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CHAPTER 7: UNFINISHED BUSINESS

In last year's report,21 the Committee recommended a series of measures relating to specific industries or economic activity, upon which the government has not acted. We still believe these measures warrant the government's attention.

CHARITIES

The Finance Committee has always taken special interest in the charitable sector. As everyone knows, the Committee has made several important recommendations to the government over the years. It almost always agreed with our recommendations and introduced numerous new tax incentives to foster charitable giving.

The time has come, however, for the federal government to properly assess the effectiveness of all these tax measures. To make sure that they are meeting the tax policy objectives one must carefully evaluate their effects. Do they work? Are they efficient? In order to do that assessment, one must have a period in which the system is in equilibrium, where no new initiatives are announced and initiated. Hence 1999 should be the base year to assess the long list of tax incentive measures introduced over the years.

Once this evaluation is completed, the government will be able to introduce new and more effective tax incentives if necessary. This is why the Committee is not recommending any new tax initiatives related to charities.

This does not mean that this Committee is losing interest in the voluntary sector. On the contrary, the Committee believes that the government must work in partnership with philanthropic organizations. They have become important players over the years, capable of meeting great challenges in the face of fiscal restraint. In many respects, these voluntary organizations increase the quality of life of millions of Canadians, especially the most vulnerable.

The Committee believes it is crucial that the effects of past changes to the tax treatment of charitable donations be evaluated. The Department of Finance should collect all the data needed to conduct such a review, and commence the evaluation as soon as possible.

EXCISE TAX ON JEWELLERY

The federal government has imposed a 10% excise tax on jewellery since 1918. This has resulted in underground activity within this industry, and subsequent increases in the cost of tax enforcement.

The Committee therefore recommends that the Department of Finance eliminate the excise tax on jewellery.

PHYSICIANS AND THE GST

According to the Canadian Medical Association, the GST is unfair to physicians because they are unable to claim input tax credits for business expenses. Because physicians are unable to recoup GST expenses through other charges, this has adversely affected the recruitment and retainment of Canadian doctors. This issue continues to merit further consideration by the government.

PRIVATE WOODLOTS

Due to the long period required for woodlots to mature, Revenue Canada argues that the woodlot business does not appear to meet reasonable expectations for profitability. The private woodlot industry argues that the tax system operates as a disincentive against sustainable forest management. This year again the Committee heard testimony in this regard. However, we note that Revenue Canada has recently released a draft Interpretation Bulletin on woodlots. Industry groups are able to comment on this bulletin. It appears that this bulletin addresses many of the concerns expressed by industry groups. Under certain circumstances they would be treated as farmers and receive all of the tax benefits that farmers receive.

The Committee is comforted by Revenue Canada's initiatives and encourages the government to favour sustainable management practices in this important forestry sector via an appropriate tax treatment of woodlot operators.

INCOME AVERAGING FOR ARTISTS

Artists and writers pay higher taxes on average because of the variability of their incomes. With a progressive income tax, those with highly variable incomes will pay more tax than those who earn the same amount year after year.

The Committee therefore continues to recommend that the government consider the introduction of income averaging for those forms of income that fluctuate substantially from year to year.

APPRENTICES' TOOLS

Apprentices and technicians working in the automotive industry are not subject to the special provisions in the Income Tax Act as are artists, chainsaw operators and musicians. The initial cost of tools, and annual replacement purchases, can total tens of thousands of dollars, yet are not deductible.

The Committee continues to recommend that the government provide targeted tax relief for all those who must bear large expenses as a condition of employment, such as is the case with mechanics' tools.

MAJOR NATURAL CATASTROPHE

The insurance industry has argued that Canada is not prepared for natural catastrophes and current taxation and accounting practices do not facilitate the creation of reserves by the insurance industry. To counter this, the government has required that insurers demonstrate the ability to measure and fund their earthquake exposure.

While the Committee is greatly encouraged by the establishment of earthquake reserves, it still recommends that the government continue working with the insurance industry to determine the tax treatment of earthquake reserves.

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21 See Chapter 3 of Finance Committee, Keeping the Balance, December 1997, p. 71 to 82.