The Standing Senate Committee on National Finance met this day, at 1:30 p.m., to discuss the subject matter of all of Bill C-97, an Act to implement certain provisions of the budget tabled in Parliament on March 19, 2019 and other measures.
Senator Percy Mockler (Chair) in the chair.
The Chair: Welcome to this meeting of the Standing Senate Committee on National Finance.
I wish to welcome all of those who are with us in the room and viewers across the country who may be watching on television or online. My name is Percy Mockler, senator from New Brunswick and chair of the committee.
I would ask the senators, please, to introduce themselves.
Senator Forest: Éric Forest from Quebec.
Senator Pratte: André Pratte from Quebec.
Senator Boehm: Peter Boehm, Ontario.
Senator Marshall: Elizabeth Marshall, Newfoundland and Labrador.
The Chair: This afternoon we continue our consideration of the subject matter of Bill C-97, which we started this morning with officials from the Department of Finance. The sponsor of the bill is Senator Boehm. Bill C-97, An Act to implement certain provisions of the budget tabled in Parliament on March 19, 2019, and other measures, is what we call the budget implementation act, the BIA.
Let’s resume our study where we left off earlier today. To the officials Mr. McGowan, Ms. Lavoie and Mr. Leblanc, thank you for being here.
This morning we completed Part 1, measure (f). Now we will move to Part 1(g). Mr. McGowan, please make your comments and we will proceed with questions.
Trevor McGowan, Director General, Tax Legislation Division, Tax Policy Branch, Department of Finance Canada: Thank you. The next measure in Part 1 of the bill introduces the new Canada training credit. It is a refundable tax credit that provides financial support to help pay for eligible training fees.
Individuals between the ages of 25 and 64 who have at least $10,000 in earnings from work, which would include parental benefits and maternity leave, and who have income below approximately $150,000 will accumulate a notional amount of $250 each year up to a lifetime limit of $5,000.
Canadians would be able to apply their accumulated balance against up to half the cost of training fees by claiming a refund on their tax return. This is a 50-per cent refundable tax credit that can help offset the cost of qualifying training by individuals.
Are there any questions?
Senator Marshall: We might be getting into this at a really low level but, when you say you will be able to apply an accumulated balance against up to half the cost of the training fees, why would it be just half? That is just the nature of the program, is it? I don’t understand it. It seems like it’s complicated.
Pierre Leblanc, Director General, Personal Income Tax Division, Tax Policy Branch, Department of Finance Canada: I think it will be something that Canadians can understand. Thanks for the question, senator. Maybe I can give you an example. Let’s say I’m in the workforce and, as Trevor says, I have the required amount of earnings. I start to accumulate room, basically, starting in 2019. Let’s say I worked in 2019, 2020, 2021, 2022, and I have accumulated $250 in each of those years, so I have $1,000 in my balance.
Now, let’s say it’s 2023 and I want to improve a certain set of skills. I see a course out there at an institution on the eligible list. The course costs $2,000. I can claim up to 50 per cent of that amount, up to my balance, which just works out given the example we’ve chosen. Basically, I would get a $1,000 credit when I file my taxes for the 2023 year.
Senator Marshall: The taxpayer would get a credit of $1,000?
Mr. Leblanc: Yes, you’ll basically get up to 50 per cent of the expenses, up to the balance you accumulated. You will get that as a refund when you file your taxes. That is how it will work.
Someone might take shorter courses more regularly, but it’s probably a given that people are working and doing other things in their lives. It’s probably every so often that they will be able to find time to take such a course. As they work, they’ll accumulate; the balance will increase in their sort of notional account and they can use that when they go ahead and take the course.
Senator Marshall: The individual has to pay for the cost of the program and not the Canada Revenue Agency?
Mr. Leblanc: That’s right. I would pay out of pocket the $2,000, using our example, at some point in 2023 when I take the course. Up to half of that basically will come back, up to $1,000, upon filing my taxes.
Senator Marshall: How much will that cost? It’s will cost around $700,000 over five years?
Mr. Leblanc: There is a small consequential effect on tuition tax credit claims. It is about $700 million over the fiscal planning period, over the five years.
Senator Marshall: How do you come up with those numbers?
Mr. Leblanc: This is something where we have a pretty good idea of cost because it’s essentially the same list of eligible institutions that currently apply through the tuition tax credit. The only difference is that, in the case of the Canada training credit, the courses have to be taken in Canada. There are certain full-time courses for a minimum length that you can take abroad for the purposes of the tuition tax credit. Basically we would look at who in that age group would have accumulated balances and who are claiming training fees or tuition expenses on their tax returns.
The interesting question will be, will more people take training as a result? We hope there is some increase but we have a pretty good sense of how people are using the tuition tax credit now from taxpayer data.
Senator Marshall: To me, it seems like a convoluted way of doing something. It just seems like we’re doing all these things that affect our taxes. It is becoming more complex and more convoluted. Did you look at other ways of implementing it? This way seems this is convoluted. You netted against it the tuition tax credit, but did you look at a simpler way?
Mr. Leblanc: We think this is relatively simple.
Senator Marshall: It is a simple way?
Mr. Leblanc: It is a relatively straightforward way. The idea is to accumulate a balance. It’s $250 per year as long as one has the earnings, and half of the cost can come back, up to the balance that one has. There is always a trade-off when using the tax system in ways that support Canadians. This is an important goal in terms of helping people to maintain their skills, especially given potential changes in the job market.
It will be important to make it clear to Canadians what they hold in their credit balance. There will be a couple of ways to do that. When Canadians get their Notices of Assessment, they will see their Canada training credit balance. Also, when a person uses My Account on the CRA website, the person’s Canada training credit balance will show there.
Those are important considerations that you raise, senator.
Senator Marshall: Thank you.
Senator Pratte: I just have one question. How are we going to make sure that the training taken is appropriate? I understand that there is a list of institutions that offer training, such as universities and colleges. Universities give all kinds of courses: in Italian and photography, for example.
Mr. Leblanc: Thank you. That is a good question. For the tuition tax credit and the Canada training benefit proposed in this bill, there are really two groups of institutions. First of all, there are post-secondary educational institutions; these are verified in each province, especially in order to make loans and grants to students. Each province and territory has its own list. These are principally post-secondary educational institutions. Of course, other organizations and institutions provide training. The Department of Employment and Social Development certifies the institutions that provide training.
One of the criteria to be met will be that a course must be provided in order to develop a skill in the context of a job, a position, or to maintain or improve skills.
The Canada training benefit, as found in the current bill, is an important component of this initiative. As for the other components, particularly in terms of the employment insurance training support benefit, consultations will be held with the provinces and territories, as well as with those who want to take training courses and with the institutions that offer that training.
The list established by the Department of Employment and Social Development can also be refined so that we are sure that it responds well to the needs of Canadians.
Senator Pratte: If I understand correctly, if an educational institution like the Université de Montréal, for example, is on the list, and someone registers for a course at the Université de Montréal, do you take it for granted that the training the institution provides is genuine? Are there really no criteria to meet? I have always dreamed about taking courses in Italian, so could I decide to register in an Italian course at the Université de Montréal and then take advantage of the training credit?
Mr. Leblanc: Yes. You describe it very well. If the course is offered by one of those educational institutions, it will be eligible.
Senator Pratte: Thank you.
Senator Forest: I will continue along the same lines, the certification of educational institutions. In Quebec, a whole series of educational institutions are regulated by the education ministry, as they are in other provinces. But there are also educational institutions that are somewhat on the periphery. They may offer professional training, in management, for example, or a lot of more specific courses. I’m thinking, for example, about the Union des municipalités du Québec, that provides training in civic responsibility. Is that type of training also considered an accredited educational institution?
Mr. Leblanc: That is the second group of educational institutions that I have just mentioned. Those educational institutions have to be registered with the Department of Employment and Social Development in order to be certified and put on the department’s list so that their courses can be eligible for this measure.
Senator Forest: Thank you.
I have one final question. With all these new measures, will you have to hire people? After all, several measures in this bill require the new credits and the new support programs to be managed. Have you assessed the impact of these measures on the Canada Revenue Agency, which will be responsible for managing the programs?
Mr. Leblanc: Thank you for the question.
We have assessed the impact and it will be quite moderate, because generally, the current definitions are being used. So, for eligible educational institutions, we are using a measure that already exists, the tuition tax credit, with just a few modifications.
There will be additions, as I have just said, to the online service called “My Account,” so that people can consult their current balance. The agency will have to answer questions from Canadians, but in that case, the impact will be quite reasonable.
Senator Forest: So it’s not going to add too many hours to your work week.
Mr. Leblanc: We will see. Perhaps I will need a training course so that I can manage things better.
Senator Duncan: I have a question about career training. There are many occasions that I’m familiar with where an employer will pay for additional training. I’m interested in what measures are taken to ensure there’s no double-dipping, for lack of a better way to put it. I’m sure Canadian remit their taxes honestly and make every effort to do that, but we’re human and errors occur. How would that be dealt with?
Mr. Leblanc: That’s a good question. Again, I think it’s similar to tuition. Similar rules exist now for the tuition tax credit where you can only claim what you’re paying out of pocket. You can’t claim what an employer is paying for you.
I think in those cases we have a self-assessment tax system which is built upon Canadians filling out their taxes and applying for the measures for which they’re eligible. In something like this, the CRA will be doing its normal verification activity. It’s not going to be a huge swathe of claimants, but we all know from filling out our taxes that, for this or that measure from time to time, it’s verifying different amounts. I think it is a natural course of the CRA’s business of administering the tax system.
Mr. McGowan: As Mr. Leblanc mentioned, it’s similar to the existing rules for the tuition tax credit, so we are already faced with the same issue. For example, when I took the bar admission course the law firm paid for it. They reimbursed it taking the position that they were paying for it on their own account because it helped their business. I wasn’t T4’d on it, it was just a reimbursement. However, if they give you $1,000 or so and T4’d it as income, then you get the money and you can pay for it.
As Mr. Leblanc said, it’s a self-assessment system. These issues are things that are currently being dealt with for a lot of courses where you take them with your employer. If you pay for them, then you can get the credit. If not, then you can’t.
Additionally, there are T4 reporting obligations on the employer depending upon which of those circumstances you are in. There is a fairly robust system currently in place and one that is built around the idea of not allowing double-dipping.
Senator Duncan: If I can just make a quick comment on that. I’m thinking of small businesses that may want to increase health and safety in their workplace by having more members or employees certified in first aid. Those are not inexpensive courses.
What I’m hearing you say is that there is a burden on that small business to T4 if they pay for it.
Mr. McGowan: No. If an employer pays for it and it’s an expense for their own business purposes, because it’s better to have in your workplace people trained in first aid, then it would be a normal business expense. It would not generally be considered based on the CRA’s policy to be taxable in the hands of the employee so they could just have that course paid for by the employer.
This would be in contrast to a course that the employee wants to take for their own purposes and for which they pay the tuition expenses. In this case, they’re out of pocket for the cost of the course and — assuming all the other conditions are met — they would be able to qualify for the credit.
Senator Duncan: There would be no way of checking if those employees then claimed that amount? That was my question. There are standard checks, and I see that for larger tuition, but costs are going up everywhere and they’re significant. The example you gave, I could see it being a burden on small business, perhaps, or an opportunity for double-dipping.
Mr. McGowan: In the personal example I provided, if my former employer paid for my course and deducted it as a business expense, he did not T4 me on the amount, so it wasn’t included in my income. If I filed to try and claim the tuition tax credit, then the fact of my employer having paid for it and the fact of my having claimed the credit would be on the system. Of course, you don’t do that in a self-assessment business.
It’s not an easy job to audit and pick up on these things, but it is something that you hope would be discoverable.
Senator Duncan: Thank you.
The Chair: We have just completed Part 1(g). We’re moving on to Part 1(h), amending the Income Tax Act.
Mr. McGowan: The next measure is a technical measure relating to the Medical Expense Tax Credit. Currently, amounts paid for cannabis are generally eligible for the Medical Expense Tax Credit where they’re purchased for a patient for medical purposes in accordance with regulations for accessing cannabis for medical purposes.
As of October 17, 2018, the regulations governing the use of cannabis for medical purposes have changed and this amendment would update a cross-reference in the Income Tax Act to reflect the new regulations that apply for this purpose. It is not a substantive change. Rather, it reflects the fact that access to cannabis for medical purposes is no longer under the Access to Cannabis for Medical Purposes Regulations, it’s regulated under the cannabis regulations under the Cannabis Act. So this would update a cross-reference in the Income Tax Act without changing the underlying substantive rule.
The Chair: Do senators have more questions?
If not, we will consider Part 1(h) completed. We will now move to measure (i).
Mr. McGowan: The next measure relates to existing rules in the Income Tax Act intended and designed to prevent inappropriate multiplication of access to the small business deduction. Currently small businesses can have a lower rate of tax on up to $500,000 of income. Somewhat recent amendments to the Income Tax Act were implemented in order to prevent the multiplication of that $500,000 limit.
Subsequent to that, the department heard from farming and fishing cooperatives that, in their particular case, the rule designed to prevent the inappropriate multiplication small business deduction was applying in respect of their sales of farming products and fishing catches to cooperatives of which they could be a member. Because of the legal nature of a cooperative organization, where the cooperative members can hold shares which are treated for the purposes of a small business deduction as an ownership interest in the cooperative, they are being caught by a measure that was intended to prevent a true multiplication of the small business limit where there was really one underlying business. For example, the classic example would be a law firm with 100 partners. The partnership itself would normally have a $500,000 limit but through certain planning techniques multiplied to provide, in essence, a $50,000 limit or $500,000 per partner.
The rules that were intended to apply in that circumstance, where each of the partners was setting up their own corporation and selling to the central partnership or providing services to the central partnership, ended up catching farming and fishing cooperatives.
Recent rules were enacted in order to provide an exception for the anti-multiplication rules that would apply for sales to farming and fishing cooperatives. Subsequent to the enactment of that measure, the department and the government heard from a number of affected stakeholders and farmers who were in the same economic situation of selling to a central entity that was feeling at arm’s length with the farmers and the fishers but that did not technically meet the criterion of being a cooperative organization. So they were not able to avail themselves of the exclusion for cooperatives despite being in very similar economic relationships.
What this measure would do is it would extend the exception that currently applies in respect of sales to arm’s-length farming and fishing cooperatives to sales of farming or fishing products to any arm’s-length purchaser. So it would remove the condition that the sales had to be a cooperative organization, thus broadening the exception and providing it to more businesses, particularly across farming and fishing industries.
Senator Marshall: Maybe you explained this already and I didn’t catch on. Why is it restricted to farming and fishing? Isn’t it possible it could be another type of business? You made a change several years ago and that created a problem. Now we’re trying to fix the problem, but we’re isolating it to two types of businesses.
Mr. McGowan: There are a couple reasons why farming and fishing businesses are provided for here.
The first, as I mentioned, had to do with the legal relationships of cooperatives. This relates significantly to the previous amendment in a previous budget bill where because of how farming and fishing businesses are often carried on where they’ve entered into these cooperative organizations and that’s just how they operate. But the legal form of these agreements, or these cooperative organizations, involved holding an interest in the cooperative which was treated — for the purposes of at least the small business deduction — as being an equity interest in a corporation, even though the farming and fishing organizations weren’t deriving real economic returns based upon their membership interests in the cooperative. They were just largely selling to the cooperatives. So it wasn’t within the spirit or the policy intent of the measure preventing inappropriate multiplication of the small business deduction.
So that initial reasoning was based largely upon the legal framework of cooperative organizations, particularly in the farming and fishing business.
The second reason is that the act, in many circumstances, applies certain tax preferences for the farming and fishing industries. You have in those businesses a number of somewhat different factors. You have large capital requirements, you’re passing down family farms and fishing businesses intergenerationally and things like that where you will see, for example, in the qualifying small business corporation the lifetime capital gains limit. There is reference to farming or fishing businesses and special rules for that. It continues an existing scheme within the act and a frequently seen decision within the act to apply separate rules to farming and fishing businesses. So you’re absolutely correct that this exception applies in those cases. However, it’s not fundamentally inconsistent with a lot of other rules in the act that do the same thing and it also evolves from the different consequences arising from the cooperative structures that are used in farming, a lot.
Senator Marshall: It seems peculiar to me that you’re carving out farming and fishing business and you use the example of the cooperatives. I can’t think of any other type of industry that uses cooperatives, but maybe there’s another type of industry that uses cooperatives and maybe they should be included in the farming and fishing group. Maybe farming and fishing is somebody else. It seems odd to me that that amendment is being put in. I can’t think of an answer; I only have the question.
Senator Pratte: I have no answers and I have no questions.
Senator Forest: I have an answer, but I am not sure how relevant it is.
In my opinion, we could see things evolve in the sense that, more and more, after companies are closed, the employees form a cooperative in order to continue operating. I think there is something productive to be explored here. Employees often look to that solution when they are facing a situation in which the employer is definitely closing a production facility or a plant. I wonder whether you considered or looked at that option. In some places, it is often the region’s main employer. This is more a comment than a question.
The Chair: It is a comment.
Honourable senators, we’ve completed Part 1(i). We will then move to the measures under measure (j).
Mr. McGowan: The next measure extends by five years the Mineral Exploration Tax Credit. This is a credit that applies in order to support certain grassroots mineral exploration. Since its introduction, it has been extended a number of times by one year at a time and has always been envisioned as a temporary credit. This measure would extend the availability of the credit for five years in order to provide additional certainty for the mining sector. In particular, in respect of the issuance of flow-through shares, where the Mineral Exploration Tax Credit can be an important factor in mining companies — particularly junior mining companies’ — ability to raise capital and engage in grassroots mineral exploration. This would extend that credit by five years.
Senator Duncan: I’m particularly familiar with this particular tax credit, as a former Minister of Finance for the Yukon. Every Yukon politician of every stripe — all of them — and every government of every stripe have renewed this tax credit. It goes back many, many years. Of course, every political stripe has taken credit for it as well.
I’m curious why we keep extending it and why we haven’t been able to make it permanent. My time as finance minister goes back almost 20 years, and there was a finance minister before me that also took credit for this. Why isn’t it permanent yet? That’s my question.
Maude Lavoie, Director General, Business Income Tax Division, Tax Policy Branch, Department of Finance Canada: These are decisions made by governments over time. Usually when a measure is temporary, it’s to allow governments to evaluate after its expiration whether or not it has met its objectives. So I can only assume that the objective of the government is to re-evaluate the need for this credit in five years, probably taking into account the economics of the mining sector and the exploration sector in particular.
Senator Duncan: There is clearly a wealth of data on the effectiveness of this tax credit. Could I ask that it be sent through the committee clerk, please? Could I ask for that information?
Ms. Lavoie: Could you be more specific? What kind of data would you like to see? There’s a lot of economic data from the Natural Resources Canada department that could provide information on exploration levels, for instance.
Senator Duncan: The effectiveness of this particular tax credit. I’m assuming the department has measured the effectiveness of it in terms of exploration spent in use of the credit.
Ms. Lavoie: We’ll take a look.
The Chair: So you can provide the information to the clerk.
Ms. Lavoie: Yes.
The Chair: Thank you.
Senator Marshall: My question is similar to Senator Duncan’s, because I had thought that somebody had conducted an evaluation of the program and that the evaluation indicated that the program was not really successful. There was some question as to the merits of the program. You don’t know anything about that, do you? I think I saw something on it last year.
Ms. Lavoie: I’m not familiar with the study you’re referring to.
Senator Marshall: Would the department have an evaluation? This is a similar question to Senator Duncan’s.
Ms. Lavoie: I will look at the data that’s publicly available and share that with the clerk.
Senator Marshall: Thank you.
The Chair: Honourable senators, if there are no other questions, we will move to Part 1(k).
Mr. McGowan: The next measure relates to income earned through certain communal organizations. These are religious organizations for members where their members are not allowed to own property. The existing rules in the Income Tax Act essentially deem a trust to be created for the communal organization where the congregation members are deemed to be beneficiaries of the trust. Income earned by the communal organization is deemed for tax purposes to be earned through the trust by the congregation members. This measure would ensure that, when income is earned by the communal organization, it retains its character when it is, for tax purposes, considered to be earned by the members of the congregation. That would be of particular importance for calculation of the Canada Workers Benefit, so that income earned by the communal organization and allocated to its members for tax purposes would have the same character as, for example, business income, which could affect or allow for entitlement to the Canada Workers Benefit.
This ensures that income earned through the deemed trust through one of these communal organizations retains its character for tax purposes.
Senator Eaton: How many individuals and communal organizations would benefit from this tax change? Was this a surging problem?
Mr. Leblanc: I don’t have those numbers with me. That’s something we can look into and try to follow up with the clerk. This was a measure that was actually announced in the 2018 fall economic statement. Then we estimated the cost of this change, just in terms of ensuring that members of communal organizations receive these benefits, in particular, the Canada Workers Benefit, to be $120 million over the 2018-19 to 2023-24 period.
Senator Eaton: What kind of communal organizations are you considering?
Mr. Leblanc: An example would be Hutterites.
Senator Eaton: How about religious?
Mr. Leblanc: Obviously, there’s an important religious component. The key issue here, which sort of leads to the tax treatment that Trevor described, is that members of the community aren’t allowed to own property individually. All things need to be held in common.
Senator Eaton: That’s right. Nuns and priests can’t own property but they live together in a congregation. However, they do make salaries teaching in some cases. I’m asking: Would that benefit extend to them?
Mr. McGowan: There’s a separate benefit for clergy members who have taken a vow of perpetual poverty.
Senator Eaton: They all do.
Mr. McGowan: The mechanism is a deduction mechanism in a different section. This is more targeted towards members of communal organizations that, by their terms, don’t allow for the ownership of property. The example of a nun who has taken a vow of perpetual poverty, hands over their salary to the church —
Senator Eaton: It’s to the community. So would they benefit from this?
Mr. McGowan: I would expect in that case, you’d have to look at all the facts, but if they’re not part of a congregation or a communal organization that applies for the purposes of this, your deemed trust regime, they would not be within the measure. But if it’s a case of, as I had mentioned, someone who has taken a vow of perpetual poverty, there’s a separate rule in the tax act to provide a tax exemption there. So it’s a separate regime.
Senator Eaton: Thank you.
Senator Forest: My question is about the definition of a communal organization, in particular in the category of congregations. Clearly, at least in Quebec, we are seeing congregations progressively disappear. Potentially, and this is happening regularly, they sell large buildings located on large lots, and make a very significant capital gain.
Does this measure mean that the capital gain will be divided among all the current congregation? Given that we are witnessing a decline, some congregations build healthcare facilities, because the average age of their members is very high. What will be the impact of this measure on a congregation that sells its facilities? Will the capital gain be divided among all members?
Mr. Leblanc: Thank you for the question. For us, a congregation is a not-for-profit organization. The capital gain we are talking about is not taxable, because the gain is realized by the organization, the institution. This measure is for a very different case in which the members of a community run a company in common. They are often agricultural companies in the west of the country.
Senator Forest: Right. In Eastern Canada, the term “congregation” has a religious connotation and refers to orders of brothers and sisters owning major facilities.
Senator Stewart Olsen: I have a couple of questions on this measure. Number one, is this a new measure? The Hutterites came before the Banking Committee in the Senate and questioned the fairness of the taxation measures. Is this the response, or am I misreading that?
Mr. Leblanc: No, I think you could see it as that. Just to give you a bit of history, the deemed trust provisions that Mr. McGowan described for me have long been in place for communities such as Hutterites and for communal organizations. The thing is that it’s the Canada Revenue Agency’s job to administer the law. In 2013, around that time, the CRA took a look at the law and said: Unfortunately, under the provisions that are in the Income Tax Act today, we need to treat this as trust income. That’s what the law says. We’re not able to treat it as self-employment income, which would be eligible for a measure like the working income tax credit. It addresses that concern.
It also goes back to that the measure is retroactive to 2014, which is linked to when that interpretive change took place.
Senator Stewart Olsen: I see. A measure of fairness is what you’re saying.
Mr. Leblanc: I think what it recognizes is that this is self-employment income for all intents and purposes. We have a measure currently, the Working Income Tax Benefit, which is now the Canada Workers Benefit, where self-employment income is eligible income. It responds to that.
The Chair: Now we will move to Part 1(l). Mr. McGowan, please make your comments.
Mr. McGowan: Thank you. The next measure relates to the Home Buyers’ Plan, which allows first-time home buyers to access funds from their RRSPs in order to purchase a house. This measure does two things. First, it increases the withdrawal limit under Home Buyers’ Plan from $25,000 to $35,000. Second, it provides that, subject to certain conditions, individuals who experience a breakdown in their marriage or common-law partnership will be able to access the Home Buyers’ Plan even if they don’t meet the first-time home buyer’s requirement. That is in recognition, of course, of the significant upheavals to people’s lives that can occur on the breakdown of a marriage or common-law partnership. It would provide more flexibility to purchase a new home and rebuild their lives.
These two measures, the increase in the withdrawal limit, and it also provides more flexibility on the breakdown of a marriage or common-law partnership.
Senator Marshall: In this year’s budget, the minister announced the Home Buyers’ Plan. That increase to $35,000, is that only for people who are participating in this new budget initiative?
Mr. Leblanc: No. There are two separate measures. You have the first-time home buyer’s initiative —
Senator Marshall: That applies to anybody, as long as they have the money?
Mr. Leblanc: Subject to certain conditions and that’s addressed in another part of the bill.
Senator Marshall: I’m trying to integrate the two.
Mr. Leblanc: Right. This takes the existing Home Buyers’ Plan and, as Mr. McGowan described, increases the limit, effective budget day, and expands eligibility to those who have experienced a breakdown of a marriage or common-law partnership.
Senator Marshall: For those who have experienced the breakdown of a marriage, we’re saying the measure also provides that subject to certain conditions. Are those conditions established yet?
Mr. McGowan: Yes. They’re in fact in the bill.
Senator Marshall: They’re in the legislation?
Mr. McGowan: Yes, they are.
Senator Marshall: Perfect. Thank you.
Senator Stewart Olsen: This measure is, in fact, encouraging people to get into the housing market?
Mr. Leblanc: Not everyone who has more than $25,000 in their RRSP is looking to purchase a first home. I think the government recognizes that. But for some people — especially those who live in more expensive markets in parts of the country — if they’re looking to buy their first home or if they’re looking for a particular home, it increases the ability to which they’re able to use their RRSP for the down payment portion of financing their home.
Mr. McGowan: On the other side of the coin, it removes the disincentive for saving for retirement. Someone might be worried: Should you make a contribution to your RRSP plan? What if you want to do something like buy a house in the next few years? There might be an inclination not to contribute to one’s RRSP if the money will be locked in there and taxable when taken out. Knowing that some large life events, like the purchase of a house, could be coming up, this program can help. It is the other side of what Pierre mentioned; it helps improve the RRSP regime as well. The programs are sort of complementary in that way.
Senator Stewart Olsen: It could be seen as a way of putting more cash into the economy as well and encouraging initiatives that perhaps we should be looking at a little more carefully. Many first-time buyers cannot really afford that home where they’re putting their money. That’s a caution with this one. I understand the goings-on behind it, but I think we should be a little cautious of taking money out of RRSP accounts. Thank you.
The Chair: Honourable senators, that completes Part 1(l). We’re going now to measure (m).
Mr. McGowan: The next measure refers to Tax-Free Savings Accounts. Tax-Free Savings Accounts are, of course, tax-free. There are two important exceptions. First is income from certain prohibited types of investments. Second is income from a business carried on inside the Tax-Free Savings Account. You can think of day trading as being the classic example here.
Income from carrying on a business inside a Tax-Free Savings Account is taxable in the TFSA Trust. The trust is liable for tax. In addition, the trustee of the trust is jointly and severally liable with the trust for that tax.
This measure does a couple of things. First, it limits the liability of the trustee of the trust, generally the financial institution offering the TFSA. It limits that liability to the assets in the trust. Recourse wouldn’t go beyond the property of the trust for the TFSA issuer.
Second, the measure would extend joint and several liability for this tax to the TFSA holder. That’s the actual investor who would be best positioned to know whether or not a business is being carried on in the trust. In the example I mentioned earlier, the holder is presumably the one doing the day trading and would be best positioned to know if there is a business there. This measure limits the joint and several liability for the TFSA trustee to the assets in the trust. It extends that liability to the TFSA holder. Thank you.
Senator Marshall: What was the impetus for this change? It seems there was some kind of problem identified, and this is the solution to a problem. Could you elaborate on that so I can understand it better?
Mr. McGowan: Yes, of course. The concern was raised that the Tax-Free Savings Account trustees could be jointly and severally liable with the trust for the taxes arising based upon a business being carried on in the trust. That is the day-trading example. They could be liable for taxes that exceed the value of the property in the trust. Of course, when the taxes are assessed, one would expect the Revenue Agency to go first to the trust and it would have to pay the taxes.
If there are taxes left over, the joint and several liability could require the TFSA issuer, the trustee of the trust, to pay the excessive taxes when they may not even be aware, particularly aware, if it’s a self-directed TFSA, that this kind of day-trading activity is going on or that there’s a business being carried on. It limits that exposure and then extends it to the TFSA holder. That’s what is going on here.
The Chair: Any other questions? If not, that concludes measure (m). We will move to Part 1(n).
Mr. McGowan: The next measure in the bill relates to the repayment of overpayments by employees in response to a cash-flow issue that had been raised. This measure applies generally to overpayments and repayments of salary, however, it would apply in the context of the Phoenix overpayments and the issues with the Phoenix pay system. Again, to reiterate, this is a general application. Any employer and employee in the same situation can avail themselves of this new measure.
An issue arose when, in the overpayment of salary or wages to an employee, the employee received a net amount. An amount was withheld on account of income taxes, CPP and EI and that was remitted to the government. The rules currently say that an employee, upon discovering an overpayment, must return the full amount of their salary to the employer. The employee would then need to apply to the Canada Revenue Agency for a refund of the withheld taxes that were deemed paid under the Tax Act. At the end of the day, of course, the employee would be made whole, but that could result in significant cash-flow issues when they must return the gross amount to their employer and then wait for their refund from the Canada Revenue Agency.
Under this measure, when it applies, the employee could return the net amount that they’ve actually received from the employer and it would allow the Canada Revenue Agency to return the rest, the withheld amount, to the employer, thus eliminating the cash-flow problem and making sure that, again, at the end of the process, all parties are whole.
I’d be happy to answer any questions.
Senator M. Deacon: I have just a quick question on this because, as you very well know, we are dealing with significant salary overpayments that fell second place to people getting paid first. This is continuing.
There was in the book some information, but do you have an updated sense of the amount of overpayment and the impact of this good decision — I think it’s a good decision — in numbers.
Mr. Leblanc: Thank you for the question. We don’t have with us any current information on overpayments. Our colleagues in Public Services and Procurement Canada would know insofar as the federal government is the employer.
Senator M. Deacon: That would be great. I would like a sense of that number — not every number, but a sense of what it is. I believe this decision and this tax measure are the right things for Canadians who have been doing exactly what you’ve said — paying back in full and then waiting. This is a good move to make quickly.
Mr. Leblanc: Thank you, senator. We’ll see what we can find. I should say that, in practice, while we’re changing the law generally, this measure will affect people overpaid in a previous year but where the overpayment is only discovered in a subsequent year. As it stands now, if an overpayment occurs and is identified in the same year, the CRA’s administrative position is to allow the employer basically to only repay the net and adjust a future withholding. Once the calendar year is over, in theory, the books are closed on that withholding. That’s why, under the current rules, when the overpayment identified in respect of a previous year, then it is just as Mr. McGowan described.
I don’t know PSPC’s ability to separate those two types. We’ll look into it.
Senator Pratte: The public sector unions have reacted positively to the measure, but they asked why it took so long to reach this solution? The Phoenix problems go back to 2015. The cash flow problems for certain employees were identified some time ago. Why is this only happening now? Is it because it is complicated to put into place?
Mr. Leblanc: Thank you for the question. In fact, there were two main issues. First of all, it is complicated because we have to consider three components. Two are income tax and employment insurance. Both are administered by the federal government. Finally, there is the Canada Pension Plan, which is operated jointly by the federal government and the provinces. The government announced its proposals in January, four months ago. The Canada Revenue Agency administers income tax and employment insurance, but not the Canada Pension Plan. So approval has to be obtained according to the Canada Pension Plan’s amending formula. Also, a lot of federal public servants work in Quebec.
For the workers in Quebec, it’s not just a matter of federal deductions. There are also provincial deductions. There is the provincial tax and the parental insurance plan and the Quebec Pension Plan.
When the federal government made its proposal, the provincial government announced its decision to move forward in a similar way. We have had discussions with our provincial colleagues. Those are the two main reasons, I feel.
Senator Pratte: Okay. Thank you.
The Chair: Therefore, senators, we will move on to Part 1(o).
Mr. McGowan: The next measure actually builds upon some of the earlier measures announced in Budget 2016. It would provide accelerated capital cost allowance treatment to electrical vehicle charging stations and a broad range of electrical energy storage equipment.
As I said before, capital cost allowance is essentially tax depreciation. The general rule is it reflects the useful life of an asset. Exceptions are provided within the tax system to provide incentives for investment. Some of these relate to what you might consider green energy equipment and are in Class 43.1, which provides a 30 per cent capital cost allowance rate, and Class 43.2, which provides a 50 per cent base capital cost allowance rate. Of course both of those two classes are the ones we discussed earlier, where the capital cost allowance rate would be increased to 100 per cent under the accelerated investment incentive measure. But in either case there are tax benefits encouraging investment into green energy.
What this measure would do is it would add electric vehicle charging stations to the classes to provide enhanced capital cost allowance incentives for EV charging stations. We discussed earlier how it interacts with the zero-emission vehicle measures. A business could buy a charging station either for use by its customers or for its own internal use, receive an increased upfront deduction in respect to the capital outlay and then use that to charge their zero-emission vehicles or their plug-in hybrids that they use in their business.
Next, the electrical energy storage would be included in Class 4. These qualifying batteries would be eligible for the enhanced capital cost allowance rates depending on what type of system they plug into. If they are connected with, say, a wind turbine that’s a Class 43.2 asset, the electrical energy storage, the battery would itself become a Class 43.2 asset and be eligible for the base deduction rate of 50 per cent or under the accelerated investment incentive program 100 per cent temporarily. So it provides additional capital cost allowance tax incentives in respect of these two types of properties.
Senator Pratte: I’m looking for the cost of this measure and I can’t find it. Do you have any idea, how many charging stations this would help implement?
Ms. Lavoie: This was a measure announced in Budget 2016, so you won’t find it in this year’s budget.
Senator Pratte: Budget 2016?
Ms. Lavoie: Yes.
As for the cost, in the first two years, it was estimated at $4 million, which is really not a lot. What happens with measures for companies is that there is always a delay in recognizing the costs. So the first two years are probably not representative of what it will cost in the medium term. The only information available to us is in the 2016 budget.
Senator Pratte: Does that apply to government institutions? I am thinking about municipalities and provincial governments that are investing in charging stations.
Ms. Lavoie: No, it applies to companies buying these stations for business reasons, either to attract a certain clientele or to meet their own needs. Organizations like Hydro-Québec would not be able to take advantage of a measure like that.
Senator Pratte: Okay. Thank you.
Senator Eaton: To follow on from Senator Pratte, there was a 2016 Budget item. How many people took you up on it? Was it successful? Is this why you continued or did no one take it up? What happened?
Ms. Lavoie: This is not information that we have from the tax data. When corporations claim Class 43.2 assets, it’s grouped together. We wouldn’t know if it’s a solar panel. It’s not specific enough for us to be able to answer that question.
Senator Eaton: You’re educating me. When you’re doing this year’s budget, you don’t look back and think that was really successful and you should do more of that; it’s just a blanket, and it disappears into the space beyond. So you have no idea whether it was successful or not in 2016?
Ms. Lavoie: This legislation was implemented this year. There may be more information from Transport Canada on the adoption of these technologies.
Senator Eaton: You can see how difficult it is for us when we ask you these things and we don’t get answers.
Ms. Lavoie: Unfortunately, it’s too early to tell at this point in terms of data.
Senator Eaton: I think the initiative is wonderful, but we don’t know how long it takes to charge a car. There’s no point having electric cars if it takes 12 hours to charge because you can’t go a long distance, especially in a polar country.
Ms. Lavoie: Some chargers are more efficient than others. Actually, under this measure, those that are more efficient, there’s a threshold for that. It will be eligible for a higher rate than those that are not.
For those that are more efficient, it takes about 30 minutes to charge an electric vehicle. Those that are less efficient, it will take more time, and under this measure it will be eligible for the 30 per cent rate rather than the 50 per cent rate because the objective is to promote the use of electric cars. I think you’re right that if it takes too long to charge your car, then it’s an impediment to adopt those vehicles.
So the highest incentive is for those that have a lot of capacity to quickly recharge your vehicles.
Senator Eaton: Senator Klyne brought up the fact that in some areas of the country it’s mostly pickup trucks or service cars rather than sedans. I guess every car will have a different kind of plug, or will the cars have to be uniform in terms of the batteries? Those aren’t your concerns, but we’re spending money and we don’t seem to have a lot of the answers. That’s my concern. Thank you.
Senator Forest: The measure could be appropriate; it’s not necessarily your responsibility, but we have to see how it will be rolled out. With $4 million, you can install about 150 normal charging stations and 75 fast charging stations. Seventy-five fast charging stations for the whole of Canada are not a lot. You are going to have to make sure that the rolling out is somewhat coordinated, because this is a tax measure. After all, 75 charging stations could mean 75 stations in Toronto or Montreal, or in one particular area. It depends on the areas. Installing these charging stations is a major issue, because each station costs about $50,000. So rolling them out involves a whole planning issue that goes beyond the tax measure.
Ms. Lavoie: The $4 million is a two-year estimate done in 2016. They were the two first years. There is always some delay before the costs are known for tax purposes. The cost of this measure when it is mature may well be higher. It is not like a measure with a fixed envelope. If companies all over the country begin to adopt this technology, the cost will certainly be higher. At the moment, it is just an estimate.
There is another measure in the budget announced this year. I am told that $130 million will be made available to Natural Resources Canada to roll out these measures across the country. I am no expert in the matter. Perhaps others will come to tell you about that part of the bill, but, in this case, the measure is left to the discretion of the companies. We are trying to encourage companies to adopt these measures, but there is not really a regional strategy. We hope that the measures will be adopted for the entire country.
Senator Forest: As regards the other measure, currently—no pun intended—are you aware if municipalities and other public organizations are eligible?
Ms. Lavoie: I am by no means an expert on the other measure. You will have to ask the officials who will be coming to testify when you study that part of the bill.
Senator Forest: So we will ask those who are more plugged in.
Ms. Lavoie: Exactly.
Senator Marshall: It mentions the March 22, 2016, date. Does that mean companies can claim that accelerated capital cost allowance, for example, last year because the amendment didn’t go through.
Mr. McGowan: Yes, the measure is effective for acquisitions, I believe, on or after the budget day in 2016 and the taxpayers and the CRA have been relying on that.
Senator Marshall: They’ve been allowing the deduction accelerated capital cost.
Mr. McGowan: Yes.
Senator Marshall: Thank you.
Senator Stewart Olsen: Would you know if the minister, in his preparation and ask for this particular measure, has done work on the uptake and areas of uptake and developed a coordinated plan? I think Senator Forest’s question was very good. If you’re going to do it, you should probably have a plan of doing it. Do you know if the minister did work on that?
Ms. Lavoie: People from Transport Canada have been studying this issue, namely, the adoption of electric vehicles, of all types of zero-emission vehicles and the charging station and have a strategy for that. They would be better placed to answer that question.
Senator Klyne: When I think about energy storage — and I think you mentioned solar panels — in the context of these electrical vehicles. In terms of incentives, it looks like you have some fiscal policies going on in this regard. Have you collaborated with ENERGY STAR rating with homes, which falls under Natural Resources Canada; and the Canadian Home Builders’ Association? I think home builders should start thinking about roughing in vehicle chargers, the hardware that accepts solar panels, and be rated on that basis and incented by them? If we’re needing charging stations, there’s one in our garage but could be if it is roughed in. There should be some incentive for home builders to start roughing this in because everybody is considering carbon tax credits now and buying cars that run less expensive along with heating, and so on. It could be built into the home for solar panels, electric car chargers and that kind of stuff. That would be something to consider if you haven’t. Have they been thinking about those things?
Ms. Lavoie: Your question is have we consulted with specific groups?
Senator Klyne: Well, the ENERGY STAR rating is under Natural Resources Canada so they are interested in our resources. You have a carbon tax program going on. People are wondering how to reduce their energy costs with their vehicles and their homes.
Have you collaborated with the Canadian Home Builders’ Association to talk about roughing these things in so that a home could accept solar panels, electric car charging, that kind of stuff?
Mr. McGowan: That’s a good idea. We did work with NRCan in putting together the measure. We did not entirely rely on them, but we utilized them for their engineering expertise.
A lot of these systems that qualify for class 43.1 and 43.2 are sort of engineering driven. Regarding the plug in EV Charger measure, we talked about what qualifies, what doesn’t, whether it’s upstream or downstream with the meter and a number of considerations with NRCan in the room. For the energy storage aspect of the measure, again, we talked to our credit partners at CRA and NRCan — and then whoever NRCan talked to — and we looked at the previously existing scheme for electrical energy storage. It wasn’t as coherent but it was a bit of a patchwork system. This would provide a more coherent system for electrical energy storage as it relates to these two classes of green energy equipment. Essentially, if the battery is plugged into 43.1 system, it qualifies under 43.1. If it’s plugged into a 43.2 system, it qualifies under those rules. Previously, however, it had been listed, not entirely on an ad hoc basis, but on a somewhat inconsistent basis as to the types of equipment that could be eligible under various types of systems and it wasn’t as consistent as it could be. In addition to our consultations with stakeholders and NRCan, the electrical energy storage rules were an attempt to make the whole system for green energy and capital cost incentives more coherent and easy to apply for the stakeholders. There is a bit more to it in the background, but we did talk to our counterparts at NRCan.
Senator Klyne: This focuses more on the individual, so it’s outside of the CCA scope, but I think somehow you should be looking or considering incentivizing passenger vehicles in the home, plus heating the home, to look at some of these things like solar panels, and so on. Thank you very much.
The Chair: Honourable senators, that concludes measures under paragraph (o). We will now move to Part 1(p).
Mr. McGowan: The next measure relates to the Canadian Film or Video Production Tax Credit. This is a 25 per cent refundable tax credit that goes to qualified corporations with respect to qualified labour expenditures for an eligible Canadian film or video production. Also qualifying under this tax credit are treaty coproduction joint projects and producers.
This measure would add Canada-Belgium coproductions to the joint projects of producers that can qualify for the purposes of this Canadian Film or Video Production Tax Credit, and that’s consequential on the signing of a memorandum of understanding between Canada and the three linguistic communities of the kingdom of Belgium. The measure would allow these joint projects to qualify for the Canada Film or Video Production Tax Credit.
Senator Marshall: I have no questions on that item.
Senator Pratte: Any particular movie in mind? No questions.
Senator Eaton: Why the kingdom of Belgium, and do we have other tax arrangements in the pipe with other countries?
Ms. Lavoie: We have a network of treaties that have been in place for over 50 years now. I’m told we have 58 foreign partners.
In 2011 Research Canada undertook work to modernize those treaties and we signed recently one with Ireland, China, New Zealand, Luxembourg and Jordan under these new, modernized treaties. Most recently with Belgium. We’re under negotiations with a number of other countries, and the objective of Canadian Heritage is to modernize the terms of those treaties. We have an extensive network.
Senator Eaton: None of these would go under the free trade agreement we have with the EU?
Ms. Lavoie: No.
Senator Klyne: The answer to my question may be net of any assistance, but some provinces have film tax credits and some don’t. When you say net of any assistance, would that be another provincial tax credit? What assistance?
Ms. Lavoie: We’ll need to get back to you on this specific question.
Senator Klyne: Okay. I had an ensuing one, but that needed to be answered first.
Senator Duncan: I’m on the same page as Senator Klyne in that I’m aware that provinces and territories have film and video production tax credits and there can be quite a competition between provinces and territories for films to be produced in their particular area. I’m wondering what the driving force is behind this. Where is Belgium doing their filming that there was a province or territory driving this particular initiative? I understand the need, as you’ve said, to modernize our treaties, but —
Ms. Lavoie: At this point it’s a broader objective of Canadian Heritage to modernize all the treaties that we have. I’m not sure that we necessarily have a movie being filmed in Canada as a coproduction with Belgium right now. An independent process has been put in place. There may be one, but I’m not aware of it. Given that we share the French language, I can see that such a coproduction may be with Quebec, but it’s just an assumption on my part. At this point I don’t have specific information.
Senator Duncan: Would it be within your department’s purview to provide the clerk with information of the film incentive tax credits in place across the country so we could have that information?
Ms. Lavoie: You mean the provincial tax credits and what they are?
Senator Duncan: Would the Department of Finance have that information?
Ms. Lavoie: We can provide the information, but I want to make sure I understand the question. Is it: What are the provincial tax credits available across the country?
Senator Duncan: Yes, and who has them.
Senator Stewart Olsen: Is it a condition of the treaty that you include this kind of thing? How do you pick the countries that we do this with? Do you have any idea? Some of the countries you named that we have these treaties with, I wonder. I’m wondering why we have this unless it’s a condition of an international treaty.
Ms. Lavoie: These are led by Canadian Heritage. I think the objective of these treaties is to facilitate the raising of capital for these movies. As they’re saying, it’s just a matter to make sure you have an international partner and that there’s a means to do that. It’s a matter as well — I’m relaying their policy on this — that it’s a vehicle to strengthen our international ties, to attract foreign investment and to showcase Canadian talent abroad. My sense is that these treaties, which have been in place for 50 years, are for cultural reasons and they are not tied to other treaties. Again, this is the expertise of Canadian Heritage.
Senator Stewart Olsen: I’m just asking because you would then have to do it with almost every country in the world. Why you can’t have a program — I know this isn’t your fault, I know you’re asked to do this. Why couldn’t we have a certain amount of funds set aside and any country — say Canada-Germany or Canada-Russia — can apply to this bulk funding rather than by country? Putting it into a treaty seems odd to me. But thank you anyway. That’s just a statement.
The Chair: That statement prompts me to ask a few questions. I remember sitting in a chair at the beginning of the year 2000. Producing film is big business. I remember when we — not in Rimouski, Quebec, for Senator Forest. New Brunswick produced a Canada-Russia series about hockey. It was produced in New Brunswick in 2000 for 1972.
I remember that we had to discuss and sit down with other government officials, premiers and ministers, Quebec and Ontario, because it’s big business.
I’m wondering, with the measures we’re doing today, if it impacts on agreements that were made by provinces with the federal government and if it will benefit the province or only benefit certain parts of Canada.
Ms. Lavoie: Again we’re here for the tax component of this, and Canadian Heritage is leading. The treaty is a federal treaty, and so it applies equally across the country. It is a renewal of a country, in this case that existed with Belgium, for quite a number of years.
The Chair: I also have to admit that Henderson, we saw him that night, and it was in New Brunswick.
Will this help uniformity in this for provinces and territories?
Ms. Lavoie: It was already uniform in the sense that, in the case of just those coproductions that we have with Belgium, we have the treaty. Then there was the need to modernize the terms, but it applies equally across the country.
The Chair: Honourable senators, this concludes Part 1(p). Now for Part 1 we will conclude with measure (q).
Mr. McGowan: The last measure is consequential on Budget 2016 announcements that enhance the Canada Pension Plan benefits that will be phased in beginning in 2019.
Whereas some registered pension plans contain defined benefit formulas that are integrated with Canada Pension Plan benefits and those registered pension plans are being amended to integrate their benefits with the enhanced Canada Pension Plan, this measure allows for the appropriate pension adjustment calculations for the 2019 and subsequent taxation years with respect to these registered pension plans.
For affected registered pension plans that are integrated with the enhanced Canada Pension Plan, it allows for the correct reporting on employees’ T4 reforms on their pension adjustments for their 2019 taxation years. This is relevant for a number of things including calculating the RRSP deduction limits for the year.
This is consequential, as I said, on the enhanced Canada Pension Plan. It allows affected RPPs to provide the appropriate amounts on employees’ T4 returns for the 2019 taxation year if they’ve integrated their benefits with the enhanced Canada Pension Plan.
Senator Marshall: So this amendment will reduce the cost of the Canada Pension Plan, right? Do I understand that correctly? Or are the costs already reduced and this is just housekeeping?
Mr. McGowan: This doesn’t affect the Enhanced Canada Pension Plan entitlements; rather, it allows for these RPPs that have defined benefit plans that are integrated with the Enhanced CPP to properly report pension adjustments on their employees’ T4 returns.
Mr. Leblanc: Mr. McGowan, Ms. Lavoie and I, as employees of the federal government, are members of an integrated pension plan. Up to the year’s maximum pensionable earnings, we pay lower pension contributions, as does the government as employer on our behalf than we do up above the year’s maximum pensionable earnings for CPP purposes. As far as I’m aware, the government as an employer has not taken a decision — at least, I haven’t heard any decision — on what they will do in light of the enhancement of the CPP. However, potentially with contributions, since the CPP will provide higher earnings for placement, there might be a decision. Again, I’m not aware that any decision has been taken for what the Government of Canada provides us as employees as a pension plan to adjust it downward as a consequence. That’s just it. Mr. McGowan, Ms. Lavoie and I have very little RRSP room, basically pretty close to zero, because of the pension adjustment we receive every year because we’re members of a defined benefit pension plan. So it could just affect that pension adjustment that’s a box on the T4 form, which is integrated into the calculation of our RRSP limit every year.
Senator Marshall: Maybe I asked the wrong question.
What’s the financial impact of that amendment on the Canada Pension Plan? I understood there was no impact. And what would be the impact on people who are entitled to Canada Pension Plan, who will collect the Canada Pension Plan?
Mr. Leblanc: There would be no impact through the Canada Pension Plan. The Canada Pension Plan benefits will be what they are under the enhancement that’s taking effect this year. The question will be for pension plans that are integrated with the CPP, so pension plans like ours. For each year of service, we get about 1.3, 1.4 per cent of earnings per year of service times the salary they use, whereas they use above the year’s maximum pensionable earnings; it’s 2 per cent.
The question will be what happens to that 1.3, 1.4 per cent.? Will that be adjusted downward?
Senator Marshall: That’s what I would think.
Mr. Leblanc: That will be a decision taken by integrated pension plans.
Senator Marshall: That’s not what the impact of that amendment will be?
Mr. Leblanc: It just allows for the proper pension.
Senator Marshall: It allows for it.
Mr. Leblanc: Basically, all it does is say: Okay, as employees we get a pension adjustment, and it just needs to be calculated correctly to account for that enhancement.
Senator Marshall: Okay. Thank you.
Mr. McGowan: If you are integrated, the rules currently —
Senator Marshall: Yes, I understand about the integration.
Senator Eaton: A couple of years ago the pensionable age went from 65 to 67 because it was said that it would make CPP stronger. We went back to 65. How solid are we? How long-term solid is the CPP fund?
Mr. Leblanc: My general sense is that the CPP is on sound financial footing.
Senator Eaton: For years to come?
Mr. Leblanc: That’s what the actuarial report suggests. That’s the Chief Actuary of Canada confirming that, but others would be better placed to confirm that.
The Chair: Honourable senators, this concludes Part 1 with the 17 measures we started this morning.
Mr. McGowan, Ms. Lavoie and Mr. Leblanc, thank you very much for your professionalism.
For Part 2, the chair will request that the following witnesses come forward: Mr. Phil King and Mr. Pierre Mercille.
We will commence with Part 2, measure (a).
Pierre Mercille, Director General, GST Legislation, Tax Policy Branch, Department of Finance Canada: Good afternoon. Part 2 of the bill proposes amendments to part 9 of the Excise Tax Act in order to implement amendments to the goods and services tax and the harmonized sales tax.
The amendments start at clause 70 on page 63 and end at clause 80 on page 68 of the bill. So the part of this bill dealing with the GST is very short.
The amendments in Part 2 of the bill generally make small improvements to the GST/HST rules. There are three health-related measures and one measure consequential to amendment to Part 1 of the bill related to the Income Tax Act. All the measures are relieving in nature and have been announced in Budget 2019.
In respect of the GST/HST health-related measures, under the GST/HST tax relief is provided for certain basic health care services and products. This is achieved by exempting the service of basic health care professionals such as doctors, dentists, physiotherapists, for example, and zero rating prescription drugs, certain biologicals and certain specially designed medical devices. Zero rating in the GST sense means tax at the rate of zero, so no GST applies.
First, GST/HST relief is provided on supplies and importation of human ova and importation of in vitro embryos.
The second health care measure allows the purchase of certain foot care devices to be relieved of the GST/HST when supplied on the written order of a podiatrist or a chiropodist. Some examples of the foot care devices that qualify for the GST relief are control ankle movement walkers, otherwise known as CAM boots; heel braces, anti embolic stockings and orthotics. These foot care devices are currently relieved of the GST/HST when supplied on the written order of a physician.
The third health-related measure expands the list of GST/HST-exempt health care services to specifically include a multidisciplinary health care service.
To qualify for the exemption, 90 per cent or more of the price charged for the supply of the service must be reasonably attributable to two or more particular services that would be GST/HST exempt if they were supplied separately. The main example that is targeted here is, for example, when a physician, an occupational therapist and a physiotherapist combine their expertise to work together as a team to provide a rehabilitation service. The three health measures come into effect on March 20, 2019.
Senator Stewart Olsen: Thank you for being here. I have an informational question. Is this applying to public or private health care? If you purchase something from a private health care provider, does that apply?
Mr. Mercille: Which of the three measures are you talking about?
Senator Stewart Olsen: Actually, any of them, because they all apply — medical devices, services. Supposing you ask for a private home care nurse or whatever, and you pay them rather than have it from the public health care system.
Mr. Mercille: The three amendments don’t include nursing home care, which I believe may be covered in another exemption. I don’t have that information now. The supply of foot care devices — it’s irrelevant who the supplier is whether it’s the government or not.
Senator Stewart Olsen: Exactly.
Mr. Mercille: The important thing is to be supplied under written order of a doctor, nurse, occupational therapist, physiotherapist, or the two new categories of practitioner who can do the order, which are a podiatrist or a chiropodist.
Senator Stewart Olsen: You tell people it’s foot care. How does that work with the provinces with their health care services? How do you reconcile that?
Mr. Mercille: When you go to buy that equipment it is usually from a private provider and you’re not going to pay tax. Now the government may want to reimburse you for the value of the orthotics in some cases. I’m not aware of all the provincial systems. This amendment relieves the tax. It doesn’t relieve the cost of the device. The provincial government may decide to help you in that respect.
Whether it’s that, or whether it’s the supply of the ova or other fertility treatments that may exist, this is not really touched by this. This is just the supply of the biological, which is the ova and the embryos. All the services — the doctors, et cetera — is for the province to decide what is covered and not covered.
Senator Stewart Olsen: Okay. So there are private fertility clinics, say, in Toronto, where you would import your ova or whatever. Was that always a patient pay issue or did that come under the purview of the clinic and therefore under the province?
Mr. Mercille: The patient in those situations would purchase the embryo or the ova. The majority of them, the way I understand it, are donated or from a family member. In this case there’s no GST/HST applied on that donation. If you purchase from a bank then the tax was applied before and the amendment proposed not to apply the tax.
After that, in respect of the service itself, maybe or maybe not. I have no expertise on whether it’s covered by the provincial system.
Senator Stewart Olsen: I’m sorry to be so particular about this. Using fertility clinics in my home province, New Brunswick, as an example. New Brunswick supports this clinic and provides the ova. Can the province then claim that exemption from the federal government?
Mr. Mercille: No. The supplier of the ova or the embryo will not collect the tax when making the supply.
Senator Stewart Olsen: Thank you very much.
The Chair: Other questions, senators? If not, that concludes Part 2(a) and we will move to measure (b).
Mr. Mercille: The final measure in part 2 of the bill is consequential to the relaxations in part 1 of the bill on zero-emission vehicles. Under the GST/HST scheme, companies engaged in commercial activities can generally recover the tax paid on their inputs through the input tax credits. However, limits for passenger vehicles have been established, based on income tax limits for business deductions.
This morning, you were told that the $30,000 amount has been increased to $55,000. The same kind of limit exists for the GST, a limit of $30,000.
The amendments in part 2 of the bill are intended to ensure that the treatment for GST purposes of expenditures that companies make on zero-emission passenger vehicles is the same as the way those vehicle are treated for income tax purposes.
The amendments will result in an increase in the amount of GST and HST that companies can recover for zero-emission passenger vehicles, which are subject to the new limits under the Income Tax Act.
This measure went into effect on March 19, 2019. This concludes the description of the measures in part 2 of the bill. Thank you.
The Chair: Thank you, Mr. Mercille.
Senator Forest: I would like some clarification. Since municipalities do not pay the GST, does this have any impact?
Mr. Mercille: Municipalities do pay the GST, but they are able to get 100% back.
Senator Forest: So this measure has no impact in this case.
Mr. Mercille: It is the same as before, because they are already treated more advantageously.
Senator Forest: They get 100% back.
The Chair: Honourable senators, this concludes Part 2(b). I have been informed by the clerk that, for Part 3, the presentation will be made by Mr. King.
Phil King, Director General, Sales Tax Division, Tax Policy Branch, Department of Finance Canada: I’m here today to discuss Part 3 of the bill and this covers clauses 81 to 86. These implement a new THC-based duty rate on certain cannabis products. This proposal builds on the current excise duty framework that came into effect on October 17 of last year. That’s when the sale of cannabis for non-medical purposes became legal in Canada.
Presently, the legal classes of cannabis products permitted for sale are fresh and dried cannabis, cannabis oils, seeds and seedlings. However, new classes of cannabis products — these are edibles, extracts and topicals — will be permitted for sale legally under the Cannabis Act later this year.
The government is proposing that the excise duty framework for cannabis products be amended to more effectively apply the excise duty to these new classes of cannabis products, as well as to cannabis oils, which are already legally available for sale in Canada.
In particular, Part 3 implements amendments so that these products are subject to excise duties imposed on their total quantity of tetrahydrocannabinol, or THC. That is the primary psychoactive component of cannabis. The introduction of this new THC-based rate has been informed by feedback received from the CRA, the Canada Revenue Agency, and from the cannabis industry itself.
The current excise duty framework for cannabis products imposes the higher of one of two rates. One is a flat duty rate based on the total weight of cannabis plant inputs in a product, and two, an ad valorem duty rate based on the producer’s price. However, cannabis producers have expressed some concerns regarding the potentially complex calculations of excise duties on oils when basing them on the quantity of cannabis material inputs. Having one flat rate based on total THC content for certain cannabis products would simplify compliance. It would allow these producers, as well as the CRA and other administrators, to more easily calculate and verify excise duties for cannabis edibles, extracts and topicals.
At the same time, this approach also better aligns the excise duty regime with the recommendations from the health care community because it bases the duty on the intoxicating component of cannabis. This is similar to how alcohol is taxed, for example, in the case of spirits.
Last, the proposed measure will not affect the federally administered revenue sharing agreements with most provinces and territories, or the projected cannabis excise duty revenues presented in Budget 2018 or 2019. This measure came into effect on May 1, 2019. Thank you.
Senator Eaton: Thank you very much. Can you tell me what date the legalization of these new edible or other cannabis products will come into effect?
Mr. King: That is already specified in the Cannabis Act. They become available for legal sale no later than one year after the current products, so no later than October 17, 2019.
Senator Eaton: You have obviously projected what you will make from the new taxes, what you project to bring into the treasury.
Mr. King: Yes. That hasn’t changed from the revenue projections that were already in the 2019 budget or the 2018 budget. The demand that was projected included these new classes of products, in addition to the existing classes, and we were very careful to calibrate the rate. The rate is one cent per milligram of THC in this new regime. We were careful to calibrate that rate so it would not affect in any material way the revenue projections. We wanted the revenue take to remain overall the same.
Senator Eaton: What would they be for 2019, can you refresh my memory, or for 2020? Especially because in October you will now have edibles going for sale.
Mr. King: Right. For the federal government specifically, we did a coordinated agreement with the provinces and territories where for every dollar we collect, 75 cents of that dollar goes to the PTs — most PTs, not all of them. In addition, there’s also a $100-million cap over the first two years for these coordinated agreements. The first two years it will be $200 million, $100 million per year. It would grow thereafter, after that cap comes off. I can give you the total amount for the five years if you’re interested.
Senator Eaton: Sure.
Mr. King: It’s $690 million projected revenues through 2022-23.
Senator Forest: I have two quick questions. Those who use cannabis for medical purposes—however they consume it and however much THC it contains—do not want to pay any excise tax. Will that tax be imposed for that kind of consumption?
Mr. King: The regime, as it currently stands, already recognizes there is some therapeutic benefit to certain cannabis products that are used for medicinal purposes. The products that are used generally have lower THC content and a higher CBD content. For any currently available cannabis product that has less than 0.3 THC in it, the excise duty doesn’t apply. That will continue for the existing product lines. For the new product lines coming on stream, including oils, to the extent, again, that therapeutic products tend to have less THC and more CBD in them, then users would pay less excise duty than under the existing regime. That is, if that were continuing and apply to these new products.
Senator Forest: Do you anticipate an automatic increase in the excise tax to reflect the CPI, as was the case for microbreweries and microdistilleries last year?
Mr. King: There are two parts to the tax. First, as I mentioned in my opening remarks, there’s a flat weight-based tax. The second is an ad valorem tax, based on the product’s final price. To the extent prices go up, the ad valorem part of the current excise regime will capture those rising prices. But, no, for the other part, the weight-based tax and the new proposed THC-based tax, there’s no automatic escalator, at the time being on those components. This is a very new industry. It’s only very recently legalized. I think we want to have some evidence, some data, to see how the market is progressing before you automatically have some tax rates baked into the system.
Senator Forest: The fact remains that this is very similar to what happened with alcoholic beverages, with distilleries and microbreweries. Last year, a measure went into effect that automatically increased the excise tax on microbrewery and microdistillery products, as the CPI increased. They are part of our tourist heritage, by the way. I was totally opposed to that. Cannabis products aim at the same sector, especially in terms of recreational use. So do we have two sets of rules?
Mr. King: That is correct; it is not in the current measure.
Senator Andreychuk: I don’t understand all of the math, et cetera, but the point you’re making is that there will be a higher tax on the stronger THC products coming into Canada; is that the bottom line? What troubles me is that what I hear is there’s a problem of management. It involves police; it involves provinces, et cetera. We’re having all the problems that we read every day in the newspapers of the present plan. We’re now going to introduce this, because there was a time limit — it was put in the act. My concern is where are these products coming from? Are you certain that the excise tax is not going to be a difficulty, if it’s on the high end, and that perhaps we won’t know what is coming in on the edibles? Whatever product we bring into Canada, it’s a food security issue, whether it’s olive oil, wine, breweries, packaged goods, cakes, cookies — everything that comes from everywhere else.
If we have certainty of our food chain safety, then we’re fine. But if we’re not certain what these countries do and do not do, then there’s a concern. Have you monitored where we will be getting these and whether in fact they will be upfront in a way that could be discernible at the border, by ship, plane, post office, wherever? You’re saying there’s going to be this transparency. I’m very concerned about products coming into Canada.
Mr. King: The very straightforward answer to both of your questions, I think, is that any product that’s for sale in Canada is produced in Canada. It’s grown in Canada. It’s processed and manufactured in Canada.
Senator Andreychuk: Products that make it up.
Mr. King: Yes. That’s all of them. It’s the fresh and dried cannabis seeds, seedlings, oils, any of the edibles, topicals and extracts. These will all be Canadian-produced products.
It’s very difficult to import products into Canada, we have very specific conditions under which you can import cannabis products and they’re generally for research, things of that nature. It’s not for consumption. So it’s a domestic industry. It’s all domestically based, on your first question.
Your second question about higher tax rates providing difficulty for industry. It was actually based on representations from industry that we moved to this system. They suggested that it would be much easier for them to track taxes and taxes owed on oils and similar products on a THC-based basis. That’s simply because if you’ve got, for example, dried cannabis and you put that into an oil, you have to add it to an oil substrate. You might concentrate that; you might mix it with a different batch with a different cannabis dried product in there; you might reconstitute it. So the supply chain gets long and it’s difficult to track the weight of cannabis in that final product. They told us it would be easier if you could test the amount of THC in the final product and then base a tax rate on that. It should simplify both the compliance and the administration.
Senator Andreychuk: I’m confused now. So it’s not going to be for the people who are going to be making edible products in Canada. You were saying it’s more what? Who will be taxed here at the higher rate? I thought it was anything coming in under that basis. It may start out as research, or whatever, but it could be coming into the market in one form or another?
Mr. King: Yes. If I can lay it out, the products that are currently available for sale, dried and fresh cannabis —
Senator Andreychuk: No, I understand that. I’m sorry. What I want to know is what is being imported is going to have the THC —
Mr. King: There’s almost nothing being imported.
Senator Andreychuk: So why are we doing this?
Mr. King: This is for domestically produced products. It’s a new taxation regime, not based on weight but based on the THC content, and it’s for the new products that will come on stream. They’re not yet legal, but they will be legal no later than October of this year.
Senator Andreychuk: So it’s going to be totally restricted to what’s in Canada, nothing will be imported?
Mr. King: None of the products that we’re talking about, edibles, topicals, could be imported, really. That’s right. It’s Canadian-produced products that will be subject to this regime.
Senator Andreychuk: And how will that be monitored?
Mr. King: I suppose it’s twofold. Health Canada will have the responsibility for monitoring and testing, if the labelling on the packaging is accurate in terms of the THC content, and, of course, the CRA is the administrator of our tax system.
When the companies file, they will do their due diligence in terms of auditing, as with any other tax system, to ensure that the rules are being followed.
Senator Andreychuk: So that you understand, there’s a lot of concern about edibles. How will they protect our safety and security? I think there is more confidence in Canadians than there is on what should be imported legally or illegally. This should be the legal part. I think of children and what’s going to be attractive. We want to be sure that we have some safe products. That’s what I’m getting at. There is talk about movements into Canada because it will be very lucrative, they say.
Mr. King: You’re right. Those are very genuine concerns. Health Canada, which has the policy responsibility for this, has set out a broad set of regulations to ensure that children are safe, among other things, when these products are introduced. It’s more for health to talk about that, but it’s absolutely a valid concern.
The Chair: Honourable senators, in closing, I want to say to each and every one of the senators we did a lot of work today. This concludes Part 3. We will commence tomorrow with Division 3 of Part 4.