Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 23 - Evidence - March 10 meeting
OTTAWA, Monday, March 10, 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: We are about to hear from our last witness with respect to Bill C-70. The bill has two parts: One related to the GST and the second related to the harmonized sales tax in the provinces of Nova Scotia, New Brunswick, Newfoundland and Labrador. Our final witness is the Minister of Finance, the Honourable Paul Martin.
Welcome to our committee. This is your first appearance before this committee, perhaps your first appearance before any Senate committee. We appreciate your taking the time to be with us today. Senators are aware that you must leave promptly at 10:30. We will take the period of time between the completion of your opening statement and 10:30 and divide it equally in terms of questions from the two sides. Thank you very much for being here. Please proceed.
The Honourable Paul Martin, P.C., M.P., Minister of Finance: Thank you, Mr. Chairman and senators, for inviting me to appear before this committee today to address Bill C-70. As you have said, Mr. Chairman, this is indeed my first appearance before a Senate committee, and I think it is particularly appropriate that it be this one.
This is a very important piece of legislation. It is multi-faceted yet it has one common, cohesive theme, namely, the improvement of Canada's sales tax system.
This will come about, senators, in two fundamental ways. First, the bill will implement, as the chairman has just said, the harmonized sales tax in the provinces of New Brunswick, Nova Scotia, and Newfoundland and Labrador. Second, the legislation contains very important sales tax simplification measures. These amendments were first announced last April and will apply equally to the harmonized sales tax in the participating provinces and the GST in the rest of Canada.
[Translation]
Quite a long time ago, the government asked the House of Commons Standing Committee on Finance to review the sales tax issue and to recommend appropriate measures. The committee reviewed all possible solutions. Some 500 witnesses from the 10 provinces were heard and over 700 briefs were submitted.
In the end, the committee recommended that the government establish an harmonized value-added tax and implement simplification measures and tax-included pricing.
We follow up on the direction given by the committee. In that sense, Bill C-70 is an important step towards the achievement of this objective.
[English]
Sales tax harmonization is a bold step forward by all the parties who were involved. Getting the four governments -- any four governments -- to rethink their respective roles and move together to reduce overlap and duplication is a defining moment in the history of federal-provincial relations. Securing this agreement is a monumental achievement in its own right, and this bill shows what can be accomplished through federal-provincial cooperation. It shows how the door can be opened to a whole new range of creative solutions to the challenges that Canadians will inevitably face together.
Specifically, this bill establishes the policy and legislative framework on which future sales tax harmonization agreements can be built. It proposes innovative and successful resolutions to issues that are required for a harmonization of the sales tax system right across the country. As such, one must view the importance of this bill as extending far beyond the provinces that are directly involved at this time. The harmonization provisions of this legislation are an example of how everyone wins when governments work together instead of working in isolation.
I am not here to talk about abstract theory. I am talking about real and tangible gains for businesses and citizens in Atlantic Canada.
[Translation]
In terms of administration, the advantages are evident, there will be only one series of tax rules to abide by rather than two. In fact, firms operating in the three provinces will have to observe only one series of tax rules instead of four. They will have to spend less time on bookkeeping and consequently, they will have more time for doing business.
[English]
Firms in the participating provinces will also gain through one of the other key benefits of harmonization, namely, the removal of the sales tax from business inputs. At the present time, with the provincial retail sales taxes, businesses have no way of recovering the tax they pay on their inputs. This makes them less competitive, both domestically and internationally. This barrier to competitiveness is most pronounced in Atlantic Canada because of their relatively high retail sales tax rates.
In New Brunswick, Nova Scotia and Newfoundland and Labrador, provincial retail sales taxes will no longer be buried in the costs of goods they sell to other countries and to other parts of Canada. This is the competitive advantage that the Atlantic region will enjoy under the harmonized sales tax. This is the advantage that will be available to any other province that agrees to harmonize in the future.
The Atlantic Provinces Economic Council, representatives of which appeared before you, estimates that businesses will save more than $580 million per year under the harmonized system, due to lower tax compliance costs and the removal of the tax on inputs.
Furthermore, businesses will not be the only ones to enjoy these benefits. As the business sector becomes more competitive and as it can turn more of its resources to business and less to the processing of taxes, it will be able to create more economic activity. Therefore, it will create more jobs throughout the three provinces. The greater job creation that will result cannot be underestimated.
Of great importance as well is the fact that as the provincial sales tax burden is lifted from inputs, consumers will benefit from lower prices as businesses pass on the savings. Nor are these the only savings for consumers. There will be a dramatic reduction in effective sales tax rates in the three provinces -- almost 4 percentage points in New Brunswick and Nova Scotia, and almost 5 percentage points in Newfoundland. Consumers in these provinces will go from facing the highest sales tax rate in the country to rates in-line with other provinces. Obviously, this will lead to significant savings on big-ticket purchases such as cars and appliances. But the savings do not stop there. Virtually any good that is purchased by a consumer in the three Atlantic provinces will have less tax, be it work boots, toothpaste or laundry detergent.
It is true that harmonization will have the effect of broadening the provincial tax base, but consumers will still be big winners. As I have mentioned, there will be price reductions for consumers as businesses pass on the savings from the removal of the sales tax inputs, and there will be lower overall tax rates under the harmonized sales tax system.
Let me cite some of the estimates of these savings. Nova Scotia's Minister of Finance has said that most Nova Scotia families will receive at least $100 more in their pockets and purses because of this tax reform. He has also said, "Almost everyone will get a tax break, and the benefits will be significant."
The Government of New Brunswick has estimated that the average family will save $255 per year under the harmonized sales tax.
Going beyond the direct benefits to consumers, I should like to draw your attention to some of the estimates that have been made of the overall economic benefits of harmonization in the three provinces. The pertinent provincial governments estimate that during the first four years of harmonization, provincial gross domestic product growth will go up by .5 per cent to 1 per cent each year as the benefits work their way through the economy. They have also suggested that beyond the first four years real GDP will be at least 2 per cent higher than it would be in the absence of harmonization.
New Brunswick's Minister of Finance has described these estimates as being very conservative in nature. He has also said that his province will gain a minimum of 1,600 jobs per year as a result of harmonization. The Government of Nova Scotia has noted that cautious estimates are for 3,000 full-time permanent jobs to be created in those provinces.
[Translation]
According to the Atlantic Provinces Economic Council, harmonizing the sales taxes will translate, in the three participating provinces, into a substantial growth in consumer spending, estimated at about $35 million in New Brunswick and Nova Scotia and $52 million per year in Newfoundland. Overall, according to the Council, consumers are going to infuse $120 million more per year in the economy of the Atlantic region. In fact, the Council stated that, as for as the provinces are concerned, this new tax is the best way to stimulate spending as we reach the end of the 90s.
Last week, during hearings held in the Atlantic provinces, the Council noted that the provinces of Ontario and Quebec were the ones who benefited the most from the introduction of the GST. Similarly, the Council believes that the new harmonized sales tax system will be most advantageous for participating provinces, particularly Newfoundland.
[English]
I have spoken of the gains to consumers through lower prices and more jobs, but the gains do not end there. One of the key benefits of harmonization will be tax-included pricing. Consumers in the Atlantic region and elsewhere have been absolutely clear on this point -- that is, they want tax-included pricing. Quite simply, they are fed up with being shocked every time a purchase is rung in at the cash register and they discover the true cost. They have an overwhelming desire to know up front exactly how much their purchases will cost.
A recent poll revealed that some 80 per cent of consumers want tax-included pricing. It will put an end to the uncertainty, confusion and frustration that shoppers encounter every day.
However, tax-included pricing does not mean hidden taxation. We recognize that governments must remain accountable for the taxes that they impose on consumers. That is why tax-included pricing requirements stipulate that the amount or the rate of the tax must be disclosed on receipts.
Again, in the poll to which I just referred, the vast majority of consumers have indicated that this satisfies the need to keep the tax visible. We, and our provincial counterparts, are committed to tax-included pricing because this is what consumers have said loudly and clearly that they want.
Nonetheless, we are sensitive to the concerns of retailers that they may incur inappropriate costs. Unless the tax-included pricing requirements are tailored to the practices of today's business world, we understand that adjustments must be made. However, we also believe that they can be made in a way that is economically efficient for the retailers and nonetheless beneficial for consumers. We have responded to their concerns. We have worked with the business community to identify potential problems that vendors might encounter. We have put forward guidelines that strike a balance between flexibility for vendors and certainty for consumers. For example, these guidelines allow for dual pricing. This means that the before-tax price may be displayed along side the tax-included price.
The guidelines provide a variety of pricing options that reduce significantly the potential compliance burden associated with pre-priced goods. Several options for the disclosure of the tax on receipts have been developed with a view to minimizing the cost of reprogramming cash registers that are already in use.
[Translation]
As I mentioned at the beginning of my presentation, Mr. Chairman, you will find in Bill C-70 improvements to the sales tax system which will benefit not only participating provinces but Canada as a whole. Most of the proposed changes were developed following consultations with representatives of the affected sectors as well as consumers.
An official from my department has described to the committee, at the beginning of its hearings, some of the broad improvements that will be made. I will not again go through these measures in detail.
[English]
In order to cut down on time, I will not go through the lengthy measures for tax simplification proposals that have been put forward because I know that the officials have done that in front of your committee. I am certainly prepared to address them when it is time for questions. It is important to understand that those simplification measures are an important part of the improvement of the sales tax system that we are putting forward.
However, I should like to mention one point. Bill C-70 also provides a 100-per-cent sales tax rebate for books purchased by entities such as public libraries, universities and schools, as well as certain charities that promote literacy. This measure, which I announced last October, builds on existing rebates to these bodies and effectively targets assistance to organizations that are in the front lines of promoting literacy.
Libraries, schools, and universities all over Canada have welcomed this measure because it reduces their costs and makes them more effective in fulfilling their respective mandates. Nova Scotia's education minister has estimated that libraries in that province will save $810,000 annually.
I am one of many witnesses to speak to this committee. Anyone who has been following the issue throughout your hearings has undoubtedly observed that the vast preponderance of the arguments made have been in favour of sales tax harmonization.
You have heard that we will create a long-term, economic gain for Atlantic Canada. The First Ministers of the participating provinces have touted this as the Atlantic advantage. Now, I believe, is the time to let the Atlantic provinces reap the benefits of that advantage.
The Chairman: Thank you, Mr. Minister.
Senator Angus: Welcome to the committee. It is good to see you here. I think you are doing a terrific job, and I commend you for that.
I commend you as well, not only personally but on behalf of my colleagues, for the candour you have shown about and around this whole issue of the GST. As you know, Bill C-70 is about the GST and related matters. Therefore, it is only fair to mention that you came right out front and said that, even though there was a promised to abolish it, that did not happen. You met that issue head-on, and I salute you for that, as do my colleagues.
The Progressive Conservatives have favoured a national, harmonized sales tax. They do now, and they have throughout. I do not think there is an issue there. We have, however, serious and substantial concerns, Mr. Minister, about Bill C-70.
Mr. Chairman, if you will forgive me, I should like to give a brief preamble. You know it is not my normal style.
The Chairman: Please proceed, but keep in mind that our time is limited.
Senator Angus: We do not understand why the HST part of Bill C-70 is tied to Part I -- that is, the necessary, technical amendments which have evolved through trial and error in actual practice and have been developed by your officials in response to the public and to businesses. They are good amendments. They are necessary, and we do not quarrel with those. We do quarrel with why you did not get on with these in a proper bill of their own rather than tack on this more difficult Part II. It is Part II that we are here to discuss.
We do not understand the need for the big pre-election rush to push through Part II. We do not understand why you are bringing it forward to apply to only three Atlantic provinces. We do not understand why you have decided to go along with a clumsy and confusing implementation process. We do not understand how you could condone marketplace fragmentation and the potential Balkanization of the three provinces in question and, indeed, perhaps all of Atlantic Canada. We do not understand how you can go along with it when the businesses and consumers of Atlantic Canada appear to be against the legislation. I have listened carefully to what you have said this morning, and it is obvious that, on the face of it and based on what you have been told, you do not agree.
You should know that, following a substantial outpouring of protest and complaint, the P.C. senators urged the Senate and this committee to travel and hold hearings. The committee agreed to do so. Hearings were held here in Ottawa on February 25 and 26 and all of last week in New Brunswick, Newfoundland and Labrador, and in Nova Scotia.
Mr. Minister, we heard over 200 witnesses. We spent some 40 hours hearing their testimony. We heard that this is not truly an HST but, rather, a political ploy -- that is, expedient legislation brought in through a process which is questionable to disguise the failure of the government to live up to its promise which was contained in this Red Book. Atlantic Canadians are not too pleased with that.
We heard that Atlantic Canadians are surprised that taxpayers' money from Canadians across this nation would be used, in effect, to pay off the three Liberal governments in place down there to the tune of $961 million in order to get them to go along with this ploy. We were amazed when a finance minister came to us and said, "Look at this. I have just received a cheque for $348 million. It is our share in Newfoundland for three years. We have it already, and I am sitting back laughing. I am making interest up to $100,000 this weekend." He said, "Have a good trip back to Ottawa."
We heard, Mr. Minister, that Atlantic Canadians would like to have this section delayed until all the provinces are on board so that it can be a national sales tax.
The Chairman: Will you get to your question, please?
Senator Angus: Yes, I am coming to it.
With all due respect to what you said this morning, tax-included pricing is the worst element of it all. You used the phrase "Atlantic advantage." We heard in New Brunswick, Newfoundland, Nova Scotia and Labrador that it is not an Atlantic advantage but an Atlantic disadvantage. The element of tax-inclusive pricing will remove any and all advantages that would otherwise be realized by the HST and by a harmonized tax through the cost of it and the confusion that it creates. That is what the evidence was.
I took the trouble over the weekend to prepare a list of the 47 witnesses who appeared before us. They represented all walks of life, Mr. Minister. They represented the poor people, consumers, individual homemakers, businesses, retail and manufacturing and the elderly. There were also politicians, three ministers of finance, M.P.s, various MLAs, candidates, doctors, life insurance companies, fishermen, taxi drivers, and booksellers. That was their evidence.
As a professional lawyer, as I am, you know that when the evidence is so overwhelming, one needs to listen.
I could go on about some of the other things that were said about it, but I wanted to focus particularly on the tax-inclusive pricing. Minister Blanchard, your opposite number in New Brunswick, gave a press release this morning: "New Brunswick wants out of tax-in pricing." I am sure you have seen this document. Minister Paul Dicks in Newfoundland told us, "Look, it is not my issue. We do not want tax-in pricing but, if that is what the minister in Ottawa wants, we will have to go along with it."
On the basis of this evidence and what the people are saying, will you ignore their clear outpouring of feeling and request, or will you instruct your officials and your colleagues to come forward with appropriate amendments that will not destroy the principle of the HST but will improve the implementation and, in particular, the tax-inclusive pricing?
I apologize for the length of the lead-in, but I did feel, Mr. Minister, that you needed to hear what we heard. We did sit some days until 8 o'clock at night.
Mr. Martin: Given that Senator Angus has essentially given us quite a litany of the elements as he particularly sees them before coming to his question, I suspect that some of these elements will arise again. I will touch on them lightly before responding to the senator's final question.
The senator stated that the Progressive Conservative Party supports, first, the GST; and, second, harmonization. The question he raises is: Why start with three provinces as opposed to going nationally? The answer to that has a lot to do with the way federal-provincial relations work in Confederation.
Medicare was a far more popular piece of legislation than any kind of tax legislation. The fact is that all the provinces did not sign on at that time. If you take a look at the way things operate in this country, effectively, you must put in place a process. If you wait for all 10 provinces to sign on at any one time, there will be very little on which you would be able to move.
This is not expediency. No piece of tax legislation has favourable political results. We are doing this because the single most important thing in Atlantic Canada is job creation and the single most important element of job creation is lowering the cost of small- and medium-sized business. This bill does that. That is the Atlantic advantage and that is the biggest single reason for moving on this.
Later, I hope we can get into the whole question of the transition payment that was made. However, the transition payment made to Atlantic Canada was one of a long line of previous moves by the federal government to help individual regions of the country when they required that help.
Consumers and businesses are not against Bill C-70. The vast majority of witnesses who came before this group supported harmonization. They also recognized the increase in gross domestic product that would occur.
You ask, however, why we have tied together simplification, the HST and TIP. There is a very common theme. When we went out across the country to talk to Canadians, they told us to improve Canada's sales tax system. All three elements are part of the improvement of Canada's sales tax system. We want efficiency, ease of administration and simplification, and all three hang together.
On the specific element of TIP, the HST is tremendously beneficial to small- and medium-sized business and tremendously beneficial to the economy of Atlantic Canada. Consumers have said to us that, in addition to the reduction in prices that will result from this, they are tired of the sticker shock. They want to know the final price.
If we were to respond to business on the one side, we felt we should also respond to the 80 per cent of consumers who said they wanted TIP.
Senator Angus: Obviously, we do not want to argue with each other. I do not know where this 80-per-cent number comes from. We have been through the EKOS poll ad nauseum with every witness. They all say that even if they had been in favour of all-inclusive pricing, they would change their minds if TIP would increase the cost of the goods and nullify the advantages of the new tax.
I should make it clear to you, Mr. Minister, that we will move for either the entire removal entirely of TIP or at least for some other mechanism. Knowing that you are such a good democrat, I would hope that you would respond to these people. These people came, as in the partial list I gave before, from all walks of life. They told us we must get rid of it. We intend to respond to that, and I hope that you will also find it in your heart to respond.
Mr. Martin: I understand your position. We want to end up with the best possible piece of legislation for Atlantic Canada. We really do believe that these are elements that hang together. In the end, the final decision must be for whatever is best for Atlantic Canada. The premiers have made their positions very clear. They are the people who run the front lines.
[Translation]
Senator Hervieux-Payette: Given the fact that I come from the province where harmonized tax has been implemented, to a large extent, for quite a while, it is often used as a reference. There is a whole issue which has not been quite resolved, an issue which is still not clear, it is the payment of a compensation to the Maritime provinces while in Quebec, where the tax was harmonized, there was no compensation. I would like you to clarify this issue.
I have one particular concern following the presentations made before us by senior citizens and low income families who are worried about the broadening of the tax base. I know that the province is supposed to make the necessary adjustments based on the federal tax base, but I would like to know whether provisions are being made to ensure that low income families are not penalized.
You said earlier that Nova Scotia families will save $100 and that in New Brunswick, the tax break will be in the order of $255. These figures were produced by these two provinces, not by your department. There is a kind of dichotomy, on one hand, a compensation has to be paid and I therefore presume that less tax is going to be collected and, on the other hand, the tax base is being broadened. So, if there is a loss for the Maritimes, how come people would pay more tax since the rate is being reduced? I would like to know what kind of calculations were made in the case of the Maritimes as opposed to the Quebec context.
Mr. Martin: Thank you, Senator Hervieux-Payette. Regarding the compensation, when I presented the agreement with the Atlantic provinces, I referred as well to the formula whereby a compensation offer was made not only to the four Atlantic provinces, but also to Manitoba and Saskatchewan. At that time, I said that any province which would lose more than 4 per cent of its income would be eligible to receive a partial and temporary compensation. It is very important to underline that this was not ad vitam aeternam. Quebec, Ontario, British Columbia and Alberta are not eligible because if we struck an agreement today with the three other provinces, clearly, they would not lose any money. Quebec, where harmonization was introduced in 1990-91, would not have lost more than 5 per cent of its income if we had struck the same agreement. Indeed, if we look at the numbers' schedule since harmonization has been introduced in Quebec, we can see that not only did Quebec not lose any money, but Quebec made some money. I think it is very logical to give a compensation to someone who loses money but not to do so when someone makes a profit.
When Mr. Landry, the Quebec Finance minister, argues that a province should not get a benefit which is not also offered to the other provinces, his argument does not stand to reason. Figures released last week show that 75 per cent of the benefits due to the technological partnership or to the new programs offered by the government of Canada or by minister Manley a year and a half ago, go to the province of Quebec. This means that Quebec, with 25 per cent of the population of Canada, receives 31 per cent of the transfers. If we chose Mr. Landry's option, Quebec would lose out. Canada is a big country and its various regions have lots of needs which should be taken into consideration in a balanced way. The demand is not the same in every province. If we decide to support the fishing industry, none of that money will end up in Saskatchewan; if we support the agricultural sector, it is likely that Newfoundland will get no benefit out of that. Such is our philosophy.
To answer your question, Senator Hervieux-Payette, tax payers in these provinces are going to pay less tax: 5 per cent less on the basis of the GST in Newfoundland and 4 per cent less in the other provinces. The best way to answer your question, Senator, is simply to go back to what Mr. Blanchard said in his presentation to the committee, when he gave the example of a single mother with three children, whose $18,000 income will grow by $1,000 a year once the tax is harmonized and compensatory measures are implemented by the province of New Brunswick. It is true that certain things which were not taxed before are now, but due to the compensation measures taken by the provinces, that single mother will have more money.
Senator Hervieux-Payette: This compensation is on top of the one which is already paid by the federal government to low income families.
Mr. Martin: Indeed, you are absolutely right to mention that, Senator Hervieux-Payette.
[English]
Senator Oliver: The Atlantic Provinces Economic Council, a think-tank from Atlantic Canada, has written a report which has been quoted to our committee several times. A line in the report says that harmonization will be good for the Atlantic provinces. The report, however, goes on to say that there are three other aspects of this bill that are not that positive and can cause some harm and reduce the efficiency of this new regime. Those three aspects are the tax-in pricing, the tax evasion effects created by the tax, and financing problems created by the new tax.
You have already dealt with number one with Senator Angus. I should like to hear your views on the third problem, namely, the financing problems created by the new tax. This refers to the situation where a manufacturer in Atlantic Canada that must bring in supplies to Nova Scotia or New Brunswick from Ontario, for example, will be suddenly faced with the 15-per-cent tax that they pay. In some cases, they will have to come up with an additional $300,000 to $500,000 to pay for this. APEC is saying, "Should the manufacturer have to finance the tax in this way?"
The other problem raised by the APEC report concerns the tax evasion effects -- that is, the effects of a new 15-per-cent tax driving more and more people underground. Will you not lose tax revenue? If so, what will you do about it?
Mr. Martin: The first point to highlight, because this is the bottom line, is that the Atlantic Council is saying that this is a good tax for Atlantic Canada. It is very important not to lose sight of the main ball, namely, that we are trying to give Atlantic Canada the advantage they talk about.
First, on the issue of the financing problems, we must also understand that provincial taxes were not always collected or paid, but they were always due. That situation has not changed. We have made it possible for the Atlantic provinces to collect the taxes that have always been due to them.
Second, those manufacturers in Atlantic Canada will now receive those inputs. The problem that you are describing, if I understand it, is primarily one of timing.
Senator Oliver: It is a timing problem, correct.
Mr. Martin: Yes, it is only a timing problem. However, it is a short-term disadvantage to pay for a long-term advantage. In other words, they pay a little bit more up front but, in the end, their bottom line is substantially stronger.
Senator Oliver: They would have to go to their banks to negotiate a new line of credit that will cost them more money. Do you have anything in mind to assist them financially so that, as individual companies, they do not have to finance this tax for you?
Mr. Martin: Since we isolate this as a timing problem, Minister Stewart in the Department of National Revenue has said that they will substantially accelerate the rebate program within the MNR. That is by far the best thing that the government can do.
There are a couple of other things. First, businesses can file monthly. If businesses file monthly, obviously that will accelerate the process. At the same time, businesses will be charging 15 per cent. They will be charging the larger amount of the sales tax and they will be holding on to that money until such time as they file. There is a flip where they actually benefit from it.
Minister Stewart is looking at a number of other programs to deal with your problem. The problem you raise is a valid problem and the government intends to deal with it as expeditiously as possible. As far as the companies, there are many things that they can do as well to minimize that problem.
Concerning your last question on tax evasion, there are a number of things. First, there will be much less incentive to evade taxes when the benefit to you is the 15-per-cent input tax credit. That is a big advantage. It is double what it was prior to then. I should think you will find that a lot of businesses will find it in their interest to obey the law because of those input tax credits.
Second, because there will be a single tax and a lower administration cost, government can put much more into the enforcement of the tax. I am sure Minister Stewart said that when she was here, namely, that is her intention. We picked up almost $1 million because of the reinforcement that she has been able to put into effect. What we are dealing with here is a simpler tax with lower administration costs and much more that can go to the enforcement side.
Senator Stewart: The two difficulties that have been highlighted have been the question of tax-inclusive pricing and the effects of the widening of the tax base on low-income persons. Let us start with a question on the first point.
On the one hand, it seems to be said -- and I, as a consumer, would agree -- that there is an advantage in knowing, when one takes an item off the shelf, what one will have to pay when one passes the cash register. We would all agree on that.
On the other hand, the inclusion of the tax in the price does seem to cause difficulties for some advertisers and retailers by reason of the nature of their business or the nature of the good which they sell.
Have you given any thought or are you willing to give any thought to the possibility of allowing those who would be disadvantaged, either as advertisers or as retailers, to state their price and indicate that it is not tax inclusive, whereas those advertisers and retailers for whom it is not a problem could simply advertise and post the tax-in price? Have you considered that approach to the problem? Would you agree there is a bit of a problem here? The question is: Is there a solution which is not worse than the problem?
Mr. Martin: The consumer argument, in terms of elimination of the sticker shock -- that is, tell us the price and do not try to get us to the cash register under false pretences -- has been made to us strongly. It has had tremendous effect on us.
In the end, it is the consumer who pays not only the cost of the goods but also the full burden of whatever taxes governments impose. We are very heavily governed by what those consumers want. It is clear that they want tax-included pricing.
That being said, you raise a valid problem, namely, the question of advertising -- especially the question of advertising which extends beyond provincial borders. Again, this is a problem that Senator Angus raised.
To answer your question, "Is there a problem," yes, there is a problem. Are we prepared to sit down with the retailers and the advertisers who are involved to try to come up with a decent solution to this problem? The answer is clearly, "Yes". We are in the process of talking to them and we will continue to do so. It is not our intention to make it more difficult for business to operate. Our intention is to benefit the consumer.
Senator Stewart: Let us go to my second question, which is very different. It relates to a widening of the tax base.
First, how well is the GST rebate system working? You might tell us how much it is costing.
Second, has the possibility of compensatory payments to low income persons who will have to pay extra tax on some items by reason of the extension of the base been considered either by you or by the provincial governments?
Mr. Martin: The GST rebate system is working very well. It is a rebate of approximately $3.5 billion to low income consumers. We have taken a look at whether, in fact, the rebate gives them more than they spend. The general view in many cases is that the answer is "Yes". In other words, the rebate is a greater benefit than the costs of goods to those low income consumers. It is functioning very well from that point of view. For that reason, we have kept it.
The individual provinces have the right to make rebates within their own system, depending upon the needs of their own populations. In fact, there are quite a series of things which those provinces have done. Nova Scotia, for instance, has not only reduced personal income tax but also brought in tax reductions both for adults and for children. It has also brought in a targeted relief program of about $8 billion to individuals who would not benefit from income tax reductions because their income is so low.
It is very important to understand that to ensure that seniors are not affected, the income definition excludes the Guaranteed Income Supplement, which is a major benefit if you are dealing with the seniors' level to which you have just referred.
In the case of New Brunswick, there is a New Brunswick child tax benefit, which is $250 for each child under 18 living at home. There is also a working income supplement for working families with children under 18. They also have allocated approximately $5 million in New Brunswick to address the impact of the HST on housing costs.
The response to your question is really a provincial response not a federal response, because the GST has not changed in any way, shape or form.
The Newfoundland government will be bringing down its budget within the month, and they will have to respond within their budget. I am not in a position to respond.
Senator Stewart: In the case of Nova Scotia, the total sales tax will be dropping from 18.77 per cent to 15 per cent. Presently, the GST is 7 per cent and the Nova Scotia tax is 11 per cent. You are dropping to 15 per cent. How will you divide that 15 per cent? How will you allocate the 15 per cent as between the federal treasury on the one hand and the provincial treasury in Nova Scotia on the other hand? Right now, the federal government gets the yield from the 7-per-cent GST; the provincial government in Nova Scotia gets the yield from the 11 per cent. You are now having a pooled tax of 15-per-cent tax. How is the yield of that tax to be divided?
Mr. Martin: That is the great advantage of having the common base. Effectively, you have a common base. We will take seven-fifteenths and they will take eight-fifteenths. It will flow in from that. This will be based as well on macroeconomic data.
I think you have a StatsCan representative coming here. One of the reasons -- not the only reason -- that we are changing the way or improving the way that StatsCan reports is to be able to answer your question directly.
Senator Cochrane: Thank you for appearing before us today, Mr. Minister. I wish that you had been able to travel with our committee to hear from the 200 witnesses that we heard in those three provinces. They certainly do not think that this is a cohesive program.
I have a paper from the Nova Scotia Division of Canadian Pensioners. If you do not mind, Mr. Minister, I will read some of the things that they have said to us. They were really concerned. They are concerned about increased postal rates; the cost of clothing and footwear under $94; funeral expenses; provision of home care services when supplied by private agencies; and the preparation of wills. These are serious issues for these people.
Their representative said that further compounding the issue for seniors is the fact that they have been hit by other pressures such as increased costs for Pharmacare programs, recycling charges, increased local telephone rates.
He went on to say:
One of the most aggravating aspects of this process has been the lack of consultation between the governments and the tax-payers of this province. Many of our members have taken the position that those they elected to represent them failed to do so. Instead they supported their party as opposed to their constituents. It appears to many of us that our provincial government was anxious to obtain federal funds to help them balance their budget and eager to get the federal government off the hook respecting their commitment to get rid of the GST. This can best be described as short-term thinking.
Mr. Minister, these are the Nova Scotia Canadian pensioners. There are quite a number of them. I do not have the number, but their representative did tell us how many are in this group. I do not think that is good or that seniors think that is a monumental deal for them.
Many businesses in Atlantic Canada are concerned that the harmonized sales tax will discourage national retailers and suppliers as well as potential customers in other provinces from doing business with companies in the Atlantic region. I do not have to tell you how desperate we are for business from the outside to come into our provinces because we need them in the worst kind of way. The harmonized sales tax will result in one tax system for three Atlantic provinces, another for Quebec, and still a different one for other provinces.
In my view, Mr. Minister, this is disharmony; it is not harmonization.
At a press conference in Toronto last Friday, Mr. Bouchard, the Quebec premier, repeated his demand for compensation to Quebec to match the compensation being paid out to the Atlantic provinces. Premier Mike Harris, at the same press conference, also said he feels his province deserves some consideration.
We know that a federal election is coming soon and that it is inevitable. A Quebec election next year is also inevitable. Is this not a bad time to be threatening our national unity by disharmonizing this sales tax?
Mr. Martin: First, I did go throughout Atlantic Canada quite extensively over the course of the last three years. Virtually, wherever I went, I would raise the question of the HST with Atlantic Canadians and discuss it with them. I certainly did it with seniors. I think I understand pretty well the views of Atlantic Canadians on this particular issue.
If you take a look at what we have done as a government in terms of seniors, despite tremendous pressures, for example, to de-index the Canada Pension Plan, we refused to do so, for precisely the reasons that you are raising, senator. That is to say, we understand that seniors are the generation which is least capable to adjust to quick change. For the same reason, the new seniors benefit that the government will be bringing down eventually is fully indexed. In fact, for 75 per cent of seniors, the results will be more beneficial than the current situation.
The first thing I would say to you in terms of seniors is that we have made a massive effort as a government not only to protect their situation but also to improve it.
With regard to the question that this is a political move, let me tell you in all candour that this is not a political move. No tax is a political move. This is really a means of making Atlantic Canadians, and their small- and medium-sized business, far more competitive and attractive. In fact, most of the seniors to whom I have spoken have children who want jobs. They have said, "Give us an economic situation that will allow jobs to be created for our children." That is the major benefit of this measure. It is to give Atlantic Canada a chance to compete not only with the neighbouring states in the United States but also with the rest of the country in a lower-tax base.
To have retail sales taxes cascading within the smaller business community in Atlantic Canada at 10 per cent and 11 per cent is simply crippling. The real answer is that business will go to Atlantic Canada if they think that their tax base will be competitive, if not better than the rest of the country. They will not go if establishing themselves in Atlantic Canada means that they will be paying a tremendous penalty vis-à-vis others.
With regard to your question about Balkanization, the fact is that we have a Balkanized system now. Do I wish we had a national system? Do I wish that we had the kind of thing that Senator Angus talked about? Absolutely. However, I also know that the nature of our Confederation is that if you want to get a national system, you must start somewhere. Unfortunately, it cannot be done overnight. It is far better to have a harmonized system in three provinces and very close to the fourth province, Quebec, than to have 10 different systems. Yes, we have a Balkanized system; but it is a lot less Balkanized than would be the status quo.
Concerning your comments about Mr. Bouchard and Mr. Harris, one of the unfortunate problems with the way our federation works is that provinces tend to forget quite quickly what they have been granted or given and to complain very quickly about what someone else gets. Perhaps that has a lot to do with the nature of provincial politics, I am not quite sure. As an example, in the early 1990s, Ontario received very large stabilization policies from the federal government which were not extended to other provinces. Alberta has received a great deal of help for its oil and gas industry, something which is not given to other provinces. However, there is a tendency for provincial politicians to stand up and say, "This person got that and I did not get it." I do not think Canadians are fooled by that. I think Canadians really want to see this country run fairly. They understand that there is a time when one region of the country should help another. This is it. This is fundamental change in Atlantic Canada. It is the responsibility of the federal government, as it has done in times of crop failure and other types of crises affecting provinces, to ensure that the whole country pulls together to help a region that is going through fundamental change.
Senator Cochrane: The committee has heard from your officials and from officials of Revenue Canada about this $961 million lump sum payment to the three provinces. We have also heard from the Auditor General, who is not very happy with you, Mr. Minister, in regard to your decision to show all those payments as a loss for the 1995-96 fiscal year when it is now March 1997.
I am concerned about the books of the provincial governments and the future welfare of my province of Newfoundland. Paul Dicks, the Finance Minister of my province, told us that he has received already a $348 million lump sum payment in compensation for the four-year transition period which begins this year, 1997. This money was received in 1996, but it will be shown in instalments as provincial revenue for the next four years. However, there will be no more cash coming in. The Minister of Finance said that as a result of this harmonized sales tax the Newfoundland government will lose $105 million per year in revenue.
Mr. Minister, I know that you have had many discussions with the provinces in your negotiations over this matter. Perhaps you can explain how Newfoundland, about which I am worried, and Nova Scotia and New Brunswick will make up for these lost revenues, namely, $105 million per year. What will happen after the four years has elapsed and we receive no more compensation?
Mr. Martin: With regard to your question concerning the Auditor General, it has always been my experience that by far the most prudent way of keeping books is to acknowledge any liability right up front. Take your profits in when they come, but acknowledge your liabilities. When we took office and I discovered that there were a number of government programs that had been announced but had not been booked, I had to so do some very fast scrambling. I hope you will forgive me for using this word, but you should operate your books in the most conservative way possible. What that really means is acknowledging the liability.
We signed an agreement. We made an irrevocable offer to the Atlantic provinces. Once that letter went out, we were not in a position to back off it. They signed it very quickly after its receipt. Therefore, as far as we were concerned, the liability was there.
It is also important to understand that the Auditor General did not qualify our books. There were no reserves on our books at all. What he said was that our deficit number is our deficit number and he accepts that deficit number. He simply queried whether we should have recognized this particular liability among a whole series of others at that time. We did; and we did because we wanted to be more conservative.
The second question goes to the heart of what we are doing. Governments have two ways of bringing in revenues. They can bring in revenues because they are charging you more taxes. Your tax rates go up. Therefore, governments bring in more revenue. That is a counter-productive way of running an economy. The best way for governments to bring in revenues is to have a lot of economic activity. What happens, then, is that economic activity on a lower-tax base gives government revenues.
Atlantic Canada's problem, among others, has been one of excessive taxation. Their retail taxes were too high. The retail taxes charged to consumers were too high. The retail taxes that were cascading within their own small- and medium-sized business community were too high. What is happening is that small- and medium-sized business will pay less tax because of the inputs. That will cause a shortfall. The reason they are doing this, however, is because they know full well that, as a result, the increased economic activity will skate them on side.
I was in Newfoundland not long ago. To see a number of small information technology companies taking hold in Newfoundland is a tremendous thing. To see that the benefits of Voisey Bay, Terra Nova and Hibernia will not be limited to those industries but will have spin-offs because Newfoundland is becoming more tax efficient is the way you should build an economy. That is why Newfoundland did this.
Senator St. Germain: Mr. Minister, do you not think it is presumptuous on your part to be paying out money in advance based on legislation that is just now going through this committee? Do you not have any respect for the Senate at all?
In theory, if we rejected this legislation, you would have given $961 million to the provinces before it was proclaimed. I asked the Auditor General that question when he was before us and he refused to become implicated in what he felt was a political question. Perhaps you can answer it for us here today.
Senator Angus: He was gravely concerned, though.
Mr. Martin: To put this in the context of a discussion with the Auditor General is certainly a valid question; to put this in the context of respect for the Senate is entirely inappropriate. I have tremendous respect for the Senate and I have tremendous respect for the senators around this room. I am delighted to be here. I will respond to all the questions, but I do not think that that preamble fits the case.
In any event, the Auditor General did not put a reservation on our books. He gave them a complete bill of health. Was there a difference of opinion? If you go through the Auditor General's report for every year, from our government to previous governments, you will see a long list of things where the Auditor General says, "I do not agree with this or that." That is standard form. The Auditor General did not place a reservation on our books. He said that in his opinion, we had acted in an excessively prudent way. If I am to be accused of something, I should like to be accused of being excessively prudent.
Senator St. Germain: With all due respect, I believe that you have gone ahead of the legislation and paid out these funds. Is this normal practice for government and is this in keeping with good business practice from your perspective? How many other programs are there? Would you pay out money to the general public in that case?
Mr. Martin: First, the reason for the payment up front is that the Atlantic provinces were to incur substantial costs. There is a dismantling of their own system and the whole question of transition. To be quite honest, this is a big undertaking and they wanted the knowledge that the money would be there.
Under the agreement, if, for some reason, the deal did not go ahead, then the money would be repayable. This is not a payment to Atlantic Canada under any circumstances; it requires that the deal go ahead.
Senator De Bané: Mr. Minister, you have given us some very important and dramatic improvement entailed with this new policy, starting with an improvement of a sales tax system, replacement of four tax systems into one, a dramatic simplification, removal of sales tax from the business inputs, an increase in the GDP of all those provinces for up to 25 per cent, and the creation of over 6,000 new jobs.
I assume that all the advantages that you have emphasized explain why the official opposition in the Senate are on record as being in favour of harmonization. We should not forget that that is their position -- that is, unless they would like to do another flip-flop at the end of the road.
That being said, what would you say in answer to those who say that this broadening of the base on this new, unique, simplified system will increase prices on items, and so on? What do you have to say to that, particularly in relation to people who have a low income?
Mr. Martin: The previous government, the Conservative government, wanted to have a base that was as broad as possible. That is why the GST was put on a whole series of items such as home heating fuel and children's clothes. They did that because they felt that by having a broader base they would be able to have a lower rate. There are a lot of items that we would not like to see taxed if we had our druthers. Governments, however, need revenues. We have accepted that philosophy from the previous government, namely, the broader the base, the lower you can have the rate.
What does that "lower rate" mean? It means that there are people in Atlantic Canada who will be paying slightly more tax on individual items. Overall, given the fact that there is a 5-per-cent decrease on those things that were taxed previously in Newfoundland and 4 per cent in New Brunswick and Nova Scotia, right off the bat, you have a lower tax base for consumers. When you then add to that the lower costs that will result as businesses pass on the savings -- and, it is important that we now have the experience after the GST that business did pass on the savings -- you have an added reason why low income consumers will be paying much less. Add that onto the fact that not only did we keep all of the GST exemptions and rebates at the bottom end but the Atlantic provinces themselves are dealing with that item on a whole series of specific items in relation to their own particular circumstances. The answer to your question is yes, certain items are going up, but, overall, low- and middle-income consumers in Atlantic Canada will have more money in their jeans as a result of this than they would have had otherwise.
Senator De Bané: Concerning the issue of including the tax in the pricing, I tend to agree with what you have said. As a consumer, I prefer to be faced with a situation where what I see is what I get. In other words, the price that I see is the price that I have to disburse and I do not have to add another 18 per cent to it afterwards. I fully agree with that.
It is not surprising, for instance, that here in Ontario when businesses have a sale they publish the price by saying either that everything is included or that there is no GST or PST, or whatever, because they know that the consumer prefers to know the exact amount that he or she must pay.
Besides publishing and posting the all-inclusive price, would it be legal under this bill for a business in the three Atlantic provinces to publish another equally itemized one that states, for example, "$10, including everything" so that if you are interested, the receipt would show that? Can they also publish that one in their advertising if the consumer would like to know what is on that receipt?
Mr. Martin: The answer to your question is yes, they can. We would insist, as you know, that the bill contain not only the tax-inclusive price but also the tax component so that any consumer will know the burden placed by governments when they see the bill. Our major goal was to ensure that when you walked in and saw that refrigerator, you knew the final price. We also said that it would be perfectly fine to have dual pricing. In fact, they can have the price without tax and then they can show the tax. Our only goal is that we want the price including tax to be shown somewhere.
Senator Comeau: Mr. Minister, over the past week or so, we have heard overwhelming opposition expressed towards the BST. There were two supporters who attended to support the bill. One was the Nova Scotia Finance Minister and the second was one of your colleagues from the House of Commons, Dianne Brushett, who spent 14 of her 15 minutes on a diatribe against unelected senators having the audacity to travel to Atlantic Canada after she herself had voted against the House of Commons travelling to Atlantic Canada to hear Canadians. One wonders about the quality of the advice you are receiving from your Atlantic Canadian Members of Parliament on this.
I wish to zero in not on the economics but on the politics of this initiative in Atlantic Canada. I know you are an astute politician. Witness the light fantastic that you did with Solange Denis prior to touching the seniors' pensions. We can all attest to your political abilities.
However, Mr. Minister, I think that you are failing on this one. You mention accepting the previous government's broader base concept on goods and services but yet you fail to bring forward an initiative such as the rebate under the GST, which was aimed towards helping those Canadians who were most hurt. Minister, lowering the prices on fur coats, luxury cars, and so on, does not mesh with increasing the price on children's clothes, heating oil, electricity, and so on. There are no specific initiatives, as there were under the GST, aimed at mitigating the damage which will be imposed on those Canadians who are most vulnerable by the implementation of this BST and not a generalized BST.
Minister, did your political antenna fail on this one?
Mr. Martin: I have noticed that when the questions come from this side of the table, they inevitably start off quite nicely, but there is always a "but".
The Chairman: It is part of their cultural upbringing.
Mr. Martin: I think that the best politics is to do the right thing. Economically, for Atlantic Canada, this is clearly the right thing. It will translate into much more economic activity. At this stage of this country's development, it will translate into more jobs. That will benefit consumers and mean that low-income consumers today will become middle-income consumers. I would far rather that people have more money in their pockets in order to buy things than anything else. I think that is both good economics and good politics.
Let me deal specifically with your question, senator. We have talked about the overall cost to consumers decreasing as a result of this, and it clearly will. Some things will go up, but enormous numbers of things will decrease in price, and these are items that low-income consumers buy. Let me give you some of the examples I have here: Pens, book bags, lunch boxes for students, and car repairs. You talked about people buying fur coats. The fact is that people who buy second-hand cars sometimes have to get them repaired. Those costs will go down. The cost of non-prescription drugs will go down. Children's toys will go down in cost. Household appliances, whether it be toasters or light bulbs, will go down, as will cleaning and kitchen supplies, soap, laundry powder, garbage bags, bedding, and home maintenance equipment. Senator, there is a list far longer than I could ever quote here of things that will go down in value which middle-income and lower-income people buy every day. That is one of the reasons we want to do this.
We must remember that a number of the senators have talked about the lower-take that governments will get. One of the reasons there is a lower take is that many of the items that they are currently taxing at this level of HST will go way down. That will benefit exactly the people that you have been describing.
Senator Buchanan: I want to also say how pleased I am that the minister is here. It is interesting that the minister may not have been here except for my father's family. I will not go into the whole story about this now, but the minister was raised in a political family, and his dear late father was a good friend of mine for over 20 years. He predicted I would win the 1971 PC leadership when he was in Halifax. My uncle Angus worked very hard for him. He was one of the top workers in his first two elections in the 1930s. Therefore, I conclude that you are here because of my family. It is very nice to have you.
As I understand it, Mr. Minister, from a person with whom I served in the legislature for many years, Bill Gillis, tax-included pricing is included in this bill because of the poll indicating 73 per cent of the people wanted this. He made that very clear. I have studied polls for a long time -- through about eight elections. If you ask a certain question, you can get a certain result. I am not saying that happened here, but it may have because 90 per cent of the people who were polled in that poll either knew nothing about the HST, knew a little bit about the GST, or knew something about the GST. None of them were aware that tax-included pricing may result in increased prices -- that is, if they had to absorb the cost of transition and annual costs of the TIP -- or job loss.
If that poll were taken again in the context of what people know now; and if they were asked, "Would you be in favour of tax-included pricing in Nova Scotia if it may mean job loss for people in the retail sector and/or increased prices or a combination of both"; and if that poll came out with 73 per cent saying "No, under those circumstances we would not want it, "would you drop it?"
Mr. Martin: Looking at the politics of Senator Angus and Senator Buchanan, I like the politics of Angus Buchanan better.
If a poll had the preamble that you have just set out essentially saying, "Would you like tax-inclusive pricing if it meant job loss and higher prices," I think quite clearly a pole with that preamble would come out the way that you have described. The problem is that I do not believe that a poll with that preamble would be accurate in that all of these retailers will themselves benefit from the input tax credits and therefore will have lower costs.
I am not saying that tax-inclusive pricing does not impose, in certain cases, some increased costs. It does. I am saying that there are offsets in the form of input tax credits which retailers will receive.
There is then the second item. In our country, especially in Atlantic Canada -- a region that you know so much better than I do -- the issue of competitiveness and job creation is uppermost in everyone's mind. In an economy that is going through such phenomenal change, how do we create jobs? I suspect that, from your own experience, you would agree with the Atlantic premiers that, given the importance of medium-sized business to Atlantic Canada, we must reduce their costs.
In the end, that is what this is all about, senator. It is really about job creation. That is why I do not think the preamble would be right.
The Atlantic premiers have gone across the country touting the Atlantic advantage. They say that if entrepreneurs in one of those three provinces are given a level playing field with entrepreneurs in any of the other provinces or, in fact, in the neighbouring states, their entrepreneurs can take on anyone and win. However, they must have the level playing field. That is what we are trying to do here, senator. That is why the HST is so important.
I guess the answer to your question is that I probably would have a lot of difficulty with the preamble.
[Translation]
Senator Corbin: Minister, you are a reasonable person, open to dialogue, there is no doubt in my mind about that. Since Bill C-70 was tabled in Parliament, did the Finance ministers in the concerned provinces ask you to do some fine-tuning or to make some minor changes to the bill which is now before us?
Mr. Martin: I have to say that we negotiated quite hard until we signed the agreement, Senator Corbin. In terms of the fundamental provisions in the bill, we had a discussion regarding books and, as you know, the provinces wanted a 100-per-cent sales tax rebate on books. When we decided to grant such a rebate to universities and colleges, it was, of course, following our negotiations and our discussions with the concerned provinces. I must say that Senator Fairbairn was very influential in this regard. We have modified the provisions regarding small businesses and the period of time required to conform to the legislation. We also had discussions regarding tax-inclusive pricing and the advertising sector and, indeed, our position is not what it was at the beginning.
Yes, some changes were made but, for the most part, these are very technical changes. As far as the essence of the agreement is concerned, no change was made besides what I just mentioned.
[English]
The Chairman: Mr. Minister, thank you for taking the time to be with us today.
Senators, I should like to make a couple of comments about process. First, Senator Angus and I have agreed that on the basis of the fact that we were all out of town last week and, as a result, any amendments which were going to be made would have difficulty getting drafted because we did not have access to legal counsel; and, second, since Senator Angus has indicated that there are a number of potential areas for amendment which members of his party want to introduce, we agreed on the following process. In the next few minutes we will have a discussion among committee members of any potential amendments that may be required. We will not hold votes on those amendments until 11:00 o'clock tomorrow morning. We will reconvene for the purpose of voting on potential amendments. That will give opportunity this afternoon for two things to happen: First, for any legal drafting of the actual wording of amendments to get done; and, second, to give members of the committee an opportunity to reflect on the issues on which amendments are being proposed.
Our agenda for the rest of this morning, then, is to discuss potential areas for amendments and the substance of amendments but not necessarily their legal wording and to have a vote on the actual amendments tomorrow. Senator Angus and I will work with the legal official this afternoon to ensure that whatever the essence of an amendment is, it is legally drafted.
I wish to take this opportunity to remind senators that next Tuesday, in our regular time slot at ten o'clock, we will have the annual appearance of the Governor of the Bank of Canada. It is important that all of you be here. Many of you have seen the coverage that his counterpart receives during his annual appearance before the Senate banking committee in the United States. The history of the Governor of the Bank of Canada appearing before this committee has been very much the same in that it is obviously a major economic and business news event. I urge you to keep in mind that we will start on time next Tuesday because it is being covered live by CPAC from ten o'clock until twelve o'clock.
Senator Angus, I believe my outline of the process is in agreement with your understanding. I would ask you to introduce your first possible amendment.
Senator Angus: Mr. Chairman and senators, I want to make it clear that I agree generally with what the chairman has stated. I should like to underline, however, that I have made it clear to Senator Kirby, pretty well from the outset of our hearings in Atlantic Canada, that we on this side feel it is important to amend this bill. Therefore, we should like to amend it from this committee. I am aware that this committee has had unanimous reports. We strive to them have them. We try to keep pure politics out of the equation and try to do what is right.
The thrust of my comments, Mr. Chairman and fellow senators, is that the evidence was overwhelming. We went down to the Atlantic provinces. In my case -- and I believe in the case of others here -- I do not come from the Atlantic provinces. I had an open mind on the issue, but the evidence was overwhelming. Every day, we turned witnesses away.
Senator Stewart, you would have been taken by this because, although we heard roughly 200 witnesses in the process, including the two days here, every day we had a line-up of people who we could not take.
Senator Stewart: They wanted the repeal of the GST, I gather.
Senator Angus: I think they were wondering where you were.
In any event, it was quite embarrassing. I know that there were no senators from your side down there, but the little corporal's guard did a heck of a good job on your behalf.
The first thing we should like to do, Mr. Chairman, is perhaps find some consensus or agreement in this committee on the TIP. The opening response would be: Let us take it out entirely. There are various steps along the way that are there for discussion. However, as far as we are concerned, the tax-inclusive pricing is a bad thing. It is easily severable from the HST, the principle of which we fully agree with, by the way. However, the witnesses told us that all the advantages derived from an HST would be taken away and nullified by the tax-in pricing.
I brought some signs here that were given to us by some of the retail organizations in Atlantic Canada to show the unbelievable confusion that comes into play here. It leads to great hardship on the people of Atlantic Canada.
Mr. Chairman, I realize that one does not lightly deal with a tax bill, if this is a tax bill. I have my doubts in terms of Part II. I think that is more of an administration ploy. In all seriousness, I feel we must get that out of the bill. If we open the bill up, a number of points were raised where there was no disagreement amongst both sides.
Books was one area. The minister referred to this today. Last October the government, in an effort to keep the promise in the Red Book about removing GST on books, did not go far enough in my opinion. When they talk about universities and libraries but exclude the intelligentsia and the reading public from that advantage, it can only lead to further confusion and to a further underground economy. I can see trucks pulling up to universities which would have ordered more than they needed. However, let us not try to "pre-sage" the type of non-compliance that this would engender. Let us simply agree that if we are to give a break on books, then let us give a break on books and not do it piecemeal.
I am still confused, as I believe you are, Mr. Chairman, on the issue of the two main life insurance companies. Assomption Vie in New Brunswick and Maritime Life in Nova Scotia came to us. At the last minute, Assomption Vie did not come to us but they sent us a message that they had made a deal. Their CEO, who used to be a minister in the McKenna government, had made a deal and therefore their problem was resolved. We have not been able to get the details of that, although I believe some people are working on that.
The Maritime Life people came and submitted a very short brief. They stipulate the kind of amendment that they need to solve their little problem. It seems like a little problem that was not intended by the legislation. If we can make them happy, I think it would behoove us to do so.
We have a couple of other points that we wish to address as well. One of them concerns rebates. You heard the numbers -- Senator Stewart remarked on it -- about the amount of money paid on rebates to the GST. On our side, we were very affected, frankly, by the outpouring from the working people, the elderly and the people on the dole who said that this is a hardship to them. With or without tax-in pricing, they feel that they will be really disadvantaged and hurt badly. I am wondering if there is not some way we could look at a rebate scheme which would be the rifle shot for a certain low end of the economic scale and help those folks. We have some ideas on that and will be bringing them forward.
Those are the main areas of concern. I also asked many questions about the medical profession. We had overwhelming evidence from the CMA and the provincial branches of the medical association in all of the three provinces that we visited. Individual physicians came to us. It is hard for me to understand how this important segment of our society, this particular professional group, would be shafted in the sense that they are not able to recover through input credits moneys they have paid out in this new tax for equipment in their offices. They receive their remuneration from the state. It seems anomalous to me.
Mr. Chairman, you mentioned to me that this goes back and opens up a can of worms, because if you do it for a sole practitioner physician, what about physiotherapists and a plethora of other people in the health care business? I am not sure I buy or follow that argument. I certainly would like to explore it in this committee, if we could.
Those are my comments.
The Chairman: Senator Angus has essentially raised five issues: tax-included pricing; the coverage of the GST on books; technically, the Maritime Life issue; whether the GST rebate should be expanded to become a HST rebate; and whether the medical profession should be zero rated. Let us discuss, sequentially, those five items.
Actually, I suggest we only discuss four. The Maritime Life issue is very technical. After it was raised with us, we had a response from officials of the Department of Finance who were with us. They have discussed that with Dr. Goldstein, our researcher, who is in turn having discussion with Maritime Life. It is not at all clear to us that an amendment is needed to deal with the problem. We are trying to understand how it was dealt with and what the arrangement was that Assomption Vie worked out with the provincial government. I should like to leave the Maritime Life issue aside. It is a technical one, and we will deal with that tomorrow if we need to do so.
We then have four items: tax-included pricing; the GST on books; zero rating the medical profession; and the HST rebate. Let us take those sequentially and begin with tax-included pricing.
I think the point Senator Angus made was that a very significant number of business organizations and individual business persons appearing before the committee argued essentially that tax-included pricing, while a good idea if implemented on a fairly broad scale, was not a very good idea if implemented on a very narrow scale. If it was implemented across 33 per cent or 50 per cent or 75 per cent of Canadian consumers, it would be one thing; it would be quite different if it were implemented on less than 10 per cent of Canadian consumers. You heard the questions and answers today between the minister and various senators on that subject.
Let us make sure we understand the issue thoroughly before we actually vote tomorrow.
Senator Hervieux-Payette: On the question of the tax-included price, consumers are sick and tired of guessing what the final price will be. I have been trying to guess in Quebec for quite a while. You multiply 13.5 by the price you pay. I do not know many mathematicians who can do that without their little calculators. I guess the minister opened the door to have the two prices indicated.
Let us say that GE has produced a refrigerator in Ontario and the price is $399. They could have that price indicated and have underneath $400 and something, which is the price that I have always looked at. It is like the exchange rate. You never know exactly what the final amount of money out of your pocket will be. In my view, the consumer should be the main focus when it comes to administering on a daily basis how much families have in their pockets.
Do we need an amendment? I was under the impression that there could only be one price on each item. After the statement of the minister, I am now under the impression that we can have the price without the tax and the price with the tax on the same item. As we were told, the $9.99 pizza could still be part of the $9.99 national advertising campaign; but in that province they would have both.
Senator Angus: I was under no illusions that they are allowed to show both. If you start showing all these different prices, first, there will be a high confusion factor. Second, I do not know what degree of intelligence you need to figure out 13.5 per cent. However, I agree with you, it is difficult. I think they should have the choice as to whether or not they want to shove this thing down their throats the way they are doing. I do not think it is what the people want.
Senator Hervieux-Payette: In comparing Ottawa and Hull, there are some items which are different. Of course, we need to know the basic price. In the Maritimes, as far as I am concerned, the only place consumers can go to shop across a border is in the United States or in Quebec.
The consumer needs to know the price of the item, as well as what they will pay at the end. As far as I am concerned, as I said, when four consumers out of five say, "We want to know the price we will pay," this is an important feature. Should we serve the ad agency or the large corporation, or should we pay attention to the consumers? This is the dilemma which faces us.
Senator Buchanan: I certainly do not agree with the senator. First, whenever I hear about tax-included pricing, I wonder why it ever came up. It does not make any common sense at all. I have an idea why it is there. The reason, if it is the reason, is now totally redundant.
A very wise bookstore owner in Halifax said this in answer to the question of why the issue of tax-included pricing was raised: We in the Maritimes are not stupid. We know why it was raised. It was to hide the GST.
It was not me who said that. It was Ms Crocker who was a Liberal candidate in two elections.
Ninety per cent of all the retailers who appeared before us said that tax-included pricing is ridiculous and that there is no reason for doing it. They do not want it.
Even the views of the general public, when they finally realized what it was, shifted. People said: We do not want to have people lose jobs. We do not want to have the price go up because of this tax-included pricing.
People can look at the price of something. They will know what the price will be, within a few cents, with the taxes in. They do not need this.
With regard to the comment that you can have it both ways, then why do it at all? The opposition to this measure is stronger than the opposition I have seen to anything. My opinion is that you should save yourselves the political problem and drop it. I want to help you.
Senator Stewart: Honourable senators, I could not go down to the Atlantic provinces because of other committee work. However, I want to ask a question. Let us say that, when in Nova Scotia, I go into a store to buy an item, the price of which, before tax, is exactly $100. I do my calculation with the 7 per cent. Then I do my 11-per-cent calculation on $107 and I come up with $118.77. Even for a mathematician such as our chairman, that will take a few seconds. People who are not statisticians and professors of mathematics will take longer.
The tax will be 15 per cent, and there will only be one calculation. It is 15 per cent on $100. Even I can do that pretty rapidly. I am wondering if, in the evidence you heard, the concentration was on lower-priced items or on the complicated price. Were the $9.99 items distinct from an automobile at $10,000 or $15,000?
When a consumer goes in to buy a refrigerator, which was mentioned earlier, surely the calculation on the tax is pretty easy, and it is important. When you get down to the small items, though, is it that important? Or is this just a fuzziness, a complexity about which people like to complain? What did the witnesses say in this regard?
Senator Comeau: It was never brought up. There was no request to have tax-in pricing.
Senator Buchanan: They just want it gone.
Senator Stewart: Presumably, the witnesses were people who were opposed. There was a target. The target was already there and they were attacking it. If, on the other hand, the bill had said that there will be no tax-included pricing, would you have heard from a different set of witnesses who would have declared that this bill is no good because it still requires them to carry a little calculator?
Senator Buchanan: Not at all. After all the years I have been in this business, I think our hearings would then have been confined to the people who were not in the retail sector. Everyone in the retail sector in those three provinces were there. They were not there in a political sense. They were there because this measure will affect their businesses very badly. It will increase, not decrease, the cost of the goods they sell. For some, it will mean store closures.
You hear people saying that that will not happen. I am telling you that it will. Why should we be passing a bill that will cause the loss of jobs in an area where unemployment is already staggering?
The Chairman: There is only one minor point I would like to make on the basis of something said by Senator Comeau a minute ago.
As I heard it, the fundamental opposition to tax-included pricing was not based on the principle of tax-included pricing but on the difficulty of implementing tax-included pricing in a fragmented market. Everyone I heard said, for example, if the vast majority of Canadian consumers were covered, then it would not be a problem.
Senator Buchanan: That is including Ontario.
The Chairman: It was raised in the context that you could not have the vast majority of Canadian consumers and not have Ontario. It was raised in the context of trying to implement this program with respect to a relatively small number of consumers. The issue was not the principle of tax-included pricing; it was the practical application of such pricing in a relatively small market. Is that fair?
Senator Buchanan: Yes, that and the cost.
The Chairman: The cost flows from it.
Senator Buchanan: That is huge, though.
The Chairman: I want to be clear on that, namely, separating the principle from the actual pragmatic problem, which is the relatively small market.
Senator Oliver: The way you state it is correct, Mr. Chairman.
I wish to respond to Senator Stewart. I know that you could not be in Nova Scotia. One of the people who appeared before us was a representative of Sobeys, which is a grocery store chain. They brought in a hypothetical label that they prepared under the current regulations that would exist if tax-in pricing were to apply on an item that would be on sale.
The Chairman: For the record, I should point out that Sobeys is probably the largest grocery chain in Atlantic Canada. I wanted to make that clear so that people who are watching will know the kind of commodity that you are talking about.
Senator Oliver: Yes. I will bring this over and let you read it. This is an ad for Olay Moisturing Body Wash. The prices on this tag are $5.16, $4.49, $7.07, $1.91, $5.16 , $6.15 and then there is "Save $1.66". I wanted to bring it over to show you how absolutely complicated this is.
Senator Corbin: Where did you get that?
The Chairman: It was filed by Sobeys.
Senator De Bané: Before the arrival of Senator Buchanan this morning, Senator Angus was complimenting the minister for having said, "We made an honest mistake before the election when we promised the abolishment of the GST."
Senator Angus: Did not you think that was magnanimous of me?
Senator De Bané: He said, "Mr. Minister, you said you made an honest mistake". After hearing 500 witnesses, the House of Commons finance committee came to the conclusion that the GST should remain and that the solution is harmonization. The official position of the Conservatives when they were in government was also harmonization.
Senator Angus: It still is.
Senator Oliver: We favour harmonization.
Senator De Bané: I should like to know wherein your opposition lies. Are you opposed to the GST? Let us not kid ourselves. While most economists say that the GST is a lot better than the hidden manufacturers sales tax, there are still consumers who are ideologically against the GST. Are you against the GST? Or are you against harmonization? Or are you against tax-included pricing?
You cannot be on different sides of the same issue. Some of you seem to be in favour of harmonization but you would like some changes on the margins. Others seem to be against harmonization and still others seem to be against the GST. I should like to know exactly what is the position of the official opposition in the Senate or of each of you, if you have your own positions.
Senator Oliver: We speak with one voice.
Senator De Bané: What is your position then?
Senator St. Germain: To clarify our position, we are upset that we have taken $961 million to satisfy the statement made by the Prime Minister, "Yes, I will abolish it", and a statement made by the Minister of Finance in 1990 when he said, "I am committed to scrapping the GST."
What I am opposed to -- and I think most of our members are opposed to this also -- is taking all this money and making people believe that they are fulfilling a political promise as opposed to dealing with the issue on a national basis.
The Chairman: Senators, just one minute. The purpose of our discussion this morning is not to revisit the positions of individual parties on harmonization. On that, both sides have been pretty clear. We are focusing at the present moment on the question of tax-included pricing and on whether or not a change in tax-included pricing is required and, if so, on the nature of that change. That is the issue on the table. It is important that we focus our comments on that specific question.
Senator De Bané: Senator St. Germain emphasized the point with which I have difficulty. He said that our position on this committee is that when this government was in opposition, it was against the GST.
The Chairman: I am sorry, senator.
Senator De Bané: He said that.
The Chairman: You made a comment that that was off topic and he responded with a comment that was equally off topic. I want to return to the topic, which is: What are we doing about the tax-included pricing issue? That is the question before us. I am happy to hear any other comments that senators have.
Senator De Bané: I think it is self-evident and it does not need a demonstration that each Canadian and each of us, as consumers, wish to know how much we will have to disburse to buy a service or a good or a product. That is what we want to know. As a consumer, you do not need rocket science to prove that. You want to know how much you are liable to pay. When a business in Ontario, or in Saskatchewan or wherever, wants to make a real effort to push their products or services, they will advertise either a certain price or "no GST" or "no PST" or "all taxes included," et cetera. That is because they know the consumer wants to know this.
I have never heard from anyone in Europe that people were mad when they paid the price that was published or posted. All the consumers from whom I have heard have said that they prefer to know that "what you see is what you get."
Senator Buchanan: Would you not agree that it would be better if it was country-wide and did not segregate three little provinces?
Senator De Bané: Of course.
Senator Oliver: Mr. Chairman, the overwhelming evidence we heard over the last week in Atlantic Canada from retailers and consumers is that they do not want the tax-included pricing at this time. We would like to have an amendment that would either take it out or delay it until such time as the majority of Canadian provinces have the harmonized tax.
Senator Comeau: The only practical reason we have heard for TIP, tax-in pricing, in the past couple of weeks has been that some polling has been conducted and public opinion polls indicate that people prefer to see the final price. That is the only reason we have had for TIP.
Unless someone is able to come up with some other rationale for TIP, I think we should amend it and take it out. As Senator Oliver said, the overwhelming evidence is that people do not want it.
The Chairman: What Senator Oliver said, I believe, was that the section on tax-included pricing should not go into effect until a majority of Canadian provinces are in favour of it. I believe that is what he said. That is a different proposition from the one that Senator Comeau made. That is why I tried to summarize the evidence before, which I thought said that the vast majority of the business community had a problem not with the concept or the idea of tax-included pricing but with the attempt to implement that idea on a small base of consumers.
Senator Oliver's comment would be totally consistent with that. He was trying to define what size of consumer base you require in order to be able to implement the principle.
Are we now discussing leaving the concept in the bill but amending it so that it does not go into effect until some test is met, whether it be the number of consumers or the number of provinces or whatever? Or are we discussing eliminating the section entirely?
As I heard Senator Oliver, he is in the camp that wants to leave the concept in but as a separate proclamation clause which will only go into effect when the test is met. The test he put on the table was the majority of the provinces.
Senator Comeau: I do not disagree with what Senator Oliver has said. In fact, polling has shown that people do prefer to have prices hidden. However, we heard in Atlantic Canada that it should not be at the price of having fewer choices and of increased costs and of lost jobs. I am not disagreeing with your concept at all.
The Chairman: Fine.
Senator Buchanan: It is severable, so sever it. If that is not accomplished, then I do not entirely agree with what Senator Oliver said. On reflection, he would probably agree that if we are talking about a majority of the provinces, then you leave out the one province which everyone mentioned -- Ontario. Most of the pricing takes place there. It would have to be majority of provinces or another X number of provinces in addition to the three and representing about 75 per cent of the people of Canada. Then you click in with Ontario.
My first option is to sever it. It is severable, and it is foolish to have it in there. If not, then it should be proclaimed only after being accepted by a majority of the provinces representing at least 75 per cent of the Canadian people. That is something similar to what we did back in 1981, but, instead of 50 per cent, it would be 75 per cent.
The Chairman: For the record, your reference to 1981 referred to the constitutional amending formula of seven provinces representing 50 per cent of the population.
Senator Buchanan: That is right.
Senator St. Germain: If tax-in pricing was to drive out some of the majors, that would be regressive for the people in Nova Scotia and Newfoundland and New Brunswick. There is nothing finer at keeping prices down than competition. The more competition you keep in the marketplace, the better. If the majors were to decide to start pulling out because of the impossibility of implementing this in a fair manner, it would be regressive and would hurt Atlantic Canada, a region which I sincerely believe needs all the assistance it can get.
Senator Cochrane: I have a technical problem. When Mr. Drummond appeared before the committee, he said that any change that we make here specifically including the tax-inclusive pricing would not require changes to the provincial legislation and that the provinces could deal with it in their regulations. If that is the case, if they can handle it by their regulations, is there anything to stop them from saying, "Well, next month we will include this tax-included pricing?"
The Chairman: I do not know the answer to that. Mr. Drummond is here. Perhaps he could respond to that directly.
Mr. Don Drummond, Senior Assistant Deputy Minister, Tax Policy Branch, Department of Finance: In discussing this provision, we should be crystal clear about what aspects of tax-inclusive pricing are in the bill before you and what aspects of it are not in the bill before you.
The federal part of the tax-inclusive price is relatively minor relative to the whole scheme. The legislation deals with the interprovincial aspects with which the provincial legislation cannot deal. I say it is relatively minor, but it is very important. If we did not deal with that, we could potentially be putting the Atlantic provinces at a competitive disadvantage because retailers outside could come in with advertizing and catalogues, et cetera, without reflecting the tax-inclusive pricing. The bulk of the legislation rests with the provinces.
In answer to the specific question, if you did remove the aspects of tax-inclusive pricing under Bill C-70, the provinces could still go ahead and, within their provinces, implement tax-inclusive pricing. However, they would not be able to get at the interprovincial aspect which would be a major factor in their decision. Are they willing to go ahead without those aspects?
Clearly, you have aspects of tax-inclusive pricing in Bill C-70 because they wanted to get at the interprovincial aspect if they were doing it within their provinces as well.
The Chairman: Is the following statement true? Ten years ago, being pre-GST, if any province had wanted to pass a measure related to tax-included pricing in its own province, it was within the jurisdiction of the province to do so.
Mr. Drummond: The contrary issue facing the GST, about which there was much discussion at that time, was why the federal government does not force tax-inclusive pricing. The federal government did not believe it had the jurisdiction to determine how prices were marked in the provinces and that that was provincial jurisdiction.
Senator Angus: Mr. Drummond, if I may, sir, there is a section in Bill C-70 which has a heading of "Tax Inclusive Pricing." It has four or five sub-clauses. I am wondering if we should have an amendment at the end of that clause saying that the provisions herein contained with respect to tax-inclusive pricing will not come into force until such time as a majority of the provinces -- or some formula along those lines.
Let us assume that we moved that amendment and it passed. What would be the effect on the bill and the scheme of the legislation?
Mr. Drummond: We have really distinguished the bill grosso modo in two parts. However, as you have mentioned, there are three parts.
The simplification improvements were announced last April, and we have your discussion that they would go ahead. You wanted to come back to a few items, but, with those exceptions, they would go ahead.
The harmonization aspects in terms of a single administrator and a common base would go ahead.
Literally, the interprovincial aspects of tax-inclusive pricing would not go ahead. The question then would fall onto the provinces as to what they want to do with their legislation and their regulations. In theory, they are open to do whatever they wish.
Senator Angus: We know what they are planning to do this morning because we read the papers.
The Chairman: Can I then summarize this as follows so your steering committee has a sense of to prepare for tomorrow? We will prepare two amendments dealing with tax-inclusive pricing. The first would pick up on Senator Buchanan's statement and sever the issue entirely. The second would simply eliminate anything to do with tax-inclusive pricing in the bill. The third amendment would leave the principle and the concept of tax-inclusive pricing in the bill, but those clauses would go into effect only once some particular test had been met.
There have been several tests put forward by various senators around the table. Your steering committee will discuss them and give you a specific proposal tomorrow which will still be subject to change if we want to do that.
Basically, on this issue, we will come back tomorrow with two alternatives, one of which completely eliminates tax-included pricing and the other which leaves the principle in the bill but has it go into effect only when some test down the road is met.
Is that a fair summary of that issue, and can we then move on to another one?
Hon. Senators: Agreed.
The Chairman: The second issue dealt with books. Perhaps, Mr. Drummond, you could stay at the table, because this is helpful.
There is some confusion, at least in my mind, as to exactly what books are taxed and under what circumstances. Perhaps you might summarize for us the status quo with respect to books.
Then, since Senator Angus raised the issue, I will ask him to comment on what changes if any he would want made in the current situation.
Senator Stewart: May I raise a complication so that we will complete answer? We heard a witness talk not about books but about reading generally.
It would be nice to know what complications arise if reading generally were the topic of an amendment. Do we mean magazines? Do we mean paperbacks in the airport? Do we mean books published in Canada as distinct from books brought in from the United States and so on? It is a very complicated area.
The Chairman: Mr. Drummond, just to complicate this further, are you aware of a bill called Bill S-11? I assume your officials are aware that it is before the Senate?
Mr. Drummond: Yes.
The Chairman: It is a bill to eliminate tax on all reading materials. You may want to comment on the status quo in relation to that bill as well. Can you summarize that? Then I will turn to Senator Angus to talk about what changes he would want made.
Mr. Drummond: Starting off with the status quo, all books, all reading materials are taxed under the GST. There are two aspects which affect books under this bill. One of them is indirect: How does the harmonization itself affect books? If we went to the common base, the 15 per cent would apply to books.
You have probably heard the intention of all of those three provinces to provide a point of sale rebate similar to what Quebec had operated for a number of years. In the harmonized provinces, the taxation of books would not change from the national treatment.
Also in your bill is a proposal from late last year on which we remove the GST books on certain purchases. That was from university libraries, from public libraries and from certain charities which advocate literacy.
The question was raised in terms of whether that would create an underground economy and would there be incentive for people to stock up books in the universities libraries and what not. I should clarify that the exemption would not extend to a university bookstore that would sell textbooks as well as paperbacks and other equipment. The exemption is through the university library which typically would not have a retail outlet or a source of selling books directly to people. That was the exemption that was treated there.
Another issue to be clarified is one which has often come up and Senator Stewart just mentioned it again. If you did go broader than that, are you talking about domestically produced books or all books?
A number of times, we have been presented with numbers that exempting books would not cost very much because people typically use Canadian, domestically-produced books. It is our view that we could not do that; it would be in contravention of our trade laws. We cannot tax something that would be coming in as an import unless we tax it on a domestic basis.
If you are broadening out the base, you are talking about exempting not just textbooks but the paperbacks which, by large majority, are imported.
The Chairman: Is the following an accurate summary of the situation? When the GST came in, it was on all books and all reading material. When the HST comes in, the provinces have said that they will rebate their portion on books. With respect to books, the status quo would be maintained. With respect to certain types of books, namely books purchased by libraries and universities, et cetera, the GST is being removed from that subset of the set of all books.
Mr. Drummond: That is correct.
The Chairman: Thank you. Now I understand the situation.
Mr. Drummond: There is a fairly precise definition in the bill before you on what constitutes a book. For example, there are questions such as whether it is an academic journal. As Canadian public policy, if it has more than 5-per-cent advertising, it is not viewed as being an exemption. There is a long list. Newspapers are not exempt.
The Chairman: We are all familiar with the ability of Finance to do that sort of thing. It drives us all crazy.
Senator Angus: I understand that the definition of a printed book is contained in subclause 259(1) of Bill C-70.
Mr. Drummond: That is right.
Senator Angus: My understanding of the situation with books is the same as that just enunciated by the Chairman. What would be your opinion of adding to Schedule VI, Part 11, the following words:
...a supply of any printed book as defined in subclause 259.1(1) of the act.
What would be the effect of that, in your opinion?
Mr. Drummond: That would in effect zero rate books, as defined, across the country. That is not just in the Atlantic provinces but across the country.
Senator Angus: That is all printed books as defined in that clause?
Mr. Drummond: That is right.
Senator Angus: That wording would do the trick?
Mr. Drummond: Yes.
The Chairman: Can you explain to us the department's rationale for not going as far as that amendment would take you when you made the change?
Senator Angus: They were only giving the Red Book half-loaf. Give the whole thing. They deserve it for taking out TIP.
Mr. Drummond: One must start with the first principle. It has been there since day one, since the late 1980s when the GST was first conceived. We got away from the federal sales tax because, over time, the base kept getting narrower, partly through legislative choices at the government's discretion and partly from court cases where there were grey issues on which court decisions narrowed the base even further.
The economic rationale for the tax was to go with as broad a base as one could and hence get the lowest rate possible. There are basic exemptions like groceries and prescription drugs but not very many. Certainly we are always faced with a long list of requested exemptions. There is a certain refrain after a time, but we want to have a broad base. That is the general issue.
There is one specific fact I should put out in the context of books. When one narrows the base, there is a cost. With the exemption proposed late last year on libraries and universities, we figured that would cost about $25 million. The full step would cost about $140 million; that is $115 million incremental to the cost proposed in this bill.
We certainly heard numbers a lot lower than that, but, as I indicated, when we searched their records on how they arrived at the number, they were typically just exempting books published in Canada. I do not think we can contemplate such a scenario.
The Chairman: That is based on Canada's international trade agreements. You cannot have a different taxation policy based on the country of origin of the book.
Mr. Drummond: That is right.
Senator Stewart: I want to raise the same point I raised when we had the witness from the readers' organization. I can understand why books for university libraries are treated differently. You have a test there. However, many books that I buy, at least when I am travelling, are really for entertainment.
For example, last night, I read a book for entertainment. I took a break for a little while and I watched my television, also for entertainment. Why should entertainment be taxed in one form but not in another? Is that a consideration that entered into your meditation on this topic?
Mr. Drummond: To the degree that we offer an exemption, we want it to have the largest impact on education and literacy. In our view, that connection was through the libraries and through the universities. As you pointed out, the vast majority of books that are purchased above and beyond that tend to be of the paperback form. Certainly, while it is reading material, it is not as directly relevant to education or literacy as the exemption that we offered.
Senator Stewart: This is a topic which I find difficult to address because I have a bias in favour of certain kinds of books.
The Chairman: The nature of politics is that we all come to it with biases. You should not feel bad about that.
Senator Stewart: On the other hand, I find it very difficult to think that I should be exempt from taxes on an entertainment book when I am not exempt from taxes on my TV set or radio. Thank you, Mr. Chairman.
The Chairman: We will move on to the next issue, but let me make sure I have understood the issue. If we were to extend the exemption using the amendment that Senator Angus raised with you, the issue is that it would cost $115 million a year in terms of federal revenue. Is that correct?
Mr. Drummond: That is the most direct issue.
The other issue that weighed heavily on our minds, as you pointed out, is that we have a long list of items that try to distinguish the grey line of what is a book and what is not a book. If you go to the full exemption, one of the concerns I would express to you is that you may not hear the end of it. Other things might have 7-per-cent advertising. There are magazines and newspapers. If one were to go broader than that, the cost would increase from the $115 million. There is that grey line of how you defend the definition of what is a book.
The Chairman: Senators, perhaps we can move on. We will check the legal wording in the amendment which Senator Angus proposed. We can put that on the table when we meet tomorrow. Does that complete the issue of books?
Given the fact that there is a GST rebate, which is a national program, the third item was the question of whether there should be an HST rebate developed along some kind of formula.
Mr. Drummond, I think the concept in mind was a rebate based on a 15-per-cent tax rate rather than the current rebate based on a 7-per-cent tax rate. I believe Senator Stewart put that question to the minister who responded that that is a provincial issue in the sense that the federal government is rebating a portion of the federal tax. The other 8 per cent is essentially a provincial tax, and provinces would be entitled to rebate it or not rebate it as they wish.
I have two questions. First, did I accurately summarize the minister's answer? Second, even if the committee decided that it wanted to have a full-level HST rebate rather than a GST rebate, is it legally possible for us to do so? In some sense, are we not giving back to residents of the region, money that by agreement we have agreed to give to the provinces? Would you explain what our legal position is even if we were to contemplate that notion?
Mr. Drummond: Before the legal aspect, we would have to understand the economic and the tax policy rationale of doing so. As we have pointed out in a number of cases -- and the figures were cited from Mr. Dicks -- the overall sales tax burden in all three of these provinces is going down. In the minister's remarks, he cited the estimates coming from the provinces themselves and he cited the estimates coming from the APEC association on the overall tax reduction burden and how much would come down from consumers. It tended to be in the $50 million to $80 million range.
In one sense, it is an odd concept. At the same time, given the rate reduction between 4 and 5 percentage points, we are reducing the sales tax burden in effect, but then we will come in with a compensation program at the same time.
I have no doubt that you could probably find individuals where their consumption basket may be skewed away from the things that are going down and skewed towards the things which are base-broadening. There are probably some people in those circumstances. However, as the minister went through the other list. Everyone on that list is buying school supplies and other things such as household appliances and the like. It is not just automobiles where that sales tax burden is going down.
Other than the partial emphasis on things such as home fuel oil, there has not been an analysis stating, on a broad and overall basis, that any consumer group is being hurt by the sales tax exemption through the base-broadening when one considers the rate reductions. Aside from the legal issue, I guess there is the fundamental question of what area you would be compensating.
The Chairman: Do you want to address the legal question? In my mind, even if we wanted to do something, I am not sure we have the legal right to do so since it is provincial revenue.
Mr. Drummond: I think that, on a legal basis, we would have the right to do it. Again, it would be a strange concept. The most natural thing to do, if one wanted, would be to raise the GST credit, but then one would be raising that across the country and that would not make sense. We would need a regionally differentiated GST credit.
I would presume, then, that all of the arguments we have heard back in terms of transitional assistance would be just as relevant as for that. I think you would get many questions from the other provinces as to why the federal government is giving an additional GST credit or HST credit to the three provinces where their overall sales tax burden is going down.
Senator Buchanan: Certain people do not like the GST. Someone said the other day that it is a consumer tax and it consumed the Conservative Party. Maybe that is true. People still do not like the GST, but low-income, middle-income and seniors' groups look forward four times a year to GST day. If you go the banks on GST day, they are there. It is a very popular rebate. For the life of me, I do not understand why the provinces do not extend it. I know they are cash-shy. Politically it would be better to have an HST rebate of the provincial PST. That would be a good program.
I say to John Savage in Nova Scotia that he should do it. It might help him in the next election. I doubt it, but it might.
The Chairman: Senator Buchanan, just so we are clear, we are not here discussing the optimal tactics for any provincial party in a provincial election, nor are we here discussing whether the provincial government ought to give back its money. We are here discussing whether there ought to be a federal amendment to a federal law. You have made a very compelling argument for it being dealt with at the provincial level.
Senator Buchanan: Are you suggesting that the federal government would have jurisdiction to have a province grant an HST rebate on the PST portion? If so, I do not see how that could be done.
Mr. Drummond: I am not sure. It would depend. We do have regionally sensitive policies. We still have an Atlantic investment tax credit. In theory, it is a rebate against other taxes you could pay. One can do these things. I am not sure you would have to legally associate it with the HST that would be paid. I think it would be a strange concept and one which would be severely criticized.
Senator Buchanan: You are saying the federal government would have the authority to increase the GST rebate for our three provinces if that is what they wanted to do. The federal government, surely, does not have a constitutional right to order a province to give a PST rebate.
Mr. Drummond: No. I thought you asked about the federal government operating its own rebate only in those three provinces somehow loosely connected to harmonization. As I said, it is such a strange concept because we would be compensating residents of an area where the sales tax burden is going down.
Senator Cochrane: In Newfoundland, Paul Dicks said that the burden will go down. However, Paul Dicks specifically told us that it will cost the provincial government $105 million more each year. That is not bringing the tax burden down, is it?
Mr. Drummond: Yes. We are merely talking about a different way of expressing the same thing. He says it will cost them more because he will have less sales tax revenue flowing into Newfoundland's coffers.
The Chairman: Senators, in listening to this discussion, it appears that this is an issue that provincial governments ought to deal with rather than the federal government. Therefore, your steering committee will not attempt to draft an amendment to deal with the subject. Am I right on that?
Senator Angus: No. I think I speak for my colleagues here.
Senator Cochrane: We will certainly look at the poor, will we not? These people are the ones mostly affected. You will have a tax reduction on cars. You will a tax reduction on refrigerators and things such as that. However, the poor people we heard from do not often buy these so-called luxuries.
We heard from one little lady who stayed there from one o'clock in the afternoon until eight o'clock, and I am sure she was 80 years old.
Senator Buchanan: She was 81.
Senator Cochrane: She was taking in every single word that every single witness was saying and she finally got to present her point at 8 o'clock in the evening. She was very sincere, Mr. Chairman, about the problems that she will face. Transportation will be a serious problem. She is a senior citizen. She will have an increase in her transportation cost. She wants to stay in her own home. She will face an increase in rent and in her hydro bills. These people ask where they will get the extra money.
One of the witnesses even said that her hydro bill will go up $30 per month. She had her budget all drawn up. Surely we must do something about such cases.
The Chairman: I am sympathetic to the position of Senator Cochrane, but just so we are clear, I am trying to respond to the question of the HST rebate issue, which Senator Angus raised when he listed the five areas.
If we are to try to draft an amendment, we need to have some precision as to what it is we are trying to draft. I understand the point Senator Cochrane raised, which was that, in addition to the tax-in pricing argument, we had a large number of witnesses whose primary concern was essentially the broadening of the provincial tax base. As we know, any increase in the cost of living for seniors, low-income Canadians, students, et cetera, is not caused by anything done to either the GST or the GST tax base because they have remained the same. It is caused by the broadening of the provincial tax base. That raises the question of whether the problem of assistance to people impacted by the broadening of a provincial tax base should be settled by the federal government or by a provincial government which broadened the tax base.
Indeed, that is why, in the two budgets that have come down thus far -- the Newfoundland budget is not due until March 20 -- in New Brunswick and Nova Scotia, there has been assistance to low-income individuals in those provinces. I am seeking guidance here because Senator Angus and I have to prepare some amendments for tomorrow.
Is this an issue which you want this committee to address? If it is, then you must be reasonably precise in telling us what you want us to examine.
Senator Stewart: I am impressed by the constitutional problem that comes up here. I think that whoever will propose an amendment on this should have the obligation of drafting that amendment.
Senator Buchanan: Quite frankly, I do not see what kind of amendment we can propose in this federal committee to allow for rebates of the PST portion of the HST. It is clearly ultra vires for the federal government to order a province to do that.
Mr. Drummond: As you have expressed it, absolutely, it would be.
Senator Buchanan: If we want to help those people, including Loretta Smith and the Tim Horton's girl and the seniors, the only thing we as a federal committee can do is say to the provincial government, "Look, you must do something to ease the burden for those people." If that is ignored, then we have to defeat the bill.
Senator De Bané: Mr. Chairman, I would like, through you, to ask a question of our witness, and that is the question just put by our chairman. What is the impact on the consumers of Atlantic Canada of the broadening of the base? Are you saying that the consumers will be hit more? Or can you give us examples where, by broadening the base in provinces in which people are presently paying 16, 18 or 19 per cent, consumers will pay less? What can you tell us about that question regarding the impact of the broadening of the base? Will consumers be paying more or less?
Mr. Drummond: If one takes the broadening of the base in isolation, they will pay more. However, there are three influences we have been careful to define. There is a reduction of almost 4 percentage points in two of the provinces and almost 5 per cent in the third province. That is the first influence.
The second influence is on all kinds of goods which now have tax embedded through the business inputs, and businesses are passing the savings on to consumers. That reduces those prices. We had the discussion when I appeared previously regarding the experience with the GST. Overwhelmingly, the evidence after the fact showed that businesses passed on those savings faster than we had anticipated.
We were quite cautious in making those assumptions. There is every reason to believe that consumers will see that benefit. You have two pluses and a negative, and you have to calculate the net of those influences.
The Atlantic provinces have made some estimates as has the Atlantic Economic Council. They have not even assumed a full pass-through of the costs, that businesses passed through as much as they passed through when the GST came in, and that is what led to those estimates of anywhere between $50 million and $80 million savings to consumers in each of those provinces.
That being said, I am sure you can find some individuals whose consumption basket causes them to be worse off.
Senator Oliver: Such as seniors on a fixed income?
Mr. Drummond: Many seniors would be purchasing those things the minister listed. You will probably find some individuals who will be worse off, but a policy at the federal level which would pick out those individuals and compensate them when everyone else they would be compensating is already better off, would certainly result in a strange piece of legislation.
Senator Buchanan: I agree with what you said, that many items will go down and hopefully those savings will be passed on to consumers, but it is not entirely known whether that will happen. I have spoken to some retailers who have told me that they will take the reduction themselves because they are marginal right now. That will work out in the future. We will see how that will happen.
In answer to Senator De Bané, most of the items the minister mentioned are day-to-day or week-to-week or month-to-month items which people buy, small-ticket items. The big-ticket items are where that reduction occurs, on things such as fridges, automobiles, stereos, big-ticket furniture items. There is no question there will be a reduction although automobile dealers say that, with tax-included pricing, the savings in Newfoundland will only be in the range of 2 per cent because they will have additional cost due to the tax-included pricing.
Power bills will go up in our three provinces. Fuel oil will go up in our three provinces. Gasoline at the pump will go up in our three provinces. Clothing under $100 will go up 8 per cent in our three provinces. The majority of the people, by the way, buy clothing under $100, and statistics will show you that is true. Children's clothing will go up. Let me tell you about stamps.
The Chairman: There is a limited number of times that we can take that one example.
Senator Comeau: Mr. Drummond did indicate that, over all, consumers will be paying less, and I do not think anyone has questioned that, if you take into account the full basket.
What some of us are indicating -- and you indicated it yourself -- is that there has been no analysis of what you refer to as the consumption basket. We do not know. Senator Buchanan was referring a while ago to a whole group of items on which prices will go up. As I understand it, there has been no analysis of how it will impact seniors, the working poor and other people. That analysis should have been done at the initial stages.
We now seem to be saying that, because the federal government does not want to impose its will on the provinces, there is simply nothing we can do. We just shrug our shoulders, walk away and say that it is a provincial problem. It is not a provincial problem because the feds have, in fact, come into this arrangement. They, in part, caused the problem which we are now facing.
Senators keep referring to the GST. Believe me, the Tories paid for it. Your government said it would abolish it, scrap it, kill it, and you did not do it. What you have come up with now is a BST. We now have a system which is a dog's breakfast. It will cause all kinds of problems in Atlantic Canada. We cannot say simply that this is a provincial issue. We must come up with something. We still have some kind of clout with the provinces.
One way to deal with the issue is to not pass this bill until such time as the provinces initiate some kind of rebate for those people who need our help.
The Chairman: In fairness, the evidence we heard is that, through their budgets, the provinces of Nova Scotia and New Brunswick have already instituted various forms of assistance for people who will be affected.
Senator Buchanan: It is minimal.
The Chairman: The Newfoundland budget has not yet come down.
Senator St. Germain: Mr. Drummond, were you in the department when the GST was originally put through?
Mr. Drummond: Yes.
Senator St. Germain: Is it true that the present government has explored 500 ways of trying to replace this tax and this is why they have not replaced it?
The Chairman: I am not sure that is a legitimate question. You can ignore the question.
Senator St. Germain: You figure that input tax credits will be passed. Senator De Bané, and all of them over there, said vociferously that when the GST goes through, this would not happen. Yet now we see him sitting there sort of agreeing that it will happen.
Why do you think it will happen now, Mr. Drummond, that these companies will pass through their input tax credits on the provincial sales tax that they will now be collecting?
I know this is confusing. I am most likely putting you on the spot, politically speaking. Do you honestly believe that this will happen seeing as how we are trying to deal with the issue of helping low-income people?
Mr. Drummond: I think it happens for the same reason that cartels, for the most part, eventually break down. There is an incentive for someone else to break out from the pack.
No doubt, some witnesses have told you that they are planning on keeping that and passing it through. We heard that in spades in 1990 and 1991. What happens is that when the person next door decides not to keep it and they lower their prices, you have to move pretty fast or you lose your market share.
When we were doing estimates of the price impact in light of the GST, we said that there is all this federal sales tax embedded in the infrastructure of a restaurant. It is in everything from electrical fixtures to display counters to kitchen equipment. They bought those items over a period of time. They will not repurchase them the next day and start anew. They will take a long time before they pass those savings on. What we are forgetting is that there is always a new restaurant coming on board. That guy has just bought his equipment and he has less sales tax embedded in the goods he has purchased. He is able to offer lower prices. The other guys had to move quickly to match the drop in prices.
Relative to our slow two- or three-year pass-through of those business input taxes, as far as we can tell right now, it all basically happened within one year.
Senator Angus: Sir, I would like to clarify again that we got to the point about half an hour ago that it is within the jurisdiction of the federal government to do something to this bill to allow a rebate. However, when Senator Buchanan asked the question, your answer was very clever. You said that the way the senator put it would be considered ultra vires. How could we do it so that it would be intra vires?
Mr. Drummond: As Senator Buchanan put it, the federal government would not be rebating some portion of a province's tax. Obviously, one could not connect it to that.
The only thing I can think of off the top of my head is that you would have a regionally differentiated GST credit and you may call it something else for those three provinces, but it would be above and beyond that.
There would be no way of explicitly linking that to what an individual may pay in higher taxes. In theory, we know that cannot be true because, on average, people will be paying less tax. How would you ever get at those small number of individuals who are paying more because of a consumption basket that is more heavily weighted toward home heating fuel, for example?
In practical terms, what you are talking about is focusing on a rebate that would be administered by the provinces on those specific goods that you did not want included in the base. A question which was put to me when I first appeared was: Have we given the authority to provinces to operate a rebate system, if they so wish, as they did with books? The answer to that question is yes.
If one wanted to do something, that would be a far simpler mechanism and much more directed to the audience you are trying to target than anything the federal government could do.
Senator Angus: In the scheme of this legislation, as I understand it, we are not talking about one tax; we are talking about two. We are blending the provincial tax and the federal tax. The provinces have agreed to let the federal government administer the application, the collection and everything else to do with their sales tax, something which they previously did for themselves. Is that not right?
Mr. Drummond: I cannot see how it is two taxes. It is one tax of 15 per cent. We will split the spoils with the provinces. They will take 8/15ths and we will take 7/15ths. However, everyone will see one tax. You will not see the two components.
Senator Angus: I want to get the syllogism on the table. You cannot have it both ways, it seems to me. You have a 15-per-cent federal tax.
The Chairman: It is not strictly a federal tax.
Senator Angus: It is either one tax or it is two taxes. My colleagues are saying that they will strongly push to get rid of the tax-inclusive pricing, and you know the reasons for that. We have a bunch of consumers who came before us who are hurting big time. We have to find a way to help them, too.
I am suggesting to you that one way to help them is through the rebate. Under the scheme of this legislation, the federal government has a right to grant a rebate. If it is one tax and the federal government is administering it, then they have a right to give a rebate, do they not?
Mr. Drummond: I am sure you could devise something that is not directly related to the amount of provincial tax or the total amount of tax that they are paying. One could do that, just as we have credits like the Atlantic investment tax credits. We have some elements of tax policy which are regionally sensitive.
I cannot now think of how you could target the particular individuals you want to target. Anything you will do would be giving a large benefit to people who will be paying lower sales tax. Included in there may be some individuals who will be paying more. I cannot envision any scenario other than a direct rebate on those commodities with regard to which you would not be spilling benefit to people who are already better off.
The Chairman: As Senator Cochrane expressed most eloquently, there was much sympathy among members of the community for the problems of low-income people, seniors, students, et cetera, who will now have certain essentials of life subject to a provincial sales tax to which they were not subject before.
As Senator Cochrane said, ideally, the committee would like to be in a position to do something about that problem, even though the problem is caused by the broadening of a provincial tax base, not by changing in any way, shape or form, either the level of federal tax or the federal tax base.
Once we all agreed on that point, there was then quite a division of views among the committee members. Senator Buchanan and I believe that it ought to be a provincial issue and that we ought to put pressure on provincial governments. Other people think that, perhaps, there was something the federal government could do.
Since it is quite unclear to me what we should do, I will adopt Senator Stewart's suggestion. When we meet tomorrow at 11 o'clock, I am happy to entertain any specific amendment that someone wants to bring forward to deal with this issue. However, your steering committee will not take responsibility for drafting such amendment because it is unclear to me what that amendment would contain. Is that acceptable?
Hon. Senators: Agreed.
The Chairman: We will move on to the final issue which was raised by the Canadian Medical Association and by each of the three provincial medical associations concerning the lack of zero-rating of doctors.
Mr. Drummond, could you quickly summarize the situation? Following that, Senator St. Germain wants to make a comment.
Mr. Drummond: This is the case put together by the doctors. Whether it is factual depends on how the provinces specify their fees. Because the provinces have not set their fee schedules for the doctors to explicitly allow for the GST or, in this case, the HST, then the doctors pay on the input. They feel that, unlike many other people, they must absorb that and are unable to pass it through.
I am not sure that is a premise we should immediately accept because that was exactly the same situation under the federal sales tax. In fact, the federal sales tax went to a 12-per-cent rate, so it was higher than the GST rate. The taxation aspect has been there for an awfully long time and for much longer than the current fee schedules that will be faced by the physicians.
As has been pointed out as well, although you have heard from the physicians, basically that same tax treatment affects an entire health care services industry, so that this particular issue is not just confined to the physicians. If you wanted to consider an amendment, I do not think you could apply the amendment solely to physicians, either.
Senator Buchanan: Is it not true that the other health care services, for example, dentists, physiotherapists, et cetera, can pass it on to their patients?
Mr. Drummond: In some cases, yes; in others, no. Others do have their masters as well. For example, in the case of dentists, the fee schedules are set out by insuring companies as well. It is not a government entity but there are some bodies that are setting their fees.
Senator Buchanan: But there is no restriction on dentists passing the additional amount on to their patients. They are not under the Canada Health Act.
Mr. Drummond: No, they do not work under the Canada Health Act nor is a schedule set out by the provinces. However, others are under such restrictions.
Senator St. Germain: Do you not think, though, that it creates an uneven playing field? I think both sides accept that the GST is the best way to go as far as taxation. They explored everything and we explored everything when we were there. Do you not think, though, that this really aggravates and is unfair to the medical profession?
If I recall correctly, there are some doctors who operate out of certain facilities and who still get remuneration but are not subject to this tax because they work in a hospital or something, whereas those who work in a practice are subjected to it. We have received many representations on this. I realize that this is government policy, but I think you said it would cost about $60 million if we give them the exemption. However, it is really an anomaly in the system. Do you not agree that these people are virtually singled out and discriminated against in the way they are handled? Is there anyone else that is discriminated against that you could point out to us?
Mr. Drummond: Other sectors are zero-rated, such as the agricultural sector, and there are much broader health services than just physicians. It comes back to your view of the tax treatment and the fee schedules as they have been set out.
How was the federal sales tax treated under the fee schedule in the 1980s? Those fee schedules have been there a long time and the tax element has been there a long time. As far as the GST applying across the country, nothing has been changed going back to the 1970s. The only thing that changed is that the federal sales tax was at 12 per cent and the GST went to 7 per cent. Presumably, after that long period of time, the physicians' fee schedules coming from their provinces reflected that tax reality.
Senator St. Germain: Can we say that they did reflect the reality of the tax situation? If you are to level the playing field, you must treat everyone equally. Do you honestly feel they are being treated the same?
Mr. Drummond: If there was a recognition of the tax aspect going back to when the federal sales tax was in existence in those fee schedules, then they are being treated the same. The GST burden that they would incur is being passed on. In addition to that, for the most part they would be getting about half of that back through the income tax system.
Senator Buchanan: So would every other business, though.
Mr. Drummond: That is right.
Senator Cochrane: I would like Mr. Drummond to listen to the words of Comcare (Canada) Limited. They are a nursing and home care company in Nova Scotia. This is what they said:
Under the current tax system when an individual receives home care services provided by a charity, the service is exempt from GST. If that care is provided by Comcare, or any company, and the service is funded in whole or in part by a government program -- again the service is exempt from GST.
The scenario is as follows:
If, on the other hand, Comcare provides the identical service to an individual on a private basis, that recipient of the home care must pay 7 per cent GST and now will have to pay an additional 8 per cent.
That is an unfair playing field. I can give you a copy of this, if you wish, Mr. Drummond.
Mr. Andrew Marsland, Sales Tax Division, Department of Finance: Home care services are exempt if they are funded by a government or by a municipality. Additionally, if a consumer receives five hours of home care services funded by either a government or a municipality, any additional service purchased by that consumer, for example, another five hours per week, will also be exempt. If no funding is available, then it is taxable.
The rationale for that is to target the exemption to home care that is required. There will always be a difficult line to draw between home care that is obviously part of a health care service and home care that is more in line with house cleaning, which someone might purchase anyway. It is a method of targeting the exemption to home care services provided under a health care system.
The Chairman: Are you saying that if a service is provided by a municipality or a government organization, it is typically provided to people with lower income or people who are in need and, therefore, it is essentially being paid for out of tax dollars in contrast to a purchased service?
We see this all the time. Some nursing homes are owned by municipalities and some are owned by the private sector and the rates are different. Essentially, the current situation provides a break to individuals who are in need of having the service provided by the taxpayers versus those who purchased the service. That is essentially the underlying rationale for where we are. Is that a correct supposition?
Mr. Marsland: That is correct.
Senator Angus: What was the rationale at the time of the enactment of the GST for exempting rather than zero-rating physicians?
Mr. Marsland: I guess that is part of a wider decision to provide exemption for the basic health care services. It is a broad approach to basic health care services and that decision was made. It is consistent with the treatment of other health care services, which are all exempt.
Senator Angus: However, if they were zero-rated as opposed to exempted, using your parlance, it would solve their problem in terms of physicians. They would then be able to claim back the ITCs; is that right?
Mr. Marsland: That is true; however, they would be in a more preferential position than they were prior to the GST when they paid federal tax.
Senator Angus: We have heard many figures as to what it would cost the government if they zero-rated physicians.
I am not referring to all of the different services. I can understand your point on the home care. You had to draw an arbitrary line somewhere and say that it is reasonable to have five days after you are dismissed from the hospital or whatever. I do not necessarily agree with where you drew the line because it is changing. The trend today is to have out-care and to get patients back into the communities and out of the hospitals.
This is a huge issue on which we have heard compelling evidence. I hope the government will revisit those guidelines. In the meantime, physicians are leaving these provinces. They have threatened. They came before us and said the extra loss to them is over and above the problem they had with the GST and that it is the straw that is breaking the camel's back. We were given the name of one physician on the record who is leaving because of this.
We are dealing here in an area of great concern to everyone -- the availability of physicians. I was impressed by their briefs and submissions. Not every element of the health care industry appeared before us, but the physicians did. They came individually and collectively, and they have a good point.
Do you know what the actual cost would be? I am talking about physicians who have their own offices and who buy equipment and so forth to set up their office and who do not have the right to reclaim.
Mr. Marsland: The CMA, in their study of 1992, estimated the cost to be a net $57 million for the impact of the GST. They accepted at the time that they were paying $29 million in FST prior to the implementation of the GST. It is not clear whether that fully reflects all the real property aspects.
The health expenditures data from Health Canada would suggest that costs would be somewhat higher than that. It is difficult to identify exactly what it would be, but it is somewhere up to $150 million.
I should add that one would have to deduct the federal income tax saving to get to the net cost, which would be about 30 per cent.
Senator St. Germain: Doctors traditionally have had a tough time defending themselves in the market because everyone believes they make zillions of dollars. As a result of that, they are often in an untenable position when defending themselves.
The loss of doctors is indicative. We are losing good doctors because of the remuneration. You keep coming back to the federal sales tax. Everyone benefited when we went from the federal sales tax to a 7-per-cent GST. I cannot fathom why you keep using the federal sales tax because every industry, everyone out there, is no longer subject to 12 or 12.5 per cent or whatever rate was assessed to their industry.
If we level the playing field, then everyone pays tax and everyone has input tax credits. How do you rationalize coming back to this federal sales tax scenario?
This was done by the administration which instituted the GST. I am trying to determine how you rationalize this because, to me, it still seems unfair that they cannot recoup this. They are business people.
Mr. Drummond: I brought it because it was a key question. Physicians say they cannot pass on the taxes and would be paying because their fee schedule is set and is insensitive to the tax consequences. The relationship between the tax and the fee schedule is not new. It is not new to either the harmonized sales tax or the GST. The doctors did pay the sales tax before. Given the long history of them paying the federal sales tax and fees being imposed by the provincial government, it is logical to ask whether the fee schedule has always reflected the sales tax they would be paying.
I am not sure that you can accept carte blanche that their fee schedule does not reflect the tax burden that is being incurred. In a sense, they are passing on the tax through their provincially determined fee schedule, just the same as a business would be doing.
Senator Angus: I understand that the hospitals receive a partial rebate, not the full 100 per cent but something like 84 per cent.
Mr. Marsland: It is 83 per cent.
Senator Angus: Why is that? What is the rationale for that?
Mr. Marsland: I understand the rationale in determining those rebate rates was to place those institutions -- hospitals, universities, and schools -- in the same position they were in prior to the implementation of the GST from a sales tax perspective.
Senator Angus: Why would physicians not be given a similar partial rebate? It seems logical to me. The whole issue seems to be interrelated. Would you consider that?
Mr. Drummond: Our view is that, for the most part, the rate has gone down. We are just dealing with one side of it, and there are two sides to it. One can deal with this issue through the provincially determined rates as well. It need not be through the tax side.
Senator Buchanan: I am intrigued about your comment that physicians paid the 12-per-cent manufacturers' tax. However, that 12 per cent would have only been paid on a small portion of their expenses to run their offices. Doctors have the normal supplies that any business would have -- paper, furniture, and general supplies in their offices for their secretaries and their nurses. The amount of money they would spend on the kind of manufactured items which would have been attracting the 12-per-cent tax would have been minimal, at least in the offices I have been in. It would have been x-ray machines or whatever was covered by the manufacturers' tax.
Mr. Drummond: As we know from the federal sales tax, even if it did not directly incur the 12-per-cent tax, the tax was embedded through the cascading of the business input. There would have been a large amount of tax, even in the things that were not nominally taxed.
Senator Buchanan: For instance, medical supplies, drugs, office expenses, subscriptions, physician membership dues, promotions, advertising, property taxes, rent, none of those were covered by the manufacturers' sales tax.
Mr. Drummond: Perhaps not all of them were directly, but many of them were indirectly. As we know, a huge portion of the federal sales tax burden, 40 per cent of it -- which was one of the reasons why it was repealed and replaced by the GST -- came through those business input taxes. Everything you listed there had a large amount of federal sales tax embedded in it.
Mr. Marsland: I do not know if you have access to the 1992 CMA report, but in that, there is an analysis or breakdown of how the CMA viewed what items bore federal sales tax and in what proportion.
Senator St. Germain: My concern on this issue, Mr. Chairman, is that we are dealing with a political decision made by Mike Wilson and now Minister Martin. We are spending money on educating our doctors, and it costs an horrific amount of money to put a student through a medical college.
We are losing them. If there is a significant loss, then we should assess it. Perhaps we should have put this question to the minister, as opposed to the officials, because it will require a key political decision if doctors are to be exempted.
We must seriously consider this. There is a significant loss of people in the medical profession, mainly to the U.S., as a result of remuneration and the way they are treated. As I pointed out earlier, they have a tough time defending themselves. It is our responsibility as senators and parliamentarians to ensure that the minority groups are also represented and that their issues are taken seriously.
I thank both of these gentlemen for trying to answer the question.
The Chairman: If I may summarize, Senator Angus and I, with the help of drafting assistance from the legal department, will attempt to draft five amendments. Two will deal with tax-included pricing, one of which is the "completely sever" issue. The alternative is to keep the principle of tax-included pricing in the bill but have that portion of the bill go into effect only after a particular test has been met. We have had several tests proposed here. Senator Angus and I will try to come up with a specific proposal for you by tomorrow.
The third amendment is that put forward by Senator Angus with respect to the GST on all books.
The fourth amendment would deal with the issue raised directly with the committee by Maritime Life and, to a lesser extent, by Assumption Vie once Senator Angus and I completely understand whether an amendment is even required in order to deal with the issue. That is unclear in our minds.
The fifth amendment would deal with the medical doctors' issue which has just been raised. A variety of options have been put forward. Senator Angus suggested dealing with them in the way hospitals do. Other members of the committee have suggested zero-rating them.
We will then have available for the committee to vote on tomorrow at 11 o'clock those five amendments. In addition, if any senator wants to develop an amendment dealing with the low-income issue, we are more than happy to entertain that tomorrow, also. However, the responsibility for drafting that rests with the individual senators, not with your steering committee.
Senator Stewart: I want to understand the implications for your decision to have yourself and Senator Angus, presumably on behalf of the committee, draft amendments. Does that imply that the committee has already taken, in an informal and preliminary way, a decision to go ahead with these amendments if a technically satisfactory draft can be achieved? Is that the implication? Do you just want more specific targets for us to discuss?
The Chairman: Senator Stewart, the first implication is absolutely not correct. The intent simply was that, in the discussion today, Senator Angus had raised a number of items on which he thought his side would like to have amendments considered. We do not have legally drafted amendments on which to vote. If we are to report an amended bill to the house, it must be in a legally correct form. The purpose of the steering committee is to try to get an amendment in the correct legal language. We must both agree as to the intent of each amendment and whether it works legally within the bill without any prejudice whatsoever with respect to whether either side will or will not support the amendment. I want to be clear on that.
Senator Angus: That in no way precludes any senator from bringing any amendments they wish to bring tomorrow when we meet at 11 o'clock. That needs to be understood.
We seem to have a general feeling that this bill unfavourably affects low-income groups, the working poor, and the groups we have discussed. We would like to find something. I have proposed this rebate thing which, in the view of Senator Buchanan, is probably ultra vires. The gentlemen from the department have indicated their view on the thing. We may or may not proceed with something along the rebate line.
The Chairman: Senators, in listing my amendments, I was clear to say that there were five which the steering committee would attempt to prepare. I also said, picking up on Senator Stewart's point, that if there are any amendments to deal with the problem of low-income people who are affected by the HST, that the responsibility for drafting that amendment would not fall on the steering committee because I did not detect any consensus on how to approach that. I was clear that if anyone has such an amendment, it will be voted on tomorrow.
Senator St. Germain: I have a question in relation to the cash-flow situation. I was not able to be with you in your travels to Eastern Canada. Was small business really concerned about this?
The minister this morning made reference to the fact that, by virtue of their sales, they will be able to recover immediately the 15 per cent. Yet Minister Stewart and Minister Martin, both, have indicated that most of their sales would be exports where there is no tax.
The Chairman: Approximately 5 per cent of the businesses raised that as an issue, but that was it.
We are adjourned until eleven o'clock tomorrow morning.
The committee adjourned.