Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 20 - Evidence - May 26, 1998
OTTAWA, Tuesday, May 26, 1998
The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-28, to amend the Income Tax Act, the Income Tax Application Rules, the Bankruptcy and Insolvency Act, the Canada Pension Plan, the Children's Special Allowances Act, the Companies' Creditors Arrangement Act, the Cultural Property Export and Import Act, the Customs Act, the Customs Tariff, the Employment Insurance Act, the Excise Tax Act, the Federal-Provincial Fiscal Arrangements Act, the Income Tax Conventions Interpretation Act, the Old Age Security Act, the Tax Court of Canada Act, the Tax Rebate Discounting Act, the Unemployment Insurance Act, the Western Grain Transition Payments Act and certain Acts related to the Income Tax Act, met this day at 9:40 a.m. to give consideration to the bill.
Senator Michael Kirby (Chairman) in the Chair.
[English]
The Chairman: Honourable senators, we are here to consider Bill C-28, which, as is usual from the Department of Finance, contains a myriad of subjects all under one piece of legislation.
Our witness this morning is Mr. Len Farber, Director General of the Tax Legislation Division of the Department of Finance, who has been with us many times in the past. He is buttressed, as usual, by a phalanx of assistants.
I know you have some opening comments to make, Mr. Farber. Please proceed.
Mr. Leonard L. Farber, Director General, Tax Legislation Division, Department of Finance: Mr. Chairman, Bill C-28, which is before you today, is a very large bill containing a lot of legislation. In order to better deal with the various issues in this bill, this is one of the first bills that we have divided up into two distinct sections. The first section of the bill deals with the 1997 budget measures, which were first released as draft legislation in July, 1997. It relates to changes to the Registered Education Savings Plans, enhancement of tuition and education tax credits to assist Canadians in saving for education. It introduces the pension adjustment reversal to improve the operation of Registered Retirement Savings Plans. As well, it improves the tax treatment of Canadians with disabilities and expands the tax treatment accorded to mining reclamation trusts. In addition, the proposals also include tax measures respecting tax assistance for charitable donations.
The 1997 budget, Mr. Chairman, also contained announcements with respect to legislative proposals that were to come forward later on with regard to transfer pricing. The transfer pricing rules were announced in the 1997 budget and were not released in draft legislation until much later on, but are included in this bill.
In addition, Mr. Chairman, this bill contains some technical amendments. As you know from previous experience, we have put out technical correction bills. They contain changes to the Income Tax Act that have basically no real policy implications, but that just correct anomalies and things of that nature. That technical bill was first released in April 1995. Comments were taken into account and re-released as a notice of ways and means motion in June, 1996, and again in November, 1996, when Bill C-69 was tabled on December 1, 1996. That particular bill, which contained all those technical amendments, died on the Order Paper at that time.
Bill C-28 picks up all the things to which I have referred, including some press releases relating to a number of issues like the film and video production tax credit, the transfer pricing issues that came out after the budget, and the production services tax credit and impaired loans. They were all issued by way of press release by the government over the course of time and are now picked up in Bill C-28, the comprehensive bill before you today.
Bill C-28 has been out for such a long period of time that it has benefited from a lot of input from the professional tax community and other interested stakeholders. A lot of the comments received have been incorporated into this bill.
Mr. Chairman, because of the extent of the amendments, I am not sure where the members of this committee wish to go with regard to questions. There are also the Canada Health and Social Transfer (CHST) amendments, which Mr. Gusen is here to discuss. He will be prepared to take any questions on that issue. I wonder if it would not be best to open up for questions, and we will deal with any particular issue that members wish to address.
The Chairman: Having listened to your preamble about what is in the bill, I want to ensure that I understood what I think you said, which is that some of the measures in this bill date back to February 1995.
Mr. Farber: They date back to April.
The Chairman: That was three years ago. Some date to February 1996 and some date to the 1997 budget. At a minimum, all these provisions are 12 months old and some are 35 or 36 months old. Is that a fair statement?
Mr. Farber: That is right.
The Chairman: Senator Stewart may wish to comment on that.
It might be helpful, given the knowledge of this committee on the CHST, to understand if there is any substantive change in relation to the CHST as opposed to technical changes.
Third, given the fact that the Mikisew Cree First Nation is appearing after you, perhaps you could remain and respond to their concerns. I also know you are aware of the issue with respect to the Mikisew Cree. I wonder if you might respond to it so we could have a more intelligent discussion with them.
Mr. Peter Gusen, Director, Federal-Provincial Relations Division: Mr. Chairman, we are making a substantive amendment to the Federal-Provincial Fiscal Arrangements Act that affects the CHST. The amendment is found in the proposed legislation at clause 285.1. It is a long piece of legislation, so you need a road map to find exactly where it is, but it is in the middle of the proposed legislation. It is a very important amendment because it raises the cash floor provided under the CHST from the current $11 billion up to $12.5 billion. I will describe how the current arrangement works and then how it will work, if it is amended as proposed in Bill C-28.
Under the current legislation, the total amount of CHST that each province receives is made up of two components -- a cash transfer and a tax point transfer. When you put the two together, it is called the CHST entitlement.
The Chairman: The names keep changing. This is the 1977 Established Programs Financing formula modestly modernized; is that correct?
Mr. Gusen: The CHST incorporated that feature of the Established Programs Financing, with tax and cash components. It also rolled in the transfer that previously existed, called the Canada Assistance Plan.
The Chairman: It increased the number of so-called established programs.
Mr. Gusen: Yes.
The total entitlement for each province is established under the legislation, and the provinces receive a portion of this entitlement in the form of a tax point transfer. The tax point transfer occurred back in 1977, as the chairman stated, when the federal government lowered its tax rates and the provincial governments raised their tax rates by an equivalent amount. The federal government transferred tax room to the provincial governments.
The provincial governments have more revenue as a result of this transfer and the federal government has less revenue, and there is no impact on the taxpayer. That is how the tax transfer works. The federal government then pays to the provinces the remainder of their entitlement in the form of cash.
Under current legislation, before this amendment is introduced, the total CHST entitlement for the current year, counting both cash and tax, would total $25.1 billion. Of that total, $13.5 billion comes in the form of a tax point transfer; the remainder comes as a cash transfer. That is under the current legislation. Under the current legislation, the total entitlements for this year are set at $25.1 billion. That entitlement stays at $25.1 billion for two years, at which time it will grow in relation to the growth in gross domestic product.
The current legislation also states that, regardless of the size of the total entitlement and regardless of how much the tax points are worth, the cash portion of the transfer will never be less than $11 billion -- the cash floor in the existing legislation.
The amendment at clause 285.1 of this bill proposes that the guaranteed cash floor in the transfer be raised from $11 billion to $12.5 billion. The value of the tax point transfer is not affected at all by this amendment. The total amount of CHST payment this year and every year out for the period covered by the legislation will be higher as a result of the increase in the amount of cash to $12.5 billion from $11 billion. This year, it will be $26 billion if the amendment goes through as proposed, rather than $25.1 billion.
By the end of the period covered by the legislation, by the year 2002, we predict that the CHST will be worth $28.5 billion, rather than $27 billion, as it would be under the existing legislation. Hence, the CHST will not only be larger to start off with, but also it will grow more rapidly over the remaining years that are covered by it.
How much additional expenditure will this entail on the part of the federal government and what would this amendment mean to provinces? Under the current legislation, the cash transfer would have been $11.6 billion this year, but with the new cash floor as described, the cash payment would be $12.5 billion. If this amendment goes through, an extra almost $900 million will be paid out by the federal government under the CHST this year. That is just for this year alone. Over the entire period covered by this CHST, from last year and extending over the next five years, the extra amount paid out under the CHST would be $7 billion in cash. The tax portion of the transfers is not affected by this amendment.
The federal government will be paying out an extra $7 billion of cash over the period up to 2002 and every province will receive a larger CHST transfer as a result of this amendment.
We have distributed a table entitled "Impact of Raising CHST Cash Floor." It lists the total entitlement of each province in cash and tax transfer points over the period from 1997-98 to 2002. In that table, you can see that more is coming to each and every province. Newfoundland will receive an extra $130 million; P.E.I. will receive $32 million more. You can also see from this table that the entire extra pay-out to the provinces comes in the form of a higher cash transfer. The increases in transfer shown on the top panel is the same as the cash transfer line in the bottom panel. Newfoundland gets $130 million more in entitlements, of which $130 million comes in the form of a higher cash transfer.
That sums up the changes effected by this amendment. I will briefly review that which is not changing under the Canada Health and Social Transfer. We are not touching the tax portion of the transfer. It is only the cash that is affected with the new cash floor. The legislation still covers the period up to 2002. The Canada Health Act principles with which you are no doubt familiar must still be respected as part of the CHST legislation. The provinces must also respect the provision that they must not impose residency requirements for the receipt of social assistance. Provinces, if they are to receive their full CHST amount, are obliged to pay social assistance to newcomers on the same basis as to long-term residents.
The provincial distribution of the Canada Health and Social Transfer is not changing at all as a result of this amendment. The provincial distribution is set to change over time, to become closer to an equal per-capita distribution of Canada Health and Social Transfer. That will happen. The only significant change being introduced in this amendment is the raising of the cash floor from $11 billion to $12.5 billion.
Senator Stewart: Are the governments in the provinces required to expend the yield from the tax points for health and for the purposes of maintaining their health and social legislation?
Mr. Gusen: No. There is no requirement that the provinces demonstrate that they spent the particular dollars that are transferred to them under Canada Health and Social Transfer on those items. The only requirements are that they respect the Canada Health Act and the ban on residency requirements for social assistance. If you look at the amount that provinces do spend on health and on social assistance and on post-secondary education, the total is much larger than the amount transferred from the federal government under the Canada Health and Social Transfer. In effect, you could say that the provinces are spending each and every dollar they receive under the CHST on those programs for which it is designated but you cannot trace where the exact dollars are going.
Senator Stewart: Let us take Nova Scotia as an example. Is the federal contribution to health and social assistance in Nova Scotia, either as a yield from tax points or as cash, half of what Nova Scotia spends, or 60 per cent or 70 per cent? What is the relationship of the contribution of the federal taxpayer as against the Nova Scotian taxpayer to these programs?
Mr. Gusen: I do not have precise numbers here but it would be in the 30- to 40-per-cent range.
Senator Stewart: The Nova Scotia taxpayer is paying about three-tenths?
Mr. Gusen: The federal contribution is in the 30- to 40-per-cent range.
Senator Stewart: So it is the other way around.
You described the increase in the cash transfer but you did not explain why the amount is being increased.
Mr. Gusen: When the CHST was announced in the 1995 budget and implemented starting in April 1996, the government decided that the size of the program was appropriate given the fiscal pressures of the day.
I am not sure if you are familiar with the health forum, a body that was set up to look at the health system in Canada. They made a recommendation that the cash portion of the CHST should never fall below $12.5 billion. That was the level it was at in 1997-98, so the health forum said that that is as low as it should go.
When it became clearer that the fiscal situation was improving, the first thing the government did was announce that they would follow the recommendation of the health forum and increase the cash floor of the CHST.
Senator Stewart: What was the rationale for that recommendation?
Mr. Gusen: That was not made explicit in the recommendations of the health forum. For what it is worth, as a non-expert witness at this stage, I believe that the cash floor was at that level in 1997-98, and the recommendation was not to let it go any lower. That was the nature of that recommendation.
The Chairman: In fairness to my colleagues, I happen to be someone who opposed the EPF when it was introduced. I thought it was the wrong way to go. That is why I go back to 1975 and 1976 on this issue.
Essentially what happened was that, if you did not introduce a floor, the trend line showed that by early in the 2000, 2001, 2002, several provinces would not be getting any cash from the federal government. Thereby, any perceived federal government leverage over the control of those programs would disappear since it would be difficult to exercise control over something to which you were not paying any money. Just so we are clear, that, rather than altruism, was what motivated the change.
Senator Stewart: Yes, but the witness was not prepared to say that.
The Chairman: I thought I could perhaps be somewhat more direct, since I am long on the record as not liking the tax point transfer in the first place.
[Translation]
Senator Simard: Is it the government's intention to have this bill passed in the Senate before the summer recess and why? Second, I wonder if the committee intends to hear the Minister of Finance, and third, is the list of witnesses already set?
[English]
The Chairman: Typically, we have not called the Minister of Finance on these bills. We have typically dealt only with departmental officials. That has been the long history of this committee on these kinds of bills.
Second, we sought out witnesses, and only the witnesses who asked to appear are on the list. I believe the only witnesses who appeared before the house committee on this bill are the witnesses who are following officials this morning. The clerk had no other expressions of interest from potential witnesses, as was the case before the house committee.
[Translation]
Senator Simard: I can see that the government is now looking forward for this bill to be passed. Prior to the federal election, though, they weren't so impatient to have the Income Tax Act and the 1997 budget amended. As for the decisions and procedures that were allowed and advocated by Mr. Paul Martin, I just mention one of them in particular. I would like to get some answer or explanation about those changes to the budget. In three instances, the Minister of Finance has allowed and advocated some practices which were inconsistent with the basic rules followed by chartered accountants. With your permission, I would like that Mr. Paul Martin be invited to appear before our committee. We could then ask him other questions.
[English]
The Chairman: I am happy to consider that question, once we finish with the witnesses. Can we proceed to question these witnesses and then the other witnesses? I am happy to return to this question.
Senator Angus: Senator Simard makes a good point, given the background.
[Translation]
Senator Simard: We could also talk about minor changes, and there is a long list of them, but I would rather address the issue of the principles and the policies which guide this government now and which might guide them over the next three years.
[English]
The Chairman: I am happy to return to that question.
Senator Callbeck: On the subject of the CHST, I should like to get some information. The CHST replaces the EPF and the Canada Assistance Plan. I am from Prince Edward Island, so I should like to have the figures from your chart for the period of time in question. I know what Prince Edward Island is projected to receive under the CHST, however, you must have the projections for a scenario under which the EPF and the Canada Assistance Plan continue. I should like to get those figures so I can compare them, please.
Mr. Gusen: I would be happy to supply what we can on that. As this is somewhat of a hypothetical question, the response will not be black and white. We will have to make some assumptions about what would have happened.
Senator Callbeck: I understand that. However, I would like to see the figures of what you had forecast.
Mr. Gusen: We will respond, yes.
Senator Kolber: Senator Angus and I have been involved in health care since we were presidents of two hospitals in Montreal; the system is obviously suffering. We keep hearing that it is the federal government's fault for withholding money. However, looking at this, if I read it right, the Province of Quebec, for example, will receive a $1.8-billion increase over the next five years. Is that a fact?
Mr. Gusen: Yes. That is over the seven-year period covered by this data. It is $1.8 billion more than they had been expecting before this change was announced.
Senator Kolber: When this legislation was being drafted, were there any consultations? You mentioned the health forum, with which we are intimately aware. Was there any cooperation or consultation with Allan Rock's department? Was this number pulled out of the air, or is it based in reality in trying to fix the health care system? Am I on the wrong track here?
Mr. Gusen: The simple answer to the question is, yes, there was consultation between the Department of Finance and Health Canada on what was done in this measure to increase the floor of the CHST from $11 billion to $12.5 billion to put an extra $7 billion into the system.
As to whether this amount was agreed upon as being sufficient to fix what was broken with the system, I doubt if you would get people within the government or the health care sector or provincial governments to agree that a certain amount was required to fix the system to make it work properly.
However, this is a major contribution from the federal government.
Senator Kolber: I am not denying that it is a major contribution, but it also seems to be not what we were told was the government's policy. If you listen to the health forum and you listen to Minister Rock, the prevailing wisdom is that there is enough money in the health system but that it is not being spent wisely. He said so in a number of speeches, as has everyone else in the government. That is a load of nonsense. As a matter of fact, in Montreal, the government body responsible for handing out the money for the last five years has said the exact same thing -- that there is enough money in the system, although we are all running huge deficits. In the last three months, they have said that, no, there is not enough money in the system, that it is woefully lacking.
Senator Angus: That is because transfer payments were cut down.
Senator Kolber: For whatever reason, it just does not exist.
One of the things you said that I think ought to be highlighted, certainly from a political point of view or from a practical point of view, is that when these transfers are made to the provinces, they are apparently under no obligation to spend it on health care or education. In fact, they could theoretically use it to build roads, could they not?
Mr. Gusen: Yes, they could. The only way we can check to see where the dollars are being spent is to look at how much we are contributing and how much the provinces are spending on those functions.
Senator Kolber: It will never be 100 per cent, so you will not know.
Mr. Gusen: The federal contribution is much less than 100 per cent, so we can say that each one of those dollars is being spent.
Senator Kolber: Has any thought ever been given to tying in the transfer payments before they are spent, or do you think that would really sever federal-provincial relations?
The Chairman: Why do I not save the witness some agony by responding to Senator Kolber's question.
The history of the funding of social programs, such as health care, in Canada is that originally the federal government paid 50 per cent of the cost and the provincial government paid 50 per cent of the cost. To the extent that the provincial government wanted a quality health care system, they got it with 50-cent dollars, but conditions had to be met. In other words, the federal percentage was exactly 50 per cent.
Senator Kolber: What were the conditions that had to be met?
The Chairman: In terms of what was covered, certain procedures were not covered.
Senator Kolber: I see that cosmetic surgery is not covered.
The Chairman: Exactly.
The 50 per cent was paid, and that is what led to the development of the health care system from 1967 to 1977.
At the time, the reason I opposed the switch to tax points is exactly your issue. I had been involved in a provincial government that had gone from funding programs for municipalities to block grants for municipalities, which is what a tax point transfer does. The municipalities proceeded to spend the money, not on the programs they used to spend them on, but on programs designed by the municipal government; hence, there is no control, fundamentally, over the tax points and how the money is spent. To move back to imposing conditions, whatever the conditions are, would be to move us back into a format that the country abandoned in 1977. I think that is a fairly accurate summary, right?
Senator Kolber: I appreciate that what I am asking is probably well beyond the purview of this committee.
The Chairman: It is really a social policy question.
Senator Kolber: I know, but we are talking about something that is supposed to cure a system, and there is no control on it whatsoever.
Mr. Chairman, you talked about providing quality health care. I believe that in the health care legislation the word "quality" does not exist. When we talk about national standards, I am not even sure what they are. All I am saying is that I hope some kind of effort takes place between the Department of Finance and the Department of Health to get these dollars put into the right pockets. Apparently, however, there is no way to do it.
Senator Angus: On this point, if we look at the chart, for Quebec, under 1997-98, the figure is $3,866 million, and gradually decreases. It is less cash and more tax points. Our political masters in Quebec are telling us that they are getting less cash from Ottawa and more tax points, but they are spending that. It is not for health. That is the net result. Is that correct?
We have been very confused because we are continually told that this is the fault of the federal government, which has reduced the transfer payments of available money.
When we first heard you this morning -- and you saw us go out and have a little caucus -- it sounded like we could go back and say, "What do you mean, because you are getting more?" In fact, we are getting less cash and more tax power.
Mr. Gusen: The way I interpret the two tables together is that in the first table, headed "Impact of Raising CHST Cash Floor," Quebec and every other province is getting more cash as a result of the amendment before you today. It is raising the amount of cash in the Canada Health and Social Transfer by $7 billion over that seven-year period. If a hospital planner were working on the budget before this amendment was introduced and then working on the budget after the amendment was introduced, there would be many more resources available to provide quality health care.
With respect to the other table, with respect to what is happening to Quebec's cash transfer over time, it is declining somewhat. However, as you point out, the tax transfer is going up, so the total of the resources made available by the federal government to the Quebec government for health care and other social programs is increasing over this period.
We are only looking at one transfer program, the Canada Health and Social Transfer. We are not looking at another important transfer program that Quebec benefits from in a big way, and that is the equalization program. Quebec's resources from the federal government under the equalization program amount to about $4 billion a year, each and every year. That is completely untied money. Quebec and the other provinces that receive equalization payments can spend that money as they see fit, according to their highest priorities.
Quebec and every other province express their highest priorities in their Speech from the Throne and their budget presentations. Health is always at the top of the list. I would say that provincial governments regard health as their highest priority. When federal funds are made available to them, either through the Canada Health and Social Transfer or through equalization, those dollars will be directed towards their highest priorities.
Senator Kolber: This page says that the total increase is $1.8 billion to Quebec, if I read it correctly. Yet when you look at the transfers and take the Quebec total of $6.8 million in the year gone by, I do not see where the $1.8 billion comes in. The total goes on up $100 million in the next year, again $100 million, then $200 million and another $200 million, then $300 million. How does that add up to $1.8 billion? I do not understand the arithmetic of the graphs. Perhaps you could elucidate.
Mr. Gusen: The first is the most helpful, I think. It says that over a seven-year period, from 1997-98 up to 2002-03, if the current legislation remains in effect, Quebec will get a total transfer of $40.218 billion. If the amendment is passed as written, Quebec, according to our current forecasts, will get a transfer of $42.036 billion, which is an increase of $1.8 billion.
Senator Kolber: Go to the other page.
Mr. Gusen: If you want to see the origin of the $42 billion paid to Quebec and its yearly distribution over the seven-year period, you take the $6,835 million in 1997-98 and add the $6,914 million in the next year.
Senator Kolber: I am sure that adds up, but I do not see where the increase is.
Mr. Gusen: That is the amount that Quebec will get each and every year if the amendment is passed as presented. If it is not, then each of those numbers would be smaller.
Senator Kolber: You are saying the first big impact of the amendment is in 1997-98. Is that it?
Mr. Gusen: That is right.
Senator Kolber: So where is that number?
Mr. Gusen: I do not have a chart that has it broken down by province and by year.
Senator Kolber: What was the number in the year before, in 1996-97?
Senator Kolber: If you do not have it here, perhaps you could provide the information later.
Senator Stewart: Is there an equalization of the yield from the tax points which are entered into this transfer?
Mr. Gusen: Yes. For all of the provinces that benefit from the equalization program, the value of the tax points is considered after equalization has been taken into account. The province where the tax points are worth the least is Newfoundland -- $17 per capita per tax point. When they are equalized, it is raised to about $21 per capita.
Senator Carstairs: To begin, it seems to me that it would have been much easier if the chart showing the years 1997-98 to 2002-03 had also included the years 1996-97 because then we would have known the totals under the old system compared to the new totals.
You used the example of Newfoundland and its $1.8 billion increase, but in fact their totals from 1997-1998 to 2002-03 go down from $506 million to $501 million. If we had known that they were at $432 million in 1996-97, then clearly we could have seen that projection, but we cannot see it. Is it possible for those figures to be put into this chart and to be distributed to the members?
Mr. Gusen: Yes, we can do that. I have the numbers here but I will present them in a format which that carries on with the chart presentation.
Senator Simard: I would like the witness to prepare an additional column for 1995 which shows that, in total, the government is saving 30 per cent.
The Chairman: You want to go back a previous year in history.
Mr. Gusen: The chart was constructed with these particular years in order to provide information on the years covered by this amendment. The years 1995-96 and 1996-97 are not covered, but it would be possible for us to add those and re-distribute the chart.
The Chairman: The committee is saying that it is useful to know where this bill takes us but it would also be helpful to know from where it is coming.
Senator Carstairs: Essentially, the old EPF formula covered health and post-secondary education; there were no restrictions on how the provinces spent the money. I can give you an example of a province that spent nothing on post-secondary education for a number of years using only moneys that came from the federal government to fund their post-secondary education system.
What else is included now? The CHST goes beyond post-secondary education and health care funding. What else is included?
Mr. Gusen: The Fiscal Arrangements Act, the act that would be amended by this bill, will be amended in only one clause and that deals with the cash floor. However, in the opening of Part V of that act, there is a description of the purpose of the CHST. Listed there are, as you said, health and post-secondary education and also social assistance and social services. Those are the areas covered by the CHST.
Senator Carstairs: We all get hammered by provincial governments who say that they are not giving the same amounts of money or they are giving less moneys or whatever. Has any statistical analysis been done? I can certainly do it myself. All I have to do is pull out a provincial budget and see that they are spending this much for health, this much on social services and this much on education. Do you do that kind of analysis, to get some handle on the percentage being spent by the provinces on health in comparison to the dollar figure that you contribute to them?
Mr. Gusen: As you say, senator, it is easy to do that sort of analysis based on provincial budget information. Yes, we do that sort of analysis. There are some problems in standardizing exactly what is considered to be health spending or post-secondary education spending from province to province. Statistics Canada produces a consolidated set of provincial and local government accounts that makes some attempt to standardize what is covered in the different categories. We prefer to use those numbers. The problem is that they are a couple of years out of date. The best analysis we have for the share of those various spending areas is covered by federal transfers using the Statistics Canada source, but it is not as timely as it might be.
Senator Carstairs: Finally, there were always contributions that provinces spent on health care, even prior to the 1977 most-recent tax points transfer, but even as early as the early 1970s when the tax points began. I will give an example from Manitoba. There had never been a decision by the federal government that they would be willing to fund pharmacare in any form. That was not considered part of the health care system to be funded at 50 per cent or by 50-cent dollars by the federal government.
Is there any list available as to the original intention of the federal government to funding as part of their medicare commitment? That may help the two of you in dealing with hospital boards to know what those 50-cent dollars were supposed to cover. We know they were supposed to cover surgery and hospital stays, but they were not meant to cover cosmetic surgery. They were not meant to cover a number of other procedures. There were also things like home care, which was basically non-existent in the 1970s, that were not to be covered. Is there such a list?
Senator Kolber: There could not be such a list. I appreciate your point but the information is almost irrelevant. The money is given to the provinces and they can do whatever they please with it. That would be lovely information to get but I do not know what we could do with it.
Senator Angus: It has been perpetuated into the future and it is useful information in terms of arguing for more money.
The Chairman: The question is basically this. If you go back to the original medicare promise of 1966-67, as it evolved, up until they switched to tax points, what was included and what was not included under the 50-50 formula? That is to say, on what did we pay 50 per cent? That is essentially Senator Carstairs' question. I have to believe the archives of your department would have that. If not, the health archives should have it, but Finance seems to have everything.
Mr. Gusen: I would suggest that maybe Health Canada would be more helpful on that score.
The Chairman: Can I suggest it would be helpful to us if you asked them?
Mr. Gusen: I will make a note of it.
Senator Angus: You see, even the pristine Banking Committee has been permeated by the concerns about our health care system and by the breakdown therein.
Mr. Gusen: The issue of what is and what is not covered under the health care system did not disappear with the end of cost sharing in 1997. The provisions of the Canada Health Act still had to be respected. Provinces still had to abide by these provisions, including the one of comprehensive coverage. Provinces were required to provide health care services that covered at least that comprehensive definition. There were instances where provinces would discuss with Health Canada whether they were providing the full gamut of services that were required under that definition. So that might be useful information, too.
Senator Stewart: When was the last major change in the financing formula? Am I correct in thinking that there was a considerable change made about 1991 or 1992?
I ask that because I remember looking at a bill under which, according to my analysis, the yield from the tax points equalized was going to increase, so that at some point the cash transfer would be phased out. I think that was about 1991-92. Is that correct?
Mr. Gusen: Yes. There were a number of changes to the EPF program. The chairman referred to 1977 as its origin. That was the big change. It was left largely unchanged until the mid-80s when, because of fiscal pressures, the government started to look for ways to restrain expenditures in a variety of areas, including the transfers to the provinces.
In the 1990 or 1991 period to which you referred, the growth rate in the entitlement, the total amount for both cash and tax for the EPF, was constrained from growing at the rate of gross domestic product to growing at the rate of the population after that period. I think that was when the idea was conceived that if this continued for a long period of time and the tax points continued to grow, if you spun it out for long enough, there would be no cash portion of the transfer left.
Senator Stewart: Yes, and with the disappearance of the cash transfer, the leverage of the Government of Canada to influence the health programs in the provinces would disappear. The provinces would say that the yields from the tax points were theirs to do with as they liked and, since there was no cash from Ottawa, the federal government could just stay in Ottawa and stop nattering.
Mr. Gusen: That was a great concern to people who were worried about the health care system and the federal influence over its direction. That was one of the main reasons why, when the CHST was introduced in the 1995 budget and came into force in April 1996, a cash floor was put in it. It was initially an $11-billion cash floor.
Senator Stewart: Mr. Martin brought that in in 1995-96?
Mr. Gusen: Yes.
Senator Stewart: Thank you.
The Chairman: Mr. Farber, I will ask you to respond to the concerns of the Mikisew Cree First Nation once they have given us their view, but can you now tell us what the issue is, from your perspective?
Mr. Farber: Mr. Chairman, in general terms, section 149 of the act exempts certain taxpayers from income tax and provides special rules for those taxpayers. In essence, the act exempts from tax the taxable income of any corporation, commission or association where at least 90 per cent of the shares or the capital is owned by the federal government, the provincial government or a Canadian municipality.
The courts have extended the interpretation of that to other entities that serve as a public authority, providing the functions of government. In that context, these kinds of entities can carry on basically any kind of business and not be subject to tax under section 149 of the act.
That was causing some concern because there are no boundaries, there is no scope and there is no geographical limitation to it. Therefore, in a series of federal-provincial consultations with the tax committees of the federal government and the provinces, we raised this issue in the context of trying to constrain the application of that so that it serves the function it was originally intended to serve. It is very difficult to come up with a definition or a set of activities that one would want to preclude such entities from engaging in. The concern is engagement with the private sector, which is taxable.
The Chairman: By "engagement," do you mean competition?
Mr. Farber: That is right.
The conclusion was that, rather than constraining particular types of activities, it would be better to look at a geographic location and limit any activities that are carried on outside.
We consulted on a test that would provide for 10-per-cent flex room with regard to things that happen outside of the municipality. If a municipality was engaging in certain commercial activities wholly within its boundaries, it would not have any limitation at all. To the extent that it happened to extend outside, one did not want to suddenly have an absolute denial where 1 per cent or 2 per cent fell outside. So, there is a 90-per-cent test with regard to that.
We have met with the Mikisew Cree about their particular concerns. It is my understanding that they have been operating for a number of years as a non-profit organization, under which terms they would not be taxable because the activities in which they engage are, to a large extent, in main-line commercial endeavours. Many of their activities are certainly outside the boundaries of what you would normally regard as their municipality, or their sphere of influence.
In that context, if one looks at the basic policy of trying to constrain activities within the boundaries of a municipality, it would be very difficult to extend the boundaries without opening it up to all kinds of activities basically anywhere in the country. Although the services they provide to the members of their community are social service benefits -- and my understanding is that all profits from their commercial activities do go to fund social services -- it is still in the context of being outside the confines of the particular definition that was put forward. At least with regard to certain of their activities, particularly in Fort McMurray, under this rule they become taxable unless they operate, as I believe they have operated in the past, as a non-profit organization.
Through the course of discussion on the draft legislation, a number of concerns were brought to our attention with regard to subsidiaries of municipal corporations, as well the coming-into-force rule. Because a number of municipalities may be organized in such a way that they carry on particular activities through subsidiaries of municipal corporations, we extended the rule at second reading so that subsidiaries of municipal corporations will also qualify for the exemption.
As well, we extended the coming into force to only start applying after 1998 in order to afford organizations the opportunity to move certain taxable activities into subsidiary corporations. They can hive them off from activities they are carrying on outside the municipal boundaries. This extra time will give them an opportunity to reorganize, in order to take advantage of the rules as they are.
In a nutshell, that is an overview of what section 149 does. As I said, it was the subject of a federal-provincial consultation. The provinces gave unanimous consent to move ahead with it.
The Chairman: We know how creative your department has been on structures that are consistent with the rules but which achieve a desirable objective nonetheless. You have commented that the subsidiaries of municipal organizations are exempt. As well, you said that the profits from organizations go into the non-profit sector and are thereby used for what I would call social policy reasons. That is what I inferred that you said.
Surely it is possible to design a corporate structure which makes subsidiaries out of profitable businesses whose profits are being used for non-profit purposes, thereby getting you out from under the problem. Is there not a creative legal or accounting way of doing that?
Mr. Farber: Mr. Chairman, without wanting to attempt to give any tax advice on how to set up a structure, my understanding is that the concern of the Mikisew Cree, particularly in trying to deal with structures as you are suggesting, is oftentimes the difficulty that the banking community has with non-profit organizations and the funding of non-profit organizations. They can elaborate on their concern more than I can, but in my discussions with them, they raised their major concern about operating through a non-profit organization structure.
The Chairman: Forget about the banking problem. The ability of the federal government in this current period to persuade banks is probably not bad. Assuming that this is the case and that the banking problem can be solved, is there something you could live with that would solve the problem?
Mr. Farber: The only comment I would make is that the structure under which an NGO will operate, and all the parameters and by-laws under which it has to operate with regard to social services, is pretty strict. They would have to follow that. All the profits earned are really ploughed right back into the community.
To the extent that those rules of general application are there to be used, I do not think anyone can argue that. However, it is matter of interpretation. It is not a matter of trying to incorporate a particular rule into the act to accommodate a situation.
The Chairman: There was unanimous provincial consent to this change in section 144.
Mr. Farber: Yes, we had written consent from most provinces and oral consent from another province. This has been discussed at federal-provincial tax committee meetings over the course of several years. The draft law was communicated to the provinces, and basically everyone was on side.
When one deals with a geographical location, it does not restrict the type of activity. It is a fairly generous rule in that context.
The Chairman: Colleagues, I suggest that we ask representatives of the Mikisew Cree to come forward. We will hear from them and then ask Mr. Farber to come back later this morning.
I would ask Mr. Taylor and Ms Marten to come forward. Please proceed.
Ms Rita Marten, Councillor, Mikisew Cree First Nation: Honourable senators, I am here today to address the committee about the proposed amendment to section 149(1)(d) of the Income Tax Act contained in Bill C-28. I have also brought one of our technicians with me. We will be happy to answer any questions after I finish my presentation.
The Mikisew Cree First Nation is located in the extreme northeastern corner of Alberta, on and around the shores of Lake Athabasca. Our principal reserve lands sit on either side of the hamlet of Fort Chipewyan, established in 1788. It is the oldest permanent settlement in Alberta.
For nine months of the year, travel in and out of our community is only possible by boat or plane. The winter months allow for construction of a temporary winter road that allows us to stockpile essential material for the remainder of the year.
The Mikisew are by far the most influential group in this region in population, organization and innovation. In a few short years, the Mikisew have developed a variety of corporate structures to address the economic effects of being one of the most isolated communities in this country.
Since about 1985, the Mikisew Cree have made some bold attempts at change. In response to the direction of our community members, we have set about creating a number of businesses. We have set up companies to manage fuel distribution, air travel and shipping, construction, building materials and labour services for the oil sands developments to our south in Fort McMurray.
Unlike corporations in mainstream Canada, our companies are not designed to return a dividend or profit to shareholders. Instead, they are designed to provide opportunities for our members in training, employment and the delivery of services essential to the life of our community. The goal is to reduce dependence on outside materials, skills and capital, as well as a reliance on transfer payments for social assistance. It is in this development of self-reliance that the proposed amendment of section 149(1)(d) is so very important.
In practical terms, the Mikisew Cree are attempting to built a functioning economy in what can only be described as a hostile environment. The small protection provided by the existing exemption is of critical importance in providing a slight levelling of the economic playing field.
With recent announcements by big oil companies of more than $20 billion in new oil sands investment, our community is prepared to launch an aggressive bid to organize and participate in what all observers agree will be a sustained period of growth and prosperity for the entire region. We have no resources of our own to gear up for this boom in the short term. If we fail to get it together in time, we will once again be left behind.
Participation in this new oil sands activity will produce returns for the Mikisew for 10, 15, maybe 20 years. These returns will be reinvested in training, employment, and planning for the sustainable use of our renewable resources like tourism, fishing, and controlled timber harvesting. These new industries will support the development of our children and grandchildren for 50, 100, or 150 years.
If the amendment to 149(1)(d) contained in Bill C-28 becomes law, it will have the effect of literally gutting economic development in our community, as well as in many other First Nations. We need the exemptions contained in 149(1)(d) to develop self-sufficiency. Under 149(1)(d), a First Nation that is organized, controlled, and that operates as a real government receives the same protection from taxation as do other governments on different levels in Canada.
When a First Nation bases the design and development of their institutional and management structures on these provisions, two very important things happen.
First, economic development through investment, construction and job creation takes place, with the assurance that all income is reinvested in the community and not leaked out through dividend payments, profit taking, or taxes. This has the effect of creating a pool of capital for further development and reinvestment. In the long run, this will increase self-reliance. Second, by developing the governing and management structures needed to be eligible for exemption, First Nations are developing the foundations of self-government.
In this regard, the Mikisew Cree have made real progress by establishing by-laws for the management of land use, internal and external financial control, as well as rigid and transparent accountability measures to our community. The Mikisew are well on their way to completing a constitution, including a comprehensive set of by-laws that will provide for the Mikisew Cree precisely the same protection that the Constitution of Canada provides for the mainstream population.
This is exactly what Canadian governments and all other parties represented here have been trying to do for years -- the development of legitimate aboriginal government consistent with both the letter and the spirit of the Constitution of Canada. Without the protection of 149(1)(d), only a handful of First Nations in this country will enjoy the land base, resource base, location advantage or opportunity for jobs needed to become self-sufficient and self-governing. If the proposed amendments to the Income Tax Act are passed, then all the progress will be reversed.
With respect for the wisdom and knowledge of this committee, we request today that you consider adding one paragraph to this amendment. That paragraph is included in the briefing paper we have presented.
Thank you for taking the time to listen. We are happy to answer any questions.
The Chairman: I understand your problem, and I am trying to determine if there is a creative way to solve your problem without amending the bill. That was the purpose of my previous question to the Finance officials. I recognize that an amendment from your point of view might be the easiest way, but it is a complicated problem here.
Are there other things that could be done to help you achieve your objectives, to which I suspect the committee is sympathetic, without going the route of an amendment?
Senator Angus: Can I ask a point of information? I think you are probably right. On the face of it, it is a sympathetic case. However, is it really just your group, the Mikisew group? Are we opening a whole big --
The Chairman: -- can of worms.
Senator Angus: Those are your words, Mr. Chairman. You are really asking whether, in solving this problem, we are creating another. If this was just a specific thing for your band and your organization, we could deal with it in a certain way. If it affects a whole series of other groups of native people, then we must look at it differently.
Mr. Ian Taylor, Director of Economic Development, Mikisew Cree First Nation: I will address the senator's question first.
You referred to what we call the floodgate argument. There are approximately 650 First Nations in Canada. Of that number, only a tiny handful would actually benefit -- or, rather, not be hurt -- by the impact. They are affected by Bill C-28 because they have a location that is either near a highway or an urban centre that allows them to participate in the mainstream economy. For isolated communities, where economic development is most needed, this exemption is what creates the damage.
It is revenue neutral, as far as Canada is concerned, because it does not cost anything, unless you want to add opportunity costs. If you have a community that is not developed, or is developing, and is not generating any tax income, then you are certainly not losing anything by allowing it to try to progress and perhaps provide income on another level. The entrenchment of this 10 per cent rule in the amendment would virtually guarantee that isolated aboriginal communities will have no opportunity to develop or participate in the mainstream economy.
Senator Angus: You mentioned a handful. I am looking for an order of magnitude. There is no hidden agenda or floodgate argument here.
Mr. Taylor: It is a legitimate question. All First Nations, by the way, have been operating under this exemption for several years, and there has only been one case where it has actually been an issue. As you can see for yourself, you do not see hundreds of bands in Canada now taking advantage of the exemption, as it exists.
Because of the connection of the exemption to a government body or a body that performs the functions of government, you have set a bar for the exemption, a criteria for qualifying that is extremely high. The Mikisew accept that criteria and standard and are perfectly willing to go along with any objective or any standardized set of criteria for qualification. We are simply asking to be held by the same standard of accountability to which every other level of government in Canada is held.
Senator Angus: I understand. Let us say that we made the kind of amendment you suggest in your document and said that this particular amendment only will apply to the Mikisew band.
Mr. Taylor: We do not want an exemption like that. We will take it if that is what we can get, but that is not what we are here to talk about.
The first question was whether there are other mechanisms available. We are funding an army of consultants, lawyers, and tax experts to determine precisely that. In the last year and a half, we have spent more than $1 million of First Nations funding, which should have been spent on housing, social services, and child care, to try to find ways and means out of this thing.
I am not a tax expert, but I will just repeat what our consultants tell us. Essentially, there are only two possible situations where we could actually, through structural changes, accommodate this.
One is through a non-profit organization. In a sense, we find it a bit of an insult that a government must operate under the rules of a charity or the Boy Scouts in order to provide functions for its constituents. On the other hand, under a strict interpretation of the tax law, a non-profit corporation that provides benevolent functions within the corporation is exempt. However, if the revenues generated within that corporation are passed on to another agency, then they are exposed to taxation.
In the case of using a non-profit organization as a legitimate mechanism to get around this problem, we have the problem, like we have in all our structures, of accountability and liability. By having a separate organization not directly accountable to our citizenry, we do not have the control that a government needs over how its revenues are generated and how the functions generating those revenues are controlled and managed.
The second path is the one we have been, and are now, following. It is developing these extremely complicated limited partnership arrangements that seek to provide two basic, important objectives: control, again, versus exposure to liability.
We have very complicated limited partnership agreements, which are a pretty hard sell when it comes to the private sector. As a quick example, the Mikisew Cree have entered into an arrangement with a relatively large North American corporation to build hotels. One is a 50-50 partnership to develop a hotel site in Fort McMurray. These people have 175 joint partnership arrangements of this kind in Canada ongoing now. Because of the details involved in this limited partnership agreement, and in order to protect the band from liability and exposure to taxation, we almost killed the deal. It took several thousand dollars, weeks of time and delay, financing costs and consultants' fees to fly halfway across the country to explain to the highly experienced board of directors of a successful corporation how this relationship between ourselves had to work in order to get around these provisions.
We foresee a slight amendment to clause 149.1(d) that would not exempt, but include, First Nations. We do not want special treatment. We want to be treated the same. If municipalities are faced with a loss of revenue or exposure to taxation through implementing Bill C-28, they have the option and the mechanism, through their relationship with the province, to simply widen their boundaries of geography. We, as First Nations, obviously cannot. They have methods to accommodate this. We do not.
Virtually all of the corporate ventures in which the Mikisew Cree First Nation is involved are not simply commercial ventures designed for profit, which is rolled over. They are functions very consistent with the role and function of government. Transportation, fuel distribution, health, housing -- these are all the industries in which we are involved. They are partly private sector, partly service sector.
It is not like we are opening casinos or operating food stores or high fashion shops or anything like this. These are functions directly related to the responsibilities of government.
Senator Angus: Is there an issue of competition? Are there other people who would like to do these same functions from the private sector but who would have to pay tax?
Mr. Taylor: That is an interesting point. In fact, an economist from the Department of Finance visited us last week and felt that most of the functions we were performing were legitimate, in the sense that they fell under the rule of government. He used as an example our airline. As you know, Fort Chipewyan is an isolated community. Transport and access and egress are only by air or by water, when it is seasonable.
Several years ago, the Mikisew purchased the private sector airline that had been operating there, providing intermittent service to the community. After great investment and expense, the community is now served twice daily by return airplane to Fort McMurray. That met the first need of the community: to reduce leakage being spent on transportation. In a sense, we have been helping the community by moving dollars from one pocket to the other. We have that established.
Step two is to increase the level of service to the community. It still costs $240 for a round-trip ticket. A vast majority of our community operates on less than one-third of the average per capita income for families in Canada. A vast majority of people therefore still do not have access to reasonably priced transportation in and out of the community. Most Canadians would expect that and would anticipate it, if their government is looking after them.
In this case, to lower the prices so our average community member can afford to travel, we must identify and pursue another profit centre. While we have a very socially based company, we are restricted by this and must now use our own community as a cash cow. We have the opportunity with the experience, management, equipment and expertise to expand air services out further into the region, developing revenue there that we can use to offset the cost of providing the services for our own people.
With this amendment, we will be restricted from doing that. We are then forced to turn on our own people like parasites and to use the pockets of our own people to keep the organization and the company flying.
Senator Carstairs: One of the issues that you raised was the issue of isolation in your community. You have a winter road, but you have no road transportation to take you outside of your community the rest of the time. Would you consider an amendment to your amendment, which would limit its impact to those isolated communities which, for example, have access to road transportation for less than six months per year?
Mr. Taylor: I am not really in a position, nor do I have the authority, to negotiate here. That is not our purpose in coming here.
The Chairman: I would like to respond to that directly. This committee has a tendency to be quite pragmatic. We also recognize the difficulties of amendments in terms of the kinds of problems they can create. You are absolutely correct; you did not come here to negotiate. We are trying to help you solve your problem in a way that also makes it solvable from our point of view. To that extent, I would not view this as a negotiation. I would view it as a group of people around a table exploring potential solutions to both your problem and our problem.
We understand the solution that you would like, but that solution causes us some problems. Is there a common ground that will solve your problem and ours and still get you what you want? Therefore, it is not a negotiation in the normal sense of the word. It is a search for common ground.
Mr. Taylor: In that respect, any amendment that would address and accommodate the disadvantage of isolation, be it of the Mikisew Cree or any other community, I am sure would be welcome.
The Chairman: I presume our clerk knows where to get hold of you because I would suspect that, over the next few days, we will want to reflect on other ways of dealing with this. We may want to talk to you or your official advisers. Now that we understand precisely your objective, the question is whether we can find a creative way to solve it.
Senator Taylor: The answer is right in front of you, senator.
The Chairman: I do not dispute that it is an answer. The question is whether there are other alternatives. That is what we would really like to understand. Thank you very much for coming.
Mr. Farber: Mr. Chairman, I want to introduce Mr. Geoff Hughes from the tax policy branch. Mr. Hughes will give the committee some insight into other possible alternatives.
The Chairman: That would be extremely helpful.
Senator Angus: We need alternatives that would achieve the same end.
Mr. Geoff Hughes, Senior Tax Policy Officer, Department of Finance: We are attempting to do that. We are all sympathetic to this particular circumstance. However, as the chairman said, we do not want, by fixing this problem, to create others.
As Mr. Taylor said, Department of Finance officials were in northern Alberta last week to discuss other alternatives with the band. We first wish to understand fully their current problems with 149.1(d) and to then pursue the possibility of entering into a tax agreement with them. The Minister of Finance, in his 1997 budget, indicated that he would be willing to do this with various bands if they themselves expressed an interest in it.
It is my understanding that this does not necessarily have to be within a self-government agreement. The band would undertake to impose its own corporate or personal income tax, or some form of excise tax like the GST. The federal government would vacate the room it currently occupies in imposing those taxes and would assist the band by actually administering the taxes, similar to what we do with the vast majority of provinces.
I have not yet had an opportunity to speak with my colleagues who went to meet with the Mikisew Cree First Nation, so I am do not know the results of those consultations, but I got a rough indication that they are willing to pursue this as one alternative to dealing with the problems caused by 149.1(d).
The Chairman: Can you explain in layman's language how the tax arrangement would solve the problem?
Mr. Hughes: This has in effect caused the band's corporations to be subject to federal corporate income tax. They would impose their own corporate income tax and we would back out of the room.
The Chairman: And the tax becomes their tax?
Mr Gusen: That is right. I do not know if that would solve the problem; I am only saying that we are investigating whether it is appropriate.
The Chairman: Did you say you have several alternative options, or is that the option?
Mr. Hughes: That is the option.
The Chairman: I suggest that we not vote on this bill today but rather give the department and the Mikisew an opportunity to have discussions, in which you may want to keep us involved.
The fact that the government would like to have the bill passed before we recess for the summer puts pressure on the department to deal with the issue quickly. We have time between now and when the Senate rises for the summer recess to deal with it. I believe it would be worthwhile to take a week or ten days to see if a solution other than an amendment can be worked out.
Do colleagues have any difficulty with that?
Given that the bill goes back to 1995, it is obviously not a life or death issue that it be passed this week. If that is the sense of the committee, I am happy to express that view. I certainly get the feeling that that is the sense of the committee.
Mr. Farber: Mr. Chairman, this bill does contain a lot of personal income tax credits, et cetera, that are being assessed as we speak, so it is important from that perspective.
In addition, as I said in my opening comments, the provisions affecting clause 149 have been delayed in their application until next year. This affords us, until the end of this year, much opportunity to hold the discussions to which you refer. Discussions of this nature will not just happen overnight. There will be a lot of negotiating to work out a tax agreement and the parameters associated with it. However, we do have until the end of the year.
In that context, there is time. We have already begun the process and I would expect that it will continue over the course of the summer and into the fall.
The Chairman: Section 149.1(d) does not come into effect until the start of 1999; correct?
Mr. Farber: That is right, Mr. Chairman. As you know, taxation operates on a fiscal year basis. So in that context, although I do not know what their fiscal year is, we have even more time beyond that to work out whatever arrangements must be made.
The Chairman: Under those circumstances, and recognizing that the department will want to get another bill through this committee within the next 12 months, I am happy to proceed with this bill, recognizing that the next tax bill will have extraordinary difficulty unless we are comfortable that this issue has been settled.
When does the fiscal year of the Mikisew begin?
Mr. Dan MacIntosh, Legislation Coordinator, Tax Legislation Division, Department of Finance: It begins April 1.
The Chairman: Therefore, am I correct that this will not go into effect until April 1, 1999?
Mr. Farber: Yes, that is right.
The Chairman: Mr. Taylor, would you like to come to the table to comment on this?
Mr. Taylor: I would simply reiterate that we are happy to accommodate any solution that the Senate can provide us on this matter.
Without casting aspersions on the good faith and intent of our friends from the Department of Finance, once they walk away from here and Bill C-28 is on the road, there is not a lot of impetus to continue the discussions.
The Chairman: That is why I was careful to make the statement, which I am sure Mr. Farber understood: The Finance Department comes to us every year with a tax bill. I assume that the bill that will come forward next year, which will still be acceptable for you because that is at the beginning of your fiscal year, will have solved this problem adequately.
It is clear that this committee believes the problem ought to be solved and it is clear that the department is sympathetic to it. If it is not solved, I trust you will have absolutely no hesitation in letting us know in plenty of time to deal with the issue. I mean that seriously.
Mr. Taylor: Certainly.
Senator Angus: Is the agreement that Mr. Hughes described something with which you are comfortable?
Mr. Taylor: As Mr. Farber indicated, we had our first discussions on the subject with officials last week. We covered some basic principles that would be involved in negotiating a tax agreement. We are keen to pursue any avenue with Canada that recognizes and, hopefully, entrenches the rights and responsibilities of First Nations.
My colleague did not mention that the agreement we are talking about would require the cooperation and acquiescence of the Province of Alberta. Therefore, this is not a simple agreement to negotiate at all. It will take some time.
The Chairman: We have until April 1 of 1999 before this bill would go into effect, as has just been pointed out to us.
Senators, I would be happy to proceed with this bill, but on the very explicit understanding that it is the expectation of the committee that, by April 1, when we receive the next tax bill, this issue will have been dealt with in a manner satisfactory to the Mikisew. If it has not, Mr. Taylor will alert us and we will see what else we can do to help the cause.
Senator Angus: Are you suggesting that this would be the end of our study on this bill? There are many other elements in the bill.
The Chairman: I am happy to have you ask questions of officials. We have another 20 minutes now, and I am happy to invite the officials back for another session if required.
Are there other items you wish to address to officials?
Senator Angus: The only two items we have talked about are the health care transfer payments and section 149.1(d). I have some points I wish to pursue, but I want to follow the sequence you have set forth.
The Chairman: It was important that we deal with the Mikisew issue because they were here today. However, I am happy to continue the general discussion with officials.
Senator Stewart: Following on with what Senator Angus has just said, I was going to ask a general question concerning the bill which is not specific to this issue.
The Chairman: Let us assume that the Mikisew issue has been dealt with. However, Mr. Taylor, will you keep in touch with us?
Mr. Taylor: Yes, we will.
Senator Stewart: Which important changes that will be made law by this bill, presuming it passes, are already in effect? I realize that some of the changes in the law are highly technical and, perhaps, of relatively small impact. However, I am concerned with the important changes. Assuming that there are important changes in effect, what are they? Can you give me a list of six, eight or ten?
Mr. Farber: Let me try to do that.
Mr. Chairman, there are a number of important changes in this bill. Let me just rhyme off a number of them.
Senator Stewart: That are now in effect.
Mr. Farber: That are now in effect?
Senator Stewart: Yes.
Mr. Farber: Mr. Chairman, they are all in effect, subject to certain grandfathering provisions and coming into force. For example, the ones we have just been discussing in terms of clause 149 will really only take effect next year. Many of these amendments, particularly tax credits affecting the 1997 year, are already in effect and people have been claiming them on their tax returns.
Senator Stewart: What is the legal basis?
Mr. Farber: Mr. Chairman, we have had discussions around this subject in the past. To the extent that they are relieving amendments and tax credits are available for taxpayers, they file on the basis that they are entitled to them. Revenue Canada will not process those returns but stockpile them until it is actually law.
With regard to tightening amendments, the same kind of approach would apply. If a taxpayer is unwilling to take that particular provision into account because it is not law on the particular date that he is filing, he is not obligated to do so. Bearing in mind, however, that once a law is passed it is generally retroactive to the date of announcement, in that context, there is no obligation on the part of the taxpayer to take any particular provision into account.
However, we have found over the years that Revenue Canada, in putting out the guides for filing tax returns, highlighted in those guides what particular provisions are not yet law and that taxpayers could avail themselves of them if they so chose, subject to those particular provisions being passed into law.
As I said, oftentimes, these tax returns are stockpiled until the relevant law is passed.
Senator Stewart: In the case of the CHST, the cash transfer, has any transfer been made in anticipation of the enactment of this bill?
Mr. Gusen: No. We have made our statements to the provinces based on the existing legislation. If this change is passed, we will retroactively make the payments to reflect the $12.5-billion cash tax floor.
Senator Stewart: What we are being told, as I understand it, Mr. Chairman, is that the only tax changes that are going into effect are either situations where the return is not being processed or where the taxpayer, in a sense, voluntarily, in anticipation of the act of Parliament is making the return; is that correct?
Mr. Farber: My colleague has just informed me that Revenue Canada is processing returns with these new tax credits. Large amounts of money are not involved, however; rather than stock piling a tremendous amount of returns, they are actually processing those.
Senator Stewart: We have been over this ground before. We are sympathetic and understand the problem. One of the problems is that it is desirable for tax changes to go into effect immediately upon their announcement. We also understand that in the case of complicated changes to tax law, it is desirable that the tax professionals have adequate opportunity and time to consider the implications of the proposed change.
The difficulty is to fit this into a parliamentary program. The United Kingdom has a statute which accommodates provisional changes in tax law, but there are reasons why this has not gone forward in Canada. The best we can do is continue to ask what, if any, important changes in tax law are being effected, and is the consequence of the bill a considerable retrospective or retroactive act of legislation? In a sense, I am confessing that there does not seem to be a procedural technique for solving the problem.
Senator Angus: Are you not also saying that these tax measures are being cobbled into a piece of legislation that has other things in there? I am told that there are things that may go back farther than the 1997 budget.
This proposed legislation has already been through committee stage in the house. We are supposed to apply a practical application to some of these matters. Senator Stewart and I have brought this up before. In the short period of two hours, we must endeavour to proceed through this proposed legislation without some kind of a road map. This is highly complex stuff, even for the boys over at McCarthy Tétrault, to say nothing of Stikeman Elliot. Could we not in the future have more than just this raw data here?
The Chairman: I am glad Senator Angus raised that question. One of the things I said earlier to Dr. Goldstein, our researcher, was that I will speak to the Deputy Minister of Finance. A situation we have found difficult is proceeding systematically year-by-year to get worse rather than better. We are now reviewing budgets that are three years old as opposed to only one or two years old.
Second, particularly for the point Senator Angus raises, in what amounts to an omnibus piece of legislation, there must be a way in which the committee can proceed through the major elements in consultation with other people. Indeed, the proposed legislation would become quite routine and then the bill itself can be dispensed within the space of 20 minutes. The Department of Industry consults with us well in advance of a bill appearing before us. The result is that when we get a bill, the bill is handled expeditiously.
I will endeavour to speak to the Deputy Minister of Finance about ways to solve this problem. This bill goes back to 1995, which means that parts of it are almost 38 months old, and that is truly outrageous. I am not blaming you for it. As Senator Stewart said, I understand the problem.
There must be a solution that is better than this, which is not a solution at all.
Senator Angus: Another point which we in public policy think is important is that, as has happened in the past, two or three little words could have a particular application for a particular taxpayer that might have millions and millions of dollars of implication if the loss carried forward, as in the case of mergers. One case immediately comes to mind. These things get slipped in, and I do not say in bad faith, but they come whipping through a committee like this, and we might not know about it. I think that the public deserves better, and it is our duty to do better. I am sometimes afraid when I vote on these bills that I might be blessing something that is quite far-reaching and at least should be questioned and given a hearing. We could be walked through it, and someone could say, "By the way, this clause 149 will give Abitibi Price a huge write-off," or something similar. I think we need to know that.
Senator Kolber: I hear what everyone is saying; however, I think we are raising our level of expectations beyond reality. I have had someone go through good parts of this. Most of it, I am told, is highly technical, clearing up anomalies and equities. For this committee to try to go through it would be insane.
The Chairman: That is not what I am saying.
Senator Kolber: The way we could handle it, in order to give Senator Angus a level of comfort, which he certainly deserves, is perhaps when an omnibus bill arises, before we meet with the Department of Finance officials, to have one or two well known taxation experts, tax lawyers or representatives from one of the large accounting firms that specialize in this come here. We could ask, "Is there anything in here that favours one group over another?" or whatever question you wish to ask.
Senator Angus: That is the very least. I was about to say we should get briefings.
Senator Kolber: Someone could monitor it for us so that we can say we have acted in a proper fiduciary capacity.
Senator Angus: In other areas, we have in camera briefings from the officials. We are walked through the legislation, and we understand the framework and that this relates to this budget, and then we hear the officials. It provides us with a better handle.
I have looked back in the history of this committee, even when the Income Tax Act of 1952 was brought in. It basically had its genesis between the department and this committee. There was a counsel to the committee, and it went through, and it was a very productive exercise. Everyone was en plein connaissance de cause. As I say, I have great confidence in our chairman, and we work as a good team, but I do worry.
Senator Kolber: Senator Stewart said this will catch tax professionals unaware. At least, I think that is what he was saying.
Senator Stewart: What I said was that we do not wish to enact a proposal which is announced in a budget immediately, in many cases, because you do want to put it out on the street, as it were, and see what the tax professionals say so that the department avoids making mistakes by reason of the intricacies.
Senator Kolber: First of all, this publication has been out for a long time.
Senator Stewart: Exactly.
Senator Kolber: People could read it. I guarantee you that what is in this publication is a result of a huge bombardment of the Finance department by hundreds of tax professionals. This does not come out of the blue.
We should be taken through by a professional. To try to do that here is crazy.
Mr. Farber: Not to belabour the point, but this is a somewhat unusual bill because it does date back to April of 1995.
We have historically been trying to put forward a technical amendments bill on a fairly regular basis. That technical amendments bill picks up many of the anomalies and technical deficiencies in the act with no policy implications at all.
The technical amendments bill put out in the public domain in April of 1995 found itself in Bill C-69. That died on the Order Paper. In order to pick up all the outstanding legislation and get that into law, we merged everything that was outstanding with the 1997 budget bill. As I indicated, to try to make the bill as user-friendly as an income tax bill could ever be, we divided it into two sections, one section dealing with those technical amendments and the other section dealing with the budget measures, so that at least there would be some perspective as to what it impacts on.
I should like to hope that an omnibus bill like this will not happen again. We will come forward later on this year, hopefully, with a bill implementing the 1998 budget proposals and try to do that as quickly as we possibly can. We do hope to get the 1998 budget proposals out into the public domain as draft law some time within the next month or month and a half so that the tax professional community can look at it, and then table the bill early in the fall and move it through both houses.
The Chairman: Honourable senators, while I understand Mr. Farber's comments and I take them at face value, and one would hope that he hopes this is an unusual case. In my time on this committee, this may be the fifth or sixth time that Finance officials have said that. I know he means it, but it just does not seem to work out.
I would suggest that Senator Angus and I work with the department over the summer to put in place a process. I think Senator Kolber said exactly the right thing: We have a fiduciary responsibility to understand all the nuances, to understand the important elements of the technical bills. We could work out a process that avoids this problem, whether the process is that we get our own experts to give a briefing, that we get early-on briefings, or a combination of the two, whether we deal with it in chunks, or whatever. I think we can develop a process over the summer so that by the time we get to the tax bills next year, we have avoided this problem. I should like to suggest that as a process.
In regard to the tax-policy question, I am sympathetic to the comment on the desirability of having the opportunity to speak to the Finance minister about tax policy or his budget policy. However, my instinct is that we should do that around the time of the budget and not in relation to budgets that are two or three years old. When we have the in camera meeting of the committee next Tuesday night, we should discuss this. We have now developed a regular annual appearance of the Governor of the Bank of Canada before the committee. We have never had a similar process with respect to the Minister of Finance. It does seem to me that the Governor of the Bank appears as soon as possible after the budget on macro-economic policy. It would not be at all unreasonable to implement the same sort of process with the Finance minister on micro-economic policy. I think it would be more impactful if we did it in the days following a budget rather than on a bill that deals with budgets that are one, two, and three years old. I think we should discuss that issue next Tuesday night when we meet in camera. If members of the committee are content with those two procedural issues, I would be prepared to proceed with the bill in its present form today.
The third caveat deals with the Mikisew question, which I presume will be dealt with between now and the introduction of the next tax bill.
That would be my summary of the discussion. Any comment?
Senator Angus: I am not ready to proceed today as I have some questions.
You mentioned earlier with respect to the Mikisew Cree that there is some time. I understand it is important to get this bill through and I am keen to get it through. However, I would suggest that we defer clause-by-clause approval of the bill today.
When we were talking about the transfer payments, someone came up with a good suggestion. Regardless of whether we propose amendments -- and I do not plan to do so myself -- we should make some observations when we report the bill, such as an observation regarding the change from the EPF and the fact that grave concerns have been expressed about the deterioration of the health care system.
Senator Stewart: That is an important point. In several provinces, there is criticism of Ottawa for not providing adequate money to do all the things that some people say need to be done.
I am sure that a lot of information is available now on the various steps in the evolution of federal-provincial finances for specific purposes as opposed to the general equalization program. Perhaps someone on behalf of the committee could try to pull all of this material together. In many cases it would be a matter of simply lifting descriptive paragraphs of what was effected in any particular year, pull it together, and show us the financial implications of the various steps in the evolution. I do not propose that it be done in the short run, but a document could be pulled together that would be most useful.
The Chairman: Mr. Goldstein has told us that he can do that.
Senator Angus: I think we need some time. If honourable senators agree that we should make observations about the transfer payments, it makes sense that we make observations about omnibus bills, although nothing to inhibit voting for it in the chamber. We have had the discussion, and we might be able to cobble together some succinct paragraphs between now and next week. I would suggest that we defer our clause-by-clause of the bill so that we may have an opportunity to discuss it in our caucus.
The Chairman: That is fine. I will ask Mr. Goldstein to draft comments or observations that deal with transfer payments, the omnibus bill issue, and so on, which we could include in the report.
Senator Angus: My first question relates to extending the capital tax on the banks. What is the rationale behind that? We hear many complaints about that. I have heard it said that this is very inhibiting. It is happening both federally and provincially.
One of the provisions of this bill extends to October 1998. Why do we not terminate it now? By the time October rolls around, the bill will not even be proclaimed.
Mr. Farber: The budget papers dealing with that particular measure do not give a rationale for it, other than it being an extension for a further year.
As to the rationale for an extension, the federal government has expected, I would presume, a certain amount of revenue from that particular sector. This extends it until corporate tax revenues from the banking community achieve a certain base level that the government had been expecting. It is extended on a year-by-year basis, so it will not be a permanent provision of the legislation.
Senator Angus: Was that provision mentioned in the budget?
Mr. Farber: That was in the 1997 budget, yes.
Senator Angus: We have had many discussions in this committee about the 20-per-cent rule respecting foreign ownership in RRSPs. I do not wish to begin the debate again. The minister has said time and again to us that, whereas he has sympathy for relaxing or increasing the threshold, or perhaps abolishing it, he does not think the time is right.
There was an extension of this rule specifically, I believe. Is it in the legislation? If so, could you point it out to me? If you have comments, I would like to know where your sympathies lie.
Mr. Farber: My colleague was checking to see if there was anything in this particular budget dealing with that issue.
My recollection is that the foreign property aspect had been moved up from 10 per cent to 20 per cent phased in over a period of time. I believe we achieved that 20-per-cent limitation a year or two ago. The debate is with regard to the 20-per-cent limitation and whether it ought to be moved up or abolished in its entirety. There are arguments both for and against it in terms of the capital markets and market-making functions.
I do not believe anything in this bill extends it beyond 20 per cent, but that is certainly an issue the department is continuing to consult on and research. Any decisions in that regard, I am sure, will be made in the context of a future budget.
Senator Callbeck: In regard to the 20-per-cent rule, since I have been on this committee, I believe every witness has said the limit should be increased. You say there are arguments for and against it. I should like to hear why it should not be increased. What are the arguments in that regard?
Mr. Farber: I believe our people in the financial institution area are far better versed in that aspect of the issue.
Part of the rationale underlying that particular provision is that pension funds are getting tax exemptions and benefits from money invested in RRSPs that are also benefiting from tax deductions and tax exemptions.
There is an argument that those dollars should be invested in Canada or that only a limited amount should be invested offshore. That would be one of the contexts in which it should be examined.
The Chairman: We will gladly raise that issue with your colleagues. As you know, the basic position of this committee over the last five years has been that it should be eliminated, particularly when the use of derivatives is enabling all the major pension funds to get around it. In fact, the foreign property rule does not impact the big guys, only the smaller investors who do not have the sophistication to use the derivatives.
I agree this is not your area of expertise.
Senator Angus: I was referring to the release dated October 23, 1997, where the 20-per-cent restriction was extended to segregated funds which perhaps were not included formerly.
I raise this issue because it is one more indication, as of today at least, that government policy is: Not more than 20 per cent of RRSPs shall be invested offshore.
Mr. Farber: I do not have that particular release in front of me, Mr. Chairman. However, if my memory serves me correctly, to the extent that you have a 20-per-cent rule that applies to other types of pension funds, there is an anomaly with regard to the segregated funds that may have been able to get around that rule. It is not a question of a government policy trying to --
Senator Angus: To close the loophole?
Mr. Farber: Yes. Really, it is to level the playing field for all types of pension funds so that, whether you are operating through a segregated fund or taking any other kind of approach, you are playing by the same rules.
Senator Angus: That is what I thought.
I want to ask you a couple of questions about the international shipping rules. My questions are not, as some were, directed to the minister and his own personal or former interest in Canada Steamship Lines but, rather, I have a personal and a particular interest in the shipping industry. I understood originally that an amendment was introduced to the Income Tax Act with a view to encouraging the establishment in Canada of administrative offices of foreign shipping companies, the principal business of which was international shipping as such, and the bulk of whose revenues, perhaps as much as 90 per cent, were derived from activities outside of Canada. This led to the establishment in British Columbia, for example, of an international shipping centre, or efforts in that direction. This was with a view to the change in Hong Kong in 1997 and other things that were happening in the international shipping world. The idea was to get some action for Canada, and I thought it was a very good step.
In the meantime, our friends to the south got the same idea and they set up one in Connecticut and one in another state. What is happening in Bill C-28 on that subject? What is the thrust of these amendments on "international shipping corporations," as they are called in clause 241?
Mr. Farber: The thrust of the amendments in the bill are twofold. You are correct, senator, that the whole issue of attracting international shipping corporations to Canada was something that was introduced in 1991. That basically provided for an exemption for those shipping companies that are operating out of Canada, where 90 per cent of the gross revenue that they derive is from international traffic, and whose principal business is from international shipping. That was the main amendment, and that was lobbied for strongly by International Maritime Centres, Vancouver.
What is contained in Bill C-28 are refinements as a result of what has happened since 1990-1991 in the context of those shipping companies that did locate in Vancouver. I am given to understand that there were approximately 21.
Senator Angus: TK Shipping.
Mr. Farber: TK Shipping was one of the first, and a lot of publicity surrounded that, but I am given to understand that there are approximately 21 international shipping companies that actually located head offices there and are operating out of Vancouver.
Over the course of time, two questions arose. One had to do with the fact that many of these companies operate through a string of subsidiaries. For liability purposes, for example, they may set up a separate subsidiary for every ship operating in international waters. It seemed to us that if we were going to exempt the whole, why would there be any difference if they operated through a series of subsidiaries basically doing exactly the same thing? That was accommodated in Bill C-28.
The second issue that was raised was whether or not the disposition of any particular ship would be a taxable event for capital gains purposes. It struck us in policy terms that, if the income being derived from the ships carrying on business in international waters is exempt, it would only be rational that the proceeds of disposition of the underlying asset would also be exempt. We believed that was an interpretation that Revenue Canada had in any event but, in order to clarify that that was both the interpretation and the policy, we included that in this bill. It was not a change in policy. We always felt that was part of the original interpretation, at that time anyway.
Senator Angus: Would it be fair to say that, rather than restricting the original 1991 amendment, the idea is to enlarge it and make it more friendly, if you will, to international shipping companies? There was a sense that, as good as it was, and even though there were 21 companies at one time or another in Vancouver, we could still, without great cost to the "FISC," have gone further. I was hoping, when I saw this in the summary of the bill, that maybe we were relaxing it even more.
Mr. Farber: No, senator. In my view, while that is a spin that one might want to put on those amendments, it is not how I would describe those amendments. I believe those amendments were merely clarifying in nature. They were really trying to make the original 1991 provisions work as they were intended to work. In the example I gave of the subsidiaries, that is how these international shipping companies operate. It would be grossly unfair to treat them in a different way; and likewise with the capital gains issue. It did not expand on the original proposal. We have been quite reluctant to expand that original proposal because such an expansion would start entailing activities like management -- management of other international shipping operations -- which is a fairly labour-intensive kind of operation and is one that is in direct competition with other management companies out of Vancouver that are taxable entities.
We constrained it to the types of situations I described earlier, where the exemption is with regard to gross revenues earned from international shipping, and where that is the principal business of the particular corporation.
Senator Angus: The clarifications are of general application; they are not of particular benefit to any single taxpayer that made representation?
Mr. Farber: No, Mr. Chairman. As I described on the merits of the particular situation, that is how these corporations operate. The rules ought to accommodate our initial intention, and if they do not, one would question the rationale of the policy in the first instance.
Senator Angus: I have one last question on another subject of great interest to me and to a number of other senators. It is with regard to charitable donations, the ability to give shares and so forth. When it was announced in the 1997 budget, it was to be a one-year trial. One year passed and we have had another budget. This was to encourage greater charitable donations to universities and hospitals.
Mr. Farber: The particular provision you are referring to is the donation of public company shares. It was instituted for a five-year period, at which time it will be reviewed to assess how it has worked and what level of gifting under that provision has taken place in order to see whether or not it can be enhanced, sustained, extended or whatever.
Basically, that has the rate of capital gains inclusion on the disposition.
Senator Angus: I gather the estimate was that it would cost $90 million a year.
Mr. Farber: I do not have the cost estimate handy but if that is coming out of the budget papers, we did put forward an estimate.
Senator Angus: This is the up side of being so late with the legislation, namely, we have now had the experience of more than a year. Is it costing as much as $90 million to the government? My understanding from the community side is that it has been extremely helpful and it has led to donations that otherwise would not have taken place. I hope that the experience will encourage you to go even further.
Mr. Farber: Let me confirm that.
Senator Kolber: You say it is a cost to the government through lost taxes, but there is some savings because people are putting a lot of money into the financial institutions in which they want to invest.
Senator Angus: That is a double save or a double dip.
Senator Kolber: No; it is an offset.
Senator Angus: It is the balance.
Mr. Farber: I will confirm the $90 million number.
Senator Angus: It does not matter if it is $90 million or $70 million. Do you have any comments about the experience?
Mr. Farber: While it is too early to have taxation statistics with regard to 1997 -- and, I know this from anecdotal evidence and having appeared at a number of conferences for gift planners and charitable institutions -- the general view is that this is having tremendous results. The charitable sector is happy with it and they are getting gifts far beyond what their expectations may have been without it.
It is a powerful incentive. For those that do hold public company securities that have large accrued gains and would be giving at any rate, it is a very tax-effective way of doing it. It is an encouragement; and it is working well. I anticipate that the statistics at the end of the day will bear that out.
Senator Angus: Are you able to share with us whether you believe we will go further?
Mr. Farber: It is so soon in the process that we will give it some time to identify the pattern. Sometimes early on in a new kind of initiative one gets a bit of a blip but that may level out. We are particularly interested in watching this to see how it works. The fact that it is working so well and the charitable institutions are so happy with it is indicative of a program that is working.
Senator Angus: When a corporation or an individual gives an amount of money, they get a receipt from the registered charity in question for X dollars. I have not seen any documentation from the department in terms of the form of receipt. What does one do if one is at McGill University and he obtains these shares? Does he look at the stock market list on the day of the gift to determine the value of that particular security? Do you understand my point?
Senator Kolber: It is the quoted market value of the stock on the day the gift was made.
Mr. Farber: The end of the day that the donor makes the gift is the quoted dollar value.
Senator Angus: What should the receipt indicate? Should they multiply 20,000 shares times $48? Would it indicate a dollar number or would it indicate the number of shares?
Senator Kolber: It would show the number of shares. I have done it.
Senator Angus: Surely it is the dollar figure, not the number of shares?
Mr. Farber: It must be the dollar number because that is the value of the charitable donation.
The Chairman: That is what you need for your tax return.
Senator Kolber: Is there some reason for not enacting legislation in this particular regard to be equal to that of what the United States has been doing for many years? Why do we seem to fall short?
Mr. Farber: There is a long answer to that. Our two systems are very different.
Senator Kolber: My understanding is that, in the U.S. they report the number of shares, there is no capital gain, and they get a full deduction for the value of the stock on the day it is given.
Mr. Farber: I do not have all the American rules readily at hand.
Senator Kolber: Rather than go through a long song and dance, could someone send me a briefing note to say what the difference is between the two systems, and whether or not there is some rationale for this difference?
Mr. Farber: We do have such a comparison. I would be happy to provide that.
Senator Kolber: I want to know how much and why.
Are you making any progress whatsoever in encouraging Quebec to harmonize? It is the only province of Canada where the same deduction does not apply.
Mr. Farber: Quebec administers its own system. One cannot impose it on them.
Senator Kolber: I am not suggesting that you impose it.
Mr. Farber: Questions of harmonization are constantly raised at federal-provincial meetings. In an ideal world, we would have a fully harmonized system, not just for personal income tax, but for corporate tax and GST.
Senator Kolber: Many of us in Quebec have failed miserably at trying to do just that. If you are successful, I will applaud you.
Senator Angus: My other question on the charitable donations concerns an issue about the capital dividend account. I understood that it was announced that, by late December, this bill would be amended to permit corporations to take in their capital dividend account.
Senator Kolber: Are you talking about a spin-off, Senator Angus?
Senator Angus: Yes. Was the bill amended?
Senator Kolber: No.
Senator Angus: Let me ask the department representatives that question.
Mr. Farber: The bill was amended.
Mr. MacIntosh: The amendment originally proposed and which was in the press release in December of 1997 was a tightening one. That is, it proposed that a corporation's capital dividend account would not include the tax-exempt portion of a capital gain realized on the making of a gift. The logic behind that was that, when you make a gift, you do not receive any proceeds from the making of a gift. That is the nature of a gift: You give something and you get nothing in return. Therefore, it was not necessary to have an addition to the capital dividend account. A capital dividend account is an account that private corporations have for tax purposes, from which dividends may be paid tax free.
Since there were no real tax-free proceeds received on the making of a gift, in theory one would not need a capital dividend account to allow those proceeds to be distributed by the corporation tax free, since the corporation does not receive proceeds.
Following that announcement, though, the charitable sector made representations to our minister to the effect that, "Regardless of that theory, the existence of the capital dividend account for capital gains deemed to arise on the making of a gift is an important incentive for the making of charitable gifts." The minister announced a subsequent revision to the rule so that where the gift in question was a charitable gift -- that is, a gift to a charity or to any of the other institutions that qualify for the charitable donations tax credit under the Income Tax Act -- the capital dividend account would continue to exist but it would be taken away for gifts of other kinds.
Where you have a gift from one corporation in a corporate group to another corporation in a corporate group that has nothing to do with charity, then that will not give rise to a capital dividend account, but charitable gifts continue to benefit from this.
Senator Angus: Is this reflected in Bill C-28 as it is before us?
Mr. MacIntosh: Yes, it is. It was changed at committee stage in the House.
The Chairman: Honourable senators, I suggest that we adjourn. We will deal with the clause-by-clause study at a subsequent meeting.
Thank you, Mr. Farber. As usual, it was a pleasant, peaceful morning for you.
The committee adjourned.