FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Wednesday, November 5, 1997

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): Order.

Welcome, everyone.

As you know, the finance committee, pursuant to Standing Order 83.1, is holding pre-budget consultation hearings to get input from Canadians as to what measures we should be introducing or recommending to the Minister of Finance for the upcoming budget.

This afternoon we have representatives from the Canadian Life and Health Insurance Association, the Life Underwriters Association of Canada, the Investment Funds Institute of Canada, and the Multi-Employer Benefit Plan Council of Canada.

We will begin with the representative from the Canadian Life and Health Insurance Association, Mr. Mark Daniels, president.

Mr. Mark Daniels (President, Canadian Life and Health Insurance Association): Thank you very much, Mr. Chairman.

We welcome this opportunity and appreciate the chance again to appear before your committee in its annual pre-budget consultations.

Indeed, the industry is pleased to have participated in each of the consultation periods the committee has held since 1994. Clearly, over this period the country's financial situation has changed a great deal. Indeed, in terms of overall fiscal management the federal government deserves a great deal of credit for the amount of progress made in reducing the annual budgetary deficit to the point where this country is now on the brink of realizing the real likelihood of a balanced budget.

Our industry strongly supports the government's broad plan of action for fiscal restraint. We urge the government to continue its prudent financial management as a means of ensuring long-term growth.

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With a balanced budget projected for no later than the 1998-99 fiscal year, the minister has now asked that this committee determine the views of Canadians as they pertain to future financial direction the government should pursue beyond the balanced budget.

In that context, Mr. Chairman, your committee has identified a number of focus questions for witnesses. One of these questions asked: What are the appropriate new strategic investments and changes to the tax system that would allow the government to best achieve its priorities?

In attempting a very brief comment on that question, Mr. Chairman, let me first reiterate that we are not encouraging the federal government to change its current strategy of deficit and, ultimately and necessarily, debt reduction. The job is started; it is by no means finished.

Having said that, if some expenditure items move onto the radar screen, we do have some views on what kinds of expenditure items could be of value to the population at large. Our submission presents a specific initiative that we believe might address this question.

In recent years our industry has worked closely with this committee in addressing a concern raised by Minister Martin a couple of years ago. At that time, the minister indicated that there might be a large group of Canadians, up to eight or nine million, he thought, who did not have supplementary health and dental protection because they could not benefit from current tax treatment. In an effort to determine the true extent of supplementary coverage in Canada and to assess the reason some groups may lack coverage, several organizations, including the CLHIA, conducted a study two years ago to determine the true extent of supplementary coverage in Canada and to assess whether tax unfairness plays a role.

A key finding of that study was that nearly 26 million Canadians, or about 88% of the population, had supplementary coverage above and beyond basic hospital and medical services provided through medicare under special government or private supplementary plans. Of the 26 million Canadians, about 20 million people are covered by private health insurance plans, usually group plans through employers. The remaining 6 million, the elderly and welfare recipients, are covered under provincial plans. So about 3.6 million people don't have supplementary coverage, about 12% of the population.

There are three groups that make up that 3.6 million people. The first, about two million of them, consists of employees and their dependants in workplaces that could have supplementary coverage and for some reason don't. This group's lack of coverage can't be attributed to tax factors.

The second group, about one million in number, including their dependants, constitutes the unincorporated self-employed. Here you would be dealing with farmers, doctors, architects perhaps, consultants, and so forth. The workers in this group, unlike their counterparts in incorporated small businesses, cannot deduct the cost of their own supplementary coverage as a business expense. For them, a simple tax change in the deductibility of premiums would put them on the same footing as the unincorporated self-employed.

The balance, about 600,000 in number, consist of Canadians with little or no attachment to the employment system. Changes to the tax treatment of employer contributions to private supplementary plans would do nothing to alter this group's lack of coverage.

The challenge facing our industry has been to increase coverage among these three groups who could be—at least the first two groups—within the reach of the private sector plans but who nonetheless currently lack coverage. A priority is the small-business sector, which accounts for a significant proportion of the first two of these groups.

In response to that challenge we have done a considerable amount of work with the Canadian Federation of Independent Business to try to understand better the reasons for that lack of coverage.

Several factors appear to account for it. First is a lack of information and awareness. Many small businesses may be simply unaware of the availability of group insurance products.

The second factor is tax disincentives. As noted previously, a large group of small businesses, the unincorporated self-employed, face a tax disincentive since they cannot deduct health and dental costs from income for tax purposes.

The third factor is the recent focus of insurers on larger businesses. For a number of years our industry spent a lot of their time worrying about large groups and not much about small. In recent years we've taken a lot more time to try to focus on the small group, the under-ten-employees market.

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We're working together with the CFIB on three initiatives right now. One is to obtain more extensive and precise information on the factors contributing to lower coverage among small businesses. The second is to increase awareness and information on group insurance products among small businesses and insurance providers; that is, both sides of the equation. Third is to increase awareness and information among insurers on the opportunities to provide more extensive and customized coverage targeted at very small firms and the self-employed.

In light of the improved fiscal situation, we are recommending to this committee that the federal government may wish to join with the CFIB and our industry in these ongoing efforts to improve supplementary health and dental coverage among small businesses by removing the existing tax inequity faced by the unincorporated self-employed. Both the House of Commons finance committee and this industry have previously recommended that this tax inequity be eliminated. We submit that the current fiscal climate may present an appropriate window of opportunity for the government to follow through on such a recommendation.

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

We'll now move to the Life Underwriters Association of Canada, Mr. David Thibaudeau. Welcome.

Mr. David Thibaudeau (President, Life Underwriters Association of Canada): Thank you, Mr. Chairman, for the opportunity to appear before your committee today.

I'm here on behalf of 18,000 members of the Life Underwriters Association of Canada, Canada's largest professional association for insurance and financial advisers. LUAC members provide financial advice and solutions to meet the needs of Canadian consumers and offer such products as life and health insurance, annuity contracts, segregated funds, investment funds, and related financial services.

LUAC formed the Conference for Advanced Life Underwriting in 1991 to meet the needs of its members who specialize in such areas as estate planning, business succession, employee benefits, and pensions. Many of the clients of CALU members are the owners of small and medium-size businesses.

Mr. Chairman, LUAC and CALU members help Canadians achieve financial security. Our members are in daily contact with millions of Canadians determining their personal, family, and business needs and then providing product solutions to help meet those needs.

In his first address to this committee, in 1993, the Minister of Finance spoke of the sense of insecurity and economic anxiety shared by Canadians during a time of poor economic growth and excessive personal and public debt. The key factor in the restoration of individual economic confidence is the development of a sound financial plan. This is as true for governments as it is for individual Canadians and their families. We therefore support the government's practice of economic and fiscal planning based on economic assumptions which are more prudent than the consensus forecast of the private sector. We support the two-year planning cycle, which enforces discipline, and we agree with the use of a sizeable contingency reserve which if not needed by the end of the year gets applied to reducing the debt.

We were pleased that the minister in his economic and fiscal update reinforced the government's commitment to deficit and debt reduction. Our members are concerned, however, that the 50-50 allocation the government has adopted as a guiding principle for planning purposes does not place enough emphasis on debt reduction. We believe the formula should instead devote at least 50% of the fiscal dividend exclusively to paying down the debt, with the other 50% going to tax reduction and new expenditures which address pressing economic and social needs.

Canada's overall debt burden remains extremely high, including $190 billion of direct borrowings by provincial and territorial governments at the end of 1996. Canada's overall debt-to-GDP ratio is still running at more than 100%, much too high by any international standard. We would do well to remember that today's debt is a tax we choose to impose on our children and grandchildren.

The finance minister told this committee that reducing the debt-to-GDP ratio will improve economic efficiency and growth by providing an environment that is more conducive to entrepreneurship and investment. We couldn't agree more. Canadians recognize the common sense of debt reduction, and that is why cutting the debt has become their top fiscal priority. According to a recent Globe and Mail-Angus Reid poll, now is clearly the time for the government to make debt reduction its top budget priority as well.

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In the limited time I have left, Mr. Chairman, I would like to touch briefly on the issues of retirement planning, health benefits and charitable giving.

As financial advisers, our members work with Canadians of all income levels to help them prepare for their financial futures. Given the impending adjustments to the Canada Pension Plan and the reformatting of the old age security and guaranteed income supplement under the seniors benefit program, Canadians are telling our members that they are very concerned about their ability to provide for themselves and their families in retirement.

As members of the Retirement Income Coalition, LUAC and CALU are working with the federal government on a comprehensive plan to address those concerns, one that considers the importance of both public and private sector vehicles.

Canadians have a right to expect that government measures that adjust public programs to meet the new demographic and economic realities are accompanied by adjustments that enhance the ability of individual Canadians to save for their own retirement. To be specific, the time to raise the annual RRSP contribution limit is now.

Turning now to health benefits, CALU was instrumental in the formation of a health benefits coalition, which is working to enhance the government's understanding of the interconnectedness of public and private programs in the overall provision of health care to Canadians.

In its December 1996 report to the House, this committee noted the importance of private plans to the health care system. The committee in fact recommended that the cost of supplemental medical and dental plans for unincorporated self-employed Canadians and their dependants be made deductible from income.

We ask the members of the 1997 finance committee to again reassert this important recommendation.

Mr. Bill Strain, who has chaired taxation for CALU, participated in an earlier discussion with this committee regarding the very serious consequences of draft legislation related to budget resolution 21. On behalf of LUAC and CALU members, I would simply like to restate our request that this committee recommend the withdrawal of this legislation and that the government consider fully the revised valuation process endorsed by the Canadian Institute of Business Valuators as a solution.

In closing, LUAC and CALU wish to compliment the members of this committee for their demonstration of openness and consultation during these pre-budget hearings. You've demonstrated your willingness to listen to Canadians from all walks of life on the issues that must be addressed.

We thank you for this opportunity to participate. We look forward to your questions.

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

We'll now move to the representative from the Investment Funds Institute of Canada, the Honourable Tom Hockin.

Mr. Tom Hockin (President and Chief Executive Officer, Investment Funds Institute of Canada): Thank you, Mr. Chairman. It's nice to see you again.

Mr. Riis, it's nice to see you again.

It's a pleasure to be here trying to persuade a government rather than trying to defend one.

The Chairman: Is it easier?

Mr. Tom Hockin: I think it's a little bit easier.

I'm the president of IFIC today. This is the Investment Funds Institute of Canada. IFIC is the member association of the mutual funds industry in Canada.

We appreciate the enormous challenge that the government has in deciding on the future course of the nation's finances and the importance of this committee in guiding this decision.

We wanted first of all to say that we're very supportive of the direction taken so far with regard to deficit reduction. We're very encouraged by recent comments made by the Prime Minister that the books may be balanced by the end of the year.

Although I will not devote my time today to discussing fiscal policy much further, I will say that, going forward, we believe that debt reduction is a very important priority.

What I intend to focus on today is an initiative that would have no direct fiscal impact—that's good news for members of the committee—but would still go a long way in giving Canadians a greater opportunity to achieve a financially secure retirement, which I believe should be the priority of this government, especially in light of our aging population.

The initiative I'm referring to is to increase the foreign property rule.

First, let me provide you with an idea of how big the mutual fund industry is, because it is bringing this idea forward.

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At the end of 1991, assets under management by the mutual fund industry were $49.9 billion. As of today they're $283.7 billion. That is a 470% increase. And assets under management have increased by 51% in the last 12 months alone. So this is a very fast-growing industry.

It's growing because Canadians are worried about saving for retirement and they're worried about saving for other major needs, such as university education for their children. They know they face huge financial commitments down the road and that their nest eggs may not grow adequately in a low-interest rate environment. So that particular concern is to a large measure pushing this industry that I am representing today.

In the midst of these developments, ordinary Canadians have come to recognize that they do not need to be rich to get the benefits of professional management of their funds through mutual funds, as well as the possibility of higher returns and the benefits of diversification. The average Canadian can receive these benefits through these pooled products called mutual funds.

Indeed, half of the 5.2 million Canadians who contribute to RRSPs earn less that $40,000 per year. It is not just wealthy Canadians who have RRSPs. Half of them earn less than $40,000 a year. This is the pillar for retirement for average-income Canadians and low-income Canadians.

Recognition on the part of individual Canadians of the need to save for their own retirement is only part of the solution to meeting the challenge of financial security when one retires. The second important component is ensuring that the funds saved are diversified and therefore safer, and that they earn optimal returns within this framework. This is particularly true for many Canadians who are small business owners, who rely solely on their RRSPs and do not have a company pension plan.

This leads me to my main point. There's an urgent need to change the so-called foreign property rule in the Income Tax Act. This rule says only 20% of the money held in registered pension and retirement savings plans can be invested outside Canada—only 20%. A change in the foreign property rule would go a long way to ensuring that Canadians' retirement nest eggs are not too concentrated in one basket, and are also able to take advantage of growth industries in other countries as well as industries that may not exist in Canada, and thereby earn higher returns.

For example, Canada has 39 industrial groups. The United States has 90 industrial groups. The sooner Canadians can make their retirement savings work for them and grow, the more Canadians can prepare for retirement and therefore rely less on government, less on the seniors' benefit, less on the GIS, and save for other major needs such as educating their children.

This limited diversification world we're living in now increases investment risk, because investment risk goes hand in hand with a concentrated portfolio—for example, a portfolio comprising only Canadian stocks. Prudent investors do not put all their money in one stock—they don't do that—or in companies in the same industry, or in companies located in only one city. No prudent investor would do that. On a world scale, however, that is what this foreign property rule amounts to. The Canadian equities market accounts for only 2.4% of global stock market capitalization, yet 80% of Canadians' retirement savings must be invested in this 2.4% category called Canada.

It's interesting that today, as we look at this issue, we've seen very turbulent global stock markets. They have shown that during a downturn, not all markets, not all sectors, decline by the same amount. A diversified portfolio of stocks, bonds, and cash that includes a wide range of foreign securities serves to mitigate the impact of downturns, even global downturns.

IFIC has commissioned Ernst & Young to conduct a study on the impact of the foreign property rule on investor returns, and I'm happy to release this study today publicly for the first time. We wanted to bring it to your committee because you have the onerous task of considering budgetary issues. We commissioned the study because the issue was urgent, and we hope you will find it illuminating.

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We asked Ernst & Young to look at the returns that could have been earned with a higher foreign property limit. A 30% foreign content limit over the last 25 years—30% instead of the 20%—would have allowed Canadian investors to earn up to 1.6% more per year on their retirement savings portfolios. This estimate is based on the Morgan Stanley Capital International World Index, which is fully adjusted for foreign exchange fluctuations, by the way.

Let's look at an average investor who contributes $5,000 a year to an RRSP or defined contribution pension plan. Even a 0.5% increase over 25 years would amount to an additional $32,000 at retirement.

A policy change that can provide Canadians saving for retirement with reduced investment risk and higher returns is sound policy, and that's why we bring it to this committee. We know there may be some opponents to such a change, but we believe that is because some people assume the foreign property rule is good because it accomplishes certain things, when it may actually do none of these things.

In particular, some people think forcing 80% of retirement savings to be invested in Canada creates jobs. We do not believe the foreign property rule creates jobs. In fact, if you or I have more money in our pockets to spend when we retire, due to this increase in the foreign property rule, we will be adding a stimulus to the economy that creates jobs. The larger our nest egg, the more we'll spend in Canada when we retire.

As we all know, small businesses are the real creators of jobs in this country. The CFIB's members, who are creating jobs, see the foreign property rule as a problem and they support an increase. As it turns out, small business people are so busy running their businesses, trying to create jobs, and trying to make ends meet that they see an increase in the foreign property rule as meaning they will have a little less to worry about in retirement. They want their RRSPs to earn maximum returns, to be diversified, and to be safe. If small businesses do not think the foreign property rule creates jobs, it's safe to assume it is not creating jobs in this country.

We also do not believe the rule is needed to ensure that big Canadian businesses can find buyers for their shares. In fact there's so much money coming into mutual funds that finding buyers for shares listed on the stock exchanges is not difficult. With the CPP fund now coming on board, we're going to add that on top of it, which will be an even bigger inflow of money, 80% of which must stay in Canada.

For the record, I would also note that most industrialized countries do not have a foreign property rule. The United States doesn't have it. The United Kingdom, Australia, Ireland, and the Netherlands have no limit on the amount of foreign investment that may be made by retirement savings. In Japan and Switzerland the level of allowable foreign investment is 30%. This is all documented in the study we're going to give you today.

I've tried to emphasize too the consumer problems created by this rule. In fact there are other factors that add urgency, and these are also covered in the Ernst & Young study. For example, a huge amount of money is flowing into retirement savings in Canada, and mutual fund managers and pension funds are becoming major shareholders in many companies. This is reducing liquidity in the market and is making institutional investors very powerful. Is that really what this country wants? The foreign property rule adds to that problem.

In conclusion, Mr. Chairman, we urge the committee to make a recommendation that the foreign property rule be increased at least to 30%. The increase should be phased in through increases of 2% per year, as the last increase from 10% to 20% was, between 1990 and 1994.

In conclusion, a higher foreign property rule will allow for more diversification, which increases safety and provides an opportunity to take advantage of higher returns available elsewhere. Such a change—this is amazing—would not cost the government any money. We are not looking for a handout. It is not often that members of Parliament have the opportunity to do something constructive that's so worth while without incurring any cost.

I look forward to any questions you may have.

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The Chairman: Thank you very much, Mr. Hockin, for your presentation.

We now move to the Multi-Employer Benefit Plan Council of Canada—William Anderson, Raymond Koskie, and John O'Grady. Welcome.

Mr. William D. Anderson (President, Multi-Employer Benefit Plan Council of Canada): Thank you, Mr. Chairman, for the opportunity to again visit with the committee and put forth our suggestions.

We've supplied everyone with a copy of our brief. I would refer you to the executive summary. You'll notice in that executive summary six major issues, three of which I would like to touch on briefly.

The Multi-Employer Benefit Plan Council of Canada, or MEBCO, represents the interests of Canadian multi-employer benefit plans. It represents all persons and disciplines involved in MEBPs, including union and employer trustees, those who establish and administer the programs, and the professional third-party administrators, non-profit or in-house, and all the professionals involved—legal, accounting and actuarial.

Among MEBCO's many constituents are multi-employer pension plans, MEPPs, which provide pensions to their members. There are approximately 360 MEPPs in Canada, which have a membership of almost 700,000 individuals, also representing their families.

In 1994 employee and employer contributions to MEPPs exceeded $1.1 billion. The majority of Canadians who participate in MEPPs earn middle to low incomes in such industries as construction, forestry, retail, food, hotels, entertainment, transportation, security, printing, the garment industry, and so on.

Just so that we have a good understanding of what MEPPs are, and how important they are to this country, these plans provide continuous benefit coverage to workers, as they change employment from one contributing employer to another. The portability of seamless coverage is essential for workers in mobile or seasonal jobs.

A worker may be employed by a particular employer for a day, a week, or a month to work on a specific project, and then move on to another project, and thereafter another, etc. Between jobs, he or she might be off work for a day, a week, a month, or longer. A worker may work for several different employers over his or her working life, with periods of unemployment between jobs. Without a central plan covering all of his or her work for multiple employers, workers could not have access to a pension plan.

The purpose of our submission is both to assist the government in meeting its fiscal and monetary objectives and to represent the interests of our members with respect to retirement and taxation issues, which, I must emphasize, are sometimes somewhat different from single employers.

If I may, then, I first will highlight the seniors benefit. MEBCO has considered the ramifications of substituting the seniors benefit, as proposed in the March 1996 federal budget, for the old age security program, the guaranteed income supplement program, and the age and pension tax credits. It strongly recommends that the seniors benefit proposal be abandoned, for the following reasons.

First, as a result of the clawbacks that are to be applied to the combined income of couples, many seniors with moderate incomes will suffer a reduction in their retirement income, as compared with today. In reality, the seniors benefit is really a seniors tax.

Second, early retirement will be encouraged, because the additional taxes associated with the seniors benefit will not take effect until the retiree reaches age 65.

Third, Canadians will be discouraged from saving for retirement, since more will be clawed back for every additional dollar of savings made. Already studies have shown that the savings of Canadians are greatly below those necessary to maintain a reasonable standard of living in retirement. Increased reliance will thus be placed on the government programs to support them in retirement.

Fourth, employers will come under increasing pressure to establish pension plans that provide greater benefits than they currently do.

Finally, there is no longer the large-budget deficit that served as a basis for its proposed introduction.

A single senior with $37,000 a year of private retirement income will see their marginal tax rate leap from 41% under the current system to 60%. This is unacceptable.

We've also included appendix A, outlining the seniors benefits and entitlements, which we can discuss later, if need be.

Now, in terms of retirement savings incentives, this is new. We think it's applicable. Canadians are currently not saving enough to maintain an adequate standard of living in retirement. MEBCO believes additional savings incentives are therefore necessary, and recommends that the following ones be introduced.

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First, introduce a retirement savings credit, whereby an individual who contributes to a registered pension plan would be entitled to receive a tax credit for each additional dollar contributed.

Secondly, introduce a pension plan administrative support benefit to offset the initial set-up and administrative costs of new or expanding pension plans. This would be a one-time-only supplement encouraging the establishment and increased coverage of pensions.

At MEBCO we strongly believe MEPPs, multi-employer pension plans, are the foundation of our members' retirement when combined with an adequate social security system and CPP. Anything that will give an incentive to increase the cashflow into these types of vehicles or increase the number of vehicles of this type is going to do nothing but help increase the standard of living for our members and at the same time decrease their dependency on the government as they get older.

Thirdly, and I don't think I have to touch too much on this, since Mr. Hockin already has, is the foreign investment limit. MEBCO feels the government should increase the foreign investment limit applicable to the funds of RRSPs and registered pension plans from 20% to 25%. This would increase the choice of investment vehicles available and the opportunity to yield higher rates of return on such investments.

I may just touch on what Mark Daniels has said. We feel the government should avoid inequities in the tax system. MEBCO strongly recommends that in the 1998 budget no introduction be made of any new taxes applicable to pension fund assets or to health and dental benefits received by individuals from their employers.

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

We'll now proceed to the question-and-answer session, beginning with Mr. Lunn. Welcome.

Mr. Gary Lunn (Saanich—Gulf Islands, Ref.): Thank you, Mr. Chairman. I want to thank all the members for coming.

Especially from Mr. Hockin and Mr Thibaudeau, I'm hearing concerns about Canadians in the future and their retirement. We've heard some good comments, especially from Mr. Hockin, on the foreign policy limits we have there, but my first question is to Mr. Thibaudeau.

I would like to know what you believe the effectiveness of the current Canada Pension Plan scheme is. Do you see an alternative to that plan which would allow Canadians the ability to provide or have a secure retirement?

Mr. David Thibaudeau: I don't know if I have an alternative to it. I think the Canada Pension Plan and all the work that has been going on with it and the changes and the adjustments that have had to be made to secure that pillar of retirement planning for Canadians are important. Our approach to it has been that it is there. We have to make sure that at least part of a Canadian's retirement income is covered off. In other words, how do you supplement it adequately and make sure it really happens? We believe in the overall planning there would be three pillars to the Canadian plan: the seniors' benefit, the Canada Pension Plan, and RRSPs or RPPs; pension plans.

Mr. Gary Lunn: I heard in your comments that your members are telling you they are very concerned about their ability to provide for their families. That's why I'm going down that path. As you know, the Reform Party sees huge problems with long-term viability. It's an arithmetic problem. The numbers just don't add up.

My next question is for Mr. Hockin. I very much am intrigued by your comments on the foreign property rule. In fact, I support what you have to say. I'm going to ask you the same question. Do you see changing the foreign property rule as a long-term viability measure for really helping retirement for future Canadians and making sure they have the ability to provide for their families? Do you think that is one of the solutions that would very much relieve the pressures that are going to be put on the Canada Pension Plan scheme?

Mr. Tom Hockin: I do. I'll tell you why. The Department of Finance estimates that in 1997 RRSPs and RPPs will account for almost 50% of all the retirement income in the country. The CPP and the QPP is only 28.8% of that picture, and the OAS and GIS is 27.5%. So we're talking about half of the whole retirement picture here when we talk about these things. If we talk about getting a 0.5% or 1% better return a year because you have slightly better diversification, you're talking about billions of dollars: $7 billion a year would flow into the Canadian economy, into the hands of retired people to spend in Canada. I think it's a very important part of the puzzle.

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Mr. Gary Lunn: Thank you very much.

[Translation]

The Chairman: Mr. Loubier.

Mr. Yvan Loubier (Saint-Hyacinthe—Bagot, BQ): Mr. Chairman, I am particularly interested in the study presented by the Investment Funds Institute of Canada concerning the limit placed on foreign investments in Canadian portfolios. I think this is the first time we've seen such detailed analysis on this limit and the impact increasing it would have on returns in portfolios. I find that interesting, because four years ago the issue was studied by the finance committee. It wasn't called pre-budget consultations at that time, but there was a meeting with experts, and the finance committee did not retain the proposal. In subsequent years, several witnesses suggested increasing the limit, but we had not studied the impact analyses.

I would like to make a suggestion, Mr. Chairman. I wonder if it would be a good idea, this time, to study this analysis and compare it to other studies that may exist at the Department of Finance to see what the possibilities are. I was looking at estimated returns. I find that truly spectacular. Returns are 30%, 40% and even 50% higher with a 30% limit rather than a 20% limit on foreign property. This time, I wonder if there isn't a good reason to take a closer and more serious look at this proposal as well as the analysis included with it.

I am not saying that we will conclude that it is the solution to adopt. It may be 25%, it may be the status quo or it may be 30%, as Mr. Hockin is suggesting, but for once, we will at least have fully covered the issue.

Mr. Hockin, I congratulate you on your analysis and I thank you for sharing this information with us exclusively here today. I find that very interesting.

The Chairman: Thank you, Mr. Loubier.

[English]

Mr. Riis.

Mr. Nelson Riis (Kamloops, NDP): Thank you very much, Mr. Chairman.

There are so many questions and some excellent presentations.

Tom, you can speak for others as well in terms of the foreign property rule. The data indicates that Australia has no limit and yet they have less than 20% of their funds in foreign. Actually, other countries are the same. Why would that be? You make it sound so attractive. My first question is why limit it to only 25% or 30%? Why not just open it all up? You only talk about $7 billion. Let's talk about $70 billion pouring pouring into the economy.

Why are you so modest, having painted this great picture of 21% to 30%? And, Bill, you're only up to 25%. What about these countries like Australia? Why wouldn't they have, if this is such a great idea—and I'm not debating it isn't, it's clear from these figures—more money in the foreign component?

Mr. Tom Hockin: Those are very good points.

I'll tell you what happened in Britain: when they lifted the rule entirely it topped out at 30%. The British investment managers understand the British economy quite well. So 70% of the investments remained in Britain. I think the same sort of phenomena happened in Australia.

I would suggest that in Canada if we just got rid of the rule entirely it would probably top out at 30%, because Canadians just know the Canadian market so well. They know the Canadian equity market and bond markets so well that it would probably not go much above 30%. I would argue that there's a lot of money wasted just policing this darn thing in pension plans and RRSPs, with the Department of National Revenue and so on. It would be nice just to do away with the rule.

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I don't know why people do not invest more. There are some countries where the economies are so small, like Ireland and Denmark, where in fact they would have a proclivity to invest more than 30% outside of their own country, but Canada has a pretty robust and diversified stock market, and I would see that if there is no rule at all it would probably top out at 30% or 32%. That's just because of the knowledge about Canadian markets in Canada. That is kind of an irrational answer, but I think, sociologically, it is really why it would work that way.

Mr. Nelson Riis: You make the case in terms of the popularity of RRSPs, and yet when you look at the amount of money a low-income earner would have into an RRSP, while he might be a participant, it is a woefully small amount of money. This means that because these are tax deductions, you have, if you like, the low-income working Canadian paying a pretty fair chunk in terms of the tax cost of this, and so on, and yet not participating in this as a savings vehicle.

I notice that countries like Norway do not have any foreign investment as part of their program, and we recognize that they probably have a different view. For Canadians at the low-income level, who perhaps are putting no money into an RRSP or so very little, would this not be unfair to them to increase the ceilings, as David suggested, as well as perhaps just increasing the ceilings to make it more attractive to some people while other people are paying for it and yet are receiving little if any benefit? How do you respond to those people?

Mr. Tom Hockin: There is a myth out there that RRSPs are really a vehicle for the rich, but in fact if you look at Statistics Canada's reports for 1995, that is not the case at all.

Mr. Nelson Riis: What percentage of people are at that upper end right now? It must be 2% or 3%, if that.

Mr. Tom Hockin: Eighty thousand dollars or more total income makes up 18% of the tax filers....

Mr. Nelson Riis: We were told in a previous hearing that less than 2% of people are presently contributing up to the maximum level.

Mr. Tom Hockin: That's probably true.

Mr. Nelson Riis: So you make the case that this needs to be lifted. As long as only 1% of the Canadian population who are tax filers are pressuring that upper limit, is this really a priority?

Mr. Tom Hockin: Of the 5.2 million Canadians who have an RRSP, 60% of them earn $40,000 or less.

Mr. Nelson Riis: Tom, you know how many tax filers there are. We are talking 16 million. You know from your previous life that even this is a small number.

David, I cannot get too enthusiastic about that upper limit when less that 2% of the people using RRSPs are in that category now.

Mr. David Thibaudeau: I think that sometimes when we look at that, we look at it as if someone at the high end can take advantage of it and someone else cannot. If you look at lower incomes, and if you look at the plans that are in place today for lower incomes, they can probably, without doing a whole lot in terms of RRSPs or anything else, achieve somewhere near that 70% of income target when they reach retirement in terms of their income before they retire. People in the higher income bracket are not going to get anywhere near that. That is one of the reasons.

Mr. Nelson Riis: Yes. Thank you.

The Chairman: Mr. Jones.

Mr. Jim Jones (Markham, PC): Thank you, Mr. Chairman.

First of all, thank you all for your presentations. They were excellent.

Do you have any data on the number of people that are participating in pension plans other than the Canada Pension Plan? I have heard through this hearing that it is quite low.

The other one is, Mr. Daniels, I didn't understand what you meant when you said that 600,000 people have little or no attachment to the employment industry.

The third question I have is what happens if we do not increase to the 30% foreign content? It seems like a lot of Canadians are doing a lot of savings these days and that we are restricting their income potential in their golden years. Also, I think there would be a lot of money in Canada looking for places to invest and maybe not finding a home. So I would like to have your comment on what happens if we don't do this.

Maybe the first two questions are to Mr. Daniels.

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The Chairman: Mr. Daniels.

Mr. Mark Daniels: Well, I can take the second one. I'm not sure I can answer the first one on actually how many people participate in private pension plans in Canada.

A voice: Forty-five percent.

Mr. Mark Daniels: Forty-five, is it?

Mr. Jim Jones: Is that counting companies?

Mr. Mark Daniels: Yes, in the registered pension plans. I think about three-quarters of those plans are actually administered by the industry I represent, but they are the small and medium-size plans. They only represent about 20% of the assets that are managed. The others, of course, fall into the larger pension plans.

In terms of my numbers, Mr. Jones, I was simply trying to explain that of the 3.5 million people, the 12% of Canadians who don't have supplementary benefits, in the three groups they fall into, the majority of them are people who work in small workplaces where there could be such benefits but for some reason the employer doesn't provide them. Then there are the unincorporated self-employed who don't have the tax advantage of being able to use them. That left about 600,000 people who turned out to not have an attachment to the workforce. They'd probably be young people before their first job, out of college, they may not be still hanging onto their parents' group coverage, and so forth.

That group represents about 600,000. What I simply meant there is that since they don't have any employment connection there's not much point in trying to catch them up in the net. Yet they're not in the welfare net, you see; they haven't yet been picked up by...and probably won't be. This is not to say they're poor; they just don't yet have a workplace attachment. That was all.

The Chairman: Mr. Hockin.

Mr. Tom Hockin: On the question of what would happen if there is no change in the foreign property rule, I can make two predictions.

First of all, this rule will be increasingly circumvented by portfolio managers through the use of derivatives. This is very, very sad, because it means derivatives are expensive to manufacture and to produce, so it takes a quarter or half a percent off your earnings when you have to have a derivative. Again, the average Canadian doesn't understand derivatives and his or her mutual fund then is less transparent, less easy to understand. That's the first consequence. And it's already starting.

The second is that increasing amounts of capital are going to be coming into the market, and we're in a situation where institutional investors can own large proportions of the outstanding shares of small to midsize Canadian companies. There are two consequences to this. First, we could further disadvantage small investors who are already fighting for equal advantage in the stock market, because the stock market is dominated by institutional players. Second, there would be increasing economic power of institutional investors in our economy. It seems to me that if you let the foreign property rule expand a bit, you have more places for those big institutional investors to go and the small investor has a better chance and the market has more liquidity and everything else.

The Chairman: Mr. Koskie.

Mr. Raymond Koskie (Chair, Government Industry Relations Committee, Multi-Employer Benefit Plan Council of Canada): Thank you very much, Mr. Chairman and gentlemen.

From MEBCO's point of view, I think Mr. Riis indicated or somebody indicated that less than 2% of tax filers are contributing up to their maximum. This would be both in RRSPs and registered pension plans. I think that is really the nub of the problem, because the middle-income and lower-income people are the people who can least afford to contribute more to their retirement plans, notwithstanding the 100% deduction from taxable income. That's why MEBCO has recommended that there be a further tax incentive to get people to contribute additional money. Now that we've hopefully dealt with the deficit, the time has come to look at some new tax measures to alleviate this very serious problem.

We are in favour of increasing the foreign limit. However, that doesn't help a lot for those people in the middle and lower income groups who simply don't have enough disposable income to pay more money into their pension plans.

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Quite frankly, I don't know of an incentive other than the tax credit we propose. For example, every additional dollar contributed into a pension plan over and above what they contributed the previous year would only cost them fifty cents. You need that kind of incentive. I mean, the government has been offloading the public system. The problems we have with the CPP and the problems with the seniors, these affect middle-income and lower-income people the most, so they are already going to receive less in retirement. But there's no counterbalance. How do these people help themselves pay more money into the plans to make up for the loss of retirement income that will flow from the seniors benefit if it is passed? There are not enough incentives out there, and it is for that reason we have asked the government to consider the tax credit. We point that out in our submission on page 26.

I think the other problem is with RRSPs. While many do contribute to RRSPs, they don't contribute to the maximum. I think there has to be a further incentive created by the government for employers to establish pension plans, because I think it's acknowledged that the return from a pension plan, whether it be a multi-employer plan or a single-employer plan, is far greater and less costly in the long run than you would have in an RRSP. Therefore, in order to encourage more employers to establish plans, in our submission we have recommended, starting at page 28, that the government provide incentives for this by establishing what we call an administration cost offset for registered pension plans.

The government has acknowledged that there is huge cost in setting up these plans in the first place. So how do we provide an incentive? The returns are greater than RRSPs, or potentially greater than RRSPs, so we have to provide an incentive. I think that now is the time for the government to give serious consideration to it.

The Chairman: Thank you, Mr. Koskie.

We will move to Mr. Szabo, followed by Mr. Pillitteri.

Mr. Paul Szabo (Mississauga South, Lib.): Thank you, Mr. Chairman.

I thank you gentlemen for the interventions. It looks like we're talking about RRSPs and things like that, so we might as well talk some more.

Last night we were told that taxpayers who made more than $75,000 a year represented only about 5% of income earners. As you know, $75,000 is the annual income you have to earn to be able to put the limit—being $13,500—into an RRSP. When you consider that we're talking about so few Canadians, I wonder whether it really is a priority or as high a priority as you might think. I want to have your opinion, because it is controversial, on whether you value fairness and equity within our tax system as much as you value incentives or opportunity to invest. If you do, then do you not think it would be appropriate to shift the RRSP deduction and make it into a credit so that each and every Canadian who puts money into the RRSP system would get the same taxpayer underwriting or subsidy that every other taxpayer would get, regardless of their level of income?

An example would be a taxpayer making $35,000 a year who puts $5,000 into an RRSP gets a tax refund of about—let's see, I did a quick calculation—$2,650, more than 50% back. Someone making $25,000 a year who puts $5,000 in would only get a tax refund of $1,800. That means that the lower-income Canadian gets $800 less back as a tax refund than a higher-income-earning Canadian.

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The fairness and equity question doesn't seem to have been addressed. I suggest that it probably needs to be addressed before $75,000-and-over income earners get a further tax break.

The Chairman: Who would like to answer that question? Mr. Thibaudeau.

Mr. David Thibaudeau: I'll attempt to wander into that controversial world.

A couple of things come to mind as I understand your thought process—I think I do. One thing is equity; the other is, what are you driving here?

If we are going to create incentives for people at the higher end of the income area, which also can be many people who can drive your country in a competitive world tomorrow, I think we have to have a way for them to get closer to attaining a similar lifestyle. Anywhere near that 70% is pretty far out, no matter what you do. When they retire, they should have the ability to get there with some form of tax assistance.

So, on the point of fairness, I think there's a fairness there as it relates to the country and its ability to compete.

If we start giving out tax credits, the other side is how you are going to get there if you're a person who has to save twice as much because of your tax level, as you suggested before, in order to get there. In other words, I'm having my interest, my earnings, taxed, and I'm having the dollar that I need to save taxed. So I've got half as much to work with and I'm returning half as much if I'm not getting tax assistance.

Mr. Paul Szabo: Before we leave that point, you also know very well that when you purchase an RRSP you can also purchase a spousal, which effectively in some cases would allow you to split income, and effectively, as a high-income earner, a high marginal tax rate taxpayer, you can actually earn a windfall on rate because you got the deduction at your highest marginal rate, but because you spit or because you structured a RRIF to stream it out slowly enough that you drop to a lower rate, you could actually achieve a windfall in rate as well as the deferral benefits, which are not available to the lowest-income-earning Canadians because they put it in at the low rate and take it out at the low rate. Is that true?

Mr. Mark Daniels: Like Mr. Thibaudeau, obviously one wanders into this swamp with real care.

I just want to say that the equity and fairness issue here is a very tricky one, but there's a real arithmetic trick in what you've just done because the reason why those numbers work out as they do is that we've got a highly progressive income tax system. So if you want fairness on one side you can't turn around and hit somebody over the head with it on the other. So it's largely an arithmetic anomaly, and I would just kind of duck out of it in that way, sir.

Mr. Tom Hockin: I would just add the foreign property rule point. You said that fixing the foreign property rule a little bit is not a high priority compared with the basic inequities that you mentioned. Logically, though, if you can see a flaw in a program, you should fix it. That makes it a high priority. In other words, if you would agree with me that it's flawed to leave it at 20% and it probably should go to 30%, then fix it if you can, especially if it's not going to cost the fiscal framework any money.

Mr. Gary Pillitteri (Niagara Falls, Lib.): On this foreign property rule to increase the advantage that you're putting forward, I hope you gentlemen can answer my question.

Today we've got trading blocks in North America, NAFTA here, and a flow of businesses and capital. Then you've got a European Common Market and a flow of capital in there.

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Specifically, Mr. Hockin, I heard you say Ireland has no foreign rule on it, but you did not mention countries such as Germany, France, or Italy, which are more the backbone of the European Common Market. Of the latter, I do know Italy, and I don't think any capital could go out of the country. Would you like to answer that question?

Mr. Tom Hockin: Just to make sure, could you rephrase the question? Are you asking me why some countries are still holding on to a foreign property rule?

Mr. Gary Pillitteri: Yes. As I said, you did not mention Germany, France, or Italy, and specifically Italy. I don't think you can take any money out of the country, unless it has changed in the last couple of years. That is the largest component of those trading blocs, specifically in the Common Market.

Mr. Tom Hockin: In this Ernst & Young study, in table 5.1 on page 16, you'll see the regulatory constraints on foreign investments by pension funds in selected OECD countries. I don't find Italy or Germany here.

You're right. In Germany there's a 4% limit on foreign asset holdings. That speaks, I think we all know, to the German psychology about safety, going back to their memories of the 1920s and incipient inflation.

Mr. Gary Pillitteri: At least Germany has 4%.

Mr. Tom Hockin: Yes.

Mr. Gary Pillitteri: Italy doesn't let money out of the country.

Mr. Tom Hockin: Are you suggesting that Italy does not allow any?

Mr. Gary Pillitteri: Yes.

Mr. Tom Hockin: Anyway, here is a rundown of what countries allow and don't allow.

Should we follow the Italian example?

Mr. Gary Pillitteri: By no means. I just wondered if it had any effect on those countries, since they make so much of a contribution within their own economies that they want to restrain their flow of capital outside the country.

The Chairman: Mr. Pillitteri and Mr. Hockin, on page 17 they do address the France and Italy issue. They are apparently not included in this analysis because they have virtually no assets in privately funded pension schemes. It's your fifth paragraph.

It's just a point of information.

Mr. Lunn, do you have another question?

Mr. Gary Lunn: Thank you, Mr. Chairman.

I note from Mr. Hockin's submission that he believes removing the foreign property rule would create more jobs, I take it because you're putting more wealth or more money in the hands of the consumers and they are going to spend it. I put my question out to anyone else on the panel who wishes to answer this. Is there anything proactive this government or this committee can do with our taxation system or through prudent fiscal management policies to stimulate the job economy?

The Chairman: Mr. Daniels.

Mr. Mark Daniels: I'm sure we all have ideas about that. The focus we have taken is really to focus on the macro-context of this debate. What has been accomplished by the government in the last four years is nothing short of astounding. True, there was some luck in it as well, but it has dramatically reversed the fortunes. The main message I try to put across is to say let's not sacrifice any of that; that's the biggest growth generator and the biggest employment generator we have.

As I have listened to this conversation, everybody up here is either in the savings accumulation business, in part, by providing products, or they are selling the products. If you listen to every one of us, it seems to me what we're saying is that the capacity of the publicly funded part of that safety net is in question today more than it was some years ago. We are all looking for ways to better meet the demand for new product.

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We recognize that there's going to have to be new product. It's an astounding record that the mutual funds industry has turned out in the last couple of years. Those growth figures are amazing. Frankly, I think they're in response to the very kind of thing we're all trying to hedge against around this table.

Most of that, incidentally, is providing capital into the system. That capital creates jobs, simply. Whether it flows outside the country or not doesn't mean it's leaking out and doesn't provide any benefit to Canadians, although it's somewhat more roundabout.

So that's the way I would answer it—the macro-context of the debate.

I don't think it would be very helpful to you, sir, if I were dropping ideas out, one side or the other, that might benefit my clients and not Tom's, or something like that.

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

A final question for Mr. Szabo.

Mr. Paul Szabo: I want to deal with this issue we started off with, that 88% of Canadians are directly or indirectly covered by plans. Because the employers get the deduction but there's no taxable benefit—yet—we know there is a disadvantage or an inequity to those who aren't covered, the other 12%.

Given that there is this inequity, would you, for instance, support other incentives or tax initiatives that would assist in some way those 12%—for instance, a reduction or the elimination of the deductible on medical expenses on the income tax form, which, as you know, now is the lower of 3% of net income and some ceiling?

Mr. Mark Daniels: Mr. Szabo, I'm not sure treating the deductible in that fashion would accomplish necessarily what you want it to do. I think what you'd be better doing is what I suggested.

Only 1 million of those 3.5 million—that's people and their dependants—are going to be able to be affected by any tax changes. I think the way in which you get at them is to allow them to use money they spend on supplementary health care products in the same way you and I do; it just comes off income before taxes. So all you would do is give them an appropriate deduction. I think that would be the most parallel, simplest, and easiest thing to do.

My recollection, Mr. Chairman, is that your predecessor and his colleagues in this committee priced that out at one time. I think the total cost of the thing for the entire economy was less than $30 million. This is not a heavy-duty expenditure as tax expenditures go. It's a relatively minor expenditure.

The rest of that burden, frankly, falls on us. We haven't reached down and gotten the rest of those people, as I've said. We are looking at structuring our plans to fit smaller employee groups than we were targeting in the past. That's why I referred to some of the work we're doing with the Canadian Federation of Independent Business. We want to know who these people are and how we get to them so that we can walk back to these councils and say, well, now it looks as though we have another $1 million under the wing.

The Chairman: Thank you, Mr. Daniels.

Mr. William Anderson: If I may, I would just add that a number of the people we're talking about in this inequality are people who are self-employed, who have tax incentives other than the guy out there working. It's much like, say, a member of Parliament as compared with the average guy with some of the tax incentives. So I'm not so sure there's an inequity there.

If I could, please, I would touch on the fact that you smiled when you stated “yet” as far as benefits being taxed. I hope this government takes a strong look at any initiative they have in the future to tax benefits on the Canadian people, because it's going to come back to haunt you in a big way.

The Chairman: Thank you.

Mr. Riis, a final question.

Mr. Nelson Riis: Thank you, Mr. Chairman.

Gentlemen, I'm not sure who I'm aiming this question toward.

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On the discussion today about the RRSPs and ceilings and the foreign levels and so on and the comments, Bill, that you made regarding the seniors benefit package and your recommendations and concerns there, is there not in your business a concern about these two programs, that as the clawback provisions kick in under the seniors benefit a point will come at which there's going to be less enthusiasm of people to invest in RSPs per se? They're going to say, well, what's the point? Why don't I pay down mortgages or do other kinds of things with my money? We've heard that from people. You folks seem like a good group to get a reaction from along these lines.

Mr. David Thibaudeau: One of the things that seem to have struck us on the seniors benefit is really a technical one that has to do with how it's administered and the impact it has that way in terms of tax to the individual. Through working with people in Revenue and Finance and so on, we're trying to work out a way in which that would come out. It would still be the same idea, but the impact of the tax wouldn't be as high.

It's a real concern when it affects someone.... I believe someone mentioned sort of the medium income level, where it really jacks the effective tax rate or the marginal rate jumping from one level to the other. I don't think that in the higher income area it's as big a concern when it relates to a seniors benefit.

Mr. Tom Hockin: Mr. Chairman, I defer to Malcolm Hamilton of William M. Mercer Ltd. on this subject. I don't know if he has appeared before your committee, but he has identified some income brackets wherein it doesn't make much sense to save for your retirement because of the way the seniors benefit works. I can't remember what the brackets were, but I think around $30,000 to $40,000 was one bracket, and then there's another bracket of people over $50,000 who, just before they retire, might as well not be saving any more. I would like him to defend his brackets before this committee. I don't think I can do it. His report concerns a number of our members.

Mr. Raymond Koskie: In our brief we have referred to Malcolm Hamilton's analysis of this, and we have referred to Paul McCrossan's analysis of the seniors benefit. Both of these gentlemen, as you know, are highly acknowledged and reputable actuaries. What they have predicted is that people are going to retire early, and of course that doesn't help the system, because if they retire early there's less money going into their retirement plans.

At tab A of our brief we have given you examples that Paul McCrossan has prepared showing middle-income people with different incomes or equal incomes to show the change in the after-tax income resulting from the seniors benefit. So, for example, in chart 7 of appendix A you have middle-income couples with equal incomes. The change as a result of the seniors benefit is that the first spouse suffers a loss of over $3,000, and similarly with the second spouse, for a total of roughly $6,500.

To my knowledge, nobody from the Department of Finance has come out with any figures to contradict what McCrossan has said here.

If we're taking money out of the system, that goes against the government's policy, with all due respect, to encourage people to save more for their retirement.

The Chairman: Mr. Koskie, Mr. Thibaudeau, Mr. Hockin, Mr. Daniels, Mr. Anderson, and Mr. O'Grady, on behalf of the finance committee, I'd like to thank you very much. It has been a very interesting round table. You've provided us with valuable information, which I'm sure will be helpful as we write the report and recommendations to the Minister of Finance.

The meeting is adjourned.