffering as a result. I think significant improvements to the resources and compensation for Revenue Canada officials could significantly reduce compliance costs for both government and business.

With respect to the Department of Finance, I'd like to pick up on a point I think Peter Harris mentioned. There has been a regular and continuous flow of extremely complex legislation. I think the reality of this is that it's an inevitable result of a complex business environment. But I think the process by which that legislation is generated could be greatly improved. Certainly the shroud of budget secrecy is entirely justified for matters of policy, but a great deal of legislation that's generated really isn't founded in policy and really doesn't need that cloak thrown over it until it reaches the stage of proposed draft legislation, when it's virtually set in stone.

I think a process by which the Department of Finance could communicate with business and the professions in the development of legislation could certainly greatly improve the effectiveness of that legislation and the degree of compliance, and significantly reduce the costs.

I think a great example is the one Peter threw out, of the foreign information reporting requirements for corporations. This is the subject of some draft legislation and proposals that have been around for awhile.

.1030

Fairly recently some forms were released for consultation. First of all, those forms require a massive amount of information in the case of a corporation of any size and with multinational operations. The amount of information, the nature of the information and the time in which the information needs to be provided, if these rules aren't changed, will place a huge compliance burden on corporate taxpayers. And we suggest that the information and the nature of the information being gathered would be virtually useless to Revenue Canada.

So here is an enormous expenditure that's about to take place. Businesses are currently scurrying around - and Peter, I'm sure you and the alliance are making representations, as are others - to try to change this proposal, to streamline it to a point where useful information is provided to Revenue Canada - it's their right to have that information - but in a form that's useful and at a time and in a way that businesses can comply at a reasonable cost.

Unfortunately this is sort of an after-the-fact event. Things are virtually set in stone. People are scrambling and wasting time and effort trying to change these rules when the reality is that this is a thoroughly inoffensive proposal. With some discussion with business, particularly with business and the professions, early on in this stage, with a few meetings, a system could have been designed that would have been accepted, adopted and complied with very readily. But now we have this great brouhaha. I think it demonstrates quite clearly that the lack of communication between the Department of Finance and business really acts to the government's detriment, not to its benefit.

The Chairman: Thanks, Mr. Spindler.

From the Canadian Bar Association, Don Watkins, please.

Mr. Donald Watkins (Individual Presentation): Thank you and good morning.

I am the chair of the taxation section of the Canadian Bar Association and I'm a partner with the Calgary law firm of Felesky Flynn, but my comments here today, Mr. Chair, should be received as my own personal comments and not as official commentary of the Canadian Bar Association.

Ladies and gentlemen, there are many others at the table today and at yesterday's hearings representing entities that can well speak to the cost of tax compliance in the sense of filing returns, undergoing Revenue Canada audits and so forth. But the mandate for discussion today also includes the costs that businesses expend on tax planning. One of the items that can factor into the cost of tax planning is the rulings process at Revenue Canada. I thought I would bring some views on this process to the hearing today as well as some comments on how the process can be improved with the support of government.

As a bit of background, the tax rulings and interpretations directorate of Revenue Canada will provide advance rulings in respect of proposed transactions so that taxpayers can attain some degree of certainty as to how the transactions will be treated upon audit by Revenue Canada. Provided the taxpayer proceeds to consummate the transaction in the manner stated in the ruling, and provided the taxpayer has disclosed all the relevant facts and information relating to the transaction, then the ruling is viewed as binding by Revenue Canada.

This service, by the way, is not free. If you use the service, you have to pay for it. There's a charge of $90 per hour plus GST for the time expended by rulings officers in reviewing the transaction and deciding to grant or not to grant the rulings that have been requested.

It's not legally necessary to obtain a tax ruling in order to proceed with a transaction. There's no requirement to get one. But as Mr. Spindler said, the tax law in this country is, I suppose by necessity, complicated, and many times a business entity will want to have confirmed the tax consequences of a transaction before proceeding. Hence, in my view the process of obtaining an advance ruling can be viewed as a compliance cost of doing business in this country.

.1035

The rulings process, in my view, benefits both taxpayers and government. It provides taxpayers with certainty as to how a transaction will be treated, but it also provides the government, through Revenue Canada and the Department of Finance, with a window on what's going on out there, what kinds of transactions are being undertaken and what kinds of interpretations are being given to the tax laws. I think this is a valuable attribute of the system from the point of view of government.

But here comes the cost part. One of the problems taxpayers face is a cost in the amount of time it takes to obtain advanced rulings.

Let me be clear that I'm not here to criticize the rulings directorate. I think the men and women who work in that department do a good job, notwithstanding the pressure and the stress that can arise from working in a relatively high-profile job. But in my opinion, Revenue Canada is facing an inability to hire and retain the numbers of high-quality staff they need to service the growing inventory of ruling requests with which they have to deal.

Part of this comes from the discrepancy between salaries that are available through the government and the compensation that can be obtained out in the private sector. It's a fact that a rulings officer can make considerably more in the private sector than at Revenue Canada.

What I would like to suggest is that the government should provide more resources for this important group within Revenue Canada. The rulings directorate should have the role of supporting business activity in Canada and the investment and reinvestment of capital in a manner that is both efficient and within the tax laws prescribed by Parliament.

I'm certainly not suggesting that Revenue Canada should issue rulings that are not within the law, but unfortunately there can often be a backlog within Revenue Canada in terms of responding to formal ruling requests that have been submitted, and therefore the cost of using the rulings procedure in terms of the time it takes to obtain a ruling is indeed a cost to business entities.

I think the rulings process is important for the government as well as taxpayers. I think it should be viewed as an important tool for government to understand how the tax laws are being used and also for taxpayers to obtain the certainty that's required in order for them to proceed with their transactions.

The good point about all of this is that additional resources need not come at any cost to the government. There's a charge for using the services of the rulings directorate. No one complains, to my knowledge, about those charges. The government should be able to easily recover the cost of any additional resources employed to improve the timing of the process and enhance the number of rulings that the rulings people can issue in a year.

I would therefore encourage the government to review the rulings process with a view to providing additional resources in a manner that enhances the value of the process to both the government and to the taxpayer. I think this can be done without any additional cash cost to the treasury.

I think they're doing a good job over there. What I'm saying is that it's in everyone's interests, including the government's interests, for them to be supported and to be able to handle more than they currently can.

The Chairman: Thank you, Mr. Watkins. Shell Oil's Drew Glennie is next, please.

Mr. Drew Glennie (Vice-President of Canada, Tax Executives Institute): Thank you,Mr. Chairman. I'd like to clarify that I'm employed by Shell Canada as opposed to Shell Oil, and I'm here in my capacity as vice-president of Canada for the Tax Executives Institute.

By way of introduction, I would support generally the comments that have been made today; however, I think I'd like to bring perhaps a little different flavour with respect to my comments.

I'd like to give you a bit of background on the Tax Executives Institute and what that organization represents. The TEI is an international organization of approximately 5,000 tax professionals who are responsible in an executive, administrative or managerial capacity for the tax affairs of the corporations and other businesses in which they are employed. We represent more than 2,900 of the leading corporations in Canada and the United States. These are generally the largest corporations in North America.

Canadians make up approximately 10% of the membership. We have four chapters in Canada: Montreal, Toronto, Calgary and Vancouver. Canada makes up one of nine geographic regions of the tax executives organization.

.1040

TEI's membership includes representatives from most major industries across the country, including manufacturing, distribution, wholesaling and retailing, real estate, transportation, financial services, telecommunications and natural resources.

Historically, TEI has been concerned with issues of tax policy and administration. Indeed, we work closely with the departments of both finance and revenue to ensure that the systems in Canada are working as effectively as possible.

We are convinced that the tax laws are the administration in accordance with the highest standards of professional competence and integrity, as well as in an atmosphere of mutual trust and understanding and confidence between business and government. I think that's important. We need understanding and confidence between business and government in Canada, which will help promote the efficient and equitable operation of the tax system.

The comments I have today in terms of tax compliance and the costs of tax compliance are relatively brief. They are non-technical. Again, I support the comments that have been forwarded to date, but if I look at my experience with Shell Canada, if I look at the costs of compliance and how those costs have increased over the past 20 years, from the mid-1970s to today, our costs have increased manyfold above the change in the value of the dollar. I attribute that to two main points.

One is the legislation itself. The legislation is voluminous. We've heard comments about the numerous changes and the complex legislation. We've heard comments that perhaps the complexity is a reflection of our society. Indeed, that may very well be; nevertheless, those two facts have worked together to increase the costs of compliance in Canada.

In addition, we have a political system in Canada with the federal government and the provinces. Again, from a tax compliance point of view, the fact that we have to report to the federal government and to the non-agreeing provinces - I'm speaking right now of income tax - means there's a duplication of effort by those respective governments and by taxpayers, which results in increased time and dedication of other resources for basically a non-economic result.

In terms of the goods and services tax and the provincial sales tax regimes across the country, the operations of my company are in every province across the country. When you look at those sales taxes, depending on the province, different items are subject to or not subject to. If you can imagine a clerk in a retail store trying to remember the classification for goods and services tax purposes and for provincial sales tax purposes, you can understand the conundrum we are faced with.

I have two suggestions, working within the current system, without changing the existing system, that would help large corporations in Canada and would not in any way diminish the focus Revenue Canada has on large corporations. I'll use Shell Canada as an example.

It may surprise you to know that we have Revenue Canada auditors in our offices full-time,365 days a year. Indeed, there are three of them. That is what I call the ``regular'' audit. In addition to that, we have special visits by an organization called International Audit. On occasion, we have special visits from other Revenue departments at the federal level. At the same time, we deal with provincial auditors from Ontario, Quebec and Alberta.

I have a suggestion. Given that the Revenue authorities are in our offices full-time, and given that they have full access to all of our documents - in 1995 we actually measured the documentation we filed with the federal government, and it was more than one metre in height - it seems indeed a duplication of effort for us to send that amount of material to the federal government when the federal government is represented in our offices full-time.

.1045

A reference was made earlier to the proposed foreign reporting requirements. Indeed, the TEI is in the process of finalizing a submission to the government. I can only support the comments that were made. It's a compliance requirement that does not generate any further information for the government.

The other suggestion is about government audits. As I mentioned, Revenue Canada is in Shell Canada's offices full-time, and yet 1991 is the year currently under audit. We're five years behind in terms of the current audit. On top of that, we have 25 years dating back to 1971 that are open to various forms of litigation and notices of objection.

I give Revenue Canada credit. They're in the process of looking at their own procedures and are perhaps looking at the process of auditing large corporations, but I compare the process of Revenue with the process of our external auditors from one of the big CA firms in the country. As you know, the CA firm is required to sign the financial statements of the corporation. We're on a calendar year. Their audit is completed at the end of February of each year and they're in a position at that point to sign a statement as to the validity of the financial records. I can't be clear on the number of man-hours or man-years the audit firm spends on our audit, but it is certainly less than three full-time persons per year.

That concludes my comments today.

The Chairman: Thank you, Mr. Glennie.

From the Canadian Federation of Independent Business, Catherine Swift.

Ms Catherine Swift (President, Canadian Federation of Independent Business): Thank you, Mr. Chairman.

Since general taxation issues have been the number one concern of our members in the 25 years we've been surveying them, we're very pleased to be here today, and we certainly want to continue to be very much a part of this process as it evolves over the next few months.

I would like to highlight some of our concerns and come at these issues from a different perspective, which is naturally that of the small and medium-sized business community, the job creators in our economy.

One of our concerns with this review is that the overall level of taxes is not part of the mandate. Canada continues to be a highly taxed economy. As we know, that level of overall taxation has increased over the last fifteen to twenty years more dramatically than it has in any other developed country.

Currently, our low Canadian dollar is very much the key factor that is making us competitive and helping our economy, but I think it's pretty important to keep in mind that back in the late 1980s when we had a much higher Canadian dollar relative to the U.S. dollar, we had horrible problems with things like cross-border shopping, and we had very serious economic problems generally.

So we wouldn't like the impression to be left that the level of taxes is not a problem. It is a problem. We think we're being let somewhat off the hook right now because we have a very competitive value for our dollar, but that won't prevail forever, so we think it's very important to look at the level of taxes as well.

Getting back to what we believe was the original mandate for this review as outlined in the budget document, the first point was to improve the tax system and to promote job creation and economic growth in an open economy.

As much research over the years done by us and by others shows - a recent OECD study confirmed it yet again in international comparisons - our constituency, the small business community, is the dominant job creator and in all likelihood will continue to be for the duration. We feel that the compliance area is a very important area and we don't want to underestimate that, but we certainly don't feel that this committee's sole or even primary focus should be the compliance area.

As well, in our experience we've also seen many instances where improvements in the so-called efficiency of a tax ended up really benefiting government rather than business. To cite a couple of recent examples in that package of GST amendments introduced a couple of months ago, we saw changes proposed to the notional input tax credit that we believe are intended to simplify things for people in Revenue Canada and the Department of Finance. They will actually worsen the situation for small businesses and a number of industries. That's just one example.

.1050

Another one is the record of employment under the EI package of changes that have recently been passed. There is the simplification element to it, no question about it, but it will also be linked with significantly increased EI costs for many small businesses. So we need to caution that often simplification, although desirable, happens perhaps for the wrong reasons.

As an organization, we have worked with this government and other governments over the years, of course, to improve the tax compliance situation for small firms and hopefully for the tax environment overall. We have again, however, found that a bottom-line principle is that when you're looking at simplifying any element of the tax system, small business owners are not willing to pay any more money.

A number of years ago we had an example with the quick method under the GST, where the government of the day initially thought that small businesses were not picking up on the quick method, not implementing it because they didn't understand it. Well, we did some research that proved they understood it perfectly well, but what they wanted to do was ensure that they weren't paying a penny more in tax than they had to. That was the real reason they weren't picking up on the quick method, although it did have simplification advantages for them. So we think that's an important principle to keep in mind generally in any so-called simplification exercise.

Generally speaking, if the government is truly concerned with really improving the tax system to enhance fairness and promote job creation and economic growth, then it has to focus on the disproportionate tax burden on small business. Again, we've seen a lot of research over the years. Studies that we've done and even the federal government's work in the purple and grey books, almost two years ago now, show that the tax burden is heavier on smaller firms than on large corporations, with estimates in the range of 35% to 40% higher overall, including all types of taxes paid by smaller firms and by large corporations.

Naturally, if that is the job creating sector, it's kind of a no-brainer to suggest that we need to get a little more equity within the business community if we want to see more of a job creation focus. By that we don't mean by any stretch that larger corporations should be paying more tax; their tax levels are also barely competitive, even with our current low dollar.

There's no doubt that the compliance costs that are associated with all of the filing, auditing, administration, and the measures that have been brought up adequately by other groups here this morning are very important, but it's also important to point out that they fall disproportionately heavily on the small business community.

Naturally, small firms don't have in-house tax specialists, people who are devoted to doing any one particular compliance job. They also don't have three in-house Revenue Canada people, and I presume they're probably quite grateful for that. Our average firm size is about ten to twelve employees. Often you'll find the owner doing a lot of this work himself or herself or basically paying higher and higher money to outside consultants, tax experts, accountants, and so on because they simply can't understand the complexity of the system.

We find it unfortunate in many respects that the GST is not an element of this review. In our own data we saw compliance problems just leap in our membership with the introduction of the GST. There's no question that it added a massive compliance nightmare for small firms that we've outlined in numerous studies over the years. It's unfortunate that it's not part of the review, because it is a huge problem.

We've brought some copies of some work we've done. I know some of you at least, if not all of you, have seen some of this work in the past, but we certainly would be happy to provide you with more copies of any of the research we've done.

We brought today some pieces on payroll taxes and how they've grown over the last six or seven years in Ontario and Quebec. We also brought a study done a few years ago on the effective tax rates by size of firms and what the differences are between small, medium, and large firms. Finally, we have a paper that was presented to a Canadian Tax Foundation conference a few years ago on compliance costs with respect to the GST. I'll just mention those and we're happy to provide more copies if people require them.

I'd also like to point out that we have had a number of meetings with Jack Mintz to work with him and his colleagues in terms of trying to get a small business perspective on a number of the issues being looked at in this exercise. We're actually on the verge of sending out a survey to our members on a number of these compliance issues, so we're hoping that in the not-too-distant future we will have some good, up-to-date survey data on a lot of the compliance and other issues from the small business standpoint.

.1055

Another area that is omitted from this study, which is unfortunate, is municipal taxation. This has been a growing problem for small businesses over the last few years. As pointed out a little earlier, a lot of the problems with complexity with our system are created by the levels of government, their interaction, their duplication and so on. Municipalities cannot be omitted from this equation. As the various levels of government start to push costs down on lower levels of government, the buck seems to be stopping at the municipal level. We see our members having more and more difficulty with that. We find that's a very unfortunate omission, and we would encourage you to consider some type of consideration of what's happening in the municipal tax area. It's another important factor.

We've done a lot of work on some of these related issues over the year, and much of it is based on Statistics Canada data. But we've been very frustrated in recent years, and we don't really know all the reasons for this. For example, we have not been able to get updated corporate taxation data from Statistics Canada for love nor money, seemingly. We think this is really regrettable. We've had more success in certain instances working with some provincial governments. In fact, right now the Government of Quebec and our colleagues in Quebec are working on a study looking at tax incidence on different sizes of business.

We very much encourage the federal government, and other provincial governments for that matter, to collaboratively use... Let's get some up-to-date statistics and start to look at these issues. If there is such a disparity between smaller and larger firms, which seems to have been demonstrated in the past, and if we want to create more jobs in this country, we had better have a better handle on what's going on out there.

Finally, we're not at this point fully convinced that the government will act on all of the findings of this committee. We feel that an awful lot of things can be done before this process concludes.

One key area we've been focusing on for some time now is EI premiums. I know there's no intention of reducing taxes as a result of this process, which again is regrettable, but in this case the EI is already at a very healthy level and will continue to grow, even with significant premium increases to the level of 60¢ to 70¢. Of course, this would be a reduction for employees as well. It would inject quite a bit of money back into the economy and could be done without any further structural changes to the system.

We would certainly encourage your committee to consider the very punitive impacts of these payroll taxes. EI is a very important one. As we know, CPP is also one where we're in all likelihood looking at increases in the not-too-distant future. We feel there are some items that can be acted on very quickly without this process having to conclude. It could certainly give the business community broadly, and small businesses particularly, some confidence so that they can go about creating some of the jobs we need to see right now.

Thanks very much.

The Chairman: Thank you, Catherine Swift.

Professor Boothe.

Professor Paul Boothe (Department of Economics, University of Alberta): I should say at the outset that I'm not an expert on taxation per se. My area is fiscal federalism. I thought I would try to contribute to the discussion by talking about the political economy of how in a federal country we get to a reformed tax system from here.

If you recall, and I'm sure you all do, in 1994 the federal finance minister, Mr. Martin, made a proposal to the provinces to harmonize the sales taxes. Basically, three political problems for the provinces were proposed by that proposal.

First of all, depending on the rate set for the national sales tax, at least some of the provinces were going to receive less revenue than they did under their provincial tax. Mr. Martin's proposal was that they make up the difference with a flat tax on income, if you remember. Of course, Alberta, my province, posed its own special problems to that proposal, as we sometimes do.

The second problem was that it was widely believed that the public would view the elimination of the taxation of business inputs as a shift of the tax burden from business to consumers. That was certainly a concern for provincial governments, some of whom had promised categorically not to raise taxes.

.1100

The final problem was that provincial governments were going to lose the flexibility they had to set the sales tax base and the sales tax rate, which in many provinces - not in Alberta, but in many provinces - is an important policy tool.

In a C.D. Howe paper I wrote with a colleague, Tracy Snoddon, we looked at the idea of a national tax collection agency as a vehicle for addressing some of these political problems and trying to clear the way for a national sales tax system.

How would those provincial concerns be addressed? First of all, by setting the rate high enough so that large provinces wouldn't have a significant loss in revenue. Of course, we're moving to a broader base with the GST-type tax, so provinces would not have to go to that income tax. That's what they were concerned about. Of course, special arrangements would have to be made for the gradual adjustment of smaller provinces.

Second, the concerns would be addressed by setting the rate low enough so that taxes on consumer goods would not be greater than the combined provincial and federal sales taxes currently in place. In fact, maybe the rate could be set so that it would fall in some provinces.

Finally - and this is the point I would like to focus on - you could offset the loss in provincial flexibility, policy flexibility, by offering a corresponding reduction in federal flexibility, by having an independent national tax collection agency jointly governed by the federal and provincial governments. So changes in tax rates and sales tax bases would require agreement between the federal and some number of the provincial governments.

In addition - and this was the sweetener to bring in the final provinces - offer provinces the option to levy their personal and corporate income tax on a fully harmonized national income tax base. So instead of having tax on tax, which we currently have and the provinces don't like, offer them tax on base but ensure that it's a nationally harmonized base.

We're now two years down the track. How are we doing?

First of all, we have our agreement with the Atlantic provinces now. I would say that's a very positive step. The other thing I would say is that I have no problem with the almost $1 billion adjustment assistance as long as everybody understands that this is a gradual adjustment process, that it's temporary, that it's going to last three years and then be done.

The second thing I would say is that I think we've been fortunate with the choice of tax rate. It's high enough to deal with the revenue concerns of the big provinces and low enough to help provinces deal with the concern that taxes are being shifted from business to consumers. The fact that everyone was worried about this is, I think, very well illustrated if you read the federal press releases on harmonization, because they spend a lot of time talking about the fact that the burden is not being shifted to consumers.

Despite those two positive developments, I don't think we're going to get much further unless we fundamentally change the proposal regarding tax collection. As it stands now, the proposal seems to be simply to convert Revenue Canada into a crown corporation such as VIA Rail or the post office. There's no assurance that it will be independent or that the provinces won't simply be handing over control of their sales tax policy to the federal government.

Now, to ask the provinces to give us control of their tax policy and to let go all of their staff while we run a more efficient tax system here in Ottawa... I mean, that may sound good in the national capital region, but it doesn't sound too good in Regina or Edmonton or Victoria. It may be possible to make a proposal like this financially irresistible to a smaller province, but it's never going to work in a larger province. In Alberta, in B.C., in Ontario, they know very well that any financial incentives they'll be offered will ultimately be paid for by their own taxpayers. So this isn't a strategy that's going to work for every province.

.1105

Therefore, I hope you will consider a truly national tax collection agency, not simply a recycled Revenue Canada - one where the governance is shared by the federal and provincial governments, where changes in sales tax rates and bases will require agreement between governments, and where provinces are offered the opportunity to levy their own income taxes, corporate and personal, on nationally harmonized tax bases.

I think this is a once-in-a-decade opportunity to move forward on tax reform in our federation, but it's going to take willingness from both the provinces and the federal government to give up some control of their respective tax spheres. If the proposal is to offer nothing and to ask for everything, which I think the current tax collection proposal really is, tax reform is going to stop dead in its tracks. We're not going to make any more progress. An independent, truly national tax collection agency might be the missing piece in the tax reform puzzle. I hope that both the provinces and the federal government can see their way clear to giving up a little in order to gain a lot for taxpayers.

The Chairman: Thank you, Professor Boothe.

Duncan Cameron, please.

Mr. Duncan Cameron (President, Canadian Centre for Policy Alternatives): Thank you, Mr. Chair. It's always a pleasure and an honour to be invited to appear before you. Thank you for your invitation.

The largest compliance cost by far associated with our tax system is of course the GST. This is a tax-farming system with a difference: the farmer has to pay in order to collect the tax. This has had a widespread impact on our retail sector. It has changed it from a service-oriented to a big-box, price-oriented sector, with a tremendous job loss resulting. It's a regressive tax and it has meant that Canada has become a less fair society. The cost of just introducing the fairness element through the tax credit itself would have to be included as a compliance cost.

How much wiser and simpler it would be if this committee would look at the proposal to introduce a financial transfers tax, to replace the GST with a tax of, say, 0.15% on all financial transactions, about $1 on $1,000. How much fairer that would be, how much more popular you would be, how much less work would be done, except of course by the financial institutions, which in this instance would inherit from all the other businesses, NGOs and voluntary groups that now have to administer this unfair tax. That's what I have to say about compliance.

On the economic impact of the tax system, I think you are correct to look at it in terms of job creation and destruction. That's where we should be measuring the types of economic policies we're introducing. Did they create jobs or did they limit jobs?

With respect to tax, three principles are foremost. The first is equity. The second is ability to pay. The third is administrative simplicity.

In my own view, the most equitable way of taxing corporations as per corporations is through a capital tax so that with their access to loan capital, equity capital, the retained earnings, they are all on a level playing field and are all paying something irrespective of how they're doing business-wise. I think the major feature before you is to what extent this capital tax can be harmonized provincially and federally so that there is one tax collector, as my colleague has suggested, but also one system across Canada. That's an important thing, because I see capital taxes as an important future source of revenue in Canada.

As for ability to pay, that's the reason we have an income tax, why we go to the trouble of filling out an income tax form. We have a belief as a society that those people who get the most material benefit from living in society should pay accordingly. Our corporate income tax system could be simplified to a considerable degree.

.1110

The principle I would like to see introduced and understood is this. While we have tax exemptions and tax relief for good reason, when these are stacked one on top of the other they can lead to zero income tax being paid. Therefore, the United States and other jurisdictions have introduced corporate minimum taxes of various kinds. I think it would be very useful for the Government of Canada to agree on a national corporate minimum tax with the provinces and to agree that it be harmonized across the provinces, and I think this tax could even, in many instances, be deductible against future tax payable. The point is that you pay something as you go along.

Finally, the point that concerns everybody and that is always the way into a tax debate is to ask what the simplest way of doing this is. What's administrative simplicity?

In my view, we have to look at it internationally. We now have a Canadian tax lawyer as secretary general of the OECD. I think we should take that opportunity to make proposals to simplify the taxation of corporations internationally.

There are two ways in which you can do this. You can go with the way every corporation is going to argue for, and that's the race to the bottom to see who can have the lowest level of taxes. Or you can decide to harmonize your methods of identifying income and imposing taxes internationally. If you have an internationally agreed-on method of taxing corporations, you simplify life for everybody.

Corporations don't like that. They don't like to pay taxes, but I'm sure they'd rather fill out one international tax form or fill out all their tax forms on one basis rather than having to deal with differing regimes.

When you look at our tax system internationally, some surprising facts leap out. One of the first is how low our payroll taxes are in comparison to other jurisdictions. Canada is not in the top ten or the top twelve of the OECD countries in payroll taxes. I think one of the reasons is that Canada has one of the poorer social policy regimes of any of the OECD countries. We're twelfth in social spending and going down.

When you look at the cost of something like payroll taxes or at how they're administered, I think you have to bear in mind what the purposes of these taxes are. I hope one of the things this committee will be doing in its future work is looking a little more at the idea of dedicated taxes, in which we discuss not just the administrative simplicity of the tax, but also why we are collecting this particular tax and for what particular purpose it is being used.

Economists have argued, and rightly so, that it doesn't matter where the money comes from. It doesn't matter whether a dollar comes from sales tax or whether it comes from corporate tax if a dollar is being spent on sending our team to Atlanta. But from the point of view of the public, it does matter. It gives them an idea of why they're paying taxes. Surveys consistently show that Canadians are prepared to pay more taxes if they believe they're getting value for their money in better services.

I won't take up any more time, but I do want to add two closing comments that have to do with the work of the committee. I have, of course, been urging the committee to study interest rates now for two years. I see they're coming down nominally, so I must assume you can take the credit for that because of your backroom work.

Secondly, that was a major recommendation of the alternative budget that the Canadian Centre for Policy Alternatives, along with Choices, has now prepared twice. I want to let you know that we're now under way on our third alternative budget. Once again it will be a very comprehensive look at both taxation and spending. It will show how to get more jobs and how to provide better social programs and government programs without increasing taxes. I commend this third budget to you. We will present it at the appropriate time.

[Translation]

Thank you, Mr. Chairman.

[English]

The Chairman: Thank you, Duncan Cameron.

Mr. Morris, perhaps you wish to comment on the suggestion that we have a financial transfer tax.

[Translation]

Mr. Tim Morris (member, Taxation Committee, Canadian Bankers Association): Thank you, Mr. Chairman. I am pleased to be here today and on behalf of the Canadian Bankers Association, I would like to thank you for your invitation to appear.

Before Mr. Cameron spoke, I would have willingly subscribed to everything I had heard. This is not the case any longer.

[English]

I'll just go over our main points, and perhaps, Mr. Chairman, I could give you a reaction to the financial transactions tax subsequently.

.1115

As to the question of which features of the federal and provincial taxes most affect business, without getting into a repetition of what was said earlier, I would say that the fact that we have multiple jurisdictions in Canada does make for a convoluted situation. In the case of financial institutions, all of these jurisdictions tax at the levels of capital tax, income tax, and payroll tax where they have them.

Also, in the context of simplification I think it is something that ought to be and deserves to be examined because the differences between some of the capital tax bases in some of these jurisdictions are really quite minimal. I would make the suggestion that since the federal auditors at Shell and also at the Royal Bank are in and have plenty of time to examine things, I suspect that maybe they could also take the responsibility to audit the capital tax returns.

Along Mr. Cameron's lines of an international tax basis, I think that perhaps small steps would be useful to consider. Perhaps a common national capital tax base for financial institutions and other corporations would be a step in the right direction, with the new skilled revenue auditors who are going to be hired as a result of these committees' recommendations to come in and audit that.

Information reporting is another matter on which we would like to echo the remarks of others. We would agree that the foreign reporting measures are overly extensive in their requests. On examination of the situation with foreign affiliates in the company I work for, many companies that are dormant will now be required to dredge up information because all foreign affiliates are covered. They will have to package this and send it off to Revenue Canada, not just the financial statements, but little summaries of financial information, probably to lay in some storeroom somewhere, I suspect.

We are audited, as others are, on a fairly continuous basis. All of these records are available to be requested if the auditor is inspired to do so. I would think that a part of the best use of resources is to allow the auditors to make judgment decisions about what is appropriate information without gathering absolutely everything.

There is also T-5 reporting. There's been T-5 reporting for many years. I believe T-5 reporting is relevant for individuals and trusts and not for corporations. These things are done on a calendar year basis. T-5s are issued for all interest payments, and for corporations they are just like junk mail.

While consolidated returns would make the legislation more complex, a great deal - probably most - of the tax planning that goes on for large corporations is in the area of achieving tax consolidation, offsetting losses against income throughout the country. I think some great efficiencies would be achieved by moving to a legislative repair of that.

There are also book tax timing differences, some of which we believe are minimal and unnecessary, and which are, of course, a natural focus on all audits. For example, the doubtful debt deductions for financial institutions are not at the same level as are those that are booked. While I understand that there should be some sort of system to depreciating property, the methods vary as between tax and book. Perhaps that should be looked at.

Most corporations that deal internationally have foreign exchange issues and attempt to hedge their circumstance. Revenue Canada, because that is the way the tax law is, takes the position that the assets and liabilities that hedge each other don't necessarily attract the same tax treatment, and a result of that is actually an increase in costs of forward contracts and perhaps a loss in some cases to the government.

.1120

We would echo the remarks of others tending away from taxes that are insensitive to income, therefore tending away from payroll and capital taxes

[Translation]

but rather towards taxes based on revenues, and also tending towards trying to avoid tax increases. The burden is already very heavy. We should not forget either how important are the facts that we are in competition with other countries - in particular, the United States, just South of the border - and that job and the services sector are mobile.

We also believe that it is possible to eliminate some provisions of the Income Tax Act which

[English]

have lost their utility. With term-preferred shares, one could ask why those measures are still there, just adding to a clutter of measures that already seem to adequately address the situation with preferred share financing.

Harmonization, allocation measures... We'd like to make a few remarks about what we perceive to be a need to enhance fairness between businesses. We believe that for businesses operating at around the same levels in the same sectors, the effort should be towards taxing them at a similar level and in a similar fashion. For example, credit unions and caisses populaires have only recently been exposed to capital taxes for the first time, and that by reason of a recent initiative in the province of Quebec. Other financial institutions pay capital taxes to all ten provinces plus two to the federal government. Maybe parity involves a bit more movement along those lines.

I think it would be desirable if the committee could look at the rationale for incentives and other special treatment of industry sectors, because I suspect that within those, the things that make the differences are tax measures. It would be de-complicating and perhaps it would achieve greater fairness to have fewer of those.

Finally, some of the witnesses have spoken about the federal measure to limit the taxes on capital and on payroll levied by the provinces. We believe this should not be done by measures against taxpayers, but rather by dealing with the provinces directly.

Thank you very much for the opportunity to present these remarks.

[Translation]

Thank you.

[English]

The Chairman: Thank you, Mr. Morris.

[Translation]

Mr. Loubier.

Mr. Loubier (Saint-Hyacinthe - Bagot): Welcome to the Standing Committee on Finance, and thank you for accepting our invitation.

In your presentation, you spoke abundantly about the cost of payroll taxes, economic costs and compliance costs associated to your obligations under various federal and provincial government programs.

However, you hardly mentioned the corporate social costs, an expression which is used more and more as public finances in several industrialized countries turn rather disastrous. It covers the whole package of direct and indirect subsidies governments allocate to businesses. So, we are talking about direct subsidies.

To that, you have to add tax expenditures in the form of exemptions, that is the various mechanisms companies can use to save on taxes, thanks to provisions in the Canadian tax system or indeed in other systems around the world.

These tax expenditures number approximately 50 and today, we hardly hear about them. Same as before. According to the Department of Finance, the cost of half of these expenditures to Canadian taxpayers would be about 10 million dollars per year.

.1125

Even if very few studies have been done on the subject, a recent one - by Professors Bernard, Lauzon and Poirier of the Université du Québec à Montréal - showed that among the 438 Canadian companies making up the sample, which had all made a profit in 1992, less than half had paid taxes. Not only that, but the rate of taxes paid to the various levels of the Canadian government was about 8%. In other words, 200 out of the 438 companies which were surveyed had paid taxes amounting to less than 20%. The real tax rate for 1992 was 8.2%, or approximately 495 million dollars out of6 billion dollars profit before tax.

This 8% rate should be brought up to 20%; it would be a normal rate, representing about half the tax rate set for profits made by corporations in the United States. The difference between the 8% paid by these Canadian companies and the 20% they did not pay is a social cost which was shared by all Canadian taxpayers. They are the ones who subsidized companies, who had to meet this expense so that businesses, even if they were profitable, could make bigger profits.

The study shows that various mechanisms contribute to this situation which, compared to that of other taxpayers, is unfair and inequitable. There is the deferring of taxes, a measure which is more widely used in Canada than in many other industrialized countries. The rates set for accelerated depreciation are not the ones which can be found in the depreciation rules established by the Canadian Institute of Chartered Accountants. Canada offers businesses some 50 exemptions.

Finally, it is possible to transfer profits and losses between Canada and some countries - in the Caribbean, for instance - which are considered tax heavens, and where Canadian companies have subsidiaries. These are the main mechanisms.

To get back to the Committee's mandate, if we eliminated these 50 exemptions, these50 mechanisms companies can use to save on taxes, these 50 measures whereby Canadian taxpayers subsidize business much more than we usually think, could we not manage to reduce economic and compliance costs associated with the taxation system as it applies to Canadian corporations? Practically none of the experts we heard since yesterday has tackled this issue head-on. By eliminating as many exemptions as possible and by simplifying our tax system, I believe we could reduce the economic and compliance costs and, more importantly, the social costs which all Canadian taxpayers have to share so that those exemptions can be offered to corporations.

Could you please comment on that?

The Chairman: Who would like to answer?

[English]

Mr. Spindler.

Mr. Spindler: Mr. Loubier, I'd be interested in understanding better the reasons underlying that study, the reasons for the discrepancy between the reported profits and the amount of tax.

With respect to Canadian corporations, the starting point for computing income subject to tax is the accounting profit, and then the Income Tax Act varies that amount by specific provision. Most of the provisions that alter accounting income to taxable income reflect various government policies that have been brought in over time. You're quite right that some of those may need to be reviewed from time to time.

There may be a question of the tax base if you're looking at financial statements for Canadian corporations versus the consolidated financial statements for Canadian companies with foreign operations. You can have distortions in the effective taxes when you combine a relatively high tax burden in Canada on a Canadian company with an extremely low tax burden on a subsidiary in a foreign jurisdiction. The problem with the system currently is that, given Canada's relatively high tax rates, corporations are encouraged to shift as much income as possible to lower-rate jurisdictions outside Canada.

.1130

[Translation]

Mr. Loubier: As mentioned earlier by Mr. Watkins or Ms Swift, the tax rate which is reported is really inconsequential. Even with tax rates set at 40%, at the end of the day, it is the results that count.

We have here a study which proves, beyond the shadow of a doubt, that in 1992, even if they made considerable profits, less than half of the 438 corporations which were surveyed - and this is a rather large sample - paid practically no tax or were taxed at a negligible rate, precisely because of the 50 exemptions provided to corporations through the Canadian tax system, which allow them not to pay any taxes.

Mr. Spindler, as an expert well versed in these 50 exemptions, you are in a particularly good position to answer my question. To reduce the economic and compliance costs for Canadian corporations, could we not undertake a very critical analysis of the 50 exemptions, with a view of bringing them to a minimum, even if it means reviewing the business tax rate or widening the tax base?

This is an issue which is rarely raised, particularly by experts such as yourself who, no doubt, very much like complexity, since you make a living out of the complexity of the Canadian tax system.

[English]

Mr. Spindler: It might be a way of increasing the tax revenues. I'm not sure if it would lead to a simpler system.

I think you're quite right that of your 50 measures or provisions, there may need to be some review. You've cited, for example, accelerated depreciation, where corporations or businesses - because it would include unincorporated businesses - are allowed faster rates of depreciation for assets for tax purposes than they are for accounting purposes. Those measures were brought in by governments to encourage investment, capital expansion, the development of business in Canada and the manufacturing sector. Their purpose at the time was very clear and the result of the provisions was very clear. They're very effective.

If the government now would like to re-evaluate some of those programs, such as accelerated depreciation for the manufacturing sector, that's perfectly appropriate. The question is whether they want to provide a disincentive or an incentive, and that's within the government's right. The high-technology sector is another area.

[Translation]

Mr. Loubier: Mr. Spindler, is there any proof that the accelerated depreciation process has indeed led corporations to invest in a certain type of assets, or would these companies have made those investments - in office automation, for instance - in any case, because the only way for them to stay on the market was to modernize their operations and remain competitive?

What I am wondering - and it is also a question I have been asking the government for three years on behalf of my party, the official opposition - is whether the exemptions enjoyed by corporations end up being tax planning devices rather than incentives to encourage companies to be more competitive. Are they still justified today, in 1996, given the state of our public finances and the fact that we have an accumulated a debt of 600 billion dollars?

Would these investments not be made anyway by corporations, even if such exemptions did not exist and if businesses were forced to pay taxes at a fixed rate, albeit lower than the current one?

[English]

Mr. Spindler: I'd make two observations there.

.1135

I haven't conducted a personal study of the effectiveness of these provisions, and maybe the Alliance of Manufacturers and Exporters can respond, but you made the point that you were concerned that they were being used as planning devices. There may have been a suggestion that people were taking inappropriate advantage of these provisions. I suspect that this is an extremely rare occurrence. I am not aware of people going out and buying expensive manufacturing equipment and not using it for its intended purpose. There are rules in the tax act that specifically require -

[Translation]

Mr. Loubier: This is not what I was saying, Mr. Spindler. What I said was that, even if such exemptions did not exist, some companies would nevertheless invest in new technologies, because it is the only way they can remain on the market.

These companies can use three things, that is, first of all, accelerated depreciation, which reduces the amount of tax they pay. Second, when appropriate, they get their yearly expansion subsidized. And third, if they continue to expand year after year, they may never have to pay taxes and, on top of that, the federal government may very well loose the total amount of deferred taxes.

With the current restructuring taking place everywhere around the world, tax provisions can be combined in a whole lot of ways, and this has an impact on the development and the expansion of Canadian corporations, as well as on their contribution to the federal Treasury. It is not surprising that, over the past 20 to 25 years, among members of the OECD, Canada has been the country where corporate tax, as a ratio of the GDP, has been the lowest.

Even if some companies are good corporate citizens, others are not and, on the whole, the contribution to our tax base by Canadian corporations has decreased substantially over the past 30 years, from 20% to 10% of the federal government's revenues. This is a cause of concern when our public finances are far from being healthy.

[English]

Mr. Spindler: Mr. Loubier, in my experience the decision made by a business to acquire equipment, to expand in certain areas and what not is founded on prudent business principles. The question then becomes where they should expand and what incentives are offered by governments. A business in Canada that's looking at expanding its manufacturing operations would be prudent to examine the provincial incentives available and the international incentives available.

The Chairman: Mr. Morris, you wanted to add something.

Mr. Morris: I wished to add that in the document the Canadian Bankers Association provided to you, we did touch on this point. We indicated that we thought it would be worthwhile for the government to examine various fiscal incentives in the context of this committee, with a view to reducing what I would say is the opposite of a tax expenditure, reducing our rates, which are rather higher, so that any decision to provide incentives is more uniformly passed around the entire corporate sector.

The Chairman: Mr. Myers, I saw your hand.

Mr. Myers: Mr. Chairman, I would like to add a bit of urgency to this discussion overall. I can tell you from meeting with many of our members that they don't have to be subsidiaries operating here in Canada, but Canadian companies looking at expansion around the world. It's a fight to attract investment here, and a great deal of that problem is because of the tax treatment of corporate earnings as well as the cost of corporate taxation.

It may interest the committee to know that in terms of the real capital stock of industry - that is, net investment after depreciation and after price changes have taken effect - has declined by 8% from 1990 to 1994. We're fighting every day for investment. The idea that you can simplify the tax system without looking at the implications of doing that and the impact on investment and on jobs...

.1140

Mr. Loubier talks about the Canadian taxpayer subsidizing business during this period of time. What would he call the job losses or the jobs that haven't occurred here because investment hasn't taken place because of the tax treatment, or the unfavourable tax treatment, of business here in Canada in terms of either returns on investment or operating taxes that are subsumed in operating costs?

Finally, I'd caution that there are a number of tax studies if you want academic proof of the impact of many of these tax measures. I refer to the Canadian Public Policy journal and some of the work that's being done by Jeff Bernstein here at Carleton University for some very good work on the impact of various tax measures on investment, the treatment of capital, and so forth.

But I would caution everybody about throwing out figures and studies. In 1992, after three years of recession and losses, many small companies in this country were not even talking about making profit in the first place. You have to make a profit in order to pay tax on corporate income. The reality for many companies is that profit wasn't made. The margins, at least on the industrial side, were at all-time lows in 1991. So I'd caution the year.

Mr. Cameron: Just on that last point, as I understand it, the reason that corporations invest is because they expect to make a profit, not because taxes are low. When the economy is strong, then there's a good chance that the capital stock will grow. When the economy is weak, it will diminish. So you have to look at the tax system from its overall impact on strengthening the economy.

With respect to these tax expenditures and the relationship with l'échange social, I think it's important to recognize that tax experts differ. Someone like Neil Brooks has looked at the tax system long enough that he does not believe there is an incentive you can put in the system such that somebody will not somehow find a way to exploit it.

He has suggested that all these incentives should be turned into grants, or be examined by this committee for being turned into grants. Instead of somebody getting to write off the cost of their new equipment, they can get a grant and buy it. The economic effect is the same.

These corporate tax write-offs are a third budget, in effect. They're never discussed, and nobody knows the expenditure is there.

My own view is that there should be incentives in the system, but we've loaded some of the incentives we have in favour of buying up new equipment and laying off people. When you start laying off people, you then get your social charges that the vice-president was talking about.

Consider the social charges of laying off a thousand people. Admittedly, the company has paid part of that through paying unemployment insurance premiums, but the social cost to all the rest of us of losing consumers and taxpayers, and local businesses going under as a result, is enormous.

I think the committee should be looking at some of the ways of having disincentives to throwing people out on the street as part of the taxes. We can have incentives to modernize and so on, so why can't we have disincentives to this kind of capitalisme sauvage?

The Chairman: Mr. Grubel.

Mr. Grubel (Capilano - Howe Sound): I am tempted to make just a few remarks onMr. Loubier's continuous diatribe about the unfairness of our system.

I urge him to read the Ontario Fair Tax Commission report, which started off with great hopes. This was motivated by an ideology of the left such that, in fact, corporations were not paying their share. When the government got through it, it found out that there were not large amounts of money being hidden by corporations.

I guess I will read it for the record, since Mr. Loubier doesn't seem to be interested.

It seems to me that the tax treatment of losses by corporations accounted for a very large proportion of the non-tax payment between the economic and the taxation reporting of profits. The second source was that taxes had already been paid by other divisions of the corporations.

.1145

But I do agree in general with the idea that we should have a continuous review of tax concessions in order to generate certain incentives for investment. I think it takes, on average, about 18 months for a tax concession and incentive to turn into a tax loophole. Tax loopholes for corporations are undesirable.

I think it's perfectly consistent with my ideology for the government not to mess in the economy like this. As somebody said yesterday, it's very important in this dynamic world in which changes are increasingly rapid that we do not try to anticipate what essentially is the role of the market to find the best outlets for savings.

I fully agree with this, but I think that as for corporations not paying their fair share, this almost seems to me like a witch hunt.

If there is transfer pricing abroad, we know that there aren't enough resources in Revenue Canada - there can't be - to outwit the individual ingenuity of people to get transfer pricing to report their profits and to find where the taxes are the lowest.

The answer, as far as I'm concerned, is simply to play nicely with the Americans, have a lower rate, and make sure that all the transfer profits are reported in Canada. Mr. Loubier would find that there would be a tremendous increase in the graph in revenue collected from Canadian corporations if we in fact had lower statutory rates than the Americans.

However, I would like to address a question to Mr. Glennie concerning the story that there are three Revenue Canada employees continuously in your office. I can see that they might check on whether or not you are actually cheating in the traditional sense: you say you paid $1,000 when in fact you paid $1,500, or whatever it might be. I am almost prepared to rule that out since you have your other audits. Cheating of this sort, forensic accounting, is not really what they're doing. Am I correct on that?

Mr. Glennie: Correct.

Mr. Grubel: Second, what they might be doing is using a given set of rules to see whether in fact you apply those rules correctly. Is that what they're doing mainly?

Mr. Glennie: I would presume so.

Can I just clarify one point? I used Shell Canada as an example, but as Mr. Morris stated, I don't think we're any different from any other large corporation.

Mr. Grubel: I didn't mean to imply this. I'm just now talking as an economist not knowing this is taking place. I just want to understand what they're doing and what the motive might be.

They interpret that a transaction you have should have paid 15% rather than 18%, or that the depreciation should be applied over five years rather than three years. Is that the kind of thing they're trying to second-guess you on? They're making sure you're doing it right all the time?

Mr. Glennie: I think there are really two things. One is that Revenue Canada would like - I'll again use Shell Canada as an example - to ensure that Shell Canada is paying the appropriate amount of tax based on the income we earn in a tax sense in a year. Second, they want to see that we are not somehow skimming money off from the Canadian fisc and either sending it offshore or somehow subverting it here in Canada.

Mr. Grubel: How do they do it? What do they do in their day-to-day operation? What would they ask from you? For three people to be constantly looking like this, what is it that they're questioning?

Let me put it in a different way. Has there ever been any study made by Revenue Canada as to how much revenue the government collects that it would not have collected if these three auditors were not at Shell Canada, and other corporations, at all times?

Mr. Glennie: We're encouraging the government to do that study.

Mr. Grubel: It's never been done?

Mr. Glennie: Not to my knowledge.

.1150

Mr. Grubel: I have one last question, Mr. Chairman. One category where I think there would be a use for these people is in advance rulings. There are transactions that involve new corporate organizations and new kinds of transactions that never have taken place before for which you would want some sort of an advance ruling. Is there a big need for constant auditing supervision of those kinds of transactions?

Mr. Glennie: I don't believe so. I think the ruling process itself discloses all the facts of a particular transaction, and from an audit point of view it's just a matter of ensuring that the facts of the case are as outlined in the ruling.

Mr. Grubel: As for those three people who are with Shell Canada at all times, are they the same people all the time?

Mr. Glennie: I think they tend to rotate every half-dozen years or so.

Mr. Grubel: Every half-dozen years?

Mr. Glennie: Or perhaps they rotate every decade. But you must understand that in addition to those three we also have regular visits from people in other areas of Revenue.

Mr. Grubel: Do you think that Shell Canada's business is particularly complex compared to that of, say, the Ford Motor Company? I would have thought that in the refining business - while you have huge growth transactions - it's pretty well all the same. It's petroleum being imported and refined products being sold. That must be 90% of your revenue base. Is that right?

Mr. Glennie: That's roughly half of our business. The other half is the exploration and production of oil and gas. We have both sides. We have the refining and marketing as well as the resource activity. In tax terms it's fairly complex.

Mr. Grubel: But a lot of it has to do with timing of investment and depreciation rates and so on.

Thank you very much. This was a matter of clarification, and I'm very pleased to have had this information for my book on horror stories about Canadian taxation.

The Chairman: Thanks, Mr. Grubel. Ms Brushett.

Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chairman. I would like to pick up from where my Reform party colleague left off.

I thank you all for being here this morning. It has been an extremely interesting and very worthwhile panel.

Mr. Watkins, you've talked a little bit about the value of advance rulings, and you've talked about how perhaps the cost isn't appropriate for the time imposed and for the value they bring to the corporation. I've heard this mentioned by tax lawyers and accountants in my constituency who say that perhaps we should have more liberty with tax rulings and advance rulings, and that we should have less complicated legislation - a more open legislation if you will - rather than the technical detail. They say we could be further ahead and more efficient in the end.

In lieu of what I've heard about some of the advance rulings...they're not published for three years and they're only private information for the person who solicits them, so they really don't benefit our society as a whole. Can you explore that for a moment and see how we could benefit our society and our economy more and how we could be more efficient overall?

Mr. Watkins: On your last point, as a matter of fact, the rulings division at Revenue Canada has a project under way whereby they propose to publish all rulings that are issued. They'll be sanitized - I think that is the word - to protect the identity of the person or persons to whom the ruling is issued.

As a matter of fact Revenue Canada is now working on a revision to their interpretation bulletin that deals with rulings, and it will be a condition of receipt of a ruling that the person applying for the ruling agree to have the ruling published. They will be given a chance to look at the sanitized version to ensure confidentiality and protection of identity. It's been a while coming but they are proposing to do that. They will release it to the commercial services and I believe it will be available on-line so that if you're plugged into the Internet you'll be able to pick it up. That is what they are doing to enhance the dissemination of rulings that are issued.

Mrs. Brushett: I'm aware of that. We've been proponents of that in this committee because some rulings have not been published for three or four years, and it seems quite ludicrous to me to keep this information secret.

.1155

The second point I would like to hear a little more on is the special tax agency. Rather than the route we're going to take, which may appear to be a crown corporation per se, we could have a joint agency, provincially and federally. What we're looking at as we review this corporate taxation legislation is how we can link how we're taxing today to better job creation in this country.

I know everyone must look at the profits and the bottom line and chasing of capital. A lot of this was brought in, as many have mentioned, for the purpose of investment, manufacturing, jobs, and so on, but it seems that in recent years, although we have seen those profits, we're not creating the jobs. We do have to bring in the linkage, so in what way might some of that help to create more jobs here at home?

Prof. Boothe: I think the idea is that the tax collection agency is really there to make the collection of taxes more efficient, that is, to lower cost to governments and at the same time make it easier for businesses and taxpayers to comply with. The benefit in terms of making tax collection more efficient is that essentially, in the case of sales tax, you need one set of sales tax collectors instead of the current ten sets we have, one federal plus nine provinces.

Of course, an intermediate step is to go in the direction the federal government has gone with the Province of Quebec, where the Province of Quebec collects sales tax on behalf of the federal government. There are lots of reasons for that, but that really gets us from ten tax collectors to nine, when really what we want to do is get from ten tax collectors to one.

You'd think the problem would be obvious - there's this money lying on the table, so why don't we just do this more efficiently? The problem is the political problem with having your own tax collectors: you get to control what gets taxed and at what rate. Our proposal there was to try to not just have one of the parties, the provinces, give up control of their tax policy, but to have the federal government as well give up some control of tax policy and have a jointly governed national tax collection agency.

One of the by-products of that, if I can call it that, is that in a federation it's harder for provinces and the federal government to agree on things to change, as we know. That would also lend a little more stability to the tax base and tax rates because you'd have to convince a larger group in order to make changes.

On the business side, one of the benefits, of course, is that if you get a national tax collection agency to work, it will only work if tax bases are harmonized, and that makes it easier for businesses to comply. If you're a small business in Ontario and you do business in a couple of other provinces, instead of having to deal with the GST and provincial sales tax in several provinces, you could deal with one harmonized sales tax. In Ontario or Alberta, for example, you could deal with one harmonized income tax even if the federal and provincial governments had different rates.

That would free up people in businesses, especially small businesses that have a fixed number of people working, to do things that are more productive in terms of producing wealth in the economy. So that's the basic idea of that proposal.

The Chairman: Catherine Swift.

Ms Swift: I don't disagree with much of that. There's no question that we're in favour of a much more streamlined system in many of the respects that Mr. Boothe outlined.

With this linkage that the profits are being made but the jobs aren't being created, first of all I think there are some erroneous assumptions. If we look historically, there are some big headlines as to profits in certain sectors, which will remain nameless. Certainly, speaking for our constituency, and even if you look at profit data nationally over the last 20 years, just Stats Can profitability data, you'll find that profitability overall, with the exception of some sectors, is down a lot. That is one of the key reasons we see corporate income tax revenues down as a proportion.

.1200

When you want to make the linkage to jobs, again, the evidence is awfully clear as to where the jobs are coming from these days. I don't think anybody is questioning that connection. Our members tell us repeatedly that it's payroll taxes.

We've heard a number of comments. First of all, we hear that payroll taxes are low in Canada. Well, Europe, where they're the highest in the world, hasn't created any net new jobs for 30 years.

Are we aspiring to that goal? I don't think so. Our payroll taxes are an awful lot higher than what they were five to six years ago. They're not going down. Take CPP as an an example. We're going to see it take quite a hit probably in the not-too-distant future.

Consider the provinces. Quebec is talking about introducing two new payroll taxes, one on training and another possibly to finance a pay equity proposal. We see provinces generally increasing this burden.

So we don't feel that the impact of payroll taxes, which are clearly and simply a tax on jobs, can be ignored. If you want to make that link to jobs, that is really a very key consideration. The overall regulatory compliance problems are also very important, but if you want a direct hit, the evidence is quite clear for payroll taxes.

Mrs. Brushett: Thank you.

The Chairman: Thank you, Mrs. Brushett.

[Translation]

Mr. Bélisle, please.

Mr. Bélisle (La Prairie): I would like to ask a question to Mr. Duncan Cameron of the Canadian Centre for Policy Alternatives. He was talking about a tax on commercial transactions, operations and exchanges which could advantageously replace the GST.

Could you tell us how such a tax would be calculated and in what way it would easier to administer than the GST? I would like to hear you comment on this proposal which I find interesting.

Mr. Cameron: The GST applies to almost everything besides food, but oddly enough, not to the purchase of securities and bonds. So, a consumer who buys Alcan's or other corporations' shares does not pay any GST. This is an anomaly if we take into account the fact that an amount of money is spent to acquire financial instruments.

How could we tax these purchases, while eliminating the tax which currently applies to basic items bought by consumers? We could include other transactions. If we taxed the purchase of securities and bonds, we should also have a tax on fixed term deposits since this is another type of acquisition. Moreover, if we really wanted to have a low rate tax, we could bring it down to 0.1% or 0.15% instead of 2% or 1.5%. We could also tax all withdrawals by cheque made through financial institutions.

Every month, I make purchases by credit card which amount to approximately $1,000. I pay no tax or GST on these transactions. At the end of the month, when I write a cheque to Visa, I could pay a small tax. This would be quite innovative. I was surprised that Catherine Swift did not raise that instead of discussing those much talked-about payroll taxes.

I am associated with three small businesses and I can see that the paperwork required by the federal government because of the GST is a major part of the administrative burden of a small business. We are talking about companies with yearly revenues of some $500,000; in other words, quite modest. The work it creates for my employees is enormous. We could simplify all this by transferring this responsibility to the six main banks which, as you know, have set up a rather comprehensive and sophisticated fee system.

It would not be much for them to add a 0.15% charge to the other fees they administer already. Instead of asking 3 million small and medium businesses and some 4 million volunteer organizations to collect taxes, this responsibility could be given to financial institutions. All of the regulatory administrative burden could be transferred to this small group established under a charter granted by the Parliament of Canada.

.1205

The Chairman: Mr. Morris, would you like to comment?

Mr. Morris: Yes. A few years ago, we reviewed the Tobin Tax, a comparable tax on foreign exchange transactions.

When you do an overall analysis of this type of tax, you can see that it discourages savings and investments. Another tax, when interest rates are rather low, would deter investors.

Moreover, since these types of investments are rather mobile, they encourage tax avoidance. Unless all countries in the world decide to impose such a tax, fixed term deposits will be made in countries where the purchase of bonds and other financial instruments is not subject to such a tax.

How could an approach which encourages tax avoidance and curbs the level of savings be a more desirable option than a broader review focused, as Mr. Loubier suggested, on the 50 incentives offered under the current system, and the lowering of the tax rate?

[English]

Mr. Cameron: If there's one thing that has created an underground economy in this country, it's the GST, with the 7% rate.

We just did a study of the construction industry in B.C. As much as 30% of it is now off the books for any government.

As for a 0.1%, or 0.15% tax, nobody is going to try to avoid it, except the people who collect it, which means those in the banks. If they did that, well, I think we could have a penalty for any bank that did avoid it.

As for the Tobin tax, that's an international tax that would require cooperation, but we could do a domestic system all by ourselves. We could reduce the rate of compliance.

I'm really quite astonished that the Canadian Federation of Independent Business and others aren't really still up in arms about the GST. They just let this issue walk away. This is a major fact of life for people right across Canada.

Ms Swift: First of all, I beg to differ.

Mr. Cameron: But there is a solution, which is a financial transfer tax. It's a very good one. It should be looked at very carefully by your organization. You should ask them these questions on surveys.

Ms Swift: For starters, naturally, that's totally erroneous in terms of the GST. We've continued to try to find a solution mostly through work with our members to try to ultimately end up with some kind of simplification. One of the key problems right now is compliance costs, which I mentioned earlier.

We very much regret that the GST isn't part of this review. If you want to look at compliance for small business, the GST is not all of it, but it's an awful lot of it.

Mr. Cameron: But you're supporting it; you're not calling for it to be abolished.

Ms Swift: However, we do live in the real world, unlike some people. How are you going to replace the net $17 billion to $18 billion?

I'd love to abolish the GST.

Mr. Cameron: A financial transfer tax would replace it -

Ms Swift: As an economist, I don't find that at all workable. We've been one of the greatest critics of banks, so I don't think we're viewed normally as bank sympathizers, but we certainly don't -

Mr. Cameron: What studies have you done that lead to that conclusion?

Ms Swift: I don't think that's really the topic. We can certainly discuss that at another venue.

Mr. Cameron: It is the topic: compliance and GST.

Ms Swift: No, it's your topic.

Mr. Morris: I don't think compliance is an issue that can slip away that easily.

The Chairman: Could I just try to introduce a little bit of order? It's a lot of fun now.

Should we give the last word on this very briefly to Tim Morris?

Mr. Morris: I would just say that compliance is an issue here and that leakage is also an issue. I assume that the government these days is looking for measures whereby there's a high degree of assurance that the tax revenues will be maintained if new measures are adopted.

I believe that investment securities are easily purchased outside the six large banks in this country. If the population intended to be controlled is that of the six large banks, we might have tremendous systems, but we won't collect anything. Large financial transactions will escape this tax. They will be quite arbitrary.

Those people with the smallest investments will be penalized by this tax. The amount of revenue, I believe, will be far less than what it will be with the GST.

.1210

Mr. Cameron: What you're saying then is that it can't collect commissions.

Mr. Morris: I also think it would mean -

Mr. Cameron: You can't collect your commissions either.

The Chairman: I'd like to hear Mr. Morris finish this, Duncan Cameron, and I'll give you a chance to sum up later on. Okay?

Mr. Cameron: Okay.

Mr. Morris: I also want to say a little bit about the GST and its compliance. The GST falls on a much smaller population in terms of compliance effort than this might. This covers all investments.

I assume that it should cover residential mortgages let between individuals. I assume that intermediaries, if they are the people who are to collect this tax, will quickly evolve to circumstances in which they act as agents, and these two parties, who are difficult to deal with, will have to be remitting the tax. God knows how that would work.

Finally, on the GST, I think the government is making tremendous and very good efforts with the construction industry and other sectors in which there is some concern about evasion. There was a recent initiative by the Department of Finance together with the Department of Revenue, the Canadian Construction Association, and an equivalent measure in Quebec, to get larger compliance. Industry has bought into that.

I have a lot of criticisms to make of Mr. Cameron's proposal.

[Translation]

The Chairman: Let me congratulate you, Mr. Bélisle, your question led to many answers.

[English]

Thank you very much. Could we turn now to Mr. Solberg, followed by Mr. St. Denis?

Mr. Solberg (Medicine Hat): Thank you, Mr. Chairman.

First, I just want to thank Ms Swift for pointing out that the removal of the notional input tax credit does cause some problems. Some of my colleagues in the Liberal Party have been denying that it is a problem, but I do want to thank you for pointing that out.

To summarize, I think what we've heard is that taxes are too high, compliance costs are too high, and that some of the taxes are inappropriate or not conducive to growth in the economy. They actually hurt businesses much more than others.

I just want to focus on that for a moment and talk about payroll taxes. Payroll taxes have been discussed yesterday and today. I think there's a real concern out there that if they continue to grow, more jobs are going to be lost.

I'd like to know from Ms Swift, and others who have mentioned it, what can be done to stop the constant rise in payroll taxes. Specifically, you might want to address yourself to unemployment insurance and also the Canada Pension Plan. What changes can be made so we don't see those things continue to rise?

Ms Swift: With respect to EI, I did mention earlier that some of the structural reforms that have been made to the system - time will tell over the next few years - that are hopefully going to improve the operation of the system and reduce the extent to which it has impeded the labour markets over the past 20 years, since the early 1970s I guess, will help.

We see now that there's a major surplus being built up in that fund. We realize that the Department of Finance would like that money to be able to apply to the deficit. The deficit is important, there's no question, but we feel an equal balance between a significant reduction in premiums and still having money to devote to reducing government cash requirements is very feasible with the current numbers. So that's what we feel is sort of quite a simple solution.

With respect to EI, in a system in which presumably employers and employees receive equal benefits, we think it's very inequitable that employers pay $1.40 in EI benefits for every $1 paid by employees. This is particularly so considering that now several billions of dollars go to the so-called developmental uses, training and what not, portion of EI.

So we feel that another very equitable means to ultimately improve job creation prospects would be to equalize, perhaps on a gradual basis, what employers and employees contribute, as with CPP.

.1215

In terms of CPP, just briefly, we did a very comprehensive survey of our members on this issue just within the last few months. They basically told us that they certainly value the program, which is probably in sync with the majority of Canadians, and want it to be retained, but they also very much recognize the problems that it is facing right now in terms of financing in the future. Our survey indicated that our members favoured a proportionately equal benefit reduction and premium increase. Again, the time period would have to be discussed.

Right now, we're concerned that the government is actually leaning very heavily toward the premium-increase side with little, if any, benefit reduction, which again could certainly be factored in gradually over a period of time so that no one was caught on a very short basis, which is patently unfair.

The survey data are available. We feel it could make a major improvement to the payroll tax burden at the federal level. The provincial level is another story as well.

Mr. Garth Whyte (Vice-President, National Affairs and Research, Canadian Federation of Independent Business): Mr. Chairman, the reason we're focusing on payroll taxes is because we're trying to stay within the terms of reference such that you don't want to hurt the fisc, the deficit reduction strategy.

A lot of payroll taxes are self-contained. Look at the unemployment insurance fund. Even though it is lumped in with general revenues, as you know, it's still a self-contained fund that has to be paid back, if it's in a deficit situation, by employers and employees to the government, or vice versa.

So it's just this fund that's sitting there. They have a surplus now, which will be about $6 billion by the end of 1996. Without touching that surplus, you can reduce premiums by 60¢ to 70¢ right off the top.

We have done a report on payroll taxes. For a firm of 25 employees in Quebec, for example, if you add up workers' compensation, education and health tax, and if you add up UI and CPP, these have increased from 1990 to 1996 by about $38,000. That's two jobs.

You talk about all these theories. We talked to our members. Talk to one or two or three employers. They say it costs them an additional 13% just to pay payroll taxes. On top of that, they pay health and dental benefits. On top of that, they pay municipal business and property taxes. There's a real disincentive toward employing more people.

Governments have moved their tax structure away from taxes on profits to taxes that are more stable, which in their minds means payroll and property taxes.

Say you are looking at structural changes. Instead of us talking about how we can pluck the business goose with the minimum amount of hissing, let's look at the real areas we can work on.

You can work on UI tomorrow at the federal level. Let's do something.

Mr. Solberg: Out of all the possible changes that could be made, in your judgment, what is the most important thing that could be done to encourage business? Would it be to lower taxes overall or to change the structure so that there's less emphasis on payroll taxes and direct taxes?

Ms Swift: We feel the number one thing from the tax standpoint would be to reduce payroll taxes. That's from the standpoint of the small business community. We also think it would have the most beneficial impact on job creation, which through economy multipliers would have a much broader benefit than if you focused on any one other particular element of the tax structure.

Mr. Myers: Could I just add to this? I think it's important to not simply look at tax cuts alone, although the greater efficiency in the tax system and the cutting is extremely important. I think there is an element here as well that has become evident in the industrial sector over the past several years. If you have the productivity gains in a sector, in an economy, then you can afford higher wages and salaries and benefits.

I think any company will tell you that you can't keep cutting, because you'll eventually cut yourself out of business. Somewhere along the line, you have to reinvest to grow. I think the tax changes we're looking at can't be just simply a matter of cuts, but also a restructuring of the tax system to encourage investment, innovation and growth.

Without that, we're not going to have the ability to do anything but cut. We'll eventually cut ourselves into a situation in which any form of social assistance is not affordable and future growth is not affordable either. That's a very big concern of the industrial sector overall.

.1220

The Chairman: Thank you, Mr. Myers, and thank you, Mr. Solberg.

Mr. St. Denis.

Mr. St. Denis (Algoma): Thank you, Mr. Chair.

Thank you for being here today to help us with this interesting exercise. When the finance committee did its pre-budget hearings in the fall of 1994 and 1995, and when we did the GST study in the spring of 1994, we heard numerous times that Canadian tax policy had to provide a reasonable balance among income taxes, consumption-type taxes and capital-type taxes. We didn't want to put all the eggs in one basket. There was a need to get revenues from each of those sources in some kind of balanced way.

I heard this morning from a couple of witnesses that we should avoid income-insensitive taxes. I don't know if that means we should be leaning just toward income taxes and have no taxes in the capital and consumption area. I also think I heard that we need to have harmonization between capital and income taxes.

All of this has led me to wonder, and now to wonder aloud - and we have Canadians who will be watching us either now or this weekend - about the fact that we know we can aim for simplicity or we can aim for harmonization, or both. It's clear to me that harmonization is really what we're trying to achieve. We can try to achieve this within those three areas: income taxes, consumption taxes and capital taxes. It could be vertical harmonization - federal, provincial, municipal, as the case may be - or horizontal integration between, say, consumption taxes and capital taxes, if that's appropriate, or within each of those areas.

Leaving aside the GST - I think we've talked about that a fair bit, here and elsewhere - I wonder if a few of you would comment on whether there are some areas of harmonization - vertically, horizontally or within those areas - you can specifically advise us on here to try to put some meat on the bones of some of these notions we're discussing.

Again, harmonization is a nice word. We all want harmony. But can we get specific in some areas on what does it mean, really, to apply harmonization in some of the areas we haven't discussed?

Any takers?

The Chairman: Who would like to start with that?

Tim Morris.

Mr. Morris: The capital tax systems are less convoluted than the income tax systems. Nonetheless, there are separate capital tax returns for each and every province, and there are minor differences in computation. I think it is feasible to generate a universal definition of capital for corporations. Once that has occurred, if that could occur, then the Revenue Canada audit teams could audit that, and for at least the agreeing provinces - those provinces who, for income tax purposes, correspond generally to the federal rules - there would be one audit, one system, one set of rules. So I think an area where it would be easier to move to harmonization would be capital taxes.

Another area where there is inefficiency with respect to capital tax and income tax is the issue of allocation between the various provinces. We have rules in this country that are common through the provinces and federally, indicating standards and methods for allocation of income across the country. However, interpretations of these rules vary, depending upon which particular provincial auditor is looking at them.

This is another area where one would think that if the rule is the same, the result should be the same, and that perhaps there could be some agreement, or some more formalized agreement, between the federal government and the provinces with respect to the application of the allocation rules. One way in which this might be done, similarly, would be to have common audits of that particular aspect of the income tax and capital tax.

The Chairman: Professor Boothe.

.1225

Prof. Boothe: I would just like to add what I think is a general point that comes out ofMr. Morris's comments. You can think of what he's just said as two specific examples of the general idea that when you're striving for harmony, harmony has two parts. It has the tax rate bit and it has the tax base bit. Listening to Mr. Morris, one of the things that is clear is that the thing that really saves compliance is having the tax base bit harmonized. Harmonized rates are good too, but the money on the table is really having to deal with different tax bases.

So, really, when you're talking about income taxes, corporate or personal, to the extent that you can achieve harmony in the definition of what's to be taxed, that's where the real savings will accrue. That's why I think a national tax collection agency can go a long way toward facilitating that harmonization of tax bases, not just sales tax but also income taxes for corporations and for individuals.

I think the other thing to say, though, is that the barrier to achieving tax base harmony is not a technical one. I mean, there are all kinds of people sitting right here who could sit down and work out for you on the back of an envelope the broad brush of what to do. The barrier is a political barrier in our federation. So if we have our eye on tax base harmony as the most important thing here, then what we have to do is think about what are the steps we have to take to get the political actors - provinces, federal government and maybe municipalities too - to come together to achieve harmony, that limited but valuable harmony, over tax bases.

The Chairman: Garth Whyte.

Mr. Whyte: We'd be remiss not to mention that at least federally, Revenue Canada is going to a single business registration number. That's going to help a lot with some compliance burden for business. Getting them on there is going to be painful, but that should help.

As well, I guess we've said it before, but we are working with the Mintz committee. We're doing a survey in which we're going to ask our members a number of questions: What are the most costly taxes to comply with? Who in your organization administers this cost? How much time does it take? What aspects of tax compliance cause the most problems?

So we're going to dig fairly deeply into this, provincially and federally, to try to help with the committee.

Again, we have to caution that if we're doing this for compliance only, our experience is that simplification and tax reform is another code word for tax increases, even when you talk about taxing off the base. Some of us who worked in Saskatchewan way back in both the Blakeney and Devine years found the magic of surtaxes. If you can tax off the base, what seems to be just a 1% increase is worth 7% off the federal base. You can see that it's sometimes a code word for increasing taxes. For this to truly work, you have to link simplification with reduction. You cannot have simplification and then have more losers than winners.

The Canadian public is very skeptical of these types of processes, of here we go again, we're going to look at ways of reshuffling the deck and then, gee, it always seems minor tax increases cost a couple of hundred dollars and major decreases save a couple of cents. I think the public overall is fed up with that. The overall tax burden is just hurting. It's hurting everybody.

Ms Swift: It's also just worth mentioning that if you look at the Income Tax Act in particular, many of the complexities in there were put in place intentionally by the government to get more revenue, often to plug so-called loopholes or whatever you want to call it. So if you're looking at simplifying, truly simplifying, especially with the corporate Income Tax Act, which is the most complicated, it may necessarily mean less revenue because of the reasons why a lot of those measures were put in place, if you look historically over the years. So it's worth keeping these things in context.

Mr. Whyte: Just to continue, though, we don't want to see this also as a ``rope-a-dope'' type of strategy, where we wait for the Mintz committee and then the government won't do anything on employment insurance which it could do starting January 1, 1997. It has to have actions that it acts on now to show that it is going to try to improve the tax system to help job creation.

.1230

The Chairman: Peter Harris.

Mr. Harris: Further on those points and Mr. Morris's point, I think there are two elements of simplification. We can all devote our energies to the Income Tax Act, and I think any of us here who practise in it know the complexities it involves, but the other level of complexity is what Mr. Morris devoted himself to - the stratification that starts the first level of complexity.

Speaking probably only for me and not for the chamber, in an ordering process I would rather see first the national tax agency along the lines of Mr. Morris's comments. I think that's the level you have to start at before you get to the simplicity levels in other acts. If you start with an individual act, be it the Income Tax Act or otherwise, you're still going to be left with the age-old issues of compliance costs and different interpretations in different provinces and at the federal level.

I would certainly favour both comments, but I think in the ordering process you have to see the harmonization process first and then the devotion to simplification second.

The Chairman: Thank you, Mr. Harris.

We will have brief questions by Mr. Grubel and Mr. Campbell, after which I will ask each of our witnesses to take one minute to give us the real nugget of why they're here today.

Mr. Grubel: Mr. Chairman, I want to put a little cold water on this national tax agency idea.

I believe in the merit of competition - competition among firms in the private sector, in labour markets everywhere, and also competition among jurisdictions capable of raising revenue. I believe that centralization of this sort, while it has many short-run benefits, also closes the road to experimentation and diversity that is the very nature of our society. I am worried that this is going to be a very undesirable consequence in the longer run. We hear all the time of the United Nations imposing things for the world as a whole, and it does not do justice to the diversity of humankind. I am very worried that if we do this in Canada, it will not be in the long-run interest of Canadians.

The Chairman: Paul Boothe, would you respond?

Prof. Boothe: Professor Grubel and I, of course, have known each other a long time. There is certainly strong theoretical literature that supports competition among governments. However, this is a situation where I wonder... It would be a bit different if you could choose which government you sent your taxes to. Then we could really have a horse race. I guess we could have companies shop around for which province they go to. Of course, they can do that now.

Our proposal about a national tax collection agency did not preclude that. We thought that if we had a harmonized tax base for corporations and for personal income, then the provinces could set their own provincial tax rates. But as with everything in economics, a trade-off is involved. The efficiency that comes from moving from ten tax collection agencies - or in the case of personal income and corporate, we'd have to throw in Alberta, so actually going from eleven to one - it would outweigh the dangers that would come from lack of competition over tax base.

The Chairman: Thank you, Professor Boothe and Mr. Grubel.

Mr. Campbell, please.

Mr. Campbell (St. Paul's): At the risk of causing fisticuffs among our witnesses at the table - ``fiscal cuffs'', says Mr. St. Denis - I want to come back to the financial transactions tax. I'm not going to invite a response, Mr. Chairman; perhaps people can do that in their wrap-up.

What worries me about this proposal, and we hear this from time to time, is that its advocates tend to be trying to prove that what doesn't work in reality works in theory.

.1235

If we're talking about replacing $14 billion net GST revenue with a financial transaction tax, I believe, Mr. Chairman, we'll destroy our equity markets, investment, growth, jobs - all the things we're here talking about today. It isn't an issue of collection. I'll agree with Mr. Cameron to that extent. It isn't an issue of collection. The issue is transaction cost. In some transactions that would be caught by that proposal you'd be doubling the transaction cost, even going with the seemingly benign level of taxation he asserts.

My second observation, Mr. Chairman, relates to comments we heard earlier, particularly from members of the Bloc. The suggestion that companies take advantage of tax incentives, and that to the extent they plan around them or plan with those in mind in some... We're almost left with the suggestion that this is why they're in business. I think witnesses have debunked that notion.

Those who take this viewpoint go on to say that to the extent companies take advantage of tax incentives, they are then somehow ripping off individual taxpayers, or put differently, more benignly, individual taxpayers are then subsidizing business. If the proposition is true, then it's true of the Quebec stock savings plan. It's true of the Quebec venture capital provisions. It's true of concessions to Hydro-Québec, and it's certainly true of Quebec's low income tax rate.

The last point I want to make relates to some of the comments about the GST.

Perhaps, Mr. Chairman, as Ms Swift is out of the room momentarily, you might direct these to her during the wrap-up. She spoke about the GST and criticized it as the greatest compliance problem for business, without making any reference, to my recollection, to the merits of harmonization.

I do understand that her organization supports the single rate as an approach that simplifies compliance. Perhaps Mr. Whyte wants to respond on her behalf. I'd like to hear some comment from the organization with respect to the harmonization initiative.

Mr. Whyte: If you want to open a can of worms, let's go for it.

The problem is, we're halfway there. We're not fully there. You have three provinces - I guess four provinces if you include Quebec - who are harmonizing. At the same time, not all the rules are worked out. We're not sure how we're going to do interprovincial transactions. There are a lot of questions out there - more questions than answers. We are right now trying to have a neutral position, trying to make sure all our concerns are on the table. But the fact is, we don't have a harmonized system. The fact is, we have a GST system layered on top of many other provincial sales tax regimes, and it's a very inefficient tax.

Having said that, we have worked very closely with Revenue Canada on an input tax credit simplification method, the quick method. We've worked very hard to try to get rid of a lot of those compliance problems. To some extent, they haven't been dealt with, but the fact remains, we have two tax systems.

Mr. Campbell: Do you support a harmonized system, yes or no?

Mr. Whyte: We support a system that is simpler, that is on one base -

Mr. Campbell: Do you support one rate?

Mr. Whyte: Yes.

Mr. Campbell: Do you support one tax collector for sales tax?

Mr. Whyte: Yes.

Mr. Campbell: Do you support one set of forms to fill out?

Mr. Whyte: Yes, of course.

Mr. Campbell: Would that not resolve a great deal of the compliance costs and questionsMs Swift spoke to?

Mr. Whyte: Yes, it would, but the one big question we haven't talked about is, what's the rate?

Mr. Campbell: Is it the right thing to do economically?

Mr. Whyte: Yes.

Mr. Campbell: For this country and for your members?

Mr. Whyte: Certainly it is.

Mr. Campbell: Do we start somewhere or do we start nowhere?

Mr. Whyte: Of course you start somewhere. That's why we are here. We're waiting -

Mr. Campbell: Thank you, Mr. Chairman.

Mr. Whyte: Mr. Campbell, as we've said before on the record, as soon as we get the details we'll be surveying our members. We've been around the horn on this several times. We've said it's good for the country. We've been told there are many different options. We still haven't seen the details. Once we've seen the details, we will go to our membership. The principles are there. No one can deny the principles. But we still have to look at the details.

Mr. Campbell: I thank you for that, because it does clarify the position. Ms Swift was quite categorical in her opening comments about the GST being the biggest compliance problem for business. You've now added all the others: you do support harmonization, you do support a single rate, and you do support single collection. It would resolve the compliance issues. You have to start somewhere.

.1240

I would only add that I'm sure the government looks forward to continuing to work with your organization when more details are available on how it can be improved, and we can continue down the road to harmonization across the country.

The Chairman: Thank you, Mr. Campbell.

Do you have any last words on that, Ms Swift?

Ms Swift: There is one issue I don't think we can ignore, despite the fact that we've been on the record for years saying that we support proper and full harmonization, because not all harmonizations are equal, as we well know. In a situation where we have three small provinces currently harmonized, a sort of harmonization in Quebec and a different situation elsewhere...our goal is one sales tax system, not five, not seven or whatever. Our goal is one. If we go through a period of ten to twenty years, just to present a difficult scenario, of having six systems instead of one, that is not the objective.

The politics are very difficult, and we realize that, but we think it is good to be very cautious. The situation as it looks now may well be worse than so-called non-harmonization if we're not seeing light at the end of a short tunnel with respect to harmonization across all jurisdictions ultimately.

Mr. Campbell: Mr. Chairman, in light of the goal that we then share of one national harmonized system, I guess we can look forward to working together towards that in the months and very few years ahead.

Mr. Whyte: We have been working there, but we're also watching very closely because we're from Missouri when it comes to the GST -

Mr. Campbell: And continuing to work with the other provinces, no doubt.

Ms Swift: Absolutely.

Mr. Whyte: That's right.

The Chairman: To conclude, I would ask if our witnesses want to put anything else on the record, limiting themselves to one minute. Mr. Morris.

Mr. Morris: There are three things we would emphasize. The first is harmonization as much as possible, early adoption of the Canada revenue commission and federal-provincial integration as far as possible, both in the measures themselves and in the audit process.

The second is the tax mix. Generally speaking, we urge that the government, over time, move away from capital and payroll taxes towards income taxes.

Finally, we believe the process should include a review of tax incentives in an effort to reduce the distortions between taxpayers competing in the same industry.

The Chairman: Dr. Cameron.

Mr. Cameron: Canadians are hurting, Mr. Chairman, as was pointed out. The reason is not big taxes; the reason is loss of income through unemployment and job insecurity. There are three million people unemployed. In this context, yes, there should be a look, as Ms Brushett pointed out, at a link between the tax system and the economy.

It's futile to cut unemployment insurance premiums or CPP premiums and believe that's going to create jobs. It's simply not the case. I would much prefer what was suggested by Mr. St. Denis, a balanced approach between capital taxes, income taxes and payroll taxes, in which case payroll taxes would increase. To the extent that this does prove to be a barrier to new job creation, provide a holiday. Make the payroll taxes progressive. Make the CPP contribution progressive. Make people who earn $3 million a year, like our bank chairmen, pay a progressive amount on that.

The Chairman: Professor Boothe.

Prof. Boothe: I'd like to point to tax collection as a key part of the harmonization puzzle. I think we've made great progress in the last two years with the harmonization of the three provinces, although I'd like to point out that Alberta is a fully harmonized province with the sales tax terms, so the four provinces.

We really need to look at this tax collection issue if we're going to make the final distance. This is not just a recycled Revenue Canada, turning it into VIA or the post office. Rather, have the governance shared by the provinces and the federal government, make sure that changes in bases and rates require agreement of some number of provinces and the federal government, and try to give, as I think Mr. Harris was alluding to, provinces the opportunity to roll their personal and corporate income tax bases into that national tax collection agency.

.1245

The Chairman: Catherine Swift or Garth Whyte.

Mr. Whyte: I have three major points. One is on the compliance-burden side. We're working with the Mintz committee, as we pointed out, and we are serving our members to find what the areas are.

Again, our members are very distrustful of government. They see a study of the tax system as another way to get more tax revenues. You have to link the simplification of the tax system to some sort of tax decrease. This revenue-neutral type of approach is just a code word for saying that the burden should be shifted again.

The comments referred to how we can get rid of tax exemptions. We find this ironic. In other words, taxes are yours, and then you're giving us an exemption. Thanks very much.

We don't look at it that way. A lot of the tax exemptions are in there for a reason. One is that the small business rate and also the $500,000 capital gains exemption - these weren't mentioned today but were mentioned yesterday as often as ones that we should think of getting rid of - are in there because of the disproportionate higher tax level rate on small firms.

We did do a study based on over 600,000 tax forms, and the study was recognized. The Quebec government has picked up the methodology. They're currently using the study to look at the tax burden by size of firm.

Here's the problem with this study. The most recent data we could get - we did the study in 1993 - were for 1987. Where are the numbers? Can you not task Statistics Canada and the finance department? When they had the purple book and the grey book, they alluded to current numbers that could talk about the overall tax burden. Can this committee not get that information?

So rather than just debate about what we should do, we can actually find where the tax burden lies. Then we'll find that a lot of it is payroll, municipal property and payroll taxes. That should be looked at.

Finally, you can do some things without working on the Mintz committee, such as dealing with the EI surplus and reduced premiums.

The Chairman: Mr. Glennie.

Mr. Glennie: Thank you, Mr. Chairman.

I think there have been three or four viable suggestions made today within the existing system that will make it more efficient. I hope the committee will follow up on those suggestions.

Second, when we look at taxes, such as payroll, capital or income taxes, Canada is not an island. We're not unique in the world. We're part of the North American Free Trade Agreement. We have to remain competitive at least with our neighbours to the south and preferably with the rest of the economic blocs in the world. If this committee is to look at the tax system in Canada to make it more efficient, I would like to come back to propose some views on that.

Thank you very much.

The Chairman: You'll be welcomed back, Mr. Glennie. Thank you.

Donald Watkins.

Mr. Watkins: Thank you, Mr. Chair.

I agree with Mr. Glennie's comments about competitiveness. I do think I'd like to just second the comments that Mr. Morris made earlier this morning about complexity and compliance and the difficulties that exist within the tax act itself. He talked about loss consolidation. Achieving loss consolidation in our system is done with major compliance costs.

Mr. Spindler and I were talking earlier about a paper that came out from the Department of Finance in the early 1980s that talked about a very simple loss-transfer system or mechanism, which seems to have died. It's too bad that it can't be revived and looked at again.

Mr. Morris talked about the foreign reporting rules, as did others. They are going to become a major compliance cost. He also talked about term-preferred share rules, which is another anachronism that we really don't need any more, but which add to the compliance costs.

I will summarize by seconding some of those comments that were made earlier.

The Chairman: Rob Spindler.

Mr. Spindler: I don't want to sound like a broken record so I want to talk about tax rates, harmonization, review of incentives and what not. I will just reiterate a small point.

The cost of compliance for business and the effectiveness of revenue collection probably could greatly benefit from a greater dialogue in the development stages of certain legislation between the Department of Finance and business.

The Chairman: George Penna.

.1250

Mr. Penna: This committee has certainly identified a number of complex areas in the area of taxation. We endorse most of the comments that have been made here today.

I think this committee should be focusing its attention on the identification of any aspects of the tax system that are acting as barriers to investment. We think one of the main goals of this committee is to encourage investment in Canada and to create jobs. I think Canada has to be seen as a good place to invest. If any taxation barriers exist out there, we should attack them.

We've talked about profits and profitability. It's true that corporations and businesses make profit, but are they profitable? Are they achieving a reasonable rate of return on the investment they employ? I think what's happening here in Canada is that they are not. If government can do anything in the tax system to improve that, then there will be an increased flow of investment and jobs.

The Chairman: Lastly, Peter Harris.

Mr. Harris: I won't repeat what I said before. I hope I've made the point.

To be a little more specific, I think the loss consolidation area is symptomatic of the whole reorganization area in the Income Tax Act. I think it should be more liberal. It is much too difficult and costly, whether it's a small company, a medium-sized company or a large company, to appropriately rearrange your affairs internally, within family corporate groups, from a business context.

Lastly, carrying that further, perhaps to larger organizations, it is also quite cumbersome for Canadian companies to acquire particularly U.S. companies on a reorganization basis that's favourable tax-wise and business-wise. It's much too difficult under our act. I would suggest that the U.S. act, while rigid in certain circumstances, has much more favourable reorganization provisions than we do.

The Chairman: Thank you, Peter Harris, and all our witnesses.

Before I wrap up, I have a little housekeeping I'd like to announce. We've had informal consultations with steering committee members. We will be looking at the following type of agenda for our finance committee.

The House of Commons returns to Ottawa on September 15. We are looking at starting hearings on September 16 on the white paper on financial institutions. We will also be working on some hearings on the taxation of charities in Canada. We will have one more session of witnesses on the issue of taxable Canadian property. We will also be looking at one or two days to deal with the subcommittee chaired by Mr. St. Denis on international financial institutions.

In terms of what has taken place today, I'm struck by who our witnesses are. We have those representing our manufacturers and our exports, which is just part of the reason our economy is growing today. We have the Chamber of Commerce, which represents so many businesses. We have our bankers, who are world leaders in so many ways. We have representatives of our small business sector, which is really the only sector overall that is showing a growth in jobs, probably our biggest difficulty right now in this country. We have experts such as Don Watkins, Paul Boothe, Duncan Cameron, Rob Spindler. We have the collective wisdom of the Tax Executives Institute through Drew Glennie.

We are fortunate, as a finance committee, to be able to draw on your expertise, your perspectives and the resources of your organizations and your members in looking at these very important issues we have to confront. I must say, I'm struck by the open process - and I like it - in that the public has a chance to hear you directly and to second-guess the decisions those of us in politics may take.

I think it's obvious that we haven't got everything right, but coming out of what has happened today, I think it's also obvious that you have given us a number of very specific areas where we can make a difference. I don't intend to summarize all of those, but we could act immediately, for example, here at the federal level to give more information on corporate taxation through Statistics Canada, as requested by the CFIB.

.1255

I'm struck by the recommendation that we should have more people in rulings for Revenue Canada. It won't cost the taxpayers anything, because it'll be on a cost-recovery basis, paid for by the taxpayers who use it.

You've given us suggestions as to what we should do with our audit procedures and the rules.

You've given us a very specific example of how we can benefit more from your expertise, specifically on the new foreign affiliate reporting requirements. I am sure the government will accept that invitation, and I hope we can get it right.

You've given us some new ideas, too, about how we can increase our competitiveness, and this idea of FISC, foreign international sales corporations, which would mirror what is coming out of the United States. It's an idea that goes back many years, when we first introduced the domestic international sales corporation, which was to give exporters a break so that they could be more competitive. Interesting ideas.

Overall, we haven't had total harmony and agreement at this table - we never have had - but all of you have said that we, as federal members of Parliament, must do everything we can to harmonize our taxes with those of the provinces.

Would you help us with this? Would you take the same message to the provinces regarding corporate taxes, regarding personal income taxes, regarding capital taxes, regarding sales taxes? Every Canadian will be the beneficiary through decreased costs of administration, through far more efficient businesses and through less compliance costs for those who are actually going to create the jobs in Canada.

We have to succeed on this. There is no good reason why we should not do it. You have made that abundantly clear to us.

I want to say that I think your presentations today, in all their detail, will be noted very closely by our Revenue and Finance officials. I know Professor Jack Mintz will find it very useful in his own ongoing studies.

I want to thank you for the resources you have brought to our committee and made available through us to the system of government. May I thank each and every one of you, on behalf of all members.

May I also thank our staff, through Christine Fisher, our clerk, and the other members of the House of Commons and CPAC, who've made special arrangements so that we could meet in the middle of the summer.

The meeting is adjourned.

Return to Committee Home Page