Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 19 - Evidence - Morning sitting
OTTAWA, Wednesday, February 26, 1997
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-70, to amend the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the Income Tax Act, the Debt Servicing and Reduction Account Act and related Acts, met this day at 9:05 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Senators, our first witnesses this morning are from the Recreational Vehicle Dealers Association of Canada. We are all familiar with Mr. Williams, and appearing with him are Mr. Redmond, Mr. Paré, and Mr. Wurtele.
Mr. Williams, please proceed after that to make your opening statement.
Mr. Huw Williams, Director, Public Affairs, Canadian Automobile Dealers Association: For clarification, I am with the Automobile Dealers Association. The three gentlemen appearing with me are from the RV Dealers Association and have slightly different concerns. I understand from speaking with the Clerk that, since our concerns revolve around relatively the same issue, we would each make a five-minute presentation and then turn it over to the senators for questions.
Mr. Ray Paré, National Tax Partner, B.D.O. Dunwoody, Toronto, Recreational Vehicle Dealers Association of Canada: Thank you for the opportunity to address you this morning. We have some concerns which we should like to mention with respect to Bill C-70. They mainly revolve around the elimination of the notional input tax credits. It sounds like an esoteric concept, but it is important to our industry and members. We will outline some of our concerns for you.
The concept of a notional input tax credit has been in the GST legislation since the beginning when it was introduced in 1991. The idea was to establish some equity in the system and to remove an element of double taxation that would otherwise exist in the system. It was there for a good reason: The GST generally removes tax from businesses. However, in a situation where a business is buying from a private individual, you do get an element of double taxation. The individual has already paid tax then sells their asset to a business. The business will then turn around and resell it, and it applies tax again. In a situation where people like us, registered dealers and people who have registered for the GST and collect it, buy from private individuals, we end up doubling up the tax on it because they have already paid it.
The idea behind the notional input tax credit was to remove some of that. If I as a dealer buy from you a used car or a used RV, I am allowed to claim a notional input tax credit. It is assumed that when you are selling it to me, there is an element of GST in that, and I get to claim that as input tax credit. When I turn around and sell that vehicle, I am not stepping it up simply because I am doubling up the tax. It eliminates that double taxation.
The example we give in our presentation -- and I am assuming that all of you have received a copy it -- is a simple case. If someone comes in off the street with an RV or car they want to sell for $10,000, they have these books in practically every local market, and people can say what they want for their vehicles. They come in and say, "This is what the price should be." They want to sell it to us for $10,000. If we buy it for that price and then turn around and sell it immediately to someone else, we must charge GST. By buying and selling, we have stepped up the value by $700. The idea behind the notional input tax credit is to say, "All right, your $10,000 cost will be reduced by 7/107," and then when you turn around and resell it for 10,000, you do not step it up. In essence, you get a flow-through and remove the double taxation element. It is a simple concept, and it has worked well for a few years.
Bill C-70 eliminates that from the GST legislation. The press releases and all the material related to it indicated that the main reason for this was simplification. In our discussions with Finance, we have been told as well that one of the major concerns was that there was abuse of it. We were surprised that there was abuse, but they have outlined some of the methods whereby people were abusing the notional input tax credit.
Senator St. Germain: Give us an example of the abuse, please?
Mr. Paré: I do not have personal experience, but I can give you the example I have seen in the press and given by Finance.
If someone wanted to be in collusion in order to take advantage of it, the new car dealer could sell a car to someone such as a native Canadian who is not subject to GST, so there is no GST applied on it. The native Canadian then turns around and resells it to the dealer. He does not charge GST because he is a private individual. The dealer gets 7/107s as an input tax credit. This has been exacerbated by the loss of the notional input tax credit which the government removed. The NITC had acted as a counter balance, allowing dealers to better compete with the private sellers of automobiles. By not applying the GST to private sales, our estimation is that the government is forgoing over $1.3 billion in revenue.
The HST has solved the problem of imbalance between the private seller and the registered car dealer in terms of 8 per cent of our dealers by solving the problem in Atlantic Canada. However, the remaining dealers throughout the rest of Canada are left with a system whereby we are selling used cars on an unequal basis with the remainder of Canadians.
Just to give a sense of how the HST solves that problem, there is a tax equal to 15 per cent that is charged on every private sale. If I were a broker, I would not sign my name on the title of Senator St. Germain's car. However, I would sell it to Senator Kenny and take a $400 commission for it. I have not charged any GST or PST on it. Often brokers or curbers run 15 cars a week off their lots. It is difficult to compete with that.
Senator St. Germain: Your industry would not do that.
Mr. Williams: It is possible for a franchised automobile dealer to broker, but it is most commonly people brokering or curbing out of their backyards. We have had private investigators chase a number of advertisements in the province of Saskatchewan, just by tracing the phone numbers. We found people working for some of the public utilities who were selling 30 cars a month. It is difficult to believe that their only advantage is that they are operating out of their backyards. The fact that they are not paying any tax is a significant advantage.
Senator Angus: Is what they are doing legal?
Mr. Williams: It is not. For example, if Senator St. Germain were to sell a used car in the province of Ontario to Senator Angus, Senator St. Germain would reregister the car and pay the provincial sales tax at the time of registration. We argue that they should also pay PST at the time of registration, which is included in the HST package.
In Atlantic Canada, there is now no way for people to avoid paying the extra 7 per cent, whereas, for the rest of the country, you can walk into a dealership and pay a different tax than you would if you bought the same car from someone else.
Senator Angus: What is tax cascading?
Mr. Williams: Tax cascading is charging tax on tax. The way the tax was calculated previously, you were charging GST on the PST. When buying a $30,000 car, it adds up.
Senator Angus: It is a big-ticket item.
Mr. Williams: That is the essence of our presentation.
The Chairman: The change that says you will no longer get the notional input tax credit is not a change in regulation contained in Bill C-70 but a clause in the bill?
Mr. Paré: Clause 25.
The Chairman: Therefore, your suggested ways around it can only go into effect, first, if that clause comes out. You could then change the regulations governing it. However, the clause which says you will no longer be allowed the input tax credit takes any playing around with the methodology off the table because you have to charge the tax.
Mr. Paré: Right now, in the GST legislation, there are several provisions that detail the documentation required in order to be able to claim input tax credits. What we propose is that you reinstate the part of the bill which allows a notional input tax credit, but make it subject to further changes in that part which require much more detailed documentation in order to be able to claim it.
The Chairman: You do it subject to regulations on documentation to be developed later.
Mr. Paré: The rules on documentation are right in the GST legislation. What we are saying is change that part of the law and require more detailed documentation.
The Chairman: In your discussions, the government sounded sympathetic but did not amend the bill when it was in the House of Commons.
Mr. Paré: That is true. We got the impression that they believed we had a good case. I do not want to speak for them, Mr. Chairman. You would have to speak to the members of the Finance Committee.
The Chairman: By the way, on this subject, are you talking to representatives of the Finance Department or the Department of National Revenue?
Mr. Paré: The Department of Finance.
Mr. Williams: It is the Finance Department which sets the policy on this issue. For the record, the loss of the notional input tax credit does not just revolve around the car or RV industry; it relates to all used goods. The abuses that were taking place were in all used good sectors.
The average franchise used car dealer is audited every year by Revenue Canada and their factories. For a large dealer, it does not make sense to be involved in these kind of transactions.
The Chairman: Is there any difference in view on this question between the automobile dealers and the recreational vehicle dealers? Is there something unique about the nature of the recreational vehicle industry that gives you a different perspective on the problem?
Mr. Bill Redmond, President, Bucas RV Centre, Recreational Vehicle Dealers Association: Mr. Chairman, the only thing unique about our industry is that a large portion of the used product we sell comes from the repurchase of units from people who no longer use them.
I will not speak for the automobile industry, but as an individual who has a car, normally, when your car is no longer suitable for you, you purchase another car.
The Chairman: In other words, you still need another car.
Mr. Redmond: In the RV business, every year, about 30 per cent of the people who dispose of a unit do not purchase a new unit.
The Chairman: I understand the logic of that. My question is: Does that change in any way the nature of the tax problem you have?
Mr. Paré: It does because the elimination of the notional input tax credit was accompanied by this net tax calculation which applies to a trade-in. For automobile dealers, you will find that a good portion of their dealings with private individuals are on a trade-in basis. With us, ours are straight purchases; there is no corresponding sale. There is no mechanism for us to get out that tax. That is why it is a more important issue for us.
The Chairman: You are neutral on the issue. If it is just coming in and nothing is going out, then you are stuck with the tax.
Mr. Paré: You have bought it from one person and sold it to another. If we could somehow match those two, then it would be different, but it is not because that is not the way the business works.
Mr. Redmond: We are both in agreement, though, on the problems that the elimination of the notional input tax credit causes for both our industries.
The Chairman: It is a more acute problem for the recreational vehicle industry because of the nature of the business.
Mr. Paré: Also because the items generally tend to be big-ticket items. Therefore, an RV is generally more expensive than an automobile. Also, our vehicles tend to have longer useful lives.
You will find that an RV often has a useful life of 25 years. You will not see that in an automobile. Over the course of that life, an RV will change hands five to six times. Every time that happens, another layer of GST is applied. The problem is much more pronounced in our industry because of that.
Senator Angus: I have heard some discussion that in Nova Scotia they will not realize this reduced tax right away. If that is true, can you elaborate?
Mr. Williams: It is true. In fact, it is one of our concerns, but nothing to do with the federal legislation is the problem. The provincial government has decided that it will introduce a temporary surtax so that there is not a huge drop all of a sudden that would hurt car sales this year. For example, people would not hold off buying a car in anticipation of the HST coming in. Income tax is one of the big things we fear. Income tax was supposed to be a temporary measure and I still pay it every year, as I am sure you do, senator.
The-2-per cent surtax is supposed to be phased out under their legislative regime. However, that is not the case for Newfoundland or New Brunswick.
Senator Angus: Is it because automobiles are a big-ticket item and the revenue loss in their view would be too much to take in one bite?
Mr. Williams: It is more to do with the fact that dealers were panicked about facing this scenario without making sales. Officials from the Finance Department felt that 2 per cent extra would not hurt us over this period of time.
Senator Angus: Are you comfortable with that?
Mr. Williams: We are comfortable with it. You may hear a slightly different version in Nova Scotia because they are nervous that it will be there and we will have all this HST run through without realizing any of the benefits because the surtax will be hidden.
Let us be honest, we are talking about a small part of the Income Tax Act about which the average Canadian does not really care. Whether that 2 per cent is in or not, I would defy the average Nova Scotian to figure it out.
Senator Angus: However, it matters to your industry.
Mr. Williams: Yes. It is a concern that is guaranteed to come out.
Senator Angus: As a follow-up on that, to your knowledge are they doing that with other big-ticket items?
Mr. Williams: To my knowledge, they are not. Perhaps I could ask Mr. Paré if they are doing that in the RV industry.
Mr. Paré: No, but there is one point I want to make. I think Newfoundland treated it totally differently. I believe their attitude was, "Yes, there will be this bias for people to hold off buying. Let us drop the rate immediately." That is what Newfoundland did. They dropped the rate down to 15 per cent to deal with the same issue.
If you were to apply that transitional tax and the 15 per cent on a private sale as a compensating measure, I will say to you, senators, you would solve our problem; but you would be doing it at the expense of the consumer. You would be hitting the consumer with double taxation. That is not what the GST is supposed to do. The GST was sold to the public on the basis that it was a clean tax, you pay it once and it did not allow for tax cascading. Yet, here we have the provinces harmonizing and saying that they will apply that tax over and over again on one of the biggest purchases consumers make. They will hit them every time, even when it is a used vehicle. If we could apply the harmonized tax, the GST, in Ontario at the point of purchase, you would put us on an equal footing, but I do not think you would be treating consumers very fairly.
Senator Angus: We have heard from retailers of dry goods and different types of commodities about the tax-in pricing. They have given us a whole plethora of complications that result, especially from the point of view of national distribution. I gather from your remarks and from your documents that this is not a problem in the automobile industry.
Mr. Williams: It is not. The first thing you notice in a car lot is that they slap sticker prices on the window, showing a sale price. Every dealership in Canada has a stack of cardboard stickers on which they write the price with a pen in trying to entice you to buy the car. It is not a big deal for us to have to write the tax-in prices on the car windows. Tax-in or tax-out pricing will not break our industry. What is important is that the rate drop and that it is easier to sell cars. It is almost a side issue from our perspective.
Senator Angus: The abolition of the cascading in those three provinces will be a help.
Mr. Williams: Absolutely.
Senator St. Germain: I have a question for Mr. Williams. You mentioned the six points and you said you were happy with five of them. Could you go over them again?
Mr. Williams: The first thing we would ask is that it be simple. We think it meets that test, although there might be some argument about that.
Senator St. Germain: Before you go any further, do you really think this meets the simplicity test? This is Bill C-70 which I have in my hand. Do you think this is simple?
Mr. Williams: I have to admit, senator, that the average Canadian probably would not say that is simple, but what is simple about it is that you have a simply understood concept within the business office. You have to administer only one tax, not two different ones.
Senator St. Germain: We are representing the average Canadian, Mr. Williams.
Mr. Williams: I take your point on simplicity.
It is harmonized; we think it meets that test.
It does not broaden the base to go after more products but it lowers the rate.
Senator St. Germain: Do you think it does not broaden the base? It does.
Mr. Williams: Not as much as we expected it would. From the standpoint of pure tax policy, if it taxed everything equally, you would have a far greater drop in the rate, so cars would not be hit as hard as they are under the 19-per-cent rate. Under that scenario, the rate has definitely dropped.
It is a multi-stage value-added tax. That is basically what the GST is.
It is visible but included so that the customer sees it. One of the things we feared was that the customer would not have any idea, from the bill of sale or elsewhere, what the tax rate was. The government could then jack up the rate whenever they wanted and the customer would never see it. Therefore, they would think it was the price of automobiles that was going up.
The last point was that it be applied to the sale of used vehicles, both those sold privately and those sold through dealerships.
Senator St. Germain: With regard to your argument on the price-included issue, do you not think that governments can now indiscriminately raise taxes? Previously, you knew that you were paying 7 per cent and 7 per cent, or 8 per cent and 7 per cent, depending upon where you were, and if that rate went up, you would definitely see the change. If it is a tax-included price, it is not visible. Take for example the price of aviation fuel. It keeps going up, and I keep asking, "What is going on? Why is it going up?" Every time I go to the gas pumps with my aircraft, the price seems to have jumped. It is up to 92 cents a litre in some places in British Columbia. Everyone says that it is because of taxes. It is not necessarily because of taxes only.
The government side says it has taken surveys which indicate everybody wants one price, a tax-included price. I am not sure whether the question is being put to the Canadian public in a proper manner. Simplicity can be sold on a simple question. If the situation is fully explained, often the response is different. I can give you the example I have used before. The restaurant association told us of a survey in which they asked people what food they were interested in. Most people said juices, salads and fruit. Yet, what is the biggest seller? Coke, Pepsi, hamburgers and French fries.
These are some of the things I am wondering about as we go through this.
Mr. Williams: You raise an excellent point, senator. One of the things that must be paramount is how the customer feels about this. If governments are allowed to get away with jacking up the rate without customers realizing it, that is unacceptable. As I understand the bill -- and I defer to a different interpretation or to the Department of Finance on this -- the tax will be broken out on the bill of sale. For example, when the customer comes in to write the deal, our dealers will say, "This car was $20,000. That is our agreed-upon price. This is your 15-per-cent tax." The customer knows what he will pay.
The sticker price is not such an issue in our business because every car deal goes through a detailed bill of sale, whereas there may be a different interpretation on a sale of a grocery item, where you do not have the tax broken out necessarily.
Senator St. Germain: You also mentioned savings to the people in Newfoundland. As you know, the government has taken $1 billion to offset the revenue losses these provinces will experience as a result of dropping their rates. They will also broaden the base to include items not presently taxed. Somewhere down the road, once the slush funds run out, the government in Newfoundland will either have to raise the tax or they will have to get their revenue from somewhere else. You say there are saving now. Well, you may have a blip in sales for four years but what will happen in four years from now when reality strikes home?
Mr. Williams: That is an interesting question. I am unfamiliar with how the government is financing the cost break. All I know is they are dropping the rate. I take you at your word. It is obviously a serious concern. I do not have any information on that myself, senator.
The Chairman: Thank you very much for coming, gentlemen. We appreciate it.
Our next witness is from the Alliance of Manufacturers and Exporters, Mr. Glen Pye.
Mr. Pye, many of us are used to the Canadian Exporters Association and also the Canadian Manufacturers Association. I know this current organization is in some sense a combination of the two. Could you tell us whether this is a permanent alliance or just two associations getting together for this one issue. Is this to be an ongoing alliance? You might tell us a bit about the organization because we are so familiar with the other two.
Mr. Glen Pye, Chairman, Alliance of Manufacturers and Exporters: Mr. Chairman, the Alliance of Manufacturers and Exporters Canada wishes to thank the Standing Senate Committee on Banking, Trade and Commerce for allowing us the opportunity to provide comments on Bill C-70. I am director of tax at Nortel and chairman of the tax committee of the Alliance of Manufacturers and Exporters. Unfortunately, this meeting came up on short notice and our president could not be here today. I am filling in for him.
I would be happy to give you a bit of background on the alliance. The alliance is a new, permanent organization which was formed last year by an amalgamation of the Canadian Manufacturers' Association and the Canadian Exporters Association. There were many similarities between the memberships of these two organizations. It was felt that a stronger organization would result if the two were combined.
Currently, we have 3,500 member companies who represent all types and sizes of manufacturing, processing and exporting enterprises. Together, our members produce over 75 per cent of the nation's manufactured output.
The alliance has at least one regional office in each province and our regional vice presidents have communicated frequently with our members on the issue of the harmonized sales tax. Across Canada, the membership of the alliance has been highly supportive of the GST. We have worked with the federal government for a number of years. We are equally supportive of the proposed HST in the Atlantic provinces.
We strongly advocate that the government continue its efforts to expand the HST beyond the current three provinces to the rest of Canada. A number of the benefits that will result from a harmonized sales tax will only be achieved once the harmonized arrangement is extended to some of the non-participating provinces.
Although the alliance strongly supports the agreement for sales tax harmonization that has been signed with the three participating Atlantic provinces, our membership has expressed concerns with the complexity of the proposed HST, as the following comments will reflect.
With respect to the April 1, 1997, implementation date, we believe that the government should honour its intention to implement the HST on the proposed date. Many businesses have taken the announced implementation date with great seriousness and have invested substantial resources to prepare for April 1 implementation. Nonetheless, for many businesses, despite their best efforts, the April 1 date will come too early to allow full compliance with the HST requirements.
The alliance, therefore, recommends that the government exercise a large measure of leniency toward those businesses which demonstrate reasonable efforts at compliance but which are not able to comply fully by April 1. Such leniency should be extended until December 31, 1997, and beyond that time, where circumstances warrant.
In particular, the alliance believes that administrative leniency must be extended in specific circumstances where there is no revenue lost to the government. Areas which should be extended administrative tolerance include transactions between registrants, where the place of supply is unclear; purchasing systems that cannot be modified by April 1, 1997; and printed and standard documentation requirements, where the time and resources needed to make the necessary changes are not available.
The alliance believes that the determination of whether or not a service is supplied in a participating province can be difficult and complex. The alliance recommends that the HST application be based on the location of the recipient services rather than the location of the supplier. We feel that would be much easier to comply with.
Another issue that has been frequently raised by our exporting members located in the HST provinces concerns an anticipated increase in cash flow difficulties. Revenue Canada must recognize that businesses will now carry an additional 8 per cent tax on many of their inputs. As a result, it is essential that Revenue Canada be fully prepared for HST implementation, including ensuring that refunds are processed expeditiously.
The alliance thanks you for the opportunity to comment on Bill C-70. We will be pleased to answer any of your questions.
The Chairman: Thank you, Mr. Pye. I think all of the suggested changes and concerns that you have appear to be either regulatory or administrative and not directly involved with the bill. They are involved with the bill to the extent that they would be regulations under the bill, but they are not technically legislative. Your real concerns are how the details of it are actually administered by Revenue Canada officials. Is that basically correct?
Mr. Pye: A substantial area of concern is the particular administration by Revenue Canada. We are concerned about the education of taxpayers, particularly outside the participating provinces and how they might extend leniency on audits in the early days of a new tax.
There is one area that relates to the bill, namely, the place of supply rules, which our members find complex. We think there might be a simpler approach. We have been working with the Department of Finance on that particular matter.
The Chairman: Do the change in the place of supply rules require a change in the act or a change in the regulations under the act? Do you know? We can find out, but I thought you might know.
Mr. Pye: I think it would require a change in the act.
Senator Angus: Mr. Pye, you mentioned one of the concerns was the place of supply rule in the proposed legislation. I understand this is one of the real complicated areas in the act. I have been trying to understand it myself. I am not even sure I understand why it is necessary. Could you elaborate on that point a bit, please? It is listed under your other concerns.
Senator Stewart: Can you give us an example?
Mr. Pye: It is particularly complex when it relates to place of supply for services. The reason it is important to have a place of supply is because you must determine which taxes you are applying. If you are a business in Ontario that is performing a service for someone in one of the three participating provinces, is Ontario tax applicable? Clearly, the GST is applicable either combined with the HST or not, but is there a PST issue in Ontario or should the HST be applied? The rules as they stand now relate more to performance of the supply. That is a difficult issue to determine.
I have talked to people in accounting firms about this. When you look at performance, is it where the hours on the engagement are performed or is it the total dollars? Some accountants could be at a higher rate than others. That is something that is open to interpretation. There is also a default rule that goes back to place of negotiation of supply. Our feeling -- and many other associations agree; we are not alone in this -- is that you know where the recipient is and you know who is receiving the service. That is clear. It is not a matter of trying to reduce our taxes; it is something on which we do not have to spend a lot of time determining the appropriate tax application. We can look at it and we know that when we are dealing with a business in Halifax, the HST applies. Therefore, there would be an application of the HST rather than going through these default mechanisms to determine the place of supply.
Senator Angus: Are any of the members of your association in the mail order business? We heard one submission from someone who used to receive phone calls into their place of business somewhere in Ontario, for example, to supply machinery in Nova Scotia, or Newfoundland, or New Brunswick. They say that because of this provision, they will have to stop filling those orders now.
I have trouble understanding that. Your solution would be simply that it is where the end use will actually take place, that is, where you deliver your goods is where the supply takes place. That seems to make good sense to me. I do not understand why they are trying to do it the other way.
Mr. Pye: Typically, with goods, that is the case. However, services are somewhat more complex. Our members generally would not have a problem. We may undertake the type of business you are talking about, but we would bill the HST if it was an order that was to be filled -- whether it be a mail order or over the phone -- in Ontario, for example, and sent to Halifax. In that case, we would apply the HST.
With the rules as they stand now for services, you could have a customer in one of the three participating provinces but find that the HST does not apply because it is considered that the service was performed outside the province, even though it is for the benefit of someone in one of those provinces.
I do not really have an answer to the question. There has been a lot of speculation concerning why these rules are written the way they are. I think the government has indicated that, perhaps, it will help us or help them to prevent double taxation in certain circumstances. We have not come across many instances in which the recipient rule will cause us a major problem.
Senator Angus: Have you had dialogue with the Finance Department?
Mr. Pye: Yes.
Senator Angus: Is the dialogue ongoing in an attempt to find a solution?
Mr. Pye: We have had continued dialogue. We are getting close to the implementation date now and I wonder whether there will be a fix. It is unfortunate that sometimes bills are passed and change is required after the fact. That might be the case in this instance.
Even my own company has had to take some simplistic approaches to complying with this aspect. You just cannot expend substantial resources determining which tax you are collecting. It becomes dysfunctional in terms of doing the business.
The Chairman: Can you give me an illustration of what you mean by "simplistic approaches"?
Mr. Pye: This goes a little bit beyond the place of supply rules, but there are certain instances in which the GST might only be applicable in the three Atlantic provinces. We have discussed this with our major customers and have said that we will just collect the 15-per-cent tax all the time rather than determine instances where the 7 per cent may apply. There might be a slight cash flow cost to our customers, but the advantage is ease of administration. There would be no revenue loss to the government. It is all fully creditable anyway. Do we want to spend hours determining whether there is a transaction to which we could have applied only 7 per cent when it does not cost anyone anything?
The Chairman: The government gets its money and you save on administrative costs. You will act as if it is a blanket rate, just for ease of administration.
Mr. Pye: Exactly. That ties into our administrative leniency issue as well. We do not want the government saying to our customers, "You took a 15-per-cent credit, therefore we will assess you that 8-per-cent tax and interest", forcing us to go for a refund. We would still be out of pocket the interest and penalty, if it applied.
We would like to say it is a wash for everyone. It saves businesses time and money, with no revenue loss to the government.
The Chairman: We will have the Minister of National Revenue here this afternoon when we can explore those issues.
Senator Angus: Does that point adequately speak to your cash flow issue, or is that another issue?
Mr. Pye: The cash flow issue only relates to some businesses, perhaps more so to smaller businesses.
Senator Angus: Can you give us a couple examples of that?
Mr. Pye: Right now, businesses are paying GST on their inputs to business. This would be a typical manufacturing business in any of the three Atlantic provinces that will export the product. They will be paying GST, but they will not be paying PST. They will be buying the goods PST-exempt for further manufacture. They may currently have a 7-per-cent GST rate. They will go up to a 15-per-cent rate on their inputs because everything becomes taxable. And they have to file refunds because, in an export business, you are not collecting any tax. As you cannot offset it with what you are collecting, you have to file for a refund from the government and wait for your money to come back in.
For some businesses, that 8 per cent is a substantial amount to finance. I have tried to determine a fix for that. It is difficult because there could be implications elsewhere. I know that when a tax is initially implemented the government is not always ready to process all the returns immediately. It is crucial for businesses like this that their returns are processed immediately and they get their money back in a timely manner.
That is more a preparation aspect for Revenue Canada.
Senator Angus: I understand that underlying this legislation is an agreement by the federal government to administer, at its expense, a capital tax which would be designed by the provinces. I understand that at least two of the maritime provinces are going ahead with such a capital tax. Since these kinds of taxes tend to affect business decisions, is it possible that members of your association could actually be worse off under the new legislation when this is taken into account?
Mr. Pye: That would not be the typical business, but I am sure there are businesses which would be worse off. It mitigates the benefits for all our members. The intent of the HST was to make these three provinces more competitive and export oriented. The HST goes a long way toward achieving that end. If you implement a capital tax, you mitigate the benefits which would have flowed under the HST. Depending on your capital structure, there may be the odd business which could end up out of pocket if they were to look at their HST savings versus the capital tax cost.
Senator Angus: As you know, they are saying that this is a revenue-neutral framework of legislation when taken together, whereas it seems to me that it adds a burden.
Mr. Pye: Although it could be macro-revenue neutral, there could always be a cost to any one company, obviously.
Senator Angus: As you indicated in your opening comments, a number of your members are exporters across provincial borders. We have heard from a number of witnesses, albeit from different types of businesses from those in which your members are engaged, that the markets are fragmented substantially by the imposition of this so-called harmonization, or more probably because of the price-in mechanisms.
What would the impact of any such fragmentation be on your members?
Mr. Pye: We are sympathetic to the businesses which the tax-in pricing impacts. However, we typically deal with other businesses. If you are an exporter, there is no tax applied; and if you are a manufacturer, you are typically dealing with other businesses and the tax-included pricing provisions do not impact us.
We are sympathetic to their concerns but we will not experience the type of problem they would experience.
Senator Stewart: In answering Senator Angus' question just now concerning exporters in the three provinces, you said that you did not know whether there was a fix within the act, which implies that there might be a possibility that some statutory change would be necessary to assure that Revenue Canada be fully prepared for HST implementation, including ensuring that refunds are processed expeditiously.
Does this mean that it might be necessary to have new statutory activity to put Revenue Canada in the position where it could make those refunds?
Mr. Pye: No. We are just sounding an alarm bell here.
Senator Stewart: That is what I thought initially.
From the experience of your organizations or parent organizations, what is the record of Revenue Canada in being prepared to make refunds and the like? Are they generally good on this or are they slow?
Mr. Pye: The only similar experience we had was when the GST was introduced. The old federal sales tax operated in a different manner. Revenue Canada is very good now. There is no problem at all.
Under the GST, refunds were not always processed as quickly as possible. Probably they had their reasons. Perhaps it was because they felt taxpayers were more likely to be in error and they wanted to do some additional reviews before processing a refund. They have to be very cognizant of the cash flow difficulty it might impose on certain businesses located in those three provinces, particularly exporters.
Senator Stewart: Mr. Chairman, this may be a point on which we will want to alert the minister this afternoon.
The Chairman: I agree.
Senator Stewart: You say that your members remain concerned by the lack of HST guidance provided by Revenue Canada to date. Have you any explanation for why Revenue Canada has lagged in this regard? Is it because the bill is still before Parliament?
Mr. Pye: I believe it is mainly because of the late delivery of the bill generally in terms of the rules that they were to enforce. I am extremely sympathetic to Revenue Canada in that they have not had a lot of time to work with this. This is a major undertaking, and informing all the necessary parties is difficult.
This HST has received more visibility in the three provinces, but many businesses across the balance of the country are substantially impacted by it. I suspect particularly many of the small- and medium-sized businesses do not even realize or have made no efforts yet to comply with it. To ensure that these businesses do comply, it needs more visibility nationally. If a business does not comply, it does not impact just them, it could also impact the people with whom they do business. The complexities could be substantial.
Senator Stewart: I understand from your general presentation, and correct me if I am wrong, that your alliance favours harmonization.
Mr. Pye: Definitely.
Senator Stewart: Are you taking steps to ensure that the governments of non-participating provinces are aware of your position?
Mr. Pye: Yes. We have sent briefs to every province on harmonization.We continue in the non-participating provinces to encourage them to harmonize their provincial sales tax with the HST. Of course, Alberta does not have one.
Senator Stewart: There could be various explanations as to why they are not moving, some being political, which we understand. Can you identify any serious structural reasons why, for example, Ontario or Manitoba -- we can march across the country -- would not want harmonization? Is there any structural reason, aside from the normal political problems?
Mr. Pye: We do not feel there are any structural problems. We feel it is, perhaps, a little more political. You said it was somewhat political.
Senator Stewart: We understand that.
Mr. Pye: We think it would definitely benefit those provinces. We realize that provinces have an agenda, and they might want to tackle certain issues initially. It is difficult to reform all aspects of taxation at once. We simply continue our efforts and hope that, in future budgets, a harmonization program will be announced.
Senator St. Germain: Thank you, sir, for appearing before us this morning.
To carry on with the line of questioning started by Senator Stewart as to the harmonization point, if we could not arrive at a settlement on the unity of Canada and on something as important as Meech Lake, and people like Frank McKenna and Clyde Wells deep-sixed the program and aligned themselves with certain people here in Ottawa, I find it very strange that anyone --
Senator Stewart: He is talking about the Alberta election, I fear.
Senator St. Germain: I would be surprised if we could see a harmonization program that would go right across this country. As you well know, representing a national organization, the regional disparities of this country are severe. As Senator Stewart pointed out, Alberta has no provincial sales tax, and the chances of them ever coming into a program like this are slim, none, and otherwise, as far as I am concerned, and I know Albertans quite well.
My question relates to interprovincial trade. In view of the realities, we can sit here and surmise and say, "The previous administration, of which I was a part, wished harmonization as well, and the province of Quebec was the first to come on side." However, it stopped there, and now we have three Liberal premiers holding hands with a Liberal government in Ottawa.
How detrimental do you think this is to interprovincial trade? One of the biggest problems we have in this country as far as the sale of goods is going back and forth between provinces. Do you not think this could pose a hindrance if they harmonize this tax in this particular region?
Mr. Pye: With respect to your first point that we might be somewhat naive to hope for a harmonized tax, the one advantage that you do have in this regard is that it could be brought in piecemeal, unlike Meech Lake where everyone's agreement was required at one point in time. Perhaps we still have a chance yet, but we will have to work province by province.
As far as interprovincial trade is concerned, the PSTs alone were substantially complex. There were barriers to interprovincial trades in determining how PSTs apply.
The one additional barrier that perhaps impacts on people is the tax-in pricing, and our membership is sympathetic to those impacted by it. It does not happen to impact us in a major way. Obviously, with national pricing and programs and various other activities that retailers undertake, it probably does create some sort of barrier for them.
For our members, I do not see a barrier here. It makes those three provinces somewhat more competitive compared to the provinces that have a PST. Quebec, obviously, has a harmonized tax already. I do not see substantial barriers being imposed here other than in terms of the tax-in pricing issue.
Senator St. Germain: Are you saying that it will not improve things, but it will not be detrimental either?
Mr. Pye: It certainly improves things in terms of businesses in that region and in terms of how competitive domestically manufactured goods are as compared to goods to other countries and the ability to export out of those three provinces. It has some improvements.
We have an HST that is somewhat different from what we apply elsewhere, but the PSTs were also different. There were many anomalies in the PSTs with which we were required to deal. One advantage now is that at least the HST applies to three provinces, whereas the PSTs had their differences. Each of the provinces had different aspects to their PST. I think that it is an improvement.
Senator St. Germain: Do you mean it is an improvement to interprovincial trade?
Mr. Pye: It is not designed necessarily to help interprovincial trade. I think it helps competitiveness of businesses in that region. There are some disadvantages and some advantages. I am not sure how they would all weigh out.
Senator St. Germain: Do you think it is worth $1 billion?
Mr. Pye: I cannot speak to that.
Senator St. Germain: You are a taxpayer, sir.
Mr. Pye: I would have to see all the calculations. However, the provinces have indicated that there is a revenue loss. We feel the economic benefits of a harmonized tax, if Canada were ever to come to an agreement, as unlikely as it might be to have the same tax across the country, are substantial, and the jobs created would be substantial, and everyone will benefit. It does not happen overnight, unfortunately.
[Translation]
Senator Hervieux-Payette: First of all, has your organization made representations in the other provinces? You must present briefs from time to time to other governments. Your members are manufacturers who also export. They want maximum flexibility and every opportunity to sell their goods at the interprovincial or international level.
Have you asked the other provinces to participate in these programs? Have you made representations to this effect outside the maritimes? Have you appeared before committees? Have you encouraged the maritimes to move in this direction?
[English]
Mr. Pye: Yes, we have encouraged every province in Canada to participate in the harmonized program. We also are encouraging Quebec to line up somewhat more closely in terms of their rules so that we would have one set of rules and one tax nationally. We go through pre-budget submissions in each province. We just put a brief in to Ontario in the last few weeks. We will be doing that in every province. We will continue to encourage this particular aspect among, perhaps, some other tax measures, but it has always been a high priority for us to get one harmonized sales tax across Canada.
[Translation]
Senator Hervieux-Payette: Could you tell me how much trade your members do? You represent a very large organization. Could you give me an idea in comparison with other sectors like natural resources, et cetera?
Compared to other members, what percentage of the gross national product in terms of sales in the Canadian economy does your group represent?
[English]
Mr. Pye: I wish the president of the association were here. I know he has all those statistics at his fingertips. The number they gave me was 75 per cent of manufactured output. I would not be surprised if it is close to half the GNP. It is extremely substantial, but I do not have the exact number.
[Translation]
Senator Hervieux-Payette: At any rate, it seems important to me to understand what your association represents. In the end, your members are the first to benefit from this simplified measure.
In Quebec, our sales tax is almost harmonized. To the best of your knowledge, did implementing this tax cause problems? Are there still problems with administering the legislation, or, to the best of your knowledge, do your members not have any particular problems and has harmonization of the tax perhaps made things easier than in the other provinces where this currently is not the case? Has it been advantageous for Quebec to have an almost completely but not totally harmonized tax or has that caused problems?
[English]
Mr. Pye: There are problems in having the harmonized tax, but the benefits outweigh the problems. The compliance benefits down the road will be there as well in terms of savings just for administering the tax.
We realize that we are one of the major beneficiaries of this measure. We recognize that, politically, it is not an easy issue to address. We have worked closely with the government. We try to do our bit to educate our employees or the public with regard to potential cost savings on manufactured product and the benefits in terms of jobs for export.
We feel it is a step in the right direction. Compliance will be easier. Again, there are some short-term complexities whenever you change systems. As far as Quebec is concerned, Quebec was a preferred system until now. It will be best if we could get the HST and Quebec to have similar rules, where you could look at a block of four provinces with one particular tax and one administration. We are hopeful. I think Quebec has made a couple of announcements about making their tax a little closer to the HST. We hope they continue those efforts.
[Translation]
Senator Hervieux-Payette: In conclusion, we can say that your organization that represents 50 per cent of the Canadian economy could tell Canadian citizens that it is advantageous for consumers, businesses and everyone?
[English]
Mr. Pye: We can and we do say that. We continue an education effort in that regard. I am sure our affiliates in the three Atlantic provinces are doing something locally. I am not as familiar with that. In the national office where I spend more of my time, we certainly are advertising as best we can. There are some benefits to be achieved here.
The Chairman: Mr. Pye, thank you for coming.
Senators, our next witness is Mr. Michael Killeen from C.I. Mutual Funds, after which we will hear from representatives of the Canadian Medical Association.
Before we do that, I have one housekeeping item. I need a motion through the committee to delegate to Senator Angus and me the approval of the final budget with respect to our travel next week. We have money. It is a strange situation where we have money in the budget but the money is for travel related to studies and not legislation. Therefore, we require a formal motion of the committee to do that.
Senator Angus: I so move.
The Chairman: Is it agreed, honourable senators?
Hon. Senators: Agreed.
The Chairman: The motion is carried.
Our next witness is Mr. Michael Killeen, Corporate Secretary and General Counsel of C.I. Mutual Funds.
Please proceed with your presentation.
Mr. Michael J. Killeen, Corporate Secretary and General Counsel, C.I. Mutual Funds: Thank you for the opportunity to make submissions, not only on behalf of C.I. Mutual Funds but also for Trimark Investment Management, one of our friendly competitors. The comments I shall make today focus on one issue arising from Bill C-70, and that is the retroactivity of the GST amendments and the effect they may have on unit holders of C.I. and Trimark, and the broader mutual fund industry as a whole.
C.I. has been in business since approximately 1973. We manage 27 mutual fund products and over $6 billion worth of assets for over 500,000 unit holders. Trimark manages over $22 billion of assets for over 900,000 unit holders. For reasons which will become apparent, I should like you to treat these submissions as having been made on behalf of approximately 1.4 million Canadian investors.
The Investment Funds Institute of Canada is our national industry watchdog. Its recently released data for the month of January, 1997, states that there assets total $219 billion in our industry. These assets are spread out over approximately 23 million unit holder accounts, representing a 45-per-cent increase over last year. This demonstrates that mutual funds continue to be the investment of choice for the $23 billion or $24 billion of RRSP contributions which should roll in for the 1996 taxation year.
Nearly all of the mutual funds managed by C.I. and Trimark, and throughout the industry as a whole, are what we call mutual fund trusts under the Income Tax Act. Each mutual fund has a corporate trustee which in turn appoints itself as manager of the particular fund pursuant to a management contract. As managers, C.I. and Trimark are responsible for providing all the administrative services that each fund requires to operate on a day-to-day basis. This is fairly self-explanatory. For providing these services, C.I. and Trimark receive a fee, what we simply call a management fee, out of the fund's assets, based, generally speaking, on a percentage of the average net assets of the particular fund. Each fund is also responsible, in addition to the management fee, for paying all operating expenses of the fund.
It is the interposition of the trustee or manager, namely C.I. and Trimark, in the affairs of mutual funds which has caused much confusion in the eyes of Revenue Canada and which has caused troubling applications of the GST rules to these management fees earned by C.I. and Trimark. The primary purpose for my visit today is to talk about the GST treatment on management fees.
Senator Angus: Could you clarify what you mean by the "interposition of the trustee or manager?"
Mr. Killeen: What I am getting at is a structural question. For tax reasons, a mutual fund trust is considered a separate entity, and a mutual fund can only act through its trustee, which happens also to be its manager. I will not go into the legal debate, but there is much legal argument over whether or not there is even a service provided by C.I. to the funds we manage, and that begs the question whether GST should even be exigible on the so-called services that we provide to the client.
As I speak, C.I. and Trimark are embroiled in litigation in the Tax Court of Canada where the issue is whether GST should be exigible on management fees earned by mutual fund managers such as C.I. and Trimark. In that forum, there is well over $20 million worth of tax refunds which could be recovered by C.I. and Trimark unit holders, if the appeals are successful.
The Chairman: For clarification, is it your position in the lawsuit that management fees earned by mutual fund managers are not as a result of supplying services and, therefore, should not be subject to the GST? If they are services, they are certainly subject to the GST. If they are not services, why is anyone paying you for them?
Senator Angus: The issue is the differentiation between the trustee and the manager.
Mr. Killeen: That is one of the academic arguments. There are a number of alternative arguments, the starting point for which is: Is there a supply? If there is no supply, there is no GST. If there is a supply, is it somehow exempt under, for example, the financial service exemption? We are trying to say that we are no different from the banks, in the sense that we are providing a financial service that should be exempt from GST application.
What has happened, as a result of the retroactive changes to the GST legislation, is that we are being treated in a discriminatory fashion in comparison to the banks and the trust companies, in the sense that the management fees that we earn are, in fact, levied the 7-per-cent GST. As a result, we are remitting that 7-per-cent GST to the government.
The Chairman: Am I correct that all mutual funds, whether owned by banks or anyone else, are in exactly the same position?
Mr. Killeen: On the question of mutual funds, yes.
Senator Angus: So this witness is not here on the harmonized sales tax part of the bill at all, but on the Part I, the so-called retroactive changes.
Mr. Killeen: That is correct.
Senator Angus: It is not only the retroactivity element that is of concern to you, but, if I understand, that the retroactivity would prejudice your lawsuit, ex post facto?
Mr. Killeen: It could prejudice our position, as I will explain in a moment. We filed our appeals shortly before April of 1996, when Bill C-70 was first announced. Our outside counsel tells us that that will give us some kind of favourable treatment in the tax court.
The failure to pay heed to my comments today will prevent mutual fund managers across Canada from recovering what is estimated to be well over $150 million worth of GST on behalf of unit holders.
A little history is in order to determine how this retroactivity issue has developed since approximately 1994. Since 1992, because of perceived ambiguities in the GST rules, CI, Trimark and others effectively chose to pay the GST to the government under protest. We filed our tax returns but we accompanied them with applications for GST refunds. Other competitors simply chose not to pay the GST.
Senator Angus: Your group, the C.I. group, filed their tax returns with the application, but the other mutual funds, the Dynamic group, for example, just did not pay?
Mr. Killeen: Certain competitors did not pay, that is correct.
In February 1994, Mr. Martin tried to clarify some of the rules with respect to the GST on management fees. He first introduced the concept of grandfathering. Again, one of the primary reasons I am here is to put forth a solution to this whole dilemma. In February, 1994, he said that grandfathering would clearly and unequivocally be permitted, such that retroactivity would be coupled with certain grandfathering provisions which would lighten the load for the unit holders of our various funds.
In December, 1994, a further announcement was made indicating that rebate claims made prior to that time could continue to be pursued. There was an indication, again, that grandfathering would be permitted. In March of 1996, C.I. and Trimark, after having their GST rebate claims rejected or ignored altogether by the tax authorities, filed appeals in the Tax Court of Canada, and shortly thereafter, in April of 1996, the Department of Finance publicly announced that it would not entertain rebate claims for the estimated $150 million in GST funds paid by managers since 1991, and Bill C-70 was set in motion.
Why are C.I. and Trimark and the mutual fund industry upset about this? It is because Bill C-70 does not contain any grandfathering provisions as originally espoused by Mr. Martin in February of 1994.
Senator Angus: If there were grandfathering provisions, you would not be here.
Mr. Killeen: That is correct.
Senator Angus: Although you have another issue with the bill, is that the main beef?
Mr. Killeen: That is correct. The reason we are upset is because of this particular use of what I will call "non-relieving retroactive legislation." There is ample case law which suggests that retroactive amendments with no grandfathering will erode the confidence of taxpayers because they cannot conduct their affairs with any certainty. It puts them in a position where they are unable to rely on legislation or coming-into-force provisions. In our view, this is an unjustifiable breach of principles of justice.
I am not here to say that retroactivity, per se, is bad because, clearly, the recent trend has been toward retroactivity. The question becomes one of reasonableness or whether, in all the circumstances, it is justifiable.
Senator Angus: In tax legislation retroactivity is a no-no, is it not?
Mr. Killeen: I do not have any examples. However, I think retroactivity is becoming a little more common.
In terms of reasonableness, C.I. Mutual Funds and Trimark will not be victims if Bill C-70 proceeds. It is the unitholders who will be the victims; it is the 1.4 million investors who collectively invest in the funds of C.I. and Trimark who must bear the expense of the GST which we pay to the government under protest.
Why did we pay the GST under protest? Because, after the February 1994 announcement, we consulted with our professional advisors and determined that the best way to carry out our fiduciary duty was to pay the money and to engage in discussions with Revenue Canada to determine how the grandfathering provisions would work.
In simple terms, we relied on the grandfathering provisions provided by the government and did everything we could possibly do, only to have the rules changed in 1996. Why is this an unjustifiable result? This is the interesting quirk of Bill C-70. The specific reference in this regard is clause 1(18) of Bill C-70. I recommend that someone have a look at that provision.
The effect of that clause will be that those companies which chose not to pay the GST in 1994 and thereafter will never be required to pay it.
Senator Angus: It is important that we understand this because it is a terrible anomaly.
The Chairman: Would you repeat that, sir?
Mr. Killeen: We chose to pay the GST under protest. In consultation with our lawyers and our accountants, we chose to pay it up front.
Senator Angus: You did that as good citizens.
Mr. Killeen: Yes, we did that as good citizens. Furthermore, we have a fiduciary duty to our unitholders to give them maximum returns in simple terms. Yet, some of our competitors chose not to do it because they knew that there was all this turmoil, shall we say, in the government ranks as to how it will apply. Clause 1(18) to which I referred has the puzzling effect of saying that those people who either intentionally or unintentionally did not pay the GST up to December 7 of 1994 will never have to pay it.
In a nutshell, in reversing himself on public commitments made twice in 1994, Mr. Martin has made our unitholders the victims of a tax system which is unable to recognize the distinctive features of the mutual fund industry.
How do we solve this problem? C.I. and Trimark recommend that the grandfathering originally proposed in 1994 should be restored for all fund companies which instituted GST refund claims prior to April 23, 1996; or, failing that, December 1994, which was the previous announcement made by Mr. Martin.
The Chairman: The first date to which you refer, April 23, 1996, was when the announcement was made, was it not?
Mr. Killeen: It was when Bill C-70 was first proposed.
That is the gist of my submission. I would be pleased to answer any questions, Mr. Chairman.
Senator Angus: Mr. Chairman, I do not understand why the ones who did not pay are getting off scot-free, as you said, while the ones who paid under protest are not getting their money back. It seems irreconcilable to me.
The Chairman: Just for the record, because my researcher wants to check this out, what clause were you talking about?
Mr. Killeen: Clause 1(18)
Mr. Killeen: With regard to the question asked by Senator Angus, the retroactivity, as set forth in Bill C-70, is broad reaching. It states that all the way back to December 1990 no one can obtain GST refund claims. Effectively, it creates a bar to companies like ours from going to court.
Senator Angus: In effect, the result is, "Tough bananas. You paid, even though it was under protest. Too bad, but there are no refunds."
Mr. Killeen: That is right.
Senator Angus: If you did not pay, it is also saying that, retroactively, you did not have to pay.
Mr. Killeen: There is a small exemption for those who did not pay between 1991 and December 1994.
Senator Angus: It is inequitable.
Mr. Killeen: I wish I had the figures for you, senator, but I will surmise that it is a large number.
The unjustifiable nature of the retroactivity is really twofold. It is not corporate profits which are affected; it is unitholder profits which are affected. As I said, I am speaking on behalf of 1.4 million Canadian investors. However, there is a greater number of victims in that you could say I am talking on behalf of the fund industry as a whole.
By creating this little exemption in that particular clause, they have created an unlevel playing field. They have put us at a competitive disadvantage to some of our competitors all because, in simple terms and without being too harsh, a promise was broken. We relied on a promise. We relied on a certain statement that forced us to govern our affairs from 1994 to 1996. Then, in 1996, we found out, "Tough luck, you did not have to pay that money after all."
Senator Angus: Did you appear before the House of Commons committee?
Mr. Killeen: C.I. has not; nor has our industry for that matter.
The Chairman: Department of Finance officials who are in the room just passed me a note on Mr. Killeen's two points, which I will summarize. I will then be happy to discuss the issue with the Minister of National Revenue this afternoon.
To the best knowledge of the Finance officials in the room, all funds have paid the tax. The witness' description of some having paid it and some having not I believe is accurate to the best of his knowledge. However, Finance officials are saying that all funds have paid the tax.
The more important issue is that even if some have not paid it, Revenue Canada will be taking the non-paying companies to court under the old wording of the legislation. Admittedly, they cannot under the new wording. They will be able to do that because the GST funds that they are after were collected at the time the old act was in effect. Therefore, the unlevel playing field argument, which is a totally legitimate concern, may not be valid, precisely because Revenue Canada intends to go after them to collect the back tax.
Senator Angus: He says there is an exemption for that back tax.
Mr. Killeen: On the second point, Mr. Chairman, I do not see how they can take them to court because they have this exemption right in Bill C-70, which is not yet law.
The Chairman: Is there an official from the department who can come to the table to clarify this issue?
Senator Stewart: Mr. Chairman, would it not be worthwhile to ask the present witness a question or two so that we are sure that we understand his case before we do what you propose?
The Chairman: Yes. We may then move on with other witnesses or bring up the issue when officials from the Department of National Revenue are here this afternoon.
Senator Stewart: I gather you are arguing that a strong case can be made that those who are the trustees of these funds, even under the existing law, are not liable to the GST. Given the nature of what trustees do, it was not Parliament's intention that the GST should apply to those trustees; is that correct?
Mr. Killeen: That is correct. That is the fundamental reason we brought the appeals before the Tax Court of Canada.
Senator Stewart: You mentioned that in February of 1994, Mr. Martin announced rules introducing the concept of grandfathering the GST returns filed before that date. Will you explain how the grandfathering announcement helped your situation?
Mr. Killeen: For all GST paid up to a certain date, grandfathering would effectively provide an exemption from retroactivity. Assuming that GST was not properly exigible on management fees, we would at some point get that money back.
Senator Stewart: In effect, grandfathering was saying that because of the uncertainty as to the applicability of the GST to these trustees -- which uncertainty, presumably, was being removed in the mind of the minister as of that date -- those taxes which had been levied prior to that day would not be collected; is that it? The fact that he is grandfathering suggests that as of the date of the grandfathering, which is retroactive or retrospective, a new set of rules will apply insofar as new activities are concerned.
Mr. Killeen: That is right.
Senator Stewart: Your concern is really with the money that you paid under protest prior to February 14, 1994. It does not deal with any aspect of the bill insofar as new activities by the trustees or managers are concerned, that is to say, new activities after that specified date. Is that correct?
Mr. Killeen: That is a fair way to look at it.
[Translation]
Senator Hervieux-Payette: My colleague and I looked into it. When we have and administer a self-directed RRSP, we pay an administrative fee each year. This administrative fee also includes payment of the GST. I am trying to make the link. Why would I pay my broker an administrative fee when I contributed to my own plan and worked for a business that didn't have a pension plan? Why would people who entrust administration of their plans to you not pay broker's fees? It seems to me that if I paid the GST for all those years, why would I be excluded?
[English]
Mr. Killeen: I cannot speak with a high level of knowledge about administrative fees charged by your broker on your RRSP account.
Senator Hervieux-Payette: They are the same.
Mr. Killeen: I am not here to argue necessarily whether or not GST should be exigible on management fees. It is pretty clear that the government has decided that GST should be paid on those fees. In the period 1991 to 1994, there was much uncertainty and great debate about whether or not the Excise Tax Act was drafted broadly enough to have management fees and management services fall within the scope of that particular piece of legislation.
We do not have a problem per se with GST applying to our management fees. Our problem is with the unevenness that has occurred from 1991 to 1996 in the application of the rules and in the public pronouncements that have been made. Our company, for example, ended up doing things one way with the best of intentions and another company ended up completely disregarding the rules, with the result that their investors probably got better returns on their funds because fewer expenses were charged to the funds.
In the tax court we will try to argue the case of whether GST should be applied. We are not sure how successful that will be. Failing that argument, there are a number of arguments at our disposal to suggest that this simple concept of retroactivity should be tempered with some grandfathering provisions, in order to create a tax system for our particular industry that has some certainty and allows lawyers and accountants, for example, to provide good advice to their clients which will not be changed retroactively up to six years ago. That is what I am trying to argue here today.
[Translation]
Senator Hervieux-Payette: If I understand correctly, the Minister of Finance should give you a cheque or ask the Minister of Revenue to collect all of the others. Obviously, you can see that my solution would be to collect all the others instead, since we want to pay our debts as soon as possible, but there must nevertheless be equal treatment for both parties. Both parties must be treated the same way. I do not suppose that you have different rules? Your fund is not structured differently from other funds? You play by exactly the same rules? You operate the same way as the other funds? You had lawyers who recommended you pay. The others did not pay. You say you want to be treated like the others, in the same way.
[English]
Mr. Killeen: We want to be treated evenly. As I said earlier, the answer is grandfathering, coupled with some major modification of the subsection. That would solve 99 per cent of these problems.
[Translation]
Senator Hervieux-Payette: This afternoon, we can discuss it with our Minister and inform him of our understanding, the nature of the problem and a possible solution.
[English]
Senator Angus: I wish to ask you a few questions about the corporate structure. You have the basic company, C.I. Mutual Funds Inc. What does that company do?
Mr. Killeen: It is in the business of providing the management and the administrative services that funds require to be sold to the public.
By "management" and "administration", I am talking about core functions such as being the registrar or transfer agency. We keep records of all our unitholders. We have a responsibility to comply with all laws and to report to all securities regulatory authorities, all with the purpose of catering to the unitholders.
Senator Angus: Do you charge the unit-holders a fee for that?
Mr. Killeen: The average management fee in the Canadian industry is approximately 2 per cent of assets.
Senator Angus: This is a legal entity which falls under the Canada Business Corporations Act. It does all those things you have just described and it gets paid for doing them. There is no issue on that, I take it.
Mr. Killeen: That is correct.
Senator Angus: You described another entity which is a trustee.
Mr. Killeen: This is not an easy issue, but there is some debate about whether a corporate trustee, C.I. Mutual Funds Inc., can appoint itself in a different capacity as a manager pursuant to a separate contract. The advice that we got in 1973 when the company was first founded was that that was a legitimate way to comply with the securities laws. Therefore, we have this somewhat strange looking feature wherein the trustee is treated separately from the manager, although in our case and in the case of most companies, it is the same entity.
Senator Angus: If I understand, it is an in-house transaction whereby C.I. Mutual Funds Inc., wearing its general hat as an administrator of the fund or funds for the unitholders, creates itself as a trustee in a narrow sense to perform certain fiduciary functions prescribed by law.
Mr. Killeen: That is correct.
Senator Angus: You do not set up a new entity, a trust under the Trust Companies Act or anything like that?
Mr. Killeen: The funds themselves, for tax purposes, are treated as separate entities. Practically speaking, you think of them as one entity and you think of C.I. Mutual Funds Inc. as a corporate entity that provides the services to the fund.
Senator Angus: The trust itself that you described in your brief and in your testimony is not a separate legal entity.
Mr. Killeen: That is correct.
Senator Angus: However, it does charge fees for being a trustee, and those are the fees at issue here.
Mr. Killeen: Not as trustee, per se; rather as manager. It charges fees for rendering management services to the fund. One way to think of it is that the trustee function is really only a token function. A trust cannot exist without a trustee. So we fulfil that legal criterion by declaring ourselves the trustee of each and every one of the 27 mutual fund trusts under our management.
Senator Angus: I understand. However, there is only the one fee?
Mr. Killeen: That is correct.
Senator Angus: You do not have a management fee and then a fee for the trust function qua trustee.
Mr. Killeen: That is correct?
Senator Angus: As you are aware, we will be doing a fact-finding study soon on the issue of the governance of mutual funds and other institutions. It is interesting that these issues are coming up now in terms of management or accountability to unitholders. This is a typical issue, is it not? You are here on behalf of the owners of the units in the various mutual funds.
Mr. Killeen: Yes. We are not here in our corporate capacity; we are here to protect our unitholders and to reduce their costs.
Senator Angus: Who are you accountable to? C.I. Mutual Funds Inc. is accountable, obviously, to the unitholders, but in what fashion? Do the unitholders have representatives on your board of directors?
Mr. Killeen: No, they do not. The directors and officers are all employees of the company. Each of our funds has a unique board of governors which is designed to oversee certain aspects of the fund. There are certain overlaps in those directors and officers, but it is all structured in compliance with security law.
You are touching on some seminal corporate governance questions in our industry.
Senator Angus: This particular tax issue has a substantial impact. Sadly, you were unable to give us numbers. We hope that you will send us some to give us an idea of the order of magnitude for the unitholders.
Mr. Killeen: On behalf of C.I. and Trimark I can tell you that in the neighbourhood of $20 million to $25 million is at issue. Unfortunately, I cannot speak on behalf of the entire industry.
Senator Angus: If there were an amendment to clause 1(18) that introduced grandfathering for these particular amounts, you would get a rebate of $20 million, plus or minus, as I understand your evidence.
Mr. Killeen: That is correct. I have an article, which I will leave with the clerk, that suggests that the amount for the industry as a whole could be as high as $150 million.
Senator Angus: However, they have not all paid under protest.
Mr. Killeen: Some have. The ones which have could conceivably get up to $150 million.
Senator Stewart: You refer to a clause in the bill. To your knowledge, does that clause have any purpose other than the specific intention of dealing with the particular set of facts to which you have made reference?
I am trying to discover whether the government saw that there was uncertainty in the law and, now, in this bill, is trying to alleviate that uncertaintyby that particular clause. To your knowledge, is there any other function which the government is seeking to perform by that particular clause in this bill?
Mr. Killeen: Not to my knowledge.
The Chairman: In the spring of 1993, there was a similar degree of ambiguity over other parts of the GST. In fact, this committee, under the previous administration, unanimously supported a retroactive amendment which went back, as I recall, to January 1, 1991, to deal with some of the ambiguities because creative accountants and lawyers had figured out ways to interpret language and were doing things which, while legal, were not in the spirit of the bill. That led the government to introduce a retroactive element of the GST.
Senator Angus: Did this serve to give relief or to impose?
The Chairman: To impose. My only reason for putting that on the table is to say that this is not the first time that has happened.
If you got the $20 million to $25 million back, how would you find your unitholders going back to 1991, who clearly are entitled to that money? Is it the case that if you cannot find them, you get to keep it?
Mr. Killeen: That is a difficult fund accounting question.
The Chairman: Yet a practical one.
Mr. Killeen: If investors had bailed out, they ought not to receive a benefit now. Probably only the current investors would benefit from that added value to the assets of the particular fund.
The Chairman: Mr. Norris, a senior official in the Department of Finance, is in the room and is prepared to address this specific question.
Mr. Tim Norris, Tax Policy Officer, Sales Tax Division, Tax Policy Branch, Department of Finance: The general response is that the department is concerned about a number of changes happening within the industry. The legislation as proposed was being challenged by various tax professionals.
The Chairman: In order to be clear on what you are saying, do you mean challenged legally or challenged creatively but not necessarily legally?
Mr. Norris: I mean challenged creatively but not legally.
The Chairman: They were filing things that, in their view, were a reasonable interpretation of the law?
Mr. Norris: Yes. Perhaps I should start again.
In 1990, the intention of the government was that management administration fees applied to a trust would be taxable. They would be the same as lawyers' fees or accountants' fees or anyone else's fees, and these management fees should be taxable.
Ms Marlene Legare, Sales Tax Division, Tax Policy Branch, Department of Finance: If I could add to that, from the department's standpoint, the position that these management and administrative fees were taxable has always been very clear. We heard from the committee yesterday that there were some areas where the technical notes could be clearer, but this is an area where they were extremely clear.
To the best of our knowledge, the vast majority of financial institutions which deal in mutual funds and investment plans that are subject to this rule complied with it in terms of paying the tax on these types of fees.
Mr. Norris: I would suggest, then, that the situation becomes one of financial institutions paying tax. Financial institutions, as exempt entities, are not able to recover tax with input tax credits. To the extent that they can claim something as commercial activity as opposed to a financial activity, they are allowed to benefit.
The Chairman: You say it is a benefit because they do not pay the tax.
Mr. Norris: They do not pay the tax. Many funds were looking at the legislation and asking, "Is there a way we can interpret this in order to recover tax that was paid?"
The Chairman: There is nothing wrong with doing this, however they were attempting to describe their activities as financial services rather than commercial services.
Mr. Norris: Commercial taxable services, right.
Senator Angus: It appears the entire issue turns on whether these services rendered by the management company are management services of a commercial nature or financial services similar to a brokerage fee on a stock transaction.
Mr. Norris: Yes, that is correct.
Some tax professionals had been offering, on a contingency fee basis, schemes or ideas as to how to avoid the tax or recover the tax that they had previously paid. Our position is that all the taxes paid were properly paid.
In one year, over 700 notices of objection were filed, and we thought that the industry was having a problem with the certainty of the legislation , which is to say we could be tied up in court arguing a number of issues for years, creating a lack of certainty in an industry which requires certainty. As we deal with people's savings and pensions, we need to have certainty.
To our understanding as a result of discussions with fund associations, including the Investment Fund Institute of Canada, most funds had been paying tax and had understood they were to pay tax. They did not like the fact that they were paying tax, perhaps, but that was the situation.
In 1994, the minister was trying to clarify legislation. We were willing to go to court on this legislation to prove that it is whole and would work. However, the situation became one of numerous people taking aim at provisions and arguing about where commas and periods should be and where sentences ended.
The question became one of how to best manage the situation as to the spirit and intent of the law. There are three kinds of retroactivity: relieving provisions, which are to the benefit of the taxpayer; retroactive taxation, where you impose taxes in areas which were previously not taxed; and, in this middle situation, retroactivity which confirms the intent of the legislation.
We confirmed retroactivity in 1994 with grandfathering. That caused a problem in the industry because those who had filed claims were allowed to challenge the law and those who did not file claims were not. All of a sudden, everyone jumped in and started filing claims, saying, "If you are grandfathering, play by the Marquis of Queensbury rules and say we can go to court on the old wording. The old wording may be weak, and we want to jump on it." We had a snowball effect.
The minister came to realize that this was not the standard taxpayer making a claim based on confusing wording, but rather a series of sophisticated schemes to recover tax that could cause problems.
Ms Legare: The decision to go with a retroactive application is not taken lightly. It is always taken to be an exception rather than a rule. The department established a set of criteria on when it would consider a retroactive amendment to be appropriate ly.
The circumstances in this case, as in the case that the chairman referred to earlier, are virtually identical to the circumstances which call for a retroactive measure.
In the situation Mr. Norris described, had the entities succeeded with their interpretations that were alternative and contrary to the policy and intent, those entities would realize windfall gains because the tax had been paid and, after the fact, claimed as a refund. Essentially, present fund holders with accrued gains and others who followed the spirit and intent of the law and did not file refund claims would not have had the same opportunity. There were potential windfall situations. There was a large revenue, obviously, and a potential risk.
The department's position was that the policy was clear and that this was something understood, evidenced by the fact that the vast majority did, in fact, pay the tax.
Senator Angus: I am not sure if we are having a mini-trial, because it would be improper to be discussing matters before the courts.
The Chairman: I was about to cut it off at this point.
Therefore, in the government's view, you are levelling the playing field.
Ms Legare: That is precisely the case. In a situation where a fund manager did not charge the tax in good faith, believing that the tax was not exigible, the amended wording does not apply. This is consistent with the department's policy with respect to the application of retroactive legislation. It addresses a situation where there could potentially be windfall gains where there was tax charged and, after the fact, due to alternative, aggressive interpretations, the registrant is claiming a refund.
In the event that, in the first instance, registrants assessed the situation and determined in their view that that tax was not payable, the amendment is not imposing a new set of rules on them. It is confirming that the tax was properly paid in the first place to those companies that did pay it. Those who had the contrary interpretation in the first instance are being allowed to proceed with their interpretation, and the courts will decide.
The position is clear that the tax was properly payable from the beginning. In the event that they do proceed to challenge the original wording, as I said, the courts will decide.
The Chairman: Mr. Killeen, we will not get into a debate, but I am happy to give you a rebuttal.
Mr. Killeen: We will never know if the interpretations that were being sold and bandied about were aggressive, nor will we ever know whether the spirit and intent were being abused. They have wiped out the court's ability to interpret the legislation prior to Bill C-70.
Ms Legare: It is true that the new wording would apply to any case in which a refund claim was filed after the fact. As I said, the old wording will continue to apply to any case in which the fees were not charged in the first instance.
Senator Stewart: In other words, you are accepting the original interpretation of the potential taxpayers as valid?
Ms Legare: If they originally interpreted that they did not have to charge the tax, they will have the opportunity to make that argument.
The Chairman: Ms Legare is saying that what Mr. Killeen said in rebuttal is correct.
Senator Hervieux-Payette: Are you saying that it is the normal, standard practice of your department that my good faith is taken into account when interpreting the law, and that therefore you may not collect from me? Do I understand you to be saying that good faith is part of fiscal legislation? As far as I am concerned, no one should decide in his own mind how to interpret it.
Senator Kenny: It is a principle of self-assessment, surely.
Senator Hervieux-Payette: Is good faith a standard type of statutory interpretation of the Income Tax Act?
Ms Legare: I meant that in the event that the supplier did not charge the tax because they believed it was not payable on the basis of the existing wording at the time they made that decision, the new wording will not retroactively affect them.
Senator Hervieux-Payette: As a general rule, is this the way you apply the Income Tax Act -- those who believe, in good faith, they have to pay it are paying it. In other words, they are the most penalized because those who think that they can escape it will not pay.
I never thought that the Income Tax Act was so nice. Now I understand why the fiscal people are doing so well.
The Chairman: I will cut off the issue at this point.
Thank you, Mr. Killeen.
Our next witnesses are from the Canadian Medical Association.
Dr. Judith Kazimirski, President, Canadian Medical Association: Mr. Chairman, I must say I feel some degree of comfort among so many maritimers, former as well as present.
[Translation]
On behalf of the physicians of Canada, the Canadian Medical Association thanks the committee for this opportunity to present our views on Bill C-70.
[English]
The Canadian Medical Association has appeared before parliamentary committees when they have considered matters pertaining to federal tax policy in Canada in the past. In 1994, we appeared before the House of Commons Standing Committee on Finance when it examined a number of specific tax policy alternatives to the goods and services tax.
The association has also made representation to the Standing Committee on Finance as part of the government's pre-budget consultation process and, last month, appeared before that committee when it reviewed Bill C-70.
I wish to remind members of the Senate Banking, Trade and Commerce Committee that the Canadian Medical Association remains strongly committed to a federal sales tax system that is simplified, fair and equitable for all. However, we are also of the view that there is a need to review the relationship between sales tax policy and health care policy in Canada and to review the issue of fundamental fairness in tax policy.
I would like to deal with the issue of fairness first. Since the GST's inception in 1991, Canada's doctors have been treated in a manner that can only be described as unfair. As the consequence of a tax anomaly, physicians are, on one hand, denied the ability to claim GST tax input credits on the medical supplies necessary to deliver quality health care, and, on the other hand, they cannot pass the tax on to provincial and territorial governments that purchase their services.
It is difficult for me to convey to you the intensity of physicians' feelings about the inequitable treatment that they receive under the GST and the soon to be implemented HST. Because of the discriminatory effects of the GST, physicians in private practice have already been forced to absorb some $300 million of additional tax since the introduction of GST. Physicians do pay their fair share of taxes to support the wide range of government services, but that is not the issue. The issue is that physicians are small business persons who provide services.
The harmonization provision of Bill C-70 will make a situation that is bad even worse. A study that we have commissioned by the firm KPMG shows that, in New Brunswick, Nova Scotia and Newfoundland, the provinces affected by harmonization, physicians will have to absorb an additional tax burden of $4.7 million each year. That is unacceptable. The primary issue here is one of fundamental fairness.
The Chairman: However, the situation would be worse if there were business inputs as to items that were not previously subject to PST but on which the PST will now be paid. Would you agree that it is a PST problem, not a GST problem?
Dr. Kazimirski: No. It is clearly a GST problem. This is a federal tax problem, not a PST problem.
The Chairman: Am I right that the reason there is an increased cost is because the HST will apply to some business inputs on which you were not previously paying the PST?
Mr. Glenn Brimacombe, Associate Director, Health Economics Research, Canadian Medical Association: That is a secondary effect. The original impact is the fact that, with the introduction of the GST in 1991, physicians cannot claim the input tax.
The Chairman: I understand the original problem.
Mr. Brimacombe: There is a compounding problem with respect to the HST.
The Chairman: There are two separate issues. One was the inequity in the original GST situation. That situation is now further compounded under Bill C-70 because of the broadened tax base causing you to pay the PST where you did not pay it before.
Mr. Brimacombe: That is correct.
The Chairman: That is why I am saying that there are essentially two separate areas.
Dr. Kazimirski: The current GST policy also raised a series of distortions that have tax policy and health care policy working against one another.
It is time to address this situation based on the fundamental principle of fairness in the tax system while ensuring that good tax policy reinforces and supports good health care policy.
Mr. Chairman and members of the committee, the medical profession is not looking for special treatment. What we are asking for is to be treated no differently from any other self-employed Canadian or small business who has the opportunity to claim input tax credits, and to be placed on the same footing with other health care providers who have the ability to recoup GST costs.
In fact, in a report from the Nova Scotia Department of Health, entitled, "Good Medicine: Securing Doctors' Services for Nova Scotians", released on January 31, 1997, it states that the GST -- and starting in April the new HST -- has a unique effect on the medical profession because doctors are the only business group unable either to be exempted from the tax or to pass it on to consumers.
Furthermore, honourable senators, during our testimony before the House of Commons Committee Finance Committee on Bill C-20 on January 21, 1997, the committee chairman, Mr. Jim Peterson, expressed sympathy for our position and understanding of the fundamental unfairness. He said:
I don't think there's any doubt that all of us feel that you're sort of the meat in the sandwich.
He further indicated that he understood our sense of frustration and concern. There is an opportunity now for action to correct this fundamental unfairness. Even with amendments to this bill, the HST will continue to discriminate against physicians.
Senator Angus: Mr. Peterson's committee did not propose any amendments, though, did they?
Dr. Kazimirski: No, they did not, sir. In its first major attempt to amend the GST, the government defeated an amendment that would have corrected this anomaly.
Therefore, as a matter of fundamental fairness that underpins our sales tax system, I would urge this committee to adopt the recommendation that we propose in our brief to you, which is that health care services funded by the provinces be zero-rated. This recommendation serves to place physicians on a level playing field with other self-employed Canadians and small businesses. We have drafted a specific recommendation in our brief that addresses this matter. By adopting the recommendation, the federal government would fulfil at least two overarching policy principles: first, strengthening the relationship between good economic policy on one hand and good health policy on the other; and, second, in all cases applying the fundamental principles of fairness, efficiency and effectiveness that underlie our tax system.
I would suggest the timing is critical. Physicians in Atlantic Canada are running out of time as harmonization goes into effect on April 1, 1997. We believe that taxation must be fair to all Canadians, including physicians.
Mr. Chairman and honourable senators, we would be pleased to answer any questions that the members of your committee may have.
Senator Stewart: The witness has made a specific recommendation. I gather that this recommendation, or something along these lines, was given to the committee in the other place. Evidently the government did not find this recommendation acceptable, for one reason or another, which I, of course, cannot explain.
It would seem to me that if we are going to deal properly with this recommendation, which has been explained quite clearly, we really at this point should hear why the government did not accept it and thus give the present witnesses an opportunity to explain why they think the government's response is inadequate.
The Chairman: Your suggestion, then, is that we ask finance officials to comment.
Senator Stewart: Exactly. The witness has made what looks like a good case. Presumably it was made before. It did not succeed before. Why did it not succeed before? Was there some misunderstanding on the part of the government which explains the fact that it did not succeed before?
The Chairman: I will ask our researcher to check. I do not know whether the correct officials are here to deal with that question.
While the researcher deals with that, I would like to ask a question for clarification. Fundamentally, the issue that is troubling you is the same issue that was debated when the GST was originally proposed. I understand that there is this compounding effect of harmonization, but the fundamental issue was the issue to not zero rate your services at the very beginning, when the GST began; is that correct?
Dr. Kazimirski: That is correct.
The Chairman: Therefore, recognizing the compounding factor, the argument you are making is exactly the argument that the medical association, I presume, made in 1991 when the GST was debated.
Mr. Brimacombe: The position of the CMA at the time, that is before the introduction of the GST, was that, with the movement of the FST to the GST, from a supplier-based to a consumer-based tax, the medical profession would be left no worse off nor be penalized.
The Chairman: What was the response you received? Obviously, it was not successful, but was there a rationale given for not dealing with your problem?
Mr. Brimacombe: I was not at the CMA at that time. I was not involved with the discussions.
Senator Angus: Was it a constitutional issue?
The Chairman: Can I just say that our researcher, Dr. Goldstein, has just reported that the official in finance, the director of the sales tax division, will be here with the Minister of Revenue at one o'clock. I suggest we proceed with out questioning of these witnesses, and they may want to be present this afternoon because we will make a point of attempting to get a direct answer from the officials.
Senator St. Germain: Does this problem relate in any way to the fact that the Income Tax Act was changed in relationship to professions? Were doctors linked in with lawyers and so on, where they were no longer allowed to write off expenses as a corporation does?
Dr. Kazimirski: No.
Senator St. Germain: It had nothing to do with that?
Dr. Kazimirski: This is strictly a matter of federal tax policy in relation to the GST.
Senator St. Germain: Is there any way if a doctor incorporates his practice, he can claim back the ITCs?
Mr. Brimacombe: To my knowledge, a physician cannot do that. It is important to point out that physicians have the ability to incorporate in only six provinces. Not all provinces extend to doctors that right, which is extended to other self-employed professionals or groups.
Senator St. Germain: If they did have the right to incorporate, would they have the right to claim back their ITCs?
Mr. Brimacombe: I do not believe so, because medical services are tax-exempt.
Senator St. Germain: Because the service provided is tax-exempt, they would have to pay the tax on the equipment they purchase as a corporation?
Mr. Brimacombe: They are paying the tax on those inputs that are part of their practice.
Senator St. Germain: It is not really clear. Perhaps we will be able to clear it up with the officials this afternoon.
I have received submissions from the medical profession in British Columbia, and they have questioned why, if they are in the health services business, they are not exempt or zero rated. I will try to dig out the information over lunch period and get at it.
Senator Angus: Does this apply to all doctors and other health care professionals who are remunerated through Medicare schemes?
Dr. Kazimirski: That is correct. It is important to recognize that, while the beneficiary of physicians' services is the patient, the payer for the service is the provincial government. They are paid from the public purse rather than the private purse. The issue, and our recommendation, relates to all services that would be covered under provincial, publicly funded health care programs. There are many other health care providers who receive their remuneration via a mixture of public and private programs. It is estimated that 99 per cent of physicians are paid from the public purse.
Other professionals such as dentists, psychologists and physiotherapists, receive much of their funding from the private purse and can recoup their costs through that means. Some of them are paid by a different mixture. Physiotherapists may receive a certain portion of their funding from the public purse and a certain portion from the private purse, but with physicians that is not the case.
The Chairman: The recouping is done because they can pass it on to a higher fee schedule?
Dr. Kazimirski: Absolutely.
Senator Angus: Anyone who is charging the consumer directly can recover.
Dr. Kazimirski: That is right.
Senator Angus: Physicians who have opted out of the Medicare scheme would be in that position, too, would they not?
Dr. Kazimirski: There are very few. It is province specific, but in most cases it is not allowed under the regulations of the provinces. Opting-out does not affect a significant number of physicians. The majority of physicians are affected significantly by the unfair treatment under the GST. They must absorb that expense directly because they have no other way of recouping that cost.
Senator Angus: Are you in a position to tell the committee what the impact will be on medical care in Nova Scotia, New Brunswick and Newfoundland as a result of this legislation if it goes through unamended?
Dr. Kazimirski: Several of us can answer that in various ways. From the point of view of a practitioner, if you are at all aware of the current environment of health reform in this country, you are aware that individual provinces are being forced to accelerate a pace of change that has stressed the system to the point where it cannot accommodate and adapt. No matter what you look at, you are now hearing about stories from the Canadian public concerning their experience with the system, which is seriously threatening both access and quality of care.
This same message was given to government by their own ministers of health, in the report that was recently released. The report stated that we cannot absorb any further cuts to the funding that is available to us to deliver health care. I am referring to the report from the ministers of health directly to government.
At the provincial level, physicians are now placed in a situation where they are working under extremely difficult circumstances in a system that is shrinking and shrinking while demand is increasing. The demand is being created by an aging population, an increase in the population, the opportunities created by technology and by changes in medical knowledge. At the same time, if you look at what is happening in the provinces and at the headlines in Nova Scotia, for instance, doctors are being cut back in terms of utilization; physician services are being capped and governments are clawing back funding from physicians for services that they are providing.
In that environment, the effect of the GST on an individual physician is very real. Under the new combined tax, that will mean $3,000 a year. That would pay a nurse in my office for one month to work with me, for instance. Furthermore, physicians are not choosing to practice primarily in Canada. We lost 654 physicians in 1995; Nova Scotia lost 58 last year, and there are many more who are planning to leave. This GST issue is one of the last straws and is having an effect on the way people look at the creation of an environment where health policy and tax policy are complementary and support a professional environment for practice -- not only for physicians but for all health care professionals.
It is fundamentally unfair that a service that is provided in an institution is taxed differently from a service that is provided in my office where I must pay for everything that I provide. This is exactly what happens. When the GST was initially negotiated, yes, the medical community supported the fundamental principle that Canadians should not have to pay for medical services in this way. When this was done, under the MUSH formula -- that is, municipalities, universities, schools and hospitals -- they were able to negotiate an 83-per-cent refund on GST. The same service provided in the facility is not covered under the same tax legislation in my office. Think of the fundamental driver of health care reform. The fundamental driver is: Move the service from the facility to the community. Move it from the medical areas and out into the community. What will doctors in their private offices be trying to do as they try to absorb more and more cost and increased utilization? They will be trying to shift it back again. That is a fundamental imbalance between health policy and tax policy.
Under pharmacare, GST prescriptions are fundamentally zero rated. This is important for the pharmaceutical industry. In order to get a drug, you must see a physician and a diagnosis must be made. It is part of the continuum of care and, yet again, a fundamental imbalance in the way that prescriptions are rated under GST and physician services.
Look at what happens in terms of physicians' offices. There are approximately 50,000 doctors in this country and most of them employ at least two to three individuals. Everyone is cut back.
Senator Angus: Most offices are outside of the hospitals themselves.
Dr. Kazimirski: Yes, most physicians have offices outside of the hospital. The facility is not an institution that is designed for physicians' offices. Physicians provide service. Some who are university-based have an office there. Most have their own offices that they fund themselves.
Senator Angus: Are the doctors who do not have external facilities covered by the MUSH formula?
Dr. Kazimirski: No, the MUSH formula covers the institution; it does not cover the physician within the institution unless they are on salary.
Senator Angus: For example, the head of the department of surgery at McGill has his office in the Montreal General Hospital and he carries out his practice from there. He is one of your members and he is affected in the same way as these others. In other words, there is no differentiation. If he had his office downtown, he would be affected the same way; is that correct?
Mr. Brimacombe: There is a bit of a distinction. Basically, if you have your office in a hospital and your practice is operated out of that hospital, if you are purchasing supplies that are part of your delivery of practice, you are running it through the hospital. That is where the 83-per-cent rebate comes in. However, for physicians in private practice, that 83 per cent rebate does not exist.
Dr. Léo-Paul Landry, Secretary General, Canadian Medical Association: Except in the case of Dr. David Mulder. He is also an exception because he is full-time.
Senator Angus: That is geographic full-time.
Dr. Landry: That is right. There are differences in that case that do not apply to the majority of physicians.
Senator Angus: Let us take Dr. Jerry Fried, a staff surgeon. If you have problems with your gallbladder, you are referred to him by your GP. Is he affected?
Dr. Landry: Having left the Montreal General a few years ago, I would be hard pressed to give you his current status.
The majority of physicians in that institution, as a matter of fact along with all of the other academic institutions, who practice in the university hospital setting also have a base outside in a private office. In that case, all of the unfairness that has been alluded to applies.
Senator Angus: Is there a constitutional issue here -- that is, a problem with provincial jurisdiction -- or does the federal government have the authority to fix this problem of unfairness?
Dr. Kazimirski: You have a phenomenal opportunity to fix this problem. This is definitely a federal issue. It is part of the federal regulation.
Senator Angus: The amendment that you would like is set out in your brief. Mr. Peterson and his committee expressed sympathy for the doctors but did not vote for the amendment.
Dr. Kazimirski: That is correct.
Dr. Landry: The question of the recognition of the unfairness goes back to the previous government. Mr. Mazankowski recognized the situation in a meeting held with him. Mr. Martin has also recognized the issue. It is a question of getting something done about it. Mr. Peterson recognized the unfairness of the situation. They all say, "Yes, we know all the details. We know about your concerns, but the action never comes."
Senator Angus: To be clear, I believe this is an issue of government policy. We are here to take a look at the bill and to ensure that it is good legislation. We can recommend policy and so on. However, unless I am missing something here, you are using this as a forum to point out that it is bad public policy.
Dr. Kazimirski: That is correct; and that it translates into public health policy.
Senator Angus: In terms of health care reform, which has been necessitated by the five points that you started with, this tax policy is on a head-on collision course with that process.
Dr. Kazimirski: That is right.
Senator St. Germain: Is it compounded by the cut-backs on transfer payments to the provinces? Is this what we are really dealing with, as well as the issue of unfairness?
Dr. Kazimirski: The issue of the transfer payments to the provinces being cut back and the further $4.5 billion that will be taken out April 1 this year has a significant impact on the ability of the provinces to continue to provide care. Yes, that does translate into the changes that I described in the professional environment. However, that issue is not the issue of GST. Those are linked in terms of their impact on the creation of that environment and on the creation of a place where there is good, fair, open policy and treatment that is translated into a health policy as well.
Senator Buchanan: Over the past two or three weeks, approximately 10 doctors have called me, two from Cape Breton and the rest from the Halifax regional area. Some have indicated to me that this may be the straw that breaks the camel's back. They are on the verge of deciding whether they will stay or go unless this issue is settled. Do you agree that there are doctors in Nova Scotia who have this feeling at the present time?
Dr. Kazimirski: Absolutely. They are not only in Nova Scotia but across the country.
Senator Buchanan: In the three provinces where this new 8-per-cent tax will be added there is a much stronger feeling, as I understand, among the doctors to whom I have spoken.
Dr. Kazimirski: Yes.
Senator Buchanan: Doctors are concerned with the original GST. Their greater concern now is what they call a compounding effect of this additional 8 per cent being foisted upon them, they being primarily general practitioners in small offices. In Nova Scotia that added 8 per cent will now be absorbed by the physicians because of the HST broadening the provincial tax base. They will now be at 15 per cent instead of 7 per cent; is that correct?
Dr. Kazimirski: That is correct.
Senator Buchanan: Their concern is that they must now absorb this 8 per cent with there being no opportunity of rebateor if even charging it to patients, which they would not want to do any way; is that correct?
Dr. Kazimirski: That is correct. They have no way of passing that expense on, and they have no ability to obtain a rebate.
Senator Buchanan: What you are saying, as they have said to me, is that they are just looking for a level playing field.
Dr. Kazimirski: That is right. We are looking not to be treated differently from any other small business in the country. For tax purposes we are categorized as small businesses. We should be subjected to the same tax rules that apply to small businesses. We are asking for fundamental fairness and a level playing field, not special treatment.
Senator Stewart: I assume you have statistics. First, let us consider the provincial sales taxes. Physicians in private practice in Nova Scotia pay the provincial sales tax on certain goods that they buy; is that correct?
Dr. Kazimirski: Yes, it is the same everywhere.
Senator Stewart: Could you tell us what that costs physicians in private practice in Nova Scotia?
Dr. Kazimirski: As you know, we have done two studies through KPMG, one in 1992 and one more recently, which looked at the effect of harmonization. I am not sure we have the details broken down province by province.
Mr. Brimacombe: Senator, are you asking about the added cost vis-à-vis harmonization?
Senator Buchanan: No, I am asking about the present situation. First, what is the cost to physicians in private practice of the provincial sales tax in Nova Scotia? Second, what is the cost of the GST to physicians in private practice in Nova Scotia? Third, what is the cost of the addition of the harmonized sales tax?
Mr. Brimacombe: With regard to the additional cost of the HST, we have commissioned two studies by KPMG. The second study considers the added cost of the HST over and above the costs of the GST. In Atlantic Canada, excluding P.E.I. for the time being, it is estimated that it will cost an additional $4.7 million.
With the introduction of the GST, physicians pay an additional $60 million per year, and that is netting out the impact of the FST.
Senator Buchanan: That is Canada-wide.
Mr. Brimacombe: That is Canada-wide and not just the Atlantic provinces.
Senator Stewart: Before you go on, with regard to the $4.7 million for the HST, we are talking about different things when you move to the $60-million figure, right? Can you give me a rough proportion of that $60 million which is attributable to the provinces in which the $4.7 million arises?
Mr. Brimacombe: I would have to get back to you on that. We did not break it out by province. When we did the national study, it was rolled up at a national level.
Senator Stewart: Have you considered the effect of the HST for all of Canada?
Mr. Brimacombe: The HST study was only done for Atlantic Canada.
Senator Stewart: You do not have figures to support your case, then. I am not suggesting your case is wrong on that basis; but you cannot give specific figures to support it.
Mr. Brimacombe: As I have said, we have given specific figures with regard to the impact of the HST for Atlantic Canada. It is fully documented in the study that we have. The figure is $4.7 million, which is in addition to the cost of the GST that all physicians are paying across the country, which totals $60 million.
Senator Stewart: Would it be fair to say that in the case of Nova Scotia, it is approximately $9 million or $10 million? I want to see how big a problem we are talking about here.
Senator Angus: Do you mean the GST plus the HST?
Senator Stewart: No. He has told us about the HST.
Senator Buchanan: That is the incremental cost.
Senator Stewart: We understand that. I am now asking to what amount is that incremental.
Mr. Brimacombe: I would have to get back to you with regard to an apportioning of that figure.
The Chairman: As a ballpark estimate, the Nova Scotia population is roughly one-thirtieth of the Canadian population, so it would probably be $2 million to $2.5 million.
Senator Stewart: Let us go back to the first step, the provincial sales tax, for which I did not vote. Would you tell what the impact of that is in the case of Nova Scotia, or all three provinces, on physicians' net?
Mr. Brimacombe: We have calculated the added impact. I do not have the figure for what they were paying in Nova Scotia pre-GST.
Senator Stewart: If we had those figures, it seems to me that it would help your case, provided that the figures are high.
Mr. Chairman, the witnesses have made what sounds like a persuasive case, and they have made it eloquently. It is a shame that they cannot provide us with the figures which would impress the people in the Department of Finance. If we could get that, it would be most helpful.
The Chairman: We are not looking for actuarial or even accounting accuracy here, and I am not asking you to give us a number now. Surely, given the data you have, and even if you use nothing but the proportion of doctors in Nova Scotia vis-à-vis your total population, that has to give you a pretty reasonable estimate.
Could you do that and fax it over to us?
Dr. Kazimirski: Sure.
The Chairman: It would be helpful if we could have that before the end of the week.
Mr. Brimacombe: The study does break down the per-physician cost by province, in addition. That is, with the introduction of the HST we are looking at an additional $1,100 to $1,400 per physician. That is roughly a 2.1 per cent to 2.3 per cent non-recoverable increase in expenses per physician.
Senator Angus: Most of this data is in this KPMG report.
Mr. Brimacombe: It is and those results have been shared with government. The first study, both in terms of process and facts, has been shared with them and refuted or disputed since 1992. The second one was also given to them when it was made available, but we will make that available to you as soon as possible.
The Chairman: Thank you for coming.
The committee adjourned until 1 p.m.