Proceedings of the Standing Senate Committee on
Banking, Trade and
Commerce
Issue 22 - Appendix
OBSERVATIONS ON BILL C-28
On 26 May 1998, the Standing Senate Committee on Banking, Trade and Commerce (the "committee") considered Bill C-28, an act to amend the Income Tax Act and other statutes. The committee heard from officials of the Department of Finance and representatives of the Mikisew Cree First Nation who appeared to express their concerns about proposed amendments to paragraph 149(1)(d) of the Income Tax Act.
The committee wishes to make the following observations about Bill C-28.
PROPOSED AMENDMENTS TO SECTION 149 OF THE INCOME TAX ACT
Section 149 of the Income Tax Act exempts from tax the taxable income of any corporation, commission, or association where at least 90% of the shares or the capital is owned by the federal government, the provincial government or a Canadian municipality. The committee was told that the courts have extended the interpretation of this section to other entities that serve as a public authority providing functions of government.
Bill C-28 would, among other things, clarify the scope of the exemption in various situations where an entity or combination of entities owns either 100 % or at least 90% of the shares or capital of a corporation, commission or association. In the case of municipal subsidiary corporations, proposed new paragraph 149(1)(d.5) provides that the tax exemption would be available only where no more than 10% of the income was earned from activities carried on outside the geographical boundaries of the municipalities owning the shares or capital of the corporations.
Representatives of the Mikisew Cree First Nation appeared before the committee to express their views about the proposed amendment to paragraph 149(1)(d).
The Mikisew Cree First Nation is located in the extreme northeastern corner of Alberta on and around the shores of Lake Athabaska. The community is isolated and for nine months of the year travel in and out of the community is limited to boat or plane. The Mikisew have developed a variety of companies to serve their needs, including companies to manage fuel distribution, air travel and shipping, construction, building materials and labour services for the oil sands developments in Fort McMurray. They noted that their companies are not designed to return a dividend or profit to shareholders, but rather to provide opportunities for the members of the community to engage in training, employment and the delivery of essential community services.
Because the Mikisew engage in businesses that operate outside their community, they contend that the imposition of the 10% geographical limitation would severely impair the ability of their isolated community to develop and participate in the mainstream economy. They noted that section 149 encourages the creation of institutional and management structures by First Nations which, in turn, promotes economic development. The Mikisew further pointed out that by developing the governing and management structures required to be eligible for the tax exemption, they are also establishing the foundations of self-government.
The Department of Finance advised the committee that officials from the Department and the Mikisew have begun to discuss alternatives ways, including a possible tax agreement between the federal government and the Mikisew, to deal with the concerns raised.
The committee is sympathetic to the concerns of the Mikisew and believes that it is in the public interest that a way be found to solve their problem.
The committee notes that the proposed amendments to section 149 will not affect the Mikisew until 1 April 1999. The committee encourages the Department and the Mikisew to use their best efforts to reach a compromise before 1 April 1999 that will be satisfactory to both parties and will allow the Mikisew to continue to engage in economic development essential to the growth and prosperity of their community.
The committee asked to be kept informed of the progress being achieved in the discussions between the Mikisew and the Department and agreed to review the issue when the committee considers budget legislation next spring, if the issue has not been resolved by that time.
AMENDMENTS TO THE FEDERAL-PROVINCIAL FISCAL ARRANGEMENTS ACT RELATING TO THE CANADA HEALTH AND SOCIAL TRANSFER
The 1995 federal budget altered the system of federal transfers to the provinces and territories for social assistance, health and post-secondary education. Prior to that time, these transfers were part of two arrangements -- the Canada Assistance Plan (CAP) for social assistance and Established Programs Financing (EPF) for health and post-secondary education.
When CAP and medicare began in the mid-1960s, federal payments to the provinces and territories were based on provincial and territorial spending on social assistance. For every provincial dollar spent under the program, the federal government would contribute an equivalent amount.
EPF was introduced in 1977. Transfers under EPF had two components -- a cash transfer and a tax point transfer. Under the tax point transfer arrangement, the federal government lowers its tax rates thereby allowing the provincial governments to increase their tax rates by an equivalent amount. Thus, EPF changed the funding for most cost-shared social programs from a 50-50 federal provincial program to one in which the federal contribution was much less cash and some tax points.
Since 1990 EPF per capita transfers were frozen and the growth in federal payments under CAP to Ontario, Alberta and Quebec (the provinces not receiving equalization payments) were limited to 5% annually.
In the 1995 federal budget, the federal government announced the creation of a block funding program called the Canada Health and Social Transfer (CHST). Federal transfers under CAP and EPF were merged into a single block consisting of cash payments and tax points beginning in 1996-97. The CHST is not based on provincial spending on social assistance, health or post-secondary education, and the provinces are not required to spend the money transferred to them under the CHST in these areas. The provinces are required, however, to respect the principles of the Canada Health Act and to provide social assistance without imposing a minimum residency requirement.
The 1995 budget set CHST entitlements (cash and tax points) at $26.9 billion for 1996-97 and $25.1 billion for 1997-98. The 1996 federal budget established CHST funding to the year 2002-03. Among other things, the total CHST entitlements were to be maintained at $25.1 billion for the first two years then grow for the remaining period. Because the cash portion of the transfer will decrease as the value of the tax point component increases, within a decade the federal government would have been paying no cash to some provinces. In this situation it would have been difficult for the federal government to say that it had the right to be involved in the contents of programs for which it was not paying any cash. Consequently, the budget established an $11 billion cash floor in each of the five years, thereby guaranteeing a federal cash transfer of at least $11 billion.
Bill C-28 would amend the Federal-Provincial Fiscal Arrangements Act as it relates to the CHST by raising the cash floor from the present $11 billion to $12.5 billion. Under the current law, the total CHST entitlement, including both cash and tax point transfers is $25.1 billion. Of that total, $13.5 billion takes the form of tax points; the balance is made up of a cash transfer. The tax point transfer would not be affected by the amendment.
Officials from the Department of Finance noted that increasing the cash floor to $12.5 billion would translate into an additional federal expenditure of $900 million under the CHST this year and a $7 billion cash increase over the entire period covered by the CHST.
The committee notes that the cash floor is significant because it ensures that the federal government will continue to contribute actual dollars to the provinces and thereby exercise some influence over healthcare through the Canada Health Act. The trend shows that, without a cash floor, the federal component of the CHST for several provinces would eventually consist of tax points only.
The committee also notes that the amount of federal cash transferred over the seven year period from 1997-98 to 2002-03 under the CHST will increase in all provinces and territories. Over time, however, the cash portion of the total CHST package will decline somewhat for some provinces as the tax component increases. For some provinces, however, a tax point transfer is of lesser value than a cash transfer. According to the evidence received by the committee, a tax point is worth $17 per capita per tax point in Newfoundland before the equalization program is taken into account; after equalization is factored in, it is worth about $21 per capita.
Increasing the cash floor is important in ensuring that more federal cash will be available to the provinces under the CHST. However, the committee has grave concerns about the deterioration of the health care system in Canada. The committee notes that the federal government has no control over how the provinces and territories spend their CHST entitlements and as the tax point component of the program increases, the amount of federal influence over the direction of health care is reduced. While increasing the cash floor goes some way toward ensuring that the provinces continue respect the principles of the Canada Health Act, it does not ensure that there will be an improvement in the quality of health care.