FINA Committee Meeting

STANDING COMMITTEE ON FINANCE

COMITÉ PERMANENT DES FINANCES

EVIDENCE

[Recorded by Electronic Apparatus]

Thursday, April 22, 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 welcome everyone here this morning.

As you know, in accordance with the order of reference of the House of Commons of Tuesday, April 20, 1999, the committee now begins its study of Bill C-71, An Act to implement certain provisions of the budget tabled in Parliament on February 16, 1999.

It's our pleasure to have with us today Mr. Valeri, the distinguished parliamentary secretary to the Minister of Finance, and Mr. Peter Gusen, director of the federal-provincial relations division of the Department of Finance.

Welcome.

Mr. Tony Valeri (Parliamentary Secretary to the Minister of Finance): Thank you, Mr. Chairman. It's always a pleasure to come before the committee as a witness, and it's always a pleasure, I must tell you, just to have the opportunity to participate with the finance committee under your chairmanship.

I'm very pleased to be before the committee this morning on Bill C-71, the 1999 budget omnibus bill. Like its predecessors, this bill has many parts. It covers a range of operations and issues. As in past years, though, there is an underlying theme that really brings these legislative parts together into a larger, dynamic piece of legislation.

As I suggested to the House at the start of second reading, the Minister of Finance captured this theme in his February budget speech when he reminded us what budget-making is really about.

He put it this way about budget-making:

It is to make the lives of Canadians better. It is to improve their standard of living. It is to build today for a better tomorrow.

This legislation establishes the vital foundation blocks for that better tomorrow. It provides historic new funding for Canada's public health care system. It sets out the design of significant additional funding under the Canada child tax benefit.

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Bill C-71 does more, however, than just put in place these building blocks. It also includes budget-based and related measures dealing with the operations of government itself, including debt management, income tax administration, and first nations taxation, to name a few.

These reflect the fact that where and what a government invests in is only part of any budget story. Just as important is how a government behaves. This legislation emphasizes the “how” by reflecting our continuing commitment to an effective, efficient, and fiscally responsible government. By consistently following this philosophy, we have been able to make dramatic new investments for a stronger economy and society while providing broad-based tax relief and keeping the federal government deficit free.

Mr. Chairman, let me briefly highlight the key elements of Bill C-71.

Action to sustain and strengthen health care is a key priority of this government and virtually every Canadian. That's why Bill C-71 amends the Federal-Provincial Fiscal Arrangements Act to implement an $11.5 billion cash increase over five years, through the Canada health and social transfer, for health care. This increase will be distributed on an equal per capita basis—the same amount for each and every Canadian in every province.

The legislation authorizes the Minister of Finance to pay $3.5 billion of these funds into a trust, which will then be distributed to the provinces at a pace they set over the three-year period beginning April 1. The further $8 billion will be distributed through the CHST over the four-year period beginning April 1, 2000.

Now, Mr. Chairman, these numbers are significant by themselves, but I'd like to put them in a wider context for this committee.

When the funding increase reaches $2.5 billion in 2001-02, direct cash support from the federal government under the CHST will total $15 billion a year. That means the health care component of the CHST will be restored to its highest level ever. But we're doing more than restoring the funding. When the growing value of the CHST tax transfers is added to the cash funding, total assistance to the provinces will be worth $30 billion in 2001-02, a new high.

Bill C-71 also provides for the elimination of the per capita disparities in the distribution of the existing CHST amongst the provinces. By 2001-02, all provinces will receive identical per capita entitlements, providing equal support for health and other social services to all Canadians.

The next measure I'd like to highlight is the Canada child tax benefit. By creating the national child benefit system, the federal and provincial governments have embarked on a major cooperative effort to support families and reduce child poverty. Our purpose is to ensure that children in this country are always better off when their parents join the workforce.

In 1997 the government announced the first federal contribution to this national endeavour; $850 million began flowing last July.

In the 1998 budget, we announced that a further $850 million would also be allocated, following consultations with the provincial and territorial governments. Bill C-71 acts on those consultations.

This bill proposes changes to both the national child benefit supplement and the base benefit. It sets out the design for the 1998 budget commitment to provide an $850 million increase in the national child benefit supplement payments to low-income Canadians. Under Bill C-71, the maximum benefit level under the national child benefit supplement will be increased by $350 per child in two stages—$180 in July 1999 and $170 in July 2000.

The legislation also moves to prevent a significant increase in the effective marginal tax rates for modest-income families. This is being done by increasing the net income level at which the national child benefit supplement is fully phased out—from $25,921 to $27,750 in July 1999, and from $27,750 to $29,590 in July 2000.

It also increases benefits by $184 per family for modest- and middle-income families by increasing the net income threshold at which the base benefit begins to be phased out—from $25,921 to $29,590.

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Overall, these changes mean that a family that has two children and that earns $20,000 will receive an increased benefit of $700, for a total of $3,750 per year.

Mr. Chairman, the legislation also addresses assistance for children in another area by ensuring that the full amount of the single supplement of the goods and services tax credit will go to single parents whose incomes do not exceed $25,921.

When the GST was established, a credit was put in place to ensure that low- and modest-income Canadians were protected from any adverse effects of the new tax system. The credit also included a supplement of up to $105 per year available to singles, including single parents.

Unfortunately, this earnings requirement means some very low-income families with children may not get the full supplement.

As well, the national child benefit could also impact on single parents receiving social assistance because of the earnings requirement.

Bill C-71 ensures that single parents will not suffer this loss. The government will increase the GST credit benefits for low-income single parents to complement the national child benefit by providing them with the full value of the supplement, that being $105.

The next set of measures Bill C-71 deals with is first nations taxation powers. In this budget the government has again expressed its willingness to continue discussions and to put taxation agreements into effect with first nations interested in exercising those taxation powers.

The B.C. Sliammon First Nation will have the authority to levy a 7% GST-style tax on all sales of tobacco products and fuel on its reserves. In addition to their existing tobacco and alcoholic beverages tax authority, the Westbank First Nation will be empowered to levy a 7% GST-style tax on fuel sold on its reserves. In addition, the Yukon First Nations Self-Government Act will be amended to allow the GST rebate provisions that were added last year.

Mr. Chairman, as you can see from the points I've made so far, the bill is wide-ranging, but it also addresses the administration of taxation in another area, in particular a service agreement signed last October with Nova Scotia.

The amendment allows for cooperation in audits and the exchange of program information between Revenue Canada and the Workers' Compensation Board to help ensure that amounts owed are indeed paid. This initiative allows for an information exchange to support and improve enforcement activities.

I think it's also important, Mr. Chairman, that I assure honourable colleagues that before any information is exchanged, the federal government will ensure that the Nova Scotia Workers' Compensation Board fully adheres to the current confidentiality safeguards.

While some of the most important measures in Bill C-71 deal with the government's investment in health care and the welfare of children, the government will not lose sight of the critical importance of continuing good financial management. The investments we've made will not jeopardize our commitment to balanced budgets. The legacy of decades of deficit financing is still too painful and too real for Canadians. This is money that cannot go to further tax reduction or additional investments in strengthening our economy or our social safety net. That's why the debt reduction plan was implemented, and that's why the government is committed to managing the debt as effectively as possible.

Bill C-71 helps achieve this goal by amending the Financial Administration Act to enhance the effectiveness of debt and risk management. The amendments both clarify the authority regarding the government's borrowing and distribution of its debt and update the government's financial and risk management powers.

Many of the changes are technical and simply confirm and clarify existing practices and powers.

For example, the government's standing authority under the FAA to refinance maturing debt is clarified to ensure that maturing debt can only be refinanced within a given fiscal year. Any debt not financed by the end of the fiscal year lapses, and cannot be refinanced in the next fiscal year.

The bill clarifies a practice the government has followed for years, but I'd like to be very clear that these changes do not give the government more authority to borrow. New borrowing authority to finance a deficit would be obtained, as in the past, through a borrowing authority bill.

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As well, other measures deal with parliamentary accountability. The FAA is amended to enhance reporting to Parliament on debt management activities and future plans. Parliament will formally receive information annually on the government's debt management program, thus strengthening the reporting structure on a very important government activity.

Before closing, Mr. Chairman, I'd just like to highlight a few other remaining actions proposed in the bill. There are sections of this bill that affect the public service, Canadian Forces, and RCMP superannuation acts, which are to be amended to improve future pension benefits.

There is also an amendment to the Patent Act that makes clear the Minister of Health's authority to pay the provinces moneys collected by the Patented Medicine Prices Review Board. These funds are from excessive pricing of products by patented manufacturers.

In addition, the Agricultural Marketing Programs Act is amended to clarify the scope of the federal loan guarantees to financial institutions that fund advance payments to our agricultural producers.

As well, the European Bank for Reconstruction and Development Act is being amended to provide the Minister of Finance with the authority to undertake the financial operations necessary to meet our EBRD commitments.

These are essentially the highlights of the 1999 budget omnibus bill. As you can see, with the federal books in balance, we have introduced a bill that delivers historic investments in an area considered by Canadians to be their key priority—namely, health care—and it continues our work to assist children in need or at risk. At the same time, it sustains our commitment to constant financial discipline.

Along with the officials, Mr. Chairman, I now look forward to any questions committee members may have.

Thank you.

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

We will now get into questions and answers.

Mr. Solberg.

Mr. Monte Solberg (Medicine Hat, Ref.): Thank you very much, Mr. Chairman.

Welcome to our parliamentary secretary. It's different to see him on that end of the table.

You mentioned “historic” a moment ago. I agree that there has been something historic about the transfers to the provinces for health care. Since the government came to power, we of course have seen some historic cuts to health care, and I guess my questions have to do with that.

We see the government pledging a five-year plan of increasing funding for health care to the provinces, but in the past we also had the government pledge to provide a certain level of funding for health care. Then they arbitrarily broke that agreement and cut spending deeply for health care at a time when they had also promised to ensure that the majority of the reductions in spending at the federal level would fall on the departments. We didn't see that happen.

How can the provinces know for sure, I wonder, given the history of the government, that this funding will be followed through on, and that the government won't arbitrarily decrease funding again?

Mr. Tony Valeri: I think you raise an important point, Mr. Solberg. At the beginning, when the government first took office, one message that was overwhelmingly clear coming from the provinces was that they wanted to be assured that there would be stable funding and that there would be flexibility.

I think you'll find, if you look back in time, that the prior administration, the Conservative government at the time, in order to deal with their deficit had cut funding on a yearly basis in their transfers to the provinces. The provinces said they wanted to see some stable funding. That in essence began a discussion on the CHST, which provided a five-year track for funding and also provided the flexibility to the provinces by transferring that amount in block funding so that provinces can then decide on their own both their priorities and how they would invest.

So we've made that commitment in prior budgets. Going forward, I think the provinces can feel very confident that there is going to be sustainability and stability in the funding to the provinces. We've laid out another track with respect to the CHST that, in consultation with the provinces, has been acceptable. If you look at the comments made by premiers, they have said that they have received what they had asked for—that is, full restoration of the cuts that were made in order to deal with the deficit with respect to health care.

I did mention in my remarks that when you include the tax points, you will see by 2001-02 an historic new level of $30 billion.

Mr. Monte Solberg: But the tax points were coming anyway.

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Mr. Tony Valeri: But that was also an area the federal government had vacated. If you're suggesting that tax points should not be counted, then I would tend to disagree with you.

Mr. Monte Solberg: No, but—

Mr. Tony Valeri: Originally it was an area the federal government occupied, and they vacated that area and allowed the provinces to step in. If you're indicating that we take back that room and transfer the entire amount in cash—

Mr. Monte Solberg: No.

Mr. Tony Valeri: —then that again is an issue that the provinces would probably not want to engage in, I would say.

Mr. Monte Solberg: What I'm saying is that the federal government got into this whole area many years ago on the promise that they would look after 50% of health care spending in Canada. Since that time, the federal government has increasingly pulled back from that commitment, to the point where I think federal transfers for health care now account for somewhere around 10% of all health care spending. It might be 12%, but it's very low. At the same time, the federal government still continues to impose the Canada Health Act on the provinces.

My question is, given this record of withdrawing from funding for health care, what assurance is there that the government won't do that again in the future? It's a pretty dismal record.

The other point I did want to make, though, is that when the government embarked on its cuts, health care, of course, is the number one concern of Canadians, but it was also the biggest cut. The only area in which the federal government seemed to do any cutting in departmental spending was in defence, ironically, which now, of course, when we're preparing to enter into possibly a ground war in Kosovo, doesn't look like such a brilliant idea.

Given the fact that we never did follow through with the type of reductions in departmental spending that the government had proposed, and in light of the Auditor General's report yesterday, I wonder if it wouldn't be prudent to take a look at the size of departmental spending and ask ourselves whether or not we shouldn't be embarking on another round of program review to ensure that we're not continuing to shovel money out the door at a time when people are demanding better health care services and we need money for defence.

Mr. Tony Valeri: I guess I'll start off by looking at the record. You might just want to look at the last budget, where in fact the transfer payments to deal with the health care component of the CHST were restored.

So if you're looking at records, you also have to take into account that the component of the CHST that was cut with respect to health care has now been completely restored with Bill C-71. That's the first point.

Mr. Monte Solberg: But it was $18.5 billion, and now it'll be up to $14.5 billion or $15 billion, depending on the year.

Mr. Tony Valeri: You have to listen very closely to what I'm saying, Mr. Solberg. What I'm saying is that the portion of health care that makes up the CHST has been fully restored with this budget. You'll find that every premier in every province has actually said that. They asked for full restoration of the cuts that were made with respect to health care—

Mr. Monte Solberg: But that's a shell game.

Mr. Tony Valeri: It's not a shell game, because that in fact is what has been said.

Mr. Monte Solberg: The money was originally sent without strings attached so that they could use it elsewhere, so now, if they use it for health care, it means they don't have it for social welfare.

Mr. Tony Valeri: You'll have to speak to the provincial premiers, each and every one of whom actually committed that this transfer would go to health care. They signed a letter, so I would expect that an individual who was duly elected by the public would stand behind his word. In fact, when he puts it on paper, I would suspect it has some relevance.

Secondly, with respect to the actual spending when we first took office, to which you alluded, as a percentage of GDP, the government spending was up around 17%. You'll see, at the end of the forecast the Bill C-71 budget covers, that government spending is actually about 12% of GDP, the lowest in some 50 years.

Now, I would agree with you as a parliamentarian that it's absolutely crucial that departmental spending is held to scrutiny, that program review is not in any way unravelled, and that we continue to ensure that taxpayer moneys are used in the most efficient and effective manner.

So I thank you for the question, and I certainly hope we can continue to work together along those lines.

The Chairman: Any further questions?

Mrs. Redman.

Mrs. Karen Redman (Kitchener Centre, Lib.): When I went through the budget, I was really excited to see the multi-year plans. Certainly that was set last last year, and we're continuing to do it this year.

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My question is, does that leave us with fewer surprises, shall we say, down the road? I've certainly heard it from the university community in my constituency that they're really pleased to see that the research funding is there and that we're looking at a multi-year plan. We are making announcements now that will unfold in the future.

I'm wondering if you could comment on that.

Mr. Tony Valeri: I think you will continue to see announcements coming out of this budget that were set aside for research and development. I think research and development is going to be very crucial to the future of this country.

There's no doubt that as we struggled with balancing the books, reductions had to be made right across the board. Our intent now is to restore those areas that will provide Canadians with the greatest of opportunities as we move forward, and to continue to do that in a very effective manner.

In fact, the social union agreement has included in the wording the words “no surprises”. So there is an actual document, after consultation with the provinces, that does speak to exactly what you were saying. I think it also speaks to improve the interprovincial relations and federal-provincial relations.

As we go forward, I think it's going to be crucially important that we stay the track and that provinces and the federal government continue to work together in a way that reflects Canadian priorities. I think both Bill C-71 and the last budget do that to a very large degree. As we move forward, working with future budgets, I think we'll continue to engage Canadians.

This committee in particular travels across the country asking Canadians what in fact they would like to see in budgets. I think that's a very valid process, and I understand it's one we'll be continuing as we work toward the next budget.

Mrs. Karen Redman: Further to Mr. Solberg's questions, is that not a way to circumvent any type of jaded attitude in terms of whether or not the premiers will do what they said they would do? Because this has now become a partnership, and we're moving forward together with a shared vision.

Mr. Tony Valeri: Absolutely. I think it was critical that the premiers, when they met with the Prime Minister, actually committed to putting any increase in the transfers into the health care system.

We all have situations in our respective ridings where Canadians are waiting in emergency rooms or waiting for MRIs. I think the $3.5 billion in particular, which was an immediate injection back in transfers to the provinces, will be critical. That amount of money can be drawn down by the provinces as quickly as they like, depending on their needs, certainly within a three-year period. That amount of money is available immediately. The $3.5 billion was injected right away to deal with those emergency issues.

Again, that comes from the dialogue that took place not only amongst Canadians through this finance committee but also through the premiers and the Prime Minister and the finance ministers and Minister Paul Martin.

The Chairman: Thank you, Mrs. Redman.

Mr. Discepola.

Mr. Nick Discepola (Vaudreuil—Soulanges, Lib.): Thank you, Chair.

I noticed that the Minister of Finance slipped in a modification that almost went undiscussed and unnoticed until some small business people in my riding wrote to me. This is with regard to the elimination of the income splitting a business person could have done through the establishment of trusts with his or her children, the income splitting over a few years.

I'm just wondering what the rationale was there and if you have any costing figures available on how much that brings in with regard to revenue.

Why do it? In our tax system we allow for the transfer of certain unused benefits from one spouse to the other, in a way allowing for income splitting that way. Why did the ministry target this one loophole that, in my opinion, wasn't really a loophole? It just allowed a small business to eventually transfer their business to the next generation.

Mr. Tony Valeri: I think the tax system is reviewed from time to time, always with the intent of making it fairer and more equitable.

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Now, I'll ask Mr. Horner to speak to the technical components, but I would think in this particular case it was felt that there was some undue advantage provided to a certain sector of taxpayer, and there was an attempt there to try to make that more equitable.

So I'll ask Mr. Horner to speak directly to that.

Mr. Keith Horner (Chief, Social Tax Policy, Tax Policy Branch, Department of Finance): I'm sorry, but I missed the beginning of the question.

Mr. Tony Valeri: Perhaps you would repeat your question.

Mr. Nick Discepola: I was saying that the minister introduced a small change in the way small business people could establish trusts for their children—in essence, income-split with their children through the issuance of dividends, for example.

Up to this year small business people had that option. It wasn't a major thing. I don't know the exact details, but there was a cap on the amount you could transfer to each child, for example, through the creation of trusts.

What it did was allow small business people to transfer their small business to the family, for example. We've closed that loophole. I'm just wondering what the rationale was for doing that.

Is it a cost-saving measure? Is it a perceived loophole measure that was closed? Why was it done so quickly, introduced in the budget almost unknown, and undiscussed, really, with the business community?

Mr. Keith Horner: Essentially, I think the idea was to have a fairer tax system. There's a concern that where people are at similar income levels they should pay similar tax. This provision provided an opportunity for people who could set up trusts like that to pay substantially less tax than somebody else in the same economic position. To the extent that you have inequities like that, it puts the whole system in disrepute. So it's important to address those as you see them.

The United States has a similar situation and a similar measure. I didn't work directly on this measure, so I'm not aware of the real details, but my understanding is that in the case of spouses receiving money through small businesses, it's often a case where the spouse is actually contributing, and there is a legitimate reason for paying dividends and income to a spouse. In the case of a minor child, it's much more clearly simply an income-splitting arrangement.

In terms of limits, that type of arrangement is self-limiting. After you've transferred enough money to the minor child, that minor child would be put into a tax bracket such that the practice wouldn't be attractive any more. So there wasn't a need to set specific limits.

The Chairman: Mr. Discepola, Mr. Solberg would like to follow up on that.

Mr. Monte Solberg: Thank you, Mr. Chairman.

I've had a number of letters about this—actually, I'm glad Mr. Discepola has mentioned it—from physicians particularly, because they had used this in the past. The problem for them, being in the highest tax bracket, obviously, is that this is one of the few ways they have to reduce their tax burden.

A number of these letter writers have suggested that if this type of assault on their income continues, they're going to have to leave the country, and in rural Canada, this is really a problem. A lot of physicians are already leaving, and this makes it that much more difficult. And it's not just physicians.

The point is, tax fairness I think also means taxes in Canada that aren't as high as they are. It's fine to have them equitable, but when you remove every tax loophole and never lower the rates, how fair is that? It's certainly not fair to the people who are being treated by these physicians, especially in rural Canada, where they no longer have doctors.

I just put that to you. I'd be interested in your response. It's a tremendous problem.

Mr. Tony Valeri: I think you hit on something in your last comment there. Essentially what we would like to do—and I think you would concur—is to try to eliminate in the tax system these loopholes, as Mr. Discepola put it, and provide general tax relief.

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We may disagree on the speed with which to provide that general tax relief, but certainly the intention, when the tax system is reviewed, is to try to ensure that individuals of equal income pay equal tax. At the same time, what we want to do is bring down the general tax relief so that individuals who are high- or middle-income earners are able to keep more of their own money.

Mr. Monte Solberg: But all these moves made in the name of tax fairness actually are tax hikes. Shouldn't tax fairness be that you remove the loopholes and then the rates go down concurrently? Otherwise—and people can be forgiven for being a little bit cynical about tax fairness—it looks like a tax hike to them, and the history is, it is a tax hike. The rates have never gone down.

Mr. Tony Valeri: I guess you can correlate this closure of the tax loophole with $16.5 billion in tax reduction over the next three years. Obviously, we want to do more, and we will continue to do more. That's the intent of the government.

I think you would agree that individuals who have the same amount of income would pay the same amount of tax, and if there was a measure in the tax system that clearly is advantageous for an individual, then I think the committee would agree that most Canadians would like to see those types of things closed but provide lower tax rates.

That's the intent, and hopefully the goal we can achieve. It's certainly a step with this particular bill.

The Chairman: Mr. Ritz.

Mr. Gerry Ritz (Battlefords—Lloydminster, Ref.): I have one short question, Mr. Chairman, thank you.

Speaking further to fairness in the tax system, you seem to target the tax fairness where it benefits the finance department, Revenue Canada. But when we look at the disparities—for instance, single-income families with children—there's certainly no relief in this budget for them.

Now, you've taken away the small business income splitting, and yet we don't see, as Mr. Solberg said, the offset with that other than over the long term; you know, you add all these years together to get the big number so it has some impact.

So I'm wondering why we don't see the disparities, such as those for single-income families with children, levelled out.

An hon. member: Good question.

Mr. Tony Valeri: Mr. Ritz, I don't know whether or not you're a member of the subcommittee, but there has been struck a subcommittee of the finance committee to look at that particular issue. Mr. Discepola is the chair. I think they started their hearings earlier this week.

We would hope that committee would provide options, in fact, for the finance committee to then consider in the pre-budget consultations so that we can make those kinds of decisions. Certainly the intent of the government is to provide fairness in the tax system and to continue to reduce taxes.

With respect to the child tax benefit, the main vehicle the government is now using to try to provide support for Canadian families with children, clearly we've heard from a number of Canadians who like the child tax benefit and who have benefited from it.

Do we need to do more work in that area? I would suggest we really need to look at it clearly. That's why the subcommittee has been struck. Mr. Discepola is chair of that. I would invite you to perhaps attend that subcommittee and make the vital contribution that I know you can.

Mr. Gerry Ritz: I have one other short question, Mr. Chair.

Mr. Valeri, you spoke with regard to $3.5 billion in medical funding that will be available “right away”. Those are the words you used. In reality, that $3.5 billion is paid out over three years. It goes into a third-party trust.

I'm wondering if you could give us some background information on that third-party trust and maybe the guidelines and regulations—“hoops and hurdles” might be a better way to put it—the provinces will have to go through to trigger that funding.

Mr. Tony Valeri: First of all, let me restate one point. The money is available right away to any province that wants to draw down their respective amount.

Mr. Gerry Ritz: But only portions of it. It's staged out over three years.

Mr. Tony Valeri: No, no, they have to draw down their amount. Let me put it this way: They have to draw down their account to zero over three years, but they could draw down that account to zero the day after. It's strictly up to the provinces in terms of how they want to draw down that amount of money. That's really contingent on how and if they can use the money.

So it is over a three-year period, but the provinces do have the opportunity to draw down that money immediately so that they're entitled to whatever respective amount is coming their way.

I can let Mr. Gusen speak specifically to the technical matters in terms of how they would access that money.

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Mr. Peter Gusen (Director, Federal-Provincial Relations Division, Department of Finance): Thank you, Mr. Chairman.

The trust has been established. The $3.5 billion will go into the trust if and when the legislation in the bill before you today gets passed. Provinces will then have access to the money immediately. They could take their portion of the money immediately or they could spread it out over the three years in which the trust will exist, at a pace that best suits them.

A number of provinces have presented their budgets since the federal budget came down and have given some indication as to how they intend to access that money and use it. Generally speaking, the provinces have identified some of the immediate needs they have, and are going to access some of the funds immediately for those needs. Other portions of it will be drawn down over time so that they can have the ongoing support for their medical system provided through the trust.

Mr. Gerry Ritz: With all the money that's been drawn out of health care across the country, why would anybody wait? I mean, you talk about it being anticipated, drawn down in a gradual and orderly manner and so on, but why would anybody not take it all this year? Is the $3.5 billion allowed for in the 1999 budget or is it staged out into the next three budgets? That's the point. If they all draw out the $3.5 billion this year, is it allocated?

Mr. Peter Gusen: The provinces would postpone accessing the money—and there would be provinces that wouldn't access it all right away—because they might want to spread it out as required by their medical systems. Some provinces have indicated that they have an immediate need for it for particular purchases, such as acquisitions of particular equipment, or for handling the debts some of the hospital authorities have. Some of the same provinces have indicated that they would like to access other portions of the money later on to handle the ongoing needs of their medical system.

So I think there's a balance there between using the money to address immediate needs and making sure it's there for future needs.

Mr. Gerry Ritz: Okay, but with the crisis we see across the country, I can see everybody taking it right now. My question, repeated, is whether this $3.5 billion, the total amount, is allowed for in the 1999 budget if everybody drags it all out.

Mr. Tony Valeri: Bill C-71 allows for the total amount of $3.5 billion to be deposited into the trust account.

Mr. Gerry Ritz: In 1999.

Mr. Tony Valeri: Completely. Any province—British Columbia or Ontario—can decide to draw down their entire share the day after legislation becomes law. It's really going to be up to each and every province to decide how they want to draw down their portion of the moneys. Some may decide to delay the drawdown, and some may draw it down right away, but the legislation does require them to draw it down completely over a three-year period.

So there's a three-year window they can take advantage of if they want to stagger their drawdowns. If they don't, they can take it all at once in the year they decide they want it.

Mr. Gerry Ritz: Thank you.

[Translation]

The Chairman: Mr. Cardin.

Mr. Serge Cardin (Sherbrooke, BQ): I would like to return to the first question that my colleague asked the Department of Finance concerning how much we could rely on the government to meet its commitments with respect to the Canadian transfer system. I would therefore like to comment on the social union agreement signed on February 4 by the first ministers of all the provinces except Quebec. The federal government agreed to "consult with provincial and territorial governments at least one year prior to renewal or significant funding changes in existing social transfers to provinces".

Two weeks later, the federal government reneged by radically altering the formula for allocating social transfers to the provinces. I would therefore like to repeat my colleague's question about the government's credibility in terms of social transfers.

I am harping on this because in its 1996 budget, the federal government introduced mechanisms to reduce inequities by at least 50 percent by the year 2000 or 2003. According to the 1999 budget, these inequities are to be totally eliminated by the 2001-2002 budget.

What credibility does the government have, then, in financial matters? Will it be able to meet its transfer commitments over a five-year period?

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[English]

Mr. Peter Gusen: The question deals with whether there were advance consultations about the changes made to the CHST in this budget in terms of the commitments made by the federal government and the provinces in the social union agreement.

The change the provinces for some time now have been asking for is that the funding in the CHST for health care be restored. The provinces and the federal government have been discussing that for a good length of time now, particularly intensely over the last year. When the federal government announced in the budget they would be restoring $11.5 billion in CHST funding over the next five years, I believe that was exactly what the provinces wanted. It arose as a result of consultations with the provinces. So it respects not only the letter but also indeed the spirit of the social union agreement.

In terms of the changes to the provincial allocation of the CHST, when the CHST was introduced back in the 1995 budget, the shares each province got were left untouched from what they had been in the previous transfer programs, the Established Programs Financing and the Canada Assistance Plan. However, it was also announced in the following budget, the 1996 budget, that over time, the discrepancies in the per capita amounts would be reduced gradually.

There was no agreement amongst provinces as to what the end of the road should be as far as provincial allocation is concerned. Some wanted to go further. Some wanted to go not so far. Some wanted to go faster. Some wanted to go more slowly. However, the provinces did provide the federal government with some guidance in the form of a report that finance ministers issued to their premiers during the summer of 1998, saying what was required for the allocation of the CHST—that is, that they get to equal per capita amounts in the CHST, and given the effect it would have on individual provinces, to get there as quickly as what would be reasonable.

Well, the 1999 budget provided an ideal opportunity for the federal government to act on the recommendations the provincial finance ministers gave to their premiers. Because there was $11.5 billion of extra money going into the CHST, it allowed for a more rapid movement towards an equal per capita allocation of CHST across all provinces, so that all Canadians received the same amount. It allowed for the government to do so without having to damage any province or take money away from any province in order to give it to another province. There was enough new money going into the system so that all provinces could come out ahead.

In terms of advance or prior consultation on that allocation issue, I believe the provinces certainly have been telling the federal government what they would like to have happen since the CHST came into existence in 1995. Most concretely, they advised the federal government in the summer of 1998 as to what they wanted to see happen, and the federal government acted.

So I think the federal government has lived up to the spirit and the letter of the social union agreement in that respect as well.

[Translation]

Mr. Serge Cardin: Yes, but over a five-year period, Quebec will receive 8.3 percent of this added $11.5 billion compared to 42.2 percent for Ontario. There are inequities in terms of speed of implementation.

[English]

Mr. Tony Valeri: I think it's fair to say that when one looks at transfers, one needs to look at the entire transfer program. Certainly the CHST is a very large component of transfers to the provinces, but the other program is equalization.

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Although my colleague quotes 8.3%, I think he should also be aware that Quebec would actually be getting 34% of the total increase in federal transfer payments announced in the last budget when you include equalization. Equalization is very vital in the sense that it helps provinces provide an equitable service in health care and education and in other programming when we compare it with other provinces.

So I think you have to look at the total transfers, both CHST and equalization. When you do that, I think you'll find that Quebec gets very much its fair share. In fact, some would argue that Quebec receives more than its fair share when you look at the percentage of the population.

[Translation]

Mr. Serge Cardin: You say fair share, but we know that the amounts received are not always for what the Quebec economy needs most. This is another matter for a different speech perhaps. We too need to receive our fair share of structural investment and purchases of goods and services by the federal government. We prefer to receive our fair share in the form of spending or investment that can help the Quebec economy obtain its fair share at other levels. We may well return to this question.

[English]

Mr. Tony Valeri: I think, Mr. Chairman, although it's—

The Chairman: Was that a question or a comment?

Mr. Tony Valeri: I think it was just a comment.

Although it's outside the scope of this particular bill, if you were to look at such programs as Technology Partnerships or others, which some others may have some trouble with, I think you would find that Quebec does get its fair share. Certainly the intent of the government is to ensure that all provinces in this federation do get their fair share and that we can work together in a way that's to the betterment of all Canadians.

The Chairman: Thank you, Mr. Cardin.

The final question goes to Mr. Szabo.

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

One of the functions the department has to go through, I'm sure, in preparing for a budget and putting provisions forward, particularly where there are some new programs or changes, is to monitor what happened and determine whether changes might be necessary if there were unintended consequences, etc. I would expect that, and I'm sure it happens.

I raise that because there is a question I have raised on a couple of occasions, and it seems I haven't gotten an answer. Maybe some finance department officials here could explain it. It has to do with the RESPs and the government grant brought in under the 1998 budget.

As you know, the appetite for the government grant—the 20% on the first $2,000—has been spectacular, absolutely spectacular. No one—no one—can deny the fact that a 20% return in year one is something you wouldn't consider. However, one of the implementation provisions of the government grant was that if you turned 17 years old in the tax year and did not have a pre-existing RESP arrangement, etc., for a couple of years, you would not be eligible for the government grant.

I know this because my own daughter, who has just turned 17 years old, was not eligible. She is in grade 11. As a taxpayer and as a family person, I did not have the opportunity to qualify for the last three years of her high school career to provide for her post-secondary education and get this 20% grant.

I raise this because all of the books I've seen.... I went to Chapters and purchased eight different tax planning books, books on beating the taxman. I looked at what they were recommending to people on how to deal with their tax money. Every one of them, unanimously—100%—said to go after the RESP but only put in $2,000, because that's the only amount on which you get the government grant, even though you can put up to $4,000.

They also said some other creative things. Since another family member, such as a grandparent, can also contribute, you can in fact “back-load” your contributions to RESPs and still accumulate enough capital to be able to provide what's necessary.

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In view of the fact that the appetite for RESPs has been so strong, and that it appears to be the experts' recommendation that your contributions be limited to $2,000 and any residual capital you might have should be continued to be invested in RESPs, has the finance department considered any modifications? Or perhaps they can at least explain why children who were still in high school when this was introduced were excluded or possibly even discriminated against in terms of being eligible to participate in the government grant.

Mr. Tony Valeri: I think that's a very good question.

The RESP program is certainly outside of Bill C-71, and I would endeavour to get a proper answer for Mr. Szabo and provide him with that information. He was correct, though, that when programs are announced, they are reviewed from time to time. If there is any type of discrepancy or unintended effect, actions would be taken to remedy that.

If I could ask your indulgence, Mr. Chairman, perhaps I could provide Mr. Szabo with a written response to his question, through the department. That might be better.

The Chairman: Okay.

Mr. Paul Szabo: Thank you.

The Chairman: Mr. Epp, you're going to be the final questioner after all.

Mr. Ken Epp (Elk Island, Ref.): I have a few quick questions having to do with the CHST.

One page 5 of this little booklet, it says we're getting an additional $11.5 billion, and it says, in a couple of places, where that's over five years. In the second paragraph, it says, “Of this amount, $8 billion will be provided through future-year increases”, with $3.5 billion provided “as an immediate one-time supplement”.

Well, $8 billion plus $3.5 billion adds up to $11.5 billion. But when I look on page 15, at the graph with regard to the increases, I see $2 billion; $2 billion; $2.5 billion; $2.5 billion; and $2.5 billion. This also adds up to $11.5 billion.

Now, where did the $3.5 billion go? It seems to have disappeared.

It seems to me also that you use your numbers twice because it seems to communicate better to the people. You're giving them twice as much as they think they're getting.

Explain that discrepancy.

Mr. Peter Gusen: The chart you refer to on page 15 has a footnote that, I admit, is in very small type. It can easily escape notice. It explains that of the $11.5 billion—made up of those two $2 billions and three $2.5 billions—part of it, the $3.5 billion that's put in the trust, is included in those little white blocks on the top of the bars.

The way it's laid out in this graph here, it's attributed $2 billion of that $3.5 billion amount to the first year; $1 billion to the second year, or 2000-01; and the final $0.5 billion to the third year, 2001-02.

Now, that's used in these budgetary documents as a possible drawdown schedule that the provinces might use, although it's explained in the footnote that the provinces have the discretion to draw the money just as soon as it's available in the trust.

So it's not that the same money has been counted twice; it's just that the $3.5 billion is made available immediately. The rest of it, the $8 billion, is added to the normal CHST over time.

Mr. Ken Epp: So if the $3.5 billion is drawn essentially immediately by the provinces, or whatever schedule they use, that would then totally wipe out the next two years of $2 billion per year, except for $0.5 billion.

Mr. Peter Gusen: It would wipe it out in the first year. The $2 billion block on the bar—it's labelled “1999-2000” on the graph on page 15—would be taken immediately; half of the amount in the second year; and $0.5 million out of the amount in the third year.... It would be all consumed at the outset.

Mr. Ken Epp: So the first two years add up to $4 billion, and they can take $3.5 billion this year and $0.5 billion next year. Is that correct?

Mr. Peter Gusen: The provinces could take $3.5 billion this year, in which case there would be no additional amount in regular CHST for 1999-2000. There would still be half of that $2 billion available in the second year—that's the normal addition to CHST—and there would be $2 billion out of the $2.5 billion in the third year.

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I believe the table on page 14 would explain it a little more completely. The amounts in the CHST supplement—the third line of figures in table 1—add up to $3.5 billion. You can see it's distributed $2 billion in the first year; $1 billion in the second; and $0.5 billion in the third year.

If the provinces chose to take that all on day one, then that money would not be available in later years.

Mr. Ken Epp: Okay.

Thank you, Mr. Chairman. That explains what I wanted to know.

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

I would like on behalf of the committee to of course thank Mr. Valeri for a very thorough presentation, and thank Messrs. Gusen and Horner as well.

If I may, I would like to take some time to thank all those individuals who may not have appeared in front of the committee but who work so hard to make our lives much easier here at this committee with their research and expertise.

So if I may, I would also express on behalf of the committee our warmest and sincerest gratitude to these individuals from the Department of Finance: Mr. Doug Wyatt, general counsel, general legal services; Mr. Gusen, of course, who appeared in front of us; Frank Vermaeten, chief of policy development and research, federal-provincial relations division; Doug Adlard, counsel, general legal services; Bill Mitchell, director, financial markets division, financial sector policy branch; Rob Stewart, senior chief, financial markets division, financial sector policy; Marc Grandisson, chief, first nations taxation; Keith Horner, chief, social tax policy, tax policy branch; Sylvie Rocheleau, tax policy officer, tax policy branch; Yves Giroux, tax policy officer, tax policy branch; Chantal Maheu, acting chief, agriculture and fisheries, economic development and corporate finance branch; Kristina Knopp, counsel, general legal services; and Stephen Millar, senior economist, international trade and finance branch.

Thank you very much.

As well, I want to thank the following individuals from the Treasury Board of Canada: Linda Gobeil, assistant secretary, labour relations division, human resources branch; Joan Arnold, director of legislation development; Pierre Hamel, general counsel, legal services; Paul Mercier, director, analysis, research and compensation; and Ken Monds, senior pensions officer, pensions division.

From Health Canada, I'd like to thank Ross Duncan, policy analyst.

Of course, if there are individuals in this room who were not mentioned, the finance committee certainly appreciates the work you do as well.

Thank you very much.

[Proceedings continue in camera]