EVIDENCE

[Recorded by Electronic Apparatus]

Tuesday, July 30, 1996

.1403

[English]

The Chairman: This is the last of our three sessions looking at the economic and compliance costs of our systems of taxation that affect corporations and enterprises.

We are very pleased to have with us this afternoon five witnesses: from Canadian National Railway, Sean Finn; from Canadian Pacific, John Lynch; from Stentor, Barry Pickford; from the Canadian Pulp and Paper Association, Lise Lachapelle; and from l'Université du Québec à Montréal, Francis Montreuil. Thank you very much for being with us.

I suggest we start with a brief summary of what each of you would like to present, after which we'll go to questions from members. I assure you I'll give each of you as much opportunity as you wish to make your case. We will then conclude with a brief summary from each one of you. I thank you again for being with us.

Maybe we could start with you, Mr. Finn.

Mr. Sean Finn (Director and Principal Tax Counsel, Canadian National Railway): Thank you, Mr. Chairman. If we may, this will be a joint presentation by CN and CP on behalf of our respective companies and the railroad industry. John Lynch, the assistant tax director from CP, will be assisting us in the presentation.

On behalf of my colleagues at CN and CP, I would like to thank the committee for giving us the opportunity to address you on some concerns that Canada's railways face today in a competitive economy. The document we circulated to you is a brief summary of some of the major tax issues we face on a daily basis vis-à-vis our competitiveness with other Canadian modes of transportation as well as U.S. competition, being class one railroads.

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This should not be viewed as an exhaustive list of concerns. However, it should give the committee a general overview of the economic and compliance issues of Canada's two major railroads.

[Translation]

I would be pleased to answer your questions in either official language.

[English]

Turning to page 2 of the handout, railways are essential to Canada. All modes of transportation are essential to the economic stability and growth of Canadian industry. Railway transportation is a key component of Canadian business.

As railways, over the last couple of years we have introduced major restructuring and various programs to reduce costs, increase capital expenditure and investment, as well as improve our customer service. The heavy tax burden that the railways suffer in Canada limits our capability to further pursue our restructuring and other issues we've commenced in the last couple of years.

I think it's a bit of an understatement.

[Translation]

The need for rail tax reform is widely acknowledged here in Canada. If you look at Table 3 on page 3 of our document, you will see that for some years, through a variety of round tables and consultation committees, there has been a recognition that the railroads and the railway industry are carrying a very heavy tax burden.

The 1991 Vancouver Roundtable, the 1992 Royal Commission on Passenger Transportation, the 1993 National Transportation Act Review Commission, the 1994 Federal Rail Renewal Initiative, and recently, the 1996 study by the Organization for Western Economic Co-operation all recognized the need for rail tax reform.

Finding a solution requires co-ordination of federal, provincial and municipal initiatives. We are currently subject to three separate levels of taxation. We are clearly looking for the federal government to show leadership in this area by supporting our call for reform.

[English]

The components of the issue are relatively simple. The first is that CN and CP pay approximately 40% more in fuel tax, sales tax and payroll taxes, as well as property tax, compared to our U.S. counterparts. It's a large component of the cost structure of both railroads.

As you know, railways own, maintain and invest in their own rights of way - our assets - and our taxes on these assets are high - property tax, fuel tax and sales tax. Other modes of transportation such as trucking use publicly owned passages or assets, and such industries are not subject to the same tax burden.

Concerning railway depreciation, the rates are much less favourable in Canada than in the U.S. This has an impact that deters our future investment in our assets.

In summary, taxes are a higher percentage of our total revenue in Canada as compared with our U.S. routes, which are a lot less; as compared with other modes of transportation, being trucking; and other Canadian industries. These components are sales tax, property tax, fuel tax and various other taxes.

I'll now turn to John Lynch from CP to address some quantitative numbers with respect to this tax burden.

Mr. John Lynch (Assistant Director of Taxation, Canadian Pacific Limited): If you turn to page 5 of the material we've handed out, the chart shows the effect of taxes other than income taxes on Canadian National and Canadian Pacific. The aggregate of payroll, property, fuel and sales tax is almost 40% higher in Canada than in the United States.

Breaking that down, the real problem area would be property taxes and fuel and sales taxes. Canadian income tax rates are roughly 45%, whereas for U.S. railways they would typically be about 40%.

Consequences of higher Canadian taxation... Stringent competition from U.S. railways sees Canadian rail traffic being routed through the United States. As an example, lumber from western Canada destined for the U.S. northeast, rather than being transported across the Canadian rail system, could be trucked down from the point of origin in British Columbia across the border to the U.S., to a western U.S. railroad, and transported entirely on a U.S. railway rather than travelling on a Canadian railway.

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Another consequence is that Canadian traffic flows through U.S. ports as opposed to Canadian ports. For example, the port of Vancouver is facing severe competition from Seattle and Tacoma. The ports of Montreal and Halifax are facing competition from New York, Baltimore and Norfolk.

The bottom line of higher Canadian taxation is that Canadian railway taxes help U.S. railways and U.S. ports.

The Chairman: Do you have figures showing how much you have lost to U.S. competition?

Mr. Lynch: That information was supplied to Finance previously. We could pull out those reports and get back to you. I don't have them readily available right now.

The Chairman: Thank you.

Mr. Lynch: Page 7 of our material is a map of fuel tax rates showing that Canadian provincial fuel tax rates are significantly higher than U.S. state fuel tax rates. The high fuel tax rates in Canada are really both a provincial and a federal issue.

Some facts on CN and CP taxes: CN and CP pay approximately $200 million a year in fuel taxes. Comparable U.S. railways, based on similar consumption, would pay about $60 million a year. The Canadian federal fuel excise tax is 4¢ a litre; the U.S. rate is approximately half that. Average Canadian provincial fuel taxes are about 6.4¢ a litre, compared with less than 1¢ in the U.S. as a state average.

With respect to property taxes, CN and CP contribute approximately $160 million a year in property taxes on their rights of way. We estimate that this is approximately double the U.S. property tax levels for U.S. railways.

Mr. Finn: Mr. Chairman, the proposed actions we're looking at are on the two levels where our burden is extremely high. First, recognizing that some of these initiatives are federal and others provincial, from the federal point of view, reduction of Canadian federal fuel tax to the U.S. levels would make us a lot more competitive with the U.S. Therefore, we're looking at a 1.8¢ reduction in the fuel tax.

Second and I think more important - this is on page 10 of our presentation - it's widely recognized that both major railroads and some short-liners have major capital investments to make over the coming years. To do so, it would be a great incentive for the railroads and also various investors to have access to a capital cost system similar to that in the U.S., for a period of five years looking at a straight-line depreciation on new assets. This would allow the railroads to renew their fleet, their assets and their plants, and would also allow us to be a lot more competitive with our U.S. routes.

Recognizing that these are federal initiatives,

[Translation]

...it is clear that the two largest components of our tax burden are property taxes and fuel taxes levied by the provinces.

We have held discussions with the provinces with a view to reducing the level of property tax on railway rights-of-way, discussions which have been highly successful in British Columbia, Quebec and Nova Scotia. Much work remains to be done, however, and it is our hope that the federal government will support our efforts to convince the provinces of our need to remain competitive.

The second component is fuel tax for which we are also seeking a reduction in rates. Again, we are currently holding discussions with both the provinces and the federal government in this area. Progress has been made in both Manitoba and Alberta. All these initiatives are intended to reduce our cost structure, which is an essential element of our ability to survive as a Canadian railway.

I will now turn it over to John, who will briefly address our main concerns in the area of tax compliance.

[English]

Mr. Lynch: Under the economic and compliance issues we would like to address, the railways support initiatives to harmonize federal and provincial tax laws. The recent proposed harmonization of sales tax by the Government of Canada and three of the four maritime provinces is a positive step. We support the objective of a single harmonized sales tax for all of Canada.

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I'll move on to tax consolidation and corporate loss transfer. Presently, de facto tax consolidation is only possible in Canada through expensive and time-consuming techniques and procedures such as corporate reorganizations, intercompany charges, financing arrangements, etc.

We understand both Finance and Revenue Canada support tax consolidation of related Canadian corporations, in principle. Therefore, we recommend that Canadian tax laws provide a mechanism for the consolidation of profits and losses of related Canadian corporations under common control.

Thank you very much.

The Chairman: Thank you. Do CN and CP always cooperate so closely?

Some hon. members: Oh, oh.

Mr. Finn: We try to, Mr. Chairman.

The Chairman: Before I call our next witness, Mr. Barry Pickford, I'd like to say that we're very pleased that Dr. Jack Mintz is here with us today as well. His technical committee is looking very closely at these issues, and we look forward to seeing his report.

Mr. Barry Pickford (Representative, Stentor Alliance): I'm Vice-President, Tax, for Bell Canada, but today I'm representing the Stentor Alliance.

Stentor Alliance is effectively the community of Canada's provincial telecommunications companies, providing a variety of telecommunications services from the east coast right through to the west coast of Canada. It's made up of a number of names familiar to you - Bell Canada, BC Tel, AGT, NB Tel and so on.

I think all of us together, in discussions before this meeting, have agreed that clearly our federal-provincial income tax system has a substantial impact on us from a compliance cost point of view and from an economic cost point of view. So we really appreciate this opportunity to meet with you today.

During 1995 the Stentor companies employed approximately 88,000 people across the country, with a payroll of about $4.3 billion. We have an annual tax bill of approximately $1.5 billion that is paid to the federal government, provinces across the country and municipalities across the country as well. It's paid to municipalities in the form of municipal property taxes and business taxes. As well, in a number of provinces we have things called ``gross receipts'', or gross revenues tax, which is a specific tax charged, particularly in the province of Ontario, to Bell Canada only.

In addition, we collect about $2 billion of sales taxes that we remit to the federal and provincial governments. We also have about $1.5 billion of employee withholdings that we remit to the federal and provincial governments.

In 1996 the Stentor companies are really very much an industry in transition. We have to take a lot of steps to meet the competitive global business environment that exists today. Most of that involves competition - competition within our own business that comes from a number of different avenues, competition for customers, effectively, and competition for new financing. As a result, it is imperative that we keep our costs of administration to as low an amount as possible.

Let me just start by saying that we believe a number of very positive steps have been taken in this area, particularly by Revenue Canada. Revenue Canada has merged its income, GST and customs groups together. This really facilitates interface with Revenue Canada. It helps reduce costs. It has allowed a single business number for each corporation in order that you can discuss with Revenue Canada payments of any number of federal taxes with them on a single basis. It provides effectively one reference point.

We believe Revenue Canada has taken some strides to involve greater taxpayer participation with them in making decisions. I think the large business audit advisory committee is one example of that.

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Finally, they've started down the road to easing what in our view is a very difficult audit process that exists with all levels of government by starting to sign audit protocols with large taxpayers that we hope will ease the audit process so that it can be done more quickly and bring us up to date much more quickly than what exists today.

Despite these steps, Stentor still feels there are a number of concerns with the federal-provincial tax system and the imposition it has, from an economic and compliance point of view, on our business.

I think the facts today are that Canada has the fourth-highest corporate tax rate among the OECD countries. In our view, the proliferation of taxes we have across the country really adds to that tax rate. We believe that if we were more efficient in the collection of taxes, there might be an opportunity to bring our tax rates down to some extent.

Within each of the provincial telcos, as you might expect, there are different companies that have been formed for regulatory purposes or to provide different services. Each of those companies effectively becomes a separate, individual taxpayer, which means that each of them must file their own separate tax returns.

In the case of Bell Canada, as an example that operates in both Ontario and Quebec, we file federal returns, Ontario returns and Quebec returns with respect to income and capital tax. As well, we file a number of different returns. But just in that narrow area of income and capital taxes, we have rate differences in each of those jurisdictions, a calculation of taxable income that is different in each of those jurisdictions, and a calculation of taxable capital that is different in each of those jurisdictions. We pay separate amounts of tax to each jurisdiction, of course, and we make instalment payments that are sometimes done on a different basis to each of those jurisdictions, as well.

Finally, there are separate audits by each of those jurisdictions, as well. Very often, there are separate audits in the case of the provinces whereby they deal with income tax separately from capital tax. So today, like a number of other companies, we are dealing with audit issues that can be as many as seven to eight years old because there still has not been closure on certain items.

As well as the compliance costs that go with all of this, there's a substantial amount of economic costs as you plan your way to where you're best located and where the tax rates are the highest.

We believe that the system could be easier if in fact consistent methods of computing capital and taxable income could be developed. We recognize that many of these things come from economic incentives that provinces and the federal government want to provide, but if that can be done more through tax rates than actual calculations of income or taxable capital, then we think the burden of compliance would be eased.

One of the biggest planning issues that relates to our group of companies, as it does to many companies, is how to deal with consolidated groups. As I said, many of the companies, for regulatory purposes, have a holding company structure with a number of operational companies sitting below them. You may well wind up with situations in which there are losses in one company and profits in another. It is necessary today to seek any relief from that to go through very complicated structures to plan around that.

In our view, as was mentioned to you before, if we could find a way to move to consolidated returns in Canada, this would ease both the economic and compliance burden. It is interesting to note that where we receive most of our competition is in the United States, which clearly has consolidated returns. In fact, it has a contiguous country rule, which may allow companies incorporated by U.S. companies in Canada or Mexico to join in the U.S. consolidation. We've got a long way to go to get up to that position.

The third issue I'd like to raise is really in the area of research and development. The Stentor companies are really very much committed to research and development. We very much believe in the government incentives that are made available to encourage research and development, and that they should be applied universally, not set for one industry versus another.

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Right now, like a number of other companies, we are going through a very difficult period of getting acceptance from Revenue Canada as to just what research and development is. We're finding that there are changes in rules and interpretations that happen today that really are applied very much on a retroactive basis.

So for what was clear in 1991 or 1992, when in effect Revenue Canada and the Department of Finance were encouraging companies to spend money on R and D, but also, and most importantly, to report that R and D as work that would be available for tax incentives, in fact the rules have changed. So when we filed our 1991, 1992 and later tax returns, we were finding ourselves being reassessed.R and D that was being claimed was being denied.

It is not really the reassessment part that is so difficult, but rather the fact that it is taking hundreds and hundreds of hours to audit this work. It's taking many man-years of time, I would say, to support the work that has been done on the basis that in the time the filings were made, taxpayers were encouraged to file very little information. Today they're being asked for very substantial amounts of information that often go back five, six and seven years, but the people who actually did the work may no longer be available within the company.

We will tell you that Revenue Canada is making changes in this area. We think these are changes that will be clear once they are established. We would ask only that those rules be applied on a going-forward basis, not necessarily on a retroactive basis.

The final area I would like to mention is with respect to sales tax harmonization. Stentor companies support sales tax harmonization.

Consider the present system we have today, in which we have the maritime provinces, as well as Quebec, harmonized with the federal GST. We believe that with the other provinces we really have provincial sales taxes becoming a part of a decision-making process as to where a business is located. We think the non-neutral aspect of it is dangerous from a Canadian point of view. We believe also that the non-harmonized provinces are at a competitive disadvantage.

Finally, in the sales tax area, in which we have provincial sales tax with no input credits, there is effectively a substantial cascading of sales tax costs. For example, taxable services in Ontario include the provision of telephone or telecommunications services. These are subject to sales tax, which means the business that is paying for telecommunications services must in some way either add that to their price to their consumers or must eat that cost and effectively treat it as a cost of doing business. A harmonized system would treat everybody equally and avoid that cascading effect.

Finally, the compliance costs of living with different sales tax systems across the country make it very difficult for corporations, effectively, to comply without incurring the substantial cost of this compliance.

I'll make a few key recommendations in those areas with respect to multiple systems and tax rates that exist in our federal and provincial tax system. We would recommend that we should have a consistent calculation of taxable income and taxable capital across the provinces and with the federal government. That's because they now charge capital tax. Even if the rates are different, at least the calculation of the tax will be the same.

We believe that consolidated returns are badly needed in Canada. Other jurisdictions, states or provinces, have found solutions to the problem. We think there must be a Canadian solution to the tax consolidation problem as well.

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In the area of R and D, uncertainty obviously equals economic cost. Canada needs a system in which incentives, when they are provided, are clear. The people who can benefit from those incentives must know that they will have equal treatment, consistently applied over time.

Finally, in the area of sales tax harmonization, we encourage the federal government to continue its dialogue with the non-harmonized provinces to seek a settlement in the area of separate sales taxes in provinces across the country.

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

[Translation]

Mrs. Lise Lachapelle, please proceed.

[English]

Ms Lise Lachapelle (President and Chief Executive Officer, Canadian Pulp and Paper Association): First of all, the industry would like to thank you for the opportunity to present our views on these issues today.

I would like to say a few words about the forest industry. We are the largest contributor to the trade balance of Canada, to the tune of $34 billion last year. We account for indirect and direct jobs to the tune of one million people being employed in our industry. Direct tax payments to the government, and this would include income tax, sales tax, payroll and property taxes, as well as stumpage fees and royalty payments, totalled over $5 billion last year. That does not include the$4.6 billion paid by our employees into the tax system as well.

You will find me echoing a number of the recommendations made by my colleagues here at the table.

[Translation]

I would first like to point out, with respect to the comments made by railway industry representatives regarding the tax system, that it is important to understand the implications of any action that may be taken in that area.

There are two issues for an industry such as ours. The forest industry is in fact the largest user of Canada's transportation system, if you include the railway, trucking and air transportation components of that system.

Transportation costs account for approximately 15 per cent of our industry's costs, depending on the company. So, you can clearly see the importance of these recommendations for our sector. One of our messages to you today is to not look at the tax system sector by sector, but rather to have a clear understanding of our links to other industrial sectors both in the manufacturing and services industries.

[English]

One of our key concerns about the current tax system is that it tends to exacerbate rather than moderate the swings in profitability of our member companies over the price cycle. It's no news to anybody that our industry is very cyclical. What concerns us is that this cyclicality is not helped but rather hindered by the tax system we have.

The trend by governments, particularly federal and provincial governments, to rely increasingly on non-income-sensitive taxes such as capital taxes, payroll taxes and a number of various minimal taxes has undermined other very positive features of the tax system. I'm thinking here of issues like loss transfers and carry-backs and carry-forwards, which were initially designed to help companies smooth out the after-tax cashflows.

What does that result in? It results in industry having to pay huge amounts of tax, even in years when we incur very large losses. I'll give you the example of 1991, when the forest industry accumulated losses of $2.5 billion, yet that year our payments to governments were $1.5 billion. If you add the loss plus the taxes paid, you can see how it added up to an amount of money that in the end was not available for further investment.

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My colleague from Stentor made the allusion to the R and D sector. Certainly for us, that has a result on both our R and D expenditures and our silviculture expenditures. Obviously, those are also influenced by the various cycles we go through.

Amongst other things, this also has repercussions on our ability to raise capital and our ability to raise capital at an interest rate, if you like, or a cost that is affordable in the sense that it will give the return to our shareholders that they've been accustomed to.

The second major area of concern we have - and again, this was alluded to earlier - is the cost of complying with the Canadian tax laws. This is no small cost. We were looking for examples to bring to you today. One of our member companies with a very simple structure, with four entities, has a file form of 1,100 pages. We don't think that's the way it should be. We don't understand why it should be 1,100 pages.

We have another member company - mind you, it has 70 operating companies, maybe a bit more than it should have - that, when we asked them to come up with a number in terms of their filing, is still counting. They didn't have time to actually go back and get them all out and count them. We don't think that's the way it should be in terms of compliance.

The other issue we have is in terms of changing tax laws. Not only do you need to have experts all the time in even our smaller companies, but those people also have to be on their toes all the time to try to figure out whether something has changed or not, or whether a recent ruling would then have Revenue Canada, say, go to the courts and actually try to get some of those changes legislated at that point in time.

The other cost - and I guess it's a bit of a running joke - is to have those auditors sitting in your offices forever. Some of our human resources people are just about to build pensions for them. They sit there for months and months at a time. As well, in terms of some of the audits - again, reference was made to this - when you have some tax issues still bringing us problems, and if you have that amount of time taken for audits and you go through transactions, either purchases or sales, you can just imagine the kind of additional paperwork it requires. At this point in time - and we checked on that as late as yesterday - we still have some of our companies being audited for their 1990 and earlier tax returns. That's just not the way you want to do business.

Again, the uncertainty doesn't help generally, not only in terms of unresolved cases but also in terms of changes that can be made retroactively to these laws.

Let me come to my recommendations. The first one would advocate that the government reverse the trend to non-income-sensitive taxes and consider their replacement with taxes that would better reflect a company's cashflow and ability to pay.

Our second recommendation echoes one made by my colleague from Stentor. It is about allowing the filing of consolidated returns. Again, here we have enormous amounts of paperwork directed only at making sure we can entertain those very complicated structures that have been put in place because, amongst other things, there is no harmonization.

This leads me to my third recommendation, which is about the harmonization of taxes into a single system at the federal and provincial levels. I won't elaborate on that. We're an exporting industry, so for us the GST is not really the main problem, but it is a problem in that we still have to deal with that all through our suppliers, whether they be suppliers of transportation, communications or what have you.

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So we're right in the middle of actually having to pay all those costs that are incurred as part of the structure in terms of all those suppliers to us, and we still have to be out there in the global market. We are already in 100 countries, but if we want to continue to be out there and to bring in that kind of money to Canada's balance of trade, we really have to do better.

One last area would be what I would call ``customer service orientation''. We do recognize that there have been some improvements here, but still we're not there. This is still not a customer-oriented department. We have to do better than that. The law system presumes everybody innocent until proven guilty, but I think some of the people at Revenue Canada might want to read that over again, because that's certainly not the way they are actually going at some of the audits at this point in time.

Finally, the overriding concern we have is to ensure... And you have not heard me talk about specific rates. We purposely didn't mention that. Our issue here is one of international competitiveness. That's really the angle that should be taken when looking at this whole restructuring, not one particular rate or another.

When we look at our bottom line, we look at federal income tax, provincial, personal income tax, stumpage fees. We also look at the additional costs that will be incurred as part of the privatization of some of the government services. That's really where our objectives should be, not in specifics. That's why we didn't come with specific recommendations or specific rates but rather to make sure that whatever decisions are taken, the whole framework of thinking is going to be around international competitiveness.

Thank you, Mr. Chairman.

[Translation]

The Chairman: Thank you very much, Ms Lachapelle.

I would ask Mr. Francis Montreuil of the Université du Québec à Montréal to please proceed.

Mr. Francis Montreuil (Professor, Department of Accounting, Université du Québec à Montréal): Thank you, Mr. Peterson.

Finance Minister Martin stated a few months back that everyone, including large corporations, had to do their share in terms of the overall tax effort.

Based on the testimony I've just heard, it would seem that some corporations are already doing quite a bit more than their share. At the same time, however, there is a need to look at business taxation from a broader perspective than simply the compliance costs engendered by a variety of tax systems.

Last December, the International Monetary Fund recommended that the federal government increase corporate taxes, even though the IMF is not generally in the habit of recommending higher corporate taxes. However, after reviewing the overall Canadian tax system, the cuts already made and tax increases introduced in recent years, it noted that there was still some room to increase the tax burden of large corporations and businesses in general.

The study seems to suggest that in relation to the Gross Domestic Product, the Canadian corporate tax burden is slightly lower than in the United States. So, perhaps we should be looking at whether this could be a means of improving Canadians' job prospects.

Also, Statistics Canada which, to my knowledge, is not a political organization, published a study a few years back that may already have been discussed and that indicated that government deficits in 1975 and in the early 1990s were due in great part to preferential tax treatment and tax benefits made available to Canadian businesses, both large and small. Those deficits were thus not the result of higher social program costs. At the same time, there is no point in revisiting the past bent on revenge; we should instead be trying to avoid repeating past mistakes.

The business community is critical of Canada's high level of indebtedness. Here I am not talking about annual deficits, which are already high, but of our accumulated debt and the interest payments that must be made every year. It deplores the fact that this adversely affects Canada's competitiveness. So, perhaps we should consider reducing or even abolishing certain tax privileges.

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In the early 1980s, a group of researchers made a comparative study of the tax systems of the United States, Great Britain, West Germany and Sweden. At the time, Great Britain had a 100 per cent capital cost allowance for equipment in the year of purchase.

Researchers compared two specific aspects of the various systems. They looked at the degree of uniformity of marginal tax rates on capital using 81 different assumptions, depending on who was making the investment, what the money was being invested in - for instance, real property, inventory or equipment - the source of the funds, and so forth.

They noted that Great Britain, at 3.8 per cent, had the lowest marginal effective tax rate of the four countries. In West Germany, the rate was 48 per cent; even though it had the highest marginal effective tax rate, it was also the country where they found the greatest uniformity across the81 different assumptions used in the economic model.

They also noted that the rate of economic growth was highest in Germany, where tax rates were not only the highest but the most consistent. Under the circumstances, the high degree of uniformity of capital tax rates meant that there was very little preferential tax treatment from one economic sector to another, yet at the same time the country enjoyed high economic growth.

Both the Canadian government and the governments of the vast majority of industrialized nations decided to move in that direction and thus to abolish preferential tax measures, broaden the tax base and lower corporate tax rates.

The 1988 reform did yield some good results despite being revenue neutral. It did not, however, allow the government to increase tax revenues coming from the business sector. So, preferential tax measures were abolished, but tax rates were also lowered. At the same time, during the 1970s and 1980s, the share of tax revenues coming from the corporate sector was steadily decreasing.

As recommended by the International Monetary Fund, should we not now consider the possibility of a slight increase in the corporate tax burden? Again, the 1987 reform was completely tax neutral. Tax privileges were abolished, but corporate taxes were also substantially decreased.

The 1992 budget represented a step, but in the wrong direction. With a view to an efficient economy, where no particular industry segment would receive preferential treatment in relation to another, and where the ultimate goal would be relatively consistent tax treatment across all sectors, the government took a step in the wrong direction. It increased the depreciation rate for manufacturing and processing equipment from 25 to 30 per cent, and raised tax credits for manufacturing and processing profits to 7 per cent.

It may well be time to consider whether these measures are really effective ways of ensuring the highest possible level of economic growth and employment in Canada.

There are some preferential tax measures that have never made sense to me and that I would like to mention briefly so that you can give them some thought.

I have never understood the logic of taxing three quarters of capital gains. Nor have I ever understood the logic of a $500,000 capital gains exemption. The many tax experts I know and who teach at the university with me have all told me that these measures make absolutely no sense to them either.

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A paper was recently published by the Institute for Policy Analysis following a study carried out jointly with the Department of Finance. Alain Dubuc has described this measure as a terrible gaffe, one that is costing billions of dollars. The study I refer to showed that this tax measure had in no way fostered either investment or risk-taking. It was considered to be completely unfair, as it benefitted only the wealthiest taxpayers. Furthermore, it had absolutely no impact in terms of job creation or economic stimulation. I thus have a difficult time understanding how a 75 per cent capital gains tax could possibly benefit the economy.

We are not currently experiencing a boom as far as our tax revenues are concerned; we have some problems in that area, although they are not insurmountable. Over the course of the next few years, however, we should be trying to identify ways of bringing our annual deficits down as quickly as possible, after which we can start to pay down the debt. The business community should applaud any initiative that would allow us to move in that direction.

As for the depreciation rate and the comments that have been made here today, I want to state that I approach these issues from the perspective of the economy as a whole. Should we, for tax purposes, be allowing businesses to depreciate the cost of their investments more quickly than what accounting principles would allow? Why permit businesses to charge as an expense, for tax purposes, the cost of an investment or a machine that will last 20 or 30 years? Why depreciate that expense over four, five, six or seven years? If the equipment is going to last 20 or 25 years, logically the tax system should provide for the cost of that equipment to be depreciated over its entire useful life.

Although I was not present either yesterday or this morning, I have been told of suggestions that the current threshold below which a small business is now taxed at a lower rate be raised.

At the present time, the first $200,000 of an active business' income is taxed at a rate of 20 per cent. Tax experts tell me that they are appalled at the number of professionals who have decided to set up their own consulting or other type of business, not in their own name, but as a joint stock company. Such individuals thus take advantage of a provision whereby the first $200,000 of a business' income are taxed at a rate of 20 per cent. Thus, as long as the money remains in the company, they can defer approximately 33 per cent of the tax they would normally have to pay had they earned that money directly.

This particular tax measure is costing the government some $2 billion a year. If we are looking at business taxation, should we not consider revisiting that measure? Do we really want to assist consultants who earn a lot of money by allowing them to be taxed at a rate of only 20 per cent on their first $200,000 of income?

I am well aware of the need to integrate corporate and shareholder tax in the case of small business corporations. The dividend gross-up and the dividend tax credit are the mechanisms that allow us to achieve that result in the latters' case with respect to the first $200,000 of business income and investment income, but as far as large corporations are concerned...

I recently read a paper on the competitiveness of the Canadian tax system in which Robert Couzin, a leading tax expert in my view, suggested that the dividend tax credit be abolished. Indeed, that subsidy may well not be appropriate in the context of market globalization, as businesses should be able to obtain financing in many different parts of the world.

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If financing is indeed available all over the world, it is important to realize that neither tax-exempt institutions that receive dividends nor foreign investors will be in a position to take advantage of the tax credit. So, it might also be a good idea to consider revisiting the dividend tax credit mechanism.

Thank you.

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

We will begin the questioning with Mr. Loubier.

Mr. Loubier (Saint-Hyacinthe - Bagot): Welcome to the Standing Committee on Finance and let me begin by thanking all of you for accepting our invitation. I have found your presentations most interesting. I would like to begin with two quick questions - the first to Ms Lachapelle, and the second to Mr. Montreuil.

Ms Lachapelle, you stated in your conclusion that you would like to see federal and provincial taxes harmonized into a single system in the future. Do you support the Liberal government's proposed initiative, which involves establishing a national revenue commission that would be responsible for collecting all corporate and personal income taxes here in Canada?

Ms Lachapelle: I am not familiar with the commission you refer to and thus am not able to answer that question. However, I would point out that my comments with respect to harmonization referred to provincial and federal taxes, and not necessarily the entire taxation system.

Mr. Loubier: So, you would be in favour of the reform proposed by the government and, in particular, the Minister of Revenue, Mrs. Stewart, aimed at establishing a national revenue commission that would gradually take over the responsibility of levying all forms of business and personal taxation, including income tax, thus gradually removing the provinces' ability to levy taxes within their own borders. In the name of efficiency, this responsibility would be transferred to the new federal commission.

Ms Lachapelle: I am afraid I am not sufficiently familiar with the proposal to voice an opinion. Our recommendations basically concerned two levels of government - first, in terms of tax harmonization and, second, regarding the possibility of filing consolidated returns. That is the perspective from which we have looked at these issues, and it does not necessarily have anything to do with federal and provincial jurisdiction. We have not yet had an opportunity to examine the implications of such a commission for our industry.

Mr. Loubier: Then I guess I should address this question to the Chairman. Is the proposal to establish a national revenue commission not intended, in the name of greater efficiency, to take away the Quebec government's future ability to levy taxes within its own borders? Is that not the proposal that is now on the table? That is precisely what we have been talking about and what Liberal members' questions have been suggesting over the past two days. Correct?

Is the suggestion that in future, the government of Quebec, for instance, no longer have the right to levy any form of taxation within its borders and that a federal entity take over this responsibility and thus be able to decide on the allocation and redistribution of tax revenues to the government of Quebec?

The Chairman: As you well know, discussions are currently underway and the provinces will be in a position to make their own decisions with respect to not only tax harmonization but administration as well. We heard one witness from Alberta say this morning that a single administrative authority, representing both the provinces and the federal government, might be desirable.

Mr. Loubier: So, you are suggesting that the government of Quebec abandon its right to levy taxes within its borders and relinquish its fiscal autonomy to a federal organization - a national revenue commission - in the name of efficiency. I believe I understand exactly what is being suggested.

The Chairman: As you well know, the government of Quebec is perfectly capable of protecting its sovereignty in the area of tax administration. If the men and women of Quebec want there to be two separate authorities and are prepared to accept the complexity and the costs that go along with that, so be it. It will be their decision.

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Mr. Loubier: You must admit you have to be a little warped to think that the government of Quebec and the men and women of Quebec, who fought long and hard to achieve the kind of fiscal autonomy they now enjoy, through the efforts of Duplessis and especially Jean Lesage in 1964, would relinquish that fiscal autonomy without so much as a whimper and accept the kind of demagogic arguments about dual administration that you have just made.

The Chairman: I am not prepared to get involved in this kind of discussion with you,Mr. Loubier. You can play politics wherever you want and try to create a country...

Mr. Loubier: I have a question for Mr. Montreuil.

The Chairman: Excuse me. You can pursue the independence option for the province of Quebec. That is your choice.

Mr. Loubier: Yes. Every time we talk about real issues, about proposals that aren't sugarcoated, and we remind you of your centralist designs and your desire to keep Quebec under your thumb, it hits home and you start making these kinds of demagogic arguments.

I have a question for Mr. Montreuil. You referred earlier to a comparative study that looked at the uniformity of taxation rates and the effect of such rates on economic growth and employment. I would like you to give us a little more information about what appears to be a very interesting study. Perhaps it could be the starting point for a real review of the tax system, and not the kind of cosmetic review that seems to interest the government. I did not really understand the correlation between uniform tax rates and economic growth.

Mr. Montreuil: The study I referred to, which was done initially by King and Fullerton, was taken up again some years later by four researchers who used the same model.

They set out to measure the effective taxation rate in each sector and essentially demonstrated, using 81 different capital tax assumptions - we could invite the representatives of 81 different economic sectors to have a seat at this table - that the greater the uniformity of tax rates among various groups or industry segments in a given country - in other words, the smaller the gap between the tax burden of one type of industry and that of another - the more positive the impact on economic growth.

Indeed, they demonstrated that a high tax rate coupled with a high degree of uniformity was not an impediment to economic growth.

This study goes back to the 1980s, to a time when there was no iron curtain separating OECD countries. I freely admit there was probably less free trade then than there is now in 1996, and that is a factor that probably shouldn't be ignored; however, countries were trading, and Germany's high level of taxation in no way prevented it from being competitive on world markets.

Mr. Loubier: And what would the implications of this kind of reform be for the federal tax system be? What are the implications of those findings?

Mr. Montreuil: Well, it is clear that a business that uses a great deal of equipment and can benefit from tax measures in this area - such as an accelerated rate of depreciation that is not linked to the useful life of the equipment - has a definite advantage over another business that uses no capital or equipment. What is needed is a determination of net income and taxable income for tax purposes that is roughly comparable from one type of business to another.

That involves abolishing certain tax measures and especially those provisions of the Tax Act that give preferential treatment to a specific sector. Obviously people operating in that sector may be able to bring forward good arguments in support of such measures and even convince the government to afford them that kind of preferential treatment.

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But a problem arises when a great many different industries make such demands on government; the tax benefit each is receiving may then be of less value and thus less effective.

If a single industry is benefitting from a tax advantage, that industry is extremely competitive in relation to the rest of the economy. However, if a whole group of industries have access to tax advantages, it is the entire economy that suffers.

The Chairman: Thank you, Mr. Loubier.

[English]

Mr. Grubel (Capilano - Howe Sound): I thank you very much for being here. The comments are very much appreciated. They provide information and I think there's strong consensus with the two other sessions we've had in the last day and a half.

I would like to raise a rather different issue, a rather radical one, partly for the benefit ofMr. Lynch, who is here. You all know the slogan that corporations don't pay any taxes; people do. Economists are considerably divided over the incidence of corporate income tax, whether in fact it's passed on through higher prices of consumer goods, so therefore consumers pay; or whether it's passed on through greater unemployment or lower wages, so workers do; or to what extent it is passed on to the stockholders, which is what some ideologues like to believe, that it really falls on so-called capitalists. That goes back to the 19th-century division between capital and labour classes.

In your own judgment, assume for a moment, Mr. Pickford, that the government raised the corporate income tax in Canada and in the United States, everywhere, by 50%. What would your company do? Would it simply accept the lower return on the invested equity capital, when with the 8% return on government bonds staying the same it would be much more profitable to put it into bonds than to continue investment? What do you think the companies in your Stentor group would do if tomorrow the corporate tax were raised the way Mr. Montreuil would like us to?

Mr. Pickford: Perhaps you've led me to the answer to that. I'm not an economist; I'm an accountant. But my best judgment would be that to the extent that taxes were raised around the world - and I think that is an important issue, because a lot of our discussion here today has been about international competitiveness and where Canada sits in that - clearly if taxes went up, prices would go up, in my view.

Mr. Grubel: Prices would go up, so consumers -

Mr. Pickford: Ultimately net income would get back to where it had been and the shareholder's return on his equity would start to bounce off again.

Mr. Grubel: According to your answer, then, the suggestions being made by a lot of people who say ``raise taxes'' is that the stockholders aren't paying it. It's really the average Canadian who consumes the product who is paying the tax.

What we just said about increasing tax, of course, could also be applied if yesterday we had zero corporate income tax and now suddenly we have 20% or 30% or whatever the rate is. Your analysis would suggest that it is really all one big illusion that the corporations are paying the tax.

I conclude from this, as one radical conclusion, Professor Lynch, why not get rid of the corporate income tax? If we do that, we will have a lowering of prices that consumers pay. Their income will go up. They will be able to pay more, etc., etc. The earners of corporate dividends would have higher corporate dividends. They could possibly pay more. It would come to the same thing, because people are somehow paying it. Can you imagine all the wonderful simplifications we could have in corporate income tax?

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If I may, Mr. Chairman, I would love to have one other expert from people who are right in the middle of it, just as an experiment, obviously without knowing definitely. If tomorrow Canada imposed a 50% increase in the corporate tax rate, leaving everything else the same, who would end up paying it?

Mr. Lynch: That type of tax increase would have to be passed on to the customers. But we also have to remember that with income taxes, in particular with the railway industry, there are different forms of tax - commodity taxes, fuel taxes, property taxes - paid to different levels of government. Measuring the amount of tax that a particular corporation pays really involves looking at all those forms of taxation.

But you raise a very good point. The fact is that all of us are really market-driven. We have to look at what our competitors are doing and compete with them.

Mr. Grubel: As an academic many years ago, I wrote a paper studying a national input-output table in order to estimate the effective rates of protection offered by tariffs. Tariffs that are put on inputs, of course, squeeze the margin of the companies that use these inputs. The innovation in my calculations was that I said excise taxes of the sort you are talking about act exactly like the tariffs; therefore, they often put at serious disadvantage the value-added room available to certain industries, especially those selling in internationally competitive markets. That's the story exactly as you are telling it, and it is absolutely correct.

The idea that we would get rid of the corporate income tax altogether, forget about all these accounting nightmares, and if the profits go up, well, the people who own the dividends would pay the taxes - would that be a good solution?

The Chairman: Ms Lachapelle.

[Translation]

Ms Lachapelle: One of the basic assumptions you have mentioned does not necessarily hold true, and certainly would not in the case of our industry. You are assuming that consumers would automatically absorb the cost of a corporate tax increase of about 50 per cent. In a number of major industries, including the mining industry and our own, that would definitely not be the case.

Of course, everyone has a strong interest in the rocketing price of pulp and newsprint, for instance. And yet if you look at current prices in relation to what they were last year, you will see that they have actually dropped by about 60 per cent. So, that part of your assumption is not necessarily accurate. And what happens when you're competing throughout the world, as we are in a100 different countries?

We are suffering substantial losses; money will not necessarily go into shareholders' pockets and price increases will not necessarily be passed on. I agree that the situation could be different depending on the price elasticity of certain industries or services. However, you certainly won't find that kind of price elasticity in many resource industries.

[English]

Mr. Grubel: I fully agree with you. We heard this yesterday. Clearly mining, forestry, and maybe even railroads are price-takers, so you can pass it on. Then in the short run your stockholders will get lower rates of return, but in the longer run, where are you going to get your capital?

Ms Lachapelle: Well, maybe we won't get any; that's the answer.

Mr. Grubel: That's the point - you're not going to get any. So in the end the question is who pays. If the industry shrinks we have unemployment. Isn't it true? The industry shrinks; it does not have the capital to provide the jobs in the forestry sector to produce the product you are selling at world market prices. That would be true.

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So in response to some of the questions raised continuously by my colleague at every session, we are here to hear how our taxation system is impinging on unemployment. Well, here we have the answer. We have some industries that are in a position in which they can raise the prices and the consumers pay the taxes. Well, the consumers are poorer. They pay lower taxes.

On the other hand, in some industries that are price takers, we have the incidence falling on capital. But capitalists around the world have so many opportunities, that they're not going to just take lower taxes in Canada, they're just going to take their money elsewhere, including maybe government bonds. Therefore, we get less investment, a smaller capital stock, and lower productivity for labour. If they insist on the high wages they had before, we get unemployment, etc.

I wanted to put this analysis into the record, especially in response to the concern of Professor Montreuil and several other people on the committee over fair shares. What is a fair share? It is a very relevant question if in fact you try to make it fair. If you raise the taxes, you are simply really passing it on to some other people who are suffering. That's because corporations are just legal entities; they are not individuals who would be suffering from those increases in taxes over anything but the short run.

I thank you, Mr. Chairman, for allowing me to ask such radical, out-of-the-line, and other-world questions.

The Chairman: Thank you, Mr. Grubel. Mr. St. Denis, please.

Mr. St. Denis (Algoma): Thank you, Mr. Chairman. And, Mr. Grubel, you're allowed that.

Thank you for being here. I have a short question and then a little bit of a longer question.

The first question is to CN, Mr. Lynch. You mentioned the tax consolidation and corporate-loss transfer on page 15. You mentioned that maybe there would an early, initial year's cost to government for the consolidation of returns in the neighbourhood of $300 million to $400 million. Is that just for your company, or is that your estimate for all corporations?

Mr. Lynch: No, that was for all corporations. In fact that was taken from the discussion paper put out by the Department of Finance in the 1980s.

Mr. St. Denis: Okay, that's fair. Thank you. I just wanted to clarify that.

I would like to ask Ms Lachapelle a question, if I may. In my riding of Algoma I have E.B. Eddy represented in Espanola, so I try to stay familiar with pulp and paper issues. You mentioned in your summary that the tax system unnecessarily exacerbates industry cyclicality. Yes, the tax system stays somewhat constant, while the industry goes up and down, but is there a way around that? There would be other industries that would be cyclical as well. I can think of agriculture, possibly, and tourism. Maybe most sectors would have a certain degree of cyclicality.

I'm wondering if there was something unique about the pulp and paper industry. Whether that was the case or not, is there something that can be done to deal with the cyclicality vis-à-vis the tax system?

Ms Lachapelle: Yes. Our intention was not to mention here that we're unique. We just seem to have cycles that will swing more up and down than many other industries. But many others do have, I would say, smoother cycles than the ones we have.

The intention here is to try to not have a taxation system render this worse.

Mr. St. Denis: So as to not amplify the highs and lows.

Ms Lachapelle: That's right. Because when you're literally at the bottom of a cycle, and in addition you have to pay all those taxes that are on your base rather than on cashflow, that's where you're having a problem.

It's not only for us. We believe that for a number of cyclical industries, if the taxation system was based more on a cashflow basis rather than the capital use and some sort of a baseline that stays there, then we think that would give us a bit of leeway in terms of the cyclicality. We think it would help.

Mr. St. Denis: Okay, thank you. I'll pass, Mr. Chairman, to the others.

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The Chairman: Thank you, Mr. St. Denis.

[Translation]

Mr. Bélisle, you have the floor.

Mr. Bélisle (La Prairie): Mr. Montreuil, you referred to a study using 81 separate assumptions in relation to the marginal corporate tax rate and gave some interesting examples. I believe in the final analysis, very few tax measures have a uniform or neutral impact on all economic sectors, unless we were to introduce a business transfer tax or a tax on business income.

Under the circumstances, what would you suggest we do to achieve a uniform or at least more neutral impact on all industrial sectors?

Mr. Montreuil: Well, as you know, I don't have a crystal ball. The purpose of this exercise, as I see it, is really to look at income tax, one of the taxes with the most preferential tax measures. One thing that strikes me is that every time serious studies are made of a tax privilege or significant tax shelter, the findings are devastating. The fact is these kinds of tax measures never meet their intended goals.

Ms Lachapelle talked about a tax on cash flows. If we are taking the trouble to review our income tax system and the measures associated with it, why not seize the opportunity to look at some other options?

We are in a difficult position. Our level of indebtedness is costing us a fortune. Over the next few years, we will be asked to make further budget cuts. I am well aware that the committee's mandate is not to look at personal income tax. However, if we do nothing, we can certainly expect to see services to the public cut back over the next few years.

Perhaps we should take the time now to see what can be done about business taxation. I would not be opposed to an entirely different system. Some institutions believe that Canada could afford to slightly increase the corporate tax burden. We are obviously not talking about a 50 per cent increase in the corporate tax rate.

As for the possibility of decreasing corporate tax rates, if you have read David Stockman's book, The Triumph of Politics: How the Reagan Revolution Failed, that talks about the Reagan Revolution in the United States, you will know not to expect much of a move to dramatically reduce the amount of income tax paid by corporations or the richest members of society.

Such a move did not yield the desired results in the U.S., but led instead to the deficit problems that we have seen since. As I say, I don't have a crystal ball; I think we have to take the time to reopen the books and take another look at this issue. We may not be prepared to make radical changes. We have, after all, had to deal with the introduction of the GST. People may not be willing to put up with new taxes.

Perhaps we could take this opportunity to revisit the provisions of the Income Tax Act and possibly consider slightly increasing the tax burden of Canadian businesses without in any way putting them at a competitive disadvantage in relation to American businesses. The measures I spoke of are some of the many options that could be looked at.

Finally, I again want to mention the provision whereby the first $200,000 of business income is taxed at a rate of 20 per cent. Few people can claim to earn $200,000 and only pay 20 per cent in taxes. I recognize, though, that that money is not actually available to them and that they must leave it in the business.

Many tax experts working in small offices tell me they want to leave the tax business, that they are fed up, that fraud is widespread and that small businesses are not paying their taxes. The statistics we see relate to businesses who have reported income. I am not the only one to have heard of this; the Auditor General of Canada himself has said that fraud poses a significant problem.

Mr. Bélisle: Monsieur Chairman, I have one last question for Ms Lachapelle.

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Ms Lachapelle, you have proposed a series of measures and talked about the need to reverse the current trend by getting rid of non-income sensitive taxes, as well as of two other specific measures intended to achieve harmonization of federal and provincial taxes.

If such measures were to result in a revenue shortfall, would you be in favour of a business transfer tax? You said earlier that the GST was not the main problem. What do you think of the idea of an increased VAT-type tax or business transfer tax as a means of making up the revenue shortfall that could be a potential consequence of the measures you have proposed?

Ms Lachapelle: Could you explain how these taxes would work?

Mr. Bélisle: Well, when you were commenting earlier on Mr. Montreuil's suggestions, you talked about a possible tax on corporate cash flows or commercial transactions between businesses. That essentially brings us back to revenues. Would you be in favour of higher taxes on business income or business profits as a means of making up the revenue shortfall that might result from the measures you're proposing?

Ms Lachapelle: We are proposing neither an increase nor a decrease. We were really only talking about taxes, not on inputs used in production, but rather on income. Of course, if we were given a tax reduction, that would be great.

We did not refer to actual levels; we simply indicated that current tax methods adversely affect our industry which is cyclical in nature. There may be other measures as well that would not be based on total inputs, in perpetuity, but rather on income, like the business transfer tax you mentioned.

But I would need further clarification of what that might involve. Our comments were related to business income as a whole, as opposed to individual transactions which are already subject, among other things, to GST.

Mr. Bélisle: But if we reduced taxes on the inputs you referred to, the federal government would end up with a revenue shortfall. In that case, would you agree to increased taxes on output, on business income? We would have to find some way to make up the shortfall that might result from a lower input tax. The government would have to have a way of collecting an equal amount of revenue on the output or income side. So, would you be in favour of higher income tax?

Ms Lachapelle: As we see it, we are not here to talk about possibly agreeing to a tax reduction or increase, but rather about a new way of levying taxes. If, in order to balance its income, the government has to make adjustments one way or the other, we will support those measures.

Mr. Bélisle: Fine, thank you.

The Chairman: Thank you, Mr. Bélisle.

Mrs. Brushett.

[English]

Mrs. Brushett (Cumberland - Colchester): Thank you, Mr. Chairman.

Before I ask my question, I would like to share a little story with our railway men in particular. In my constituency about two weeks ago, I had a telephone call - complaint, actually - from one of my constituents about the number of trains going through in the middle of the night. It was really wreaking havoc with her motel business.

I suggested that it was a nice problem to have, really, because it meant that the port of Halifax was booming. All those trains rolling through Truro and Amherst down to Montreal were actually creating jobs. That was really a good news complaint. My suggestion was that perhaps she could serve a drink of brandy before everybody went to bed so that they might have a better night's sleep and at the same time keep everybody employed.

One thing that seems to have come out loud and clear from this afternoon and from the other sessions on these last two days of hearings is that a tax consolidation would be beneficial to this country.

My constituents have said to me that if I could give Canada a present for the 21st century to bring in the new century, perhaps we could have a modern taxation system that would reflect our movement into NAFTA and into the great, tremendous amount of export trade we're doing today.

As we talk about these things - and I would direct this to Mr. Pickford, perhaps, or to anyone else who wishes to contribute - it seems to me we've made agreements where we're even talking about building truck routes across North America to expedite that trade, and train traffic, much more quickly. We're doing all kinds of things to make exports work, and now it's time to look at the finances and the tax structure in this country to parallel, at the same speed, how we're making these other trade agreements, keeping it moving at a pace that suits the 21st century.

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I want to hear your comments on whether we could devise a policy that reflects, in the regulations in this country dealing with consolidated tax, corporate tax - the entire ball of wax of taxation for Canada - the message that this is a safe place to live, a good place to invest your money, with skilled workers. How would this translate into jobs? Would it do what we are doing now with exports and goods? Could we do that with capital if we got away from a 10-year timeframe of auditing, with Revenue people having to camp in corporate offices, the private sector paying the heat and light and overhead? How could we expedite that so that we could bring in line financially in this country revenue and finance parallel to what we're able to do in selling our goods and services abroad?

I'd like to have your comments, because I think that's a challenge for us in the next few years.

Mr. Pickford: I agree with you; I think it is a challenge. To a certain extent, some tax consolidation is permitted, because I think the Department of Finance, and through them Revenue Canada, believes it is appropriate. The difficulty I think a number of people have raised, both at this meeting and in other meetings you've attended, is that it is a very complicated thing to do. It takes tax rulings and a lot of effort to get it done.

It seems to us a tax consolidation would really put us into an international business climate, one that compares favourably certainly to the U.S. In the U.K., they have a similar type of system, as in many other countries we compete with around the world.

I agree with you. If we can do it, and if we can get the provinces on side - that has been one of the impediments to tax consolidation in the past - Canada could well advertise itself as a very sound place to invest. Not that it isn't today; this is just one of the other elements that makes it similar to the economic environment people deal with today in their own country. Instead of saying, oh God, if I go into Canada it will be that much more difficult, the rules I'll have to deal with will be that much more complicated, now I can go in there and deal with rules that are if not exactly the same as ours, at least similar.

One of the differences I think you'll find between U.S. companies and Canadian companies is that Canadian companies tend to have most of their assets in one single entity to the extent they can. Very often, they may well say they are not concerned about the legal liability exposure of their assets to liabilities of a new business there, whereas in the United States it is very common for a corporate group to have many corporations within that group, primarily because businesses, as they run in geographic locations, may have different financial risks to them, and are segregated into separate corporate entities, because they can consolidate all of them together for income tax purposes.

Mrs. Brushett: Are there any simple steps? How do we begin the process? We're starting here with these hearings and with the Mintz investigations and so on. I guess it's such a big ball of wax -

Mr. Pickford: It is a big ball of wax, but a lot of time was spent on it in the mid-1980s. Many people believed we were...I won't say ``close'' to consolidations, but they were at least starting down the path. I think the first step would be to get a lot of that information out again, to look at the reasons why there should be consolidations and why there should not, and really examine much more closely those impediments to consolidation and maybe step over the line a little bit to see if we can really make it work this time.

I think everybody at this table is in the international field to one extent or another. They're in running competition with people who can do it. Our competitors are finding ways, quite honestly, to take their losses back into the U.S., even losses that are incurred in Canada.

Mrs. Brushett: I see this as probably the key to everything we've heard in the last two days. We have to look at it competitively, and the jobs will then come. The other things will be a natural outflow.

Thank you very much.

Mr. Pickford: You're welcome.

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The Chairman: Mr. Grubel.

Mr. Grubel: I have a comment for Mr. Montreuil. When I said there would be all these adverse consequences if we raised the tax rate by 50%, I was implying that we would get all those benefits as a mirror image if we reduced the taxes by 50%.

On top of this, we heard how corporations around the world are so skilful in transferring their profits to nations where the rate is low. Can you imagine how much extra profit we would attract if our tax rate were lowered? Not only would we have lower prices, increased international competitiveness and more capital flowing into our industry, on top of that we would get all those phantom profits reported in Canada. We would end up with higher revenue.

I would say to Ms Brushett that if we did that, all the relatively little costs of conforming and all of that would be negligible relative to the benefits of lowering corporate income taxes.

I would like to propose this as a serious alternative. In this world we are a small enough country to do it so that we could benefit from all those things without having to fear that the Americans would follow suit to get even with us. The Japanese would come here; the Europeans would come here.

Another comment to Mr. Montreuil: if only we had the economic problems of the Americans caused by Mr. Reagan's lowering of taxes in the 1980s. Wouldn't it be nice to have an unemployment rate of 5% rather than 10%, which I think would follow if we lowered corporate tax rates? Wouldn't it be nice to have a steady growth rate without inflation that we are now enjoying?

This morning I heard an astounding story. I heard that Shell Canada has in its headquarters permanent residents from Revenue Canada who have sat there personally for between six and ten years, who do nothing but harass the rest of the accounting staff with requests for things to audit. As we know, work can always be found to fill in the time.

I would like some information from you people. Is this true? Do you also have in your companies, as permanent residents, auditors from Revenue Canada? These are on top of special audits made on occasions when there may actually be some disagreement over something or they want to get extra tough. What about the railroads? Do you have auditors sitting in the headquarters of CN and CP?

Mr. Finn: Yes, we have auditors, but not just federal auditors. We also have provincial auditors on our premises on an ongoing basis. You can imagine from a compliance point of view - we have Revenue Canada on our premises eight months of the year, I would say, and we also have every province present. A lot of time is spent on that.

In all due fairness, and I think Barry touched on this, Revenue Canada has made some effort with large audits to try to be as current as possible. That means that when they come in now, they don't audit four or five years in the past. They try to audit a shorter period. And they are a lot more receptive to submitting to tax managers and vice-presidents of taxation a business plan of their audit. So you can...I wouldn't use the term limit their audit, but you can limit their focus. Often these people come back every year, so they know the company.

To answer your question, it's gotten better than it used to be, but there is still a very strong presence of auditors in the major companies in Canada.

Mr. Grubel: I'm getting the time signal, but this is a very specific question. The way I understood it this morning was that there are essentially three offices set aside in the headquarters of Shell Canada that are permanently occupied by the same people sitting there year in and year out, sometimes for as long as six or ten years in a row. It's the same people. They put up their family pictures and everything else. Is this true in the railroad companies? Is this true in your company? Is this true?

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Ms Lachapelle: We do have some auditors and some of our member companies who would be present - I guess it was mentioned - sort of seven or eight months of the year. A couple of them would be there either on special audit or just on a permanent basis, literally. I'm not saying they're there for six or eight years. I don't know. All I know is that there are some permanent offices reserved for them on a quasi-permanent basis. It is true.

Mr. Pickford: I think we have very much the same situation. There is a separate office set aside. One of the concerns is because of the temporary move of our headquarters in Montreal. It was no longer going to be a separate office for the Quebec, Ontario and federal auditors. They would have to learn to share and live together. Hopefully they will be able to do that, because the move only happened a month or so ago.

We have to be a little bit careful. There may well be people who are there for five, six and seven years, but quite honestly, that's to the benefit of the company. It's not that they're there on a continuous basis, but at least it's the same person who is coming back to do the audit and who is familiar with company issues, as opposed to a new person coming in who has to relearn or begin the whole process of learning about the company. They spend a considerable amount of time with any large company, however.

The Chairman: Mr. Campbell.

Mr. Campbell (St. Paul's): Thank you, Mr. Chairman.

Mr. Pickford, while your microphone is still on, I'll turn to you first. I want to hearken back to something you said in your initial comments about decisions on investment being based on the array of taxes, among other things, that companies have to be concerned about.

I think I've got you right that you were very supportive of the harmonization effort. You pointedly said that provinces that are not harmonizing are at a competitive disadvantage to provinces that are harmonizing.

Do I take it from this that among the many factors you would consider in citing an investment in one province versus another is whether or not there is sales tax harmonization or a degree of harmonization? Would that be a fair statement?

Mr. Pickford: I think it's a fair statement. I wish we were in the position such that we could move quite as easily as that. What I'm much more concerned about is that customers may move from one province to another.

Call centres have been a centre of much concern recently. New Brunswick has been very active in moving call centres into the province. One of the advantages is that they had sales tax exemptions for that. Now they have a harmonized system. Fortunately for us, Ontario, just recently in its last budget, effectively exempted 1-800 and 1-88 numbers, which are the call centre types of numbers, from provincial sales tax. So that particular issue has gone away. I think it will be good for our business and quite honestly good for the business of our customers, as well.

Mr. Campbell: But what about in a general sense?

Mr. Pickford: In a general sense, with the extent to which there are opportunities to move to a province that has a harmonized system over one that does not, all things being equal, you would go to the harmonized area.

Mr. Campbell: Thank you.

[Translation]

I would ask Mr. Montreuil to clarify his comments, which I may have misunderstood. You referred to a report by the International Monetary Fund suggesting an increase in corporate taxes.

Mr. Montreuil: That's correct.

[English]

Mr. Campbell: I'm not sure that's correct, Mr. Montreuil. I think what they recommended, if you're referring to their normal consultations in their report on Canada, was to look back at 1991 at tax expenditures associated with direct business subsidies. They recommended that there could be some savings on some increase in revenues by cutting back on subsidies. They mentioned R and D and others in particular, which of course, since 1991, we have done.

Following the recommendations of this committee, the government is cutting those by almost two-thirds by the end of next year. I don't recall a recommendation - I have the report in front of me - suggesting any increase in corporate taxes.

Interestingly enough, they did recommend an increase in the GST at one point, further cuts in transfers to the provinces, and a bunch of other things that I don't think we want to get into here. But I don't see anywhere in the report a recommendation for an across-the-board increase in corporate rates.

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So I just want to give you a chance to clarify if what you meant was looking at tax expenditures vis-à-vis corporations and subsidies in particular, because that's what the report says.

[Translation]

Mr. Montreuil: My reading of the report was that the International Monetary Fund was suggesting that there is still room to increase corporate tax burden. Whether that burden is increased through higher rates or through lower tax credits and fewer tax subsidies is really not the issue here.

Mr. Campbell: But there is a big difference between the two.

Mr. Montreuil: In terms of system efficiency, yes. It was mentioned earlier that the system would be more efficient if it had fewer preferential tax measures. But in terms of tax revenues, can some segments of society or organizations do a little more, as Minister Martin has suggested? Are they really able to do more? Are some businesses able to increase their tax effort? The International Monetary Fund says they may well be in a position to do so.

[English]

Mr. Campbell: Then let's turn to that, now that we've clarified that they did not recommend an increase in rates. They recommended the possibility of an increase in revenue by ending certain subsidies, looking at the tax expenditure side of things. So I think we understand each other.

But then let's look at the greater burden you think some in society could absorb, particularly in the corporate sector. Did I understand you correctly that you were recommending an end to the special rate of tax on small business income?

[Translation]

Mr. Montreuil: I am not recommending that the deduction for small business be abolished. I am suggesting to the members of both this committee and the technical committee that they take a close look at the people who are benefitting from this tax measure, one that now costs the government some $2 billion. Not all small businesses are involved in production. There is a wide variety of scenarios.

Should we not reconsider the fact that each and every business that is now taking advantage of this deduction in relation to the first $200,000 is essentially receiving a $32,000 annual grant from the federal government? I really think we should look at this more closely.

[English]

Mr. Campbell: So you would end special treatment of family farms. You wouldn't give preferential rates on small businesses.

I'm not sure I understand exactly what you're recommending.

[Translation]

Mr. Montreuil: I think small business taxation should be put under a microscope. When I look at the $500,000 exemption and I see what society gained from it and what it cost, I have to ask myself who really benefitted. The fact is the ones benefitting are small businessmen and SME shareholders.

[English]

Mr. Campbell: And you'd say the same of family farms?

[Translation]

Mr. Montreuil: I know that agriculture is...

[English]

Mr. Campbell: That's different?

[Translation]

Mr. Montreuil: I see no difference between agriculture and transportation. It is possible to have a pan-Canadian vision.

Mr. Campbell: Some members of Parliament may not share your views in that regard.

Mr. Montreuil: Some of you may represent the farm sector, while others may represent capital-intensive industries; that did not prevent me from saying that we should perhaps take another look at the capital cost allowance. My comments were intended to stimulate discussion. If we really want to reduce the compliance costs associated with various taxes, we have to look at all these things.

Given Canada's current position as far as business is concerned, I think we would be taking a very narrow view of things if we were to so limit ourselves. Why not re-open the debate on other issues? I don't pretend to have an answer for everything. But these are things we have to look at.

[English]

Mr. Campbell: But if I understand your thesis... You spoke of the tremendous amount of fraud that you're aware of, or believe exists, people taking advantage, for instance, of the small business rate. What I find odd about your conclusion is that we'd somehow have less fraud and more revenue if we raised the rate. You are advocating higher rates across the board when I take your logic to its ultimate conclusion.

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[Translation]

Mr. Montreuil: Fifteen years ago, someone who wanted to get behind the wheel of his car and drive it when he was drunk could get away with it; that was not a concern for society. That type of attitude doesn't change after just one budget or with new social legislation. Those things may help, but the process takes years. I'm not the only one to be aware of the facts I have presented today with respect to business taxation; one has only to read the newspaper, peruse the Auditor General's reports or listen to what well-informed tax experts are saying about their own clients to be aware of them.

They certainly won't sit down in front of you and tell you all those things about their clients. But they do tell me privately that the current system does not work; they have direct knowledge of the underground economy and all the small business people who are not reporting their income. The government should be asking itself whether it isn't time to take a different approach and set a realistic goal of 10 to 15 years to change people's attitudes and bring them to understand that it's in their interest to ensure that everyone pays his fair share.

Perhaps you misunderstood me earlier. I did not link tax fraud to the issue of low rates of taxation on the first $200,000 of business income.

[English]

The Chairman: Thanks, Mr. Campbell.

[Translation]

If members have no further questions...

[English]

I would ask our witnesses to give a one-minute summary of what they really want us to take away from this meeting.

[Translation]

Let's begin with you, Professor Montreuil.

Mr. Montreuil: Thank you, Mr. Peterson.

The committee now has an opportunity to reflect on a variety of issues relating to business taxation. I believe it must consider revisiting certain provisions of the Income Tax Act that contribute to the complexity of the legislation, such as the one that provides for taxes to be paid on only three quarters of capital gains. Tax law contains an incredible number of complex rules. I think it would be well worth our while to re-examine them. Thank you.

The Chairman: Thank you, Professor Montreuil.

Lise Lachapelle.

Ms Lachapelle: I would just like to quickly run through our recommendations. First of all, we are proposing that as part of this new analysis of the tax system, other ways of taxing businesses be considered that would be based more on income than on a business' capital base.

[English]

We would also want to be allowed to file consolidated returns. We're very much in favour of the harmonization of federal and provincial taxes into a single system. We still feel there are some costs of compliance that can be eliminated. A better customer service orientation from the Department of National Revenue would always be welcomed by us.

But the overriding concept we want to leave behind is the one of always looking at this restructuring of the taxation system in terms of the international competitiveness of Canadian industry.

[Translation]

The Chairman: Thank you, Lise Lachapelle.

[English]

Barry Pickford.

Mr. Pickford: I'll repeat very briefly some of the issues, but I wanted to focus on one.

We believe that sales tax harmonization is important from a national point of view. Certainly the issue of R and D and how those rules are being interpreted is important to our companies, and I think to a number of companies, not just the Stentor companies alone. Tax consolidations, we believe, would be beneficial for the country.

But most importantly... We have circled around this. We have talked about tax rate changes, reductions, 50% increases perhaps. What I thought this was all about today was more looking at where Canada's tax rate is today and at least examining it from the point of view of whether there are reasons why it is the rate it is - that is, the fourth highest in the OECD world. Because of the complexities of our tax system today, we must file returns in multiple provinces and with the federal government. We must calculate income and capital differently for all of those jurisdictions. All of that has a cost. If that cost can be avoided, perhaps we can look at some kind of an income tax reduction, which I believe would be beneficial for all of us. Thank you.

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Mr. Lynch: What we'd like to leave behind with the committee is that we're not really asking for favouritism for the railway industry; we're really just asking for a level playing field with our major competitors, which are trucks and U.S. railroads. Canadian railways have been losing market share over the years. This is why we feel that a reduction in fuel tax rates similar to what's available in the U.S. and with CCA rates similar to what the trucking industry and the U.S. railroads have would help to create that level playing field.

The Chairman: Thank you very much, Mr. Lynch and Mr. Finn.

Our session this afternoon is the last of our audiences to look into the costs to corporations of our actual corporate tax system. I take away from this a theme of international competitiveness.

In terms of our railways, you've indicated that because our taxes are vastly higher than those in the United States, Canadian producers will actually turn to American railroads to ship their goods. We lose out not only through our railways, but through our ports as well, and in jobs.

This was the same as was presented to us by Lise Lachapelle on behalf of the pulp and paper industry. She said that where you locate is very often determined by the total, overall tax burden that you have to suffer.

We heard eloquent testimony about the need for tax consolidation and harmonization. In Canada, with fewer than 30 million people, we have a very complicated overall tax structure with ten different provinces, the federal government, and municipal taxes on top of that. Each of those jurisdictions imposes a number of different types of taxes, all of which require separate compliance costs and responding to different auditors and tax officials.

From what you've told us today and from what other witnesses have told us, I come away from these hearings wondering whether we are not totally overgoverned. Can't we, as a small nation, in terms of the size of our economy and population, be one of the leanest, most efficient, best, and user-friendly, in terms of the tax system we have to deal with every day? Why do we put this anchor around our necks and do it to ourselves in a way that affects jobs and increases the cost of doing business to businesses and individual taxpayers?

So I think this message has come through loud and clear, and I think it has been reinforced by you.

[Translation]

Some of you around this table would like to retain existing overlap and duplication for reasons of sovereignty. I believe a single system of administration and a single set of tax laws would be in the best interests of the men and women of both Quebec and Canada.

[English]

On behalf of members from all sides, I would like to thank you very much for your excellent presentations to us today. I know that they'll be of use to the technical committee when it makes its recommendations, which will come back before us.

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The next meeting of this finance committee will be here in Ottawa on September 16, when we will be considering the Bank Act. In the meantime, again, on behalf of all members, I thank our staff, our clerk, those from the House of Commons who have arranged for all of these facilities, and particularly our witnesses, who have made excellent presentations to us. I thank you very much.

The meeting is adjourned.

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