FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Monday, May 3, 1999

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[English]

The Chairman (Mr. Maurizio Bevilacqua (Vaughan—King—Aurora, Lib.)): I'd like to call the meeting to order and take this opportunity to welcome the Honourable Tony Valeri, Parliamentary Secretary to the Minister of Finance, as our witness as we study Bill C-72, Income Tax Amendments Act, 1998.

Mr. Valeri is joined here by the following members of the finance department: Brian Ernewein, director of the tax legislation division; Gerard Lalonde, chief of business and property income; Simon Thompson, chief of pensions, resources, trusts and insurance; Robert Dubrule, senior tax policy officer, tax legislation division, tax policy branch; and Mr. Bill Murphy, tax policy officer, personal income tax division, tax policy branch. Mr. Leonard Farber, director general, tax legislation division, is not here, I understand.

Welcome to you all.

Mr. Valeri, you no doubt understand how this committee functions.

You're supposed to say, “Very well, thank you, Chairman.”

Voices: Oh, oh.

Mr. Tony Valeri (Parliamentary Secretary to Minister of Finance): Actually, Mr. Chairman, I was going to wait until my mike came on so that I could say, “The committee functions very well.”

The Chairman: You may begin.

Mr. Tony Valeri: Thank you, Mr. Chairman.

I'd like to keep my remarks fairly brief so that we have an opportunity for some questions. I know Mr. Epp is very happy with that.

Bill C-72, as my honourable colleagues would know, implements the income tax amendments announced in the 1998 budget. In designing any changes to the tax system, the government has always adhered to the principles of its tax policy.

First, the tax system must be fair. With respect to a policy direction, tax reductions must benefit low- and middle-income Canadians first, because they are most in need of assistance.

Second, the initial focus of broad-based tax relief should be on personal income taxes, where the burden is greatest.

Third, given our high debt burden, broad-based tax relief should not be financed with borrowed money.

Each of our budgets has provided targeted tax relief where it would be most beneficial. The elimination of the deficit in 1997-98 has allowed for the introduction of broad-based tax relief measures. With the deficit behind us, Canadians can now look forward to tax relief in budget after budget after budget.

However, in providing for broad-based tax relief, we must be guided by our third principle of tax policy—namely, that tax relief must be sustainable. We must not provide unaffordable relief that would jeopardize our regained fiscal health.

Accordingly, the measures in Bill C-72 first reduce taxes for those who can least afford to pay them—low- and middle-income Canadians.

I'd like to provide an overview of the highlights of this bill, Mr. Chairman, if I could.

There are two measures in Bill C-72 that provide general tax relief. The first increases the amount of tax-free income that low-income Canadians can earn. As my honourable colleagues know, personal tax credits ensure that no tax is paid on a basic amount of income. Prior to the 1998 budget, the basic personal amount Canadians could earn tax free was $6,456. The spousal and equivalent-to-spousal maximum was $5,380.

Bill C-72 increases these amounts for low-income Canadians by $500, effective July 1, 1998. Single taxpayers earning under $20,000 can earn up to an extra $500 in tax-free income. For a family with income under $40,000, the maximum increase is $1,000.

This measure removes 400,000 low-income individuals from the tax rolls, and another 4.6 million taxpayers will pay less income tax.

The 1999 budget proposes to extend this increase to all taxpayers and raise it an extra $175, increasing the total basic amount by $675. Canadians would be able to earn $7,044 in tax-free income in 1999, and $7,131 in the year 2000. At the same time, the maximum spousal and equivalent-to-spouse amounts would increase to $6,055.

Mr. Chairman, 600,000 low-income Canadians will benefit the most from these measures; 400,000 lower-income Canadians will pay no federal income tax because of Bill C-72 and another 200,000 will disappear from the tax rolls because of the 1999 budget measures.

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The second measure in Bill C-72 that provides general tax relief is the elimination of the 3% general surtax on incomes up to $50,000 and a reduction in the surtax for those earning between $50,000 and $65,000.

As a result of this bill, the 3% surtax is eliminated for almost 13 million filers and reduced for another 1 million filers. The 1999 budget proposes to complete this process by eliminating the general surtax for the remaining 2.7 million Canadian taxpayers who continued to pay it after the 1998 budget. As of July 1, 1999, it would be eliminated for all 15.1 million Canadian taxpayers.

I now want to turn to the targeted tax measures in this particular piece of legislation. In each budget since we have taken office, the government has provided tax relief where the need was greatest. Several targeted measures in this bill relate to the Canadian Opportunities Strategy, which was introduced in the 1998 budget to help ensure that all Canadians, especially those with low and middle incomes, have an equal opportunity to participate in the changing economy. The government made a commitment to do this by reducing financial barriers and other obstacles that stand in the way of acquiring skills and knowledge.

Barriers, mostly financial ones, reduce access to post-secondary education for many students. Canadians must be able to access the knowledge and skills needed to find and keep good jobs in a changing labour market, and Bill C-72 implements several measures designed to provide financial assistance to students.

Students need targeted tax relief to reduce their heavy financial burden. A graduate completing four years of post-secondary education faces an average student debt load of some $25,000, almost double the $13,000 average debt load of such graduates in 1990. About 40% of today's student borrowers owe more than $15,000.

Bill C-72 provides tax relief for interest paid on student loans in the form of a 17% federal tax credit that applies to both federal and provincial student loan programs. Almost a million students will benefit from this measure. A student with a $25,000 loan would see their federal and provincial taxes reduced by about $530 in the first year alone. The new credit could mean $3,200 in tax relief over a 10-year pay-down period.

I'd like to remind honourable members that the 1998 budget also contained other student assistance measures, including the following: an increased qualifying income threshold for interest relief on student loans; graduated interest relief; extended loan repayment periods; and an extended interest relief period. Together these new interest relief measures will help 100,000 more graduates.

Mr. Chairman, I'd like to move on to a related area. Canadians who are already in the workforce often lack the resources to upgrade their knowledge and job skills, which is vital in today's knowledge-based economy. To help Canadians upgrade their skills through full-time study, Bill C-72 includes such measures as tax-free RRSP withdrawals for lifelong learning.

An individual enrolled in full-time training or higher education for at least three months can withdraw up to $10,000 per year from their RRSP, up to a maximum of $20,000 over four years, to further their education. The money must be repaid over a 10-year period.

Upgrading knowledge and job skills is also hard for part-time students trying to balance work and family. Accordingly, we are proposing to extend the education credit to part-time students. These students can claim a credit based on an amount of $60 for each month they're enrolled in a qualifying course lasting at least three weeks, and that includes at least 12 hours of course work per month. This measure will facilitate lifelong learning for over 250,000 part-time students.

To help parents save for their children's future, the 1998 budget introduced the Canada education savings grant to make registered education savings plans even more attractive. Providing a 20% grant on the first $2,000 in annual RESP contributions for children under 18, up to a maximum annual grant of $400 per child, makes RESPs one of the most attractive savings vehicles available to Canadians for their children's education.

Bill C-72 proposes several other changes to RESPs. In particular, disabled part-time students would be eligible for educational assistance payments from RESPs for the first time. As well, families whose children do not pursue higher education will, under certain conditions, be able to transfer up to $50,000 from their RESP to their RRSP. This is an increase of $10,000.

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The new caregiver credit is another targeted measure in this bill. The credit would reduce the combined federal-provincial tax by up to $600 for Canadians caring for an elderly parent or a disabled family member. The measure would assist about 450,000 caregivers who wouldn't normally qualify for the infirm dependant credit.

To improve equity in the treatment of self-employed and incorporated businesses, self-employed Canadians will be able to deduct health and dental insurance premiums from their business income.

In addition, Bill C-72 proposes to double the amount volunteer firefighters can receive from a public authority on a tax-free basis, from $500 to $1,000. It's also proposed to extend this measure to other emergency service volunteers, including ambulance technicians and search and rescue volunteers.

Mr. Chairman, these are the highlights of Bill C-72. I believe tax relief is certainly something all parties agree on. The 1998 budget continued the government's policy of providing targeted tax relief and began the process of general tax relief, starting with those most in need, low- and middle-income Canadians.

The 1999 budget builds on these measures as part of a long-term strategy to reduce taxes. Together the two budgets provide $16.5 billion of tax relief over the next three years. The measures in Bill C-72 are effective in targeting Canadians who need tax relief the most.

On behalf of the officials present, I look forward to any questions the committee members may have.

Thank you, Mr. Chairman.

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

We will begin with Mr. Epp.

Mr. Ken Epp (Elk Island, Ref.): Thank you, Mr. Chairman. I am full of questions here.

First of all, technically, what's the probability of an MP actually having an influence on what the Canadian people have already done? The deadline for filing taxes was last week, and that's the period this covers. What is the point of us now debating this?

If a large contingency of MPs said they were voting against this—fat chance with the way the Liberals do things—and if it were actually defeated, would there be retroactive changes? Everybody has already filed.

Mr. Brian Ernewein (Director, Tax Legislation Division, Tax Policy Branch, Department of Finance): There are a couple of elements to the question. First of all, none of this takes effect unless and until it is passed into law. Revenue Canada does have a practice of administering some of the provisions that affect the current taxation year, by which I mean the 1998 taxation year, for which people will generally have filed their tax returns by now.

Revenue Canada is quite clear in two respects. One, they will not administer all the provisions; it will depend on the circumstances. For those provisions they will administer for those budget changes, which they will assess on the basis of that assessment, it is provisional. If it is the case that the proposed legislation is not passed into law, Revenue Canada makes it entirely clear to taxpayers that they will be obligated to issue a reassessment, putting people back into the position they were.

The second point I wanted to make is that there is a limited number of them, but there are provisions in this legislation that relate not just to 1998; they may go back to earlier taxation years. An example is the application of the alternative minimum tax to RRSP contributions, or the retiring allowances into an RRSP. That provision goes back a few years if it takes effect, and only if it takes effect would Revenue Canada administer the law to give the refunds to which those new rules would give rise.

Mr. Ken Epp: So Canadian taxpayers have already filed their income tax for this tax year, based on these provisions as if they were passed in Parliament. Is that right? Is that true or false? I'd like a yes or no to that, if possible.

Mr. Brian Ernewein: I'll try to be as succinct as I can, but it's not a yes or no. How will taxpayers file? It will depend on the taxpayer. Revenue Canada suggests to taxpayers that they may wish to file on the basis of the proposed changes, but those changes won't give rise to a final assessment of tax unless they're passed.

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Mr. Ken Epp: What did the form say? Did it include these provisions?

Mr. Brian Ernewein: The forms, as a matter of practice, often will include recent income tax announcements. They're often indicated through special shading or the like to indicate that they are not passed legislation.

Mr. Ken Epp: Okay.

My next question is to the honourable parliamentary secretary.

Why did this take so long? This was in the works for so long. Why hasn't Parliament dealt with this thing so that at least it was in place by the end of December? Canadians could have known the rules.

Mr. Tony Valeri: It would always be my intention to move finance bills as quickly as possible in the House, but as the honourable member knows, I'm sure, there is a House leader schedule, which the House leaders from the Reform Party, the government, and Conservatives come together to both discuss and set.

With respect to this particular bill, we have moved it along as quickly as possible. As I said, there are provisions in place to deal things if the bill did not pass, but I would suggest to you that we have every confidence that the bill will pass.

With respect to your question, then, I think it's a valid technical question, but in terms of practicability, with regard to the impact on the Canadian people, I don't see that there would be one.

Mr. Ken Epp: Okay, but I think it's a sad commentary. Let the record show that I think no single thing done here in Ottawa affects Canadians more than our tax system. If it isn't a priority of the government to have that straight.... I could list quite a few things we've had to deal with in Parliament that I would see as having a lower priority than this one.

Mr. Tony Valeri: Perhaps I could ask the honourable member to convey something to the House leader of the Reform Party—namely, urge the government House leader to continue to move finance bills as quickly as possibly through the House and through this committee so that we can have that positive impact on Canadians. I would appreciate that.

Mr. Ken Epp: I'll sure be glad to do that—

Mr. Tony Valeri: Thank you.

Mr. Ken Epp: —but let's face it, Don Boudria calls the shots. We know that.

You have indicated in your introduction here that the tax system must be fair. You also talk about “broad-based tax relief” in terms of personal income taxes.

Just about everybody I talk to says their taxes have gone up. This idea of tax relief is, I think, a phantom, and the spin doctoring the government is doing...because there is none.

I had a conversation with a constituent this last weekend that really disturbed me. Before her husband passed away, they invested some money. They chose to invest it in property. She has now sold it, because she's old and she's tired of going after people who don't pay their rent on time.

When she sold her rental property—she had several of them—the tax bill more than ate up any profit she made. If she took all of her expenses out after the rent she was able to collect, and she made some capital gains on this, the tax bill totally ate up all of the profit. Basically, all she got back was her property. She said she could have done just about as well by having her money in a bank account.

To me, that doesn't speak of broad-based tax relief; it speaks to me of tax gouging. I like these words, and they're fine concepts, but I don't think we are implementing them in the types of things we're doing.

I'll get down to some details here in a few minutes, but what's your response to that generally?

Mr. Tony Valeri: I'll provide a general response, and then perhaps some of the officials can speak to your specific example.

In this particular bill, and in Bill C-71 with the 1999 budget, broad-based tax relief would include such things as the complete elimination of the 3% surtax, which affects the 15.1 million tax filers, or the increase in basic exemption of $675, which affects the 15.1 million tax filers. Measures that are also contained in the 1998 budget are targeted, so they're not broad-based.

It's clearly been said, and certainly been a position of the government, that we've started our tax relief measures. It's clear, if one attends Question Period, that there is a commitment to continue to provide tax reduction in a broad manner. We balanced the books some two years ago, and we're starting down the road of broad-based tax cuts.

Now, you've made reference to capital gains. I'll ask an official to speak to an official example, but those would be examples of broad-based tax relief in the last two budgets.

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Mr. Brian Ernewein: I'm afraid I can't offer very much by way of helpful comment on the particular example you gave other than to note that if the tax on this woman's profit from the sale of the rental property was greater than the profit itself, that implies a 100% or greater-than-100% tax rate. Many will say tax rates are too high, but they're nowhere near 100% or more. In the circumstances, it must must be the case that either her perception is not entirely accurate or perhaps there was some calculation of expenses to which she wasn't entitled or able to claim, or perhaps it was something else.

I'm sorry, but it just doesn't jump out at me why the result you described might have arisen.

Mr. Ken Epp: I advised her to go and look at her taxes again. I told her someone had made a mistake. She'd been charged for capital gains since the day she bought those properties, and that was an error. There was something wrong there. I did advise her in that way, but still, she was visibly and justifiably upset about this.

Going along to page 3 of your notes, Mr. Parliamentary Secretary, it says, “personal tax credits ensure that no tax is paid on a basic amount of income”. You have the basic personal amount Canadians can earn tax free, and now there are new numbers. My question is, why aren't those numbers equal?

I'll tell you about something that comes from my own personal experience. In our family, we chose to have my wife as a full-time mom when the kids were small, and I was the wage earner. Very frankly—and I don't know how to say this and still sound politically correct—the cost of maintaining my wife was considerably higher than my own personal expenses. That's true. It happens to be true. Everything, including her clothing, was more expensive.

Now, in terms of our family income, you say she isn't worth as much as I am, and I beg to differ with you. I think she's probably worth more than I am. Why aren't we at least equal?

Mr. Tony Valeri: I never want to get into a situation, Mr. Epp, where I say one individual is worth more than the other.

Mr. Ken Epp: You are, though.

Mr. Tony Valeri: I think you deserve certainly a more technical explanation from a tax perspective, because there is some type of tax philosophy behind this.

Perhaps I can call up one of the officials who might be able to speak to that—unless you've stumped them as well.

Mr. Scott Brison (Kings—Hants, PC): Perhaps I can interject.

In terms of depreciation and treatment of assets, I think in some cases there is some ability to classify certain assets as high-maintenance units.

I don't know whether or not this is what Mr. Epp is referring to. I just offer that constructively.

The Chairman: You're very constructive all the time, Mr. Brison.

Can we get an answer now?

Mr. Ernewein.

Mr. Brian Ernewein: I'm not sure if it's a complete answer, but I believe the basis for the basic exemption, and the somewhat lesser amount provided for the spousal or equivalent-to-spousal exemption, is that a person living on their own requires x amount for basic living. It's a level below which taxes should not apply, because that's the level required for, if you will, basic necessities, basic shelter. For the second person, it would not be equivalent to one's own basic exemption but a somewhat lesser amount.

So it's not the case that two can live as cheaply as one but that two can live more cheaply than one.

Mr. Ken Epp: I guess we shouldn't really be asking the departmental official to answer political questions here, and I think this is political.

The fact of the matter is, a single person can live much more cheaply than a family person who undertakes, with a single income, to support a spouse and a family. I'm not here saying it should be the mom or the dad. I know of both cases.

In the case of friends of ours, for instance, she works as a teacher and he looks after the kids at home. There's no doubt a single person can live much more cheaply than if they're providing for a family. That certainly has been our experience.

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I don't think we'll get an answer here, but I want to be on record as saying very strongly that, first, the spousal deduction should equal at least that of the wage earner in the family, and secondly, the children's deduction, or tax credit, is woefully inadequate.

In terms of the actual amount of money it takes to raise kids, I've heard numbers like $60,000 to $100,000 to take a child from birth until they're finished grade 12. In terms of what we can use from our earnings to provide for those children, it's all taxed first. You have to earn $200,000 in order to provide $100,000 for your family.

Philosophically, the Liberal government is wrong here, because they are really overtaxing Canadian families.

The Chairman: Thank you, Mr. Epp. Your time is up, by the way.

Mr. Ken Epp: Not already; I'm barely warmed up.

The Chairman: You have your own stopwatch there.

Mr. Ken Epp: Yes, but I don't go by it, because you don't go by it.

Voices: Oh, oh!

Mr. Ken Epp: What I do is note, “This is now the benchmark”, and I want to see how much time—

The Chairman: You're not getting a lot of use out of that great investment you made.

Mr. Szabo.

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

With regard to this issue of the spousal amount, the non-refundable tax credit, being a different amount from the personal amount, I believe the personal amount is $6,456. The spousal amount is $5,380. The differential is $1,076.

Mr. Epp is suggesting that they really should be equal, but there is another difference that he possibly isn't aware of. With regard to the spousal amount a one-income family can have transferred to the spouse who files a tax return, the spouse can earn up to $538 tax free before any amount of that transfer is reduced. Any excess of income of the stay-at-home spouse—that is, in excess of the $538—starts to reduce the non-refundable tax credit of the transfer. It just happens that $538 is one half of the difference of the $1,076.

Even if you assume it's the highest marginal rate, a 50% tax rate, it effectively means they're equal. The two benefits are equal.

Speaking historically, I believe it was put in there so that a spouse in the home with no income could earn, say, passive income—namely, interest income, non-earned income, not employment income—and not have to file a tax return. It saved paper. However, the actual value of the benefit wouldn't be diminished as long as the aggregate income of that spouse was not over the $538.

So the reconciliation is not that the two numbers are different; there actually is this $538 additional tax shelter that a stay-at-home spouse does transfer to the parent.

With regard to the other issue in terms of how much money it takes to raise a child, it's not as simple as saying you made $60,000 and it's all taxed. The fact is, we have an awful lot of other benefits that are included exclusive of the Income Tax Act. The child tax benefit, for example, is not taxable, and it creates cashflow to the parents. A number of deductions are also available. In our history we've always had all types of benefits for families raising children. In fact, the differentials are not as great.

So it's not simply that I've forgone a job of $20,000 a year and therefore I've lost $20,000. The fact is, we pay taxes and we get benefits for them, such as our health care system, assistance for seniors and the disabled, and all the other things that are included there.

I wanted to raise that only because I think it's not quite right to simply leave it as the simplistic, “We pay tax and get nothing.” In my view, Canadians do not know very well what value they get for their tax dollars.

To the extent that there are other things that can be done, or changes to be made, we should be more constructive about how we can make changes that would have a better value for the tax dollars. Those are the types of things we deal with as parliamentarians to find out how we can better invest taxpayer dollars, because the government has no money itself.

I just wanted to raise that.

Mr. Valeri, thank you very much for your presentation with regard to the budget information. Obviously it's another building block on the path set by the government, starting back in 1994, with its first budget.

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With regard to the point Mr. Epp was raising, that we have legislation before us now that affects returns that have already been filed by the vast majority of Canadians, I have only one question. Were there any particular items that required additional work or discussion or vetting to ensure that the legislation as proposed was going to be operative? In other words, were we dealing with any problems or is this simply a matter of timing?

Mr. Brian Ernewein: The budget legislation, and indeed all our legislation, generally benefits from the consultation exercise, and in this case is consistent with what we've done in many other circumstances. We had the benefit of comments after the budget was released. We also had the legislation issued in draft form to get comments on that.

In response to the question, I'm really reflecting back on comments we received on the draft legislation itself, on the details of the legislation. We received a number of useful comments. The Canadian Life and Health Insurance Association sent in a submission concerning the budget proposal to provide deductibility of the cost of health insurance for self-employed. The language in the legislation itself is fairly elaborate, with a fairly complex set of rules to try to obtain comparability between different plans and benefits. They made a number of useful suggestions on that score.

As well, shortly after the budget went out we received some representations in relation to the proposals concerning employee relocation, moving expenses, and the taxation of the taxation/exemption of certain compensation for housing losses on a move. As a result of those representations, the Minister of Finance announced his intention to delay the implementation of part of that proposal.

There's a proposal in the 1998 budget changes relating to loans by corporations to non-residents. It doesn't affect the general taxpayer, but it's fairly complicated in the drafting and in the discussions. We received some representations from people interested in that area.

That's very much off the cuff. I'm sure there were other representations, and useful ones, but I don't recall.

Mr. Paul Szabo: What about with regard to appropriate regulations, where they continued to be substantially worked on after the budget implementation bill was put together?

Mr. Brian Ernewein: Are you speaking of the income tax regulations further to the income tax amendments?

Mr. Paul Szabo: Not everything is necessarily in the bill. There are regulations appended that could be amended from time to time by Order in Council, etc.

Mr. Brian Ernewein: That's true. In the case of this budget, there's not much that will be required by way of regulation as opposed to amendments to the Income Tax Act itself. There's a budget proposal relating to a reserve for insurance companies for provision for earthquakes. This will be done by regulation as opposed to an amendment to the Income Tax Act.

Offhand, I'm not aware if there's anything else.

Mr. Paul Szabo: Finally, just generally, is the process we've gone through the same as or similar to the process that's happened in prior years with regard to the timeframe in which we're operating?

Mr. Tony Valeri: I think it's fair to say, Mr. Szabo, that after a budget, draft legislation with respect to income tax amendments will be put out there, essentially for comment from practising tax practitioners and anyone else who wants to comment on the draft legislation to try to improve it for presentation to the House. Normally it gets out in September or in the latter part of the summer, and it's out there usually until the end of the year or perhaps into the early part of the following year.

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When we start to put together the timetable, after the comments come back and after final legislation is prepared and then the introduction to the House, most often we do find ourselves with this type of timeframe. Sometime in the latter part of April, the beginning of May, you end up dealing with the income tax amendments to a prior budget bill.

I guess it speaks to what Mr. Epp was saying a bit earlier. I guess we could add, in response to Mr. Epp, that the intent of the income tax legislation, even after budget day, is to put draft legislation out so that Canadians can comment on that legislation. That gets fed back into the department, which then develops the legislation. Then it goes for further scrutiny amongst the parliamentarians.

Mr. Paul Szabo: Thank you.

The Chairman: Thank you.

Our two final questioners will be Mr. Gallaway and Mr. Brison.

Mr. Roger Gallaway (Sarnia—Lambton, Lib.): Thank you, Mr. Chairman.

I have a quick question with respect to the caregiver credit. A recent Ontario study, or some information I saw recently, suggests that the cost to the public purse of keeping a person in an institution—and it may be a hospital, which is a growing phenomenon, or a private or public residence—costs the public purse, on average, $1,600 a month. And that's in the province of Ontario.

When one compares this credit of $600 with the minimum of somewhere in the neighbourhood of $18,000 a year, then $600 for someone who is a caregiver for a person in need, usually a family member, seems like a paltry number.

How did the department arrive at this number of $600? What were the trade-offs involved in arriving at this number of $600, and with whom did you consult to arrive at this number?

Mr. Brian Ernewein: Mr. Chairman, I'd like to ask Robert Dubrule to sit in and answer this, please.

Mr. Robert Dubrule (Senior Tax Policy Officer, Tax Legislation Division, Tax Policy Branch, Department of Finance): The reason behind the caregiver tax credit was to extend to family members the credit that was available only with respect to infirm dependants. It was realized that many adult taxpayers take care of their parents or in-laws, and it's sometimes rather difficult or very sensitive to have a medical evaluation of the person, recognizing the age of the dependants. We decided to extend, in a way that was at the same level, the infirm dependant to parents and grandparents of taxpayers as soon as they reached the age of 65.

At the same time, we recognized that seniors, when they have no income, have the basic old age pension plus the supplement, which brings that income to around the $10,000 to $11,000 range. Usually at that income level it's not possible, under our income tax system, to claim a dependant given that level of income.

As I said, this is an extension in terms of the infirm dependant credit. As well, it allows a claim with regard to a person whose income would normally allow for a claim of the tax credit.

Mr. Roger Gallaway: Having listened to your response, I would ask you, then, of these 450,000 people referred to in this briefing by the parliamentary secretary, are you suggesting to me that the majority of these people are seniors with incomes in the $10,000 to $11,000 range?

Mr. Robert Dubrule: Since, in the case of dependants who are already infirm, people have access to the infirm tax credit of the same value, what I'm suggesting is that it includes the senior but it may also include a number of younger dependants who may be on welfare, for example, and who would get more than, say, the basic credit, or those who are under 65, are disabled, and get some form of disability benefits that exceed, say, the $6,456 amount that would normally preclude the claim for an infirm dependant tax credit.

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So it's a combination of various types of individuals.

Mr. Roger Gallaway: Okay.

Finally, how do you arrive at the number of $600? Where did you come up with it?

Mr. Robert Dubrule: We simply took what is currently available in terms of the infirm dependant tax credit.

Mr. Roger Gallaway: Which is...?

Mr. Robert Dubrule: The same number. The $600 you're referring to is basically the federal amount of $400 plus whatever percentage of provincial tax is applicable.

Mr. Roger Gallaway: Okay. If I multiply the 450,000 caregivers you've identified in this brief by $600, it's $270 million. It's a very simple mathematical equation. Was that a prearranged number, then? Is this an allotment where the Department of Finance has said, “This is what we're going to give for caregivers”, or is this just a coincidental number?

Mr. Tony Valeri: I think, Mr. Gallaway, it's a bit of both. I think the intent of the particular initiative was to extend the credit, as we did. Within that same debate, I guess, is the trade-off as to what we can possibly do within the financial resources.

In your briefing book it does illustrate what in fact the change cost the Treasury. I believe it's $30 million in the first year, up to $120 million in the second, and $125 million into the third. So it is a bit of what the intent of initiative was, to extend it, and secondly, what we can afford. Obviously, if we had more money to allocate to it, then the decision would have been somewhat different, I would suspect.

Mr. Roger Gallaway: No; my question is, and was, in terms of the number you've given of $600, was that arrived at based on some study or was it just a number based on financial resources?

Mr. Robert Dubrule: I guess the main representation before the budget was to the effect that adult taxpayers didn't get any incentives or tax relief to keep at home their elderly parents. They pointed out to us that because of the level of income, the basic pension and the GIS, it was not possible under the rule then, to have any particular tax relief.

So while the amount is similar to the infirm dependant credit, one has to keep in mind that it provides tax relief in respect of persons who right now are receiving roughly $11,000 per year. Since the GIS is indexed, we will of course monitor this to ensure that where an individual gets only the basic OAS and GIS, a supporting child will be able to claim the full amount of the credit.

Mr. Roger Gallaway: Okay.

Thank you.

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

Mr. Brison.

Mr. Scott Brison: Thank you, Mr. Chairman.

Thank you to the department people and to the parliamentary secretary for giving us some time today.

My first question is on the treatment of income splitting for small business owners. I'd like you to clarify the changes in the treatment of income splitting, because I understand there have been some significant changes in that area.

Mr. Brian Ernewein: This, I suppose, is one of the hazards of coming to the finance committee with one budget after another budget has been tabled, but in fact the income-splitting measures form part of the 1999 budget and are not in Bill C-72.

Mr. Scott Brison: Would you have any difficulty, though, discussing the 1999 changes?

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The Chairman: Let's not waste our time on that.

Mr. Scott Brison: It's your bailiwick, and I don't know when we're going to have you here again.

The Chairman: You don't have to answer that, because that's not in the bill, but if you'd like to, go ahead.

Mr. Brian Ernewein: If this committee is interested, certainly we're prepared to answer the question.

The Chairman: Sure.

Mr. Tony Valeri: In the spirit of transparency and openness, Mr. Chairman, I would suggest that the member from the Department of Finance answer the question.

The Chairman: I'll take that into consideration and report to you at the next meeting.

Go ahead.

Mr. Brian Ernewein: I'm sorry, but can I ask you to repeat the question? I have the subject but not the question.

Mr. Scott Brison: It's with regard to the changes in the treatment of income splitting for small business owners. Perhaps you could just briefly give me the government's rationale for changing the treatment and making it actually more difficult for small business owners to split income with family members.

Mr. Brian Ernewein: By way of overview, the income splitting or income attribution rules have been in the Income Tax Act for many years in an attempt to counter or limit income splitting. The way in which those rules worked or were supposed to work was to say that when property was provided directly or indirectly by, say, an adult to a child, then any income from that property was not to be taxed in the child's hands but instead was to be taxed back in the parents' hands, from where the property came.

That system worked reasonably well until quite recently, when, particularly prompted by a Supreme Court of Canada decision in Neuman, it became reasonably clear to us that the attribution rules would not work.

Our perception of what Neuman means is that if someone can find any amount of money to acquire shares of a company—a very modest amount, $5 or $10, for instance—the dividends that can be paid with respect to those shares can be entirely disproportionate to the amount of the original investment.

In our view the old attribution rules worked well, saying that if father transfers to daughter $10,000 worth of shares, then the $1,000 of dividends paid on those shares are going to be taxed in father's hands. Further, daughter would not be able to lay hands herself on $10,000 from other sources to buy those shares to generate the dividends. It was a closed system. Effectively, father was going to continue to be taxed on the shares of the company and the earnings of the company until daughter became of an age where she could make a contribution to the company and justify taking money out.

However, it now appears, or at least until the budget, that if daughter could find $5 or $10 of her own—and it's much easier to amass $5 or $10 from someone other than father than to amass $10,000—from some other source and invest that in a company—her father's company, for instance—father could cause $1,000 of dividends to be paid on that $5 worth of stock. Because the original capital for that share investment did not come from father, the current attribution rules did not apply to attribute the income back to father.

Christening money, babysitting money, or what have you—if it was not subject to attribution, then it could be used as the handle to draw off quite a bit of money from, as in the example I've given, a private company. There were some other variances of that, which we've attempted to deal with in the 1999 budget proposals, but that was the thrust, and that was the concern.

Mr. Scott Brison: Okay.

I was going to ask about the tax treatment of trust funds, but that is another question that is more in the current budget.

Mr. Brian Ernewein: In the 1999 budget, yes.

Mr. Scott Brison: I won't ask two questions of that genre.

The volunteer firefighter issue is something you raised. I represent a rural constituency in Nova Scotia, where, for instance, most firefighters do not receive honoraria, and yet this tax-free allowance is available to those volunteer firefighters or emergency service volunteers who receive some form of honoraria, and it benefits those individuals.

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For those who do not receive any honoraria, there are still costs, but most of the volunteer fire departments—for instance, in a province like Nova Scotia—can't afford to pay out any form of honoraria.

I've had a lot of representations to me, not just by firefighters in my riding but also by emergency service volunteers throughout the province, on changing the tax-free allowance.

What's the phraseology—tax-free allowance or deduction?

Mr. Ken Epp: Personal tax credit.

Mr. Scott Brison: Well, we're changing it to a tax credit as opposed to—

A voice: A tax-free allowance.

Mr. Scott Brison: I see it here.

We're changing it to a tax credit. Perhaps even having it available for a smaller amount, but having it available to all emergency volunteers, would, in a non-discriminatory way, help all emergency service volunteers who have a significant level of cost out of their own pockets to participate or to volunteer in that way.

Have there been representations made to you by organizations, and what would be the aversion to the federal government addressing that issue?

Mr. Tony Valeri: I can start off and then perhaps you can step in, Brian.

Essentially, the intent of going from $500 to $1,000 was that when you're thinking within the tax system itself, it seems somewhat unfair that someone giving of their time to volunteer—and in the case of firefighters, putting their life at risk—who might be receiving $500 or $1,000 to cover costs would actually have to then pay income tax on the $500, or $1,000 in this case. The thinking behind it was that it's at $500, so let's double it to $1,000. We didn't want to collect or trigger income tax on that particular amount of money.

What you're suggesting, I think, may possibly speak to something outside of the tax system itself if you want to then recognize volunteerism and perhaps have some type of program out there that might actually transfer an amount of money through federal to provincial, provincial to municipality, or municipality to volunteers.

I mean, that's a mechanism that could be discussed outside of the tax system, but the intent here was to not unduly penalize individuals giving of their time and receiving income and then suffering a tax consequence because of that.

So the intent was to deal with that and take it from $500 to $1,000.

Mr. Brian Ernewein: I don't have very much to add other than to make note of or reiterate the fact that the $500 exemption for volunteer firefighters has been part of the system for quite some time. At that level, what the budget proposes to do is update the figure and extend it to other emergency service volunteers.

Mr. Scott Brison: Okay.

The post-deficit environment in which we find ourselves now does provide us with opportunities for not just tax reduction but also a more holistic approach to tax reform, to actually address some of the systemic issues within the tax system that some view as being contributing factors to, for instance, the ongoing threat to Canadian productivity.

I would appreciate your feedback on a couple of issues. First of all, one of the things we're hearing from people presenting to the committee on the productivity issue is that productivity levels in the country are very closely linked to investment levels, in some cases foreign investment, but even in terms of investment levels domestically.

Taxes on income on capital, as well as taxes on capital themselves, are brought up consistently by tax experts and productivity experts as being factors that are affecting productivity by reducing levels of investment.

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Is there any critical mass within the department to really take a look at some of the Mintz report recommendations on, for instance, business taxation, and in a more general sense to shift away from taxes on capital and to perhaps reduce capital gains taxes in a general sense or perhaps provide a greater exemption?

I'd be interested to know whether or not there is discussion within the department in terms of addressing this, what I see as a critical issue.

Mr. Tony Valeri: I guess it's fair to say that the finance department, as other departments within the bureaucracy, will be looking at a number of questions. I would suspect that whether it's the departments of industry or international trade or finance, they're always looking at the challenges we face as a country with respect to our competitiveness and our productivity.

I think it's fair to say that this particular committee, launching that review and getting some of those experts witnesses in, is shedding some light on the issues of brain drain and productivity. In the context of future budgets, we're about to engage in a pre-budget consultation where I'm sure that particular issue will be coming up again and Canadians will suggest what direction government should be taking with respect to corporate income taxes, which you've made reference to.

We've said publicly as a government that given our present personal income tax burden and the real uncompetitiveness of our personal income tax system within the G-7 countries, as resources were available we would try to address that uncompetitiveness. But there's no question that a broader discussion needs to take place. It's just a matter of whether we have sufficient resources to engage and to do something about our entire tax system or whether we continue to focus on our personal income tax system to try to provide Canadians with essentially more money in their pockets.

Mr. Scott Brison: I appreciate your comments, Mr. Valeri, and I appreciate the comments of our public servants here.

I suppose I should take the opportunity, as a Progressive Conservative, to thank you people. I think it was you people who brought us the GST initially. Our party's...I think it was the public...but the tax experts within the department.

Canada's benefited, although I'm not so sure our party has. That's all right. We were supposed to handle the politics of it, but....

I'd appreciate your feedback, though, on whether or not there is any critical mass within the department to address a shift from taxing capital in Canada to a movement that would effectively increase and improve our competitiveness vis-à-vis increasing foreign and domestic investment.

The Chairman: That was just a comment, I gather.

Mr. Scott Brison: No, it was a question. I wanted to get a feel for whether or not within the department there are discussions held to address the issue of taxes on capital. We're hearing it over and over again from the people who have presented to us here.

The Chairman: Mr. Valeri.

Mr. Tony Valeri: I think it's a fair question. If I might suggest, since the individuals who could speak directly to that particular issue are not here today, perhaps you would like to get them before the committee at some point in the future, perhaps in the context of your discussions, Mr. Chairman. That's certainly a possibility for the future.

Mr. Scott Brison: Okay.

I have one last question on the issue with respect to personal taxes. Speaking comparatively, one of the issues we face is that we hit our highest personal income tax rate in Canada at around $60,000, and in the U.S. it's about $412,000 Canadian. Our top marginal tax rates in Canada, federal or provincial, are I guess around 50% at the highest rate. In the U.S., the top rate is around 40%.

That has been named specifically by some of our high-tech industries as the reason there's so much pressure on some of the talented people we have within the high-tech sector to take positions in the U.S.

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What is the government's plan to specifically address that incredible disparity between the U.S. and Canadian systems in terms of income levels over $65,000? We're taxing people at the highest marginal tax rate.

The Chairman: Mr. Valeri.

Mr. Tony Valeri: I guess the honourable member wouldn't expect that I would be putting forward a position today, given that this issue is in constant discussion and debate within the context of personal income taxes. You did make reference, though, to the high marginal income taxes being, as you put it, one of the main reasons for young talented Canadians leaving Canada to work in the United States.

I think you'll find that judging from the albeit limited number of individuals we've had come before the finance committee with respect to the productivity question, when we had a number of individuals come before us to talk about brain drain they rarely talked about taxes. They talked about wages, they talked about lifestyle and they talked about the desire to leave one's family or not leave one's family as all playing a role in the decision as to whether or not to leave the country. It's not really just about taxes.

In fact—to paraphrase a line that was recently stated in the House of Commons—if that were the case, then I guess the Cayman Islands would be the centre of intellectual and economic activity. That not being the case, there are a number of other pertinent factors that come into play when someone makes that type of decision.

So in the context of this committee, certainly within our own constituencies, and as we lead up to the next and future budgets, certainly personal incomes taxes are front and centre, and we're going to continue to try to address our competitiveness. It's not going to be a race to the bottom. We as a government are going to continue to balance Canadian priorities, whether it's health care, education, or other Canadian priorities that we determine through a pre-budget consultation. We'll continue to reduce taxes, but we're going to do it in a very balanced manner. We're hoping to address that particular inequity in the future.

The Chairman: Thank you, Mr. Brison.

We're going to have the following questioners: Ms. Leung, followed by Ms. Redman, followed by Mr. Epp.

Ms. Sophia Leung (Vancouver Kingsway, Lib.): I have a question on student loans. On page 5 you said, “Graduates remaining in financial difficulty can have their student loan principal reduced by as much as half.” Would you be more specific on how you would define “financial difficulty”? Most students, as you know, if they end up with a $25,000 loan, have a lot of difficulty. Without income, how would they expect to repay?

Does this say that once they prove they are in financial difficulty they can reduce the principal by 50%? It's very interesting to me, because I do have a lot of students coming to me saying they're having difficulty.

Mr. Bill Murphy (Tax Policy Officer, Personal Income Tax Division, Tax Policy Branch, Department of Finance): On that particular issue, the improvement to the Canada student loans program announced in the 1998 budget is not part of this legislation. It's part of action under the Canada student loans program, indeed a series of items under the Canadian Opportunities Strategy, to help students with their debt problems.

I don't have the expertise with regard to the program to be able to tell you how it works, but we could get that information for you.

Ms. Sophia Leung: The reaction from the students who come to me is that actually you do not reduce. As well, there is a limitation on their payments. They even have to consider declaring bankruptcy, but that is also discouraged. This is why I'm very surprised you have this option to reduce it by 50%.

Mr. Bill Murphy: I think the two measures are connected in the sense that with the measures on bankruptcy, one of the reasons for that initiative was recognition of the desire to have students in repayment take advantage of some of the interest relief measures then available. Indeed, some of those measures were enriched a little bit and made more attractive to help students in repayment who were facing some difficulty. They would make it a little bit easier for those students to continue on in the repayment phase.

The 1998 budget—and this legislation deals with the tax issues—had a number of measures on the spending side in the business of helping students repay their loans more effectively by having more generous conditions or giving them more time or suspending the payments for a period of time, if necessary.

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I'm sorry we don't have anybody here who can actually get into the details.

Ms. Sophia Leung: Would you send me the details?

Mr. Bill Murphy: Okay.

Ms. Sophia Leung: Mr. Chair, I have one more little question.

The Chairman: Yes, of course.

Ms. Sophia Leung: Regarding helping Canadians upgrade their skills or education, here you say they can withdraw $10,000 or $20,000 from their RRSP, but the money must be repaid over 10 years.

That's their money, right? That's from their own RRSP.

Mr. Bill Murphy: That's correct, yes.

Ms. Sophia Leung: So if they cannot accumulate $20,000—and that's their own money—by any other means, are you going to penalize them?

Mr. Bill Murphy: Generally when funds come out of an RRSP—

Ms. Sophia Leung: They're tax free, yes; I understand that.

Mr. Bill Murphy: Right. Normally an individual would pay tax, whether in retirement or other times of their life, except in the case of the homebuyers' plan, generally. In this particular program, withdrawal from an RRSP would result in an income inclusion.

In order to encourage students who are looking for a source of funds and who have their RRSP available, so that they can get back into lifetime learning, be it for six months or several years, this legislation would give people the opportunity to go into their RRSPs and take that income out for education without paying tax right away. Indeed, they wouldn't have to pay tax at all on the income at that time if they repaid it. If they don't repay it....

One of the reasons it would be included in income if they don't repay it is to give them the incentive to put the money back in for use in their retirement. After all, that's the primary purpose of RRSPs, to get people to save for their retirement. If, however, they make the judgment for whatever reason that they don't want to put the money back in, since tax has not yet been paid on that money it's appropriate that tax be paid at that point.

People have flexibility. They participate in that program. They pay back a tenth of the amount outstanding over a 10-year period of time. They can pay more quickly if they wish. They can also decide in certain circumstances not to pay this year but maybe start repaying in subsequent years.

The Chairman: Thank you, Ms. Leung.

Ms. Redman.

Ms. Karen Redman (Kitchener Centre, Lib.): Thank you, Mr. Chairman.

I'd like to go back to the issue Mr. Gallaway touched on, the $600 caregiver credit. I understand the rationale behind how you arrived at the $600, but I'm wondering whether that was ever looked at in the context of overall dependant care. It's one of the issues we've been dealing with on one of the subcommittees, and I'm just wondering if that conversation is being carried on, or has been.

Mr. Brian Ernewein: I'm sorry, but is the question whether $600 is the right amount or...?

Ms. Karen Redman: That you would broaden it to all dependant care. I understand this was borrowed from the infirm deduction, as it was explained previously. I know when Status of Women came before us they were talking about dependant care as a type of umbrella issue, and I'm just wondering if we've looked at it in that light at all.

Mr. Tony Valeri: I think it's a fair comment to say that certainly the government looks forward to the report from the subcommittee. Certainly that report and its recommendations would be considered in the context of the pre-budget consultations as a whole.

As resources permit, there is obviously a lot more we could do as a government in areas like that. The thing that's limiting is the trade-off and the amount of resources we have available. I don't think anyone around this table would disagree that we need to do more to deal with dependant care.

I guess it's fair comment to just say that we would look forward to that report and certainly take that consideration as we move forward into the pre-budget consultations a little more specifically.

Ms. Karen Redman: Thank you.

The Chairman: Mr. Epp, final questioner.

Mr. Ken Epp: Okay. I have several questions.

I don't know whether you have this data right at your fingertips; maybe you can get it to us. I would like to know how many taxpayers have been drawn into the next high tax bracket simply because of the fact that the brackets themselves are not indexed to inflation.

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I know we have in this bill a measure to improve the basic exemption so that first tax bracket kicks in just a little later, but going from levels one to two, and two to three, has not been changed.

So I would like to know the numbers. Do you happen to know them, or will we have to wait?

Mr. Tony Valeri: It's fair to say we don't have the numbers now.

I guess through you, Mr. Chairman, we could provide those numbers.

Mr. Ken Epp: I'd appreciate that. I appreciate that you're saying 400,000 low-income individuals are being taken off the tax rolls, but at the same time, many people who are, by definition, living in poverty, are still paying an increased level of taxation.

Then I have this question on the surtax. There's a general surtax at 3%. That's gone as of the 1999 budget, right? Zippo. Gonzo. Did the tax department or the finance department compute what that would do to government revenues?

Mr. Brian Ernewein: While my colleagues are looking up that number, maybe I could just raise a point in relation to the first question.

When you talk about the number of taxpayers, as you describe them, drawn into the next high tax bracket because of the lack of indexation in the tax system, to the extent that the lack of indexation causes people to shift into different tax brackets, there are people who of course will shift some of their income as well from one bracket to another through indexation. That is, if the tax bracket changes from $29,999 to $30,000—and this is what I take your question to be—how many people actually have their income move from $29,999 into $30,000 from one year to the next?

There'll be more people, of course, who will have some income over $30,000 in one year and have somewhat greater income the next year through slight inflation. Therefore, the effect of a lack of indexation is that slightly more of their income will be subject to the higher tax rate.

I ask this because I'm not sure whether we do have a number of people whose top dollar of income moves them from one tax bracket to another. I guess I would pose the question as to whether it would be useful to have that type of information, because to the extent that there's a lack of indexation and the extent that it creates a problem, it creates a problem just as much for the person who's already in the next bracket and doesn't have their top dollar of income go into a higher bracket through the lack of indexation. It's just that more of their income gets moved about.

Mr. Ken Epp: The fact is, as a percentage of your total income, you'll end up paying more taxes just as a percentage. We talk a lot about debt-to-GDP, always this ratio idea. It certainly has been my experience, from the time I started working as a truck driver until now, that if I look at, every year, what proportion of my income I pay to income taxes....

When I was a young guy, of the money I had to earn to live on, I paid maybe 5% or 8% of it into taxes. A young person starting at that same level now is paying probably 30% to 35% of their total income into taxes. So there is that influence.

Mr. Brian Ernewein: And I do understand the point. It's simply that the question you've asked is with regard to who jumps tax brackets from one year to the next. The number may be 5 people, it may be 50, and it may be 5,000, but I'm not sure it will reveal to you the effects of de-indexation or the like.

We will endeavour to get what numbers we can.

Mr. Ken Epp: I'd appreciate that.

My next question has to do with students. I have worked in the education industry for the bulk of my life, or at least up until this point. Maybe by the time my days here are ended, it will be only a small portion; who knows?

A voice: But you're still teaching.

Mr. Ken Epp: In fact, not very long ago some people asked me how my job was different. I told them that the difference is, when I taught at college my students actually showed up for the lectures, and now I talk to empty chairs.

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I want to know about the financing of students. It looks to me as though the students who receive the greatest benefits as a result of this bill are students who are really successful at earning money. In other words, if they've been able to earn enough money to put into RRSPs, then they can transfer it and can use that.

If there's a rich family that has put money away in the registered educational savings program for their children, and then some of them become entrepreneurs without having to go through a bunch of schooling, then they can transfer that money back into RRSPs. I don't know what the rules are with respect to the 20% contribution from the government. Would a good financial adviser now say to a family, even one that has no kids, to set up an RESP because they may have some sooner or later? Later on they'll have a 20% contribution from the government into their RRSP.

Is there a limitation on that?

Mr. Bill Murphy: On that latter question with regard to RESPs, the Canada education savings grant can only be used for post-secondary education. If an individual set up on a prospective basis an RESP and made contributions and wanted to eventually take the income out for purposes other than education, the grant itself would go back to the government.

Mr. Ken Epp: Is the 20% added into the fund as it grows?

Mr. Bill Murphy: The 20% would go back to the government, yes, unless used for education.

Mr. Ken Epp: Oh. Thank you. That was the question I was asking.

Mr. Tony Valeri: You couldn't transfer the 20% back into your RRSP if your child did not attend the university.

Mr. Ken Epp: Okay. That was the question I was asking. I didn't know. I'm sure I could have gotten that answer from other sources, but....

The Chairman: Can I ask a follow-up question?

Mr. Ken Epp: Sure, Mr. Chairman.

The Chairman: It's based on your question, under your leadership.

Now, the $400, let us say, the 20%, is used to generate x amount of dollars in investments, right? But you get to keep that—or do you?

Mr. Bill Murphy: If ultimately the child does not go on to higher education, or a new beneficiary is not named, or ultimately nobody uses those funds for education, then it is true that if the nominal value of the grant goes back to government, income that accumulated on that grant while it was in the program could be transferred to an RRSP. That's true. If it went back into income directly, it would be subject to both an inclusion in income at your ordinary marginal tax rate and a 20% deferral tax in addition.

The Chairman: So it is possible in some cases that people may be using government funds to actually increase their return on their RRSP investments.

Mr. Bill Murphy: I guess it's conceivable that might happen, but the circumstances are that, first of all, the expectation is that the vast majority of people who are going to save through RESPs not only name a beneficiary when they set up an RESP but they also have a beneficiary in mind. That's the most effective way of using the program. The primary purpose is to save for somebody's education.

If the child does not go for education, there are a number of conditions that have to be satisfied before you can take the income back or even into your RRSP. For example, all beneficiaries, current and previously existing, have to be at least 21 years of age so that you give the beneficiary a chance. If they don't go at age 18 or 19, you give them a couple of years to do whatever they're going to do and then think about their education.

The plan has to be open for 10 years or longer before you have the opportunity to take it back into income. Essentially, you have to be a resident of Canada as well.

The Chairman: Okay.

Mr. Epp.

Mr. Ken Epp: Does this mean a well-to-do family could actually effectively then increase their RRSP contributions in this way? They could put x dollars into their RESP as well as make contributions into their RRSP, and then at the end of 21 years, when the child says, “I'm sorry, but I'm making $1 million a year already, and I don't need to have this education”, can they then roll that back into the RESP, or is it subject to the annual accumulated limitations?

Mr. Bill Murphy: Using an RESP does not increase your RRSP contribution room in any way. The option of taking income from an RESP and transferring it to an RRSP is set up as a type of fallback.

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If the child you've named as a beneficiary does not go for education, then it's recognized that a lot of people, particularly middle- and lower-income families, will have perhaps skimped on their RRSP contributions in order to first finance the child's education. So if the child does not go on to higher education, the secondary purpose of RESPs kicks in—that is, to allow now that family, those parents, to save, to put some money into their RRSP that they might not have been able to do before.

Mr. Ken Epp: Is the amount that can be transferred from RESP into RRSP limited by the annual limits?

Mr. Bill Murphy: Yes. It's limited by the fact that the RESP structure does nothing to increase your RRSP contribution limits, first of all. Secondly, there is a maximum lifetime transfer limit that applies. In fact, as part of this bill, you cannot transfer more than $50,000 from an RESP to an RRSP.

Indeed, somebody attempting to use the strategy that I think you described would not find it effective. If a family has enough income to be able to set up an RESP solely for the purpose of doing something like this, they would very likely be better off maximizing their RRSP right from the beginning. If they did that, and the child did not go on to higher education, or they never intended to send that money to the child at all, then the only option left open to them would be to take it back into income, pay their ordinary marginal tax rate, and the 20% deferral tax on top.

Mr. Ken Epp: Okay.

My next question has to do with support of families who are poor. In terms of breaking the cycle of poverty—and we sometimes talk about this thing called “dependence on welfare”—one of the great factors has to be the education of the young people in those families. If you get them educated they're going to break out of that cycle.

Now, you have all these tax credits that are available, and at first there is no interest on a loan. Later on, some of that is forgivable and so on. Has there ever been any thought to giving the students a refundable tax credit instead of non-refundable? Has that ever been discussed and debated and evaluated in terms of the financial implications?

Mr. Bill Murphy: I guess it has come up from time to time. Students groups have suggested it from time to time. Generally, however, the vast majority of tax credits are not refundable, because the primary purpose of a tax credit and deduction is to reduce the tax you'll pay. Indeed, if it reduces your tax to zero, then all your credits and deductions have already done their job; you're not paying any tax.

We have two refundable credits in the personal income tax system, the GST credit and the child tax benefit. I guess we obviate a little bit the need for refundability of those credits by allowing either a student who does not need the full value of their credits in a particular year to either carry them forward for their future use or to transfer to supporting parents or grandparents. There are a lot of cases where people transfer their credits to their parents or their grandparents. So that, together with the fact that they can carry the credits forward, means the value of those credits is not lost to them.

Mr. Ken Epp: I would like to carry that forward, but the chairman is pushing me onward.

I have one last question, Mr. Valeri. On the very last page of your statement, you said, “Together, the two budgets provide $16.5 billion of tax relief over the next three years.”

Now, it seems to me that Bill C-72 is a provision for the 1998 fiscal year. So where does the $16.5 billion come from, and why over three years? What is the accurate tax relief of Bill C-72 for that year?

A voice: Calendar 1998?

Mr. Ken Epp: Yes, calendar 1998; that's the way I should put it. Thank you.

• 1700

Mr. Tony Valeri: In the actual document you would have received on budget day, I guess, Strong Economy, Strong Society, the budget plan for 1998, you will see a listing of each of the tax measures by year and the actual costs.

It's also included in your briefing document under tab 2. I don't know whether or not you have your briefing book here, Mr. Epp, but under tab 2 it gives you a listing of what each of the measures cost the Treasury.

Under 1998-99 you would have $1.2 billion. Under 1999-2000 you would have $2.4 billion; under 2000-01, you have $3.2 billion. It's $6.8 billion for 1998, and then the balance would kick over into the 1999 budget.

Mr. Ken Epp: Okay. Those are factual things. We'll make more political hay out of those when we debate this in the House.

Mr. Tony Valeri: Thank you, Mr. Epp.

Mr. Ken Epp: Fair enough.

The Chairman: Do you have any further questions, Mr. Epp?

Mr. Ken Epp: I think I have enough fodder here, thanks.

The Chairman: Mr. Ernewein.

Mr. Brian Ernewein: Mr. Chairman, we owe Mr. Epp one more response. He had asked earlier about the 1999 budget, and the effect of eliminating the 3% surtax on the revenue numbers.

Those are in the 1999 budget materials. They are not in your briefing book, because the briefing book concerns the 1998 budget.

The estimated cost of eliminating the 3% surtax is set out as $600 million for 1999-2000; $995 million for 2000-01; and $1.15 billion for 2001-02.

Mr. Ken Epp: Thank you.

The Chairman: Mr. Epp, thank you very much.

Mr. Valeri, departmental officials, thank you so much for, as always, a very thorough analysis of the work handled here in this committee.

I'd also like to thank the members for their questions.

Tomorrow, as you know, we're continuing the study on productivity in both the morning and afternoon.

The meeting is adjourned.