Proceedings of the Standing Senate Committee on
National Finance
Issue 24 - Evidence - October 3, 2012
OTTAWA, October 3, 2012
The Standing Senate Committee on National Finance met this day at 6:45 p.m. to examine the substance of Bill S- 205, an Act to amend the Income Tax Act (carbon offset tax credit).
Senator Joseph A. Day (Chair) in the chair.
[Translation]
The Chair: Honorable senators, this evening, we will begin our study of Bill S-205, an Act to amend the Income Tax Act (carbon offset tax credit).
[English]
Bill S-205 seeks to amend the Income Tax Act to provide for a new non-refundable tax credit for carbon offset purchases.
As honourable senators know, a bill with the letter "S" before it indicates that it was introduced in the Senate; and the fact that it is a larger number, like 205, is a fairly good indication that it is a private member's bill as opposed to a government bill.
We will begin by hearing from the sponsor of the bill in the Senate, the Honourable Grant Mitchell, who will provide us with an overview of the bill and why he believes that this bill is timely.
[Translation]
Hon. Grant Mitchell, Sponsor of the Bill: Honorable senators, it is a pleasure for me to be here before your committee. I believe that this is only the second time I find myself on this side of the table.
[English]
It is a wonderful experience. I thank the committee for hearing me in respect of my bill, and I thank the government in particular for allowing this bill to pass second reading and come before the committee. It is the second time that I have been on this side and the first time I have ever had one of my bills come this far. I am pretty excited about it.
I will explain briefly what this bill does, give you some of the advantages of the bill, and address some of the concerns that were raised very well in debate at second reading. Then I would like to open it up and take your questions. I will be as brief as possible in those first two or three tasks.
The bill is a non-refundable tax credit that would encourage individuals, particularly families — children and parents — to do something constructive and effective about reducing greenhouse gas emissions and contributing to solutions for the climate change issue. It is very much premised upon the government's very successful sports tax credit, which gives a 15 per cent tax reduction up to $500 to a family that invests in hockey skates, football equipment, or lessons in various sporting activities. It is not unlike the firefighters' tax credit. In fact, that model has very much inspired this model.
How this tax credit would work is that instead of buying hockey pads for a child, although they might do that too, a family could sit down and talk about what they can do together as a family to solve this problem that we accept about our greenhouse gas emissions. They could take some money and invest it with a farm, a small business, or a big business, although I think the focus would be most appropriate on a small business or farm, that will reduce carbon emissions that otherwise would not get reduced. This family would give them some money to invest in a technology, a process or a mechanism to reduce greenhouse gases, which they would not be able to do if they did not get that money.
We would limit the amount to probably a $500 donation, contribution or investment each year and we would limit it to the first level of tax refund of 15 per cent. A family would get together and give $500, and they would get $75 back, just like they do now in the case of the sports tax credit.
How does that mechanism work? The offset and credit system is difficult to understand for many people. It is a complicated process, in some sense. However, if you are investing in a set of hockey pads and get a return for that investment, it is the same. In this case, you are simply investing in someone who will do something on your behalf to lower carbon emissions, and you will be encouraged to do so by receiving a tax reduction.
The cost of this is difficult to project, just as it was when we started down the road with the sporting tax credit. You simply do not know. Imagine that 1 million Canadian families, or 1 million individuals, decided to put up $500 each. There would be $500 million invested in farms and small businesses in Canada by families who might otherwise not have made that kind of investment; and the cost to the Canadian taxpayer would be $75 million. At $20 per tonne — the cost of reducing one tonne, which I will explain in a moment — that investment would reduce emissions by 20 million tonnes. That is almost 10 per cent of the government's 2020 target at very little expense to the government and at a huge leverage with $500 million from Canadians who otherwise would not have invested money in that particular enterprise.
It is not insignificant. It is a relatively low cost to government. It is inspirational to families and individuals who want to do something and want to know that they can do something. It has all of those benefits.
As an aside, a family of four in Canada produces roughly 25 tonnes of carbon per year in our daily lives, with driving our kids to school, cooking our food and so on. At $20 a tonne, that would be $500. Our family, a family of four, could be carbon neutral for $500. That is a significant achievement.
That brings me to the next question, which is why did I come up with this idea? Some time ago I kept running up against this question: How is it that so many of us cannot seem to understand or grasp or accept the science and the challenge of climate change, and perhaps the risks and the dangers? I believe there are many reasons for that, but one that came to me, and one of the central reasons, is that if you actually accept it, it is almost overwhelming because it seems to be such a big problem. You are then confronted with the question: What can I do about it? If you cannot come up with an easy answer, it is easy to move back from that question.
If we could demonstrate to people, to children in particular, that there are things that individuals can do that can really have an impact and that we as individuals can really make a difference, we could educate, inspire and bring families together. This is for individuals and not for businesses. We could really accomplish something and move this along in an educational way. At the same time, we would increase investment, inspire technology, inspire creativity in the economy, create more jobs because of this extra money that is being invested, and in the longer term we would begin to develop — well, in the shorter term — a carbon market that would give us leverage when we start to deal with the regime of the United States when they get to that, as well as with international regimes. In fact, if the carbon market becomes effective there are all kinds of countries that require reductions of industry. They could bring money and invest in Canadian farms and businesses through our markets that would work effectively and function effectively, and begin to stimulate international foreign investment in Canada for a fundamentally good reason and good purpose. It has all of those advantages.
The concerns are not small and I do not diminish them, but one is the question of cost. The cost can absolutely be limited, just like the government decided to do with the fitness tax credit for equipment and sports. You can limit it to the first $500 of investment in credits; you can limit it to the first 15 per cent, the first level of taxation. However, unlike the tax credit for sporting equipment, where you do not know until the end of the year how much it will cost you because everyone just submits receipts at the end of the year, in this case there will be relatively few providers of tax credits. You could assess every single day how many they are selling. You would know the exact cost every day online. You could press a button and there it would be and you could say, "We are getting too close; it is going to be too expensive." If you put some limit on it you can just say, "We are going to stop doing it."
Let us consider the expense. Any money that goes into this that reduces carbon will be carbon that is reduced against the government's target and will displace other initiatives that would also cost money. It is not net new cost necessarily at all. It is just a different way of doing what otherwise the government says and I want to believe they will end up doing in a different way. It is not a net new cost. Ultimately, if this works and people come to understand how well it works and it is educational and gets broadly based, you could actually begin to pull back on the tax credit. It is a way to kick-start it, give it an incentive and get it going.
I think the cost is not by any means unmanageable. As with any of these kinds of tax incentives and tax initiatives, there is always an opened-ended cost concern, but this is absolutely transparent, absolutely accountable and very measurable in the way that other ones have not been and are not.
For the record, I would mention that the sports tax credit costs just over $100 million a year. I would be very surprised if this one, initially, ever reached that kind of tax expenditure.
There is always the concern of whether a tax credit is regional; whether someone is investing in a tax credit and it goes to another country or to another province, with the taxpayers in one province and the benefit going to another province. Well, this can absolutely be focused like a rifle on a given province. If it is an Alberta taxpayer, an Albertan would only get credit for the tax reduction for an Alberta tax credit. That whole idea of net regional outflows is absolutely settled and solved very easily. It would be very easy to administer.
The third problem is how to verify the credits. How can you be certain that the credits are legitimate credits? What is the cost of the process of all of that? Well, it is interesting. This is being done already with great credibility in British Columbia with the Pacific Carbon Trust for commercial kinds of credit dealing with footprints. It is being done with great success in Alberta at a huge industrial level, where farmers and businesses are now selling carbon credits to major emitters in Alberta to meet caps that have been put on them. There are in fact 21 ways in which farmers can change the way they deal with livestock and grow things to reduce carbon in a way that can be measured and legitimately approved, monitored, followed and audited. It is happening all the time. Major corporations such as TransAlta are buying these. It is very doable and very reasonable.
More to the point, around 2008, when the Government of Canada was considering and had established that its policy on climate change was going to be cap and trade, they did extensive work on developing the credit trade system. There are three documents they produced: Canada's Offset System for Greenhouse Gases, which lays out its general approach, and then there are two more very detailed packages that lay out program rules and guidance for the project proponents. These are the people, the companies, the aggregators and the groups that would put together the credits. It is all in here about the criteria they have to meet, all developed by the Government of Canada. There are very extensive guidelines for how the verifiers would operate, right down to how you do an audit, who would do the audit and who would be available to do the audit.
It is interesting that, in the government's concept, key to the verification and key to the establishment of the review process would be the environment department. In fact, it does not necessarily have to be done by government at all or in a very limited way.
Representatives of the Montreal Stock Exchange were before this committee three or four years ago and said they were ready to go on a carbon market. There said they were happy to administer it because there is money to be made there.
In Alberta's case, Climate Change Central, which is a quasi-independent Crown corporation with private board members and government board members, has been delegated the task of monitoring their offset system. The Pacific Carbon Trust is a Crown corporation as well that is not directly government and ultimately may well be in a position to be self-funding. In that case it probably is not.
It is very possible to do this. It has wonderful possibilities for educating people. I envision families feeling that they can contribute in a significant way to making the future of the world better and do it in a way that they can see real results. We do not have to have $10,000 to change all the windows in our home; so we are do something because we do not have $10,000, but we do have $500. We will show our kids and work with you to show how we can improve the climate change issue, how we can make the future better, and how we can stimulate the economy by investing in small businesses and farms, which of course are generally in rural areas where rural communities are under threat, where farmers are always looking for revenue and need it. This is a way to stimulate them. There is so much we can do with this.
It is a small step but it has big implications. It does not need to be costly at all and much of the work that needs to be done has already been done. This is all good. I recommend it to you.
The Chair: Thank you very much, Senator Mitchell.
For those who are new to our committee, we keep a list. If you would like to participate in the discussion or questions, just signal and we will put your name on the list. We usually take the list from the top, the first person who indicated she or he would like to participate, but we also try to balance back and forth. Depending on how much time we have, I will let you know if you are getting close to the end of your questioning period.
Before going there, could you just clarify something about the family that invests $500? They get the $75 tax credit and the good feeling that they are reducing their footprint, but do they get any of that $500 back at any time from the company in which they invested?
Senator Mitchell: No. They are not buying equity in the company; it is not an investment in that sense. It is not a bond or equity. They have no risk in it on the other side, which is very important as well. It is in a sense an investment in the economy. It stimulates that economic enterprise — the farmer — who can now buy a piece of equipment that will till in a more environmentally friendly way and reduce the carbon he or she otherwise would have emitted as a result. They will get their $75 back. The $500 is essential.
The Chair: They will get $75 back if they pay income tax.
Senator Mitchell: If they are taxable, yes.
The Chair: It is non-refundable, meaning that they have to be paying income tax in order to reduce the amount that they would otherwise pay.
Senator Mitchell: Exactly.
The Chair: I think that is helpful. Do you see down the line, as part of your scheme, legislation to encourage the family to do this, or will it just be a good gesture and a feel good thing for families to do?
Senator Mitchell: It is a very good question because of course, if it required a great deal of advertising by government, that would be another cost, which I have anticipated.
I think that there are what are called aggregators, groups in Alberta, for example, that go out and talk to farmers and say, "We will take your 500 credits and yours and yours and package them and sell them for you." They will be happy to do the advertising to the people to sell them to.
I would anticipate or hope that they would go to schools or advertise on any number of media. They will say, "There is a tax credit for you if you buy some credits from us." The private sector will be encouraged to do the advertising. I would expect that, just as the sports tax credit got a lot of publicity in the media, this would probably get quite a bit of publicity in the media. That would kick-start it, but that does not cost the government anything.
It would really be an expenditure for the industry that wants to build these tax credits and sell them to people.
The Chair: As I understand it, for the sports credit, you are either getting a membership in a rink somewhere or you are getting hockey pads or a pair of figure skates. You are getting something. In the case of your legislation, you invest $500 and get back $75 and a good feeling that you are doing your share.
Senator Mitchell: If I give $500 to charity, what am I getting? I am getting a sense of satisfaction that I am doing something right for someone else.
The Chair: Does anyone have any questions on those points?
[Translation]
Senator Hervieux-Payette: I would like to congratulate my colleague for his imagination and commitment to the environment.
Just as my colleague did, if you compare the tax credit to a type of charitable organization, I think it would be more difficult to sell than if you included a return on investment, or at least the possibility of a return on investment. If there is a carbon exchange, why would someone else benefit? Why should the person who invests $500 lose $425, while someone else wold then make money on the carbon exchange?
I do not know what you would call it, but you could have a $500 "unit" which would yield a $75 tax credit; these units could eventually be bundled, and if they were sold to companies like TransCanada, they would benefit from a return on their investment.
Let me ask this question: if you want to sell this to Canadians, it is a good idea, but I think that even good parents who want to educate their children will prefer to buy their kids a pair of skates, rather than invest $500 in your venture.
If it is just to feel good in the current economic context, it might be difficult, but why should there not be some kind of agreement with a carbon exchange to allow for the bundling of units, which could eventually have a certain market value?
[English]
Senator Mitchell: That is absolutely entirely possible. It gets to be quite complicated with the different kinds of units. This time, I am talking about simple ones that do not necessarily have a resale value because they are one-time. It can build to that. However, this is at a simplistic level, and I have tried to keep it at that.
As to whether people would do it, I guess if people do not want to do it there is no cost or downside to it. Why do we not try it? However, I think people do want to do it. I think that there is a generation of people — young people in particular — who often see the world quite differently than my generation does. They are quite concerned about climate change in a way that many of an older generation are not. They can be quite inspired to do something about it. I get a sense that people often do not know what to do and that they often do not have the money to do something that is enormously significant like changing their windows because that is very expensive and does not necessary get you very much by way of carbon reduction.
The other thing that these kinds of offsets do is to give you the low-hanging fruit. They direct people through market mechanisms to the cheapest way to reduce the most carbon. I do not know that 10 or 15 years of success in a carbon market will see that carbon market lasting beyond 10 or 15 years because a lot of the low-hanging fruit will be gone, but it is a great way to build a transition to where companies can begin to build their technologies so that they begin to reduce their own output in increasingly more expensive areas. In the interim, it is a great way to get us from A to B and the cheapest and most efficient way of doing it.
[Translation]
Senator Hervieux-Payette: If farmers wanted to invest in this project, where would they get the money?
[English]
Senator Mitchell: Well, people would take it out of their own income as you and I do when we give money to charities or to a political party. It is money that they feel they could do something with and demonstrate to their children through.
[Translation]
Senator Hervieux-Payette: I am talking about the person receiving the money. Somebody gets that $425: who? And what will they do with it? You talked about farmers, but someone, somewhere, will do something with that $425.
The Chair: You mean $500, right?
[English]
Senator Mitchell: I will give you an example. Westport Trucking is one the leading companies in the world for converting diesel engines to liquid natural gas engines. If you run a liquid natural gas truck, you reduce your carbon emissions by about 30 per cent. There has been reluctance on the part of diesel truckers — and we have had them appear before our environmental committee — to make the transition because they cost about $80,000 more a truck. In fact, it does pay back relatively quickly, but it is this mindset. Westport Trucking or another trucking company could set up a system and say, "We will convert 50 trucks and reduce this much carbon. It will cost us a lot of money to do it, so we would like to sell the credit that we are going to earn to do that to people who would be interested in assisting us." That will be a breakthrough.
The example that I am really quite motivated by is farmers because I think farmers are often so desperate for income and stability in the longer term. As I say, there are 21 ways, which have been documented and sanctioned in Alberta, for the reduction of carbon, such as zero tilling. Instead of digging the land up, they poke it and put the seed in. It requires money to buy that new piece of equipment. Instead of dealing with livestock manure in certain ways, you deal with it in other ways, and it does not produce methane in the same way. It takes equipment to change the methodology to do that. It costs money, so they sell that to get the equipment and maybe make profit doing it. This is being done in Alberta all the time. Companies are doing it. They get credit for it and reduce their net emissions and their de facto footprint. I think that there is a market for families and individuals to do that as well.
[Translation]
Senator Hervieux-Payette: Yes, but someone receives the money, someone will make money at the end of the day; what I am saying is that this might be a long-term investment over maybe 5 or 10 years. It would make sense for a person to invest $500 a year, just like you would buy $500 worth of shares in a company, and receive a yearly tax credit of $75. But the person would have to partner with someone else to get a return on investment. Imagine a family earning an honest living, a family that is not wealthy, who invests its money in a going concern, for instance, a trucking company. This company might indeed need some major capital investment. I think it would be more practical, from a marketing point of view, for an investor to have a relationship with the company, and for the investor to get a return on their investment.
[English]
Senator Mitchell: I certainly hear your point; I understand your point.
There is evidence that people are interested in doing this. People are buying credits now, but it is not encouraged particularly. People can buy credits through airlines, and so on. There are people who are motivated to do this. This would maybe motivate more and provide another opportunity for people to contribute to something bigger than themselves. Many people see the world differently than the way you describe it. If it does not work, then no harm is done; no cost.
Senator Buth: Thank you very much for your explanation of the bill. I am looking for definitions of what are the types of things that would qualify, and I do not see anything in this bill in terms of definitions. That makes it really difficult to even look at cost benefits or administration of the bill. Could you talk about definitions?
Senator Mitchell: You generally would not define them in a bill; it would be very restrictive. Hopefully, a market will open up and many people will begin to be interested, many different centres.
Your government has already considered this right here. They have set up the process by which you would define credits, you would define those people who could produce them and you would define those organizations that would verify them. It is quite consistent with the way the legislation is done and the way you would have done your legislation on cap and trade. You may still come back to this. All of that work has been done. You would not want to define that only Westport trucks could be doing this in legislation. You would not want to define that only farmers use certain kinds of things. You would never define that in legislation.
Senator Buth: I understand that you would not define a company, but I would have expected to see some definition of what types of things would qualify.
Senator Mitchell: We do define offsets in the bill, and we give the power to the Minister of the Environment to create and define the process by which those offsets are defined, by which those offsets are verified, and by which the market would operate. Where I get comfort from is the fact that, here it is. You have already done a great deal of the work for it. We do not need to make it up. It is not as though this legislation is in a vacuum. This legislation is backed up by a great deal of work by your own government.
The Chair: Senator Buth, do you see on the first page, proposed section 118.06 in the definitions, "approved offset project" and "carbon offset provider," et cetera?
Senator Buth: Yes, designated by the minister. It is leaving the definitions up the minister. I find it difficult to evaluate what this would actually cost. I know you have given us some examples, but you said at one point that the cost to the taxpayer would be $75 million. That is a substantial amount of money.
Senator Mitchell: Let me address that. When you brought out your sports tax credit, you had no idea what that would cost. When you brought out the tax-free investment account, you had no idea what that would cost.
The Chair: Senator Mitchell, it might be helpful if you talked about when the government did this as opposed to Senator Buth.
Senator Mitchell: Yes; you are right.
When the government brought out its tax credit for bus users, there was no idea what that would cost. When previous governments brought out the RRSP, there was no idea what that would cost. There is always that sense of risk, but I am saying that the cost is very manageable in ways that other tax credits are not because you can measure the cost of this absolutely every day. You can be plugged into each of those outlets that are selling these tax credits. Every day, you can aggregate it and know what they have sold, multiply it by 15 per cent and say that it will cost us that much. However, if you are reducing 20 million credits — 20 million tonnes using this program and that will cost you $75 million, then you are not spending $75 million in some other program trying to reach the government's target by 2020 of 17 per cent below 2005 levels. There is the offsetting part of it, and also it is a leverage to get individuals to invest in the economy and stimulating the economy as another by-product.
Senator Buth: My background is agriculture, so I am quite familiar with farmers and tillage operations and what they are doing out there right now. You even said that Alberta is doing it. Why would we bring in federal legislation if there is a system out there that is essentially functioning?
Senator Mitchell: Alberta is doing it at a commercial level. Alberta has not chosen to do it at an individual level. I am not working at the provincial level, nor are you, but we have the power to do this. The federal government has responsibilities for environment and for climate change, and the federal government has a target. The provinces are not doing all kinds of things that the federal government is doing for regulation, and I am saying that the federal government can do this with all these other added benefits; that is, the benefit of inspiring young people and young families to do something for their community, for their future, for the environment; the benefit of investing and stimulating the economy; the benefit of investing in farmers and small business; the benefit of supporting and securing rural communities; the benefit of supporting renewable energy sources — all of those benefits. That can be done easily at the federal level, at probably almost no net cost and probably at a great deal of net economic stimulation.
Senator Buth: Where is the valuation criterion, then, in terms of what the impact will be on the environment?
Senator Mitchell: Generally in the markets today, when you go out to international markets or even markets here, you will get to around $20 a tonne. It can be much cheaper. In Alberta it has been as cheap as $6 a tonne for farmers because they can do some things inexpensively, but let us say $20. There is a link between that amount of money and the cost of reducing a tonne in a more or less efficient way — one of the more efficient ways in our industry or in our economy — right now. There is a market evaluation that will say, "We are willing to help you reduce a tonne of carbon for what the market says right now," about $20 a tonne generally. We let the market decide.
Senator Buth: That leads to me to my second question, namely, why not let the provinces do it? If there is a market system that is functioning right now and there is essentially trading in carbon offsets, then let the system go ahead.
Senator Mitchell: You could say the provinces can do all kinds of things that they are not doing, but I am saying that we have B.C. doing it at a commercial level; Alberta doing it at an industrial level; and Quebec, working with some northern states, doing it again at a commercial industrial level. This is a gap in the market.
To take your argument to its logical conclusion, you could argue that the federal government should not do anything. Why not let the provincial government do everything in climate reduction and get your targets that way? You have not gone to that. You are doing emissions standards for cars and emissions standards for coal-fired plants. Alberta could do them. They have coal-fired plants. You are doing emission standards for oil sands; those are Albertans. I am saying that you could do this for families to reduce and to create a carbon credit.
The other thing is that you can stimulate other sectors to do this, like securities commissions. The Montreal Securities Commission at one point was very keen to do this. I do not think the two are mutually exclusive. I think we all have to work together and do whatever we can do to solve this problem because this is a big problem.
Senator Peterson: Thank you for your presentation. I take it that the two structures now, B.C. and Alberta, are not part of your plan. These are commercial things that are going on. To do your plan there would have to be a new structure so there could be some oversight.
Senator Mitchell: Yes.
Senator Peterson: If someone is going to pick up a $100 million tab, they will want to know that it is happening and where it is going.
Senator Mitchell: Exactly. It would be a new structure. It is a structure one form of which, one possibility, has been outlined in great detail by the current government in 2008. There is a structure that could be done through the Department of the Environment. It seems that would be their preference, although I think you could minimize the Department of the Environment. You could certainly have oversight from that point, but you could find organizations, securities commissions. Maybe Climate Change Central in Alberta would be prepared to do the federal- level stuff as well, so you would have a separate structure.
Senator Peterson: Your example with Air Canada, I can pay more for my ticket and supposedly minimize my footprint. Air Canada must have to buy that from someone.
Senator Mitchell: Yes.
Senator Peterson: Is this a revenue-neutral thing, then; someone is getting revenue and someone is getting an expense?
Senator Mitchell: It is not revenue neutral to Air Canada or to the ticket buyer who buys the credit to cover their trip. That money probably goes to a wind farm in southern Alberta, which would build a windmill to create electricity to offset electricity from a coal-fired plant. That is how that would work.
Senator Peterson: I would want to know that Air Canada had purchased that. What is the point of my giving them more money if they just take the money?
Senator Mitchell: Exactly. That is part of the problem. You can go out and find credits now, but you do not really have a way of knowing. It would be like buying a stock in an improperly regulated or possibly not accredited stock exchange. That is part of the problem. People do not have the fundamental confidence that they can find a credit that they can really trust, and they need to be able to find that.
To give you an example, the federal government itself has bought credits. This is sort of an answer to the senator's earlier comments. Canada bought $225,000 of offsets to offset the federal government's carbon footprint in the 2010 Olympics. Your government, the Government of Canada, in 2011, put $225,000 into this very thing. It is absolutely doable, and this government absolutely understands that it is doable, and they have absolutely spent $225,000 of taxpayers' money to do it.
[Translation]
Senator Dagenais: Thank you, Senator Mitchell. We know that there has been a lot of discussion around carbon credit projects in the last few years, but we have not seen any impressive results yet. I have a two-part question.
First, do you have any examples for us of similar ideas that have been implemented nationally, and that were a success for small investors and government? If yes, did these work well?
[English]
Senator Mitchell: There are now many examples of structures that have worked nationally, very effectively, not necessarily for individuals. One of the most surprising cases of the use of credits, and where much of the early work was done, with great success, was in sulphur rain. Sulphur rain was solved in Eastern Canada and the eastern States in large part because of the use of credits, and out of that process we got a whole new industry.
I know the European market has been discredited because it got off to a poor start. However, in that market, they were actually giving credits to industry. It is very different. We are not giving anyone a credit, to begin with. However, even that market is working very effectively. Literally hundreds of millions of dollars are being utilized.
There are new markets in New Zealand and in Australia. There are markets literally all over the world. We will get to this, I believe, and I even believe the Americans will get to this, because there is just so much low-hanging fruit and it is so powerful to use market mechanisms to drive this. That is what I like about this. This is a market mechanism; it is not some bureaucrat trying to figure out what the price should be. There will be a market that will price it.
This is very powerful. It has not been used so much at the individual level because no one has thought to do it, but sometimes the first step is a creative idea that can really work. I think we have to get it at the grassroots of our society. We have to get people to understand and see that we really can do something; we really can solve this problem, working together. It can be quite an inspirational process, a sense of purpose for a country and for individuals, for kids going out and picking up bottles, to come home and say, "How can we fix this environmental problem?"
[Translation]
Senator Dagenais: The second part of my question concerns the smaller projects that you mentioned, such as those in British Columbia and Alberta. Do you have data to show that these projects produce results?
[English]
Senator Mitchell: Absolutely. The caps that Alberta put on the major emitters have required 12 million tonnes of reduction in 2011. Half of that was done with credits; the other half was done with technology changes. That half, that 6 million tonnes, which they purchased from anywhere between probably $6 and $14.99 a tonne — there is a reason for that — all went to farmers and small businesses in Alberta. It is not an insignificant amount of money at all; it is $60 or $70 million in that case. The year before it was about 3.6 million tonnes, or about 30 or 35 per cent of what they had to reduce. They are having real results there.
Last year, Pacific Carbon Trust did 1.25 million tonnes. They have set aside about $25 million. They are working hard to find centres of enterprise that will produce enough credits, because they can see where there could be a real demand for these credits.
Senator Callbeck: Thank you very much, senator, for being here. It is an interesting piece of legislation. My questions are along the lines of what Senator Peterson asked, and that is on the process, just to understand how this would work.
If a family decides they want to invest $500, you say they could get a tax credit for 75 or whatever. Let us say they want to put it in a farm that will buy technology, and as a result, it will reduce greenhouse gases. Who determines what projects that family can invest in?
Senator Mitchell: There is a very detailed piece in here, for example, for what criteria a farmer would have to meet — and in Alberta, it is very detailed — in order to produce a credit that would then be sanctioned by, in the case of Alberta, the Climate Change Central — which is, as I say, a quasi-government group, part government, part private sector — that would say, "This farm enterprise has met all of these different criteria, and we will therefore qualify them to sell these amounts of credits." It gets very technical, but you can actually see your credit linked through GPS to the very section of land that your reduction has been produced upon.
Senator Callbeck: Who does this in Alberta? Is it a private-sector group? Is it part of government?
Senator Mitchell: The Government of Alberta set up the regime, and then they went to this group called Climate Change Central, which is interesting. One of the founding members of Climate Change Central was Senator McCoy. Climate Change Central does a great deal of work on various environmental issues, studies and so on, but they are very high-quality professionals and they were given the task of supervising the approval of producers of credits and supervising the process of auditing those credits. It is delegated from the Alberta government to this group, with a clear set of criteria so that we know there is integrity in the way it is done.
Senator Callbeck: It is a group that decides what projects the family could invest in?
Senator Mitchell: Yes.
Senator Callbeck: Also, they set a figure; if it is $500 each, that 10 families can invest, or 20 or whatever?
Senator Mitchell: No. The only figure that is set is a price that the farmer says, "I cannot produce that credit for the price that you want to pay." What is the price at which we can produce that? The farmer might say, "I can produce these credits for $6." The family goes to the market — there are accredited marketers who bring this together — gives them the money, they give it to the farmer, and now the family knows they have been responsible for reducing $6, divided into the money they have given, to produce a number of tonnes reduction.
Senator Callbeck: What is the follow-up? How does the family know that the farmer actually spent the money?
Senator Mitchell: They receive a certificate stating this has been done. There are audits of farmers to ensure it is being done properly.
Senator Callbeck: Who does those?
Senator Mitchell: It is through Climate Change Central. In the case of Canada, there is a whole booklet on verification and how that is done and how an audit would be conducted; it is very detailed. In some senses it is like a stock exchange. We have been selling stocks and bonds in the Western world for 150 years, and someone will invest "X" amount of money in the Bank of XYZ, and banks do not even have physical money any longer. It is all digital entries. Where do we get the confidence that we actually own some of that bank and that the bank has a value? We get it because there are verification processes; there are auditing processes; there is a stock exchange that gives us comfort that these are quality companies and are being properly regulated.
In a smaller way, this is exactly what that is, and it is a question of how we find the most efficient way to set up market mechanisms and stock exchanges or credit exchanges that would do the job This is being done and to great effect, and Alberta is one case where it has been quite effective. You may be able to piggyback on that. They might say they would be happy to do it.
Senator Callbeck: You mentioned Air Canada earlier. If a person pays Air Canada money to reduce greenhouse gas emissions, is there any way to know the money is spent that way?
Senator Mitchell: Did I mention Air Canada? Airlines do this. Let us say an airline will state on their website, for example, they invest in these kinds of wind farms. That may be the only security you get. That is part of the problem. If you knew there was a sanctioned market maker in this, whether government or preferably a securities commission — the Montreal exchange, for example, is kind of interested in doing, Chicago exchange does it. It is a huge exchange. The European exchanges do it — then you would have real confidence and would know where to go and that you really are getting this and the reduction is being done and you could see on your GPS that it is being done right here, right now on a certain piece of land or in a specific company, so you get comfort.
People need a sense of security that it is being done, and the problem is partly because there has been so much negative spin against this, which I think is very unfortunate. I think credits are a way to get the low-hanging fruit, to reduce emissions in a very efficient way and to invest in industries that need help to stimulate economies. It is a great way to do it.
Senator Callbeck: In those documents you have, were the costs of setting up this regime or process looked at?
Senator Mitchell: I am sure this government would never have proposed something they had not costed. I am not privy to those costs, but I cannot imagine they would have considered doing this without costing it. I am sure we could get the costing, but I believe that whatever cost may be suggested we could do this because they are focusing on the Department of the Environment. I think you could actually do this as we do securities. You could get private sector exchanges, private sector operators to do it, and they would make money because they could charge a fee or a spread on this. I think it can be done quite inexpensively. You would need an auditing function you can trust, but there is quite a bit of energy in markets to do this. Industry is looking more and more for this kind of leadership because they know as they get more international, for example, there is more and more pressure on them to reduce emissions. Sometimes it is cheaper to do it by asking someone else to do it for you, like we ask services of many people who can do things better than we can — make our car, reduce our carbon.
Senator L. Smith: The concept is fascinating. Going back to Senator Callbeck and Senator Peterson, you showed us a document that was part of a program that was in development three or four years ago. I read through the very short piece of legislation. You mentioned a $500 amount for individuals. Is that a number that you came up with or is that something that has been thought of before?
The problem I am having is the concept itself is very positive, but the issue is the framework and the organizational structure around it. It is great to say your government did this or the government at the time did it, but you are submitting something for consideration. In my mind there has to be not only the submission but a framework around it so you can analyze it and understand the implications of the cost and the benefit. The concept is outstanding.
Senator Mitchell: Thank you. I know what you are saying. I guess, ironically, I have more confidence in your Minister of the Environment than you seem to at this point. I have confidence that the Minister of the Environment, who got this piece of legislation and has done this kind of work, could make it work, that they would make it work and would be concerned about cost.
There are a couple of reasons I picked $500. One was because I knew cost would be an issue, and there are three or four ways one can limit costs. We could say you can invest whatever you want in these credits. You could put out $1 million and we will give you $150,000 back; that would not wash. I said let us go with $500 because that is one way to limit costs, and it happens to correspond to the $500 limit on the sports tax credit, so there is a precedent.
I also said we can limit costs because of the 15 per cent rather than going up to the third level, so 15 per cent limits cost. That is really where I came from.
Essentially, you have to start somewhere, and I think quite quickly we could adjust and see if $500 is not enough or too much or 15 per cent is not enough or too much, or maybe it is working so well we can phase it out because people understand and we do not even have to give the tax credit, but we have kick-started it.
In legislation of this sort we are giving a great deal of power to the minister, and certainly there is precedent by the current government to do that, and in this case I think that is what you have to do because we are breaking new ground. I feel a great deal of comfort because a lot of work has been done on how this could be done properly.
There is precedent by other governments in Canada doing some of this right now. I was very impressed by what Minister Prentice did, the process he went through to evaluate the group that he would buy the $225,000 of credits from to offset the Olympics. There is precedent there, too. That was very well done. They went out to the market and tendered it and got the best price, and they really did something that was groundbreaking. In fact, I could quote:
Canada is proud to be the first host country in history to help offset the greenhouse gas emissions of its Olympic games.
Giving credit where credit is due.
Senator L. Smith: I have been in business all my life, and when someone makes a presentation to us as a group, I understand the concept, which I think is outstanding, but then there is the second part where you do not have the structure. You say the government worked on this before, "Okay, guys, I have the idea; you just take it and run with it and set it up." I just have not been in many situations in my life, from a business perspective, where I have ever had a presentation where someone says that.
My first thought is when you do something you have a test market, and there is a certain level, and then you test it. You have a certain level, and then if it is successful you move and take the next step. Now you have come up with the whole box and say, "Okay, here it is, boys." How can our committee be expected to analyze that?
Senator Mitchell: It is a good question. I think I am using the model that the government used with its sports tax credit. There was no test market. The test market is you try it and see, and in that case there would not be a lot lost if it did not work because it would not cost a lot to implement. In this case, there would not be a lot lost if it did not work because if nobody used the program it would not cost a lot to implement it.
There is that model. The government did it with the fireman's tax credit. It is done all the time. In this case I am not expecting it will be done tomorrow. I am saying it would require the resources of government.
Senator L. Smith: It may be helpful if you submit something that you are obviously enthusiastic about which I think most people would think would be a reasonable concept, but as a suggestion, you might want to put some parameters around it. If it is a $500 credit, then say it is a $500 credit so that it has some specificity around it so you might have someone who would want to take a more serious look at considering that.
Senator Mitchell: I absolutely appreciate that, for sure. Thank you.
Senator Buth: Thank you for your explanations, Senator Mitchell. It has been helpful.
When I hear things like "certificates," "audits" and "verification systems", I hear the cash register continuing to go up. How are those costs built into a system like this?
Senator Mitchell: It is a key element because as happy as I am with the work done on this cap and trade, I think that the government's initiative was that this would be controlled by the Department of the Environment.
I am saying that because there is money involved in this, because there is a trading of a value out there in the market, there would be money that a market aggregator or a market could charge, not tax money, but money they could charge to do this, just like the securities commission. We do not give money to the Toronto Stock Exchange or the securities commission to manage that huge and important market that stimulates and runs our economy in many ways. We do not give them any money because they become self-funding.
We are breaking new ground. This is new ground, no doubt about it, but climate change is new ground and —
Senator Buth: Carbon offsets are not new ground. We have talked about B.C.; we have talked about Alberta.
Senator Mitchell: Right, but doing it in this way is on a bigger scale. I think the new ground in Canada is getting private sector interests to do it. I think that all of this is great, excellent work, but if you have the securities commission, for example — the Montreal stock exchange has been quite interested in doing this kind of thing — then it would not have to cost very much of government, if at all.
Senator Buth: Except for the credit part.
Senator Mitchell: Yes, the tax credit, except for that credit part. Again, what I say is, you want to get to your target, and the minister has said he is about 50 per cent of the way to his target, so there is still 50 per cent to go. I am saying this would be one program that could help us get that 50 per cent. You are going to be spending money anyway.
In fact, imposing regulations on the oil sands rather than a cap and trade system is way expensive. You want to talk about the audits that the government will be doing. The most expensive way to do it is to regulate, which is the choice this government has made. Cap and trade and a levy for carbon are way better, and allowing the market to drive it like this does is way better. There is all this possibility of money in a private sector place that the government does not have to fund to get it done, just like the stock exchange.
Senator Buth: It goes back to what Senator Larry Smith was saying, that it is hard to evaluate and see where the costs are and where some of the benefits are as well.
Senator Mitchell: Absolutely. I appreciate your interest a great deal. It is a question of how to get this detail. To some extent, you have to make an arbitrary decision. My approach, my philosophy was that I do not want to limit the minister in making it. I could say, what if the minister decides this is so good I want to make it a $1,000 limit? I have to do it; it is a $1,000 limit. Well, then, we have to go back and change the legislation.
Pick a number, but I have some faith that a government would get this legislation and say it is a good idea, let us make it work and we have some precedent.
I think there is something to be said for being more specific and a lot to be said for being not more specific and limiting what the government could do with it. I think you will find in many cases governments — this government included — leave much to that process so that the flexibility, the creativity or the judgment can be made and not restricted by this kind of definitive, overly restrictive legislation.
[Translation]
Senator Dagenais: Senator Mitchell, we know that the government always likes to work with set budgets and predictable costs. However, that is not necessarily the case here.
In the case of environmental projects for example, if we had to choose between your project and simply increasing the Canada Economic Development budgets, why should we choose your idea?
Senator Mitchell: Pardon me?
Senator Dagenais: We know that the government likes to have predictable costs. Canada Economic Development has environmental projects for which they can predict the costs. Why should we favour your suggestions?
[English]
Senator Mitchell: One program that was in place for some time and has been discontinued was the one where if I had changed my windows or fixed things around my house, I got money back. Those costs were absolutely unpredictable because you had to get that work done, then you would have to get an auditor to come into your house to check it and then submit your receipts. You would have no idea how many people were doing that.
In this case, the costs are absolutely predictable 24 hours after they are implemented. This is very manageable and predictable. I mean, 24 hours, but not 12 months or 15 months or two years, as in the case of that other project. They had no way of knowing how many Canadians would put in how many windows or how much insulation until they submitted their receipts.
In this case, you would know tomorrow. Every time you press a button in a central place, you would know you sold $10 million worth of these yesterday, so that is a tax credit of $150,000. You would know it. It is very predictable and manageable. You could also cut it off. The minister could say, "That is it, we are done; 321 days into this, it is going to cost us too much money."
The Chair: Timing is very good. We will be suspending very soon, and then the Department of Finance officials are here. They have been here throughout, so they have heard your presentation, which should help things flow along. We invite you to stay on the sidelines here, if you like.
Before I suspend, we have your bill, and some amendments have been made available to us. Do you intend to make those amendments here before we do a clause-by-clause study, or would you do that at third reading in the Senate?
Senator Mitchell: I would take the chair's direction in that technical matter. These amendments are perfunctory in the sense that since we designed and prepared this bill, there have been changes to the Income Tax Act, so clause numbers change and it is really that which is done, so whatever you would recommend in that regard.
The Chair: They all relate to that act?
Senator Mitchell: Yes, pretty much. There is nothing substantive.
The Chair: We can talk about that later. We would not need an explanation further than that. Thank you.
We are studying Bill S-205, An Act to amend the Income Tax Act, carbon offset tax credit, and we have heard from the proponent of the bill.
We are pleased to have government officials with us now. They have been with us throughout the meeting, so they have heard the earlier testimony and, presumably, have had an opportunity to look at Bill S-205.
I am pleased to welcome Mr. Sean Keenan, who has been with us previously when we were doing some other legislation. He is Director of the Personal Income Tax Division within the Tax Policy Branch of the Department of Finance. Welcome back, and thank you for being here.
Mr. Keenan is accompanied by Suzanne White, Chief of Resources, Energy and Environment with the Department of Finance.
Thank you both for being here. Would either of you like to make introductory remarks before we go to comments?
Sean Keenan, Director, Personal Income Tax Division, Tax Policy Branch, Department of Finance Canada: I will make a few remarks as we have been here.
From a tax policy point of view, at the Department of Finance, when we look at a bill like this, for a proposal such as this to be implemented, we would want to know many things that Senator Smith was mentioning, namely, the parameters associated with a credit of this type and how you would implement such a program, some of the concepts that would normally be considered and the type of projects that would be eligible for the credit. What are the conditions under which an individual or an organization could be accepted as an eligible carbon offset provider? What would be the mechanism under which you would ensure that carbon offsets were valued appropriately in order to ensure that the credit was being provided in a manner that was both economical and the best use of the taxpayers' money?
A lot of that seemed to come out in discussion. That is not really in the bill. When you had a credit, there was also a question about what an investment would be. Would investors be investing so they would have a credit they could subsequently trade, in which case the government would be providing a tax credit for, essentially, an investment in the market? For example, I bought $500 worth of credit, sold it at a profit and then I got $75 in tax relief for that investment. That would be different than saying a family was buying a $500 credit that was non-tradable and that would be a real carbon offset in the sense that it would have to be reducing carbon emissions in some way.
Some of those concepts are not clear. I know Senator Mitchell talked about a limit, which would then have an impact on the ultimate cost of the bill and how much an individual family could ultimately receive as a result of that credit. Those limits were not in the bill, per se. From a Department of Finance perspective, if you are ultimately determining the cost, you would need to know some of those parameters.
The Canada Revenue Agency administers the income tax system, so individuals would be filing credits and would have to get a receipt and say, "I have purchased this credit from this particular undefined group." Therefore, there would be a requirement for a lot of expertise within the CRA to do the auditing and to ensure that the projects that were eligible for investment would be known and would actually be carbon reductions. For a lot of the evaluation that would be required to implement such a credit, the expertise would have to be at CRA, and currently, it does not exist. From an administrative point of view, I think that would entail a significant cost. That would have to be built into the cost of the program.
We look at it from a tax policy point of view. Those are some of the questions that came to our minds, and they were not found in the bill.
The Chair: Thank you very much, Mr. Keenan.
I would like to know if either you or Ms. White were involved in what had been explained to us earlier about the tax credit balancing that went on during the Olympics in Vancouver and the carbon balancing. Are you aware of the fact that it took place?
Mr. Keenan: It is certainly not an issue that we would have dealt with in the Personal Income Tax Division, no.
Suzanne White, Chief, Resources, Energy and Environment, Economic Development and Corporate Finance Branch, Department of Finance Canada: I believe if they were purchasing offsets to offset some of the emissions with respect to the Olympics, it would not likely have been done with the tax credit, since one does not exist at this time.
The Chair: This Government of Canada publication was brought to our attention, and it is entitled Canada's Offset System for Greenhouse Gases. Have either of you been involved with this or any of the policy discussions that are in here?
Ms. White: I came on shortly after that document was introduced. It was as part of the government's Turning the Corner plan back in 2007. There was going to be an emissions cap and trading system, so Environment Canada did develop a number of documents that would include an offset system. That would have been in those areas that were not going to be covered by the regulations, for instance, in the agricultural sector. I believe the documents were still at a draft stage at that point, and the government decided to proceed with a different approach.
The Chair: For those who read the transcripts or happen to be watching this session this evening, the decision on policy as to what type of program, if any, to implement is a government decision, that is, cabinet; the executive would make the policy decision.
That is not your area. You are the implementers of policy decisions. Is that correct?
Mr. Keenan: If you are talking about a tax credit, at the Department of Finance, we do tax policy inside the department, but, ultimately, a tax credit would be implemented by the Canada Revenue Agency. A decision on whether that would be the way to go would have to be made, ultimately, by the government.
The Chair: The policy decision as to what program to implement, if any, might be based on advice that you would give to the government, but it is a government decision as opposed to a departmental decision.
Mr. Keenan: Absolutely.
The Chair: I think it is important for everyone to understand that. You are here in the capacity as representatives of the department.
Ms. White: From the Department of Finance's perspective, we would monitor those policy choices. However, with client policy being under the lead of the Ministry of the Environment, they would be the ones that would develop the policy and advice.
The Chair: That was helpful.
Senator Nancy Ruth: You were talking about the CRA not having the expertise to deal with this sort of thing, but how did they get the expertise to know whether the receipts for ballet lessons or sports equipment were valid? What is so difficult about this if you have a legitimatized list? They cannot have a list of every sports store and piano teacher on file at the CRA. How did the CRA get this expertise for these other tax credits?
Mr. Keenan: I think there are two different things. For the fitness credit, there are rules that people have to follow; there are eligibility criteria for the credit. Parents would be involved in putting their children in certain programs and they would get a receipt from the provider of the program, and then they would submit their claim. They would keep the receipt and that could be checked for auditing.
I think there is a bit of a difference in the sense that, under the proposal of the carbon offset, you would need to know a few things. What I heard from Senator Mitchell was that there would be a limited number of providers where you could buy the credits. If this is part your environmental agenda, will these projects meet your goals? Is this the best use of the money? Are you getting value for the dollar?
I think it is a little different in the sense that you would need to have someone inside the government — whatever mechanism — to say, "These are accredited projects and we agree that these are on the list." That would require some kind of expertise that does not currently exist.
Senator Nancy Ruth: Do you have any idea how much staffing, training or new staff would have to be employed to do this and what the cost would be?
Mr. Keenan: I do not know about the cost, per se. The government has the Scientific Research and Experimental Development, or SR&ED, tax credit. That is for businesses that are undertaking innovation and research, and they can claim this kind of credit.
I know there is a whole directorate at the CRA to provide information to businesses to say, "If you will be investing in this project, these are the things that you need to consider, and this is the information that you need to provide to the CRA in order to make a claim under this credit." There are probably 40 or 50 people who work in that directorate. I do not have the number or how much the budget would be.
Senator Nancy Ruth: You are not sure what the cost would be to the CRA if this sort of thing were implemented; is that correct?
Mr. Keenan: I do not know what the cost would be — only that there would be a cost.
Senator Buth: Thank you for being here to answer our questions, although I realize it is hard to answer them without the costing information.
I am curious whether the following could happen right now: Someone buys or makes a donation to a charity like Ducks Unlimited Canada and is then able to claim this through a charitable tax donation.
Mr. Keenan: There are environmental protection charities; the pursuit of environmental objectives is considered to be a charitable purpose under the common law. Therefore, there are a number of charities registered with the Canada Revenue Agency for the purpose of protecting the environment, and they can be involved in a number of activities.
An individual who wishes to donate to an environmental charity, if the purpose were to reduce carbon emissions, certainly could receive the charitable donations tax credit for that contribution. The charitable contributions tax credit applies at a 15 per cent rate for donations up to $200 per year, and then at a 29 per cent rate federally for donations above that amount.
Senator Neufeld: I appreciate that Senator Mitchell did not cost out everything in his bill. In defence of Senator Mitchell, I think maybe two people work in his office, compared to government, which would define something and put it in legislation.
Senator Mitchell: Those two people are really good.
Senator Neufeld: It takes hundreds of people to define exact costing, so I can understand that to a degree. I think he is trying to get across a concept that government could look at seriously and, after that, put the meat around the bones so that you have all of these things in place.
I am not sure that it would have to be CRA that would have to do all that work to verify whether it is an offset or whether it is a credible offset. It seems to me that would be done through the Ministry of the Environment. I believe that is the way we did it in British Columbia; namely, the Ministry of the Environment actually worked on what was an offset and what was not an offset. If the Ministry of the Environment, which already has some documentation on what offsets are, had that in place and they said such and such was an offset, CRA would just, I would assume, accept that; they would not have to go out and double-check it, but maybe you would.
I would like your answer here. Do you go out and double-check something with Ducks Unlimited Canada? If I were to give $10,000 to Ducks Unlimited Canada, get a tax receipt and then claim it for whatever value that would be, would CRA go out and check and ensure that Ducks Unlimited Canada actually spent that on what would be proper and what would fit the parameters of "charitable" as it is defined with the government?
Mr. Keenan: A registered charity is required to submit a registered charity information form, which is a T3010. On that form, they provide information on what it used its money on, such as administration and the pursuit of charitable purposes. That information is available and it is also publicly available such that people who wish to make a donation to a registered charity would be able to see how much they spend on X, Y and Z.
The Canada Revenue Agency audits registered charities in the same way it audits businesses. It keeps a certain audit percentage to ensure that registered charity that identify that they have charitable purposes are actually pursuing those purposes through charitable activities.
Senator Neufeld: Do I understand from that response, then, that if something like this took place and the Ministry of the Environment put in place what was acceptable as offsets and acceptable as to what could be invested in, would CRA still double-check that, or would they just accept that as being something that is sanctioned by the government?
Mr. Keenan: If the decision was that the administration inside the Ministry of the Environment determines what is an acceptable carbon offset project or what meets the criteria and that they would publish a list that the CRA would then confirm against, I do not think that reduces the cost, per se, in the sense that the Ministry of the Environment would have to undertake that work. You need to have it in one place or another, or you have to say, "We are setting up criteria and willing to follow those."
Senator Neufeld: I am not disputing that. It has to be done someplace. I was trying to determine if the CRA would still go out and double-check to ensure it was an offset.
You have cleared that up. You would accept from another government department that that was something that actually was put in place as an offset, and was legal and in its form. I appreciate that.
You said to start with, unless I misunderstood, that the tax department would want to know what the ultimate cost was. I think those were your words. Senator Mitchell in his presentation talked about the sports tax credit. How did you determine the ultimate cost, or did you? You said you had to have the ultimate cost before you could make the decision. Did you do that in the sports tax credit and how did you accomplish that?
Mr. Keenan: In general, when the department is making its assessment of proposals that are made to the government or bringing forward proposals to the government, part of that analysis is an assessment of what the potential cost might be. In the case of the Children's Fitness Tax Credit, I was not there at the time. I know that we would have looked at publicly available data on the participation of children in sporting activities and any available Statistics Canada data or data that was publicly available, that we could then glean from that data what is the size of the population, how much children actually participate in these types of activities, and then to give an assessment of how much those activities cost and so potentially what an average family spends on sporting activities.
As the next step, you would ask about the potential for the expenditure and how many of those people would be in a taxable position, in which case they might benefit from a non-refundable tax credit, to come up with an estimated cost. Those costs would have been published in Budget 2007 when the child fitness tax credit was introduced. There is certainly in the tables there an estimate of the cost of the credit, and it is just an estimate. Ultimately, as tax data comes in that shows what the take-up of the credit is, then we would revert to what is the cost.
Each year the department produces a tax expenditure report that provides our ongoing estimates of what we think the cost of those credits are to the tax system.
Senator Neufeld: I appreciate that response. It is a guesstimate, because actually the government wanted more people to get their kids involved in sports, so that would have to be taken into account. I guess the ultimate cost said to me, there is a ceiling, but you are saying it is a ballpark figure, and I would assume that the same thing would happen with this kind of legislation. Once you design what is acceptable as offsets and those kinds of things, then you would make an estimate of the population and the number of people who could afford to invest, as Senator Mitchell said, $500 a year. That information is probably available through Statistics Canada, too. You could come up with some estimate also of what this could actually cost.
Mr. Keenan: We would certainly do our best to provide an estimate. Certainly, in the case of the fitness credit, if you have a $500 limit and say the credit will be on $500, that could potentially provide up to $75 in tax relief.
Without a limit, it is hard to know. It provides a different range of confidence in the estimate. We would need to know the parameters in order to provide our best estimate.
Senator Neufeld: I do not disagree with that.
The Chair: To follow along in that regard, Mr. Keenan, you would also have to make some estimate of how many people would take this up and it would probably take a while for people to learn about this, so the first year there would not be as many as there might be in the third or fourth year.
Mr. Keenan: Generally, we would look at existing data. If it is a completely new product, a new credit, and you are trying to provide an incentive for families to participate, it would be hard for me to speculate on how we might do the cost estimate, but we would make certain assumptions about take-up and that they would be at some point at point A, year one, and then potentially grow over time. As you gain more experience with the data, that would tell you ultimately.
The Chair: Were you involved with the most recent tax credit for the eligible volunteer firefighters that came into effect just recently?
Mr. Keenan: We did have involvement in that, yes.
The Chair: That is just one of several non-refundable tax credits that appear after section 118 in the Income Tax Act. You have had a chance to look at the proposed legislation?
Mr. Keenan: Bill S-205?
The Chair: Yes.
Mr. Keenan: Yes.
The Chair: In your view, looking at Bill S-205, putting aside the costing issue that we have talked about and the government's ultimate decision as to whether or not the government feels this is a good policy decision — let us assume that to be the case, that the government has decided that Bill S-205 achieves what was is intended and to create another non-refundable tax credit that would fit in here just after the Volunteer Firefighters Tax Credit.
Mr. Keenan: Technically, from a legislative drafting perspective? Is that your question? I am not one of our tax legislative drafters, but my understanding is that there is nothing technically wrong with the bill in the sense of whether it does what it suggests. It provides a non-refundable credit at an amount equal to a tax rate times a certain expenditure.
The Chair: That was my question. Your answer is that it does, subject to a government policy decision as to whether it should or should not be one of those non-refundable tax credits.
Mr. Keenan: I understand that the senator has amendments as well that would be required to reflect the changes in the Income Tax Act that have been made since it was introduced. I have not looked at those.
The Chair: Nor have we in detail, but we understand that all they do is move things along a little bit, because this was prepared before the Volunteer Firefighters Tax Credit came in, so it pushes things down the line a little bit. Another year has passed, so it is coming into force 2013 and onward as opposed to 2012, which we are already into. That is my understanding, in simplistic terms, but you are the policy people and we leave that to you. We just wanted to make sure that the legislation technically would achieve what is intended.
Mr. Keenan: You mentioned the coming-into-force date. That would be another consideration that you would want to factor in. Do you have the infrastructure in place? Are you able to administer the credit on a certain timeline?
I heard the senator mention that you could say a person who is living in province X could only claim the credit for a project in province X. Therefore, if a decision were made to limit the credit in that way, you would need to have eligible projects essentially available in provinces for all Canadians to participate in that kind of project. I think those are some of the details of the bill that are just not known right now.
The Chair: Yes. One way to allow the government to consider this and all the policy issues and complications and costs would be to leave a discretionary or put out the coming into force for a while to allow for that to take place.
Mr. Keenan: I do not know about the former in terms of the cost. I think if you were setting a limit, that that would be in the legislation. It would be Parliament indicating what the value of the credit would be. I think extending the coming into force would then certainly allow for a number of the administrative details to be worked out.
Senator Mitchell: I want to thank Senator Neufeld for pursuing and clarifying that. It is an important issue.
If a cabinet minister, the Minister of the Environment, wanted to do this before they prepared a bill to present to the house, they could ask you to cost it for them, is that right? That is what you are suggesting they would do? I think you said they did. They would bring their proposal, you would price it, they would change it, and then they would finalize the bill and take it to the house and put it through this process. Is that right? You would be happy to give them that consultant —
Mr. Keenan: We generally work for our own minister. If that was an agreement that was worked out between the two ministers' offices, for example, we could do some work for other minister, but in essence we would.
Senator Mitchell: If I did it, it probably would not happen. If I came to you tomorrow and said, "Thanks, great idea, I have to price it," would you look this over and tell me what I need to do? Would you do that? No.
The point I am making is Senator Neufeld's point. The best I could hope for — and I would be over the top if I got this — is a government that said this is not a bad idea. We should do something with it. That would be more than good enough, but just for argument's sake right now the limit on the sports thing is $500. Was it specified in the Income Tax Act and, if they decided it was so expensive and they wanted to change it to $400 tomorrow, could they specify that in the Income Tax Act or could they do that by regulation?
Mr. Keenan: I think the legislation says there is a maximum credit that is $500.
Senator Mitchell: They could lower it to $400 though.
Mr. Keenan: You would amend the Income Tax Act.
Senator Mitchell: They could do it with regulation. There are all kinds of things in the Income Tax Act — limits and specificities — done by regulation, not by legislation. It would be impossible to run the income tax structure if everything had to be legislated as you are suggesting, would it not?
Mr. Keenan: If something is in the regulations it could be changed by regulation, but if it is in the act and it determines what the limits are, then it would have to be changed by —
Senator Mitchell: How do you get it in the regulations before you have an act? That is my point. I cannot get $500 in the regs until I have an act that allows the minister to put whatever he wants in the regs. I cannot believe that there is no precedent where a bill like this has been open, given the minister lots of flexibility, the minister puts whatever he or she wants in the regs and your department has been fine with that.
Mr. Keenan: I am not certain about that.
Senator Mitchell: The other thing is about who is responsible for checking whose credentials. As another tax specific example, let us say there is a relatively obscure, small mutual fund licensed by the securities commission or whoever licensed these things. They are okay and because of that they get a tax status. I can invest in there, get my tax credit and they give me the tax receipt or whatever you get from the mutual fund company.
You do not go and phone the securities commission and say, "Do you mind if we walk in on that mutual fund and make sure their licences are all approved?" You accept the mutual fund's approval. I think you were inferring that somehow this act had to establish the criteria of the effectiveness of these credits for you. However, you do not do that for a mutual fund. You just worry they are licensed and you make sure they are doing their tax receipting properly.
The Chair: Is that a question?
Senator Mitchell: Yes.
Mr. Keenan: I think in the case of mutual funds there are certain types of acceptable investments individuals can make in registered plans in their RRSP or tax-free savings account.
I am not 100 per cent certain on those rules, but generally we would say they have to be licensed with a province and so that is true. I think you would still want to have some way to say what acceptable projects are. You would defer to someone, whether it was a private sector body or a government agency. You would need to do that in some manner. Someone would have to make that determination.
Senator Mitchell: Did you specify —
The Chair: Senator Mitchell we are getting close. Could you wrap it up?
Senator Mitchell: Thank you very much. I am really interested and I appreciate this. It has been fun for me.
The act regarding the $500 for sports does not specify every sport, does it? It does not specify every type of hockey pad or dancing? It does not get down to that specificity. You would accept some general description of a sporting activity and skates would fall under hockey and that is okay. They did not specify hockey skates, so I do not have to specify —
Mr. Keenan: As a technical point, the fitness credit does not apply to the equipment, just to the activity itself. There was an expert panel that was struck to provide some criteria for the Children's Fitness Tax Credit and suggested some rules. The legislation says it has to be of a certain type of activity. There must be adult supervision and it has to be a certain length of time. Inside that framework, the Canada Revenue Agency issues guidance to providers and then to taxpayers to say you may claim this credit in respect of these types of activities. It is not it does not go and say the Ottawa Minor Hockey Association is on, check.
The Chair: Senator Mitchell, colleagues, thank you very much for good questions and helping us understand Bill S- 205. Thank you for being here Ms. White and Mr. Keenan. We appreciate your help and insight into how a piece of legislation like this develops, which is different.
It became apparent through our questions that it is different when it is a private member's bill rather than government proposed legislation that has the backing of the executive. That is fine. We both are part of our system and it has been very helpful having you here. We thank you on behalf of the Standing Senate Committee on National Finance.
This concludes our meeting. I understand there may be a debate later on tonight that you may want to get to, so we will let you get to it.
(The committee adjourned.)