FINA Committee Report

Supplementary Report

Progressive Conservative Democratic Representative Caucus

The PC-DR Caucus supports the main thrust of the report of the finance committee pre-budget consultations. However, there are additional actions not included in the report that we believe should be taken to improve productivity and thus strengthen the Canadian dollar. Strengthening productivity will ultimately improve Canadian standard of living.

Before the October 2000 mini-budget Canadians had the second-highest corporate taxes in the OECD and it is expected that following the December 2001 budget that Canada will continue to have the second-highest corporate taxes in the OECD. This creates a competitive disadvantage between Canada and our international competitors. In today’s global economy, it is clear that competitive tax rates are essential. Tax reduction combined with meaningful tax reform will help create a more prosperous Canada.

The Canadian dollar has lost 20 per cent of its value against the U.S. dollar since the Liberal government was elected in 1993. Since 35 per cent of everything Canadians consume is from the U.S., a 20 per cent reduction in the Canadian dollar’s relative value represents a massive drop in the standard of living for all Canadians. The dollar is not just doing badly compared to the U.S. dollar, this year it has lost 11 per cent against the Mexican peso, 4 per cent against the British pound, 3 per cent against the Russian ruble, and 6 per cent against the Argentine peso.

Canada’s poor productivity performance has been a major contributing factor to the decline in the value of our dollar. This low productivity growth leads to a vicious cycle as our low dollar decreases the incentive to innovate and increases the cost of production enhancing tools and technology. This in turn reduces productivity further and drives our dollar lower.

Specifically, the PC-DRC urges the government to take action to address Canada’s antiquated tax system, reduce Canada’s regulatory burden, and strengthen Canadian productivity.

1. It is the view of the PC-DRC that the report does not adequately emphasize the need for productivity focused tax reform. The weak Canadian dollar both reflects and serves to foster Canada’s lagging productivity levels.

A major contributor to Canada’s economic problems, well before the terrorist attacks, was our failure to encourage investment in productivity. For any growth to take place, especially during slowing economic times, investment in innovations and efficiency is the key to solid and stable growth.

With the emergence of the new economy, technology has become essential to wealth creation in Canada and the world. High taxes are a clear barrier to investment in this new economy.

Canada’s productivity growth has lagged behind that of other industrialized nations in recent years. Canada’s productivity growth over the past two decades has been slower than every other G7 country. We have one of the worst growth rates in the OECD. A look at the impact of innovative public policy in other countries will highlight why Canada is falling behind. Ireland, for example, has utilized aggressive tax reform to encourage knowledge-based industry. From 1988 to 1999, Ireland had a real GDP per-capita growth rate of 92 per cent. For the same period, Canada’s GDP per-capita growth was an anemic 5 per cent. By cutting taxes, especially business taxes, Ireland attracted significant levels of foreign investment. Clearly, there is a direct correlation between levels of investment and levels of productivity.

Canada has a “branding” problem in the international investment community. Branding is especially important as today’s capital is highly mobile. Capital can move unimpeded to friendlier jurisdictions. Investors do not feel Canada provides the best investment opportunities. Even Canadians look elsewhere for investment and employment opportunities. Perception is reality. Canada can only alter the opinion of foreign investors through significant improvement of the real and perceived business environment. Small incremental changes will go unnoticed by investors. Bold tax reform would symbolically and substantively help improve Canada’s future prospects in the new economy.

If we are to keep and attract talent, our fiscal environment must be more competitive with our neighbours. Changing times requires a changed approach. Until recently, the goals of the tax system were redistribution of income. Now the tax system redistributes people. Our system needs to adapt to this reality, for if we do not, our best and brightest will continue to move elsewhere, and become our competitors instead of our assets.

Part of the solution would be eliminating capital gains tax completely. In terms of the impact of the new economy, there is probably not a more negative tax than our capital gains tax regime. Capital gains taxes lock up capital that Canada’s growth industries sorely need.

We strongly support the committee’s recommendation to eliminate capital taxes. The new economy depends on mobility of investment capital and human capital. For too many years we have seen young Canadians driven away by the tax rates at home to opportunities in other countries.

The PC-DRC also supports the committee’s recommendation to eliminate the remaining capital gains tax for gifts of listed securities. This is the single most important step that government can take to improve funding for the charitable sector, and in doing so strengthen Canada’s social support network.

The government should fully implement the corporate tax reform recommendations of the Mintz Report. Tax reduction combined with tax reform can ensure that all sectors benefit from corporate tax reform. Corporate tax reform should seek to reduce the distortionary nature of our tax policy, further reduce profit insensitive taxes, and in general reduce our corporate tax burden.

We recommend lowering corporate tax rates to the OECD average, which is to a combined federal and provincial rate of approximately 35 per cent, and recommend the immediate elimination of the personal capital gains tax, and a commensurate reduction of all taxes on investment.

2. Ensuring the ongoing free flow of goods and services across the Canada-U.S. border is the most important immediate economic challenge facing Canada. One third of our GDP is a direct result of exports to the U.S. 70 per cent of this moves by truck, the mode of transportation most adversely affected by any border obstruction. Much of that trade is with firms that rely on just-in-time inventory systems to keep production costs low. If Canada is to continue to be an attractive place to invest, Canadian firms must continue to have confidence that the border will not be a barrier to timely and efficient flow of commerce.

The PC-DRC has proposed a “Public Protection and Border Management Plan.” The PC-DRC recommends the government work with the United States government to:

(i) Create a new Ministry of Public Protection and Border Management to take responsibility for Canada’s customs, immigration, law enforcement and intelligence agencies;

(ii) Create a bi-national (tri-national) border management agency, that would jointly monitor the entry of goods and people into and out of the North American continent and across the Canada – U.S. border, while pre-clearing low-risk individuals and goods for expedited transit; and

(iii) Create a new Parliamentary Committee to provide oversight of this new Ministry and other anti-terrorist measures contained in Bill C-36.

Canada needs a plan quickly so that these extraordinary circumstances do not threaten, prevent or impede the mobility of people, goods, services and merchandise between Canada and its most important trading partner, the United States of America.

The PC-DRC strongly supports recommendations to significantly increase resources for the Department of National Defence, the RCMP and CSIS.

3. Canada needs significant regulatory reform focused on productivity enhancement. Regulations are a form of hidden taxation. As they raise the cost of doing business, Canadians end up paying a relatively higher price for goods and services. They also kill jobs by making Canada less competitive. In the aftermath of September 11th, SMEs have been one of Canada’s strengths. Small businesses have helped maintain Canadian employment levels and we owe it to them to take leadership in creating a more vibrant economic environment.

The PC-DRC recommends implementation of an annual “Red Tape Budget” in addition to the annual spending budget. This would afford Parliament the opportunity to debate the regulatory burden on both Canadian business and individuals. The regulatory budget would detail the estimated total cost of each individual regulation, including the enforcement costs to the government and the compliance costs to individual citizens and businesses. A regulatory budget would help hold governments accountable for the full costs of their regulations and could prevent the current patchwork of redundant regulation that can stifle Canadian enterprise.

The use of sunset clauses can help ensure that the raison d’etre of a regulation is reviewed periodically. Currently, once a regulation is on the books it is there forever, even after it has ceased to provide a public benefit.

4. The PC-DRC endorses a system, as it existed prior to the late 1960s, whereby a certain number of departments selected by the Opposition would have their Estimates scrutinized by Parliament, without a time limit. Forcing Ministers to defend their department estimates in the House of Commons would improve parliamentary scrutiny on government spending, and strengthen the role of Members of Parliament.

5. In the U.S., the basic investment vehicle for venture capital investment is the Limited Partnership. The PC-DRC proposes that the Income Tax Act be amended to allow Limited Partnerships to play the same role in Canada.

The Act should be amended to add a special rule applicable to limited partnerships similar to the rule in section 259 of the Act that applies to trusts. This rule would ignore the interest in the partnership and would treat the partner as holding directly a proportionate interest in the assets of the partnership. If such assets were Canadian, they would be treated as Canadian in contrast to the present regime that deems them to be foreign.

In addition, as a Limited Partnership does not restrict the percentage of its ownership that can be held by a single investor, the 30 per cent restriction referred to above would be eliminated.

To further improve the Canadian environment for venture capital we recommend:

(i) Eliminating tax on capital gains realized by foreign investors;

(ii) Eliminating withholding tax on interest;

(iii) Extending treaty protection to limited liability companies;

(iv) Having more equitable tax treatment for cross border mergers;

(v) Having employee stock options in Canadian controlled private; corporations (“CCPCs”); and

(vi) Having broader rollover privileges for reinvestment in CCPCs.

Clearly, the elimination of personal capital gains tax would dramatically strengthen Canada’s venture capital community.

6. Currently, a tax-free allowance of $1,000 is provided only to those Emergency Service Volunteers who receive remuneration for their services. This policy discriminates against rural firefighters, for example, who rarely receive any compensation. The Income Tax Act should be amended to provide a tax credit of $1,000 to all Emergency Service Volunteers. This initiative is particularly important in a post-September 11 environment.

7. A tax credit should be introduced based on the repayment of the Canada Student Loan principal, to a maximum of 10 per cent of the principal, per year, for the first ten years after graduation provided the individual remains in Canada.

Additionally, the federal student assistance program should move to a system where student loans are repaid as a percentage of net after tax income starting the first full working year after graduation.

8. To encourage reservist service in the Canadian military, the income tax act should be amended to exempt military reservists from paying tax on their “Class A” income. “Class A” training refers any activity other than full time work with the reserves.

As Canada expands its international commitment we will become more reliant on our reserve forces for “Homeland Defence.”

This exemption will provide an incentive for people to become part of the military reserves. This will need to be accompanied by new legislation protecting the jobs of reservists who are called to active duty.

9. In a post Kyoto environment, the government should be encouraging sound forest management practices. The government should allow forest maintenance expenses to be deducted against income. Private woodlot operators should be provided with the same capital gains tax exemption currently available to farmers.

10. The PC-DRC suggests that a private sector initiative be undertaken in response to the report from the Broadband Task Force. A national broadband initiative is analagous to the laying of the railroad, where the first priority was to connect the major cities. After that, subject to real demand and economics, the outer regions and towns were connected. Canada should have a broadband policy but it should be structured as cost effective and it should be driven mostly by the private sector, not the government.

11. The federal government’s current farm safety net framework fails to meet the needs of farmers across Canada. There has been a devastating impact on farm income due to this summer’s severe drought conditions. Industry analysts have estimated losses to the grains and oilseeds sector to be $2 billion this year. This stark reality is compounded by the fact that there will be less money in the national disaster assistance program this year. The new Canadian Farm Income Program has only $435.5 million budgeted for 2000-2001, compared with more than $600 million in disaster assistance that was delivered in the final year of the Agriculture Income Disaster Assistance program. Additional federal support is required and should be one of the top priorities for the government.

12. The federal government has created a class of depreciable capital assets specifically designed for new energy efficient or environmental friendly technologies. The government should improve the tax treatment of alternative energy sources such as biomass, biogas, fuel cells, wind power, small river hydroelectric and photovoltaic technologies as an incentive to encourage energy efficiency and the use and development of environmentally friendly energy sources. Specifically, changes to expand Class 43.1 of the Capital Cost Allowance schedule should be implemented to ensure that emerging energy efficient technologies are included.

Scott Brison, M.P.

PC-DRC Finance Critic