FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, June 11, 1998

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[English]

The Vice-Chair (Ms. Paddy Torsney (Burlington, Lib.)): We'll call this meeting to order. As you all know, pursuant to standing order 108(2), the committee resumes its pre-budget consultation process.

The witnesses today are, from the Canadian Gift & Tableware Association, Jack Shand, who is the president; from the Canadian Office Products Association we have James Preece; from the Canadian Professional Sales Association, Terry Ruffel; and from the Canadian Retail Building Supply Council, Stephen Johns, who is also president.

Gentlemen, welcome. As you know, you have between seven and ten minutes to make your presentation and then there will be a question and answer period. And after our experience this morning, I encourage you to read at a reasonable pace. It gets a little confusing when people go too quickly, especially in the different languages.

Mr. Shand, you are first.

Mr. Jack Shand (President, Canadian Gift & Tableware Association): Actually I'm going to defer, Madam Chair, to my colleague, Terry Ruffel, who will speak for us all.

The Vice-Chair (Ms. Paddy Torsney): Terrific. Thank you very much, Mr. Ruffel.

Mr. Terry Ruffel (President, Canadian Retail Building Supply Council): And we'll do that rather quickly too. Just as a matter of introduction, we've supplied the report to you, so we're quite prepared to answer questions and give you feedback.

Thank you for the opportunity to speak today. I understand it's something like 99 groups that you've seen so far, and that's an outstanding record for the committee. There are four of us here today, and this happens to be the fourth consecutive year that our five associations have made a submission, so we respect the opportunity to talk to the committee and voice our concerns and recommendations.

With me is Jack Shand, who you mentioned a minute ago; he's the president of the Canadian Gift & Tableware Association. One of the most notable achievements of the CGTA has been the development over a short period of time of one of the largest trade shows in Canada. Jack was telling us earlier that the CGTA probably has one of the largest trade shows in North America. That show brings together the gift and tableware industry, and overwhelmingly you're going to hear his concerns and opinions from Canadian retailers and their suppliers.

Jim Preece is a CAE, and I believe that's a certified association executive. He is the president of the Canadian Office Products Association, COPA. It's truly one of Canada's unique trade associations, representing as it does all aspects of the office products industry. I'm not aware of any other organization that can speak on behalf of domestic manufacturers, the importers of the industry, as well as the retail and wholesale sectors. So COPA comes highly regarded by the office products sector.

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Steve Johns is president of the Canadian Retail Building Supply Council. Again, this organization has a unique position within our coalition, since it's an umbrella group representing a number of retailers, lumber retailers, building supply material companies and associations. Steve himself has a different status from the rest of us, in that he's the elected leader of the Canadian council. When he's not representing the CRBSC, Steve is the executive director of the Lumber and Building Materials Association of Ontario.

Not here today because of illness is Vaughn Crofford. Vaughn represents the Canadian Hardware and Household Manufacturers Association; they too are a member of our coalition. Mr. Crofford asked me to express his regrets at this unforeseen absence. He certainly did participate in the preparation of the brief, so his association and his views are represented within our comments.

Finally, as the card indicates before me, I'm Terry Ruffel, and I'm president of the Canadian Professional Sales Association. In attempting to decide what interesting tidbits I might relate to the committee about my organization, two points occurred to me.

First, CPSA is one of Canada's oldest associations. Next year is our 125th anniversary, and we're quite proud of that. Through much of our history the CPSA was the Commercial Travellers' Association; it's a fine old organization and certainly well respected within the sales community.

Our submission provides details on each of our organizations. I do want to stress that collectively our position within the Canadian economy is substantial. Together the CGTA, the CHHMA, COPA, and the CRBSC represent 3,800 companies. Last year they employed some 100,000 Canadians, and between them the group generated in excess of $28 billion in sales, chiefly at the pre-retail level. We're 32,000 members in our organization, the CPSA, and the $8.75 billion in retail sales that the CRBSC represents has a huge impact on the Canadian economy.

It would be difficult to imagine that there's a single member of the standing committee, let alone the House of Commons, who does not have several members in their riding and constituency. The importance of this fact should not be lost. It means that our members are contributing and can contribute in the future to the economic progress, not only in the more buoyant sections of Canada but also in the regions experiencing true economic hardship, either temporarily or chronically.

Since our pre-budget submission was filed with the clerk of the standing committee a week ago, Madam Chair, we will take the contents as read and I will not attempt to summarize them in detail. These points will come out in our subsequent discussions.

It will suffice to say that our coalition sees meaningful debt reduction progress as the most important issue facing the standing committee this year in its pre-budget deliberations. One of the best ways the debt and the debt-to-GDP ratio can be put on a permanent downward path is to ensure the economy is vibrant and the recovery is prolonged and extended throughout the country.

Once again, thank you very much. I understand we're the 99th. Somebody referred to the great Gretzky earlier, so hopefully we'll give you some great comments. We look forward to a discussion with the committee and answering any questions you might have. Thank you.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much, Mr. Ruffel.

[Translation]

Mr. Gilles Perron, from the Bloc Québécois, will ask the first questions.

Mr. Gilles-A. Perron (Saint-Eustache—Sainte-Thérèse, BQ): Unfortunately, I haven't read you submission, but I believe that you are mostly concerned with the national debt. What are your concerns about the transfers to the provinces, mostly on the social side and in the areas of health and education? Should we continue to cut in the three areas I just mentioned or should we resume putting money there?

[English]

Mr. Terry Ruffel: I'm sure the group will comment.

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Our concern is if we have a vibrant economy and we have our national debt under control and we have our deficit balanced and there's a long-term commitment by the federal government driving toward a surplus, you will get more money back into the education and training sectors and the health and welfare sectors.

I remember a comment we made in one of our previous submissions: if we get our mortgage, our national debt, under control, if we start to eliminate and reduce the huge interest payments that our national debt consumes, there is a wonderful opportunity to take those resources and redirect them.

I know we've done extensive survey work, and I know these gentlemen will comment on their member surveys as well, and the overwhelmingly important area that I think is coming out, certainly in our membership, is controlling the national debt, starting to pay down the national debt. I think one of our recommendations in here is to continue that contingency fund and start applying that.

As good Canadians, all of us know the importance of a mortgage and paying down the mortgage, and I don't think the federal government really should operate much differently. There's wonderful opportunity, when you start to pay down the mortgage and reduce the consuming interest payments, to redirect that to the many areas you commented on.

Jack, do you have some comments in that area?

Mr. Jack Shand: Yes, thank you.

Mr. Perron, I was going to also suggest specifically, regarding the area of education, that one of our recommendations is that the government consider going beyond the February 1998 budget provision for the tax-free withdrawal of RRSPs to finance lifetime learning, to enable Canadians, particularly parents and families, to access their RRSP savings to finance the post-secondary education of their children.

As I'm sure you're well aware, the debt burden for young people as they pursue post-secondary education is increasing. This has been a significant burden for many families, particularly those of low and middle income. We would strongly encourage the government, because I think it serves many of the objectives, to ensure a more competitive labour force, to provide greater access to education, to allow people, particularly parents, to access these funds they have saved for retirement.

Because of the very fact that people are so committed to the contributions to RRSPs, I think there will be a significant incentive for them to pay back these funds. We have as a precedent, as you know, a number of years with the home-buyers' program, where first-time homeowners have been able to access their RRSP funds for that purpose.

So that is one area where we feel that in the area of education, which as you well know is an area of provincial jurisdiction, there could be a very favourable tax policy to encourage Canadians to continue or pursue post-secondary education and access RRSP funds to achieve that end.

The Vice-Chair (Ms. Paddy Torsney): As a point on that, Mr. Shand, of course the last budget did include that provision, so we anticipated.

Mr. Jack Shand: That's on lifetime earning, as I understand, Madam Chair. But it's not our understanding that it's something that could be accessed for such things as children's education in a post-secondary setting. As we understand it, the intent was for Canadians, mid-career perhaps, or at some point in their career, who needed to retrain, to upgrade their skills to be competitive in the workforce.

The Vice-Chair (Ms. Paddy Torsney): You are correct. So you would want that expanded to allow for parents to use it for their children.

Mr. Jack Shand: That would certainly be our recommendation.

The Vice-Chair (Ms. Paddy Torsney): Okay.

[Translation]

Mr. Perron.

Mr. Gilles Perron: I have another concern. We know that presently the employment-insurance fund contains millions and millions of dollars and that there is a lot of money in the contingency fund. Do you think that a reduction of the contribution rate for the employer and the employees would create new jobs? I would like to hear your comments on the participation rate and the advantages linked to a rate reduction. Do you think that a decrease of the premium, should be suggested to the government?

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[English]

Mr. Terry Ruffel: I'll comment briefly, and then I'll turn it over to Jim.

We had some discussions on that before we came. I believe the committee heard from the Mintz committee or saw the Mintz report earlier. Certainly one of the lines that struck us within that report was that the unemployment insurance fund should be experience-rated. It seems to us that when you operate a normal insurance type of fund there have to be adequate reserves, adequate funds set aside for future recessions and downturns and increase in unemployment.

If the fund were experienced-rated, we would certainly endorse that, which means if it's approaching the $19-billion mark currently, we don't see that fund growing indefinitely. Certainly a reduction in rates to reflect a downturn in unemployment and a reduction in the costs to Canadians and Canadian employers would be a useful thing.

Jim, do you want to elaborate on that a little bit?

Mr. James H. Preece (President, Canadian Office Products Association): Certainly our position has been that any controlling of the payroll taxes and what not would be a benefit to the industries so that they could in turn turn that back into increased employment. With the increased cost to the employers, their ability then to hire new people is diminished. If this government were to look at controlling that and reducing that where feasible, within reason, then there would be an ability to turn that back into additional employment.

Mr. Terry Ruffel: Stephen, I know your coalition of associations was particularly interested in this point. You might want to elaborate their concerns.

Mr. Stephen Johns (President, Canadian Retail Building Supply Council): Yes. The Canadian Retail Building Supply Council met a couple of weeks ago in Quebec City. We talked about a number of issues, but this was fairly prominent on the agenda.

We certainly agreed that given the burgeoning surplus in the fund, a rate reduction would be in order. Really, we're at the lowest rate of unemployment this decade, coast to coast. We recognize that there would be an associated job creation stimulus. We talked about this and concluded that some kind of a rate reduction would particularly benefit the low- and middle-income earners, if for no other reason than the fact that the premium is capped when an employee's earnings reach $39,000.

Having said that, we would concede that unemployment insurance rate reduction should probably be gradual in view of the dramatic rise in CPP premiums slated over the next five years, otherwise employers and workers would be looking at a one-shot break, followed by four years of big payroll tax increases, and I don't think that would be appropriate either.

The only other point I want to make is further to Terry's comment about such a process being experience-rated. I think the feeling around the table this morning when we discussed this was that would have to be applied across the board, as opposed to sectorally.

The Vice-Chair (Ms. Paddy Torsney): Thank you.

Mr. Shand, did you also wish to comment?

Mr. Jack Shand: No, thank you.

[Translation]

The Vice-Chair (Mrs. Paddy Torsney): Thank you very much, Mr. Perron. Let's now hear Mr. Brison.

[English]

Mr. Scott Brison (Kings—Hants, PC): It's great to have you with us today. It's impressive the number of Canadians, and Canadians involved in small business, for instance, that you represent. It's very important that we have this opportunity to hear from you.

I was interested in your report, and particularly the tax relief side of it, because that's an area on which we have been vigilant in promoting lower taxes to promote growth in Canada. But also, I would be interested in your feedback on tax simplification, which we find continues to serve as a barrier to economic growth in Canada. The original tax code was 17 pages; we're now up to 2,000 pages and counting. I'd be interested in your feedback on that.

Also, on flat taxes and some of the proposals, I just received today a report from the Congressional Research Service of the Library of Congress on a proposal for flat tax in the U.S. I'd be interested in your feedback on that.

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I have one question on your mortgage interest deductibility. Mortgage interest deductibility sounds like a very positive step, and in fact when this legislation, Bill C-223, was introduced, members from our party supported the private member's bill, but it was with great concern. We supported it because it did represent tax relief, and any tax relief is preferable to none at all at this juncture. But I have some concerns, as does our party, about further complicating the tax code at this time.

Also, at a time when we could be entering a deflationary period, we would be actually, with government policy, encouraging Canadians to take on more debt. The home is not necessarily the best possible investment at this juncture. Arguably, people should have the choice to make the decision as to what to do with their own money, and we shouldn't be performing tax eugenics or Pavlovian tax policy in encouraging one activity or discouraging another.

I would posit that it would be preferable to have an overall simplification and reduction as opposed to specific behavioural encouragements.

Mr. Terry Ruffel: I'll comment first, just on the overall comment. I know this affects Stephen's industry more than it does those of most of us at the table.

As to tax simplification, I think all Canadians would welcome that. Certainly we've had input over the years on the goods and services tax. You take a very complicated Income Tax Act and lob on top of that a very complicated GST that tries to mirror the Income Tax Act.

As you read in the report, I represent and work for a sales organization, the Canadian Professional Sales Association. You could take the tax implications surrounding sales people across this country, and a lot of small business people, and you could look at the rules and regulations dealing with cars, which are extremely complicated. There are measures in there to simplify that.

Unfortunately the position often taken by the finance department has been that it has to be totally accurate and fair to the extent possible. When you take that approach—that it has to be totally accurate—what you end up with is an extremely complicated tax code. The whole issue surrounding business use of cars, for example, is extremely complicated. Then you take the GST, which gets lobbed on top of that, and it makes it extremely complicated again.

As to the issue of business meals—and we comment on it in this report—again, it's very costly. And we're only arguing, by the way, about business meals related to business travel—the cost of being on the road. I know you heard last winter from the truckers' association. We have some sympathy, in that the extra non-discretionary costs of being on the road are very expensive. Not only are they very expensive, but to track those input tax credits related to the GST to eliminate the 80% or the 20% or the 50% deductibility, really there's not a lot in it for the finance department as far as tax dollars go, and it is a huge burden on Canadian business people to track that stuff, to eliminate those deductions, and then to eliminate the GST implications altogether.

I'm a chartered accountant, by the way. If you said that some of the tax code is turning many Canadian business people into bookkeepers rather than productive, working Canadians out selling things, you'd be absolutely right. So we would welcome any of that sort of tax relief.

A little bit of rough justice has to be adopted by the finance department, and maybe a recommendation from you that sometimes you give up a little bit of tax dollars just to make the tax code understandable, and that when Canadians get around to preparing their tax returns, it's as simple as possible.

I'd like to see you get your dollars, but sometimes the extent to which the tax code goes to get those dollars is a terrible mess.

Stephen, in particular I wanted you to comment and you wanted to comment on the issue of mortgage interest deductibility, and maybe Jack will dive in too.

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Mr. Stephen Johns: Thank you, Terry and Madam Chair.

Certainly from the perspective of the industry I represent, we see this as a real boom, a real stimulus. Depending on who you're listening to, we're looking this year at housing starts—single, detached starts—somewhere in the order of 160,000 to I think the Royal Bank has predicted as high as 173,000. That represents a significant spike compared to where we were three or four years ago. But by the same token, if you compare that number to where we were back in 1990, we've basically clawed back to the 1990 level.

From a supply and demand perspective, numerous studies have concluded that the demand would be there for additional housing, and we're seeing evidence of that, specifically in certain parts of Ontario, the greater Toronto area being most noteworthy.

Beyond that, the other point I wanted to make is that currently those who are in the fortunate position of owning homes are tying up a considerable amount of income in the home. In 1996, slightly shy of 3 million households were spending in the area of 30% of their income on shelter. Very clearly, if a break in the form of mortgage interest deductibility were available to that significant segment of the population, that would free up more disposable income for spending in other areas. And we all know what the economic impact of that is.

Again, from my industry perspective, we do have a big industry. You saw numbers cited in the submission. Those numbers actually related to our member organizations, but in fact if you're talking about the the retail building supply industry at large, we're talking about some 3,500 stores coast to coast, 52,000 people employed, and about $10.5 billion in annual sales volume. Hey, if we could further stimulate that significant segment in the marketplace through this type of initiative, again, the ripple effects are obvious. The primary and tertiary economic impact would be substantial.

The Vice-Chair (Ms. Paddy Torsney): Thank you, Mr. Johns.

Mr. Shand.

Mr. Jack Shand: Did you want to jump in here, Mr. Brison?

Mr. Scott Brison: On the mortgage interest deductibility again, in the U.S. they've had the policy for a long time, and many in the U.S. government would like to get rid of it, but it's almost impossible to, because of the political ramifications of it.

But from an economic perspective, isn't it better to give tax relief that would benefit all Canadians and would effectively create the same sort of economic stimulus without favouring one sector over another, and that also would not have the dangerous ramifications of potentially encouraging many Canadians to over-leverage investment in their own home and perhaps attain more debt or carry greater debt loads than they really should at a time when we might be entering, as many economists feel we are, a deflationary spiral?

Mr. Stephen Johns: In fact measures have already been implemented, such as 5% down, which arguably have had a similar type of effect. But again, you're looking at making home ownership potentially not only a more attractive proposition but also a more reasonable proposition for those who might not otherwise be able to dip in. I'm not sure that any tax incentive of this nature would have absolute, universal application, but we believe it would benefit the majority, and it would clearly benefit our industry.

Mr. Jack Shand: According to the information we have from Statistics Canada, there are 10% more homeowners today than there were five years ago. That's likely the result of a number of factors, such as lower interest rates and the opportunity, at 5% down payment, for more people to get into the housing market for less money. At the same time, we see that the average cost of shelter has increased as a percentage of income. So we have a significant number of Canadians, particularly those under the age of 50, across virtually all income segments, who are paying 30% or more of their income toward shelter.

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Mr. Scott Brison: Is that gross income?

Mr. Jack Shand: Yes.

In regard to the issue of tax relief, whether it's here or whether it's in some other location, I think we have to acknowledge that we have very high household debt, very high consumer debt. It has increased dramatically. And people are looking for some sort of relief, whether it's on the mortgage side or the income tax side, or whether it's something such as the GST, which to your point, Mr. Brison, has the benefit of hopefully hitting all Canadians equally in a favourable sense.

Mr. Scott Brison: We happened to think it was a pretty good tax at the time.

Mr. Jack Shand: Yes, but having said that, those areas would certainly be the three that we would encourage the committee to consider as areas for tax relief for Canadians in the next budget.

The Vice-Chair (Ms. Paddy Torsney): Thank you.

Mr. Preece.

Mr. James Preece: One of the questions you were asking about is the issue of tax simplification. We conducted a study recently of our membership to determine what their opinions were relative to a variety of issues, and 85% of them indicated that tax simplification was very important to them and their small businesses.

A lot of our members are small-business owners who are responsible for dealing with this type of issue. The more resources that they spend on filling out forms and responding to paper-based issues, the more it defeats their ability to position their companies strategically in order to be profitable in the long term. Because of the amalgamation and the mergers within our industry sector, they're undergoing tremendous pressures in order to maintain their businesses, and anything that detracts from their ability to do that will detract from their ability to maintain their businesses, period.

Simplifying the tax system would be one item on the list of many things that could assist them in their overall success. Our position is certainly to encourage the government to look at reducing the complications in the whole taxation system. That really moves down the line; it's not only reporting but the whole issue of the GST and the HST, the harmonization of the tax systems from province to province, and we certainly encourage that simplification as well.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much.

Mr. Szabo, please.

Mr. Paul Szabo (Mississauga South, Lib.): Can you briefly tell me the process that was gone through to come up with these recommendations?

Mr. Jack Shand: I can lead off. Our organization was one of several represented here today that took the questions of interest to this standing committee and developed questions around them, which were sent in surveys to the full membership of the organization so that they would have the benefit of providing some direct input. The results, not only of our member survey but the surveys of others represented here today, were then brought together into this coalition submission.

Mr. James Preece: One of the important issues for an association, I think, is to find a vehicle to get input as opposed to having a group of people preparing something on someone else's behalf without input. As Jack pointed out, we ourselves conducted a survey of our membership, and the basis of that survey is how we formulated our input into this process, the same as Terry and others, I believe.

Mr. Paul Szabo: You're basically comfortable that these would be reflective of the general opinions of your members.

Mr. Terry Ruffell: Certainly. In our case we took a sample of members, and I think there were over 400 responses to that, Mr. Szabo.

So when we talk about addressing the national debt, that certainly was a strong indication from our members. When we talk about a dividend—I think we talked about a dividend earlier in the form of some tax relief—the feedback we got was very much members' preferences. That, by the way, was a dividend towards personal tax relief.

Mr. Jack Shand: Also, if I may, I will just very briefly note that in those cases where the members did not always agree, whether within a particular constituency, such as my organization, or among the different groups, we were very clear about that in the submission. One area I can cite is the issue of tax relief and whether they would favour personal income tax relief versus a GST reduction. In our case, I think it was a 53/47 split in favour of personal income tax relief, and that varied from group to group.

Mr. Paul Szabo: So we've consulted.

Mr. James Preece: Yes.

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Mr. Paul Szabo: I have to tell you that I'm really surprised. I know that anybody would say “if I can get a deduction I'll take it, if you offer it”. But mortgage interest deductibility is a horrendously expensive proposition and is actually skewed to the wrong end in terms of benefit when you consider what the extremely low interest rates have done for us and when you consider the RRSP availabilities at every opportunity.

If you haven't bought a house now you probably shouldn't if you can't afford it with the low interest rates and the ability to use your RRSPs for a down payment, simply because interest rates are eventually going to go up. And if you leverage yourself heavily today at low interest rates and the rates go back up to 9% or something like that, suddenly your carrying costs are doubled and you're in some trouble.

I'm very concerned in regard to the housing side, simply because of the fact that people have over-leveraged themselves. And I'm concerned that if you give more inducements to get more people into it you are going to exacerbate that risk area, and you'll see people walking away from houses like nobody's business.

The Vice-Chair (Ms. Paddy Torsney): Mr. Szabo, I think Mr. Johns wanted to respond.

Mr. Stephen Johns: I just wanted to say very quickly in response that I certainly think your point is well taken, but by the same token you just have to look at the current housing market. And again, I'm obviously most familiar with the resale market in the city of Toronto, because that's where I live. It's a white-hot market and housing prices are about as high as they've ever been. You can talk about interest rates on the one hand, but on the other hand, market values have escalated appreciably.

And just as a quick aside on this whole issue, the one point I didn't make—it is made in the submission but it probably bears repeating—is that we are endorsing the whole notion of mortgage interest deductibility, but we are recognizing that it's probably only possible in a regime of offsetting capital gains.

Mr. Paul Szabo: Oh, absolutely, without question. You don't have too many numbers here, but I was curious about the GST reduction. I guess your recommendation is at least 1%, down from 7% to 6%. Do you have any idea how much that would cost?

Mr. Jack Shand: I'll speak to that. The easy answer is no, and we feel—

Mr. Paul Szabo: $2.4 billion.

Mr. Jack Shand: Okay, thank you. And let me just—

Mr. Paul Szabo: And I raise it because it's a large number you're asking for in terms of the fiscal dividend after you allocate so much for debt. I think there is a consensus that at least what the government committed to in terms of the absolute downward movement of the debt.... But when you're talking about $2.4 billion, you're talking about one of the significant items here.

But there was a statement in your presentation that surprised me. You say that on the other hand it can be argued that

...the GST rate reduction would have a broadly-based impact on the disposal income of all Canadians, particularly lower-income earners, who currently pay little or no personal income tax.

I understand the last point, but your assertion is that this is going to be particularly beneficial to the lower-income earners. And I have to tell you that in terms of disposable income, it benefits higher-income earners over low, generally, and in fact there isn't an equity. Across-the-board anything is very expensive, but when it's across the board and is skewed to one income group over another that makes it even more problematic.

I'm wondering if you can explain to me why you think this is going to benefit low-income earners in particular.

Mr. Terry Ruffel: Probably you will get an impact.... One of our key recommendations in the report is for the stimulation of the Canadian economy in such a way that you're going to get lasting impacts on jobs and incomes. So whether it's a GST cut or it's a personal tax cut, we really see the opportunity to put more money back in the hands of Canadians, Mr. Szabo, so that they in turn will spend money to stimulate the economy.

Maybe the more affluent people would receive a direct impact in reduced taxes, but there we see the whole issue of stimulating the economy as having a very positive impact on all Canadians, particularly those who are earning minimum wage, and there will probably be greater opportunities for jobs and greater opportunities for higher incomes for a large group of people. So maybe it's a secondary impact on the lower-wage Canadians with a better, healthier economy.

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Mr. James Preece: The other spin-off benefits might well be that by lowering the GST you'll increase the number of people who are not trying to avoid the GST through an underground economy. As it lowers there is less of a disincentive to pay it, and it may well in fact have an implication on that end as well.

Mr. Paul Szabo: That's certainly a good point. I know that there have been initiatives from the Department of National Revenue, particularly in the construction area, on subcontractors. They're really focusing their efforts and getting in fact a 1,700% return on their cost of investigations now.

Mr. James Preece: They're certainly catching some of that underground economy.

Mr. Paul Szabo: Absolutely, and that's good.

Finally, with regard to the fiscal dividend, whatever the number might be, you've said you want the debt to go down and the $3 billion contingency you're okay with. I assume the assumptions on prudence are with regard to a little more caution on the growth assumption, a little more caution on the cost of money, short and long term, which has been what the minister has done in the past.

Mr. Terry Ruffel: Short-term spending in particular.

Mr. Paul Szabo: Okay. Since you want an absolute downward movement, not just a lowering of the ratio, what percentage of a fiscal dividend do you think there should be? We've had people come to say that we should get it down to 50% by the year 2000 on a ratio, which is very aggressive. In terms of the fiscal dividend, if we had a $10 billion surplus fiscal dividend, how much of that would you suggest really should be going against the debt?

Mr. Terry Ruffel: Certainly our key recommendations are to address the national debt first and eliminate the deficit and work toward surplus. So those have to be your top priorities. We don't think we should lose sight of this.

As to the size of the dividend for Canadians, we would take anything, I guess. But I think we'd like a meaningful reduction in taxes that's redirected to Canadian pockets. We need to mention the $2.5 billion. I have a deep suspicion that there's not a huge impact for most Canadians when you spread it around. But certainly a significant redirection....

I noticed in an article I read this morning, and when we sat down with our tax advisers at Ernst & Young, that there was one term that kept popping up during both the article and the discussions, and it's “tax burden”. I noticed in the Ernst & Young discussions, it was tax burden, tax burden. It wasn't taxes or tax rate; it was always referred to as the tax burden. I really think Canadians are now looking for a dividend. Hopefully we've turned the corner on our deficits.

So I think we need a meaningful tax reduction without losing sight of our national debt, without losing sight of maintaining a surplus. I think you really have to think of it as a tax burden for Canadians and we should do whatever we can do in a meaningful way to redistribute it. Our druthers would be personal income tax cut. I know there are others at the table who talk GST. I think those are the words, tax burden and meaningful reduction.

The Vice-Chair (Ms. Paddy Torsney): Thank you. Language is a very powerful thing, isn't it?

Mr. Epp, please.

Mr. Ken Epp (Elk Island, Ref.): Thank you. This is my very first time at a finance committee meeting. I'm substituting for Dick Harris today.

I'm curious about your submission with respect to the business expenses, business meals, the 50% limitation. There are some people who use this to go and take out their friends. It has nothing to do with business, but they can claim it because they get receipts. How could one possibly properly administer this so that there wouldn't be an abuse of it and yet still so it would be fair? Because according to your submission you'd like to see it up to 80%.

Mr. Terry Ruffel: It was 100% and then it went to 80%, and then we followed our American friends down to 50%.

Our comment would be that any expenses that are deductible for business purposes would have to be related to business. Those are the tax rules today. Somebody who would take their friends out and submit those receipts for tax purposes would not be following the tax law, the tax code. So that would be illegal. What we're talking about is legitimate business expenses.

Particularly what we tried to do, sir, is address it more to a small-business issue. We see entertaining clients as probably the one opportunity for most small businesses to promote their business and to thank customers for business. So we're trying to direct our relief toward very much a small-business issue, and we're also trying to direct it to people who make a living on the road.

• 1620

In a case where you saw a salesperson leave Toronto, then hit Quebec City, and then Halifax on the way back for a rather extended territory, I think you would realize that it's very expensive to do that and a necessary expense of being on the road. We think in all fairness that because of those extra costs there could be a measure of tax relief. Our American friends are approaching this in a limited way, raising the deductibility limit again.

Our concern is the cost of doing business. The reduction in the allowability of those deductions just makes it more expensive to be on the road. We're not talking about SkyDome issues, we're not talking about entertaining friends, we're not talking about private boxes; we're talking about legitimate business expenses, the cost of being on the road.

Mr. James Preece: One of the issues with respect to this whole particular question is the fact that selling in the 1990s has moved more and more toward relationship building. One of the difficulties small business has competing against large businesses is that over the years they couldn't do it on a technical level. Now they can do that. The larger the corporation, the more ability they have to absorb these resource costs, such as entertaining, etc. So the small-businessperson is at a disadvantage if he is unable to deal on that level. By dealing with this particular issue you now put more ability in that individual's hand to create the relationships they need in order to have long-term relationships with clients that in turn make them profitable and keep them in business.

Mr. Ken Epp: I would like to go to another question. I'm sure the others would have a comment, but if we could get one or two on each that would be good.

I noticed in your submission you talked about the unacceptably high unemployment, particularly among youth. That also is a great concern of those of us who are at this end of the table. I wonder what you think would be the best thing the Canadian government could do to increase the probability and the availability of jobs for young people.

Mr. Jack Shand: I think there are a couple of things that can be done. I had shared earlier with the committee, before your arrival, Mr. Epp, the possibility that Canadians could access their RRSPs specifically to pay for the continuing education of young people in post-secondary institutions.

Mr. Ken Epp: You mean other than themselves.

Mr. Jack Shand: Absolutely. It's not likely that there would be many young people who would have an RRSP of that magnitude, but that's conceivable; and certainly if they did, they could access it as well.

I think the business community needs to look very seriously at developing mentorship programs, looking for opportunities to bring young people into businesses. I'm not quite sure, and I don't know whether my colleagues want to comment on this, but I'm of the view that this is a corporate responsibility and not necessarily one where there has to be some kind of fiscal carrot dangled to induce them to do it. I know that others feel that perhaps there could be some incentives where perhaps in terms of EI, etc., the employer's contribution would not apply in the case of a young person's job being created.

But certainly the RRSP recommendation is one very strong recommendation we have, and it's just an extension of what was announced in the last budget regarding lifelong learning for mid-career adults.

Does anyone want to speak on the mentorship? I guess not.

Some hon. members: Oh, oh.

Mr. Stephen Johns: Further to what Jack was saying, I want to support wholeheartedly the notion of private-sector-driven mentoring, if there were tax incentives made available, or tax deductibility opportunities to make that happen at the private sector level.

• 1625

I think part and parcel of that would be certain efficiencies and certain economies of scale that would be to the benefit of the government from a fiscal management perspective. In other words, you wouldn't take tax dollars and necessarily throw them into government programs; instead, you'd put them in the hands of the private sector. At the end of the day it would be a less expensive and more efficient proposition.

Mr. Ken Epp: I've had some ideas along this line, too, and you didn't voluntarily come up with them. I wrote down payroll taxes as probably one of the biggest incentives we should look at. For example, what would you think of taking the EI premiums and making them one to one instead of one to 1.4? Would that have a significant—

Mr. Terry Ruffel: Jack quizzed me on that, and I think it's an excellent idea. Just as a comment, as we fell in that gap, that pause, we've had the opportunity to talk to Human Resources Development Canada, HRD, and our understanding in those discussions is that I guess the government started in April but the funds had run out in May for some of the youth internship programs and mentoring programs, some of the ideas they had. I think there's wonderful goodwill out there. All of us are in national associations and are quite prepared to help, quite prepared to stimulate our memberships toward employing younger people. I think there's an opportunity that's being missed by the federal government.

There's goodwill out there, and when I hear that a government program runs out the second day of the fiscal year and there are not enough resources in there.... If I would have a commercial to present to the government and the HRD department, it would be that there should be increased funding, particularly for that, because I think you're missing the boat. I think there's a great opportunity to have people like Jack urge his membership to take younger people on.

He thinks it's going to come out of goodwill, but probably some of his members might argue that with a little stimulation we might be able to do it even better. I think a commitment to funding with HRD in this regard would be a priority. I really think you're missing the boat. There's a will to do something out there, but it's not happening.

Mr. Paul Szabo: Incidentally, just for the information, going from 1.4 down to one is worth, basically, $7 billion.

Mr. Ken Epp: What a boost to the economy that would be. You'd probably have four times as many people working and you'd get it back.

I've had some discussion with people who say that a disincentive to hiring people is that if they hire a person, even part-time or in the middle of the year, they end up paying the full shot of the employee benefits for the year. The employee—when he or she files income tax—gets their overpayment back, but the small business doesn't. Would that make a difference, or is that just a red herring?

Mr. Terry Ruffel: Certainly in our own case as an employer, because I have nearly 30 staff, we don't pick up benefits right away for new people. There's always a waiting period.

Mr. Ken Epp: EI and CPP.

Mr. Terry Ruffel: They kick in right away, you're right. I guess there's some relief now, but I happen to agree with you, that encouragement is a meaningful encouragement to employ people.

The Vice-Chair (Ms. Paddy Torsney): Mr. Preece, I think you wanted to comment.

Mr. James Preece: I was basically going to agree. A lot of the new employment is coming from small businesses, and anything that assists them in that process in terms of controlling those costs, be it UI, CPP, whatever, can go a long way. I know myself, I have a small staff of ten, and I've brought on two people recently, and all of that is a huge expense. Now, the more I'm able to recover through controlled payroll taxes, the more I'm able to put back in their hands.

Mr. Ken Epp: I have many more questions, but my time is up until the next round.

The Vice-Chair (Ms. Paddy Torsney): He's good; he times himself.

Mr. Valeri, you're up and then we'll see about a second round.

Mr. Tony Valeri (Stoney Creek, Lib.): Thank you, Madam Chair.

I have a couple of questions. We were talking about payroll taxes and Mr. Epp brought up a couple of different scenarios. I've always started from a premise that with respect to a business, one hires when one needs to hire. You hire because you need someone to hire, not because a program is out there to encourage you to hire. Market conditions will dictate when I take someone on, either because of production need or an increase in consumption that would support an additional person.

Of course I'm not disagreeing with you that payroll taxes do form part of overhead costs, and we want to make sure that those costs are in line and competitive with those of other nations.

• 1630

When we compare ourselves with the Unites States in terms of payroll costs, we are quite competitive, and we are quite competitive in terms of all the G-7 countries. When we look at other aspects of the tax system, we're not as competitive. For instance, Canada has personal income taxes that are not as competitive as those in the United States or most other G-7 countries.

In a world of surplus, or in a world of being able to make reinvestments back into the country, one is faced with choices and trade-offs. I'm often at a loss to understand why, in that world, there is a greater emphasis on a reduction in EI premiums versus a reduction in personal income taxes.

If everyone wants the outcome to be greater market stimulation, greater employment numbers, and through that, obviously, greater profitability, with the idea that we want to remain competitive with other nations, why wouldn't there be a greater emphasis on reducing personal income taxes, versus reducing payroll taxes that are in fact competitive?

Mr. Terry Ruffel: I agree with you.

Mr. Tony Valeri: As a first question—

Mr. Terry Ruffel: I don't know if it's a question, but it's a good observation. I'll let Jim comment in a minute, but personally I think you're dead on.

Our key recommendation would be to get the tax mix back in balance, and if there's anything that's out of balance—and you've touched on it—it's the personal income taxes that are out of balance.

Referring back to Mr. Szabo's observation, we would never argue that you would have an EI fund or an unemployment fund that wouldn't have enough reserves plus enough premium income to sustain any future unemployment or even anticipated downturn in the economy. There should be reserves there, adequate reserves, experience-rated reserves, with an adequate premium coming in to sustain that.

To keep accumulating funds for the sake of accumulating funds and maybe redirecting them somewhere else.... I think that whole area of EI should be self-sustaining, well-funded, well-reserved for that specific use. But to take surplus funds out of the economy, that could be a wonderful opportunity to redirect some of that money toward other jobs.

You're absolutely right. I believe you're dead on. Personally, the priority should be—and I know our association would like it—to see relief in the area of personal income taxes. That's the one area in which we think we're out of balance.

Jim.

Mr. James Preece: The comments that were made earlier were on the whole issue of tax burden. If you were to take in isolation each and every recommendation that any organization might put before you, and say I can't do this, this and this, then yes, you are right, you can't do all of those items. But what a responsible government does is take all of those and identify areas it can manage in terms of managing its own books and the books of the country.

I think the concern some people have within our industry is that if you reduce the personal income tax, is someone else going to pick it up, be it the provinces or be it the municipalities, etc? I guess that's one reason why there's some receptivity to a reduction, perhaps, in GST, where nobody can really pick that up potentially because none of the provinces are going to necessarily increase their sales tax.

As long as at the end of the day the tax burden as a whole is resolved and lowered, then it doesn't necessarily matter in which component it takes place, because it will stimulate the economy.

Mr. Tony Valeri: Yes, but I would suggest to you that in a global economy it does matter. I think we're in agreement that the personal income taxes may not be our most competitive form of taxation.

Our value-added tax, when you compare that in a global economy, is in fact in line with what's going on around the world. Corporate taxes in Canada, in specific sectors, are in line in some sectors. They're not, for instance, in the service sector, perhaps, and I go back to the Mintz report and how it talked about the realignment of corporate taxation. That's the other part I want to touch upon.

I would agree that tax burden is important, but I would also suggest to you that where that tax relief is provided is also important when we compare ourselves in the global economy, in particular with our neighbours to the south.

• 1635

With respect to the Mintz report—and I don't know how familiar you are with the Mintz report—its basic recommendation was to bring neutrality to the tax system. In other words, try to take out of the tax system things that would cause behavioural change. In essence, you do this not because it is the most economical thing for you to do, in terms of business, but because there is a tax advantage to doing this and that's why we do it. Then there's some economic benefit to that, as a result of it.

He argues for neutrality. How do you defend your recommendations, which in essence would skew the system even more in certain circumstances versus a report that calls for neutrality? Or do you agree that we should move toward greater neutrality? A trade-off, for him, would be greater neutrality and a reduction in the corporate tax system.

Mr. Terry Ruffel: We discussed the Mintz report very briefly. I don't think any of us would pretend that we've made more than glancing comments on some of the major issues there, so I think probably we're a little out of our league to comment on that.

Jack, is there anything else you could add to that other than admission of our lack of knowledge about it?

Mr. Jack Shand: The only thing I'll say is that having worked with literally thousands and thousands of business people across this country throughout my career.... You made a statement a little bit earlier about what induces people, particularly small-business people, to create jobs. I think we can't lose sight of the fact that sometimes it's the opportunity that they see, and a gentle push, through an incentive, will cause them to make the decision that now is the time. You know, it's somewhat related to the whole issue of consumer confidence.

What prompts Canadians today to go out and have retail sales going up when their household debt is so high? It is because they're confident. They're obviously confident that they will be able to repay that debt in the future. I think there's something to be said for that.

My members, the constituents I represent, are, among other things, looking to do business in the United States, to export. For those small-business people who have not yet done this, sometimes they need some incentives. You know, they put the decision off. It's not about having a lot of orders at the door that suddenly you're compelled to fill or you're going to annoy all of these customers. It's about opportunity.

I think that if there are going to be policy incentives in the tax system, they should be very much geared toward encouraging growth activity in the economy. My view is that this is entirely consistent with the submission we have put forward today. Just to remind you again, it says to very much stay the course and focus on reducing the debt. When we have made considerable progress in that regard, here are a number of options that we feel could potentially maintain a level of confidence and activity in the economy, potentially even beyond what its normal course of buoyancy may be.

Mr. Tony Valeri: I think everybody's in agreement with that. The only point I was making was how best to achieve those objectives while at the same time remaining competitive within our tax system, and to identify what's uncompetitive and how to deal with that, and what is competitive. Why push that further when we are already substantially more competitive? And I only refer to the EI scenario.

Another question would be, and this is another point—

The Vice-Chair (Ms. Paddy Torsney): Before you continue, I think Mr. Johns and Mr. Ruffel were trying to speak.

Mr. Stephen Johns: I just want to say very quickly that while we may well be competitive in a relative sense, in certain taxation categories, I don't think that should make the federal government shy about taking a look at the types of things we are proposing.

Currently in Canada the economy is relatively buoyant, relatively bullish. There are regions that are struggling, but, hey, the dollar has just hit an all-time low again, the stock markets continue to do a bit of a free-fall, and there are still problems in Asia. There are legitimate threats to this little wave we're rolling along on now, and I think if government doesn't work toward creating a climate that makes doing business in this country and beyond an attractive proposition, that bubble could very quickly burst.

• 1640

I believe our economy, while in fairly good shape now, is also very fragile. Certainly our industry, the retail building supply industry, has just weathered six or seven years of economic storm, if you will. We're kind of enjoying what's now available to us in terms of an economic foundation, but that could be a fleeting thing in the absence of some initiatives of the sort we're talking about or proposing.

Mr. Terry Ruffel: I think Mr. Preece talked about the tax burden, Mr. Valeri, and I do think you've touched on a huge question. You heard our comments on the burden, and you touched on good tax mix and where Canada is not competitive. Hopefully when you get around to the tax dividend, you'll answer that question about good tax mix and where we're uncompetitive—and you heard my comments about where I think it is.

Mr. Tony Valeri: We're also uncompetitive in property taxes, which is another burden itself.

Mr. Terry Ruffel: If you could do something about that—

Mr. Tony Valeri: Unfortunately....

But I want to go back to the point you made, Mr. Johns, about ensuring that the climate is correct. Of course the climate, in my mind, translates into fundamentals: interest rates, inflation, declining debt, balanced budgets, all of those things.

The reason you made the reference to our bubble may burst is because of some of the things that are going on around us, not in Canada but things that may be going on in Asia. That's why we have a problem out in western Canada in terms of commodity prices. Everything that happens around the world impacts us.

I only make the point that everyone is in agreement with the objectives you've laid out, but it's just how you get there—always remembering that any tax incentive that goes into the system needs to be paid for through some other tax, either increase or something you can't do.

So I appreciate the comment about the mix, but I'm somewhat surprised that we continue to focus on the EI rather than where in fact we are not competitive. I would have hoped you would have come and said that EI is competitive when we compare ourselves to other countries, but personal taxes are not, so get the debt down. It's sort of the things that essentially we're facing, the challenges we're facing.

Mr. Terry Ruffel: Maybe we could be more competitive in EI.

Mr. Jack Shand: And if I may, two of those three points are in fact addressed and are central to our submission.

The EI issue is one that was raised here today by the committee. There is no discussion of EI in our submission. There are no recommendations with respect to EI, either reducing it or otherwise. But the central points of our submission are get the debt down and focus on some measure of tax relief—in your case, personal taxes.

Mr. Tony Valeri: So that I'm clear on the EI question, then you're not really pushing for an EI rate reduction. In a world of trade-offs, in a world of deciding, everybody would love to have an EI cut, a personal income tax cut, a corporate cut, debt reduced, everything in line, but that's not the real world, unfortunately.

Mr. Jack Shand: We wouldn't be unhappy with an EI cut. Certainly I think our members would be pleased with it, but—

Mr. Tony Valeri: At the expense of a personal income tax cut.

Mr. Jack Shand: —I think it's reflected in the submission that it is not the priority. The priority recommendation we focused on is personal tax and/or GST.

Mr. Tony Valeri: So in a world of trade-offs, EI versus PIT, your recommendation would lend itself to support for PIT, personal income taxes.

Mr. Jack Shand: Yes.

Mr. Tony Valeri: Thank you.

The Vice-Chair (Ms. Paddy Torsney): Thank you.

Mr. Epp.

Mr. Ken Epp: Some of the issues I have on my list have been discussed in between, so I will do some of the others.

You have concern about the national debt, and you talked about the ratio of national debt to gross domestic product and all of these things. Why do you care? What difference does it make to your business?

• 1645

Mr. Terry Ruffel: As Canadians, I think most of us, Mr. Epp, compare it to our own businesses, and maybe compare it to our own lifestyle, where we have a mortgage. Mr. Valeri touched on it a minute ago, saying that our house is in order, and Mr. Johns certainly touched on it: these are the good times.

There could be a shock to the Canadian system, and to spoil many of the sacrifices we've made and the burdens we've paid over the last number of years to pay down some of these deficits is our national debt. Things could turn very quickly against us, so I would urge that we not forget the mortgage, where there's an opportunity to knock down the $3 billion in your contingency fund. It's an excellent idea.

If a shock to the system came with another downturn and we saw our national debt balloon, it would be a sorry state of affairs that we may have lost all of the gains we had.

I just can't help thinking of it as a mortgage, and maybe that's my nature, to pay down the mortgage. I think it would be in the best interests.... Certainly where the debt is outside, owned by foreigners, that could be a major shock to us if the Canadian dollar fell further out of bed. So I wouldn't jeopardize the gains we have by ignoring our rather substantial national debt.

Mr. James Preece: One of the direct implications is what Terry commented about earlier: two days into the program, there were no funds left on a training initiative. If you have no debt, you have more money for training.

A comment made earlier by Monsieur Perron was dealing with the transfers on social programs and whatnot. With each province going through its cuts, without the debt, there's more money in the system to be able to deal with those areas. With the high unemployment of the youth and the impacts on Ontario in particular, with the implications for the adult training programs being removed from high schools, there's going to be greater need for training in order to get those people into the workforce. All of that could be made available by the huge amount of resources that could be freed up as a result of not paying down the debt, once the debt's paid off.

Mr. Ken Epp: In other words, not using our money for interest; instead we use it for something else.

Mr. James Preece: Why give to somebody else?

Mr. Ken Epp: That's what you're saying?

Mr. James Preece: Yes.

Mr. Ken Epp: Okay.

You also talked a little bit about tax reduction, GST, and so on. Is the GST onerous to you because of the cost of the tax itself or the administration of it? Which annoys you the most?

Mr. Terry Ruffel: Running a business, most businesses don't pay GST. It's a flowthrough. We have our input tax credits. So certainly from a business perspective, it's the administrative burden of the GST and the regulations.

As I commented earlier—I don't think you were here, Mr. Epp—what we have essentially done is taken a very complicated Income Tax Act and lobbed on a GST that mirrors the Income Tax Act in many ways. All in the name of justice and total fairness, we've made it extremely burdensome.

Coming back to the issue of business meals deductibility again, where you have to track your GST and eliminate some of the input tax credits, from a business perspective, I would say the administration of the GST is probably the biggest burden, particularly where you get a GST system that mirrors a very complicated Income Tax Act. I think you talked about 2,000 regulations in the tax code.

So from Canadians' point of view, they have to bear the brunt of the final cost of GST.

Mr. Jack Shand: It was the introduction of the GST that I think really created the greatest headache for anyone who had to apply it. Computer programs had to be changed, and a significant learning curve and costs were associated with satisfying the government's requirements vis-à-vis GST. The regulation, filling out the forms, etc., continue.

So I would think for the members I speak for, Mr. Epp, the consumer impact would be the much greater concern at this point, and if there were going to be any change or movement on the GST, it should be to reduce the rate.

Mr. Ken Epp: Okay.

I want to ask you about import and export. I don't know whether it affects your groups. Do government policies on import and export affect you, and if so, in what areas should we do things better?

Mr. Terry Ruffel: Jim and maybe Jack are rather heavily involved in both those areas. Does somebody want to comment?

Mr. James Preece: You can go first.

Mr. Jack Shand: Oh, thanks.

Voices: Oh, oh!

• 1650

Mr. Jack Shand: My members, Mr. Epp—and there are some 1,500 businesses right across the country in our organization—are extensively involved in import and export. That's all they do.

Right now there are two major issues. The one that's relevant to this committee potentially is the whole question of the value of the dollar. But as has been acknowledged as well, that is also, with respect, beyond the control of this committee and beyond the control of this or any other government.

A range of regulations, from an import perspective, just drive businesses around the bend—container inspections and all these kinds of things that go on at the border—but again, that's beyond the purview of the committee.

To answer your question, for the most part, we've found the members don't have major concerns. There are some minor irritants in terms of how some of the roles are applied, but clearly the members will be focused on the decline in the Canadian dollar. Ours is an industry that imports extensively from the U.S., so you can appreciate where our dollar has performed against that and what it means to the cost for their business and then to the end consumer.

Jim.

Mr. James Preece: We're not unlike Jack's group in that our industry imports a great deal. We track a number of categories through Stats Canada, and amazingly enough, we actually have a surplus in this country in terms of our exports versus our imports.

The one area, although it's not a financial one per se, is certainly harmonization of the labelling issues, with our concerns in Quebec versus a lot of our imports coming from the U.S. and their lack of receptivity to complying with Canadian standards with respect to labelling. Those are not financial issues, but they nonetheless pertain to import-export.

Mr. Ken Epp: I have one last one, and it has to do with capital gains. Do you think it would be good for our economy if capital gains investments were eliminated altogether? I know we already talked about the expense of it, but you're talking about increasing the lifetime limit from $500,000 to $1 million. If that's good, then why not eliminate it altogether?

What I'm asking you to guess at is, if that were done, would the boost to our economy in Canada be sufficient to offset the losses from that?

Mr. Jack Shand: I think it comes back to a point Mr. Valeri raised earlier about where Canada stands on the competitiveness. Obviously for a great number of Canadians, $1 million is just a dream, but for our constituency, which represents small business, quite often family-owned small business, when you take their principal residence, the value of their small business, RRSPs, and goodness knows what else they've managed to accumulate over a lifetime, $1 million is not what it once was. In that respect, this recommendation particularly relates to the impact on and benefit for our constituents, who are small-business people.

I will say this. Mr. Szabo asked us a question earlier about the value of that 1% on the GST, and it's our philosophy that we like to come to committees with solutions, not positions, and to have our numbers. Unfortunately we couldn't do that on this occasion, because we were asked to be here on such a short turnaround, two weeks.

Mr. Ken Epp: So was I.

Voices: Oh, oh!

Mr. Jack Shand: But we certainly have agreed as a group to do those numbers and have those numbers available.

So to your question, Mr. Epp—What's the difference between $1 million and no limit whatsoever?—we'll endeavour, through the tax experts we work with, to quantify that for you. But my hunch is that would be too big a step in the grand scheme of all of the other considerations before the minister and the government. We would be delighted if it were simply increased from $500,000 to $1 million.

Mr. Ken Epp: As I said, I'm new to this, and I may be wrong, but it seems to me there was a time in our history when capital gains were not taxed.

Mr. Jack Shand: There were times when Canadians weren't taxed either, but that's—

Voices: Oh, oh!

Mr. Ken Epp: That's before my lifetime. The other one I remember.

Mr. Jack Shand: If you want a competitive advantage....

Mr. Ken Epp: Yes.

Okay, those are all my questions for now. Thanks.

The Vice-Chair (Ms. Paddy Torsney): Thank you very much, Mr. Epp.

Mr. Brison.

Mr. Scott Brison: I have just a couple of quick questions.

• 1655

You mentioned that there's nothing we can do to fiscal policy, necessarily, to strengthen the dollar. I would argue otherwise: we can do quite a bit in terms of long-term fiscal policy to strengthen the dollar. Over the past year about 20% of our foreign debt matured, and there was very little incentive for it to be renewed in Canada at this juncture, with our interest rates. If we reduce our debt, our exposure, as you've suggested—and particularly our foreign debt—will be less and that will have a significant impact on the dollar in the long term.

How does a low dollar affect your membership? There are some arguments—and typically, I disagree with them—that we can devalue our way to prosperity. In the short term you can do that, but in the long term those are pretty specious arguments. I'd be interested in knowing the impact on the quality of life of your constituents. I'd also be interested in knowing your perception of the impact on Canadians, particularly consumers, of the ridiculously low dollar.

The Vice-Chair (Ms. Paddy Torsney): Mr. Preece wants to speak and Mr. Johns wants to speak. Flip a coin.

Mr. James Preece: All right, I'm closest.

In our industry we've gone through tremendous mergers, and because of that a lot of the parent companies in Canada are North American-based or global companies. And over the last little while, they've negotiated North American pricing, which essentially means that they establish that it's a dollar for this product regardless of whether it's in the United States or Canada. What happens then is that they tack on the exchange, so obviously, the lower the dollar, the higher the cost of the product in Canada. But it's uniform across the industry. So the higher dollar then means, in essence, that the cost of the product comes down for Canadians. And that probably is the most material thing.

Our industry doesn't necessarily export a tremendous amount as far as domestic, Canadian-owned companies are concerned. They tend to be companies operating in Canada and exporting products back to their parent company, in the U.S. perhaps.

So there would be a reduction in cost for the consumer.

The Vice-Chair (Ms. Paddy Torsney): Mr. Johns.

Mr. Stephen Johns: Obviously from the perspective of our associate members, who are largely manufacturers, the current level of the dollar is probably perceived as a good thing. Many of those manufacturers export, but they are also doing very well at present in serving the retail building supply and hardware industry.

But I was relaying a story to my colleagues earlier today. I was at the international builders show in Dallas in January and was speaking to a number of major suppliers of building products and hard-lines items. I was talking to them in terms of the Ontario market and was interested in finding out their level of interest in coming to Ontario, and for that matter to Canada.

A lot of these people said they'd really like to get up here and offer their products to the marketplace and give the consumers and the retailers more choice, but at 69¢ or 68¢, they said they simply can't afford it. They said they can only shave their margins down so low; at a point, it is not viable. And we're just about at that level, if you're to believe the likes of some of these major vendors that I spoke with at that time.

So as to whether or not that's a good thing or a bad thing, I guess it's a perspective thing.

Mr. Scott Brison: Also, the other policy that can strengthen the dollar is reduced taxes, which can improve long-term economic growth and productivity. That's something you've presented as well.

The Vice-Chair (Ms. Paddy Torsney): Thank you.

Mr. Szabo is next and then I have a couple of questions.

Mr. Paul Szabo: I just did a telephone interview on a radio show—CFRA—about the Canadian loonie, which closed at 68.04¢ today. And depending on where you are in the scheme of things, it's a good thing or a bad thing, or you could be somewhere in the middle. Obviously tourism and exports are very important to us, but if you're an importer of goods and services, or if you're a traveller, etc.....

But there's a process of arbitrage that always takes place, and the dollar right now.... We're members of a global economy, which means that when the Asian crisis continues to percolate there is a significant shift to U.S. currency and we feel those pressures.

• 1700

Our growth has been and continues to be projected to be the strongest in the G-7. Interest rates are at levels that are very useful for business for investment purposes and for consumers to borrow for leveraging.

There is a lot of give and take and trade-offs, and it's a very difficult thing to pick things. I think Canada has shown some restraint as far as being knee-jerk reactors to changes in the economic marketplace.

I think I have a good idea of your commitment to a firm position on debt reduction. You've made a good case with regard to one way or another delivering some sort of tax relief to Canadians, simply. And it should be tangible. If you're going to give them a penny, don't give it. If you're going to give them a dollar, it's better. And I think I agree with you. I would rather make it a substantive change that people appreciate.

You do know, however, that even in Ontario, where Mike Harris gave a 30% tax cut, most Ontarians probably would say they don't think they really saw it all that much, because it was spread out over all their pay cheques, plus they're paying user fees now on a lot of things they didn't used to pay fees on. So if you look at just one very narrow part of it, you know, it's always good to see.... Ten cents on the EI premium is worth $700 million of revenue to the government. It's big numbers. And yet to pass on a 10¢ saving to ordinary Canadians.... They wouldn't see it, and I'm not sure if that would be enough. I think we have to look for creative ways to make sure it's a meaningful change.

Having said that, there still is this issue of spending. And I think it's important to give an idea from your perspective as to whether new spending is in the cards, whether we have to backfill a little in areas. I don't know whether you get that kind of feedback, but I do think we see a lot of pressure with regard to health care and education, investment in children and, basically, the social safety net, which has, over the period of getting our fiscal house in order, probably taken as tough a beating as any business has. Everybody shared the burden here.

And I'm wondering if you have a comment with regard to spending as capping spending or reallocating from existing envelopes or whether you feel there is an area—or some areas—where new spending would be appropriate.

Mr. Terry Ruffel: I'll give you a quick answer and then I'll let the others comment.

In the survey that we did, Mr. Szabo, new spending came very low on the scale of what to do with the tax dividend. You heard about national debt and personal income taxes. It seems to me that about 8% of the members were in favour of new spending. There was a very low return there.

If I had to make a suggestion about priorities, I think maybe the Canadian taxpayer might come up first as a priority. Mr. Epp talked about the national debt and asked if it is important. Yes, it is extremely important. The wonderful opportunity to pay down the mortgage a little and redirect interest payments that are going to investors and not to low-income earners, to the health care system and to higher education.... On a priority list, I would probably say that there's a great opportunity in the next round to put some really meaningful things back into that, but as for new spending these days, I don't think that's the priority, certainly from what I'm hearing from members.

Jack and others? Steve?

Mr. Jack Shand: Our recommendation is that government should be committed to continuing to identify questionable or wasteful sources of spending and eliminate them. You people, more than even we are, are certainly aware of the perception many Canadians have that all federal governments generally have managed to do is pass the burden down to provinces and in turn, then, to municipalities. Their perception is that the government really hasn't put its own house in order; it's just shifted the burden somewhere else.

Whether that's true or not, I think many Canadians—and certainly the business community—would strongly encourage the government to continue to look for areas where cuts can be made. I don't think they're in the areas that you refer to. I think more than enough has been done there. But there may be other areas, and if I had the answer I'd give it to you, but I don't.

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Mr. Stephen Johns: Mr. Szabo, you made reference to the situation in Ontario and the Harris government policies. Whether it's coincidence or otherwise, the fact of the matter is that in Ontario—and you probably already know this—in 1997 we saw significant economic growth. If you talk to just about any of the economic pundits and the banks, the suggestion seems to be that growth in the order of about 4% in real terms is expected in Ontario in 1998, with maybe a slight cooling off to about 3% in 1999.

Total retail sales in 1997 increased by some 7.3% as compared to the previous year, and projections are for sustained growth in that area in Ontario through 1999. The labour market has improved dramatically, and I think that's really the fundamental reason for that retail sales spike.

Employment in Ontario grew by 1.9% in 1997. The unemployment rate slipped to 8.5% from 9% in 1996. They're talking about job growth in 1998 in the order of 380,000 jobs, and if that figure came to fruition, we'd be looking at an unemployment rate in Ontario of slightly under 7% in 1998. It's projected that this is in fact going to happen. We could be looking at unemployment in the order of just over 5% in 1999. As I'm sure you're aware, those are the lowest levels since 1990.

So some of the things we're talking about, which may not necessarily be inconsistent with what's going on in Ontario, theoretically could spur on similar results, economic impacts, if we're to accept that as a legitimate template.

Mr. Paul Szabo: Okay. That's interesting, because the Conference Board made a pretty good case that Ontario's tax cut had nothing to do with the job growth in Ontario; it all had to do with low interest rates and getting the fiscal house in order. But that's a debate point, because you can't colour-code dollars for impact.

I appreciate your views. Thank you.

The Vice-Chair (Ms. Paddy Torsney): Thank you.

I have a couple of questions. Although in reviewing the recommendations you didn't come to talk about EI changes, there was a mention that if EI premiums were lower there would be this increase in job creation. I wonder how many of your members hired how many people under the new hires program, which of course was an EI holiday for anybody adding additional staff.

Mr. Jack Shand: I'm sorry, I don't have an answer. I don't know, not today. I would be happy to get it for you, though.

The Vice-Chair (Ms. Paddy Torsney): It would be quite interesting if you could survey that, because that wasn't just a 10¢ reduction; that was a complete freebie. It would be pretty important to see that. I think it would be an interesting measure of whether or not changes in EI....

Mr. Paul Szabo: How many new jobs did that create?

The Vice-Chair (Ms. Paddy Torsney): We have in fact reduced the rates each year.

For my second question, Mr. Ruffel, you talked about the co-op types of programs or mentoring and sort of waiting for government to ask or something—I'm not sure. How do you see this process happening?

I know of other organizations, certainly, that have taken charge and started their own programs, whether it's credit unions or life insurance companies or different groups, saying that national unity is important, and we're bringing together kids from across Canada; quite aside from any government investment, we've decided this is important and we're going to do these things.

I hear you talking about mentoring, and Mr. Shand certainly has identified it as an issue. I gathered from the way you've positioned it that somehow we were failing to ask you to do something. Is that how you see it, that we have to come up and ask?

Mr. Terry Ruffel: No, I don't think that's quite positioned right. My comment was that I thought there was a great opportunity, a tremendous amount of goodwill out there for associations to do something.

Probably what I've seen is more of a debate whether this is a federal issue or provincial issue. And I think the opportunity for goodwill, if it's going to be nudged forward—and by the way, I think there is an important role for the federal government to do something—is being lost mainly because of a lack of funding and a huge debate as to whose jurisdiction it is.

Jack, do you want to elaborate on that a little bit more?

Mr. Jack Shand: No.

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The Vice-Chair (Ms. Paddy Torsney): I guess I'm still confused, because if you needed to hear from one federal politician that I think associations and businesses and the sectors you're in should take on more students or should do something with their local high schools or should make it a priority for their members to get busy and mentor young people in their community, you just heard it. I don't think that stuff takes money from the federal government. I think it's about your association deciding itself that this is a priority, and I know members of your association do it already.

So I'm wondering, what more prodding or what debate is taking place between provincial and federal governments that you think is hindering you guys from getting involved?

Mr. Terry Ruffel: You're right. I think Jack touched on it earlier in his comments. There should be a major initiative on our part to employ younger people. That said, I think where things probably work best is with partnerships. I think if we could partner, we'd probably get a bigger bang for the buck and a bigger commitment.

I've had a very quick look at an internship program we're looking at, and it's a huge cost. I'll be honest with you, I would need another staff member just to administer the intern program. Where government is particularly effective, I believe, is where you partner with associations and you partner with industry, and if you wanted to, possibly redirect—as Mr. Szabo said a minute ago—where you see new funding or expanded funding. There probably is an opportunity there. Sectoral councils have partnership programs, I believe. If I had to put some dough somewhere, it would be in a great opportunity to partner with people.

What I've also seen is we bring our dollars and you bring your dollars, a matching concept, a contribution concept. It's very, very effective.

If you wanted to take something, Madam Chair, that's maybe rather small and you wanted to kick-start something in partnership programs—and I do believe we have to bring our own money and our members have to bring their own money—then you could really maybe make a big difference. So there is one idea for new spending.

The Vice-Chair (Ms. Paddy Torsney): Okay. And even before we get to that money, I do encourage you in terms of your newsletters and your communications to maybe highlight some of the individuals in your organization, at your annual general meetings or whatever, who have done things. I know my office has volunteers and has young people in a co-op program, and there are days when I think I have a full-time volunteer coordinator on staff. But it's pretty important to the young people. They grow a lot, and I know in my community it's a big part of it. It's just considered everybody's responsibility and they do it. Yes, there is a cost to each individual business, but it's pretty important.

I think it was you, Mr. Ruffel, who mentioned that you didn't want targeting on tax relief. I thought, wow! Do your members think it's great that we have bracket groups, that we have people earning $7,000 in Canada paying taxes? Or do you think they deserve a little more relief than people making $150,000 a year? That's what targeting means, focusing on the people making the least amount of money.

Mr. Terry Ruffel: Certainly for us—and I guess from our associates' perspective let the others comment—we think taxes should be as low as possible and as broad as possible. Any sort of tax policy should have taxes as low as possible and as broad as possible covered. That's why I think even our comments about GST, where you're starting to get hints about exemptions here—we just see ourselves going down the same road as the old manufacturers sales tax. You couldn't understand the tax codes. Be assured that, from our perspective, as low as possible, as broad as possible, and.... I'm not sure Canadian taxpayers earning $7,000 a year are still on the tax payroll—

The Vice-Chair (Ms. Paddy Torsney): Yes, they are.

Mr. Terry Ruffel: Then they need relief like the rest.

The Vice-Chair (Ms. Paddy Torsney): Does anyone else wish to comment?

A voice: I agree.

The Vice-Chair (Ms. Paddy Torsney): There are a couple more questions.

Mr. Paul Szabo: The GST credit that they get, they actually, on a net basis, don't pay any tax, but—

The Vice-Chair (Ms. Paddy Torsney): Not under $10,000, you're definitely not paying tax.

Mr. Stephen Johns: Beyond that, in all honesty, as I reflect back to 1989 or 1990, when we were getting into the whole GST debate, the association I now run, in fact—I mean, we had some issues, obviously, but we promoted harmonization. We also talked about reducing that rate to 2% or 3% and just deleting all exemptions entirely in the interest of simplicity, universality, and neutrality and all those neat things that seem to be coming up again.

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The Vice-Chair (Ms. Paddy Torsney): Mr. Shand, I think it was you who was talking about further recommendations for cuts. I wasn't sure actually, when I read the recommendation. It really just says to remain committed to the policy that we have adopted through program review and making sure what we're doing is relevant. There wasn't much discussion in the document itself about whether or not people had identified specific things they wanted cut, and I wasn't sure if there were things you had in mind.

Mr. Jack Shand: I think I may have tried to answer that question for Mr. Szabo earlier, that our members very much encourage the government to continue to identify areas that are of either questionable or wasteful spending and have cuts there. But specifically, no. What I think we would all encourage you not to do is focus on areas such as health, education, and other areas where there have been significant cuts.

The question and the perception is whether the federal government has done much as opposed to just shifting the burden down to the provinces.

The Vice-Chair (Ms. Paddy Torsney): Okay.

Mr. Jones, if I heard you correctly, I think you were saying that American companies sometimes couldn't compete with products in Canada because their dollar was higher, and I think Mr. Preece said that sometimes goods were cheaper in Canada. Are those two things inconsistent, or do you think they can both happen at the same time? Are goods that are sold in Canada and the U.S...? It did sound like you said they were cheaper in Canada and you said American goods were too expensive to retail here.

Mr. James Preece: No, no. What I was getting at is that with North American pricing this product cost $1 and it's all based on U.S. dollars. So when it's bought in Canada, it's $1.35, not $1. It's more expensive. As the dollar is less, the cost of the product coming across the border is obviously going to be higher.

We happen to be in a hugely competitive market in Toronto, whereby our pricing actually is less than pricing in the United States. What we're running into is the conflict in which the U.S. is saying we want the Canadian price now. So, yes, as the dollar shifts, the cost to Canadians will shift accordingly.

The Vice-Chair (Ms. Paddy Torsney): It has been my experience, especially with some of the North American chains, that goods in fact are cheaper in Canada than they are in the United States because they're being priced at $10 for the item rather than the exchange being included. I can think of hardware, for instance, or certain items. Sometimes they're VAT-priced, God knows how, cheaper in Canada—I guess that's called dumping—than they are in the U.S.

Mr. James Preece: In terms of the office products market, there are instances where products are priced less here than they are in the United States but that's because of the market forces within that environment. They simply won't buy it at this price, so you have to sell it at a lesser price in order to get the business. Because of that, it's driving the price down.

Our industry happened to have fairly high margins back in the good old days, and those margins have come down quite a bit. Those margins may not have come down in certain sectors in the United States.

The Vice-Chair (Ms. Paddy Torsney): Okay.

Mr. Johns, do you have anything else to add?

Mr. Stephen Johns: Just the point I tried to make that if an American manufacturer of say a power tool has set a suggested retail price of $245 U.S. and that price is set within the context of realizing a certain margin, a certain profit, and that same tool or a competitive tool in Canada, manufactured by a Canadian manufacturer, is likewise on the market at around $245 or $250 Canadian, all of a sudden you simply can't compete. The margins are gone, and you're not making any money, so you withdraw from the marketplace. In theory, this could be to the disadvantage of the consumer in terms of reducing the amount of choice.

The Vice-Chair (Ms. Paddy Torsney): Okay.

Lastly, I made a sort of offhand comment earlier when you were talking about tax burden. I really do think language is quite important. You know, as we created this country and we created the things that enhance our quality of life, people thought of it as an investment to pay through taxes for health care. So I encourage you to agree that we need to perhaps re-evaluate some of the language we use.

Again, in comparison with the U.S., I know some of my friends who buy their health care in the U.S. and pay a heck of a lot more and would be quite happy to have the system and the price that we pay through taxes. So while we do call it tax burden, maybe we should think about calling it investment, or what we get for our money. Language plays a role in our perception and in the reality of how we make decisions.

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Mr. Terry Ruffel: Mr. Valeri touched on that good tax mix. Some areas, Madam Chair, as you touched on, are very competitive. Other areas are not so competitive. We're probably losing people, losing jobs, and losing investment. So when you come around to your deliberations, there probably are areas that we need to readjust to bring it back to being competitive and bring it back to a good tax mix.

Mr. Jack Shand: Yes, and I'd just add that the other basic role of investment—and I think we have all followed this philosophy for decades—is that investments should bring some dividend at some point, or they're lousy investments. I think Canadians are simply waiting for the dividend.

The Vice-Chair (Ms. Paddy Torsney): Thank you all very much for participating today and for consulting your own members before you made this report to us.

As you know, we will continue these hearings in the fall, and we will also have cross-country hearings, so your individual members or citizen constituencies are welcome to bring forward their particular ideas if they would like. Carol Chafe, as our clerk, will be putting together that list across the country. You're welcome to participate and welcome to invite your members to participate.

Mr. Epp, it was great having you at the committee for the first time.

We have one last comment.

Mr. James Preece: On behalf of our membership and our committee, I'd like to thank you for the opportunity. We look upon this opportunity as an excellent partnership amongst our industry and our members to be able to participate in what we feel are constructive comments with respect to the upcoming budget, as opposed to having a combative approach to this process. We've achieved that objective in our eyes, in that we've presented some constructive ideas and some positions with respect to how our members feel about the budget, the financial situation of our country. Again, I'd like to thank you for that opportunity, and our members thank you as well.

The Vice-Chair (Ms. Paddy Torsney): And thank you for commenting on some of the areas that are up for debate where you agree with the present system. Sometimes people forget to tell us where they agree with something, and the push seems to be in the other direction, because no one says they do agree with something.

Thank you all very much for coming.

This meeting is adjourned, and this committee will meet again at six o'clock across the hall in the smallest room. Thank you.