All the witnesses appearing before the Committee stressed the need to plan for the future, be it in health care, education or innovation. In his remarks to the Committee, Arthur J. Carty (President, National Research Council of Canada) spoke on the need to keep the future in mind: “We, like you members of the Committee, must act in times of crisis with all of our ingenuity, energy and devotion to Canada. But we must absolutely, at the same time, look beyond immediate problems to new possibilities, a positive future and the interests of our children’s children.”

Other pressing issues remain to be dealt with. Bonnie Morton (President, National Anti-Poverty Organization) reminded the Committee of the need to remember social issues. “Today much of the talk about federal policy in general, and fiscal priorities in particular, is about security. … In its most simple sense security means ‘untroubled by danger or fear.’ Regardless of the need for the federal government to concern itself with the security and safety of Canadians from external threat, millions of Canadians every single day, simply because they are poor, have their security threatened — security of food, security of housing, security of employment and security of income. In turn these insecurities lead to problems with health, education, family and community.”

In the health care sector, David Thibaudeau (President and CEO, Canadian Association of Insurance and Financial Advisors) told the Committee that, “While we appreciate and support the need to reallocate current spending to such priority areas, the protection of Canada’s health care system must also remain a top priority.” He was echoed by Pierre Beauchamp (Chief Executive Officer, Canadian Real Estate Association): “The Finance Minister says, rightly, that health care and other social programs must remain a priority, but the approaching strain on the government’s coffers owing to an aging population isn’t going to go away.”

This Committee has consistently recommended adopting a long-term vision, one focused around achieving the kind of productivity increases that will bolster the country’s standard of living. The Committee’s June 1999 report Productivity with a Purpose: Improving the Standard of Living of Canadians argued that productivity increases “cannot be achieved overnight. [They] require policies that are far-sighted, and that will produce long-lasting benefits far into the future… . [We must] resist the temptation to seek quick fixes.” It is important to remember that long-term growth tends to solve much of what is viewed as current economic problems. In 2000, the Canadian economy produced about $1,060 billion worth of nominal gross domestic product. With an average 5% nominal growth rate over the next five years this should grow to $1,353 billion by 2005. This in turn implies that the federal government could have an extra $50 billion in tax revenue,[46] or about $8 billion more than it now spends on debt payments each year.

The events of September 11 make planning decisions even more difficult than normal. Security is the number one issue and the Committee firmly believes that at this point it should have a clear priority over other claims. Nevertheless, there is no lack of competition for the other positions on the list. At this time of strained finances and new priorities, the Committee believes that where funds are available, the greatest weight should be given to initiatives that improve Canadian competitiveness, productivity and innovation.

If we truly care about the long-term health of public programs and infrastructure that support Canada’s way of life, we must not let short-term panic become an excuse for renewing the sad cycle of fiscal despair. Thomas P. d’Aquino, President and Chief Executive, Business Council on National Issues

Given the Committee’s views on the dangers of falling back into deficit, we recommend postponing any major new non-security spending initiatives until the longer-term fiscal outlook is secured. At this point we wish to reiterate our five priority areas for the upcoming budget, namely:

• security initiatives;
• protecting against a deficit;
• a continued commitment to the $100 billion tax reduction plan, and its timetable;
• a continued commitment to the federal health-related transfers to the provinces; and
• increasing support for R&D and the CIHR.

The following contains a number of issues that need to be addressed when fiscal conditions permit.

Taxation

Capital Taxes

Capital taxes act as a disincentive to new investment, and discriminate unfairly against capital-intensive industries. Sab Meffe, Chair, Taxation Committee, Railway Association of Canada

The Committee believes that capital taxes represent one area in which the government can make the tax system smarter. Of the many recommendations that could lead to productivity gains and rising standards of living, proposals to eliminate or reduce the capital tax on corporations stood out both because of the frequency with which they were raised during our pre-budget consultations and also because of their obvious and direct link to the productivity agenda. Capital taxes are used at both the federal and provincial levels. In 1999, the latest year for which data are available, capital taxes generated about $1.5 billion for the federal government and about $3.9 billion for the provinces.[47]

The federal government collects two capital taxes, the Large Corporations Tax (LCT) — which applies to all corporations with capital employed in Canada in excess of $10 million — and the Part VI capital tax on financial institutions. Life insurers must pay an additional surtax. These taxes act as a minimum tax — rather than an additional tax — that is paid in good times and bad. It can be offset by any current year’s corporate income surtax payable. Surtax incurred in any of the previous three, or subsequent seven, years may also be applied against current year capital tax liabilities.

As the figures above reveal, capital taxes are more important at the provincial level. Seven provinces[48] levy a general capital tax on corporations, and every province levies a capital tax on financial institutions. The bases for provincial capital taxes differ from the federal base, and the provincial bases differ from one another. One of the major differences between federal and provincial capital taxes is that “provincial levies are generally deductible in computing taxable income for corporate income tax purposes. This lowers a corporation’s taxable income. For example, if a corporation had a provincial capital tax bill of $10 million and an income of $100 million, its net taxable income for income tax purposes would be $90 million [income less capital tax].”[49]

Gregory J. Haymes of Statistics Canada remarks, “provincial levies are considered fixed, because, unlike federal levies, corporations cannot reduce their capital tax payable based upon their corporate income tax. Secondly, provincial capital taxes are deductible in computing taxable income for corporate income tax purposes, thereby, lowering the federal and provincial corporate income tax base.”[50] This feature has created an incentive for the provinces to use capital taxes because part of the incidence is shifted to the federal government.

Capital taxes represent a tax on innovation, productivity and on investments. They are applied to companies even when a firm suffers a loss. We also recommend that the federal government, together with provinces, abolish this regressive burden on businesses. Gilles Ouimet

As witnesses told the Committee, capital taxes discourage investment, reduce productivity, and disproportionately affect capital-intensive industries. Furthermore, according to the brief submitted by the Coalition for the Elimination of capital taxes, a group of Canadian firms from the manufacturing and resource industries, “As capital taxes are a profit-insensitive tax, in times of economic slowdown they reduce companies’ ability to ‘weather the storm,’ leading to an even greater hit on their profitability.”

Financial corporations face an additional burden. According to the Conference Board of Canada:

A study of the effects of capital taxes on the financial sector found that these taxes run counter to efforts by regulatory agencies around the world to increase the amount of prudential capital in financial institutions. The conclusion was that the competitiveness of Canadian financial institutions worldwide was being hurt by high capital taxes. The report[51] called for the immediate reduction and eventual elimination of all taxes on the regulatory capital of financial institutions — a view supported in the final report of the Task Force on the Future of the Canadian Financial Services Sector. The Case Against Capital Taxes

We believe that it’s important to eliminate capital taxes. These profit-insensitive taxes are job killers. The federal government would also be encouraged to work with the provinces to eliminate all capital taxes. Barry Lacombe, President, Canadian Steel Producers’ Association, Business Tax Reform Coalition

Investment in new equipment is one of the key factors affecting long-running productivity growth. One of the few non-controversial conclusions among experts is the fact that economies that invest heavily in physical capital tend to enjoy higher productivity and hence growth rates than those that do not. The overwhelming majority of all investment is financed out of retained earnings, i.e., what is left out of net profits after dividends have been paid to shareholders. Anything that reduces this pool of financial capital is likely to have a negative effect on investment. And that is exactly what the capital tax does: it targets the pool of financial capital out of which the bulk of physical investment is financed.

At the risk of sounding repetitive, by eliminating the capital tax…the federal government would be sending a strong, positive signal to investors at a critical point in the business cycle. What better way could you provide a step to further encourage the deployment of new energy-efficient and productive assets to serve the economy? Bruce Burrows, Vice-President, Public Affairs, Government Relations, Canadian Railway Association

The Committee has supported in the past, and continues to support, a reduction in capital taxes, in conjunction with provincial reductions, while at the same time harmonizing the tax base, in order to simplify the system. In its November 2001 study on capital taxes, the Conference Board of Canada concluded that harmonization of federal and provincial tax bases and rates “would yield significantly lower capital tax revenues to the provinces, but a simple change in tax rates would take care of the revenue shortfall. In fact, simplifying the capital tax calculations would enable corporations to realize benefits from lower compliance and audit costs.”

In its 1999 Pre-Budget Consultation report, the Committee observed that, “Taxes on capital or the returns from capital tend to reduce the returns from investment and hence reduce the amount of investment that is undertaken. This means a smaller stock of capital as well as an older stock of capital. Both of these factors will lead to lower productivity and hence lower real wages. Moreover, as this lower productivity would make Canadian firms less competitive internationally, it could also lead to lower employment in Canada.”

The Committee notes that several provinces have already begun to move on capital taxes. On April 1, 2001, Alberta eliminated its capital tax on financial institutions, and has moved to repeal the deductibility of capital taxes paid in other provinces in computing Alberta corporate tax. In the 2001 Ontario Budget, Ontario indicated it would begin eliminating the Ontario Capital Tax, starting with an increase in the threshold to $5 million of taxable capital. British Columbia, in its 2001 Economic and Fiscal Update, announced it would be phasing out the B.C. corporate capital tax by cutting the rate in half this year, and eliminating it entirely in 2002. Finally, in its most recent budget, the Québec government said it would reduce its capital tax from 0.64% to 0.3% by 2007. According to the Conference Board of Canada, “Other provinces have either raised the exemption levels … or have offered generous tax holidays for large investment projects.”[52] At the federal level, the government allowed the temporary surtax on deposit-taking institutions to expire in October 2000.

Priorities may have shifted, but the Committee’s analysis remains correct, as does our 1999 recommendation for a reduction in capital taxes, in conjunction with provincial reductions, while at the same time harmonizing the tax base.

The Committee recommends that the federal government encourage a harmonization of the capital tax base, and the elimination of the capital tax.

Tax Deductions for Charitable Donations

The voluntary sector plays an important role in sustaining the quality of life in Canada. These groups have increasingly taken on larger roles in society in all areas of social services. It is therefore vital that the government support them in their work. On October 12, the government announced that it would make permanent the successful 1997 measure by which certain donations of publicly traded securities to public foundations are subject to a capital gains inclusion rate of one-half the amount included for other gains.[53] This measure had been scheduled to expire on 31 December 2001.

From the data available, it appears that this measure has been an effective additional incentive for people to make donations to charities. This is exactly what the measure was designed to do. Finance Minister Paul Martin

According to a Deloitte & Touche Report, the number and value of gifts of publicly listed securities, as well as their dollar share of total donations, has risen between 1996 and 1999.[54] According to the Department of Finance, data for the 1997-2000 period show that both the number and the value of donations of securities have increased significantly. Furthermore, the Department of Finance reports that a broad range of charitable areas — education, health, religion, and welfare — have benefited from the increase.

Witnesses appearing before the Committee, including the Canadian Arts Summit, Community Foundations of Canada, and United Ways of Ontario, were unanimous in their support for both the exemption and its extension.

No matter what kind of charity you are, no matter which part of the country you’re in, and no matter what issue you work on — libraries, universities, hospitals, family services centres, religious organizations, or aid organizations — the capital gains tax cut has helped increased philanthropy across the board. Nicholas Offord, President, Mount Sinai Hospital Foundation of Toronto; Association of Fundraising Professionals

I would like to commend the government for its recent wonderful announcement with regard to the extension and actually to making permanent of the capital gains rules concerns gifts of appreciated shares to public foundations. Gail Asper, Managing Director, Asper Foundation Inc. President, CanWest Global Foundation

We applaud the recent decision and consequent announcement made by the Minister on 12 October 2001, to make permanent the incentive for gifts of publicly listed securities to charitable organizations and public foundations. In communities across Canada examples abound of extraordinary new gifts to charities of publicly listed securities stimulated by this incentive. Canadian Association of Gift Planners

While the Committee supports the government’s announcement, we believe that more can still be done, in two areas specifically.

First, the Committee notes that the special rule on donations of publicly traded securities applies only to public foundations, not private foundations. This, despite the fact that over 80% of foundations in Canada are private. Furthermore, as the Asper Foundation notes in its written submission, “The 1,783 private foundations across Canada provide the same public accountability as public foundations — they submit the same reports, they have exactly the same requirements to contribute to registered charities and they are equally successful in reaching a wide range of charities.”

If the capital gains tax incentive of gifts of publicly traded shares encouraged even one individual to create a foundation like the Max Bell Foundation, the benefit to Canadian society would be many, many times greater than the benefit Canadians would realize from the imposition of that relatively small capital gains tax. We believe extending this incentive will send a message to dozens, even hundreds, of Canadians that the Government of Canada values the creation and growth of private foundations. David Elton, Chair, Government Relations Committee, Private Foundations Canada

Second, while the reduction in capital gains inclusion for donations of publicly traded securities is a good start, the Committee believes it only makes sense to eliminate the rest of the capital gains inclusion on these securities, as is currently the case in the United States and which was undertaken last year by the United Kingdom. From a cost perspective, while a complete exemption in 1997 (when the regular capital gains inclusion rate was 75%) would have cost between $20 million and $70 million per year in the initial years, the reduction in the regular inclusion rate means the revenue loss would only be between $6 million and $21 million. In other words, as Donald K. Johnson (Vice-Chairman, BMO Nesbitt Burns) urged the Committee, it is time to “finish the job.”

Eliminating the capital gains tax on gifts of stock to charity … is affordable, it’s sound, it’s proven to work. Nicholas Offord

The Committee supports the government’s proposal to make permanent the 1997 budget measure that provides special tax assistance for donations of publicly traded securities to charities. We recommend that the government exempt fully from capital gains taxation donations of publicly traded securities to charitable organizations, including private foundations.

Employment Insurance and the YBE

In the past the Committee has supported the government’s move to continue to reduce EI premiums. In December 2000, the government announced that for 2001 it would lower EI premiums by 25 cents to $2.25. The government has also committed to a 10-cent reduction in EI premiums for the coming year. Indeed, according to the October 2000 Economic Statement and Budget Update EI premiums will be reduced by $16.2 billion between 1997-98 and 2002-03.

On 15 May of this year, the government passed Bill C-2, An Act to amend the Employment Insurance Act and the Employment Insurance (Fishing) Regulations. The Bill:

• Eliminated the Intensity Rule;
• Adjusted the Benefit Repayment (clawback) provision;
• Modified the re-entrant rules for parents returning to the workforce;
• Allowed the government to continue to monitor and assess the impact of the EI program until 2006;
• Allowed the Governor-in-Council to set the premium rates for two years;
• Maintained the maximum insurable earnings (MIE) at $39,000; and
• Aligned EI Fishing Regulations with the enhanced maternity, parental and sickness benefits.

Furthermore, parental benefits have been extended by 25 weeks, from 10 to 35 weeks. Combined with maternity benefits, this extends child-related leave from six months to one year. The new benefit repayment rule exempts first-time claimants from the benefit repayment (requiring repayment of benefits only if the claimant’s net income is greater than $48,750), and limits the maximum repayment to 30% of a person’s benefits. Regarding the intensity rules, as of October 1, 2000, all EI claimants were eligible to receive 55% of their insurable earnings.

As well, the EI Family Supplement for low-income recipients of EI with children is worth $110 million annually.

Witnesses appearing before the Committee raised two main issues with regard to EI. First, there was the issue of a 10-cent cut to EI premiums. Groups such as Canadian Manufacturers and Exporters told the Committee that they saw the EI reduction as part of the government’s already-announced tax-cut plans.

The $100 billion federal tax plan includes a 10¢ EI premium cut for 2002. A lower rate cut will signal to employers and employees that the government is prepared to move off its tax reduction plan. Garth Whyte, Senior Vice-President, National Affairs, Canadian Federation of Independent Business

In 1995 the EI premium rate was set at the $3.00 per $100 of insurable earnings, despite the fact that the formula required a rate of $3.30. In 1996, the rate was reduced by a further 5 cents at a cost of $350 million. In 1997, the rate was reduced by a further 5 cents. Maximum insurable earnings were reduced, causing a $900 million reduction in premiums. Premium relief was offered to small business in 1995 and again in 1997 and 1998. In 1999, 2000 and 2001 the rate was reduced by 15 cents per year. The rate is still above the break-even rate and the Committee believes it should continue to be reduced toward that level.

The Committee recommends that the government continue to reduce EI premiums so as to gradually get closer to the break-even rate.

The second issue raised by witnesses, notably from groups like the Canadian Federation of Independent Business, the Hotel Association of Canada, the Canadian Tourism Association, the Canadian Restaurant and Foodservices Association and the Retail Council of Canada, is a yearly basic exemption (YBE) for EI similar to that used in the Canada and Quebec Pension Plans. A YBE would exempt employers and employees from paying EI premiums on the first few thousand dollars of an individual’s income. Witnesses suggested a $2,000-$3,000 YBE.

The Committee notes that the House of Commons Standing Committee on Human Resources Development and the Status of Persons with Disabilities (HRD Committee) supported a $2,000 YBE in its May 2001 report, Beyond Bill C-2: A Review of Other Proposals to Reform Employment Insurance. That Committee remarked that currently a third of the 1.2 million individuals eligible for a premium refund in 1998 applied to have their premiums refunded, and that a YBE would “reduce administrative complexity and … ensure that all individuals, not just those who apply for a premium refund by filing an income tax return, are treated equally.... This approach is not only fairer to workers with low earnings, but also to employers who are currently required to pay premiums on behalf of workers who receive a premium refund.”

The Committee notes that, at $2.3 billion, a full YBE would be costly to implement and is not affordable given the current economic downturn and need for increased security spending.

The Committee recommends that the government consider implementing a YBE, and that, in the interim, it take into consideration the recommendation of the Canadian Restaurant and Foodservices Association.

Revisiting Capital Cost Allowance (CCA) Rates

…we believe that the federal government has the opportunity to significantly influence the construction and development of generating facilities and infrastructure in Canada through changes to the CCA rates. Investors require enhanced tax rates and strong signals that produce rates of return needed to attract the necessary capital. The resulting inflow of investment capital will contribute to economic growth, increase jobs and [create] a more competitive industry sector in today’s global marketplace. Roy G. Staveley, Senior Vice-President, Public Affairs and Environment, Canadian Electricity Association

The Committee heard from a cross-section of industry representatives who argued that many capital cost allowance rates (CCA) — the rate at which a firm can writedown the value of its investment in a piece of machinery for tax purposes[55] — no longer reflect the actual economic life of the equipment.

Locomotives and railway cars have a certain physical life and, depending on how you maintain them, that physical life could extend 20, 30, 40 years. An economic life, however, is predicated on the productivity of those assets, and whether those assets are not so much fit for use, but whether those assets really are going to last and generate those productive benefits over a very, very long period of time and allow you to remain competitive against the other modes of transport and other geographic regions. John Marinucci, Director, President, National Steel Car Ltd., Canadian Association of Railway Suppliers

This is due largely to rapid technological change: a machine that at one time may have provided a firm with a competitive edge for ten years may only do so for three years in today’s fast-changing world. The sooner these assets can be written off, the sooner the company is able to invest in new technology. This has obvious benefits in terms of productivity. The printing industry gave the Committee a particularly striking example of how technology is rapidly changing the competitive environment and why revised CCA rates are necessary.

Unfortunately, manufacturing industries, such as printing, that now rely heavily on high-tech equipment for their production, are unable to depreciate it based on its actual useful life. In fact, Canada’s tax policy respecting the depreciation of computer-based equipment is totally outdated. Currently, it can take in excess of seven years before a piece of computer equipment has substantially depreciated for tax purposes, even longer for expensive technology devices. This is an unreasonable amount of time, given the rapid obsolescence of this technological equipment. According to a recent survey, printers are disposing of computers and peripheral equipment within 14 to 36 months. Customers are demanding new and better products and services at an ever-increasing rate. As a result, printers must continue to purchase new high-tech equipment to remain competitive. At the same time, no reliable market exists for used computer-based products since there is virtually no value to technically outdated equipment. Jeff Ekstein, Canadian Printing Industries Association

Revisiting CCA rates would also serve important infrastructure and broader North American competitiveness needs. For example, as the Canadian Electricity Association reminded the Committee, much of Canada’s electricity infrastructure is dated and new investments have been slow in coming throughout most of the 1990s because of slow economic growth and slow demand. With stronger economic growth in the last part of the 1990s and a new, more competitive energy market that is fast becoming North American in its scope, new investments become increasingly important if Canada’s electricity industry is to remain competitive and, indeed, able to meet domestic demand. The Committee heard similar arguments from the Railway Association of Canada and the Canadian Association of Railway Suppliers.

Relative to the United States, rail transport in the United States is depreciated for tax purposes in seven to eight years as opposed to our 15 to 20 years in Canada…. Changing the tax rate on rail cars, locomotives and intermodal equipment will not result in a tax loss in cash to the Canadian taxpayer. Since the United States already has those favourable tax policies in place, the railroads have been leasing their product from the United States to the tune of approximately $600 million plus per year in rents. The bulk of that capital flows to the United States and never returns to Canada. John Marinucci

We’re a service business. We have to meet the needs of our customers, and our assets have to fit the demand. This means that, over time and at an increasingly fast pace, customers require different features on equipment. That means that in a short period of time, we might have to buy new equipment with different features. Newsprint rolls, for example, are only getting bigger and heavier…. Bruce Burrows

There are important environmental benefits to revising CCA rates as well: new technologies are frequently more efficient and hence more environmentally sound. The federal government has created a class of depreciable capital assets specifically designed for new, energy-efficient or environmentally friendly technologies. The government should consider expanding the criteria for eligibility.

Since environmental performance in reducing greenhouse gases is vital to this country, the proposed CCA rate changes will contribute to the turnover of capital stock in favour of a more efficient plan and encourage emerging technology development. Jeff Ekstein

The Committee recommends that the government undertake the research necessary for a comprehensive reform of the capital cost allowance rates to better reflect the pace of technological change and the ever-shortening economic life of modern machinery and equipment.

Registered Savings Plans

The ability to fund an adequate level of retirement income on a tax-effective basis is crucial in encouraging our best and brightest to remain in Canada.... Sustaining and growing the tax base through a productive work force will become increasingly important, particularly as the baby boom generation reaches retirement in the next 10 to 15 years. Canadian Life and Health Insurance Association Inc.

A number of submissions to the Committee recommended that the government increase contribution limits on registered retirement savings plans (RRSPs) and registered pension plans (RPPs). A number of organizations recommended that contribution limits be doubled immediately to $27,000 and that these limits be immediately indexed to inflation, as was done with the rest of the income tax system in the 2000 Budget. Some suggested that this increase be accomplished by increasing the percentage limit to 36% of earned income (up to $75,000) instead of the current 18% limit.

Witnesses put forward a number of arguments to support these recommendations. First, it would improve the competitiveness of Canada’s savings regime with that of its major competitors. This would help attract and retain workers in Canada. Moreover, government tax revenue would rise as the baby-boomer population reaches retirement and cashes-out its retirement plans. This bulge in tax revenue would come just as this same population puts increasing demands on the health care system.

Income withdrawn from enhanced private retirement savings vehicles, made by Canadians today, would provide critical tax revenue at a time to match the expected tax expenditures. Canadian Life and Health Insurance Association Inc.

Increasing the percentage rate allows Canadians at all income levels to make increased contributions to their RRSPs. It would also bring Canada closer to the contribution limits in countries that are competing with Canada for skilled talent. John Mountain, Vice-President, Regulation, Investment Funds Institute of Canada

In its last few budgets, the government has taken measures to help Canadians prepare for their retirement. For example, in two separate moves (the 2000 Budget and the subsequent Economic Statement and Budget Update) it reduced the capital gains inclusion rate — the portion of capital gains that is taxable — to 50% from 75%. The government has also committed to increasing RPP limits to $14,500 in 2003 and RRSP limits to a similar amount in 2004. Thereafter, the limit on each savings plan would increase by another $1,000 (i.e., in 2004 and 2005 respectively), after which limits will rise with inflation.

Raising the RRSP limits is essentially a matter of providing Canadian workers with more flexibility in planning for their retirement. John Mountain

While the Committee believes that increasing the RRSP contribution limit could play an important role in attracting and retaining skilled workers, it must also consider the government’s fiscal position.

The Committee recommends that RPP and RRSP limits be indexed to inflation, consistent with the government’s decision to restore full indexation to the personal income tax system. Similarly, the Committee recommends that the government consider a one-time increase in contribution limits for the full range of savings plans beyond what is already planned.

Another important part of the government’s efforts to encourage savings is the Registered Education Savings Plan (RESP), which allows parents to invest up to $4,000  per year for their children’s post-secondary education up to a lifetime maximum of $42,000. In 1998, the government introduced the Canada Education Savings Grant, which matches 20% of the first $2,000 invested annually in an RESP. While the Committee heard unanimous support for both programs, there was some concern that the program did not provide enough assistance to low and middle-income families. The Canadian Association of Not-for-Profit RESP Dealers put forward three proposals to address this concern. The first would have the government increase its contribution for low and middle-income families to 30% of the first $1,000 (annually) put into an RESP. Second, the government was urged to change the Income Tax Act to make it easier for provinces to offer programs similar to the Canada Education Savings Grant. Third, the government should create bankruptcy protection for RESP plans: low- and middle-income families are more likely to declare bankruptcy than higher-income families, thereby threatening the accumulated savings undertaken for their children.

The Committee recommends that the government increase the Canada Education Savings Grant contribution to 30% of the first $1,000 contributed annually to an RESP and reduce it to 10% for the second $1,000 of contributions. The Committee recommends that the government also consider creating bankruptcy protection for RESP funds.

The Canadian Film and Television Industry

The Canadian Television Fund has played an important role in ensuring the presence of high quality Canadian programming by providing production financing for Canadian content productions. It has also had important economic spinoffs in the form of jobs and made-in-Canada film and television expertise. The fund is due to expire in April 2002. The government is currently considering a renewal of its commitment to the fund.

The government also encourages Canadian content productions through the certified film or video production credit, which was created in 1995 and can amount to as much as 12% of the total production budget. While an important fiscal incentive for the creation of Canadian programming, the industry has argued that the tax credit calculation is subject to a large number of cost disqualifications that make the calculation complex and uncertain, which in turn delays the actual payment of the credit. The Canadian Film and Television Production Association is currently in negotiations with the Department of Finance to simplify the tax credit.

The Committee supports a continued commitment to the Canadian Television Fund. We also urge the government to continue working with the Canadian Film and Television Production Association to simplify the certified film and video production credit.

Microbrewers

This year, the Committee heard from the microbrewing sector. These 53 small companies are located in communities across Canada, bringing important economic activity to all regions of the country. However, they told the Committee that the high level of excise duties paid by their sector is having an adverse effect on their ability to remain viable. Excise duties represent the single highest federal tax paid by the industry. According to the submission of the Brewer’s Association of Canada, “at $27.985 per hectolitre, excise duty equals the average cost of maintaining a small brewery, estimated at $30 per hectolitre and direct labour costs, estimated at between $27 and $32 per hectolitre.” Furthermore, the low level of tax burden on American microbreweries leaves Canadian companies at a competitive disadvantage because they compete for the same market segment.

The effects of excise tax are relentless, however. This year we will sell just a little better than $10 million worth of beer, we now employ about 42 people and we’ll pay in excess of $800,000 in federal excise tax. To put it in perspective, it costs more in excise tax than it does in labour to produce the beer. At $28 a hectolitre, that tax competes directly with capital required for reinvestment in property, plant and equipment and for hiring more people. Howard Thompson, President and CEO, Creemore Springs Brewery Limited, Brewers Association of Canada

In order to alleviate the situation, the brewers association suggests a 60% reduction in the rate of excise duty on the first 75,000 hectolitres of production for Canadian brewers producing no more than 300,000 hecotlitres annually. According to their submission, such a reduction would represent a $10.9 million savings to microbrewers, or about 2% of total excise duty revenues.

Mechanics’ Tools

Revisiting a theme from previous pre-budget consultations, representatives from the automotive industry remarked to the Committee on the lack of provisions in the Income Tax Act regarding their tools. These special provisions in the Income Tax Act would be similar to those allowed to artists, chainsaw operators and musicians. The initial cost of tools for apprentices and automobile technicians, and annual replacement purchases, can total tens of thousands of dollars, yet is not deductible. As well, the industry continues to face a shortage of qualified technicians.

As a result of this unfair tax treatment we are experiencing the following problems: a serious decline in youth enrolment in automotive technical schools, a shrinking workforce, and a shortage of skilled workers. … Our automotive dealerships have the jobs for youths. However, the government’s taxation of technician’s tools acts as a large financial barrier and is a disincentive to many young people considering a career as an automotive technician. Canadian Automobile Dealers Association

Employment expense deductions are generally not available to those who are not self-employed. Only a few exceptions are granted, as noted above.

The Committee believes the government should make some provision for fairer tax treatment of mechanics’ tools and recommends that this be limited initially to apprentices.

Tax Treatment of Race Horse Operators

The Committee heard concerns that the Income Tax Act, and in particular Section 31, may be hurting the Canadian horse racing industry, weakening its position relative to its American counterpart and other entertainment and sporting activities. As of 1952, most losses from a business are fully deductible against other income if it can be shown there is a reasonable expectation that the business will generate a profit. However, part-time farmers, including most race horse operators, can only deduct a maximum loss of $8,750 against other income regardless of whether the individual invested $5,000 or $500,000 in the business.[56] Given its negative effects on the Canadian horse racing industry, there appears to be little remaining rationale for this loss limit, which has also not kept pace with inflation since it was introduced in 1951, when the maximum was set at $5,000.

Race horse operators are not alone in this concern. For example, the Saskatchewan Wheat Pool argued that Section 31 also hurts young farmers, struggling under large debt loads, who supplement their farm operations with off-farm work. Because of vagueness over what constitutes their “chief source of income,” many face the same loss limits in Sections 31 as racing horse operators.

The Committee recommends that Section 31 of the ITA be repealed. The Committee also recommends that the Department of Finance or the Canada Customs and Revenue Agency issue an interpretation bulletin providing guidance as to what constitutes a reasonable expectation of profit test for race horse operators.

Employee Stock Ownership Plans (ESOPs)

Throughout the consultation process, the Committee heard numerous recommendations from Canadians for targeted tax measures that could increase productivity. One such proposal was the suggestion that the federal government create tax incentives for Employee Stock Ownership Plans (ESOPs) or, alternatively, Employee Stock Purchase Plans (ESPPs).

ESOPs are benefit plans that help employees acquire shares in the company they work for, usually with little or no money down, no salary deductions, no commitment of the employee’s pension funds and no personal liability. The shares are purchased with loans taken on by the company on the employee’s behalf and repaid out of the company’s own contributions.

Most ESOP proposals for Canada are patterned after a U.S. program, which has been in effect since 1974. The U.S. model features deductibility of interest payments on the loans used to acquire the shares and deductibility of employer contributions to the plan. In the case where the shares are not issued from the company’s own treasury, the U.S. system also allows shareholders who sell a 30% or greater stake in the company to employees to rollover the amount, tax free, into some other business. In the early years of the U.S. ESOP program, there were also tax incentives for lending institutions. Regarding ESPPs, these plans essentially facilitate the acquisitions of shares by employees through an outright purchase, generally resulting in a 20% tax credit on the cost of the shares.

Witnesses told the Committee that, by giving employees a stake in their own companies, share-ownership plans encourage employees to think more like owners, leading them to come up with the cost savings and revenue-generating ideas that generate productivity gains. The plans could also be used to attract and retain important employees, not just executive-level staff who generally are compensated with some combination of salary and stock options. ESOPs and ESPPs also hold out the promise of addressing other long-term concerns such as the aging population. For example, increased employee ownership could ease the transition from one ownership regime — for example, in a family-owned business — to another because employees would have a greater say and presumably, understanding of the company. ESOPs or ESPPs could also act as a supplement to existing RRSP and Canada Pension Plan retirement funds.

While there was a general consensus that ESOPs are preferable to ESPPs because they tend to lead to broader ownership, there was also the acknowledgement that a go-slow approach that began with an ESPP program might be best. The Committee recommends that the government consider measures to promote the use of ESOPs.

Preservation of Heritage Buildings

Joseph Howe, one of Nova Scotia’s early democratic heroes, in 1871 remarked: “A wise nation preserves its records … repairs its great public structures, and fosters national pride and love of country.” Indeed, Canada’s heritage buildings are an important part of our history, linking us with our shared past. The Committee therefore shares the concern expressed by Brian P. Anthony, Executive Director, Heritage Canada Foundation, who told the Committee that “Canada has lost between 21% and 23% of its heritage building stock in the past thirty years — that is to say, nearly one-quarter in one generation.”

In the 2000 Budget, the government indicated its willingness to support the restoration and preservation of Canada’s heritage buildings. Canadian Heritage officials have undertaken discussions with other levels of government with a view to establishing a national register and conservation standards with respect to heritage property.

For these actions to have maximum effect, more needs to be done. The Committee notes that countries like the United States, France, Great Britain and Australia, use their national tax systems to encourage the preservation of heritage buildings.

The Committee recommends that the government examine appropriate tax changes that would promote the restoration and preservation of heritage buildings.

The Canadian Federation of Independent Business (CFIB) presented the Committee with a package of recommendations important to the small business community which, the organization contends, would have only a modest impact on federal revenues. Although the Committee has dealt with some of the items separately, we present the CFIB package here.

• Re-introduce the New Hires Program to increase the employment prospects of young workers.
• Reduce the excise tax on the first 75,000 hectolitres of production of microbreweries.
• Allow salaried workers who are obliged to provide their own tools to deduct the cost of those tools from income.
• Simplify the administrative requirements for the application of the R&D tax credits.
• Eliminate the Jewellery Excise Tax.
• Simplify the accounting of the automobile expense deduction.
• Accelerate the tax depreciation of high-tech printing equipment.
• Allow employers who make over contributions to EI or CPP to recoup those overpayments the way employees can.

Research and Development

While we must deal with the emergency, the policy issues we are struggling with before September 11 have not been resolved. Government must still consider how to promote innovation in the economy to generate jobs and prosperity. Jean Szkotnicki, President, Canadian Animal Health Institute

In reality [innovation] is an investment in a brighter future, which serves as a beacon of hope in these times of doubt and great uncertainty. While we are understandably greatly distracted by the September 11 tragedy and its fallout for the North American economy, confidence will surely be further eroded if governments detour from policy commitments that can have positive long-term effects on our economy and on our way of life. David W. Strangway, President and Chief Executive Officer, Canada Foundation for Innovation

By its nature, investment is a long-term endeavour, requiring individuals and businesses to make decisions that will only reap rewards well into the future. As such, it is risky. Investment in research and development is also critical to enhancing productivity, as technology is the key to higher productivity in the long run.

This Committee has long supported Canada’s move to a knowledge economy, and the government’s commitment to move Canada from 15th place in spending on research and development in the world to fifth place by 2010. Such a goal is laudable, and reinforces the government’s security priority. Arthur J. Carty (President, National Research Council of Canada) reminded the Committee of the role of innovation in dealing with crises, and how long-term planning can have important benefits:

When a national emergency or a major crisis strikes, there is always a widespread realization that the technological resources that the country needs to respond depend upon decisions that were made, or should have been made, ten or more years ago. Today, for example, NRC’s latest biosensor technologies for the detection of biological warfare agents, its vaccines against biological weapons, its intelligent diagnostic systems for real-time monitoring in aircraft, its technologies for anti-fabrication and counterfeiting, its fire-suppression techniques and its world-leading 3D scanning vision systems for facial recognition and vehicle identification, not to mention its Canadian Police Research Centre, can plan an important role in new and innovative national security efforts.

But we are only able to consider this role today because, decades ago, wise people made commitments in the midst of other pressing issues that could easily have eaten away at our vision for the future. … We know that we cannot afford to sacrifice our national capacity for creativity and innovation and I want to make that point very strongly; we cannot afford to sacrifice that.

The Committee continues to support measures that promote the creation, and use, of new technologies. Because the gains from research and development accrue to society as a whole, and not just those firms that undertake the research, the government has an important role — through funding and tax incentives — to play in R&D support. The government also has a role to play in creating an environment conducive to invention and innovation by creating centres of excellence and institutes of research. Tax incentives for research and development, technology diffusion programs, research infrastructure, and adequately financed granting councils are also important initiatives that the government has taken to promote R&D. Research is a risky endeavour and the tax system does have an impact on the extent to which individual Canadians and businesses undertake and finance risky activities.

Canada has made significant gains in R&D spending. In 1997, the government created the Canada Foundation for Innovation (CFI), an independent agency mandated to rebuild and reinvest in research labs, installations and facilities in universities, hospitals and colleges across the country. It also created the Canadian Research Chairs, and continued to support the three granting councils. So far, the CFI has supported more than 1,400 projects at 100 universities, hospitals and colleges. Each of these projects funded by the CFI, to the tune of now over $900 billion, has enabled institutions to find matching funding from the provinces and additional monies from the private sector and the universities themselves. Through the Canada Research Chairs, the CFI has also provided $250 million, with no matching funding requirement for Chairs at smaller universities.

In Budget 2000 and the October Economic Statement, the government added an additional $1.4 billion to the CFI. Federal investments in the CFI have attracted additional funding from provincial governments, universities, and the private and voluntary sectors. Taking into account the funding added in this year’s budget, the federal government’s contributions to the Foundation will result in a total investment of about $5.5 billion in new research funding. As well, to address key environmental challenges such as climate change and air pollution, the government provided $500 million as its contribution to the First Business Plan of the National Implementation Strategy on Climate Change.

In particular, the Committee heard nothing but support for the work of the three federal granting councils, the Canadian Institutes for Health Research (CIHR), National Science and Engineering Research Council (NSERC), and Social Sciences and Humanities Research Council (SSHRC). The creation in the 1999 budget of the CIHR, in particular, has been well-received by Canadians, so much so that one of its problems (reflected also by the other granting agencies) is that its success has strained its ability to fund all the high-quality proposals it receives.

However, much work remains to be done. Currently, we are sixth out of the G-7 nations in terms of R&D spending, trailed only by Italy. The Committee heard from a number of universities, researchers, and hospitals concerned that not enough of the federal government’s research assistance has been directed towards the basic infrastructure such as laboratories and buildings that support this research. It is not just the amount of R&D that concerns the Committee but also its nature. R&D linked to commercialization is also important.

Indirect Costs

The Committee heard from several witnesses, including the Association for Healthcare Philanthropy Canada, Association of Universities and Colleges of Canada, Canadian Alliance of Student Associations, The Canadian Consortium for Research, Canadian Association of Research Libraries, and Humanities and Social Sciences Federation of Canada, on the need to increase funding for the indirect costs of research: laboratory maintenance, libraries, the management of the research process (from grant applications to commericalization), and the other tools needed for researchers to do their work. Currently the indirect costs of research are borne mostly by the universities themselves, placing a significant burden on their finances. This also robs some non-science faculties of operating funds so as to finance scientific research indirect costs.

While direct costs are covered by the various granting councils, and while some CFI programs target some indirect costs, more can be done. The Committee heard that countries like the United States and the United Kingdom fund all or part of the indirect costs of research, in addition to the direct costs. According to the submission of the Association of Universities and Colleges of Canada, “in the absence of payment for indirect costs, Canadian universities are losing the battle to remain internationally competitive.” This view is supported by the Advisory Council of Science and Technology, which noted in their September 2000 report: “If we continue to ignore these needs — often termed the indirect costs of research — we will adversely affect the efficiency of our research system and ultimately the ability of our universities to attract and retain world-class researchers.”

The Committee remarks that these concerns are not new. In its 1999 PBC report, the Committee remarked on the lack of funding of indirect costs: “No external funds are provided for these indirect costs, and the required funds often come from teaching budgets. An investment infrastructure program would bring together all of the other federal initiatives, enabling research to be commercialized, and graduate students and post-doctoral fellows supported. The Committee believes that research should not be fostered at the expense of university teaching and other university priorities. The federal government should ensure that its efforts to promote research comprise a coherent whole, complementing its own and provincial initiatives.”

At the time, the Committee recommended “that a research infrastructure fund be established that would finance institutions’ research-related costs flowing directly from other federal research grants.” This type of recommendation was supported this year by the AUCC, which recommended annual block grants to universities to reimburse indirect costs incurred in support of federally sponsored research, at a minimum rate of 40% of direct costs, with an adjustment in the allocation rate to reflect baseline compliance and opportunity costs incurred by smaller universities.

However, recognizing the fiscal constraints faced by the government, some participants said that researchers and their institutions at the very least need a re-allocation of existing funding towards basic infrastructure costs. New monies directed at “pure” research will simply lead to physical bottlenecks and will drive more universities to divert funds from other areas to support the work done in the laboratories. Professor of Economics David Laidler told the Committee, for example, that the Faculty of Social Sciences at his university, the University of Western Ontario, has lost about $12 million in operating funds so that the university could finance the indirect costs of research in engineering.

The Committee recommends that the federal government make a strong commitment to providing funding for the indirect costs of research.

Increased Funding

The funding of indirect costs was not the only financial concern expressed by witnesses. The Committee was also told that Canada must not neglect its three federal granting councils, CIHR, NSERC and SSHRC, recognizing that other countries are not standing still when it comes to R&D funding. Still other witnesses remarked on the need to assure that both large and small universities benefit from increased R&D funding, and that science and engineering research not be privileged over the social sciences and humanities.

In order to make Canadian research more effective, several groups, including the Partnership Group for Science and Engineering (PAGSE) and the National Science Organization Working Group, proposed the creation of a national academy for the Sciences, which would “provide a source of credible, independent — that is a very important point — and expert assessment of sciences underlying pressing issues and matters of public interest.”[57] It would include the Canadian Academy of Science and Humanities, the Canadian Academy of Engineering, and a new Canadian Academy of Health Sciences. To set up such an institution would cost around $30-$50 million over ten years, according to witnesses.

The Committee is aware that individual research endeavours and overall research capacity require long-term financial commitments. Inadequate funding in the short run can have serious long-term consequences for research. Stable and secure funding is needed to undertake projects that last many years and to recruit and retain researchers at Canadian institutions.

We call on the government to take the steps necessary to achieve its R&D investment goal, making Canada fifth among nations.

The Committee also recommends that the social sciences, which have traditionally been under funded, receive an appropriate share of new funds.

Canadian Astronomy Long Range Plan

As part of the government’s drive to increase spending on research and development, the Committee notes the submission by the Canadian Coalition for Astronomy. They suggested undertaking a Long-Range Plan (LRP) for Canadian astronomy. Presently, Canada invests $22 million annually in astronomy research, which in turn provides world-class opportunities for Canada in science and engineering. However, the next generation of astronomical observatories are so complex and advanced that they can only be completed in conjunction with other countries. Furthermore, the Committee heard that:

If we do not invest in the new round of projects outlined in the LRP, Canadian technology will not be a part of them. These international agreements stipulate that only companies from signatory countries may bid for contracts on these projects. Therefore, if Canada does not fund the LRP, Canadian companies will not be able to compete for the more than $4 billion worth of work outlined in the LRP. Peter Janson, Chair and Executive Officer, AMEC Inc. Coalition for Canadian Astronomy

Essentially, the LRP — a ten-year national plan developed by an expert panel of Canadian and international scientists — is the price for Canada to be able to have a seat at the international astronomy table, and to be able to reap the R&D rewards from such collaboration. The LRP has received unanimous support from the House of Commons Standing Committee on Industry, Science and Technology. Already, the Canadian Space Agency has committed $100 million over the next ten years for the space-borne part of the Plan. The Coalition is seeking between $140 million and $164 million over 10 years, depending on whether its CFI application is successful.

Canada’s investment in the long-range plan buys the opportunity for Canadians to participate in designing, developing technology and software, and building and maintaining these facilities. It also provides Canadians access to these new telescopes. The world observatories will help Canada stay at the forefront as we unravel the secrets of the universe over the next ten years. Russell Taylor, Professor of Astrophysics and President of the Canadian Astronomical Society, Coalition for Canadian Astronomy

The Canadian astronomy community has a history of effective use of resources. For example, for a $50 million contribution to the $1 billion Atacama Large Milimeter Array project in Chile, the first major international observatory, Canada was able to obtain access to over 30% of the time on the telescope. In 1990, the Canadian government invested $38 million to buy its partnership in the Gemini Twin 8-meter telescopes, resulting in over 80 high-tech and engineering companies being able to compete for work on the project, generating significant economic returns for Canada, as well as access for Canadian students and scientists to the most up-to-date technology.

According to witnesses appearing before the Committee, international agreements to go forward on the first part of the LRP are likely in February, so time is of the essence.

The Committee believes that immediate funding for the LRP is warranted, given the time sensitive nature of this issue. This would help build on our past successes and achieve the government’s stated goal of increasing research and development. Consequently, we recommend that the government provide the LRP with the needed funds in the upcoming budget to assure that Canada is able to realize the significant economic benefits that will arise from its international participation in the next generation of astronomical observatories.

Social Infrastructure

Social infrastructure is a broad concept that encompasses a variety of public services, policies and programs — in education, health, housing, social assistance and welfare, support to families and children in need for example — designed to maintain and improve the standard of living and quality of life of a country’s population.

The Committee believes that a sound social infrastructure begins with a strong economy. Without a strong economy and the tax revenues that result, the government’s capacity to support necessary social programs is threatened.

Post-Secondary Education

Intimately linked with the importance of increased research and development funding is access to post-secondary education. There is no question that education is the key to success, both for individual Canadians and for Canadian society as a whole. Individually, higher education levels are associated with greater employability, greater stability of employment and higher real incomes; for Canada as a whole, they assure that we can compete in the knowledge economy. Access to post-secondary education is therefore crucial for Canada.

In order to assure Canadians’ prosperity, access to post-secondary should be on the basis of skill, not ability to pay: everyone who wants and is able to complete a post-secondary education should be afforded the opportunity to do so. This means assuring that the financial burden of attending a post-secondary institution does not act as a deterrent to Canadians who want to better their education.

Over the past several years, the government has taken several initiatives to alleviate the financial burden of post-secondary education. We have already remarked on the contribution of RESPs and the improved tuition credit. The Canada Millennium Scholarship provides over 90,000 needy students each year with scholarships averaging $3,000 a year to reduce the debt that they would otherwise have incurred, while Canada Study Grants of up to $3,000 provide assistance to about 25,000 students with dependants. The government has also changed the Canada Student Loans Program to help students manage their debt by: increasing the number of people eligible for interest relief; providing debt reduction of up to 50% of Canada student loans outstanding up to a maximum of $10,000 for those in extended financial difficulty; and a tax credit for interest paid on federal and provincial student loans.

Despite these changes, the Committee heard that student debt levels remain a problem for many graduates. According to Liam Arbuckle (National Director, Canadian Alliance of Student Associations): “The inability of students to cover costs of their education through savings, in-study earnings and grants inevitably leads to greater student loan debt. Unfortunately CASA has not found an up-to-date, reputable number on the average student loan debt upon graduation. We do know that an aggregate amount of outstanding student loans was 6.2 times higher in 1999 than in 1984. More than 1.4 million family units reported student loan debts in 1999, up from 490,000 in 1984. The median student loan debt rose from $3,400 to $7,300. It must be noted that this number, $7,300, is the level of student debt in various stages of repayment; the average student loan debt upon graduation is certainly well over $10,000.”

The federal government obviously has a concern with the debt level of students because it introduced both the Millennium Scholarship Fund and a debt reduction in repayment measure in the 1998 budget.

Regrettably, debt reduction in repayment has not worked nearly as well as students hoped. The Canada Student Loan Program estimates that 75% of borrowers who exhaust the 54 months of interest relief the federal government provides are ineligible for debt reduction in repayment. The primary reason for this lack of eligibility is that debt reduction and interest relief use two different eligibility tables. These tables determine a borrower’s eligibility for assistance based on income and debt load.

CASA believes the federal government needs a debt remission program that is at least as accessible as the interest relief program. After all the borrowers who will be applying for debt remission will already have been earning a barely subsistent income for five years and will have amortized their loans from 10 to 15 years of repayment.

Jennifer Orum (Vice-President, Coordinator, Financial Aid and Awards, University of Victoria, Canadian Association of Student Financial Aid Administrators) told the Committee that the Debt Reduction in Repayment (DRR) program, introduced in the 1998 budget has only helped a couple of hundred students, mainly because of its stringent criteria. Revisiting the DRR would be one way to help students cope with the interest burden of student loans, as would an examination of further income-contingent repayment schemes.

The Committee is mindful of the financial difficulties of students and recognizes that it is against Canada’s economic interests to discourage the pursuit of post-secondary education. We recommend that the government re-evaluate the criteria for some of its student debt relief initiatives to determine if they are too stringent. It is unlikely that the DRR was deliberately set up so as to help only a few hundred students.

The current group of students has access to a variety of new federal initiatives that were not available to the previous cohort. If those initiatives are successful, these students will not need the debt relief measures required by earlier groups of students. Once financial circumstances improve, the government can consider any other debt relief measures that might still be required.

Housing

Everyone is entitled to a home to call his or her own — affordable, accessible, safe and clean, and with a significant degree of privacy. Mae Harman, Past President, Ontario Division, Chair of Economic Concerns Committee, Canadian Pensioners Concerned Incorporated

Housing is a prerequisite for exercising other rights such as health, education, employment, citizenship and leisure. Tenants Rights Action Coalition

In its travels across the country, the Committee heard of the housing crisis facing many Canadians. Rental markets continues to be very tight across the country, having the greatest effect on the least well off. The National Housing and Homelessness Network told the Committee that according to Canada Mortgage and Housing Corporation, more than 1.7 million tenant households — about 4.6 million people — are in “core need” of affordable housing.

In its reports to rental housing published in the fall of 2000, the Canada Mortgage and Housing Corporation predicted that the vacancy rate, the lowest in 15 years, would continue to fall. FRAPRU (Front d’action populaire en réaménagement urbain)

Vacancy rates are the lowest they’ve been in years. In some parts of Vancouver the vacancy rate is less than 1%. CMHC indicates a balanced vacancy rate at about 2.5%. Renters compete for any available unit. Low-income renters cannot compete. Linda Mix, Community Legal Worker, Tenants Rights Action Coalition

The Committee is of the opinion that there is a role for the federal government to play in the housing market and commend the government on its August commitment to spend $680 over four years on an affordable housing initiative.

I would also like to commend the government in its renewed interest in the housing issues following the August conference — especially as they relate to the homeless people across this country. Shirley Browne, Vice-President, National Council of Women of Canada

The National Coalition joins many others in appreciation of the federal government’s re-entry into affordable housing development, the first such action since 1993. National Coalition on Housing and Homelessness

While several groups have advocated increased federal funding of housing initiatives by $2 billion a year, we believe the government’s $680 million is a significant step. The Committee shares the view of witnesses that all Canadians should be housed adequately and affordably from coast to coast, and that this problem is best tackled by all levels of governments, along with local organizations.

CMHC policies and practices also have an impact on the housing market, especially in the rental market. It provides insurance for loans on rental properties, which is usually needed when equity is less than 25% of the project value. The premium rates range from a low of 1.75% (equity of at least 35%) to a high of 4.5% (15% to 19% equity).

Although policies related to new construction are under review by CMHC, the Committee has been told that current policies are too strict and have contributed to the decline in rental unit construction: 40,000 units per annum in the 1990s compared to 57,000 units per annum in the 1980s and 85,000 units in the 1960s and 1970s. The Committee recommends that CMHC re-examine its policies so as to support a vibrant rental housing market.

The federal government has promised new spending on affordable housing of $680 million over four years. This spending program was included in the Liberals Red Book III. It was in the last Throne Speech and Minister Gagliano, at a federal/provincial/territorial housing ministers’ conference in mid-August in London, Ontario, once again tabled the spending for this program, and we look forward now to its implementation. Mark Goldblatt, National Coalition on Housing and Homelessness

We want to congratulate Minister Gagliano on the progress that he’s made to date but we want to ask you for your support in giving him the kind of flexibility that he will need to complete his negotiations with the provinces and hopefully, come to a successful announcement at the end of November when he meets with his colleagues in Quebec. Sharon Chisholm, National Coalition on Housing and Homelessness

The Committee recommends that the government follow through on its commitment to spend $680 million for affordable housing and calls on all levels of government to work toward a successful conclusion of a federal-provincial housing strategy. We also call on the government to continue to work with the provinces on this important area of social policy, and welcome any new investment that can be made.

Disability Issues

The Committee has long advocated policies that would make it easier for persons with disabilities to work and be active members of society. This year, the Committee heard a number of presentations about the ongoing difficulties faced by persons with disabilities and those who assist disabled persons in their day-to-day lives, including parents, caregivers, and the broader community.

We have spent a lot of time over the last couple of years consulting with hundreds of families across the country to get a sense of what their issues are. … They’re looking for their sons and daughters to be valued, and they’re looking to receive the supports that are going to allow their sons and daughters to be ordinary members of the community. Dianne Richler, Executive Vice-President, Canadian Association for Community Living

The government has shown its commitment to helping persons with disabilities in many of its budgets and economic statements. In last fall’s Economic Statement and Budget Update, for example, the government increased the disability tax credit (DTC) by almost 40% to $6,000. This increased the maximum tax relief from the DTC to $960, an amount that will increase with time because the DTC is fully indexed to inflation. In the 2000 budget, the government committed to adding $30 million a year to the Opportunities Fund, which was first introduced in the 1997 Budget to help persons with disabilities prepare for, find and keep jobs. The 2000 Budget also provided $11.5 million over three years for the Health and Activity Limitations Survey, which was carried out as part of the 2001 national census.

On the tax front, the 2000 Budget introduced disability measures worth $45 million. These included the creation of a supplement of as much as $500 to the DTC to better recognize caregivers of children with severe disabilities. The government also expanded the list of eligible medical expense tax credits to include the cost of modifications made to homes to assist individuals with severe mobility impairments. Finally, the government increased the limit on the child-care expense deduction for children eligible for the DTC to $10,000 from $7,000 to better recognize the higher costs of child care for children with disabilities.

We are one of the groups that has been presenting before this Committee for a number of years, and we have been very pleased to see the response in the last several budgets supporting people who have a disability. Dianne Richler

There’s a limitation to how far you can go if you try to address the jurisdictional issues separately. Dianne Richler

The Committee was told, however, that tax measures alone are not enough to address the barriers to full participation in community living faced by many persons with disabilities. A coalition of three disability groups called on the federal government to commit to begin negotiating a joint, comprehensive and national strategy with its provincial and territorial counterparts to address the long-term needs of the disabled and those who provide supports to these individuals.

The Canadian Association for Community Living (CACL) provided a broad framework of what it thinks any such agreement should look like. The first priority should be an agreement on clear definitions of terms (e.g., disability) and key policy objectives, such as what is meant by disability supports at the individual, family and community level. Community-level supports, CACL suggests, should include policies that recognize the unpaid and unrecognized work done by caregivers and families for disabled persons, as well as assisting non-governmental agencies that work with the disability community. This would mean, for example, paid employment leave to look after disabled children and a refundable disability-related expenses tax credit. Such an approach reflects the 2001 Speech from the Throne’s commitment to improve the support available to parents and caregivers who are sometimes forced to chose between keeping their jobs and providing care to a child. Implementing this kind of a program would require federal-provincial cooperation because of overlapping jurisdictions. The Committee recommends that the federal government enter into negotiations with its provincial counterparts to develop a joint investment strategy that would address comprehensively the needs for disabled persons and those who support them.

The CACL acknowledged that the negotiation process for this kind of framework could take at least two or three years. As an interim measure, the government could change funding practices for national disability organizations, many of which are on the verge of bankruptcy. This would allow them to plan their activities appropriately. This proposal echoes recommendations made by the House of Commons Standing Committee on Human Resources Development and the Status of Persons with Disabilities as well as the Federal Task Force on Disability Issues (the Scott Report). Specifically, the Scott Report recommended that the government provide assured core funding of $5 million to sustain national organizations “as a recognition of the additional disadvantage of people with disabilities in having their voice heard at the federal level.”

The Committee recommends that the government adopt the recommendation of the Scott Report and establish core funding for disability groups, with a base amount of $5 million for national disability organizations.

It is the Committee’s understanding that the government is also considering investing $60 million in Industry Canada’s assistive devices program. These monies would be used for research and development into, and promotion of, new technologies for disabled persons.

The Committee recommends that the government follow through with its commitment in the Speech from the Throne to increase support for the development of new technologies to assist Canadians with disabilities.

National Children’s Agenda

After September 11th, the National Children’s Alliance recognizes that national security issues need to be on the agenda. However, it is important that we continue to invest in economic and social development. Public investment in social, human and cultural capital is critical not only to prepare our children for the jobs of the future, but [it also] builds a level of trust, recognition, and respect for diversity that assures that all Canadians can participate in a positive way to the development of the country. National Children’s Alliance

The well-being of Canada’s children was another recurring theme in this year’s pre-budgetary consultations. Witnesses suggested several proposals to address child poverty, ranging from a national child care system that would make it easier for parents to participate in the workplace, to additional tax measures to assist low-income families.

[A] further study in 1998 study by two leading economists … concluded that, if we offered child care to all Canadian children aged 2-5 years, the immediate benefit to our economy would be greater employability for parents, higher income and taxes paid by parents, and savings to the social welfare system. Mary-Anne Bedard, Executive Director, Ontario Coalition for Better Child Care

The government has repeatedly acted on its commitment to improve the plight of Canada’s least-advantaged children and reward parents who chose to work. In its most recent Speech from the Throne, the government stated its goal to ensure that “no Canadian child suffers from the debilitating effects of poverty.” Even before the Throne Speech, however, the government took important steps in this direction by first creating the kind of fiscal, monetary, and legal environment needed to spur strong economic growth, arguably any society’s most effective anti-poverty measure.

But economic growth alone is not enough, something the government has long recognized. Beginning this year, for example, maternity and paternity benefits were doubled to one full year, allowing parents to stay at home longer with their children during this critical period in a child’s development. In 1998, federal, provincial, and territorial governments created the National Child Benefit (NCB), the country’s single most important new social program since the introduction of Medicare in the 1960s. The NCB essentially supplements the existing Canada Child Tax Benefit (CCTB). Since the introduction of the NCB, the government’s contributions to this important program have increased steadily. Effective July 2001, the maximum NCB supplement increased by about $300 per year — $100 of which was announced in last fall’s Economic

Statement and Budget Update, bringing the maximum annual Canada Child Tax Benefit (CCTB) amount for a family’s first child to almost $2,372. The NCB supplement portion of the amount is $1,255 for the first child, $1,055 for the second child, and $980 for each subsequent child. Moreover, as of July 2001, the income level at which the NCB supplement is fully phased out increased to $32,000 from $30,000 in 2000.

Last fall, the federal, provincial, and territorial governments reached an agreement called the Early Childhood Development initiative (ECD), which expands and improves access to services for all families and children in four key areas: health, pregnancy, birth and infancy; parenting and family supports; early childhood development, learning, and care; and community-level supports. The federal government has committed to investing more than $2 billion into the ECD program over a five-year period. A key feature of the ECD agreement is the requirement that the government tell Canadians how well its programs are doing in addressing the needs of children. This will take the form of annual reports (beginning in 2002) based on agreed upon indicators for the costs and benefits of the various programs under the ECD umbrella. This information will play a key role in fine-tuning these programs to better meet their objectives.

The Child Care Sector in Nova Scotia commends the federal government in providing leadership in developing and committing funding to implement an Early Childhood Development strategy in the provinces and territories. It is indeed gratifying that our federal and provincial/territorial governments have recognized that, as a society, we have an obligation to our young children to provide them with the best environments so that they can reach their fullest potential. Child Care Connections

However, most child advocacy groups told the Committee that more needs to be done. They suggested that the federal government, along with the provinces and territories, develop a more holistic approach to addressing the problem of child poverty, providing a large number of services under one policy tent rather than the fragmented array of programs currently available.

Although the ECDI is an important first step to achieving a comprehensive national system of early childhood development services, including child care, it is not, in its current form and at is current level of funding, a solution. A comprehensive system would incorporate currently separate program areas — early learning or early childhood education and child care. These programs would be linked to and coordinated with a range of other programs and services... and would be designed to meet the needs of all families. Ontario Coalition for Better Child Care

The federal government needs to continue to take leadership to work with other levels of governments and the third sector in develop a systemic and integrated approach to support community services and programs. National Children’s Alliance

The Committee also heard concerns that far from matching new federal monies, some provinces may be diverting these new funds elsewhere. They called on the federal government to take a more active role in the allocation of these funds, arguing that the review system put in place under the ECD agreement is inadequate.

… it is up to each individual province to decide how much, if any, of the federal funding to invest in any of the services, including child care … . There is no mechanism to ensure that the provinces invest in those areas that are the most needed. Ontario Coalition for Better Child Care Network

The Committee heard a number of other proposals to address child poverty, including that the government increase its fiscal commitment to the ECD to $2 billion a year, extend the ECD program to children aged 6-18 (the current program is targeted at children aged 0-6) and accelerate its plan to gradually increase the ECB supplement.

Another proposal suggested the government encourage greater involvement from the non-government sector in monitoring of the delivery of the ECD program. This would also mean assisting the non-government organization (NGO) sector in developing the tools necessary to measure these outcomes.

Successful implementation of the National Children’s Agenda will be dependent upon a vibrant third sector to collaborate in the planning, implementation and evaluation phases. The voluntary/NGO sector’s role in national information sharing is crucial for dissemination of best practices in program delivery and evaluation…. There will be challenges in defining the boundaries of ECD. It appears that when governments make public their baselines we cannot expect to see any consistency in reporting across jurisdictions. This will make it difficult to hold governments to account concerning their ECD program funding and to make comparisons across jurisdictions. It is critical that the voluntary/NGO sector play a role in monitoring and in working with our constituents in other jurisdictions. National Children’s Alliance

In keeping with the Committee’s support for programs that promote best practices and efficient delivery of services, the Committee supports the National Children’s Alliance recommendation that the federal government fund third-party monitoring of expenditures of the ECD agreement.

The Committee heard a number of other tax reform proposals to assist and provide incentives to parents who chose to stay home and look after their children during their formative years. One suggested plan would allow stay-at-home parents to continue paying Canada Pension Plan (CPP) premiums while on unpaid parental leave from work. This would guarantee that their CPP benefits would be the same as if they had continued working. Individuals taking this option would have to make both the employee and employer contributions. Individuals making CPP contributions receive a 16% federal non-refundable tax credit and generally have sufficient tax liabilities against which to apply this credit. Such would not be the case for all who opt to make CPP contributions while on unpaid leave. The government must consider how to treat such circumstances. Moreover, the CPP is a joint federal-provincial program and such major reforms require provincial consultation.

The Committee recommends that the government study a proposal that would allow parents who chose to stay at home to continue paying CPP premiums.

Caregiving time must be counted in pension status and those doing this work should be permitted to contribute to the Canada Pension Plan and to personal RRSPs in their own name. Beverly Smith

Physical Infrastructure

New spending priorities, such as national security, make it even more vital that government spend and regulate wisely. For example, initiatives such as improving Canada’s infrastructure should be done for their own merits. Michael Atkinson (President, Canadian Construction Association) told the Committee: “I quite frankly am not one who likes the idea of trying to stimulate the economy by just throwing money into infrastructure. I think it creates short-term jobs if it is not together with a plan that is really looking at how we are going to manage our infrastructure, which is so important to our economy down the road.”

Put simply, if infrastructure is undertaken as a stimulus measure, there tends to be little concern about establishing priorities according to need. If undertaken on its own merits, spending tends to be allocated according to expected rates of return. The best projects get funded and poor proposals are rejected.

As with security spending, public infrastructure supports private activity by making it more efficient. This public infrastructure consists of transportation facilities such as roads and bridges, telecommunications systems, water and sewer systems, and educational and health care facilities. In the case of transportation, Jack Davidson (President, B.C. Road Builders and Heavy Construction Association) remarks, “Transportation and highways infrastructure is an essential component of a strong economy. Regional productivity depends highly, if not completely, on the effectiveness of transportation systems.”

Government expenditures on infrastructure have decreased substantially over the past three decades. In the 1960s Canadian governments were collectively spending about 5% of GDP on real gross fixed investment. Today they are spending proportionately half that amount. In part, this might be due to the fact that we significantly added to our stock of infrastructure in the 1960s. Nevertheless, the decline in public spending suggests that this stock is not being adequately maintained.

In the 1999 PBC the Committee recommended that “the federal government initiate a new, long-term infrastructure program, in partnership with the provinces and municipalities, to fund new infrastructure initiatives. This program and its component investments must be subject to program review and meet the test of a Productivity Covenant.” The Committee recommended that the federal government commit at least $500 million per year for at least five years.

The government has addressed the physical infrastructure issue in several ways. It has allocated $2.65 billion over the next six years. In the October 2000 Economic Statement, the government committed to examining ways to sustain investments in key strategic infrastructure, particularly by encouraging public-private partnerships. In the 2000 Budget (as part of this higher number), $400 million was allocated for municipal infrastructure in cities and rural communities across Canada, including affordable housing and green infrastructure, and up to $150 million for highways. In addition, the Budget provided a further $200 million per year over the next five years for these safety improvements.

However, much remains to be done. For example, several groups proposed a national highways strategy. According to Michael Atkinson, “Canada is the only G-8 country currently which does not have a national highway program.”

Just as we must plan for the long term in other areas, it also makes sense to plan for the long-term renewal of our infrastructure. In this area, Canada can do better.

Quite frankly, right now we don’t know what the governments of this country are planning to do with our key, core infrastructure in this country six months from now. For an industry that is the largest in Canada, with the largest employment, etc., if you want us to plan, do the right thing, be prudent, and work with you as partners, we must do a better job of planning. Michael Atkinson

The lack of planning suggests that, for all levels of governments, infrastructure spending has not been accorded the priority it deserves. Since strong and sound infrastructure is an important contributor to productivity (and thus prosperity), this is worrying.

This country has a very significant hidden deficit, that is, the pieces of public property and the public buildings where, in the interests of economy, maintenance and on-going upkeep is not being done. Sooner or later we’re going to pay for that. An infrastructure program like a national highways program or affordable housing is a pay-me-now or pay-me-later situation. Robert Blakely, Director of Canadian Affairs, Building and Construction Trades Department

The longer this deficit is neglected, the greater it will cost to effect repairs and maintenance. Jeremy Kon (Vice-Chairman, Coalition to Renew Canada’s Infrastructure) suggested that the cost of repairing Canada’s highway system have escalated from $13 billion in 1988 to $17 billion.

As Jeff Morrison (Director of Communications, Canadian Construction Association) pointed out, “investing in roads and highways is not an end in itself, but rather an integral part of a global strategy that is key to increasing economic competitiveness in the regions, to reducing vehicle emission levels and the number of highway accidents and to reducing the amount of time spent by Canadians on travel in their personal and professional lives.

However, it is also important that public infrastructure be directed to those areas where it has the highest return. For example, the Cement Association of Canada told the Committee that key trade corridors between Canadian cities and the United States should be the focus of any Canadian highway renewal program.

Addressing Canada’s infrastructure concerns will require partnership, between federal, provincial, and municipal governments. The Federation of Prince Edward Island Municipalities called on the government to work with the provinces and territories to establish a permanent infrastructure program with increased funding. One particular problem is urban transit issues. Urban centres constitute the core of the Canadian economy. The Urban Development Institute of Ontario noted the need for federal-provincial-local partnerships to address strategic regional transit solutions for the Greater Toronto Area (GTA). Regarding private-public partnership, they suggested a task force/CEO panel on approaches to addressing the transportation infrastructure needs of Canada’s urban regions.

The Cement Association of Canada (CAC) recommended exploring new ways to attract more partners and more private dollars to pay for Canada’s highway system.

On the rural side, the Association of Yukon Communities (AYC) remarked on the need for “the creation of an infrastructure program to provide basic services that many urban areas take for granted. Specifically, a dedicated infrastructure program is required to meet basic water, wastewater, and transportation needs.”

Infrastructure funding is a particular problem for Canada’s northern communities. Many communities lack basic infrastructure and will require special attention to bring their housing, roadways, waterworks, and other parts of their infrastructure to a level that will allow northern communities to participate fully in the Canadian economy, for example, The MacKenzie Highway from Grimshaw, Alberta, to Fort Simpson, NWT. According to Chief Cece McCauley (Women Warriors of Sahtu, Norman Wells, Northwest Territories), “we’ve been waiting since 1976 for them to finish the road from Fort Wrigley to Inuvik.” The lack of an all-weather road is hurting the area’s communities, Chief McCauley told the Committee.

“The Sahtu Region is the largest region of the five regions in the Northwest Territories, in the western territories, and we are isolated. Everything seems to be mobilized around Yellowknife and Hay River on the southern part of the Northwest Territories, closer to the Alberta border and then the Beaufort Sea to the Yukon, Whitehorse and the Beaufort, so we’re in the middle. We’re still isolated. We still don’t have any roads and everything has to be flown in. The only time we can get freight is in the summertime for maybe two-and-a-half to three months in the summertime. The high cost of living is terrible.”

Witnesses estimated that it would take $100 million per year over the next five years to meet housing demands in Nunavut alone. As Keith Peterson (Vice-President, Nunavut Association of Municipalities) told the Committee:

In a recent meeting with Finance Minister Paul Martin in Iqaluit, it was pointed out that Nunavut has never had the investment in basic infrastucture that has been realized in other Canadian jurisdictions over the past century, yet we compete in the same economy while struggling with social and economic issues that result, in large part, from inadequate infrastructure….

A major problem with infrastructure funding seems to lie in the per capita structure of the Canada Infrastructure Works Program. “Nunavut’s allocation of only $2 million under the Canada Infrastructure Works Program is inappropriate. … The formula financing agreement with Ottawa, which is theoretically meant to fill the gap between Nunavut’s spending requirements and the revenue it can generate on its own, is inadequate.”

The Committee recommends that the government, when designing and implementing infrastructure programs, take into account the special needs of areas such as the North where remoteness and small populations make per capita funding inappropriate.

The federal government can also support infrastructure investments through its tax policy. The Canadian Urban Transit Association and other witnesses encouraged the federal government to consider employer-provided transit passes as tax-exempt benefits in recognition of the beneficial environmental and fiscal impact of increased public transit use in urban areas. These include improved air quality, reduced greenhouse gas emissions and traffic congestion, and reduced needs for new roads, bridges and parking facilities. According to witnesses heard by the Committee, a similar program in the United States has contributed to a 20% rise in transit use over the past five years.

[In the United States] it’s actually considered the number one incentive for individuals to now use public transit and leave behind their single-occupancy vehicles. … It’s one of these nice private/public partners. It has been extremely successful, which is why we undertook this in the first place. Amelia Shaw, Manager, Public Affairs, Canadian Urban Transit Association, National Task Force to Promote Employer-Provided Tax-Exempt Transit Benefits

We believe the federal contribution to the national infrastructure program should be increased when economic conditions permit. This would allow strategic investments to be made in infrastructure areas like water and waste water systems, solid waste management, energy management and transportation. John Clark, President Elect, Appraisal Institute of Canada

Another important issue regarding infrastructure involves the use of public-private partnerships. Infrastructure projects can be extremely expensive and governments might delay needed investments because of the impact on their fiscal positions. Public-private partnerships could provide more stable financing for infrastructure, shift the risks of infrastructure to the private sector and introduce some of private sector incentives to public projects.

Canada trails behind many other OECD countries in employing this strategy to fund infrastructure investments. Two examples of successful Canadian partnerships were the Confederation Bridge between Prince Edward Island and New Brunswick and Ontario’s 407 Express Toll Route.

The Committee recognizes the need for infrastructure investment and recommends the federal government employ the public-private partnership model.

It is important not just to renew or rebuild infrastructure, but also to protect it. As the Insurance Bureau of Canada points out, Canadian governments now spend an average of $500 million per year to repair damage from extreme weather. Reducing our vulnerability to natural disasters is a legitimate component of any infrastructure spending.

PetroCanada

The privatization of PetroCanada began in earnest in 1991 when the federal government sold 20% of its shares in the company to the private sector. The sale of a 10% stake in 1993 and a further 52% stake in 1995 followed. Since then, the government has promised to sell its remaining 18% stake in PetroCanada when it can obtain a fair price and conditions warrant. The conditions now appear to be ripe for a divestiture.

The Committee therefore recommends that, given current economic conditions, the government sell its remaining stake in PetroCanada consistent with the government’s longstanding commitment.

First Nations Issues

First Nations issues pose an especially difficult challenge for the government. As several eloquent presentations made clear to the Committee, Aboriginal peoples in Canada continue to suffer from severe poverty, a lack of adequate jobs, health, education, housing and infrastructure. This is made clear by the United Nations’ Human Development Index. While Canada as a whole was rated the third-best country in which to live, Canada’s First Nations reserves were ranked 63rd.

While we have begun the processes to rebuild our lives, our nationhood, and to revitalize our treaties, there is a need to do much more. Chief Perry Bellegarde, Federation of Saskatchewan Indian Nations

The priorities of first nations people focus on improving our basic standard of living in terms of health care, housing, education and employment opportunities. We want to share the resources in Canada and ensure that first nations have equal opportunity to succeed in the future. We want increase our quality of life and standard of living. On the United Nations human development index we want to be number one like all Canadians aspire to achieve in this day and age. Chief Perry Bellegarde

As several witnesses remarked, there remains a pressing need to expedite the treaty process and address the role of the Indian Act.

The issue of land claims is a basic question mark hanging over both First Nations and the Canadian government. This uncertainty makes businesses reluctant to invest in disputed lands, placing another constraint on First Nation economic development. Other issues brought forward were the need for First Nations to be able to collect real property tax, and that interest rates on loans undertaken to complete the treaty process begin to accrue only after the successful completion of a treaty. Witnesses also called on the government to re-evaluate the level of funding that goes toward First Nations people. For example, the Committee heard that in Saskatchewan, a population explosion among Aboriginal peoples is of great concern.

The funding formula imposed by the Department of Indian and Northern Affairs Canada does not adequately reflect the growing population. We’re losing ground. You can see in the slide there’s a gap that’s growing. The population is increasing very rapidly, but the dollars coming forward don’t correspond. There’s already a cap on housing, already a cap on post-secondary and there’s just not enough there to meet the need and the gap continues to grow. Chief Perry Bellegarde

Our submission speaks to building resilient first nations, eradicating First Nations poverty, and First Nations participation in the economy, a national strategy. They are addressed through enabling individuals and families which is about putting in place the social infrastructure through adequate housing, a safe environment, clean water and a greater access to health services comparable to average Canadians which will help remedy first nation individuals needs for their eventual participation in the economy. Grand Chief Matthew Coon Come, National Chief, Assembly of First Nations

Again, we understand finance and interest rates and inflation and everything else, gross domestic product. We also understand there’s only so much there, but you have to live within your means. We understand the deficit is a burgeoning thing. We have to be careful of that. At the same time, our position is we say if nothing changes now for first nations people in Canada, those high social costs of keeping Indians in jail, Indians on welfare, child poverty, child prostitution, are going to continue to escalate. Chief Perry Bellegarde

The Committee recommends that First Nations issues continue to be a government priority and focus on improving the standard of living and quality of life of First Nations people, including education, infrastructure and housing.

Agriculture

Canada’s agricultural sector is a key part of our economy. The agri-food industry employed 13% of Canadian workers and annually contributes almost 9% of Canada’s GDP. In 2000, Canada exported $21.7 billion worth of agri-food products and generated a trade surplus of $5.2 billion. However, the Committee heard that Canada’s agricultural community continues to experience hard times.

I would also like to say that farmers have suffered a great deal, and not only this year. I can assure you and I know you’ve heard this before — we had an incredible drought in almost every province in Canada this year. Not only did we have a weather-related production disaster, but that fell on top of a protracted period of very low prices, especially in the grains and oilseeds industry, and a protracted period where our farmers have found themselves competing against government treasuries in other countries. Bob Friesen, President, Canadian Federation of Agriculture

Witnesses, and the Committee, saw some hope for Canadian farmers in the shape of the June 2001 agreement in principal between Federal, provincial and territorial agriculture ministers on a national action plan to make Canada the world leader in food safety, innovation and environmental protection. According to the ministers’ communiqué, the plan will:

• Build on Canada’s reputation as a producer of safe, high-quality food, by strengthening on-farm food safety systems and securing their international recognition, and through the development of identity-preserving tracking and tracing systems throughout the food chain.
• Enhance the sector’s environmental performance through accelerated adoption of sound environmental practices on the farm.
• Improve farmers’ ability to manage the inherent risks of farming through safety net programming.
• Use science to help the sector create economic opportunities with innovative new products, and to strengthen environmental stewardship and food safety.
• Renew the sector through programming for farmers that addresses their unique needs and helps them adapt to change.

Furthermore, “Ministers recognized there will always be circumstances where farmers are faced with unanticipated income declines as a result of weather, disease and other factors beyond their control. Federal and provincial governments are committed to the current review of farm safety nets, with the aim of completion by 2002. They agreed that work on the long-term direction, in close consultation with industry, will build on safety net funding.”

We have a lot of what I call micro-policies, but I believe the success of those policies is contingent on building very strong crosswalks between them. All too often in the past we developed policies that undermined the utility of other policies. We have to get much better at synchronizing or harmonizing these policies into an overarching Canadian agriculture policy, and I believe the Whitehorse agreement went a long way toward that. Bob Friesen

The Committee supports the agriculture ministers’ action plan, and looks forward to the completion of the current review of the farm safety net. We recommend that the government follow through on its commitment to this action plan.

Witnesses suggested several ways in which the government could aid farmers. These included changes in the capital cost allowance, tax incentives for environmental initiatives, greater attention to the effects of cost-recovery programs (see section on cost recovery), and the elimination of excise tax on agriculture-related fuels.

In fact, by our calculation, every 10% increase in farm fuel results in a potential 6% decrease in that farm income. Bob Friesen

As the Committee noted in 1999, “The best solution is clearly to negotiate international reductions in farm subsidies, allowing the market to set prices and allowing competitive producers to succeed. Canadian producers are efficient and can successfully compete against other farmers in world markets. They cannot compete against the American and EU treasuries.” Traditionally, the agricultural sector has been the most difficult sector to liberalize, with countries such as the United States and the European Union providing much larger agricultural subsidies than Canada. Furthermore, the Committee was told that the likelihood of the United States lowering its subsidies is minimal.

Even on a per-capita basis of the entire population, the U.S. spends over twice what we do on agriculture. In their last notification at the WTO, their 1998 notification, they notified 29% of the value of their farm gate production as subsidies. … And in Canada it’s 9%. Bob Friesen

In the United States, for example, agricultural aid amounts to $350 per capita. In the European Union, it is $336. Canada brings up the rear with half that amount, or nearly $163 per capita. Serge Lebeau, Deputy Director, Agricultural Research and Policy, Union des producteurs agricoles du Québec

While the Committee supports the government’s goal of liberalizing trade in agriculture, we reiterate our 1999 PBC recommendation: “The Committee believes that the federal government should be mindful of the fact that other countries do not always follow our lead in international trade matters. When they do not, there can be significant consequences for Canadians. In such cases, the government has a certain obligation to those adversely affected as a result.”

Foreign Assistance

In its 1999 Pre-Budget Consultation report, the Committee included a section on foreign aid. In it, we concluded “that providing development assistance to developing countries can benefit the global economy. We also feel it is important for Canada to focus more firmly on human development initiatives as well as on long-term poverty reduction.”

We continue to hold this view. As the North-South Institute wrote in its submission to the Committee, “If as a nation we ignore the larger challenges posed by global poverty, widespread conflict, and issues such as climate change, our best efforts to promote the interests of Canada and Canadians will be to little avail.”

This year, we heard that Canada has slipped to 17th place among aid donor countries, down from 12th in 1999. As a percentage of GDP, Canada’s development assistance is 0.28%, below the target of 0.7% of GDP set by the a United Nations Committee chaired by former Prime Minister Lester Pearson. More immediately, the crisis in the Middle East is making the need for international humanitarian assistance even more pressing.

In the light of the crisis, we will urgently need, for example, to increase our humanitarian and emergency assistance as a direct consequence, because of the plight of up to 5 million Afghan people suffering from a long drought and starvation. Their plight and that of millions of their compatriots can only be made worse by the dislocations caused by impending war, adding to an already non-sustainable refugee population in Afghanistan and Pakistan. Roy Culpepper, President, North-South Institute

The Committee notes that the government has already allocated $16 million to deal with the crisis in Afghanistan.

In sum, the Committee reiterates its contention that providing development assistance to developing countries can benefit the global economy.

The Committee notes that if the Official Development Assistance (ODA) target of 0.7% of GDP is to be meaningful, the government should establish a timetable outlining progress toward that goal.

Green Economy

The environment … is rarely costed internally, and, as a consequence, market forces seem to be the enemy of the environment. But they don’t have to be. With a little ingenuity, we can harness market forces so as to actually benefit the environment. Stuart Smith, Chair, National Round Table on the Environment and the Economy

Measures that improve our the physical environment are another key input into the productivity agenda and fit with this committee’s long-time emphasis on improving the standard of living. Until recently, environmental policy consisted almost exclusively of rules and regulations designed to alter the behaviour of firms and individuals with respect to actions that have an impact on the environment.

This reliance upon “command-and-control” mechanisms is now being questioned, in part because of a broad trend away from direct government intervention in the economy. However, the concerns that motivated environmental rules and regulations have not disappeared. If anything, they have become more pressing. As a result, in the last few years policy-makers have started to take a serious look at a set of policy tools grouped under the rubric of “green economics.” These tools hold out the promise of, on the one hand, addressing environmental concerns while at the same time keeping direct government intervention to a minimum.

In the academic world, green economics usually refers to the application of standard economic principles and tools — and especially the use of the market and pricing mechanisms — to the study and policy analysis of environmental issues. The idea is to correct market failure so that market mechanisms can contribute to the efficient allocation of resources. This means, to some extent, letting individuals and firms decide how to meet environmental goals. One of the major tasks of green economics is to find ways of making prices reflect the full societal cost of production and make markets work better, which often means factoring in negative externalities such as pollution.[58] Absent such government intervention, pollution will tend to be “over-produced” because there is little or no incentive to limit its production. By internalizing these externalities to individual decision making these externalities, a more efficient outcome can be achieved. As Philippe Crabbé, of the Institute of the Environment and a participant at a PBC environmental roundtable, put it, “The market price for natural capital is too low. It is too low because of its components are totally unpriced, such as clean air for example, or do not include their full environment costs, such as fuel for example.”

Furthermore, a market-based system leaves it up to the companies to decide which of them is best able to be most “green” and which technology to use to achieve that end. Under a rules and regulation approach, the government is essentially taking a bet that the technology or solution it’s imposing is the correct one. Under a market-based approach, there are many possible solutions.

From the policy-maker’s perspective, green economics usually means making use of the tax system. However, it can also mean using pollution permits, charges and similar market-based mechanisms. The Committee’s interest in green economics led it to hold two roundtables on the subject in the spring of 2000. Additionally, we also heard from several environmental groups in the course of our regular pre-budget consultation hearings. These witnesses suggested a number of proposals that had as their goals an improvement in Canada’s environmental well-being. These fell under three broad categories: tradable emissions permits; tax incentives to encourage environmentally friendly technologies and energies, and brownfields cleanup; and improvements to Canada’s national parks. Several groups, including the Green Budget Coalition, suggested that the government undertake a “Clean Canada Fund” that would fit in with Treasury Board’s current inventorying of federal toxic sites. The Committee wishes to express its support for Treasury Board’s work in inventorying federal toxic sites, and calls on the government to assure that it has the necessary funds and tools to identify and begin working on the cleanup of these sites.

Emissions Trading

The much more visionary long-term integrated cost-cutting way, however, would actually be to start to reflect the price of carbon in the prices that we have on the marketplace. It’s much more politically difficult to do, but it actually starts to send the right signal. What you need is one instrument to do it instead of designing 100 types of tax breaks to create incentives for 100 types of different behaviours. Stephanie Cairns, Senior Policy Analyst, Pembina Institute

Tradable emissions permits represent potentially one of the most useful green market measures. Under a tradable emissions scheme, endorsed by the Kyoto Protocol, a cap is set on the amount of pollution in a system and firms trade emissions permits based on the amount of pollution they produce. Thus a firm that is producing pollution over and above its limit would have to buy permits from a cleaner firm producing under its limit. In way overall emissions could be capped while keeping market-distorting effects to a minimum. Since 1996, Canada has had tradeable permit systems for CFCs, and pilot projects are underway for CO₂ and a host of other related industrial by-products. As the Pembina Institute noted in its submission to the Committee, implementing an emissions permits system raises several difficult technical issues, such as how exactly would the permits be traded and where, who will be covered, what levels to set pollution at, and the grandfathering of existing companies fl should companies be initially allocated a set of permits free of charge or should they be forced to bid for them. The Committee heard that emissions trading projects are moving along slowly.

Indeed, the Committee was told that it takes time for companies to learn how to work under market-based emissions system and countries that use these tools first will generally provide their economy with a head start over late-comers. This head start becomes all the more important if environmental concerns assume the same kind of importance now accorded to national security. For example, if climate change requires swift action, countries that have taken a long-view and planned accordingly will be better placed to address any future environmental crises.

Those companies who live in countries that have their own domestic system will get the efficiencies from being able to trade among themselves. And if we compete with those countries and do not have our own system, our companies will not get those efficiencies. So it’s important for this Committee to consider the fact that to remain competitive we will need to have our own domestic system in order for our companies to be able to compete with others. Theoretically you could always simply use command and control in Canada. And if Canada fails to meet its obligations the Canadian government could buy credits on the open market. But then our companies will have failed to have the benefit that comes with innovating in the purchase and sale of credits among themselves. Stuart Smith

The Committee recommends that the government expand and expedite its research into the appropriate computer modelling of competing emissions trading systems.

Tax Measures

There’s no question that a level playing field between existing sources of energy, fossil-fuel based, and alternative sources of energy is not good enough. We have to have — during a transition period while the new technologies, the new fuels, establish themselves commercially — a tilted playing field in favour of the renewables. Stuart Smith

Environmentally friendly tax measures can either discourage the use of dirty fuels through higher excise, income taxes and lower capital-cost allowance (CCA) rates or, conversely, encourage the demand for and supply of cleaner fuels through tax credits, lower excise taxes, higher CCA rates and more generous income-tax treatment.

The Committee was told that the tax system still provides considerable advantages to dirtier fossil fuels, a legacy of Canada’s resource-based economy. Proposed measures to address this issue included replacing the existing excise tax on motor fuels by applying a broad-based revenue-neutral (relative to the existing excise tax) environmental excise tax on all fuels and removing favourable corporate tax treatment for the mining, oil and gas and chemical industries. A third proposal was that the government consider increasing taxes on dirty fuels such as coal while reducing taxes on environmentally friendly sources of energy. By so doing, the government could achieve its environmental objectives without giving up tax revenue.

When we’re talking about putting new taxes in place on pollutants, we’re quite open and would encourage people to look at the reduction of taxes in other areas which might stimulate economic activity. We’re looking for revenue-neutral packages that can help us change the signals that we’re sending into the economy, essentially tax the bads and decrease taxes on the goods. Robert Hornung, Policy Director, Pembina Institute

Energy tax credits for “green power” (which is presently at a cost disadvantage when compared to traditional forms of energy such as oil and natural gas) can fall on either the demand or supply side. On the demand side, Suncor Energy suggested to the Committee that the government create a Consumer Green Energy Credit which would cover a portion of the higher cost associated with the purchase of green power from electricity providers as a means of increasing currently low demand for green power. On the supply side, proposals included extending the broader Canadian Renewable and Conservation Expense (CRCE) treatment to a wider range of expenses, an Investment Tax Credit (ITC) under the Income Tax Act on capital costs and or a Production Tax Credit (PTC).

The Committee also heard that improving the energy efficiency of Canada’s buildings could make a significant impact on our Kyoto obligations. Specific proposals included an investment in performance-based grants for energy-efficient retrofits of homes, a national, community-based home retrofit advisory services program, and a national better buildings fund. The Committee heard positive reports of a Toronto-based program similar to a better buildings fund.

At a world level it was recognized that retrofitting of buildings was a fundamentally profitable exercise. Which would then lead you to ask the question, why is it not being done [in Canada]? What we found was, we needed to educate both the decision makers in the public sector and the financial community, the investment community, to come together and form these kind of partnerships. Jack Layton, President, Federation of Canadian Municipalities

One way we did it with the green-investment fund, and with the Toronto atmospheric fund and others, was to put some money on the table to say, we’re willing to take the risk here for a part of this kind of work. What we found is, the leverage has been fantastic. For every dollar that the investment fund is putting forward, we’re getting $10 of private money coming in to match. Not only that, we’re not getting any defaults on our loans. It’s very exciting. Jack Layton

The Committee recommends that the government consider policies that would encourage the use of environmentally friendly energies and technologies.

Completion of the National Parks System

Canada’s national parks represent some of our most precious natural assets. Not only do they help contribute to biodiversity, habitat and watershed protection, they also provide significant economic benefits in the form of tourism.

An investment in the protection of Canada’s biodiversity through investments in national parks is an investment in the ecosystem services such as clean water for downstream communities, and an economic development and diversification of local communities. Robert Hornung

In the past two Speeches from the Throne, the government has stated its intention to complete the National Parks System and restore the existing parks to ecological health. Over its previous two mandates, the government has created seven new national parks. Still, as witnesses reminded the Committee, much remains to be done. Completing the National Parks System will require 14 new national parks and 26 marine conservation areas. And, according to Panel on the Ecological Integrity of Canada’s National Parks has concluded that existing national parks face serious threats, including habitat loss, air pollution, pesticides, and overuse by visitors.

Although efforts are being made to improve environmental quality of coasts and seas in Canada, degradation of ocean environments has continued. The lack of an integrated approach to using this shared resource has often caused conflict among economic, environmental and social objectives. Canadian Parks and Wilderness Society

And while negotiations to complete the parks system continue apace, witnesses told the Committee that a lack of funds is responsible for the stalemate in parks creation and maintenance. The nature of the problem facing Canada’s parks is that, much like investments in Canada’s physical infrastructure, the longer we wait to fix the problem, the greater the degradation and the greater will be the final bill.

You don’t save money by putting off repairs to our existing parks, to the infrastructure that Canadians rely on to use them safely. If you don’t repair the shingles on the roof of your house, you’re going to have a rotten roof and you’re going to have a lot more expense. The same principle applies in many cases to roads and bridges, and the like, in our parks like Jasper. Sam Gunsch, Executive Director, Edmonton Chapter, Canadian Parks and Wilderness Society

Funding is also required to address the urgent situation of the declining health of our existing national parks. Unfortunately even good legislation, and we have excellent legislation in the National Parks Act, is not enough to protect these habitats and the species that live in them. Parks Canada requires the capacity to properly manage visitor impacts, to conduct research and monitoring and to participate in regional land use planning processes that will ultimately affect its ability to protect natural resources within parks. Christie Spence, Co-manager, Wildlands Campaign, Canadian Nature Federation

The Canadian Nature Federation estimates that over the next five years $165 million is needed to plan, negotiate and begin to develop a dozen new national parks and marine conservation areas, and $328 million “to reverse the decline in the health of park ecosystems.”

While the Committee is mindful of the extra obligations that national security are placing on Canada’s bottom line, we recommend that the government complete the restoration of our national parks and the completion of the National Parks System, as fiscal conditions permit and in the interim protect from encroachment those lands that would be parks.

Ducks Unlimited presented the Committee with a proposal for a national conservation cover incentive program (CCIP) to protect marginal farmlands. Their proposal aims to reduce tillage of environmentally sensitive areas including areas with marginal or highly erodible soils, wetlands, and riparian areas (that is, areas where waterways and land meet). According to Ducks Unlimited, under the proposed CCIP, “landowners would receive government-led financial incentives for restoring or protecting areas where land meets water and converting cultivated marginal land to permanent vegetation, such as grassland, for non-agricultural use.”[59] Ducks Unlimited estimates the total cost of the program at $90 million.

In the past, ecosystems services, we feel, have not been fully captured in commercial markets or adequately quantified in terms of comparable economic services or manufactured capital. And, in fact, they’ve been given too little weight in Canadian policy decisions. And we’re hoping through our demonstration of the net benefits associated with this program that we can demonstrate that this program will, in fact, provide ecosystem services to society. Brian T. Gray, Director, Conservation Programs, Ducks Unlimited Canada

Such a plan is in keeping with the idea behind green economics, that prices should account for positive and negative external effects, such as the environmental degradation that comes from using marginal farmlands. In a similar vein, the Committee heard of the need to restore degraded fish habitats in the Great Lakes Basin. As Conservation Ontario remarks, “Healthy watersheds are key to healthy great lakes.” They propose a $30 million fish habitat endowment fund that would provide benefits to the commercial, sport and aboriginal fishery industries, while promoting a better environment.

The Committee supports measures to clean up the Great Lakes basin and protect fish habitats and recommends that the government study the consequences and feasibility of the two proposals.

Cost Recovery

As part of its Program Review initiative, the federal government instituted a new policy of cost recovery for a variety of services. In part, this was a response to budget-cutting measures but it was also part of the initiative to “get government right.” Under Cost Recovery, departments were to streamline their operations and eliminate those that were not needed, with the understanding that clients would pay for some of the services they receive.

This is not normally the way government operates. As a general rule, the federal government collects revenues from Canadians and provides them with a variety of services, not linked to their contribution to general government revenues. This is due to the fact that government programs are generally designed to provide benefits to the public as a whole.

In some cases, however, government services deliver private benefits. In such a case, the government is like a private firm. Unlike the typical business firm, however, the government tends to be a monopoly provider of a service. And unlike the typical monopolist, the government has the power to order customers to purchase a particular product.

In its 1999 Pre-Budget Consultation, the Committee noted growing concerns surrounding the government’s Cost Recovery and Charging Policy, which sets out a number of major principles for departments and agencies to apply when setting user charges. The Office of the Auditor General seconded these concerns, noting “that government accounting systems are typically not designed to provide costing information needed to justify the levels of user fees charged.”

In the spring of 2000, the Committee issued Challenge for Change. The report concluded that while the cost recovery policy is generally sound, it is not being implemented consistently, and that departments have been left to their own devices in designing and implementing user charges. In an attempt to address these problems, the Committee issued 12 recommendations, which called for:

• A red-tape commission to evaluate and streamline regulations
• A parliamentary committee to conduct a government-wide study of the cost recovery policy;
• Better supervision and monitoring of departmental user-charge programs by Treasury Board; and
• Better provision of user-fee information and how they are calculated to all interested parties.

Again this year, the Committee heard that user charges remain a problem, both for businesses and individuals. A poor regulatory system negatively affects Canadian competitiveness by increasing costs and wait times for approvals. On the business side, Jean Szkotnicki (President, Canadian Animal Health Institute) told the Committee that “Canada’s system is less responsive, more outdated, and more costly than our trading partners. Canadian businesses need regulatory relief if we want them to remain competitive.” Citing the example of approval delays at Health Canada’s Bureau for Veterinary Drugs (BVD), she said: “This delay is not the result of additional scrutiny. In fact the BVD has a product submission on average of four years after initial screening before they even begin to review it. The BVD’s poor performance hurts industry, competitiveness, and denies our customers, livestock producers and veterinarians, access to the safer more targeted pharmaceuticals used by U.S. and foreign competitors.”

“Health Canada, even after years of requests, has no plans for improving the performance of the BVD. Treasury Board, which is responsible for monitoring cost recovery, has not implemented even one of the recommendations you made more than 15 months ago. I believe that the next step must be to address the concerns about regulatory burden within the budgetary plan context.”

The Insurance Bureau of Canada also remarked on the need for continued streamlining and harmonizing of federal and provincial regulatory practices to remove obstacles to competition and innovation. According to its brief, Canada should have a regulatory system that is both efficient and effective and delivers good value for both the industry and its customers.

The Committee shares Ms. Szkotnicki’s and the Insurance Bureau of Canada’s concerns over cost recovery and the burden of regulations, and reiterates its call for the government to institute better oversight of the cost of regulations and user-charge programs by reporting on them annually with the budget. The application of these must not be undertaken in isolation but must be consistent with the government’s overall policy objectives, namely the international competitiveness of Canadian industry and an improvement in living standards via enhanced productivity.