Proceedings of the Standing Senate Committee on
Banking, Trade and Commerce

Issue 24 - Evidence - June 7, 2007

OTTAWA, Thursday, June 7, 2007

The Standing Senate Committee on Banking, Trade and Commerce, to which was referred Bill C-40, to amend the Excise Tax Act, the Excise Tax Act, 2001 and the Air Travellers Security Charge Act and to make related amendments to other acts, met this day at 10:55 a.m. to give consideration to the bill.

Senator Jerahmiel S. Grafstein (Chairman) in the chair.

[English]

The Chairman: Honourable senators and witnesses, welcome. Our study of this important bill is being broadcast from coast to coast to coast and can be seen around the world on the Internet.

Bill C-40 proposes amendments to the Goods and Services Tax, GST; the Harmonization Sales Tax, HST; taxation of wine, spirits and tobacco; and the application of the Air Travellers Security Charge Act. The proposed changes are designed to improve the operation and the fairness of the sales tax system as well as to ensure consistency between sales tax legislation and underlying policy goals. Many provisions of Bill C-40 are technical in nature and were already announced by Finance Canada in previous years.

To discuss the details of Bill C-40, we are delighted to have appearing once again Ms. Diane Ablonczy, Parliamentary Secretary to the Minister of Finance. She is accompanied by officials from Finance Canada: Mr. Pierre Mercille, Chief, Sales Tax Division, GST Legislation; Mr. Carlos Achadinha, Chief, Sales Tax Division, Alcohol, Tobacco and Excise Legislation; and Mr. Geoff Trueman, Chief, Sales Tax Division, Air Travelers Security Charge.

Diane Ablonczy, M.P., Parliamentary Secretary to the Minister of Finance, Department of Finance Canada:. It is always my pleasure to appear before a Senate committee and to be of assistance to honourable senators in their important work of scrutinizing and considering measures of government in the sectors of banking, finance and many important issues on the economy.

As you said, Mr. Chairman, the intent of this bill is to improve the efficiency and ease the compliance and administration of the sales tax system. Bill C-40 also improves fairness in our tax system. The government wants to make the tax system simpler and fairer for individual taxpayers and businesses alike.

In this year's budget, as honourable senators know, Canada's government took important steps to implement measures in Advantage Canada, which is a long-term economic plan for our country. In the budget, one of the things we did in pursuance of this plan was a proposal to reduce personal income taxes to encourage people to work, save and invest. The budget also has measures to help businesses succeed through lower taxes to spur innovation and growth, which will lead to more jobs and higher wages for Canadian workers.

We believe that more needs to be done to improve fairness in the tax system, generally, and that is where Bill C-40 comes in. Bill C-40 consists of three parts. Mr. Chairman, you mentioned these well in your opening remarks. Part I of the bill contains measures relating to the GST and HST; Part II relates to excise measures — taxation of wine, spirits and tobacco products; and Part 3 contains amendments related to the Air Travellers Security Charge Act.

As honourable senators know, a number of these initiatives were announced previously either by way of press release or by a Notice of Ways and Means Motion but they have never received legislative approval. It is time for that final step to be taken. There have been some changes in government and active political events, which could keep some of these measures from going all the way through to Royal Assent. We want to make that happen before too many weeks have passed.

I will touch briefly on the key measures in the bill in more detail. I will begin with the GST/HST measures, some of which relate to our health system. Canadians are proud of our health care system and we want to ensure that it continues to meet the needs of Canadians. In Bill C-40, the current GST/HST exemption for speech language pathology services will be continued indefinitely. The bill also exempts health-related services that are rendered in the practice of the profession of social work. It is important to mention that these amendments are consistent with the government's policy criteria for inclusion of a particular health care service on the list of those that are GST/HST exempt. These new measures meet all the criteria.

We are all aware of the special challenges faced by Canadians with disabilities. You will recall that in July 2006 the Minister of Finance appointed the Expert Panel on Financial Security for Children with Severe Disabilities. The panel submitted its report, A New Beginning, in December 2006. Some of you may have had an opportunity to review that report.

Budget 2007 acts on the recommendations of the panel by providing more assistance for persons with a disability and for their families. In the spirit of that action, Bill C-40 will amend the sales tax legislation related to the purchase of specially equipped vehicles for persons with disabilities. Currently, the GST/HST rebate applies only to the purchase and importation of new vehicles. Bill C-40 will allow purchasers and importers of used specially equipped motor vehicles to receive a rebate of the GST/HST that has been paid on the portion of the purchase that is attributable to the special equipment.

Finally, with respect to business arrangements, we want to ensure a favourable environment that allows businesses in Canada to prosper and expand. With that goal in mind, Bill C-40 contains miscellaneous housekeeping changes that will remove technical impediments and simplify compliance with GST/HST legislation. I am sure that that will be well received, Mr. Chairman. In short, this bill reflects the goal in Advantage Canada of easing tax compliance for businesses by reducing red tape.

With respect to the second part of the bill, the excise measures — measures to implement refinements to the legislation related to wine, spirits and tobacco products — I should mention first that much of the content of this portion of the bill came about as the result of extensive consultation with stakeholders from the alcohol and tobacco industries. Therefore, there should not be any surprises for the industry in this bill. I can confirm that the proposals in this bill have been received favourably by the industry.

These measures will improve the operation of the legislation and bring it more in line with current industry and administrative practices. For example, with respect to small Canadian winemakers, amendments in Bill C-40 are aimed at simplifying administration and compliance of the duty exemption for these businesses. These amendments will allow winemakers to concentrate their efforts on continuing to produce award-winning products for us all to enjoy.

The excise tax section of this bill also contains a number of measures related to the taxation of tobacco products. These amendments will ensure that Canada's legislation reflects current practices of Canadian tobacco manufacturers. An amendment relating to a requirement for information identifying the origin of tobacco products brings our legislation into compliance with specifications of the WHO Framework Convention on Tobacco Control. I did not know there was such a convention, but there is, and I am sure honourable senators are familiar with it. That is an international treaty on tobacco control, sponsored by the World Health Organization.

The last part of Bill C-40 contains measures pertaining to the Air Travellers Security Charge Act. These are measures that, for the most part, are technical in nature and are the result of consultation with stakeholders. One amendment, for example, provides that the Air Travellers Security Charge is not payable in respect of air travel that is donated by an air carrier to a registered charity, where the charity donates the flight to an individual as part of its charitable purposes. This would include air travel that is donated by air carriers to charities that arrange free flights for an individual for medical care, as well as so-called flights of a lifetime for physically, mentally and socially challenged children.

I would like to emphasize that many of the measures in this bill were developed in response to presentations from the tax and business communities. We want to be responsive to how our legislation and regulations of government actually impact people on the ground, and we want to make them as user friendly as possible. In the Advantage Canada economic plan, we promise to reduce red tape and unnecessary regulation. Bill C-40 is a step in that direction.

Mr. Chairman, I would now be pleased to answer any questions regarding the bill. We have officials from the Department of Finance Canada here as well, who have joined us today to clarify any technical questions that you may have.

The Chairman: Thank you very much. I understand that your time is limited until twelve o'clock, and that your officials can stay longer. Our hearings usually end between 12:30 and 1:00. In those circumstances, I will ask our questioners to limit themselves to eight minutes each. That will fairly spread the time among all of the questioners.

Ms. Ablonczy: I appreciate that. The Finance Committee of the House, of which I am a member, is considering Bill C-33 this morning, so I should probably be there.

The Chairman: I appreciate that.

Senator Angus: First, the sponsor of the bill in the Senate, Senator Meighen, was unable to be here today. I want to record his apologies in that regard and say, on his behalf, that he has no particular problems with the legislation. He has spoken eloquently about it at second reading in the Senate.

Ms. Ablonczy, I cannot help but pull your leg slightly because our friends on the other side like to pull our legs often, right? I noticed that when you were reading your opening statement, on the first page, where in my text it says, ``It is clear to Canada's new government that we need to make the tax system simpler and fairer,'' you left out the word ``new.'' I wondered if your text is different than mine.

Senator Goldstein: No, she is more realistic.

Senator Moore: Give me a break. This is passé.

Ms. Ablonczy: Well, Mr. Chairman, we all have our predilections in how we present material. We all know that we are working together for the good of Canadians. I do not like to be overly partisan in these things, so that is why I do that.

Senator Angus: I thought that was very good.

Ms. Ablonczy: I am glad, though, that you pointed that out.

Senator Angus: I am trying to find out how to answer it because I do the same thing in the Senate. That was a very good answer.

I understand that this bill had all-party support in the House of Commons; is that correct?

Ms. Ablonczy: It did. Many of these measures were announced or put into place by the previous government; this is not a partisan bill in any way, shape or form. It is a bill that is there to assist all Canadians, particularly those in business and other areas.

Senator Angus: As I noticed, and you have confirmed, many of the measures in the bill were initially announced years ago publicly under the previous government. I am assuming the reason that it took so long to get to this stage is basically the level of consultation required to modify excise tax legislation. Is that true? I understand it is more complicated with the excise tax provisions than it is with certain other elements of the bill.

Ms. Ablonczy: I think that is one element of why this bill may have taken a while to get before us. As I mentioned before, there was also some musical chairs, I guess you could say, in the House of Commons. Sometimes technical bills of this nature are not as high on the priority list, but they certainly are for the end user. That is why it is important that we add certainty to some of these measures that have been consulted about for some time.

People are saying that they would like to have the ``I's'' dotted and the ``T's'' crossed so that we know where we are at. That is why we want to get this bill through the House now. If we can even do that before the end of the session, that would be fine.

Senator Angus: Are there many regulations ready to go once this enabling legislation is passed? We find sometimes that the devil is in the detail and when we are reviewing legislation, we do not get to see the regulations. There is a big process that follows after the enabling act is passed. In this case, could your officials share with us whether a bunch of regulations are ready to go into the Canada Gazette?

Pierre Mercille, Chief, Sales Tax Division, GST Legislation, Department of Finance Canada: I will talk about the GST aspect of it. Basically, we wait for Royal Assent of the bill to produce the regulations because the enabling authority is in the legislation.

With respect to the GST part, I think there are one or two regulations, but they do not have very specific rules. For instance, there is a provision in the act that refers to a prescribed act. Our goal is to prescribe three acts from three harmonized provinces. There are not a lot of hidden rules; it is very straightforward.

Senator Angus: What about the Excise Act?

Carlos Achadinha, Chief, Sales Tax Division, Alcohol, Tobacco and Excise Legislation, Department of Finance Canada: I can speak to that. Like Mr. Mercille, I am not aware of any regulations that would be forthcoming following these amendments.

Senator Goldstein: Thank you, Ms. Ablonczy, for that excellent overview of the bill and thank you all for coming here and helping us get a better understanding of the bill. We have all had the advantage of being able to read the background briefings prepared by your department. They are, as usual, excellent, very informative and useful to us.

I have a few specific questions. The first deals with harmonization. We have three harmonized provinces at the moment and a fourth that, although not harmonized, at least has the advantage of having a single form, and that is Quebec. Are there any negotiations going on with other provinces for harmonization?

Mr. Mercille: The federal government is open to harmonization. The decision is ultimately with the province. From time to time, there discussions, but I cannot say that there is a province that is close to deciding to harmonize.

[Translation]

Senator Goldstein: So, at this time, there are no discussions?

Mr. Mercille: For the moment, there are no formal negotiations under way on harmonization. Occasionally, we receive inquiries on costs. However, the federal government is open to discussion. One of our goals is to harmonize provincial sales taxes. From our point of view, it would be a good thing for the economy. This matter, however, comes under provincial jurisdiction and we do not have the power to sway the decision.

[English]

Ms. Ablonczy: I could also add, senator, that the finance ministers are meeting on June 19.

Senator Goldstein: Is this an item on their agenda?

Ms. Ablonczy: That could well be raised at those meetings. As you well know, it is sort of an ongoing work-in- progress.

Senator Goldstein: That would be useful because a reduction in paperwork for businesses is always desirable.

The travel tax refund issue was terminated early in the year and the travel industry has successfully varied that termination. I understand for bulk purchases or bulk travel for conventions and the like, the relief of GST is available. Has that program already been put in place or is that also a work-in-progress?

Mr. Mercille: The old visitor rebate is being replaced by the new, more targeted program Foreign Convention and Tour Incentive Program. The legislation for that is included in the budget bill, Bill C-52, which is now at third reading in the House of Commons. I assume that you will be able to look at that in the near future.

Senator Goldstein: If we get to it within the next few days we will be able to see that put in place as well.

Mr. Mercille: Yes.

Senator Goldstein: Good. A number of private bills, which are sitting at the moment in the House of Commons, deal with other items for which exemption is requested. There are four of them as I understand it: One is feminine hygiene products; one is funeral services; one is home heating oil, and I will come back to that in a moment; and the last one is natural medicines or health products.

Is the department supporting any of those initiatives? Let me ask the question in a less direct way. Is the government supporting any of those initiatives?

Senator Angus: The new government.

Senator Goldstein: You think it is new.

Ms. Ablonczy: I do not have the specific recommendation before me, but I can undertake to get information back to the committee about the government's position on those bills. I know some positions may not have been finalized yet, but for those that are I can let you know. I do not want to say off the top of my head.

Senator Goldstein: I want to return to home heating oil. I understand that it would be a major revenue loss for both levels of government if home heating oil were to become exempt. However, would that not be a rather easy way to help alleviate the problems that have arisen as a result of the huge and relatively sudden increase in the cost of oil? Most Canadians heat their homes with oil and many who are not in urban centres or who are in agriculture use oil for heating and other purposes.

Ms. Ablonczy: I am sure that those kinds of considerations will be vigorously put forward in debate on the bill.

As the committee will know, the problem is not the persuasiveness of particular exemptions. The New Democratic Party feels strongly that feminine hygiene products should be exempted. There is a difficulty in the integrity of a system if you start adding to complexity by having exemptions here, there and everywhere. I think that is the bigger picture that I know honourable senators will be considering when these bills come before them.

Although there are good reasons for a number of exemptions — and you can see in Bill C-40 some additional exemptions have been put into place — the bigger question is to what degree you want to have more and more exemptions put in the system. It really does add to complexity and difficulty of administration. That is the balancing consideration without denying the legitimacy of the concerns that you have just put forward.

Senator Goldstein: I want to thank you for those very good answers.

Senator Tkachuk: I just have a few questions which are mostly concerned with clarification.

One is on video games business arrangements, which is on page two of the briefing we were provided. According to this, the new measure ``clarifies the treatment of the right to use certain types of amusement or entertainment devices, such as the playing of a game, when it is provided through the operation of a mechanical coin-operated device that can accept only a single coin of twenty-five cents or less as the total consideration for the supply.''

What does that mean? What was happening before or what do you propose happens now?

Mr. Mercille: This refers to a machine that accepts only 25 cents to play a game. Before, the view was that it was the supply of a service. The legislation was providing for the fact that there was no tax because it was a service from a machine that was accepting only 25 cents.

The Canada Revenue Agency in its interpretation of the legislation thinks now it is more the supply of a right. It is what we call intangible personal property. That is, it is the right to play the machine. The distinction between the service and the right — and ``right'' would be ``property'' in legal terms — is that a service usually involves a human aspect. If you have a service from someone, there is usually a human that does something for you. When you put money in a machine there is no human involvement there. It is better qualified as a right.

The only thing the provision does is to ensure that if someone interprets it as a right, you get the same treatment as before. Basically, there is no change. Following an evolution in the classification of the supply, we made the amendment to ensure that the status remains the same as it was before.

Senator Tkachuk: When a machine rather than a human being fixes your car, is that considered a right or a service?

Mr. Mercille: I am not aware of any machine that can fix a car by itself. Usually, a technician is involved.

Senator Tkachuk: A person is charged for the machine when he has his car serviced. Is that not right?

Mr. Mercille: I would need a more specific example.

Senator Tkachuk: When you take your car in for service, they do an electronic diagnosis of your car. Then a mechanic will fix your car. When you pick up your car, you are given a bill and the total charge shows 6 per cent GST.

Mr. Mercille: Whether that is a supply of property, like a right, or whether that is a supply of service, it will be taxable. This case was a kind of exception to the general rule that is taxable. We had to change it to maintain the same treatment.

Senator Tkachuk: I am always of the view that when you have a tax, it should apply everywhere. Then, you can lower the tax if you want. All these exemptions only cause problems so I was pleased to hear what Ms. Ablonczy said.

When we were in opposition, I did not like the Air Travellers Security Charge and now in government I still do not like it. How much revenue is generated from that security charge?

Geoff Trueman, Chief, Sales Tax Division, Air Travelers Security Charge, Department of Finance Canada: The current level of revenue is $350 million to $360 million per year.

Senator Tkachuk: How is that money spent? Is it allocated directly to security or is it sent to all airports? Does it all go into the Consolidated Revenue Fund?

Mr. Trueman: It goes into the Consolidated Revenue Fund for expenditures through the Canadian Air Transport Security Authority.

Senator Tkachuk: How much are those expenditures?

Mr. Trueman: In the current year, they will be greater than the revenues from the charge. They will approach more than $400 million.

Senator Tkachuk: Is that in addition to what was previously spent on these matters before we had this charge?

Mr. Trueman: Prior to the Air Travellers Security Charge coming into effect in 2002, air carriers were responsible for the cost of air travel security. They were spending in the order of $70 million to $75 million per year. There has been a significant increase in the amount of money spent on air travel security in Canada.

Senator Tkachuk: How much has been raised from the charge since it was implemented?

Mr. Trueman: I can point you to a document that Finance Canada released in August 2006. It provides an update on revenues and expenditures to date and projections through 2007-08. The charge was implemented in early 2002 with a five-year plan to balance revenues and expenditures over that period of time. During the early years, we saw a slower- than-expected ramp-up of air security expenditures. As the Canadian Air Transport Security Authority took over air screening and moved to install new screening equipment and deploy more individuals, the process of balancing the revenues and expenditures was a little slower than expected. In the early years of the charge, we had a surplus of revenues over expenditures. The charge was reduced three times in budgets 2003, 2004 and 2005 in an attempt to level out the charge at a rate consistent with ongoing expenditures and to achieve the five-year balance.

We provided updated information in August 2006 with new forecasts. The government identified that there would be a surplus through to the end of 2006-07, which would be taken into account in establishing funding for air travel security in future years. Therefore, that surplus would be allocated over coming years to air travel expenditures. In fact, that was the underlay to the new funding provided in Budget 2006 when $133 million was provided to the Canadian Air Transport Security Authority over two years.

The Chairman: I have a brief question on a related topic. Why is the Air Travellers Security Charge in Canada the highest security charge in the world?

Mr. Trueman: In Canada a decision was taken to fund air travel security fully through the charge to align the benefit of air security with the travellers that received the security and to have those costs borne by air passengers. Other systems in the world take different approaches. Some fund from general revenues and some have a passenger charge. There are various approaches to expenditures related to air travel security throughout the world.

The Chairman: That does not answer the question. The consequence of having the highest traveller charge in the world puts our travel, which is used not only for tourism but also for business, at a competitive disadvantage.

Senator Angus: It disadvantages our airlines, too.

The Chairman: Yes. Why would we do that?

Mr. Trueman: The decision was made that the principle beneficiaries of air travel security are the passengers and that these security expenses would be borne by the individuals who receive the service.

The Chairman: You have explained that but you have not answered the question. Perhaps Ms. Ablonczy can answer the policy question. What is the economic thinking behind something that makes us less competitive? This committee has argued that the problem in Canada goes to the heart of our economy: our inefficiency and lack of productivity. Having the highest security charge in the world increases our lack of productivity. Yet, the government talks about increasing the efficiency and competitiveness of our economy. I truly do not understand.

Ms. Ablonczy: I was not privy to the discussions that surrounded the introduction of this charge. I am not here to give my personal opinion, but I will say that as a frequent traveller I have considerable sympathy for the frustration of the members of the committee who raise this issue. I hope those questions will keep being asked, because I think there is good reason to suggest that this measure could be examined in pursuance of our goal to simplify the system and to have that reasonableness.

The Chairman: I appreciate that, but we have heard complaints from the tourism industry that the government is not making it any easier for tourists to come to Canada. We have the problems with the U.S. clogging the border, other border issues and the difficulties and complexities associated with air travel. For good reason I raise the serious matter of Canada having the highest security charge. Obviously, we will have to pursue a response to the question in a different forum.

Senator Moore: Ms. Ablonczy, I note your comments with regard to charities and airlines or individuals who help charities with air travel. In January 1997, when various measures to simplify compliance for charities were introduced, the intent of one provision was that goods supplied by charities as well as real properties under short-term lease or licences by them would be GST exempt. I do not think that has happened. Could someone address that?

Mr. Mercille: The amendment included in the bill followed comments that we received from the charitable sector. An example arises when a charity rents a room for a conference or other gathering. Usually, a charity does not have to charge a tax on the price of that rental.

Senator Moore: Who does not have to charge a tax?

Mr. Mercille: The charity.

Senator Moore: Does the charity own the room and rent it out to someone in the community?

Mr. Mercille: Yes. Although there are exceptions, generally charities do not charge tax on their supplies. In that example, the charity does not have to charge a tax when it supplies the room. The problem arose when the charity provided a projector or other item. In legislation and other areas the room is deemed real property while the projector is deemed personal property. When a projector or screen or other item is provided with the room, the charity has to charge tax on those items but not on the room. The rule simply ensures that if the projector comes with the room, then everything is exempt.

Senator Moore: The projector probably got there as a result of donations to the charity. It belongs to the charity, and you want the charity to collect tax for the use of the projector; is that right?

Mr. Mercille: No. Right now in the legislation, when a charity sells property sometimes they are in direct competition with other vendors of the same property. In this case, they have to charge tax because they are basically doing a commercial thing; they are not doing their usual mandate. The rule right now forces them to collect tax on the projector. With this amendment, since the projector is supplied with the room, they will not have to collect tax on it. It is just to simplify their lives so that they do not have part of their supplies that are taxable and part that are not taxable.

Senator Moore: Can you cite other examples of where the bill will make things easier or more efficient for charities?

Mr. Mercille: In this bill, that is the example, but there are many examples other than a projector in a room. Personal property that is supplied with real property could be all sorts of things provided with the room.

Senator Moore: This is a very wordy act and there is a lot of detail in it. There is a section that looks like it is retroactive. Some things refer to dates, for example April 23 and April 24, 1996.

The Chairman: For the benefit of the witnesses, I believe that is subclause 31(2), on the recovery of bad debts. Is that the clause you are referring to, Senator Moore?

Senator Moore: Yes, it is.

The Chairman: Subclause 31(2) on the recovery of bad debts has a 1996 application date.

Senator Moore: Is it a retroactive provision?

Mr. Mercille: It is a relieving provision. Basically, it is a rule dealing with agents. Sometimes someone uses an agent to provide the supplies and collect the tax. When you use an agent, the agent acts on your behalf. We introduced rules so that it could be the agent who remits the tax to the tax authority instead of the principal; the agent acts on the principal's behalf.

There is a provision in the act whereby if you supply something and collect the tax, even if the customer has not yet paid you — maybe they are late in their payment — you still have to remit the tax to the tax authority. If the tax becomes a bad debt, usually you are entitled to a deduction for your net tax because you remitted tax that you never received.

This is a very technical bill; these are technical measures. The practical example that occurred in this case is that when the principal used an agent to supply something, and the supply created a bad debt, there was no way for the agent to recover the tax; only the principal could recover a bad debt. The amendment we are making here says that if you use an agent for your supplies, your agent is collecting and remitting the tax for you. If the debt becomes a bad debt in the principal's books, the agent will be able to take a deduction in his or her net tax remittance.

Senator Moore: What is the significance of the 1996 date? Is it the statute of limitations?

Mr. Mercille: No, it is because the rule we created that gave the agent the right to collect on behalf of the principal came into force at that time; therefore, we fixed the problem from then forward.

Senator Harb: I have a question regarding page 38 of the bill, clause 28(1), which states:

For the purposes of this section, if a person supplies a beverage in a returnable container in circumstances in which the person typically does not unseal the container . . .

What do you mean by that? Can you give us an example of where something like this would take place?

Mr. Mercille: The example for this is a bar or restaurant where they supply the beverage in a glass. The measures starting on page 38 and going for many pages are a reform that we did for the treatment of deposits on returnable containers. When you buy a soft drink — not in Ontario, but in many provinces in Canada — you pay a deposit of 5 cents or 10 cents, depending on the province.

The way the tax system worked in the past is that 10 cents was part of the price of the beverage, so it was subject to tax. The beverage went from the bottler to the wholesaler, to the retailer and to the customer; and then it went to the recycler to take the metal and do something with it. The tax was applicable on the deposit, but when the person was returning the container, it could be assumed that the container was not really consumed because it was returned. Take, for example, a bottle of beer; they will just take the bottle, refill it and resell it.

This became very complex because after the GST was introduced, many provinces introduced their own system for treating those deposits. In New Brunswick and Nova Scotia, you pay 10 cents when you buy a can and you get only 5 cents back. In Quebec, you pay 5 cents and get 5 cents back. In Ontario, you do not have it except on beer and wine, which is recent. In other provinces, you may have an environmental fee to pay for the recycling of the containers.

Because it was very complex and the rule was not well understood by the industry, we decided to apply a simple principle. If the amount you pay as a deposit can be refunded to you when you return the container, we will exclude it from the tax base. Basically, it will not be subject to tax anymore.

The provision you are pointing out is that we agreed to do that when you go to the grocery store and buy a coke or something like that. We did not agree to do that if you go into a bar and buy a beer, because what people try to do is say if you buy a beer, you pay three dollars and since there is a 10-cent deposit, I will charge tax only on $2.90. That rule is here to prevent that. There is no recycling of the bottle; it stays in the establishment, which returns it.

Senator Harb: Notwithstanding the fact that the customer got it and paid for it?

Mr. Mercille: There are some provincial laws that prevent the customer from leaving the establishment with the bottles.

Senator Harb: My final question concerns the tax applying to certain products. Say, for instance, you buy a muffin; if you buy one, you pay GST, but if you buy seven muffins, you do not pay GST. Can you tell me whether the Department of Finance has done any studies on the cost-benefit analysis of trying to apply the tax all across the board, but reducing it to a level where consumers will feel they are paying taxes on everything but it is still neutral for them and they are a lot less confused? We do not have this problem of saying I want it to be exempted and others saying no. Have you done any studies and, if so, would it be possible to get copies of them?

Mr. Mercille: I do not think there is a specific study on that. As a general principle, economists will tell you that everything should be taxed and the rate should be very low. If you tax everything, the level of the tax would be lower for the same level of revenue.

A decision was made when the GST was introduced that there would be exemptions for basic groceries, prescription drugs and things like that. When you decide to have an exception for basic groceries, you have to try to define what that is; that is what the legislation tried to do. For the example of six muffins versus one muffin, the decision was not to give a zero tax rate for restaurant food, which could be defined as things you would eat on the spot. If you buy one muffin, you will probably eat it in the establishment; if you buy six you will probably bring them home to share with your family. That is the nuance of why one is taxable and six are not.

I do not think it has been studied whether we should tax everything. Pure economists would say it is a good thing, but I am not sure consumers would agree.

The Chairman: I want to talk about the process. We are absolutely satisfied with your statement that you have spent a lot of due diligence dealing with some of the inconsistencies in this legislation for the wine industry, which is very competitive. This is a good step forward in making this industry more efficient from a tax perspective.

Were other segments of the economy that are as directly affected consulted as heavily and as precisely as the wine industry was?

Mr. Achadinha: I can speak to the wine industry, if you are talking about the excise duty that applies to the wine industry.

The Chairman: I am satisfied that you did your homework and that you did consult. These are improvements. This will make the treatment of taxes on wines and spirits more effective and competitive.

The question I have is on the other pillars this bill deals with. For instance, we have tobacco and air travel. Were the consultations with those industries as intense and pervasive as they were with the wine industry? We know about the wine industry because many of us have been lobbied by that industry in relation to these measures.

Mr. Achadinha: I can speak to tobacco and spirits, because we consulted with those industries. The draft measures were circulated for consultation. We met with them. Many of the provisions reflect their comments. My colleagues can talk about some other industries and their relationship with them.

Mr. Mercille: I can talk about returnable containers, because I was part of those consultations. We had meetings in Atlantic Canada, Toronto and Calgary. In the briefing book under the heading of returnable container rules, you can see a list of about 10 organizations we consulted with.

The Chairman: We read your briefing book. I understand. We are trying to satisfy ourselves that deep consultations took place. We are satisfied on the wine side because we have not heard dissatisfaction. We would have heard that. Were the other pillars treated equally?

Mr. Mercille: Yes. Under the list of measures you will see which consultations took place. It is also important that the majority of the measures in this bill were announced previously through news releases. This was the process that the department and the government used. The measures were announced to everyone and before measures were put into a bill the stakeholders were given the opportunity to comment on the measures. We have received some comments, but since there is a lot of good news for taxpayers in this bill, we have received fewer complaints.

When we have a bill where, basically, we are increasing the tax on something including something in the base, we receive more complaints. We did not receive too many comments on this one, because taxpayers usually do not send us a letter saying thank you for your good work. They usually send a letter for the other way around.

The Chairman: I just want to be satisfied before we move to approval that the public has been informed, the public understands and the various segments of the public that are affected have had an opportunity to respond to the department. We have to satisfy ourselves of that with you because we have no other witnesses.

Senator Moore: I am from Nova Scotia and I want to clarify a couple of things. First, with regard to deposit on containers, your example is of a $3 bottle of beer. I am charged a 10-cent deposit on that for the recycling. Is the tax on $3.10 or just on the $3?

Mr. Mercille: If you buy a bottle of beer in a beer store and you pay $3, there is a 10-cent deposit. You will get your full 10 cents back for a beer bottle. The 10 cents will not be subject to tax. Only the $3 is subject to tax because you get back your 10 cents when you return your bottle.

I understand in Nova Scotia the deposit for soft drinks is 10 cents, but they give you only 5 cents on return. There is a higher cost of recycling or something. The 5 cents that is unrecoverable is part of the consideration for the supply. Let us say it is expensive soft drink.

Senator Moore: It is $3.05. I bet Nova Scotians do not know that. Details can get kind of fuzzy when you are dealing with small things.

Mr. Mercille: They were paying tax on the 10 cents before, but now the tax is only on the 5 cents. The good thing is that this costs the government a bit of money, so someone will make money. In Nova Scotia, you have to be a member of the Resource Recovery Fund Board Inc. to distribute soft drinks. The fact is, there are containers on which they get the 10 cents and not all are returned; you are not taxed on the difference.

In a pure consumption tax, a container that is not returned is a container that is consumed, so it should be taxed. For simplification purposes, because of the various systems across Canada, we are ready to forego the tax on the containers that are not returned. The rate of return for beer and soft drink containers is high because it is valuable material.

Senator Moore: In Nova Scotia there is the HST new housing rebate; can you tell me how that works?

Mr. Mercille: When the GST was introduced, the federal government provided a new housing rebate, which is a percentage of the tax that you paid.

Senator Moore: On materials or on the whole thing?

Mr. Mercille: There are all sorts of various rebates, whether you build your house yourself or purchase a house that is already built.

The HST is basically a tax at 14 per cent, of which 8 per cent is a provincial component. It is collected by the Canada Revenue Agency and there is a formula based on national consumption where we distribute the money to the three harmonized provinces: Nova Scotia, New Brunswick and Newfoundland and Labrador. It is basically a provincial tax imposed under a federal act. The provinces are responsible for their tax. They decide if they want to do a rebate.

Nova Scotia decided to do a rebate similar to the federal government's when the harmonization was done in 1997. In their budget of 2002 they announced a change to some of their parameters of the rebate. They reduced the rebate and changed the accessibility of it. This bill only implements a provincial decision. The 8 per cent of the HST is money from the province and they asked us to accommodate their budget announcement in this bill.

The Chairman: You have satisfied us, I believe, that you have been fair, there has been consultation with the various segments and they have all had an opportunity to raise complaints and objections. Hopefully you dealt with them in some fashion.

I have a question for Ms. Ablonczy on a different topic: When they deal with rule-making in the United States, there is a distinct process. A rule is made similar to a regulation but it also applies to some legislation. It then gives the public an opportunity to respond, within a time frame, to those changes and an opportunity for the government to deal with those responses.

Has Finance Canada considered a process for when new measures are about to be introduced that would provided a distinct opportunity for affected groups and individuals to respond and for the government to take responses into consideration? This is not to say that the government has to accept what the affected groups say. From time to time, this committee has received complaints that the department has not properly consulted with groups. I will give two examples. By the way, this is not indicative of the new government but rather of previous governments.

Senator Segal: We are all victimized by the same department.

The Chairman: I do not think that is fair. The department is trying to do a difficult job in a difficult circumstance.

Both examples are in the last budget. The first issue was income trusts, on which the committee held hearings precisely because the public did not have an opportunity to raise its concerns. The second issue had to do with companies that deduct interest expenses for investments overseas, and again they were not consulted.

Can you tell the committee what government policy is on this and whether government is prepared to formalize policy, as they do in the United States, when dealing with rules in order to give a distinct period of time for the public to examine the provisions affecting them and to respond?

Ms. Ablonczy: Mr. Chairman, you will know that in the case of decisions respecting income trusts, prior consultation was not possible because of the effects that would have had on the market. With respect to interest deductibility, officials could give senators some idea of what prior consultations might have taken place. As the committee will know, there was a lack of clarity in how the language in the budget was interpreted by some of the people affected. The minister then provided clarity and that matter has now been laid to rest. It was not lack of consultations so much as perhaps inadvertent lack of clarity in the budget that was the problem.

The policy of all governments is to not take people by surprise. Certainly in the bill before this committee there is no element of surprise because many of these measures have been on the table for a very long time. The only surprise is why it took so long to come forward.

The Chairman: I understand and will conclude by saying that when it came to income trusts, a process was started by the previous government. It was a flawed process and the flaw continued to the new government. In the process, Finance Canada issued a circular suggesting that advance rulings as they apply to income trusts were going to be considered. That process stalled and was not completed for many reasons. This committee is concerned about the tax system being fair, equitable and transparent and about the efficient operation of the economy as well.

I ask the representative of the government, Ms. Ablonczy, and officials to consider this important part of their process. We know that ministers of finance spend a great deal of time in consultation, public and private, in order to ensure that the ultimate core of our economy, the tax system, is fair, transparent and equitable.

Ms. Ablonczy: Mr. Chairman, I completely agree. You have raised an entirely legitimate point. For the new government, there has been a bit of a learning curve. The point has been well taken that as time goes on, the consultations will add a good layer of understanding of any measures that are taken. I do not think you will find any push-back about the need for consultation from any decision maker in any government. Sometimes it takes a little more time to build up the layers of knowledge. That will happen.

The Chairman: Before you go, I have one final question for you. Senator Segal, do you have a question?

Senator Segal: It is of a general nature.

The Chairman: My question is specific to the matter of equity and fairness. As the bill applies to tobacco, raw tobacco is duty free and fine cut tobacco is not duty free. Is that correct?

Mr. Achadinha: There are controls in place with respect to that, although I am not sure which provision you are referring to. The amendments here do not change the application of a tax or duty to any product.

The Chairman: I have the tobaccos reversed. Bill C-40 appears to allow fine cut tobacco but not packaged raw leaf to be supplied to the export market or to the duty free market. Is that correct? If so, is it fair?

Mr. Achadinha: It tries to clarify what products are allowed to be exported or what products are currently exported in terms of stamped product and which ones are under strict controls. With respect to exports, the controls are specifically on products that are packaged and stamped as opposed to products that are in the raw process. The controls are different because those products are expected to be exported for a different purpose. It could not be used domestically and is not ready to be used. An issue arose regarding the words ``tobacco product.'' It is a broad term that encompasses products from the raw base to fully manufactured products. Specific controls are in place with respect to products that have gone beyond the raw stage. Those controls apply to products once they go beyond the raw, processed-right-out-of-the-ground stage. It is a matter of replacing ``tobacco product'' with the more defined and clarified term ``manufactured tobacco.''

The Chairman: I have a brief question on fairness. We have a list of exemptions that apply to Aboriginal citizens or groups. Yet, other small manufacturers in Canada are not treated in the same way. This puts them in an unfair position. Is that correct?

Mr. Achadinha: Excise duties are levied on the producers. All manufacturers are treated equally and in the same way. There is no difference between a producer on-reserve or one off-reserve. They are all required to pay the duty.

Senator Angus: The chairman is getting at one of the confusions. All of you are from the Department of Finance Canada. We also have the Canada Revenue Agency, and the Department of Justice Canada, which also gets involved in these matters. I have seen the communication of regulations relieving special duty on certain tobacco products on the one hand and the stamping and marking of tobacco products regulations on the other hand. Both sets of regulations have been promulgated under the Excise Tax Act as the enabling statute. I believe that is the case. Is that not where certain producers of tobacco products in Canada apply for an exemption to the excise tax and other restrictions in exporting their tobacco products and various conditions apply? How does that work and how does one get on the list?

Mr. Achadinha: They are called proscribed products, and it is clear that these goods are manufactured. For example, you have won a contract to supply a good for a foreign country — this is a tobacco product that is not common in Canada, of a different blend, not a product that is for use in Canada. Therefore, you can apply to have your product put on this list.

If it is called a proscribed product, then this product can be produced in Canada. It is for export, it goes outside of Canada and, therefore, it avoids some of the controls that are in place for other products that are domestically produced, that are of a blend and type that are normally consumed in Canada.

Senator Angus: Does anything in Bill C-40 affect any of those issues?

Mr. Achadinha: One measure that was announced here deals with the WHO Framework Convention on Tobacco Control. Because these proscribed goods were not for use in Canada — that is, they were of a different blend, not a Canadian type — a contract was awarded for a Canadian manufacturer to produce goods for a foreign country. In that case, we did not have specific rules on the proscribed information that should be on that particular product.

As part of the WHO Framework Convention on Tobacco Control, it was agreed internationally that every country would require their tobacco producers to indicate on every product they produced the origin and the manufacturer of the product. We have now removed the exemption for these proscribed products from those requirements. All the products produced in Canada will now be required to have on them where they were made and who was the producer of those goods. If those goods arrive somewhere in the international market, you will have that information on that product and you will be able to trace it.

Senator Angus: In terms of fairness, so that you know where we are coming from, the point has been made to some of us that the list of exempt tobacco products includes cigarettes in packages that are produced by certain native groups, with names like Running Deer cigarettes and so on, and that it seems to be more difficult for other Canadian producers to get on that list. If that is true, that would be unfair, it seems to me. Do you know anything about that?

Mr. Achadinha: You were inquiring about this particular regulation. It is by regulation that you get put on this list; and my understanding is that the Canada Revenue Agency is responsible for this list and they do a regular review and updating of the list.

Senator Angus: Do you folks work together — the Department of Finance, the Canada Revenue Agency and the Department of Justice — on those matters?

Mr. Achadinha: This is largely an administrative matter so it is largely the CRA that is responsible. They may contact us about a specific good, but in most cases, this is something they do on their own. It is just a matter of updating this list. The manufacturer makes the request to have their cigarette product added to the list. The list is under the regulation, so it is a proscribed list. Again, it must go through the regulatory process, which means that some timing is involved in getting your product on this list. However, our involvement is very limited.

Senator Segal: I know that Ms. Ablonczy would agree with me that there is no activity that Parliament discharges that is more fundamental to its role than that of taxation. Right back to the Magna Carta and Runnymede, the role of Parliament is to oversee the expenditures of the King because the money is not his. It belongs to the people first. No one has been more eloquent on this issue, both in opposition and in government, than Madam Ablonczy.

Should these specific tax changes be passed by the Senate, and one anticipates that they will be, in due course, what accountability regime do you anticipate to measure whether the goal set for these changes in the Excise Tax Act is being achieved? How will you measure whether the positive impact that the officials and the bill propose is in fact happening, or whether the changes may be producing, in a particular case, some undue distortion that was not planned for? Such events do occur on occasion, because life happens while people are making plans. I would be interested in your views on what kind of accountability one should expect for these kinds of changes generically.

With respect to the consultation process, democracies other than our parliamentary system have a much broader consultation process before budgetary decisions are made. For the very long time, the French have had a commission that travels about the countryside, and people represent different perspectives such as labour, small business, farming and so on. The commission prepares recommendations for the government of the day about what policy, excise and tax changes might be in the interest of the country going forward. I am not suggesting that we should adopt that approach, but it is one approach that involves the country more directly.

You may not have time to reflect on that today, but in any representations you may make back to the department or in your own reflections, I would feel better knowing that you are seized with the issue, because you have been very eloquent on it in the past.

Ms. Ablonczy: I am not sure how eloquent I have been. With respect to your contention that the most important exercise of government is taxation, administration of the peoples' money, I would tend to agree with that to some extent. However, I would point out that that was before government started directing other areas of our lives besides relieving us of our hard-earned cash.

I think we could argue that, to some degree, some of the social impacts of other policy can be equally far-reaching, although not at the time of the Magna Carta. Perhaps we can discuss that over wine sometime.

The impacts of these measures are monitored by the department on an ongoing basis. There is no question that the measures are put into place and then anxiously watched, especially because these are relieving measures. In other words, they relieve people of the obligation to pay tax, and I know that no self-respecting department that is responsible for collecting tax would not watch to see whether there was abuse or whether the purpose for which the relieving measures were put into place was actually being accomplished. I think you can take it that as a matter of course it would be monitored fairly closely.

The point that both you and the chairman made about the need for consultation is important. It is interesting that you raised that point, because the Finance Committee of the House is today continuing discussions about the shape of our pre-budget consultations. The Finance Committee of the House typically spends many hours — and many days of travel across the country — hearing submissions about what should be in the budget.

To be candid, I think the shape of these consultations is more interest groups lobbying the committee for inclusion of spending to further the interest of the group — most of which, if not all, have a great deal of merit. I personally would like to see those consultations directed more to issues rather than to interests, and I will be putting that argument to my colleagues even today. I think we should talk more about what ought to be in the budget and not about what different interests might get out of the budget spending. I think it is important that we have these kinds of processes. I agree with you.

The Chairman: Senator Segal, we have given Ms. Ablonczy an undertaking that she can be out of here by 12 noon. She has now been kind enough to extend her visit for another 10 minutes. If she wants to take another question, that would be up to her; otherwise, we will allow her to be on her way.

Ms. Ablonczy, do you want to take another short question from Senator Segal?

Senator Segal: No, that is fine.

Ms. Ablonczy: I am getting urgent emails, but since it is only one question, I certainly would want to be at the disposal of the committee.

Senator Segal: In the broader agenda of effective tax harmonization for the purposes of trade with our American and European trading partners, would any of these changes be material, constructively or not? The officials, perhaps, would have a view on that.

Senator Angus: You mean that are in Bill C-40?

Senator Segal: Yes, in Bill C-40. Do they create lacuna or are they not material in terms of that broader issue?

Mr. Mercille: I am not sure I understand your question. One example I can give from the bill is that under the GST there is a new rule for some import arrangements if you buy goods outside of Canada. Again, it is a technical bill, and this is a specific situation. Let us say a vendor in the United States sells to a Canadian consumer. The goods are now owned by the Canadian consumer, but the Canadian consumer has no knowledge of how to cross borders or deal with the customs issues so he asks the supplier basically to import the good for him. There were issues in the past because there was potential for double taxation and potential that an entity that is not supposed to recover the GST was able to recover the GST. We consulted on that and proposed something to address those two issues that have been around for some time. These measures have been well-received and they will facilitate the movement of goods.

The Chairman: Ms. Ablonczy, thank you so much. You can be on your way. We appreciate your prompt attendance and response to our questions. You can see that we are vitally interested not only in this legislation but in the process and the consequences. I am sure you will be back to us again shortly. We will be keeping a steady eye on the progress of this bill as it applies to the Canadian public.

If senators do not have further questions for the officials, we will move to clause-by-clause consideration.

Senator Goldstein: I have a quick technical question. Mr. Mercille, I am intrigued by the exemption for coin- operated machines and the indication that they are not subject to GST and PST. There is an obvious practical reason for that: it cannot be 25 cents plus 14 per cent of 25 cents; that does not make too much sense. However, access to electronic machinery, for instance land registries or securities registries in Quebec and elsewhere, is taxed. What is the rationale for the difference?

Ms. Mercille: There is a provision in the GST, and it is actually amended in this bill, that provides that if you retrieve information of a document in official registries and if the supply is made by our government, the supply is exempt.

I can talk about the amendment here. It is similar to what I said earlier about the machine. Before, when you wanted to retrieve such a document you would go to a counter and there would be a person there giving you the document or the information. There are now many provinces where you can do that through a website. This was the same issue as before. Before it was a service because there was human intervention in making the supply. When you use only your computer it becomes more a right to access. That is, we do not classify it as a service, we classify it as a right. The amendment we made in this bill is to ensure that even if you have access to a website you get the same treatment as if you went there in person and a person served you.

Senator Goldstein: If I use LexisNexis, which is a private body, for the purposes of accessing certain legislation and certain case law, is that taxable?

Ms. Mercille: That is taxable.

Senator Goldstein: Why do you make the distinction?

Ms. Mercille: We make the distinction because the other one that we have exempted performs a government function. You cannot go to LexisNexis to get confirmation of your divorce or land certification and so on. These are private providers of information. You can buy the information in another way and it will be taxable also. The difference here is that it is supplied by a government and there are many that are supplied by government that are exempt.

The Chairman: Is it agreed, honourable senators, to proceed to clause-by-clause consideration of Bill C-40, to amend the Excise Tax Act, the Excise Act, 2001 and the Air Travellers Security Charge Act and to make related amendments to other acts?

Hon. Senators: Agreed.

The Chairman: Carried. Contrary minded? I will mark that unanimous.

With the leave of the committee, I would like to group the clauses of the bill.

Hon. Senators: Agreed.

The Chairman: I hear no opposition. I shall mark that unanimous.

Shall the title stand postponed?

Hon. Senators: Agreed.

The Chairman: I will mark that unanimous.

Shall the short title in clause 1 stand postponed?

Hon. Senators: Agreed.

The Chairman: I will mark that unanimous.

Shall clauses 2 to 63, the amendments in respect to the Goods and Services Tax/Harmonized Sales Tax carry?

Hon. Senators: Agreed.