Second Reading, Bill C-32, An Act to implement certain provisions of the fall economic statement tabled in Parliament on November 3, 2022 and certain provisions of the budget tabled in Parliament on April 7, 2022
Honourable senators, I rise to speak to Bill C-32, an act to implement the Fall Economic Statement and certain provisions of the budget tabled in Parliament on April 7 of this year.
Bill C-32 is comprised of four parts. Part 1 proposes 21 amendments to the Income Tax Act. Part 2 proposes amendments to the Excise Tax Act and this year’s Budget Implementation Act. Part 3 proposes amendments to the Underused Housing Tax Act, which was enacted last June as part of Bill C-8. I spoke to Bill C-8 at second reading and again at third reading. Part 4 of the act proposes a number of other measures, including an act entitled “Framework Agreement on First Nation Land Management Act.” Senator Francis spoke to that portion of the bill last week. Part 4 also includes clauses on eliminating interest on federal student loans and apprenticeship loans.
The proposed changes to the Income Tax Act in Part 1 of this bill will have a significant impact on tax revenues. Some amendments will increase tax revenues for the government while other amendments will reduce tax revenues. Finance officials told us that the net impact of these amendments will increase tax revenues by $4.2 billion over six years.
Government revenues, and especially tax revenues, have increased significantly over the past three years. Total revenues have increased 33% over a three-year period, from $334 billion in 2019-20 to this year’s estimated revenue of $445 billion, or 10.4% annually on average.
I have excluded the two COVID years from my calculations, and have compared financial information from 2019-20, the last year before COVID, to the current fiscal year.
Personal tax revenues have increased 24% over the three-year period from $168 billion in 2019-20 to this year’s estimated revenue of $209 billion, or 7.5% annually on average.
Corporate tax revenues have increased 82% over the three-year period from $50 billion in 2019-20 to $91 billion this year. That averages out to 22% annually over the three years.
In summary, the most significant increase in government revenues over the past three years is corporate tax revenues.
In this bill, the government is proposing additional taxes on corporations, including the Canada Recovery Dividend, the additional tax on banks and life insurers and the tax on the buyback of shares.
The Canada Recovery Dividend is a one-time 15% tax on banks and life insurers. It is based on 2020 and 2021 taxable income. It will be imposed for the 2022 taxation year, and it will be paid in equal instalments over five years. At this time, we are told it is a one-time tax.
Government estimates that this tax will increase corporate tax revenues by $800 million annually beginning this fiscal year and the following four years for total revenues of $4 billion over five years.
The additional tax of 1.5% on the taxable income of banks and life insurer groups applies to taxation years that end after April 7, 2022. Government estimates that this tax will increase corporate tax revenues this fiscal year by $290 million and over $430 million annually in each of four subsequent years. Total estimated tax revenues over the five-year period is $2 billion.
I expect the tax increases of the Canada Recovery Dividend and the additional tax on banks and life insurers will be passed on to consumers, further burdening Canadians with increasing costs as they struggle with high inflation and increasing interest costs.
Effectively, the banks are being taxed but they are passing it on to the consumer, so the additional revenues the government is collecting are really coming from consumers.
Bill C-32 also imposes a 2% tax on the net value of all types of share buybacks of public corporations in Canada. The government has indicated that the details of the new tax will be announced in Budget 2023 and would become effective January 1, 2024. Although the details have yet to be announced, the government estimates that this tax on share buybacks will increase corporate tax revenues by $2 billion over five years and will, as the government states in its Fall Economic Statement, “. . . encourage them to reinvest their profits in workers and in Canada.” It’s ironic that government thinks it can encourage corporations to invest in this country by increasing their taxes.
Mr. Alex Gray from the Canadian Chamber of Commerce, in an interview with The Hill Times, said that the tax will do little to change how corporations invest their earnings. Instead, it sends a discouraging message to Canadian businesses. A similar view was expressed by Mr. John McKenzie, Chief Executive Officer of TMX Group, Canada’s largest stock exchange operator. Mr. Don Drummond, a former associate deputy minister of finance, also told The Hill Times that he disagrees with the proposed tax. He went on to say he does not know why governments meddle in the affairs of businesses.
I do not see how increasing taxes on corporations will encourage them to invest in Canada. I think it would have the opposite effect.
Honourable senators, government spending has increased significantly over the past several years. For the four years between 2016 and 2020, which was the last year before the pandemic, government spending increased 5%, 6.6%, 5.6% and 7.4%, respectively. Compare those increases to this year. Expenditures in 2020, which was the last year before the pandemic, were $363 billion. This year, so far, the government expects to spend $472 billion, as indicated in the Fall Economic Statement and Supplementary Estimates (B), and we’re only part way through the year yet.
In other words, government expenditures increased from $363 billion in 2019-20 to this year’s $472 billion over a three‑year period, an increase of 30%, which equates to an annual average increase of 9%. The expenditures for this year do not, as yet, include some major expenses, such as increases to the Canada Health Transfer and the Department of National Defence.
The Canada Health Transfer is the largest federal transfer to the provinces and territories, and helps pay for health care. It is expected to cost $47 billion this year, increasing to $58 billion in 2027-28.
But we all know our health care system is in crisis, and provincial and territorial premiers are asking for much more — $28 billion more. That far exceeds what is included in the government’s spending plans.
There is also a commitment to increase additional funding for the Department of National Defence for aircraft, ships, submarines, NATO and the modernization of NORAD.
They are also increasing the size of the public service, which has now grown to almost 400,000 members, as indicated in a recent report by the Parliamentary Budget Officer. We do not know what impact inflation will have on the salaries and benefits of its members, but it is expected to be significant.
While government is forecasting declining deficits over the next four years and a surplus in 2027-28 — the fifth year — I cannot see this happening given the spending patterns of this government and the forecast of a recession next year. In fact, the Fall Economic Statement indicates that tax revenues this year will increase by $37 billion more than the estimate in April’s budget. Rather than use that $37 billion to reduce the deficit, government actually spent $21 billion in additional expenditures and debt service charges, leaving only $16 billion to put toward the deficit.
Honourable senators, while increased taxation on corporations and individuals may be seen by the government as a source of revenue to pay for increasing expenditures, increased taxes can have a negative impact on the economy. Both individuals and corporations are mobile and can move to friendlier jurisdictions.
Since government expenditures exceed government revenue, the government has been taking on more and more debt to fund the shortfall. In my past speeches in the Senate, I have indicated how the cost of servicing the government’s debt is increasing. As estimates are refined with the release of each financial document, it is easy to see that interest costs are on a significantly upward trajectory. Despite warnings that additional debt poses the risk of significantly increasing debt servicing costs, the Minister of Finance has assured us on numerous occasions that the government can easily absorb the cost of the additional debt and that the interest on this debt will remain low.
In her 2021 budget speech, the Minister of Finance told us that, in today’s low interest rate environment, not only can we afford these investments, it would be short-sighted of us not to make them. She continued on to say that the government has issued an unprecedented level of long-term bonds at low interest rates to ensure Canada’s debt is sustainable and will not weigh on future generations.
The problem with her plan is that this government does not pay down its debt. It just replaces maturing debt with new debt, which may be financed at higher interest rates. Contrary to what she says, it does weigh on future generations because we are not paying down this debt. Rather, it will be transferred to future generations, and they will have to pay the interest costs — and pay off the debt.
With the increase in interest rates, we can now see the impact it is having on government expenditures. In November of 2020, just two years ago, the government told us that debt servicing costs this year would be $22 billion. In this fall’s economic statement, it has increased from the $22 billion to $35 billion, an increase of 60%. The government’s debt servicing cost is now one of its most expensive programs.
As I’ve already indicated, government revenues are not sufficient to pay for all of government spending, so the shortfall is borrowed. As a result, it is important to oversee government borrowing as there is a legislated ceiling for its debt.
Two years ago, the government amended the Borrowing Authority Act to increase its legislated debt ceiling from $1.168 trillion to $1.831 trillion as of March 31, 2024 — a 56% increase over a three-year period. It’s challenging for parliamentarians to track the current debt at a specific time because this information is not readily available. It is only disclosed in the Public Accounts of Canada. To obtain a more current number, one has to calculate it using the Public Accounts of Canada, monthly reports of The Fiscal Monitor and the financial statements of Crown corporations.
At March 31, 2015, the debt of the government was $918 billion. The most recent Public Accounts of Canada, as of March 31, 2022, indicate that the debt is now $1.5 trillion. Since March, it looks like the government has borrowed — and this is my estimate from looking at The Fiscal Monitor reports — another $10 billion. So government debt is now approaching $1.6 trillion, an increase of $640 billion since March of 2015.
The increase in debt servicing costs is not only attributable to rising interest rates; it is also attributable to a significant increase in government borrowings.
In its annual budget documents and fall economic statements, government provides updates on its borrowing strategies, but there is less information on what actually happened with the debt. So far, we have received two debt management strategies for this year telling us what will happen into the future. But as of today, there is no debt management report telling us what exactly has happened last year. Section 49 of the Financial Administration Act requires government to table its annual report on its debt management program within 30 sitting days after the Public Accounts of Canada have been tabled.
Since the Public Accounts of Canada were tabled on October 27, the Debt Management Report should be tabled by its legislated deadline of December 15, which is this Thursday.
It is now December 13, two days before the legislated deadline, and we’re still waiting. I understand now that the House of Commons may actually adjourn tomorrow, thus deferring the Debt Management Report for last year into the next year. The government is not an enthusiastic supporter of openness, transparency and accountability.
Of the 21 amendments to the Income Tax Act, 5 are related to housing. I will speak to three of the amendments.
Part 1 of the bill proposes to introduce a tax-free first home savings account, a doubling of the First-Time Home Buyers’ Tax Credit and introduce a multigenerational home renovation tax credit.
The Tax-Free First Home Savings Account will allow a potential homeowner to save up to $40,000, or $8,000 annually, tax-free, which can be used to purchase a home. There already exists the Home Buyers’ Plan, which allows home buyers to withdraw up to $35,000 from their RRSPs, which can be used to purchase a home. However, any withdrawals from the RRSP must be repaid within 15 years.
The Parliamentary Budget Officer estimates that the Tax-Free First Home Savings Account will cost $731 million in 2023-24 and $2.5 billion in total over the following three years. While these initiatives sound helpful, it is unrealistic to think that young people will be able to save $40,000 in the Tax-Free First Home Savings Account or use the money in their RRSP if it has to be replaced.
The cost of housing has increased significantly over the past number of years, and interest rates are rising. While the average cost of a home has decreased over the past year, interest rates are rising, and we do not know if or when they will come down.
Bill C-32 also proposes to double the First-Time Home Buyers’ Tax Credit from $5,000 to $10,000 for homes purchased on or after January 1 of this year. This tax credit is non‑refundable. The Parliamentary Budget Officer estimates that the First-Time Home Buyers’ Tax Credit will cost $115 million this year and $470 million over the following four years.
The third housing initiative proposes a refundable multi-generational home renovation tax credit, which, starting January 1, 2023, would provide up to $7,500 to construct a secondary suite for a family member who is a senior or an adult with a disability. I think the government wants to start us doubling up.
Honourable senators, the housing sector has become a key vulnerability of the Canadian economy, a point raised by the Superintendent of Financial Institutions, the President of CMHC, the International Monetary Fund, the Governor of the Bank of Canada and many think tanks and economists.
Interest rates have increased significantly, which has increased homeowners’ mortgage payments. In many cases, the outstanding balances on mortgages now exceed the original amount of the mortgage, or the value of homes are now less than their mortgages. In addition, the unmortgaged debt is increasing as Canadians who are struggling to cope with inflation take on more debt to pay for food, fuel and other necessities. They are using their credit cards to buy their groceries.
While the proposed amendments to the Income Tax Act for potential homeowners may help some homeowners, a more comprehensive solution to the housing crisis is needed. Simply providing some financial assistance to some homeowners will not fix the housing problem.
Part 4 of Bill C-32 will provide the Minister of Finance with $2 billion to buy shares in an unnamed, non-existent corporation. The bill provides no information on the corporation except to say that it will be:
. . . a wholly-owned subsidiary of the Canada Development Investment Corporation that is responsible for administering the Canada Growth Fund.
The bill does not explain what the term “administering” means. The corporation has yet to be created, and there is no information on the corporation. The bill provides no information on the composition of the board of directors or even if there will be a board. There is no information on the mandate and function of the corporation, no information on the governance structure, nothing on whom the corporation will report to and nothing as to how the corporation will report to Canadians and parliamentarians.
There is also no information as to the financial management and control over the $2 billion. Since the corporation does not exist, what does the minister intend to do with the $2 billion? Will she retain the money until the corporation is created, or will she invest it — and if so, where?
Of equal concern is the provision in the bill that provides the minister with the authority to draw down, as the bill says, “ . . . any greater amount that is specified in an appropriation Act . . . .” There is no dollar limit affixed to this greater amount.
Honourable senators, the part of Bill C-32 that legislates the spending of $2 billion and more is a mere 17 lines in length and provides no details regarding the $2 billion and more, nor does it provide any information on the referenced subsidiary corporation. In fact, the subsidiary corporation at this point in time does not even exist.
In its Fall Economic Statement, the government indicates that its revenues characterized as “projected other revenues” have been revised downward “due to the impact of higher interest rates on the Bank of Canada’s income.” The Bank of Canada has now reported its first financial loss in its 87-year history — in its third-quarter financial statements — in the amount of $522 million.
Unlike losses relating to the purchase of government bonds, which are covered by an indemnity agreement with the government and which will be paid by the federal government, the indemnity agreement does not cover these losses. With the rise in interest rates, interest on deposits at the bank is increasing. However, interest earned on the Government of Canada bonds, which the bank purchased during the pandemic, is at much lower interest rates. It is this mismatch of interest revenue at lower rates and interest expense at higher rates that is creating the loss for the Bank of Canada.
So the question arises as to how the bank and the government will treat these losses. I had expected that the Fall Economic Statement would indicate how these losses would be treated. Will the government reimburse the bank for these losses? Or will the losses be accumulated on the bank’s balance sheet? Since these losses are expected to continue into the future, parliamentarians and Canadians should be told as to the disposition of these items.
Honourable senators, the timeliness of the financial reporting of the public accounts continues to be a problem. This year, the public accounts were tabled on October 27, somewhat better than the tabling of last year’s public accounts, which occurred on December 14, but still short of September 30, which would be six months after the fiscal year-end.
While the public accounts were tabled this year on October 27, the Auditor General Report was actually dated September 12, after which it took the government 45 days to table it in Parliament. On average, over the past decade, the public accounts have been tabled more than two months after the conclusion of the Auditor General’s audit. In other words, it appears that the government is withholding the tabling of the public accounts.
At a recent meeting of the Senate Finance Committee, Auditor General Karen Hogan assured us that her office would complete the audit of the public accounts in time to allow for a pre‑September 30 tabling. She went on to further say that, typically, she signs off at some point in early September and she would be ready to advance that a few weeks if needed in order to meet all the publication deadlines.
The International Monetary Fund’s advanced standards on financial reporting recommend that governments publish their annual financial statements within six months of the fiscal year‑end. Parliamentarians and Canadians require access to this information on a timely basis so that the information provided is current and not historical.
Honourable senators, the Canada workers benefit is a refundable tax credit to help Canadians who are working but earning a low income. The Fall Economic Statement announced a change in the government’s policy for the Canada workers benefit. Single individuals will receive $1,395 if their adjusted net income is $22,944 or less. For incomes between that amount and $32,244, the benefit is reduced. Families will receive $2,403 if the adjusted family net income is $26,177 or less. For family incomes between that amount and $42,197, the benefit is reduced.
Of the $52 billion of new spending announced in the Fall Economic Statement, $4 billion relates to changes in the Canada workers benefit. Beginning next year, all workers who qualify for the Canada workers benefit based on their income for the previous year will receive an advance payment of the benefit every three months rather than a lump sum payment after filing their tax returns.
However, the revision to the benefit has also introduced a new change. Under the old system, the payment would not have been made until after the worker had filed their tax return. If the worker had opted for a partial advance payment under the old system, any overpayment determined after the worker had filed their tax return would have to be refunded to the government. Under the new system of quarterly advance payments — paid prior to the filing of tax returns — any overpayment calculated when the tax return is filed will not have to be refunded. The substantial cost of this change — $4 billion — is largely due to the government’s decision not to recover these overpayments when workers become ineligible for benefits or eligible for lower benefits.
However, the new system introduces unfairness in the tax system and in the program itself. For example, it will create situations whereby two workers receiving the same salary in a given year will result in one worker receiving the Canada workers benefit because they qualified for the benefit in the previous year. If a worker was eligible for the benefit last year but has a higher income this year, exceeding the ceiling for benefits, that worker will still receive the Canada workers benefit and not have to repay any overpayment. Compare this situation to that worker’s colleague who receives the same salary for that same year but did not qualify for any benefit the previous year. That worker will not receive any of the Canada workers benefit. Not requiring repayment of a benefit for ineligible recipients is a departure from the existing federal tax system.
The Parliamentary Budget Officer told us that the substantial cost of this measure is largely due to the government’s policy decision not to recoup these advance payments when recipients’ incomes rise and they become ineligible for benefits or eligible for lower benefits. He said that not requiring repayment of federal benefits for ineligible individuals is a pronounced departure from the existing federal tax and transfer system.
Honourable senators, two of the proposed amendments within Part 1 of Bill C-32 relate to the Canada Revenue Agency. Part 1 (q) of the bill strengthens the rules on avoidance of tax debts when a taxpayer transfers assets to a non-arm’s-length person for insufficient consideration.
The second amendment is in response to a court decision which called into question the extent to which Canada Revenue Agency officials can require people to answer all proper questions, and to provide all reasonable assistance relating to the administration and enforcement of the Income Tax Act.
The amendment is intended to strengthen the Income Tax Act and other legislation to ensure the Canada Revenue Agency has the authority to require a person to respond to questions orally or in writing. Unfortunately, Canada Revenue Agency officials appearing before our National Finance Committee were unable to explain whether these amendments respond to their recently released Overall federal tax gap report: estimates and key findings for tax years 2014-2018, and whether the amendments will assist the agency in collecting taxes that are part of that so‑called tax gap.
In their recently released report, the agency estimates that the tax gap is in the range of $35 billion to $40 billion. The tax gap is a measure of potential tax revenue loss resulting from tax non‑compliance. Despite recognizing that the tax gap exists and attaching an estimate to it, the Canada Revenue Agency is not making progress to collect the monies owed. Rather, the perception is that the agency focuses on already tax-compliant taxpayers. The collection of even a portion of the $40 billion tax gap would significantly reduce the government’s deficit, and more efforts to collect these monies should be made.
In the Fall Economic Statement, there is a listing of new initiatives along with additional initiatives implemented since Budget 2022. Together, they total $52 billion over six years through to the end of March 2028. However, of the $52 billion, $14 billion represents funding for which no information is available. The Parliamentary Budget Officer, upon testifying at our National Finance Committee, said the unexplained $14 billion is not a one-off, it is the largest amount announced without specific detail since 2016 and the precise number suggests that the government knows exactly what it is going to do with the money. However, when the government does announce the initiatives for this $14 billion, it will not relate back to the $14 billion. Parliamentarians will not be able to reconcile the $14 billion back to anything. We will not know whether the $14 billion will be used, what it will be used for or whether it is simply another a buffer or contingency.
This is not uncommon for this government. It builds in contingencies for expenses, and in establishing its new debt ceiling two years ago, it included a buffer of 5% for additional new borrowings along with a duplicate of the buffer provided five years ago when the debt ceiling was established at that time. The government likes to give itself lots of room to manœuvre when spending and borrowing, and transparency is not top of mind.
In Budget 2022 in April, the government announced two spending reviews that would focus on the overall level of government spending. First, there would be a strategic policy review to assess program effectiveness, identify savings and reallocate resources to adapt government programs and operations to a new post-pandemic reality. The strategic policy review was estimated to save $6 billion over three years beginning in 2024-25.
In a second spending review, the government said it would review previously announced spending plans with a view to reduce spending that has yet to occur — that is the term they used — by up to $3 billion over the next four years, or $750 million a year starting in 2023-24. Note that the government itself made the commitment to focus on spending that has yet to occur and it was this future spending that was to be reduced. In its Fall Economic Statement, the government announced it had already achieved the total targeted savings of $3 billion and more because the uptake of COVID-19 supports in the previous fiscal year — that is, 2021-22 — had exceeded the $3 billion target.
Honourable senators, the government’s commitment in Budget 2022 was to reduce spending in future years, not go back to a time that predates their commitment and use completed programs to take credit for savings that actually occurred before they made their commitment to reduce spending. Obviously, the government is not up to the task of managing their spending. Surely, the government can do better than this. Canadians deserve better.
Before I conclude my comments, I once again raise the issue of much-needed tax reform. The last major review of Canada’s tax system occurred in 1967. Much has changed since then: How we live and work has changed, Canadians are living longer, technology is constantly changing and the proportion of women in the workforce has increased significantly. Our tax system has become a patchwork of new rules, amendments, incentives and so on. It is now over 3,000 pages long. Incidentally, the first income tax legislation in 1917 was — I thought it was 10 pages long, but Senator Loffreda said 11, so we’re close. Our Income Tax Act has become inefficient and complicated for Canadians, businesses and professionals, such as accountants and lawyers. Maybe we would not need so many accountants and lawyers if our tax system was reformed.
It has even become complicated for the government to administer, especially the Canada Revenue Agency, as evidenced by an audit carried out by the Auditor General of Canada in 2017, during which responses to tax questions provided by the Canada Revenue Agency to auditors were incorrect almost 30% of the time. Many professional organizations and many individual Canadians support a comprehensive tax review, including the Chartered Professional Accountants of Canada, the Business Council of British Columbia and the Canadian Chamber of Commerce, as well as committees of both the Senate and the House of Commons.
Once again, I encourage my colleagues to support a comprehensive review of Canada’s tax system. This concludes my comments on Bill C-32. Thank you.