Proceedings of the Standing Senate Committee on
National Finance
Issue 9 - Evidence - June 14, 2010
OTTAWA, Monday, June 14, 2010
The Standing Senate Committee on National Finance, to which was referred Bill C-9, An Act to implement certain provisions of the budget tabled in Parliament on March 4, 2010 and other measures, met this day at 12:06 p.m. to give consideration to the bill (topic: Parts 1 through 5).
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: I thank all honourable senators for being at this meeting of the Standing Senate Committee on National Finance.
[Translation]
Honourable senators, on March 4, 2010, the Minister of Finance tabled the government's budget.
[English]
This was followed on March 29 by the introduction in the House of Commons of Bill C-9, the budget implementation bill. Bill C-9 was adopted by the House of Commons on June 8 after consideration in the House of Commons for 72 days. On June 10, the day following first reading in the Senate, we proceeded with second reading of Bill C-9 with the consent of the chamber to deal with this bill expeditiously and not wait the normal two days between first and second readings.
Bill C-9 was referred to this committee. Honourable senators also agreed to proceed with committee hearings beyond our normal time slot to proceed as expeditiously as possible with this bill, which includes 2,208 sections in 880 pages.
[Translation]
Today, we are going to start our study of this bill.
[English]
Today, honourable senators, we will start our three hours of hearings with Parts 1 to 5, inclusive, of Bill C-9. We sent everyone the other parts of this bill that we will be studying each day this week. Please let us know if you have not received it. The steering committee will meet later in the week to determine how our calendar is proceeding in dealing with various parts of the bill.
We will ask witnesses to refer to the bill as much as possible. I hope all honourable senators have the bill before them, because over the next few weeks, we will go clause by clause though Bill C-9 and honourable senators must understand what is in the clause before saying yes or no to passing the clause. That is why we need witnesses to tell us what is in the various clauses of the bill.
Witnesses, it will be much appreciated if each of you will make specific reference to the bill when making your presentations. Mr. Wach will help us with an overview of Part 1. Perhaps we will begin with Mr. Wach and Mr. Lalonde will speak later.
Gérard Lalonde, Director, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: Thank you. I do not expect to be speaking much. Mr. Wach is here to carry the bulk of the load. I am here to provide, in essence, moral support and back-up if necessary.
The Chair: We asked for this briefing several weeks ago, and we were told you were unable to give the committee this briefing. Therefore, we are spending the first week of this study doing something that could have been done several weeks ago. It is important for the record to be clear on that issue. However, we are here now.
Mr. Wach, please begin by giving us an overview of Part 1. In doing so, bear in mind that we are interested in knowing what each clause is attempting to achieve. We do not want to learn, much later after you have left, that there are some unintended consequences. In essence, what are we trying to achieve with each of these clauses?
Tim Wach, Office of the Assistant Deputy Minister, Department of Finance Canada: Thank you, Mr. Chair, and thank you for having us here today. Subject to your comments, I will take you through the principal changes included within the bill, which are changes to the Income Tax Act, and refer you to the principal clauses in which those changes are effected. There are a number of clauses within the bill which provide for consequential changes; they are not the principal changes that give effect to the budget proposals. In this way, I can take you to the clauses which are of prime importance, where the real "meat and potatoes" are, so to speak.
The changes to the Income Tax Act included in Part 1 include the changes to the Universal Child Care Benefit. The principal change to the Income Tax Act is in clause 4 of the bill. This proposed subsection is intended to effect the proposal in the budget to allow a single parent who is in receipt of the Universal Child Care Benefit to be able to have that amount taxed in the hands of a dependent child, thereby providing for equivalent treatment for a single parent as is currently available under the Income Tax Act to a couple, where only one of the individuals is earning income.
In other words, the single-earner couples in those circumstances could have the benefit taxed in the hands of the spouse who is not earning any taxable income. That tax treatment is not available to a single parent. Therefore, this treatment is intended to allow the single parent to have the same after-tax effect from the receipt of the Universal Child Care Benefit as would the couple with only a single earner.
Clause 13 is a proposed amendment to the Income Tax Act and is the change that impacts the availability of the Medical Expense Tax Credit. That change is intended to exclude from qualifying for the Medical Expense Tax Credit expenses for medical and dental services that are purely cosmetic in nature.
Clauses 16 and 17 are intended to clarify the treatment of payments to a Registered Educational Savings Plan or a Registered Disability Savings Plan made by a program funded, directly or indirectly, by a province, or which a province administers. The clauses intend to treat these payments in those plans, and the individuals who are the beneficiaries of those plans, in the same way that similar payments coming from the federal government are treated. We describe these changes as "clarifying" because they really clarify the law to have it apply in the way that it has been applied for the last several years, so it is consistent with existing policy at both the provincial and federal level.
The Chair: Those are on pages 8 and 9, et cetera. We will not ask questions at this stage, but we will have many questions later. First, give us the introductions and then we will get into clarification.
Mr. Wach: Clause 26 contains consequential changes to the family income thresholds used to determine the eligibility for the Canada Education Savings Grants, Canada Disability Savings Grants and the Canada Disability Savings Bonds. These are made to bring those thresholds into line with changes to the tax brackets that were made in 2009 and which came out of Budget 2009.
Clause 12 effects a change to the tax treatment of U.S. social security benefits that are received by individuals who are resident in Canada and have been resident in Canada consistently throughout the period before 1996 and who have been in receipt of such benefits from the U.S. It is intended to reinstate tax treatment that was available prior to 1996 and was provided for under the Canada-United States Income Tax Convention at that time. In other words, it really reinstated a tax treatment which was available some 14 years ago and only very narrowly focused on individuals who were in that circumstance 14 years ago.
Clause 14 extends the Mineral Exploration Tax Credit. I am sure this is not new to any senators. It is a change extending the METC for one year in a manner similar to what has occurred the last several years, as well.
Clause 23 effects a change, or is intended to effect a change that would reduce the interest rate payable by the Minister of National Revenue to corporations on overpayments of taxes, effective from July 1, 2010. This will reduce the interest rate paid to the average yield of three-month Government of Canada Treasury Bills sold in the previous quarter. That effectively reduces by 2 per cent the interest rate paid to corporations on overpayments.
There are a number of changes in Part 1 that effect the changes that were proposed to the definition of "taxable Canadian property." The most significant would be the changes in the definition of "taxable Canadian property" in subsection 248(1) of the Income Tax Act, which is at clause 22. The change narrows the impact and the ambit of the definition, so that, principally, shares of private companies that do not derive their value principally from real property located in Canada will no longer be treated as taxable Canadian property. The most significant impact of this change is that it will eliminate an administrative requirement that was applied in many circumstances for sales of private companies.
In particular, it was impacting the venture capital and private equity fields. In many circumstances, the vendors of shares of private Canadian companies were required to go through an administrative or a clearance process with Canada Revenue Agency, even though there was, ultimately, no Canadian tax being payable, generally, largely because of protection available under Canada's various bilateral tax treaties.
This change brings Canada more in line with its significant trading partners, the U.S. in particular, in not taxing sales of shares of private Canadian companies and, more importantly, not forcing these types of transactions to go through the administrative and clearance process with Canada Revenue Agency.
Clause 19 introduces changes to the act to permit non-residents to file for and claim refunds of taxes that have been withheld on payments made to them where, ultimately, there is no Canadian tax liability. Due to the interaction of the requirement on Canadians or non-residents to withhold on payments — making payments to, for example, non- residents providing services in Canada, or, similarly, under the existing administrative process relating to taxable Canadian property — it was not unusual for a non-resident to find that amounts had been withheld or that tax was being assessed of the Canadian and the non-resident was not in a position to be able to challenge and recover that tax simply because of the passage of time.
The changes in clause 19 are simply intended to allow a non-resident to be able to recover in those circumstances the amounts that were withheld on account of a tax that, ultimately, was not payable.
Clause 36 is a change to the regulations dealing with predicate offences. That brings tax evasion cases that are prosecuted by way of indictment within the ambit of the Criminal Code provisions that deal with proceeds of crime and money laundering. Up until now, those types of prosecutions were not included within the proceeds of crime and money laundering regime in the Criminal Code. Those tax evasion cases will now be subject to the full administrative powers that are available under the proceeds of crime and money laundering regime.
One other change is to increase the room available in pension plans for overfunding beyond the current 10 per cent limit up to a 25 per cent limit. This is in order to allow corporations a little more room to fund in excess of their immediate liabilities and thereby have the pension fund in a better position in the event of a downturn in the market such as we have seen in the last couple of years.
The Chair: It is going up to 1.25, did you say?
Mr. Wach: Correct.
The Chair: That presumably means the corporation would not have to pay income tax on that amount of money that they are putting into the pension fund.
Mr. Wach: They would be permitted a deduction for the amounts that go in, correct.
The Chair: It is increasing the amount that can be deducted, and that hopefully will protect the employees in the future.
Mr. Wach: In theory, one would expect that if there are greater contributions, there should be more protection in the event of a downturn, yes.
The Chair: Are any of these proposed amendments focused on a very small group or one or two individuals? We have seen changes in the Income Tax Act in the past that, in effect, were written for one trust or one foundation.
Mr. Wach: No, in this circumstance, there is not a single taxpayer or a couple of taxpayers targeted. These are of general application.
The Chair: Going back to clause 4, which is the deduction, you said the amount of the child tax credit could be attributable, if there were a couple, to the lower tax-paying person to reduce the tax burden. This is for the situation where there is a single parent looking after that child. To whom is the income attributable?
Mr. Wach: The parent would be entitled to elect to have the amount included in the income of the dependent child. It would then be taxed in the hands of the dependent child.
The Chair: Does that create an administrative burden for the parent, in that the child might not be — and probably is not — filing an income tax return, but now will have to?
Mr. Wach: I suspect it would in many circumstances, yes.
The Chair: I suspect it would as well. It is not an interest-free situation, it is a deductible situation; is that correct?
Mr. Wach: No, the taxation of the amount is shifted from the high-income parent to the low-income child. In all circumstances, there should be no tax on that amount, unless the child has income from other sources.
The Chair: Exactly. That is a good start. I think we understand the first clause. I will go on to the other ones later.
Senator Ringuette: Concerning clause 13, the tax credit for medical and dental services, you indicated that tax credit would not be allowed for cosmetic processes or expenses. Who will determine what is cosmetic and how will it be determined?
Mr. Wach: Ultimately Revenue Canada, as administrator of the act, will have to come to conclusions. However, the CRA has indicated that they will take guidance from medical practitioners, and it will be upon the guidance and the certification of the medical practitioners that CRA will make those determinations.
Senator Ringuette: Will this be on an ad hoc basis then?
Mr. Wach: As with any change to the Income Tax Act, yes, it will have to develop over time, but I think the CRA has a pretty good idea of what they think does or does not qualify. There is always some grey area that will require some administration or interpretation in particular circumstances.
Senator Ringuette: What if there is a conflict between the CRA interpretation and the medical professional? What will happen if there is no agreement between the two entities?
Mr. Wach: I do not think the CRA is willing to cede their responsibilities to the medical profession or medical practitioners. If there is a difference of opinion between the taxpayer and the CRA, ultimately that will be determined, as will any other tax dispute, in the tax courts.
Senator Ringuette: Are you saying that the CRA cannot accept the medical opinion that is provided in a certain case and, therefore, the taxpayer will have to challenge the opinion of the CRA in court?
Mr. Wach: The law has not been drafted such that it is within the determination of the medical practitioner as to whether or not it qualifies. The law has been drafted such that the CRA makes that determination, as it does with the vast number of things under the Income Tax Act.
Senator Ringuette: I have some reservations about this clause. If the bill says that it has to be purely medical and reconstructive, in my humble opinion, I think that only the professionals in the medical and reconstruction fields can provide the opinion to be accepted by the Canada Revenue Agency.
Mr. Wach: I do not anticipate that the CRA will challenge many medical opinions. However, the question was who decides, and ultimately the decision rests with the CRA.
Senator Murray: That is different from the Canada Health Act in that respect, where one assumes the medical practitioner decides what is essential.
Mr. Wach: Right.
Senator Ringuette: Concerning the taxable Canadian property, you indicate it is just to eliminate administration and this brings the act along the lines of the U.S. law. How much loss in revenue are we expecting from this change?
Mr. Wach: I refer you to page 339 of the budget materials in Annex 5. That is costed at $30 million for the 2010-11 fiscal year. It is $25 million for each year for the four following years.
Senator Ringuette: How much did you say for the following years?
Mr. Wach: It is $25 million each year.
Senator Ringuette: Could you elaborate more on this issue of non-resident taxes?
Mr. Wach: Regarding the concept of taxable Canadian property, non-residents who earn income from Canadian sources are limited in the extent to which they are subject to Canadian tax. They are taxable here if they carry on business here, if they earn employment income here or if they dispose of taxable Canadian property.
Taxable Canadian property includes real estate in Canada, timber resource properties in Canada and mining properties in Canada. It also includes shares of private companies, whether or not those shares derive their value principally from property that would itself be taxable Canadian property, such as real estate.
For example, the shares of a small start-up research and development company in Waterloo that is owned by two or three entrepreneurs would be taxable Canadian property. If a U.S. venture capital company invests in that start-up company in Waterloo and takes back shares, those shares, under the existing law, would be taxable Canadian property. If the venture capital company decides to sell those shares two or three years later, the company having become a big success, the U.S. venture capital company would be required to go to CRA and apply for a section 116 certificate to get clearance from the CRA in advance of selling those shares to whomever wants to buy them. That is the case even though that sale is not subject to tax in Canada because of the treaty between Canada and the U.S. This was happening on many transactions. In fact, the venture capital sector was one of the strongest proponents for changes to the section 116 regime and to taxable Canadian property, and they were also one of the strongest supporters of this change when it was announced in the budget.
Senator Ringuette: Are you saying that for a foreign investor, who is a resident of a country with whom we have a bilateral agreement with regard to taxes, this clause would remove his or her obligation to pay taxes on, for example, the shares of this Waterloo small business?
Mr. Wach: Right.
Senator Ringuette: Do Canadians pay taxes on the sale of those shares?
Mr. Wach: Of the Canadian company, yes, they would. They would not pay U.S. taxes on the sale of shares of the U.S. company, so it brings us into line with the U.S. treatment.
Senator Ringuette: Are we talking about $30 million this year and $25 million every year until the act is changed?
Mr. Wach: According to the budget materials, yes, we are.
Senator Ringuette: How does this compare to Canadian investment abroad with regard to bringing property taxes? We say "property"; it is capital gains tax.
Mr. Wach: Yes, it is capital gains tax, and, as I said earlier, it brings us into line with the general treatment of our major trading partners, the U.S. in particular. The United States has a very similar regime to what we would have, once this bill is enacted. They have what is called the Foreign Investment in Real Property Tax Act, which imposes tax on non-residents selling shares of a U.S. company that derive their value principally from U.S. real property, and they have a similar clearance regime. You have to go to the IRS and pay the tax in advance of selling the shares, but they have not, for as long as I have been in the tax business, imposed a similar regime for private companies that do not derive their value principally from real property. We have done that, and now we will, with this change, be more in line with what the U.S. does and with what most of our trading partners do.
Senator Ringuette: What is the estimate of Canadian investment abroad that would be in line with what you are proposing?
Mr. Wach: That I do not know. I do not know whether we have those numbers because that would require tax statistics from the U.S., Europe and other countries. I do not know if we have that information available to us.
Senator Ringuette: My other question is about Part 17 that contains amendments to ensure federally regulated credit unions that meet the definition of credit union in the Income Tax Act are subject to the same income tax rules as provincially regulated credit unions.
Could you please elaborate?
Mr. Wach: I am not an expert in credit union taxation, so I cannot give you the full spectrum of credit union taxation. Currently, credit unions can only be incorporated under provincial law, and, with the proposals that are included in Part 17, federal legislation will permit federally incorporated credit unions. The changes to the act are simply to allow them to have similar treatment to provincially constituted credit unions.
Senator Ringuette: How will that happen?
The Chair: Are you into Part 17, not section 17?
Senator Ringuette: No, I am at Part 17.
The Chair: We are just dealing with Part 1 at this stage. There is a Part 17.
Senator Ringuette: I am ahead.
The Chair: Yes, there is a section 17.
Senator Ringuette: It is the same people.
The Chair: No, we are dealing with Part 1, and Mr. Wach has given us an overview of Part 1. He did talk about section 16 and 17 of Part 1.
Mr. Wach: But not Part 17 of the bill.
The Chair: We understand that. We will get an overview of that in due course.
Senator Ringuette: Then I would like you to discuss the pension issue. I cannot remember which part you said. It is under section (g) in the briefing book that you sent to us. What are the estimated costs — or losses, should I say?
The Chair: We are having difficulty finding what section of Part 1 you are referring to, Senator Ringuette.
Senator Ringuette: This is section 1(g).
The Chair: Are you talking about clause 16 and changes to contributions to education savings plans in the provincial scheme?
Senator Ringuette: No, I am talking about the pension surplus, the threshold.
The Chair: The 1.25? Corporations paying into a pension plan so they can put more in there? That was a question I asked just before we started with the senators.
Senator Ringuette: Yes. That is clause 34.
The Chair: Are you asking about the federal treasury? Is that your question?
Mr. Wach: I do not know that we have that information with us today. We can get that for you, if you would like.
Senator Ringuette: Yes, please. I would like to have that information.
In my reading of Bill C-9, I recollect that there is also a situation in that clause that talks about an employer and employee agreeing with pension funds that are underfunded.
Mr. Wach: Discussions between employers and employees?
Senator Ringuette: I seem to recall reading that in clause 34.
Mr. Wach: I am not familiar with that.
The Chair: It is difficult to understand what clause 34 means.
Mr. Wach: Clause 34 is a consequential on the changes to the interest rate that the CRA pays to corporations for overpayments under different provisions.
The Chair: Which section deals with where corporations can put 1.25 of the anticipated exposure? You spoke about that, but at the time you did not give us a section.
Mr. Wach: You are right; I did not. I am trying to find it.
The Chair: Take your time. It is under pension liability, and the corporations are entitled to put aside up to 1.25 of the anticipated exposure, which is an increase in the amount that the corporations are entitled to set aside.
We need someone like you here to help us because when we read these sections, they talk about amending some regulation somewhere; it does not talk about what the effect.
Mr. Wach: You are absolutely right. Same with changes to the act; they take little pieces out. That would be clause 18. You are right, senator.
If you look in clause 18, you will see the changes are simply where the words are underlined, and in subparagraph 18(1)(d)(ii), you will see the 25 per cent is underlined; that currently reads 10 per cent. All we are doing is changing that 10 per cent to read 25 per cent, giving the employer a little more room to fund beyond the actuarial liabilities and up to 25 per cent more than the actuarial liabilities.
Senator Murray: Perhaps I am wrong. Clause 18 of the bill deals with section 147 of the Income Tax Act, registered pension plans. The proposed paragraph 147.2(2)(d) in the bill provides the rules that govern the predictability of employer and employee contributions through registered pension plans, but it is just employer contributions that we are dealing with in this amendment.
Mr. Wach: That has changed. It is just the employer contributions, correct.
Senator Murray: I wonder why that is. I guess I will have to ask the minister. Why would they not sweeten the arrangements for employee contributions as well? We are trying to encourage people to put aside money for their old age, are not we?
Mr. Wach: We are.
Senator Murray: Make a note that we will talk to the minister about that when he comes in.
Senator Ringuette: Yes, I think we need to.
Mr. Lalonde: If I could interject. This has to do with circumstances where a pension fund may not have enough assets and current income to deal with the current liabilities in respect of pension benefits because of a downturn in the economy. You fund a pension to a certain extent, and the actuaries come to a view that the given amount would be enough to fund your liabilities. If you do not have a bit of padding, to deal with unexpected downturns in the economy, you could have a situation where you have a dramatic and unexpected downturn and there is not enough money in there to fund payments to the employees.
Generally speaking, you would ask the employers to fund that shortfall. If you ask the employees to fund the same shortfall, it is just the employees putting money into the plan to pay out to the employees. You do not achieve a lot that way. Where you do achieve a benefit is making it able for employers to overfund the pension plans to the extent of 125 per cent to ensure the payments can be made out to the employees.
Mr. Wach: It is also important to recognize that this applies only to defined benefit plans as opposed to defined contribution plans.
Senator Ringuette: I read Bill C-9 a month and a half ago. Is there not also a provision to increase powers to OSFI with regard to pensions?
Mr. Wach: There may be. If there is, it is not in Part 1, so I cannot speak to that.
Senator Ringuette: Maybe we should have OSFI here to speak about the pension part.
The Chair: The steering committee will consider what other witnesses we might want to have. What we are trying to do now is get an understanding for each part of the 24 parts. We are dealing with Part 1 of 24 parts.
Senator Marshall: My question relates to the change in the pension surplus, the 10 per cent to the 25 per cent. Mr. Lalonde has already answered my question. I wanted to know what the impetus was for the change, and he has already answered that question.
Senator Dickson: It is strongly supported by John Manley.
The Chair: Many others as well, I am sure. The question is how many corporations would be able to take advantage of it right now.
Senator Murray: I am always intrigued by the financial implications of these measures, which are never quite specified.
If you look at Part 1, some of the amendments could be accurately described as tax expenditures and that you are improving some of these plans, for good reason. With respect to others, you seem to be shaving the arrangements in order to save a few bucks. If I am wrong about that, you will tell me.
If I wanted to know what the implications for the treasury were of all these various changes, where would I look?
Mr. Wach: Annex 5 to the budget materials has costing for all of the tax measures.
Senator Murray: What about savings?
Mr. Wach: Yes, both.
Senator Murray: Thank you.
Another matter about which I am confused, rather than enlightened by the discussion, is Canadian non-resident ownership of property, and so on.
Many Americans, Germans, and so on — own real estate, holiday homes and whatnot in Canada. Does this affect them?
Mr. Wach: No, not at all.
The Chair: Is this the discussion of the definition of taxable Canadian property in clause 22?
Senator Murray: Yes.
The Chair: It will not include those individuals?
Mr. Wach: No, gains on dispositions of real property owned by non-residents in Canada, whether for personal use or business, will continue to be taxable in Canada on dispositions of that property.
Senator Eggleton: Let me return to clause 4 on the Universal Child Care Benefit. In response to a question from the chair, you indicated a single parent could off-load the tax burden onto the child's tax form. I have a couple questions about that.
First, if there is more than one child involved — for example, two or three — does that require a tax form for each child?
Mr. Wach: No, the tax result can be achieved by designating the amount to one child.
Senator Eggleton: If you have three kids, you can achieve this through one child.
Since children up to six years of age are not used to filling out tax forms, I assume there will be a special form for the single parent to complete. Will there be a proactive effort to inform single parents of the need to fill out this form and the advantage of doing so?
Mr. Wach: I am not aware that there will be a special form. I think it will be a regular T1 for the child, as if the child had taxable income from any other source.
I cannot speak to the processes that the CRA has put in place to inform either tax practitioners or taxpayers about this. From my own experience, CRA's website and the information provided is helpful and very good in these areas. I expect they will provide similar advice and direction on their website. However, I did not speak to the CRA on it.
Senator Eggleton: I hope that is the case. If the government wants to level the playing field, so to speak, for single parents, I think it has to make people aware that this measure exists. That is an important part of it.
Do you know how many single-parent taxpayers there are? What is the estimate of the numbers involved?
Mr. Wach: I do not know the number of taxpayers. Again, referring senators to Annex 5 of the budget materials, the measure is budgeted at $5 million per year.
Senator Eggleton: That must be based on the number of filers expected times —
Mr. Wach: The tax difference. One could do the math.
Mr. Lalonde: I will clarify one aspect of the question asked that it is important for taxpayers to be aware of the opportunity.
The ability to transfer the amount taxable to an eligible child is connected with what used to be called the "equivalent to spouse credit." In that context, the single parent will already be claiming a credit in respect to that child. Therefore, it will show up in the materials in that specific area where they will already be looking.
Senator Eggleton: I still need some proactive work.
Senator Dickson: My questions relate to changes in venture capital provisions. Research innovation and commercialization of the results of research are one of the hallmarks of Canadians, universities and anyone involved in that type of high-risk business. My understanding is that these changes will make venture capital much more accessible to Canadian start-up companies. Am I correct in that assumption?
Mr. Wach: That is a fair statement. The venture capital sector has argued for changes similar to these. In particular, they wanted to eliminate administrative burdens that were, according to the venture capital sector, a barrier to raising funds in the U.S. and abroad. The reaction from that sector has been favourable.
Senator Dickson: Do I understand further that these changes will not have an impact until passage of this particular legislation?
Mr. Wach: That is correct. It is one reason we moved quickly to include this legislation in the first budget implementation act. Practitioners and tax advisers will not tell their clients to move forward with their proposals until the legislation is enacted.
Senator Dickson: The bottom line is that, if this legislation goes through, there is a high probability for more venture capital money to be accessible for Canadian or foreign venture capitalists to invest in Canadian start-up companies and companies that need secondary financing.
Mr. Wach: The sector tells us that will be the case.
The Chair: Are we discussing section 19 of Part 1?
Mr. Wach: This was section 22 on taxable Canadian property.
Senator Dickson: Senator Ringuette asked you some questions about cosmetic surgery that I want to follow up.
I understand that Canadians who require cosmetic surgery for medical or reconstructive purposes will not be affected by these changes. Is that correct?
Mr. Wach: That is correct.
Senator Dickson: Can you give an example of the types of cosmetic surgery that were claimed previously for which you could receive the tax deduction that you will no longer get a tax deduction?
Mr. Wach: One of the examples discussed pre-budget was Botox treatments that people received tax deductions for under the existing law that will not qualify following these changes.
Senator Dickson: Are the changes we propose compatible with other jurisdictions or are they more draconian?
Mr. Wach: No, they are compatible. The most recent jurisdiction to adopt similar changes was Quebec.
Senator Dickson: It is estimated that this will create savings for the government. Can you estimate the savings?
Mr. Wach: Again, referring senators to Annex 5 of the budget materials, we estimate the savings will be $40 million per year.
The Chair: Did you explain what prompted this amendment?
Mr. Wach: No, I did not explain it.
The Chair: How did this come about? Who was saying: Hey, we are giving out too much money for cosmetic surgery.
Mr. Wach: To be honest, I cannot tell you the original genesis of the proposal. I do not know if Mr. Lalonde knows where it originated.
Mr. Lalonde: The department keeps an eye on tax developments elsewhere in Canada and, to some extent, elsewhere in the world. The ability of taxpayers to deduct cosmetic surgery has been an issue that has been around for a while. It is a situation where, as it becomes more popular, it becomes more of an issue. We were aware of what Quebec did.
In the course of looking for things to recommend to the minister in developing the budget, this was one item identified.
The Chair: Was that as a result of the liberalization of this deductibility clause two or three years ago? It was interpreted more liberally than the government wanted. Therefore, they are now putting restrictions on it.
Mr. Lalonde: No, I would say the increasing numbers was an independent phenomenon. As I said, the Province of Quebec had already moved, so it became a question of will you do something about this?
The Chair: Just as a point of clarification with respect to clause 22, we have had a discussion with Senator Dickson's question about the effectiveness. I am looking at page 15, under subclause 22(3): Subsections (1) and (2) apply in determining after March 4, 2010. . . ." Assuming this clause is passed sometime — a year or 10 years from now — it goes back to March 4, 2010 for calculation purposes; is that correct?
Mr. Wach: That is correct. I think the point Senator Dickson raised was the impact on transactions occurring today and whether it is only once this change is enacted that, for example, tax advisers to the purchaser from the non-resident vendor of shares of a private Canadian company will be content in telling their clients they can go forward without going to CRA and getting the clearance certificate because, until such a time, the law is as it is.
The Chair: When the bill is passed, is it retroactive to March 4, which is the day after the budget was introduced?
Mr. Wach: That is correct.
The Chair: Thank you. That is helpful.
Senator Dickson: I want to ensure we are certain on that point. As I understand it, the advisors want certainty and specificity insofar as the law is concerned. Will the budget pass this committee or not? We do not know how long we will be here or whether it will be chopped up and diced up.
The Chair: That is an argument for saying you want the bill passed or not.
Senator Dickson: We want the bill passed, particularly this one. Business must grow in Canada; there is no question.
Senator Murray: Have I got a deal for you.
Senator Dickson: I might have one for you.
The Chair: Can you tell me what the process is that you go through for these tax measures? Do you go through the Department of Justice Canada or the Department of Finance Canada? Who brings in all these things and says we have a problem with deductions for cosmetic procedures and we are paying too much money for corporations that overpay? Who is sitting around thinking about these things and who brings them together? Who makes a decision to put them into this budget implementation bill?
Mr. Wach: It is an ongoing process, senator. The inspiration comes from many sources, such as the minister and the ministry's office. As Mr. Lalonde mentioned a moment ago, we in the department are aware of what happens in other jurisdictions within and beyond Canada. We try to stay current. In the case of taxable Canadian property, there were many representations from taxpayers and their advisers as to what we should do.
There are many different sources. The minister's office wades through some of them. We wade through a number of them. Some suggestions go up to the minister, and he says yes or no. That which has been included in the budget and formally proposed goes into the budget implementation act. I do not know if you are interested in the discussions between a previous budget implementation act and this, though I suspect not.
The Chair: I suspect you have a running list for the next implementation bill.
Mr. Wach: For next year's budget, you mean?
The Chair: You are working on a number of these kinds of items that were not in the budget, such as taking out cosmetic or to pay the corporation's 0 per cent.
Mr. Wach: No, those were in the budget; those were proposed in Budget 2010. We are currently working on the second budget implementation act, which would enact the balance of the income tax proposals that were included in Budget 2010 but which are not in this bill. At the same time, we are gathering thoughts and ideas for next year's budget.
The Chair: Many of these thoughts and ideas are around how you can save money and make things fairer in the income tax laws and regulations. Then you try to reflect that in general words in a budget document before you put it into a budget implementation bill; is that not correct?
Mr. Wach: That is correct, although we also include, as you know, ways and means motions with the budget materials. They sometimes get pretty technical and look very much like what ends up in a budget implementation act.
The Chair: We tend not to deal with the ways and means; that is a House of Commons thing. We are not nearly as familiar with that.
Mr. Wach: The reality is only the tax lawyers and accountants read that.
The Chair: Could you tell me how clause 23 ties in with clauses 34 and 35? Is this all the same concept?
Mr. Lalonde: Senator, I will add one comment to what Mr. Wach said. I am sure that all honourable senators are already aware of this, but I would like to clarify the record for those who might be reading the minutes or watching.
The Department of Finance collects ideas from a variety of sources, as Mr. Wach indicated. However, in terms of what goes into a budget and a bill, that is the government of the day's decision. Those are not decisions of civil servants. We can make recommendations, but it is the government of the day, and, as representative in the case of the Department of Finance, the Minister of Finance, makes these decisions.
The Chair: Thank you. We hope to have the Minister of Finance here; we are trying to lay some ground work to ask him some intelligent questions when he comes. That is why we are asking these questions of you. If we go beyond what you are able to answer, just tell us it is a policy matter for the minister.
Mr. Lalonde: I did not have any problem with the questions. I wanted to clarify that, in the end, we do lots of legwork, but the decisions are made by the government of the day.
The Chair: Thank you. That is helpful.
Could you look at clauses 23, 34 and 35? They all look to be paying the corporation overpayment 0 per cent, and then 2 per cent otherwise. Are we dealing with the same concept of reducing the amount for overpayments that might be made in interest or reducing the interest amount payable by the government back to the over-payer?
Mr. Wach: That is correct.
The Chair: There are many different places where this might happen. Is that why we have different sections with the same idea?
Mr. Wach: Yes.
The Chair: Presumably, you are reducing this now, because interest rates are low. However, do we anticipate there will be a section six months or two years from now, when interest rates go up, in which you will make those changes in the opposite direction?
Mr. Wach: I suspect not. These interest rates are determined by way of formula. The formula is not obvious from what is in front of you because, as you mentioned earlier, senator, you only get piece of what is in the actual legislation.
The interest rate is determined on a quarterly basis under the Income Tax Act and the other acts mentioned here. It is based on the average yield of Government of Canada Bonds in the previous quarter. Added to that amount is either 0 per cent, 2 per cent or 4 per cent, depending on the purpose for which the interest rate is being determined; for example, whether interest is being paid by a taxpayer on an underpayment of tax or whether it is being paid to a taxpayer, individual or corporation by the CRA.
There are also a number of provisions in the Income Tax Act where parties are given sort of a safe haven from rules that might otherwise apply. Let us take the example where loans are made by an employer to an employee. If the employee pays interest on that loan, there is no taxable benefit that is considered to accrue to the taxpayer.
All of those interest rates are determined in the same manner under the act by way of this formula I mentioned. Then, depending on the purpose for which the interest rate is being applied, either that rate itself, that rate plus 2 per cent or that rate plus 4 per cent is applied. As interest rates move up or down in the market, generally, the interest rate under the various acts is adjusted, and is adjusted on a quarterly basis.
The Chair: Yes, but this is changing the base.
Mr. Wach: This is changing the amount added to the base rate that is applied when the CRA is paying an amount to a corporate taxpayer.
The Chair: The formula is not changing.
Mr. Wach: That is correct.
The Chair: But the amount that you would add for a corporation is now 0 per cent; was it 2 per cent previously?
Mr. Wach: That is correct.
The Chair: The net amount going to the corporation is being reduced by this action, is that right?
Mr. Wach: That is correct.
The Chair: Do you anticipate that it will stay like this, or is it likely we will see this again in two or three years when interest rates have gone up?
Mr. Wach: That will depend on the policy decisions of the day.
Mr. Lalonde: I know what it is like to be in the hot seat; you think that you have had a complete answer, but there might be small pieces missing. In this one, I think I can add a small piece of information that would resolve the question.
As Mr. Wach has indicated, this interest rate is determined by reference to the treasury bill rate for the previous quarter. As interest rates go up, as you have questioned, that treasury bill rate for the previous quarter would go up as well. It will adjust automatically; as interest rates go up and down in the market, the rate payable on overpayments of tax by corporations will go up and down in the market accordingly.
Senator Ringuette: How and who decides when this is adjusted? In the law now, you have 2 per cent. Will we have to pass a new law every time?
Mr. Wach: The law currently provides for a rate determined by way of the formula, based on treasury bill rates over the previous quarter plus 2 per cent. The law, once this is enacted, if it is, will apply the base rate without the 2 per cent. That will automatically go up and down as treasury bill rates go up and down.
Senator Ringuette: How does that formula apply in reverse in regard to what interest rates are charged?
Mr. Wach: It is based on the same formula. However, if the taxpayer has underpaid his or her taxes, it is the base plus 4 per cent.
The Chair: I have read clause 12 many times trying to understand what was happening. Your explanation today is that this is reinstating something that existed 14 years ago for Canadian citizens who filed income tax that receive a pension or social security from the United States — deducting it against Canadian income tax.
Mr. Wach: Not deducting it, but just the amount that is included in income for Canadian tax purposes. Under the Canada-U.S. Tax Treaty, the treaty previously excluded 50 per cent of that amount from taxation in Canada. In 1996, the treaty was changed and we changed the tax treatment in Canada. We are now reinstating the pre-1996 treatment.
The Chair: Is that because of negotiations between Canada and the U.S. or is it because someone decided we are being unfair here after 14 years?
Mr. Wach: I think it was the latter, that people were in a circumstance 14 years ago and we changed the rules on them.
The Chair: How do you explain how these things come about? Does that mean someone was lobbying you on this particular thing, saying this has been 14 years and it is not fair? How does it come about that we make a change like this after it has been in place for 14 years?
Mr. Wach: Again, I am not aware of the genesis of this clause. I do not know if Mr. Lalonde is familiar with it.
Mr. Lalonde: I think it is fair to say that there was a lobby effort on the part of those individuals who had been enjoying the treatment that existed pre-1996. They lobbied the various governments, and it is the decision of the government of the day as to what is included in the budget.
The Chair: So all honourable senators understand; I am trying to get the process, as opposed to policy. The process is quite interesting — how suddenly 900 pages of things appear before us. That is what I am trying to get to.
Senator Ringuette: There is a portion of the credit union issue in Part 1; but in reality, it is in Part 17, so I will bring my questions at that time.
Senator Murray: I did the arithmetic; I hope I did it accurately. If you look at Part 1, based on the supplementary information in Annex 5, it looks like you are saving $2.5 billion and spending $1.77 billion. Does that seem about right? We are talking ballpark now. I will put it on the record and if it is wrong, someone will challenge that. I added the figures up.
These measures in amendments to the Income Tax Act and related acts in Part 1, I presume most or all of them come into effect as of the 2010 taxation year, or do some of them come into effect on budget night?
Mr. Wach: Some come into effect on March 4, budget day. Some are for the 2010 taxation year.
Senator Murray: January 1, 2010.
Mr. Wach: Correct.
Senator Murray: I suppose I am not looking carefully enough in the actual bill for that. I wanted a general idea. We are looking at Part 1 now. We are not into excise or anything like that.
The Chair: The coming into force seems to be at the end of the various sections.
Senator Murray: It is not in this case, as far as I can tell.
The Chair: Which case are you looking at?
Senator Murray: I am looking at Part 1.
The Chair: Page 22?
Mr. Wach: Each of the clauses has its own coming-into-force provision.
Senator Murray: I do not see that.
Mr. Wach: It is in the bill itself.
The Chair: Page 22 at the end.
Senator Murray: All right, I will leave it. I do not want to belabour the point. I went through the coming-into-force provisions in the bill; in some of them, they are deemed to have come into force as far back as 2007 — perhaps even before that — and others are 2009. For the benefit of Senator Dickson, I wanted to say that in that case, when the bill receives Royal Assent becomes somewhat irrelevant.
The Chair: Senator Murray, you might be interested in looking at page 21, clause 33of the bill. Clause 33 proposes subsection 16(2) to the Canada Education Savings Plans Regulations. Since the bill is what we will have to vote on, I like to keep referring witnesses to the bill. That is interesting because it says subsection 1 applies to 2007 and subsequent years. If you look down to clause 34, that comes into force July 1, 2010. You will see that throughout these various sections.
Senator Murray: On the previous page, subsections 1 to 3 apply to 2009.
The Chair: Yes, 2009 and subsequent years and presumably that is because this measure was announced a couple of years ago.
Mr. Wach: Either it was announced or the parties had been operating based on the provisions as clarified in this bill.
The Chair: Thank you for that clarification. For the mining tax credit that you said is being extended again — I think the expression was "again" — how long has this been around where it keeps being extended? Is that just so that the mining industry will not become comfortable with this, that you keep holding them on the edge?
Mr. Lalonde: On the last question, it was previously introduced as a temporary measure. I think Mr. Wach is looking to see if the date it was originally announced is in the budget materials. We are not trying to trick the mining industry or keep them on their toes as to what we are doing next. It is a situation of it being a temporary measure. The government of the day will look at the financial situation of the industry as a whole in the lead up to every budget and decide at that time whether it is appropriate to continue it or not.
The Chair: Can you tell us how long this has been temporary?
Mr. Lalonde: It has been temporary for at least four or five years. Mr. Wach is trying to see if we indicated the date of the original introduction of this measure in the budget materials, but this credit has been around for a while, and it has been temporary for several years.
The Chair: Any other questions flowing from that? That is the last name I have of honourable senators interested in participating in Part 1 from the point of view of the officials, so I assume we are all comfortable with and understand fully the various clauses contained in Part 1.
Senator Neufeld: I do not have the exact date, either, of the mineral exploration tax credit. Usually the federal government and provinces work together on it, and it has been around for a decade or more. This tax credit did not just arrive here recently. It has been around for quite a few years. I do not know the exact year, but I know I have heard of it and dealt with it in British Columbia for a long time. That is probably why I do not remember the year, but, certainly, it is longer than four years.
The Chair: Someone someday soon will ask why it is not permanent. There must be a reason why it is not being made permanent. That is a policy decision, as you say.
We will now proceed to Part 2 of Bill C-9. Mr. Carlos Achadinha and Pierre Mercille will be helping us. Who will be giving the presentation on Part 2?
Carlos Achadinha, Legislative Chief, Sales Tax Division, Public Sector Bodies, Department of Finance Canada: I will start and provide the initial review because Part 2 includes amendments in respect of the excise duties as well as the sales and excise taxes, more commonly known as the GST/HST.
The Chair: We are looking at page 23 through to page 154, inclusive.
Mr. Achadinha: It commences with clause 37, an amendment to the Excise Act. It is a consequential amendment, and it relates to the interest rate changes that have been discussed and announced here. Then we will move on to amendments to the Excise Act, 2001, starting with clause 38.
The amendments are in respect of the introduction of a new tobacco-stamping regime for tobacco products. This new regime is to help enforcement agencies distinguish duty paid products from counterfeit cigarettes. Specifically, these amendments introduce new controls over the production, distribution, and possession of a new stamp for tobacco products as well as various penalties and safeguards. In addition, it also provides specifically for a transitional period until April 2011 for the full implementation of this enhanced regime.
We can go quickly through some of those amendments.
The Chair: Do not go too quickly because we are trying to make notes and understand what you are talking about. I know honourable senators will want to know, and we will come back to this to ask about the mischief you are trying to solve.
Mr. Achadinha: I have brought some samples, so we have an idea of what we are talking about. I hope honourable members get a sense of what we are talking about.
The Chair: That is the kind of initiative we like.
Mr. Achadinha: They are a little old. Perhaps when we discuss these products in the end, you may not want to keep them.
The Excise Act, 2001, is the federal piece of legislation that provides for the structure of the taxation of tobacco products. We are amending that specific piece of legislation to provide a new enhanced tobacco stamping regime. This will include specific rules in terms of who can possess this stamp, the issuance of the stamp and various penalties in terms of contraventions.
It was announced initially that the government would look at this stamping regime back in Budget 2005. There have been ongoing discussions between the CRA and the industry for a number of years. In 2008, the Minister of National Revenue provided an announcement that he would be moving forward with this particular stamping regime, and in August 2009, the Minister of Finance issued a draft release indicating the structure of this regime and provided a draft amendment in respect of it.
The current stamping regime entails a band that goes around the particular tobacco product, and it has some wording. For example, this says "CANADA DUTY PAID," and the colour is specific to each province. Each province has a different colour. I will circulate these, so you are familiar with them. That is the current system.
The Chair: You said that the provinces participate in this.
Mr. Achadinha: The provinces participate in this. Each province has a different colour; for example, I believe the band in Ontario is yellow, and in Quebec it is blue.
The Chair: Is it important to know which province is in because the provinces participate in the revenue that is generated?
Mr. Achadinha: It is a compliance measure for the provinces as well. The stamp also indicates it is a legitimate tobacco product with respect to the provincial rules and regulations. Provinces have regulations with respect to requiring a stamp on their products as well, and they work in complement with the federal system.
The Chair: That is interesting.
Senator Ringuette: This system exists now.
Mr. Achadinha: That is the current system.
The Chair: The Province of New Brunswick would not be happy if someone from New Brunswick had a Nova Scotia or Newfoundland and Labrador cigarette.
Mr. Achadinha: On the package, if it had a different colour, it would be a clear sign that the product was not purchased in or intended for that particular province.
Senator Ringuette: That is as long as the package is not opened. Once the package is open, then there is no way to identify it.
Mr. Achadinha: It is that particular band. It is just a strip that goes around.
This product comes from the Ukraine, I believe, and this is a jurisdiction that has moved to a new stamping regime. It has a specific stamp on the tobacco product, and when Canada moves to this new stamping regime, the new tobacco products will include a specific stamp that will be placed on the tobacco product itself.
The Chair: Do you mean the cigarette or on the box?
Mr. Achadinha: It will on the box and the carton, not on the cigarette. These are prototypes of what it will look like, so I will circulate these, and you will see there are different colours that relate to the different provinces.
Senator Ringuette: Do you have the same kind of colour scheme?
Mr. Achadinha: It will be the same colour scheme. You will see in the prototype I have circulated there are different colours. The different colours will relate to the different provinces.
Senator Ringuette: My question is in relation to the products bought in duty free shops.
Mr. Achadinha: They have a specific different colour; even Canada has a special colour.
Senator Ringuette: Will that remain?
Mr. Achadinha: That will be incorporated into the new regime.
I will circulate this one as well. This product comes from Ukraine. They have moved to this new stamping regime. Other jurisdictions have moved to this new, enhanced stamping regime. The stamp will include both covert and overt features, so it will be difficult for counterfeit manufacturers to replicate, and these enhancements will make it easier to distinguish a legitimate product from a counterfeit product.
We will be moving forward with that. The legislation provides for the mechanism, namely, the legislative provision, to support this new particular regime. The Canada Revenue Agency is at the same time moving forward with new regulations, which are complementary and will provide further information to the industry in terms of how it will be applied
The Chair: How many sections are involved?
Mr. Achadinha: They go from clauses 38 to 54. There are amendments to the Excise Act, 2001, and that is the piece of legislation that specifically outlines the application of federal taxation rules. It is the excise duty rules for tobacco products.
Then we are making complementary amendments to the Customs Act, and that will deal with the importation of various products. It will set out rules as to the times that tobacco products are to be seized when they come across the border, and these special rules set out what to do with those seized products. Basically, the rule would be that if it is seized, it is illegitimate, and it cannot be sold. Right now, part of the rules is that customs will resell some of the items it seizes. The particular rules will say that anything that comes across with an improper stamp must not be sold but must be destroyed.
The Chair: Would that be by burning them?
Mr. Achadinha: The method of destruction is up to the minister responsible for the border and Canada Border Services Agency.
Senator Ringuette: This stamping product is similar to the American stamping product.
Mr. Achadinha: All jurisdictions in the U.S. have different stamping rules. The State of California has moved to a particular stamping rule that is similar, consistent with what you would see there.
If you look at some of the products I have distributed, you will see that the domestic products are in fact counterfeit.
The Chair: They are counterfeit?
Mr. Achadinha: Those are counterfeit products. The manufacturers have become so sophisticated that you cannot distinguish those products without laboratory examinations. Those particular products have been seized and provided to us as examples.
This is a counterfeit package.
The Chair: It has all the warnings and everything. Let us put it to the experts here.
Mr. Achadinha: I am an expert, but I do not smoke, so I am not sure why they are particularly counterfeit and how they were identified.
Senator Finley: I am an expert, but I do not smoke that brand, so it does not make any difference to me. It does feel different. It feels rougher.
The Chair: I am glad you brought these samples along. It makes it so much more real to us.
Senator Neufeld: That is why you do not want to have those in your pocket when you go outside the house.
Mr. Achadinha: They are not fresh, either. We cannot attest to their quality, where they were produced and what ingredients went into them.
Briefly, I have tried to distribute ideas and what they would look like. There is a transitional provision until April 2011 for full implementation of the new stamping regime. That will provide time for both the CRA to release and to put in force the complementary regulations and for manufacturers to obtain and test the required equipment to begin applying these particular new stamps.
There is to be only one particular stamp provider. The rules will specify that the Minister of National Revenue will designate the particular provider of these stamps. A company provides specialized printer and various currency printing. It is a sophisticated and well-known stamp provider. There is a contract that has already been let by the CRA. That process is in place. The legislation will provide for the full implementation of the legislative parameters around that and support the movement to this new stamping provision.
That is largely the conclusion of the tobacco provisions, which are clauses 37 to 54. I will move to my colleague, Mr. Mercille, who will give you an outline of Part 2 relating to Goods and Services Tax and Harmonized Sales Tax.
Pierre Mercille, Senior Legislative Chief, GST Legislation, Department of Finance Canada: The GST and HST amendments appear from clause 55 up to the end of Part 2. I do not have my presentation in the order of the clauses, but while there was a discussion on income tax, I tried to identify the main clauses related to those items. As you know, we are bound by drafting rules and sometimes there are amendments that are not exactly next to the other amendment that is related to the same thing. We are bound by the existing structure of the act.
I will point out the main provisions, but I do not have a complete list of the related provisions and consequential amendments.
I will start at clause 59, where there is an amendment to simplify the application of the GST/HST to the direct selling industry.
The Chair: Can you tell us the page number.
Mr. Mercille: I do not have the page number. It is clause 59.
The Chair: Clause 57 is about 10 pages long. Clause 59 is on page 65.
Mr. Mercille: The direct selling industry uses two different models. There is the buy-and-resale model, where a direct seller would sell to an independent sales contractor, and the independent sales contractor would resell those products to consumers. I do not have any samples with me, but I could have brought some plastic containers or soaps. I think you are familiar with the kinds of products sold by members of that industry.
A growing number of direct sellers employ a different model that is more commission-based. The products are not sold to the independent sales contractor but directly by the company, the direct seller, to consumers. The person who arranges the sale receives a commission.
Right now, under the existing legislation, there was a streamlined accounting method for direct sellers using the buy-and- resale model. The simplification there was that the direct seller reports the tax based on the suggested retail price. Therefore, this kind of system relieves the independent sales contractors, which usually are small, but some are a bit bigger, to have to account for GST. They have the choice of not registering for GST, so they save on the paper burden side.
The same kind of simplification does not exist for the commission-based model. If they reach above the threshold of the $30,000 for a small supplier, those commission vendors must register and charge tax to the direct seller.
In certain circumstances, the proposal is to allow those vendors to not have to report the tax based on a simplified method. It does not change the total tax paid by the consumer because the consumer is charged by the direct seller.
In another area, in terms of cosmetic procedures, there is also an amendment in this bill relating to the GST/HST. However, I want to point out the substantial difference. Since its inception, the GST always applied to purely cosmetic services, health services. The amendment here is to ensure that it applies to all services. With the way it was described before, it covered dental and surgical services. That is the way these services were delivered at the inception of the GST.
The intent is the same now, which is to basically cover some services that may be provided by nurses, such as botulinum toxin injections, something that we talked about earlier. In that case, there was no rule that those were not exempt.
The Chair: Can you tell us which clauses you are talking about now?
Mr. Mercille: I am talking about clauses 83 to 89. The amendment here continued the policy where cosmetic procedures will continue to be exempt if they are provided for medical or reconstructive purposes, and also if they are paid by the provincial health insurance plan.
The next series of amendments concerns the financial institutions. Clause 55 was put forward to address the uncertainty that was created by recent court cases, and it reaffirmed the policy intent respecting the scope of the definition of financial services. This is in respect of certain administrative, management and promotional services.
The amendment is such that the Excise Tax Act is proposed to be amended to clarify that such services are not financial services and they are taxable for GST/HST purposes. These amendments are brought forward following court cases that went against long-standing policy decisions.
Also in respect of financial institutions, in clauses 61 to 67, there are amendments to address advantages that currently exist in favour of imported services over comparable domestic services. We are talking about situations where a business uses a branch of the business outside Canada to acquire services like data processing. Since services are not stopped at the border by the CBSA, those services could be acquired tax-free. This is primarily for financial institutions because they are the main providers of exempt services that use those types of techniques.
Clauses 56 and 57 are amendments to streamline the application of the input tax credit rules for financial institutions. To put it in context, when there is provision of an exempt financial service, the service provider is not entitled to claim the input tax credit, ITC, — basically, the tax paid on inputs to provide that service. Some financial institutions also make taxable supplies. When they make taxable supplies, in that respect only, they are entitled to claim input tax credit for the inputs used to provide those supplies because they would charge tax when they made them.
The rules are basically to streamline and level the playing field where those financial institutions provide both taxable and exempt services and to provide rules for the proper allocation of the tax paid. They basically give rise to an ITC if they are used to provide taxable supplies and do not give rise to an ITC if used in exempt activities.
Other clauses in the area of financial institutions are spread throughout the bill. However, the main provisions are in clauses 58, 71 and 75. This amendment replaces a complex system of legislative and administrative rules that currently apply to different employer-sponsored registered pension plan trust structures. This provision implements a new uniform GST/HST rebate system that will apply fairly and equitably across all of those structures.
Complications came from administrative and legislative rules in place. Those pension plans are basically a master contract that determines who is responsible for the expenses. Is it the trust or the employer that incurs the expenses? Under the Excise Tax Act, the trust is treated as a separate person. The administrative rules and legislation that existed created uneven treatment in cases such as, for example, a single employer incurring an expense, a single employer not incurring an expense and only making a contribution and a multi-employer pension plan that was already entitled to a rebate under the act. Basically, that rebate system is reproduced for all pension plan structures.
Clause 76 provides a new annual information return for the financial services sector to improve GST/HST reporting. Even if the institution files monthly, this return must be done only once per year.
Clause 73 is linked to the new information return. If you file annually and your filing due date is three months after the end of your fiscal year, this amendment extends the due date to six months after the end of the fiscal year to align with reporting under the Income Tax Act.
The last amendments I will talk about are clauses 93 and 94. They are similar to what my income tax colleagues discussed previously. They basically reduce the interest rate payable by the Minister of National Revenue in respect of taxes and duties overpaid by corporations. Given the system CRA uses to administer those tax acts, when an interest rate change is made in one act, it must be changed across all tax acts administered by the CRA.
The Chair: Are all of the other clause that we had a chance to read consequential and help elaborate on the points you raised?
Mr. Mercille: Yes. Usually, a larger provision contains the main rule and consequential amendments support that rule elsewhere.
The Chair: I think you said the filing of a return once per year was in clause 76 of the bill. Irrespective of whether the corporations may be filing more frequently than once per year, they will be required to file this return once per year. Is this to reduce administrative burden or is there another purpose?
Mr. Mercille: There is a difference between GST and income tax returns. Income tax has one return per year. GST returns depend on your taxable sales level; returns can be monthly, quarterly or annually. Even if your sales only require an annual return, you may choose to submit monthly for some reason.
For the purposes of this clause, we will not ask for that information every month, but only once per year. Some of the information may also be determined in part from income tax.
The Chair: You say for this situation, we will only ask for a return once per year. What is that situation?
Mr. Mercille: I am not sure. I will start again.
The return has to be filed annually. There is no situation where it has to be filed monthly. However, the return must be filed every year by financial institutions. This information will be used for many purposes — policy development, administration and to ensure we provide the correct revenues to our partners in HST provinces.
The Chair: If the corporation is a manufacturer, will that corporation file monthly?
Mr. Mercille: No, this clause only relates to financial institutions.
The Chair: I understand that. Is there the possibility for certain non-financial institutions are required to file monthly, semi-annually or annually? Is that the difference we are creating?
Mr. Mercille: No, there is no reporting difference. All have to report tax exactly the same way. They now will have to attach an information schedule when they file their return. It reports information about the taxable and exempt sales. It is not a form to determine the amount of tax they have to pay.
The Chair: It is that information filing by financial institutions will be done once per year. That is what you are achieving through these amendments.
Mr. Mercille: It is a new information return that they did not have to file two or three years ago.
The Chair: At all?
Mr. Mercille: No.
The Chair: You are now indicating it must be filed once per year.
Mr. Mercille: Yes.
Senator Finley: I want to address some questions to Mr. Achadinha. Thank you for your entertaining presentation.
I assume this new tobacco stamping process will largely be institutionally controlled. I do not think most smokers will look closely at the stamp to determine if it is an illegal cigarette. I assume the tax regime will investigate and follow up.
Mr. Achadinha: That is correct.
Senator Finley: I want to discuss contraband tobacco in a broader sense. The examples you showed are one element of the counterfeit tobacco business, which is obviously well organized and sophisticated. The product looks and feels like real tobacco products.
What I see as a problem, particularly in my neck of the woods in Southwestern Ontario, is the plastic bag with 200 cigarettes for $6. Does your research show that the plastic bag system is 25 per cent of contraband cigarettes and the more sophisticated packaging is 75 per cent? What is the difference between the two types of contraband?
Mr. Achadinha: It is difficult to assess because the market is always fluctuating. According to enforcement agents, the RCMP and our CRA colleagues on the ground, they indicate that the baggies are the current primary source of contraband. They are usually brought into Canada from foreign sources. According to the RCMP, a sophisticated network is involved in the organization of the contraband.
Senator Finley: The materials are largely coming through a select number of Canada-U.S. border crossings. I know you are perhaps sensitive about going through this, but what is the total cost to the Canadian tax treasury of illegal or contraband cigarettes? I am sure you must have some calculations.
Mr. Achadinha: We do not have particular estimates in that regard. As you can appreciate, the data and estimates the department would put out would be validated, substantiated data.
We are unable to substantiate anything because of the particular nature of the good. It is unreported. Even in terms of survey results, if you asked people how much they consume in terms of smoking, smoking is not necessarily a popular activity and they might not accurately report in terms of the products they are consuming. If they are smokers, they might not accurately reflect where they are sourcing their product.
Senator Finley: You must have some idea. It is not a $5-million-a-year problem. It is obviously much higher than that.
Mr. Achadinha: I would think it would be fair to say it would be higher than that. We have seen some declines in the public account revenues produced with respect to tobacco revenues. Therefore, there has been some indication that, yes; it is significantly higher than the $5 million that you just quoted to me.
Senator Finley: Who bears the cost of the new stamping system?
Mr. Achadinha: The manufacturer bears the cost.
Senator Finley: Therefore, the cost is put onto the consumer at a point in time. That only pushes up the delta in the price between the plastic bag of 200 cigarettes and the sophisticated stamping method you have.
Mr. Achadinha: In my understanding, these will be bought by the manufacturers in large quantities. It will add a marginal amount to the cost of a particular product.
Senator Finley: If you do not know the size of the problem — how big the counterfeit stamping was — you probably cannot have much in the way of measurable metrics for how successful you expect the new stamping to be, or do you?
Mr. Achadinha: We will rely on our enforcement partners — those who are the most familiar with the on-the-ground activity — to get back to us in terms of how successful the stamping measure is in getting rid of the counterfeit.
This is just another tool that these enforcement people will be using as part of their enforcement program. The government has added additional RCMP officers at border points and additional border officers.
There were measures announced in Budget 2008. Those were put more in terms of trying to address tobacco contraband. For example, now there are limits on who can possess manufacturing equipment and there are specific penalties if you are caught in infraction of possessing that particular equipment. There were also different rules put in place to clarify and specify when a company can be denied a license or have one cancelled for various activities.
Recently, there were some settlement agreements with some of the large manufacturers related to earlier smuggling activities. Going forward, they have agreed to introduce various compliance measures to assist the government in providing knowledge on any other contraband activities that they become aware of through their various contacts.
The stamping is another tool to help assist the enforcement agencies in trying to address the contraband issue.
Senator Finley: I would like to address one or two questions to Mr. Mercille. I am not sure what you mean as "direct sellers." Are they the people who sell Slap Chops on television and supply them directly to the customers?
Mr. Mercille: Director sellers hire people who make representations in the living room and basically show you the product.
Senator Finley: Like Avon products?
Mr. Mercille: I did not want to mention names.
Senator Finley: It helps my simple male mind to understand.
Would it be fair to say that a large portion of these small direct sellers would be women? I am not trying to be gender biased in this question.
Mr. Mercille: Probably, but I have no data on that. I want to point out that the direct seller is the big company. The independent sales contractors are smaller suppliers that often supply on a part-time basis.
Senator Finley: These are the people for whom this change is aimed, is it not?
Mr. Mercille: Yes, it is a simplification measure because it might remove the obligation they have to register. If, for some reason, they have a very good year, they might have an obligation to register.
[Translation]
Senator Poulin: My question is similar to Senator Finley's. Take for example a large company like Avon that has part-time salespeople. Would that mean that the GST does not apply to Avon products since the salespeople do not register for it? Is that what you mean? I am trying to see how the change applies.
Mr. Mercille: The traditional model is that the large company sells to the small vendor, who then takes ownership of the goods and resells them. If the company decides to make lives easier for all its vendors, it adds the tax on the manufacturer's suggested retail price. The company does not put it on the price the small vendor pays for the goods, but rather the price the vendor sells them for. So that makes vendors' lives easier since they do not have to collect and pay the tax.
That has been in the act for years. The amendment here is that, if the small vendor does not take ownership of the goods to resell them, there is nothing to make their lives easier, even if they might have another product line where the other tax collection system is in place.
If vendors' commissions keep going up and up and reach a reasonably high level, they may have to collect the large company's taxes because those services are taxable.
There are a lot of industries with commissioned vendors who make more than $30,000 a year and who are all registered; they claim the input tax credit and charge the company that sells the products for the tax. There are specific instances where products are not sold in stores. Generally, those products are bought through the vendors, since they are not available in stores. These are specific products. It has to be a company that uses that sales method for the most part in order to choose to make life easier for vendors. It cannot be someone who does this job part-time and owns stores at the same time. They must be special cases.
[English]
Senator Finley: There is a charity bookstore in my neck of the woods that has raised money for many years to support education training in Haiti. Generally speaking, and until a few years ago, they were perhaps generating $30,000 or $35,000 sales at a dollar or two apiece. Over the last few years, perhaps with the downturn in the economy, the used book business has increased. Therefore, they have gone past the $30,000 threshold and are required to go through the administrative hoops for GST, even though this is for a charitable result. I also understand that this $30,000 limit has not been changed in a number of years. I realize it has nothing to do what with what we are talking about today, but it is of some import to me.
Are there any plans to increase that threshold for people in this sort of situation?
Mr. Mercille: I have confirmation that it is $50,000; Mr. Achadinha could probably answer that question because he is the manager in that area. Increasing the threshold in that area would be a decision of the government, but the trend is that it has not been changed since 1991.
Senator Finley: That is a long time.
Mr. Achadinha: It is $50,000 for charities. The general rule is $30,000 for commercial vendors; in the area of the charity world, it is $50,000.
Senator Finley: But it has not been changed since 1991?
Mr. Achadinha: I think the charity one was changed. It was initially $30,000; it was increased some years later — I do not know the exact year — and it now sits at $50,000.
The Chair: No inflationary adjustment on an annual basis?
Mr. Achadinha: Not for a certain number of years.
The Chair: I have a follow-up question to Senator Finley's. I envisage a manufacturer, a supplier of a product outside of Canada to vendors inside Canada. If these vendors opt to not register, saying that the supplier would include the HST or GST in the product, but they are outside of Canada, how do you ensure that the Canadian treasury gets those funds?
Mr. Mercille: The way the GST/HST legislation is structured is that the tax that the people are more aware of is the tax the people pay at the store when they buy something. To ensure there is no competitive inequality between vendors in Canada and those outside Canada, if the vendor was outside of Canada, delivering goods into Canada, the goods would be stopped at the border, and they would be taxed on importation of the goods. There will be an equivalent treatment.
The Chair: A direct seller, the small person — say my mother, who sells to her friends in the community — before that product comes in across the border, the GST/HST is already applied to it, is that what you just told me?
Mr. Mercille: No, first, I think that there has been consultation on those amendments. We were told by the industry that for people using that model, they usually incorporate a business in Canada. They do not want to operate across the border.
To answer your question, if the vendor supplies to a non-resident, the question is where is the service being provided? If the service is being provided in Canada, in that case, they would have to charge tax at some point, if they reach the $30,000 threshold.
The Chair: With this amendment, the final direct seller can opt not to register and can avoid paying the tax, saying that the supplier will look after that, but the supplier is outside of Canada.
Mr. Mercille: The proposed amendment is an election for a registrant direct seller. If you register, it means you are required to be registered with the CRA. If you are not registered, the direct seller outside Canada cannot make that election, so the normal rules would apply; it will be like that amendment was not even proposed.
The Chair: The small vendor, in that the case —
Mr. Mercille: It depends on the level of his sales — how much he makes a year, how much he made in the previous years, et cetera.
The Chair: Are these amendments in any way going to rectify or solve the situation of the court cases that existed in relation to direct sellers and foreign suppliers in the past? I am thinking, in particular, of a company by the name of Amway.
Mr. Mercille: I am not aware of a GST case with Amway. There may be one; I am just saying I am not aware of it. However, these amendments are not in reaction to a court case.
The Chair: You did indicate that section 55 was in reaction to one.
Mr. Mercille: Yes, that is the financial institution amendments.
The Chair: But not these changes to direct sellers?
Mr. Mercille: No, it is basically following representations by industry.
Senator Ringuette: I am still on the direct selling industry; would this apply to television sales? They are a direct seller — not through the web, but through TV, which is a similar medium.
Mr. Mercille: I am not an expert on that subject. I do not I watch those channels too much. However, I believe that if I was someone selling on TV, I would not use an intermediary to make my sale. If you were to call my number, I would sell directly to you. Unless there is a small intermediary, a small vendor in the middle, those rules have no application.
Senator Ringuette: I am still uncertain —
Senator Finley: Someone makes the product initially. It is usually not an organization that exclusively makes whatever. Like you Mr. Mercille, I do not watch much of this, but I have seen, to my horror, some of them. In effect, a marketing organization is selling those. The intermediaries are the guys who are on television moving the product, I would think. They would not fall under this, is that right?
Mr. Mercille: To fall under this, there are rules to be followed. One of the rules is that it is an exclusive product. Normally, it is a product that is sold there and not sold on TV. There are stores now in the shopping malls that sell items, "as seen on TV."
The thing is that this model would apply in a case where a vendor, instead of doing the usual way of commercializing stuff — basically going to stores and saying do you want my product in your store and doing that — uses a model of a large number of various small suppliers to do the sales for them. There is a large number of them in Canada, I am told, but they are usually door-to-door salesmen; or sometimes you may see a little stand for three days or so in the business environment — in a food court or something like that. I have difficulty relating to sales on TV, which basically you probably buy directly from the person who sells to you.
The other important thing to know is that both the direct seller existing rules and the network seller — as we call them now — new rules are an election to be made by the original vendor. The election is made with CRA. They may not want to be in there in that case.
I do not know how much a TV ad generates in sales, but in this case, you need essentially all of your vendors to be below the threshold of $30,000 a year. I assume if they have money to do advertisements on TV, they may make more sales than that.
Senator Finley: If Slap Chop wants to sell its products at a flea market, for example — brand new packaging — would the flea market then be a direct seller?
Mr. Mercille: The flea market is a location where people rent stands, so they would never be considered a direct or network seller. The person who rents the flea market stand might be an independent sales contractor or a commissioned vendor. However, you do not want to pay for something at a flea market that will be delivered to you later. You want to buy on the spot. With the new amendment, the direct seller will send you the product by mail or other means of delivery.
Senator Ringuette: What about those TV direct sales?
Senator Finley: I am confused about the difference, to be honest.
Mr. Mercille: At a flea market, potentially some of the people who rent a booth may be independent sales contractors of a direct seller. If the direct seller uses the existing election, the independent sales contractor does not have to remit to CRA a portion of the price he charges because the direct seller already remitted the price on the suggested retail sales price.
In the case of a vendor on TV, who knows whether there is an intermediary at all? I can buy a truck load of those products, but I do not have an ongoing relationship with them and I am not a commissioned vendor for them. That may be the case, but this is a factual situation. I have difficulty answering something that is factual.
Senator Finley: You are talking as if it is a job broker, for example, if I go out and I buy 15,000 mix masters or something.
Mr. Mercille: You are not an entrepreneur yourself. If you invest in those products because you think you are going to sell for a profit, these rules have nothing to do with you.
Senator Finley: Is there a point break where I am an entrepreneur and where I am not — for example, if I buy 20 mix masters instead of 1,000?
Mr. Mercille: I pointed out that these proposed amendments apply to the small vendors who are paid commission. If they are paid commission, they have no inventory of their own. They do not buy and resell products.
Senator Finley: I understand that part.
Senator Ringuette: Commission has to be included in a price, and the GST/HST has to be based on the selling price. That would be the rationale.
Mr. Mercille: Maybe an important point to make is that the GST is a transaction tax. Therefore, every time there is a transaction, namely, the provision of a good or a service, the question must be asked whether that is a taxable supply and whether tax should apply to it.
In the traditional model of a direct seller, the independent sales contractor purchases and resells goods. In the new model, which is the commission-based model, the equivalent of the independent sales contractor is just a commissioned-based vendor. He is not selling any goods. He is selling his services of representing the company and arranging for sales to a larger company who has agreed to pay him commissions. The transaction is different. At the end, the direct seller will sell directly. The legal transaction of the plastic container or the soap or the perfume will be between the direct seller and the final consumer.
I am not sure if that answers the question.
Senator Ringuette: I will move on to the usual financial services. You have indicated that clause 55 and clauses 61 to 67 "reaffirmed the policy intent respecting the scope of the definition of financial services."
Then, in relation to financial services and the ITC, you implied it was to "to address advantages that currently exist in favour of imported services over comparable domestic services."
The entire issue of financial services is twofold. One is to better define those services, and the second is to ensure that imported financial services are equal to the domestic financial services in terms of tax advantages.
Why, all of a sudden, are we discovering that imported financial services have preferential treatment over the domestic services?
Mr. Mercille: First, if I had to write this myself, I would have said "imported services" instead of saying "imported financial services." In the description that you just read, if you remove the word "financial" it is still true, but the example is more complex then.
Senator Ringuette: Try us.
Mr. Mercille: I will talk about the importation of services. The structure of the GST is as I explained: You make a sale in a store, and there is what we call "Division II Tax" because Division II of Part IX of the ETA says if you make a supply, you have to charge and pay tax. To ensure there is no competitive inequity with importation, there is also tax at the border, but with the tax at the border, CBSA officials can only stop goods. They cannot stop rights and they cannot stop services.
There is another part of the legislation that is with respect to importing a service that you will use in Canada so that, for example, the foreign supplier can send it through an email or it can be an architect who sends you plans or all sorts of things. You choose not to hire a Canadian supplier who would charge you tax to do that. You choose to import it from outside Canada. The legislation says if you are not going to recover that in ITCs because you are a company exclusively in commercial activity, you have to self-assess an amount of tax because we do not want to give advantage to foreign suppliers.
For example, in a fairly complex case where a branch of an insurance company uses a branch of the same insurance company outside of Canada to do things like data processing and so forth, it would cost a lot of money to have it done in Canada, especially in the insurance environment. The company did not do the self-assessment that the legislation intended; the long-standing policy principle was there. Following the loss of that court case, there was a doubt about whether those provisions applied, and there was a proposed change. In respect of the proposed change, there was significant consultation with the industry, and it was finally confirmed in Budget 2010 and included in this bill. That is the part about the imported services.
Senator Ringuette: You gave the example of a court case and an insurance entity. A lot of data processing is being done in the U.S. — or should I say through the U.S. — and being imported by our banking institutions, and I am talking about Visa and MasterCard. Are GST and HST being paid on those data services?
Mr. Mercille: The intent of this amendment is to ensure that there is no way that a taxable service provided outside Canada can be used in Canada without being subject to GST/HST. That is being done because a supplier, if registered, directly charges the financial institution in Canada as the service is being provided in Canada. Even if it is being provided from outside of Canada, they still charge tax on it because it is being supplied to Canada. Through the self- assessment mechanism, they make sure to apply these amendments in this legislation because the court put in doubt the fact that the existing rules applied. The rules are now detailed and complex because the judge said they were too simple. They did not work.
Senator Ringuette: How often is the self-assessment situation —
Mr. Mercille: Every reporting period.
Senator Ringuette: Which, for the financial institutions, is now one year.
Mr. Mercille: No, that is the providing of information on a special return. The financial institution can do that monthly, quarterly or annually. I believe the majority of them are annual filers, but I do not have numbers on that.
Senator Ringuette: I will give you another example. If Senator Finley and I operate a financial advisory office, we must charge the GST and HST on the financial advice that we provide, and we must send the collected GST or HST to Revenue Canada every month.
On the other hand, what you are saying now is Canadian financial institutions do not have to make returns on a monthly basis, like in our little business; they can keep that money as cash flow for at least a year. That money does not go into the cash flow of Revenue Canada, the Government of Canada, but we have to borrow to ensure we have the cash flow to pay our debts and to meet our payments. That is quite a gift. How much is this gift worth to the Government of Canada?
Mr. Mercille: First, let me clarify the situation. The frequency of reporting is based on the quantity of taxable supply made by the entity. There are thresholds, such as $30,000 to $500,000 and $500,000 to $6 million. I am quoting the numbers without the act, but let us say over $6 million, everyone must be a monthly filer. These are taxable supplies.
The financial institutions that provide mainly exempt supplies pay taxes up front because under the legislation, they are considered to be the final consumer. They pay tax on all their inputs, and they do not get it back for the financial services they provide. They have already incurred the tax.
Someone as you described, who is providing taxable advice, is collecting tax from the people to whom they provide the service, and they remit that tax.
There is definitely an advantage of providing financial services versus providing taxable services because financial services are exempt and do not give rise to ITC, while taxable services are taxable, but the tax is charged downstream when the supplier can claim ITCs.
Therefore, I am not sure where the big break is given here. I do not understand the point.
Senator Ringuette: I think there is a break, and it is called volume for financial services. We see that happening everywhere, and sometimes it ties in with your commission-based model with regard to financial services. I agree, it is a complex issue, but I think we have to have more examples of this situation. I fear that you might want to close a loophole but open another one with regard to both the issue of direct selling and the issue of extending the period for financial institutions to make their GST/HST return. That is costing Canadians money, to an industry that I think has had much regard, but I do not think they necessarily need it in this time of economic recession.
[Translation]
Senator Chaput: My questions are similar to Senator Ringuette's. As you were explaining the amendment, I was wondering why you were proposing it; why is it necessary now? What was the crux of the problem?
Mr. Mercille: Are we talking about direct sellers or financial institutions?
Senator Chaput: Both, but let us start with the financial institutions.
Mr. Mercille: The amendments for financial institutions come mostly from court decisions that have interpreted current legislation in a way other than the political intent has been for a long time. In the financial services sector, yes, it is nice that services are considered to be tax exempt, but we must understand that, when two parties come to an agreement and the vendor considers it a taxable service, the tax would be charged, and the buyer thinks it is taxable and pays the tax. Ultimately, that allows the vendor to claim input tax credits.
But some court decisions have held that it was no longer taxable for the buyer and that it would become a tax exempt service. That also affects the vendor.
In terms of transaction taxes like the GST, it is important that people understand the rules. Once the tax is imposed on something and the buyer agrees to pay it, the vendor has some rights; that does not only create obligations for the buyer. And if the buyer goes to court and says that the services should have been tax exempt, it creates consequences for the vendor.
In general, most amendments are the result of financial institutions' efforts to modernize the rules and also the result of some court decisions.
Senator Chaput: Does that simplify or complicate the rules?
Mr. Mercille: I have a really hard time saying that we can simplify them for financial institutions since it is a really complex sector. But that certainly makes them clearer and fairer in some cases.
Senator Chaput: As to the credit card networks, if the network is excluded, could there be any repercussions on the costs to consumers?
Mr. Mercille: In the financial services sector — I go back to the fact that the GST and the HST are transaction taxes — it is important to find out what is provided when a person pays for a given service. To just say credit card networks is too vague. I do not know. We must also look at the way in which the service is provided. If they give you credit as cash advances, it is definitely a financial service.
The amendment to section 55 stipulates that it is different for a credit card company that gives you a cash advance. If you do not pay your account, it is risky for them, but they will charge you interest for that. The risk factor is very important. It is possible that you may end up not paying.
There is a difference between that and going to a mall and having someone tell you that they are paid to make you fill out a credit card application. They will tell you that the card is very good and you should sign up for it. That is more similar to marketing or promotion services. There is no financial component as such. One of the amendments clarifies services like that, because there was a court decision that caused confusion to that effect.
Senator Chaput: Thank you.
The Chair: It is difficult.
Senator Chaput: Very.
[English]
The Chair: That is the end of my list for Part 2. Mr. Mercille, thank you very much. We appreciate your explanations.
We now move on to Part 3, which is a small section and contains amendments with respect to the Air Travellers Security Charge Act. Mr. Achadinha will lead us through it.
Mr. Achadinha: Part 3 of the budget bill includes the amendments in respect of the air travellers security charge to increase what is commonly known as the ATSC to fund new air traveller security expenditures. For air travel within Canada, the charge will be raised from $4.90 to $7.48 for one-way travel, from $9.80 to $14.96 for a round trip, and for transport and border travel to the United States, the charge will be raised from $8.34 to $12.71. For other international travel, it will be raised from $17 to $25.91.
The new rates will apply to air travel purchased on or after April 1, 2010. There are also provisions similar to the other acts with respect to the interest overpaid by corporations and similar changes.
The provisions are split out in terms of air travel security and air transportation service acquired in Canada, which I believe is clause 96. Clause 97 deals with air transportation services acquired outside of the country. It is split up in terms of where the service is acquired.
Then the rates are provided. There are examples of rates where the GST applies and where the GST does not apply. The intent is that the amount paid is the amount I have quoted to you, which would include GST. For example, $7.48 would be the total rate for one-way domestic travel.
The Chair: Are you saying the percentage increase is the same in each instance if we factor out the GST?
Mr. Achadinha: It is the same. There are different rates here. I will go through the provision itself. The first provision says $7.12, which is the charge where GST is required to be paid; and the second is $7.48 where GST is not required. If you subtract the 0.5 GST, you would go to $7.12.
The Chair: Where does this money go?
Mr. Achadinha: This money is intended for the purposes of funding the Canadian air travel security system.
The Chair: Does it go into a separate account?
Mr. Achadinha: The money goes into the Consolidated Revenue Fund and it is used to fund expenditures for the air transportation system. There was an announcement on February 26 that the rates are being increased specifically to provide an additional $1.5 billion in funding to increase and enhance the funding for the air travel security system.
The Chair: We have the advantage of having studied the Main Estimates and the supplementary estimates. We are aware of the $1.5 billion over five years. We are aware of the $250 million that was in the Main Estimates and the $352 million in the Supplementary Estimates (A).
How do those funds, which we are giving to Canadian Air Transport Security Authority, CATSA, for the purposes of enhancing air travel, fit in with these increased costs?
Mr. Achadinha: I am not familiar with the Main Estimates or how they are being explained in that regard. The carriers will collect the monies provided and received through the air travel security charge. It is remitted to the Canada Revenue Agency, put into the Consolidated Revenue Fund and then there is a separate process whereby it is determined how that money is funded to CATSA and the other departments.
There are other elements outside of CATSA that encompass the enhanced air travel security system. There are funds for Transport Canada and there is an RCMP program.
The Chair: There is a GST portion for certain of these flights within Canada. When that money is collected and remitted, is the GST portion taken off and put somewhere and the balance put into general revenue?
Mr. Achadinha: All the money goes into the Consolidated Revenue Fund. The annual amounts of the air travel security charge are published. Then there is a calculation done in terms of what the GST would have been collected and applicable to those particular funds. That is also included in the amounts provided for the new funding for the air transportation system. It includes all amounts from the air travel security charge plus the GST that would be applicable, plus the federal part of the HST.
Senator Ringuette: As the chair indicated, we had CATSA as witnesses on our study of Supplementary Estimates (A). They were aware of the additional money in Supplementary Estimates (A) for security purposes, but they had no idea what was to be applied with regard to what kind of machinery and how much machinery would be purchased. Could you enlighten us about that?
If you are increasing by 100 per cent —
Mr. Achadinha: It is approximately 52 per cent.
The Chair: It is 52.46 per cent.
Senator Ringuette: Then you must be able to say what you will be doing with this 52.46 per cent, because CATSA did not know.
Mr. Achadinha: It is outside of my mandate, responsibility or area. In the announcement of February 25, provided by the Government of Canada, there was an outline of the estimated revenues that would be received from the increase, as well as the expenses. It did provide an overview over the next five years.
Senator Murray: What is the revenue to be collected from this charge in the present fiscal year?
Mr. Achadinha: I do not have the present fiscal year, but based upon what was published and estimated, I can tell you there will be an estimated $590 million in ATSC revenues in 2010-11.
Senator Murray: From the entire charge.
Senator Ringuette: From the GST.
Mr. Achadinha: No, from the entire ATSC revenue, including the GST/HST.
Senator Murray: That is the present fiscal year.
Mr. Achadinha: Correct, we are in 2010-11. That is an estimated amount.
The Chair: That is anticipating the 52 per cent increase.
Mr. Achadinha: That is anticipated. That was published at the time the announcement was made on February 25.
Senator Ringuette: Is the best entity to provide us with that information is Treasure Board since CATSA could not?
Mr. Achadinha: I imagine that is potentially one entity that could be responsible. We are not responsible for spending programs. We are responsible for application of the particular taxation framework and the rules in that respect. How revenues are spent is someone else's area of responsibility.
Senator Ringuette: You have two different fees: one for domestic air travel and the other for transborder air travel. Are those two fees in two different funds?
Mr. Achadinha: No, all fees are reported to the Canada Revenue Agency; the Canada Revenue Agency collects those fees; and the fees go into the Consolidated Revenue Fund.
Senator Ringuette: Again, you cannot tell me where the fees will be applicable with regard to the levies on domestic air travel. We are looking at domestic and transborder travel. We do not have many airports that deal with transborder travel.
Mr. Achadinha: The ATSC applies to flights from 89 airports in Canada because those are the airports at which CATSA is responsible for providing security. A number of smaller airports do not have security provided by CATSA. No charge is applicable on flights that depart from or land at one of those particular airports. Those are the terms of the charge itself.
Senator Ringuette: What has happened in the last year to justify an increase of 52 per cent?
Mr. Achadinha: A number of security issues, not only internationally, have affected the requirements. Certain requirements have been put in place by foreign jurisdictions because of the nature of the air travel industry. A flight leaving Canada has to undergo certain security procedures to land in those foreign jurisdictions.
There was a significant event in December, 2009. Following that event were significant enhancements in the requirements for flights to enter the United States. There are additional pressures on CATSA spending to maintain integrity, the level of security required and to enhance the charge appropriately.
Senator Ringuette: I understand. You indicated that you find the funds and someone else spends the funds. However, it seems that we cannot get an answer to our questions. We are talking about $590 million.
Mr. Achadinha: Correct.
Senator Ringuette: That is a lot of money.
Mr. Achadinha: To be specific, expenses published for 2010 will be $682 million. There will be different expenditure and revenue patterns. Over five years, it is expected these will balance and roughly offset each other.
Senator Ringuette: I maintain my comment that we still do not have an answer. You seem to be able to justify the increase, but on the other hand, CATSA is not able to tell us where they will put that money and what they will do with it.
Senator Murray: Do we not have some answers coming?
The Chair: We do. We will try to find a witness to help us with that.
Senator Finley: I will repeat what I said to the CATSA people on Thursday. I feel a lot more secure flying in an airplane thanks to the fine efforts of those people.
I understand that CATSA is undergoing a comprehensive review of how it spends its program money. Are you aware of that review and are you aware of its status?
Mr. Achadinha: The review is led by Transport Canada and CATSA. It is outside of the Department of Finance. It was announced in the budget on February 25 that CATSA would undertake a review of its spending and program, et cetera.
Senator Finley: I sympathize with Senator Ringuette's horror at the price. However, I am older than Senator Ringuette is and I remember the days when we walked through an airport with absolutely no security whatsoever. It strikes me that $500 million or $600 million is a small price to pay when matched against the potential liability cost of a jumbo jet exploding off the coast of Ireland, for example.
I am interested in the revenue projections. When you determine income, do you run a sensitivity analysis against charges applied? For example, if the charge is $7.24, we expect 1.5 million people to fly. If it increases to $10, the demand could drop by 10 per cent or 15 per cent.
Mr. Achadinha: A complicated model projects revenues. It takes into consideration various factors such as pricing and elasticity of demand. I am not an expert on the model.
Senator Finley: Is there much difference in the elasticity of demand between $7.48, which is currently proposed, and $9.50? Would there be a big drop in demand for a $2 increase?
Mr. Achadinha: The ATSC is only one element in the total price of an air traffic ticket. Tickets are fairly expensive. The ATSC is a small element of the price.
Senator Finley: You would agree with Minister Baird that it is unlikely Canadians will go to Buffalo to save a couple of bucks.
Mr. Achadinha: You have to take into consideration all other factors. The U.S. also has a number of different charges, including their own security charge.
Senator Finley: Finally, the previous government correctly introduced this charge in 2002 — I am not being critical — as a response to the events of September 11. The charges were, in actual fact, higher then than they are today. Is that correct?
Mr. Achadinha: The initial rates in 2002 were $12 for a one-way fare and $24 round trip for domestic flights; it was $12 for transborder flights and $24 for other international flights. It was higher in some cases and lower in other cases. In some instances, they would be in line. In other cases, they would be lower today.
Senator Finley: Over eight or nine years, allowing for some intermediary fluctuations, it went down.
Mr. Achadinha: Correct. There were decreases.
Senator Finley: It has begun to level out again. Overall, the price of an airline ticket has not been substantially undermined over the last eight years by this particular charge.
Mr. Achadinha: I think that would be fair to say.
The Chair: Do you have the annual amount? It started at $12 in 2002.
Mr. Achadinha: When it was initially brought into force, it was $12 for a domestic one-way flight.
The Chair: Provide us with domestic one-way flights throughout your example, instead of giving all these different figures.
Mr. Achadinha: It was $12 for a domestic one-way trip and $24 for the round-trip fare.
The Chair: Let us just deal with domestic one-way fare. What was the charge in 2003, 2004, et cetera?
Mr. Achadinha: The rates have gone down periodically over time. I do not have the differences. I think there have been three adjustments to the rate.
The Chair: At present, it is $4.90.
Mr. Achadinha: Yes and this legislation proposes to increase it to $7.48.
The Chair: But you do not have the intermediary amounts?
Mr. Achadinha: No, I do not think I have the different adjustments.
The Chair: If you can easily put your finger on those figures and provide them to our clerk, we will circulate them to committee members.
Mr. Achadinha: Certainly, we do have those numbers.
[Translation]
Senator Poulin: Mr. Achadinha, I am not a tax expert. Could you tell me why we impose a fixed amount instead of a percentage?
[English]
Mr. Achadinha: It was decided at the introduction of the ATSC that as a service, people would receive similar security; therefore, it would be a fixed amount. It is a user-pay principle. We all receive the same sort of security when we are going through an airport. We may pay a different price for airline tickets because we may purchase them at different times.
[Translation]
Senator Poulin: On the bill I receive from an airline, it says "fuel surcharge." Is the "security tax" also clearly identified?
Mr. Achadinha: I think so.
Senator Poulin: I do not remember seeing that.
Mr. Achadinha: I think it is clear.
Senator Poulin: Perhaps I do not read it carefully enough.
Could you also tell me if you consulted with individuals or groups to check if there would be an impact on Canadians' travel as a result of this change?
[English]
Mr. Achadinha: With respect to this change, there was no advanced consultation. Normally, with respect to changes in tax rates, there are not consultations that can have effect. That is the normal practice when we are changing tax rates, et cetera.
Senator Murray: For the record, we are collecting this as of April 1, is that right?
Mr. Achadinha: Correct.
Senator Murray: My observation is that being the case, it is a matter of indifference as to whether this bill receives Royal Assent next month or the month after or at Christmas.
Senator Marshall: Is the CATSA review that Senator Finley spoke of covered by the $1.5 billion or is that funded separately?
Mr. Achadinha: I am not certain in terms of how that will be funded. That is an issue for the Department of Transport Canada to determine.
Senator Marshall: When you were responding to Senator Finley, you mentioned a February 25 announcement.
Mr. Achadinha: Correct.
Senator Marshall: What was that announcement?
Mr. Achadinha: The intention to increase the air travel security charge and the additional funding was announced by Minister Baird on February 25, 2010.
Senator Marshall: You are saying there was some financial analysis given in that announcement.
Mr. Achadinha: There was a backgrounder included with the announcement. That backgrounder provided information in terms of the current rates, the proposed rates at that time — because it was February 25 and it was intended to come into effect on April 1. It also provided projected revenues and expenses. That is all part of the backgrounder to the February 25 announcement.
Senator Dickson: I have a question of clarification, and if Senator Murray would like to ask a question of the experts here, I would only be too pleased.
My question is in relation to the changes relating to venture capital. That is completely different in this situation, because when we are talking about venture capital, we are talking about the marketplace. We are looking at a third- party investor who goes to his adviser, whether it be a chartered accountant or whoever his adviser might be. An investor who is going to invest in a company in Canada wants certainty as to what the tax rules will be. The person on the hook is the particular financial adviser — his insurance company, et cetera, down the line.
We want the flow of capital, as I take it, into Canada as quickly and as soon as possible. It is a much different situation insofar as a tax on an airline ticket. I wanted to clarify that point.
Senator Murray: What is the coming-into-force provision of that amendment? That is the question.
Senator Dickson: No, the question is the risk involved to the investor, the third party.
Senator Murray: You could say that for the whole bill.
Senator Dickson: So it becomes law.
The Chair: It is not intended. Thank you for your points. We do not want to get into a debate with our witnesses here. We are here to gather information.
I would like to refer you to amendment 97 at page 156. This looks to be similar to what we saw earlier with overpayments in income tax and excise tax. However, it is slightly different. Whereas corporations were paid zero previously —
Mr. Achadinha: That is the interest rate regulations with respect to the air traffic security charge. A similar amendment is being made to other legislation.
The Chair: But it is not the same?
Mr. Achadinha: It is identical. It is just structured in a different way. It was drafted later and structured differently. The legal drafters will structure according to the different rules that come into place in terms of structuring legal text.
The Chair: What is the basic rate in respect to the particular quarter?
Mr. Achadinha: It will be the Treasury Board rate. I think it is from the previous three months.
The Chair: If a corporation has collected this —
Mr. Achadinha: These are for overpayments. It is the amount due from the Minister of National Revenue to that particular registrant, taxpayer or carrier. They would be entitled to receive the average of the Treasury Board rate for the previous three-month period.
The Chair: Whereas the sections we saw earlier said 0 per cent; that was 0 per cent on top of this rate, correct.
Mr. Achadinha: That is the base rate.
The Chair: You do not repeat the 0 per cent here.
Mr. Achadinha: You always say here is the base rate here.
The Chair: That is what they get.
Senator Ringuette: I have a comment. You are reinforcing that throughout the different sections, where you are revisiting the interest rate on overpayment or interest rate on underpayment. This goes to my earlier comments about the small businesses of Canada having to put their GST return on a monthly basis, whereas, the large corporations receive an extended period to put in their GST and HST collection. Therefore, they would not be paying the basic rate and the quarterly rates and the Treasury Board rates, plus 2 per cent.
Mr. Achadinha: I have just been alerted that it is the treasury bill rate, not the Treasury Board rate.
Senator Ringuette: There are other laws for Canadians and the Government of Canada in extending this GST to, you specify, "certain financial institutions," not all financial institutions. There is a lot of intrigue in there. I am anxious to hear from the minister.
The Chair: We will do our best to accommodate you on that in due course.
Honourable senators, our time is up for today. We have dealt with parts 1, 2 and 3. We would like to thank all of the representatives of the Department of Finance for being here and helping us with those parts. We had hoped to do parts 4 and 5 today, but our time is concluded.
I would suggest, in order to stay on schedule, we will begin with Part 6 tomorrow, and we will pick up parts 4 and 5 later in the week when we have extra time available. On Thursday afternoon and Friday, we did not have anything in those time slots. For the government representatives and those of you who are here, you can follow the schedule we have already set for you and you can keep the same people coming at the same time.
We will look forward to seeing more representatives from the Department of Finance and other departments tomorrow morning at our next session.
Senator Runciman: Will we be meeting here in the same meeting room tomorrow? I was thinking of leaving our binders behind, if we wish.
The Chair: The meeting will be next door and I think there is a committee there now so we will have to take care of our binders.
This meeting is now concluded. Thank you very much for your assistance.
(The committee adjourned.)