Proceedings of the Standing Senate Committee on
National Finance
Issue 28 - Evidence - November 7, 2012
OTTAWA, Wednesday, November 7, 2012
The Standing Senate Committee on National Finance met this day at 2 p.m. to examine the subject matter of all of Bill C-45, A second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures, introduced in the House of Commons on October 18, 2012.
Senator Joseph A. Day (Chair) in the chair.
[English]
The Chair: Honourable senators, I call this meeting of the Standing Senate Committee on National Finance to order.
[Translation]
Honorable senators, this afternoon we are resuming our study on the subject matter of Bill C-45, A second Act to implement certain provisions of the budget tabled in Parliament on March 29, 2012 and other measures, introduced in the House of Commons on October 18, 2012.
[English]
Honourable senators, this is the third meeting on the subject matter of Bill C-45. Yesterday we managed to complete our review of Part 1 of the bill, and thank you all very much for your cooperation. It was nice to get through that Part 1. It is a large part, and bigger than the two parts we will be looking at today; and then Part 4 we will do after our break.
Today we will proceed with Part 2, entitled Measures in Respect of Sales Tax, which begins at page 142 of Bill C-45. We welcome two officials from the Department of Finance who are familiar with this part of the bill. Pierre Mercille is the Senior Legislative Chief for GST, Goods and Services Tax Legislation; and Lalith Kottachchi is the Legislative Chief of the Real Property and Financial Institutions Section, also with the Department of Finance.
As we did yesterday, after there has been an explanation of the initiative beginning at clause 74, working our way through, I will look around and, before you proceed to another concept, another clause, I will see if there are any questions or requests for a further explanation. If not, then we will proceed to the next concept, if that is okay.
Mr. Mercille, will you begin at this time?
Pierre Mercille, Senior Legislative Chief, GST Legislation, Department of Finance Canada: Yes. I will say a few words before I start the clause to explain the amendment in this part of the bill.
Part 2 of the bill implements amendments related to the application of the GST/HST to the financial services sector. They are amendments of a technical nature that were previously released in draft form on January 28, 2011. After consultation with affected stakeholders, they have been confirmed in Budget 2012.
In fact, a number of the amendments included in this bill have been proposed following comments received from the industry in respect of two news releases issued by the Department of Finance in 2010, describing proposed amendments to the GST/HST applicable to financial institutions.
First, I would like to say that a number of amendments included in this part of the bill implement certain technical rules for financial institutions that do business in one HST province and in at least one other province, relating to the determination of their liability for the provincial component of the HST.
However, the objective of these amendments is mainly to refine the way financial institutions account for and report the tax, rather than amendments that determine how much tax burden financial institutions are subject to.
There is also a fair number of housekeeping amendments of a drafting nature that do not represent a policy change. They are proposed to correct oversight and to improve readability of the act.
Honourable senators, I will start with clause 74.
The Chair: Following on from your general comments, first, could you explain to us why some of these initiatives were announced as far back as five years ago and are only now seeing the light of legislation? Has there been some difficulty in the consultation process?
Mr. Mercille: I want to clarify this, because I got exactly the same question in the House of Commons.
These amendments were proposed in 2010. There was a news release on May 19, 2010, and it was a backgrounder of a general nature. It was followed by a release of draft regulations and a further backgrounder on June 30, 2010. These were put out for consultation and we received comments and we reissued the draft regulations, with the draft legislation that is included in this bill, on January 28, 2011.
Senator Callbeck: You say that what we are looking at this afternoon applied to financial institutions that do business in HST provinces and in at least one other province. What about financial institutions that only do business in provinces where there is the HST?
Mr. Mercille: What I said is that some rules in here apply to financial institutions that do business in one HST province, in one other province, but there are also rules in the act and in regulation that apply to financial institutions that only operate in an HST province.
The main difference is that if you operate in two different provinces, you would be facing two different tax rates, and that is why we need more sophisticated rules to apply to those situations.
Senator Callbeck: It said here that the measures pertain to the selected listed financial institutions, and then it goes on to define them as they deal in provinces with HST and at least one province.
Mr. Mercille: Yes. I tried to avoid the label "selected listed financial institution" in my presentation because it is technical. It is essentially a financial institution that operates both in one participating province, an HST province, and in at least one other province.
Senator Callbeck: Will it also affect financial institutions that only deal in provinces where there is HST?
Mr. Mercille: HST will apply to that financial institution at the rate in the province in which they operate. However, they do not have to deal with the complexity of having the multiple consumers in multiple provinces with multiple rates.
Senator Callbeck: All right.
Mr. Mercille: The first clause is clause 74. This clause is linked with clause 85, which will come later. Together they amend the definition of "fiscal year." This is fairly straightforward. It is to facilitate compliance. This amendment requires investment plans that do business in an HST province and in at least one other province to have calendar years as their fiscal year.
The Chair: For what reason do we go to calendar years as opposed to the financial or fiscal year that we are accustomed to?
Mr. Mercille: In some circumstances investment plans that have invested in another investment plan need to share annual information in respect of where their ultimate consumer is located, in order to determine how much HST they will pay. The more consumers they have in an HST province, the most burden of HST they will have. If they have their clients mostly in non-HST provinces, they will have a lesser HST burden. In order to make that determination, they have to look at where their consumers are located. If an investment plan has invested in another one, the first one has to provide information of where their consumers are located, basically their unitholders, and it is much easier to share information between mutual funds and investment plans when they have the same calendar year, because this is annual information that needs to be shared.
The Chair: Thank you. That is helpful.
Senator Finley: I have a couple of simple questions. As a guy who used to run businesses, changing your fiscal year can be a fairly enormous undertaking for a typical organization, which can involve everything from software, to paper, to you name it. Has that been taken into consideration in terms of this bill or have the financial institutions been approached to know that this is happening? What is the reaction?
Mr. Mercille: As I said, this was consulted on extensively. There were three news releases addressing those changes. Industry had an opportunity to comment after each of those news releases. An important fact to mention is that most investment plans already use the calendar year as their fiscal year.
Senator Finley: About how many financial organizations do you think might be affected by this change? Surely you must have some idea, I would think.
Lalith Kottachchi, Legislative Chief, Real Property and Financial Institutions Section, Department of Finance Canada: Based on the information we received from industry, it would be only a very limited number. The information that industry has provided indicates that it would be less than 5 per cent of the population.
Senator Finley: Is that of the population of investment companies?
Mr. Kottachchi: Investment plans, yes.
Senator Finley: Do we have any idea what the financial hit will be for these 5 per cent as they transition to a new fiscal year?
Mr. Kottachchi: There should not be any financial hit. It is a matter of calculating the tax based on a particular year of 365 days. Whether it is January 1 to December 31 or April 1 to March 31, it should not make any difference in terms of the tax liability.
Senator Finley: Not the tax liability — I am talking about the operating costs of the changeover — the transition process. As I say, there is software, paperwork and mailings, et cetera. There are many things to consider — strategic plans going out three, four, or five years that could be affected by something as simple as a change in a fiscal year. Do we have any idea what that financial implication will be?
Mr. Kottachchi: Again, based on our industry consultations, it was negligible. They preferred actually having the same year for all investment plans. That way, it is easier to share the information in a timely manner because we allowed them to obtain the information within three months. Everyone has to provide, on September 30, what is the distribution of investors of each plan; and that information has to be provided, as Mr. Mercille pointed out, to the different tiers of plans by December 31, because the next year starts January 1.
As a matter of fact, a large number of investment plans, like the mutual funds, calculate the tax on a daily basis. Therefore, there was no additional burden for them to have a calendar year as their fiscal year for GST/HST purposes.
Senator Finley: I am not entirely convinced that I got through this, but I am okay for the moment.
The Chair: Okay, but do not lose your thought. Keep pursuing it.
[Translation]
Senator Chaput: My question is in the same vein as that of the honourable senator.
[English]
You said that 5 per cent of investors will not be going with the calendar year. Approximately how many investors would that be? How many industries? Did they respond to your comments? Did they recommend staying the way they are?
Mr. Kottachchi: I indicated the investment plans, not the individual investors. One mutual fund might have 1,000 investors; but the investors will not be affected. The mutual fund as an entity, because it is a trust or a corporation, will have a fiscal year. The mutual fund will account for tax based on a calendar year.
Senator Chaput: They will do that even though they are not operating on a calendar-year basis.
Mr. Mercille: They will start operating on that basis.
Mr. Kottachchi: It will be only in terms of filing the returns.
Senator Chaput: Yes, I understand.
Senator Buth: To clarify what you just said, the institutions — the investors do not have to change their calendar year of the business, but they have to report what they are required to report on a calendar year.
Mr. Mercille: This is the fiscal year for the purpose of GST.
Senator Buth: Right. The business does not have to change their fiscal year. Thank you.
The Chair: However, they are likely to change. Why would you keep two sets of books?
Senator Callbeck: Will changing the definition of "fiscal year" to "calendar year" apply to all financial institutions or just to this selected list of financial institutions?
Mr. Mercille: It will apply to a subgroup of them, which are investment plans.
Senator Callbeck: It will apply to a subgroup of the selected list of financial institutions.
Mr. Mercille: Yes. It will not apply to banks.
Senator Callbeck: The other institutions that are not on that selected list will not be affected.
Mr. Mercille: No.
[Translation]
Senator Bellemare: The objective of this part is also to confirm the power to make certain regulations in respect of the GST. Could you elaborate on this power to make certain regulations? What are these regulatory powers?
Mr. Mercille: The answer to your question could perhaps wait, if you want me to proceed clause by clause.
[English]
Senator Nancy Ruth: I want to ask whether foundations, public or private, would be included in this because they are investment vehicles and they pay GST.
Mr. Mercille: You are talking about charities.
Senator Nancy Ruth: Yes.
Mr. Kottachchi: Investment plans are defined under the Excise Tax Act. They do not include family trusts and other types of vehicles. It will be limited to mutual fund trusts and pension plan trusts. However, in some cases, you can establish unit trusts. If you establish certain trusts that fall under the income tax definition of "mutual fund trust" or "unit trust," they will be captured. Otherwise, they fall outside the scope of these provisions.
Mr. Mercille: I was not finished with clause 74. There is a housekeeping amendment here, and I hope there will not be too many questions on this.
Next is a housekeeping amendment to improve the readability of the act. Clause 74 adds definition in the main definition section of the GST/HST legislation. These definitions are simply moved from a different location in the act. Basically, I mention this because there are a number of other housekeeping amendments related to that change, which I will have to mention.
The Chair: If you are moving it, presumably you are canceling it somewhere else.
Mr. Mercille: Exactly.
Clause 75 is the first housekeeping amendment that follows the movement of the definition. The definitions were included in section 172.1(1) of the ETA and have been removed with this clause.
Clause 76 is also related to clause 78. These amendments are consequential to a simplified accounting method applicable to investment plans that have a province-specific investment product. Essentially, this will allow investment plans that have investment products that can only be owned by a resident of a particular province to treat their activities related to that product as a separate taxpayer and to not have to use the more complex method to determine their HST liability that otherwise applies to investment plans that operate in many provinces.
There is also in clause 76 a housekeeping amendment that corrects an error in a cross-reference. To come back to the earlier question about power to make regulations, this is an example where there are powers created in respect of a prescribed purpose. The purpose will be prescribed in the regulation when the simplified accounting method will apply, and those conditions that will be provided in regulations are what I just explained, that is, if an investment plan has a province-specific investment product, that is, a product that can be purchased only by residents of a particular province. They are treated like they operate in only one province because all their unitholders are in one province.
Clause 77 is another housekeeping amendment that is related to the movement of the definition that I explained earlier.
Clause 78 is related to what I just explained about clause 76. It is consequential to the simplified accounting method applicable to investment plans that have product-specific investment vehicles.
The Chair: Simplified accounting?
Mr. Mercille: This is at the request of industry coming out of our initial consultations.
In clause 78 there is also a housekeeping amendment that is related to the movement of the definitions.
Clause 79 makes a few amendments. The first amendment deals with the definition of who is a financial institution required to use a special method to determine its HST liability. This is the definition of SLFI that was mentioned before. This definition now provides that the person must be a financial institution of a type that is already listed in the legislation, for example, a bank or an insurance company, and that that financial institution meets conditions prescribed by regulation, again responding to the earlier question.
The condition to be provided by regulation is, as I have said a few times, that the financial institution operates both in an HST province and in at least one other province.
The Chair: Why do you need that? Is that to give federal jurisdiction to get it out of just one province?
Mr. Mercille: Following the new CITCA framework with the provinces, that is, the Council of Integrated Tax Coordination Agreement, when Ontario and B.C. joined the framework it provided for greater tax policy flexible to provinces. For example, they are allowed to change the rate of the provincial component of the HST. The three Atlantic provinces originally under the CITCA in 1997 could not change their rates. They were bound together and had to change together.
The fact that each province can now choose its own rate made it a more attractive system for the provinces, but it created some complexities because now you have to deal with the various rates in various provinces. There were a few refinements proposed in the news release that I mentioned earlier which were to address concerns when the harmonization of Ontario and B.C. was announced. That is why this is done.
The Chair: I have an imperfect recollection of a financial institution in Quebec that had the right under its charter to operate in other provinces in addition to Quebec and decided that it would repatriate itself only to Quebec. Would it be driven by some of these rules to do that? It would not be operating in more than one province then.
Mr. Mercille: It is a financial decision by a financial institution whether they want to operate in one or more provinces. The GST legislation just tries to ensure that whether you operate only in one province or in many provinces, the rules that are mainly provided already in legislation and regulation, the tax burden is a function of where your consumers are located.
Senator Callbeck: You say it gives greater flexibility for tax. Are you saying that now every province can set its own rate?
Mr. Mercille: Yes, except that Ontario, which joined in 2010, was locked in for two years, but after that they can change the rate. They can decide to increase or decrease the 8 per cent provincial component of the HST depending on their policy decision. That is a provincial decision.
Senator Callbeck: That goes for all provinces with this legislation?
Mr. Mercille: It is not with this legislation.
Senator Callbeck: It is there now?
Mr. Mercille: It is already there, yes, and it is with the agreements that were signed with the provinces.
Senator Callbeck: I thought we were doing something later about Nova Scotia.
Mr. Mercille: I will explain that when we reach it.
Senator Finley: Are the three Atlantic provinces now unbundled from this individually?
Mr. Mercille: Yes. They have joined the new framework and their agreement is essentially the same as Ontario's.
In clause 79 there was another amendment. The amendment corrects an anomaly in the legislation and allows a financial institution that operates both within and outside of an HST province up to two years to deduct a certain amount paid as the provincial component of the HST in determining its HST liability. This two-year rule mirrors an existing rule for claiming input tax credits by financial institutions. Previously, when HST was paid, they had to make an adjustment immediately in the period in which they paid the tax, while for input tax credits if they forgot in that period they had two years to do it.
This again is pursuant to an industry request. A few changes were being proposed and they asked us to fix that anomaly. They wanted two years to make a deduction as they have two years to do an input tax credit.
Senator Chaput: Are the "up to two years" calendar years or two years according to the way you are functioning?
Mr. Mercille: It is two years from the period in which the tax was paid. It is a reporting period. However, they are not necessarily calendar years, because this is for all selected listed financial institutions, not just investment plans.
Senator Chaput: They have two years from the time it has been paid?
Mr. Mercille: Yes.
There are also two housekeeping amendments. One corrects a minor error. There was a reference to subsection which should have been a reference to section.
Clause 79 also removes a definition that is no longer in use, which is purely housekeeping.
Clause 80 adds two new sections to the act. The first one is new section 225.3. This measure introduces a new rule that will allow certain mutual funds, referred to as exchange-traded funds, whose units are traded or listed on a stock exchange or other public market, to obtain a pre-approval from the Canada Revenue Agency for the method they use to calculate their liability for the provincial component of the HST.
The proposed amendment facilitates compliance by exchange-traded funds when these financial institutions cannot easily obtain their required information about the province in which their investors are resident to determine how much provincial component of the HST must be paid and at which rate. This again was an industry request.
Senator Finley: I do not understand why you have created an exception for this particular group of institutions.
Mr. Mercille: As I explained before, there may be another investment plan that invests in exchange-traded funds. We explained before that those investment plans must share annual information about the location of their ultimate unitholders. As they are exchange-traded, the unitholders can change every day as can the province they are in. They need that information to determine how much HST they will pay at the end of the day.
What is being proposed is that in determining where their unit holders are, some exchange traded funds, if asked the location of their investors, are sure they know maybe 75 per cent of them. For the other 25 per cent, it would be expensive for them to try to get that information. They can apply to CRA and say, "I have the information on 75, and I give you my records and whatever, and I ask you to approve this method so that I can use the 75 per cent information I have to determine it for the rest of the 25 per cent of the people I do not know." If they have a lot of difficulty finding the information, CRA may approve, in certain circumstances, an easier method for those funds to be able to calculate their tax liability.
Senator Finley: You are saying that if you know the information on the 75, you will extrapolate it to 100, and that is an acceptable process?
Mr. Mercille: That is an example. There could be other situations that exchange traded funds could submit to CRA. If CRA thinks it is reasonable, they can approve the method if it saves some compliance cost for the exchange traded fund.
The Chair: Does this facility exist for other type of funds? Are exchange traded funds just catching up?
Mr. Mercille: This amendment is specifically for exchange traded funds because the fact that their units are traded freely makes it more difficult for them to know the exact location of their investors.
Senator Chaput: The final decision is made by the minister.
Mr. Mercille: Everything in this is minister-approved, yes.
Senator Chaput: He has to approve it once he has the file and it has been reviewed.
Mr. Mercille: Yes. This was proposed in a news release, and the minister is being briefed and the minister approved the issuance of the news release and the inclusion of these amendments in this bill.
Senator Chaput: He approves the final institution files that have been accepted? He approves that too? On the list of institutions, at the end of the process?
Mr. Mercille: The minister is not provided the list of names of the financial institutions. He is provided with information about the general description of what they are. Basically, briefing notes are made, with recommendations and options, and the minister decides what he thinks is appropriate.
The Chair: Thank you.
Mr. Mercille: There is another new section in clause 80. It is the new section 225.4. This section allows investment plans to treat their non-resident investors as resident in Canada to simplify the determination of their GST/HST liability. However, this is an optional rule. If an investment plan does not think this is advantageous for the plan, the investment plan may elect out of this rule.
Senator Callbeck: Could you explain that rule again, please?
Mr. Mercille: The investment plan needs to know the location of all the investors. There are essentially three groups of investors. There are investors in HST provinces, investors in non-HST provinces and investors outside Canada. The proposed amendment is to simplify compliance. We will say that investors outside of Canada are considered to be residents in non-HST provinces. The consequence of that is basically to simplify the compliance for the financial institution if they have many clients outside Canada. For a client outside Canada, they are making service to them, and these services provided to non-residents are considered exports and are zero-rated and give rise to input tax credit, so the investment plan has to decide whether the input tax rate they may lose is important. It is often negligible. They have to do the trade-off about the simplification costs versus the ITC, the input tax credit.
Clause 81 is another housekeeping amendment related to the movement of the definition that I discussed earlier.
Clauses 82, 83, and 84 are linked together. These amendments will require a certain group of investment plans prescribed by regulation to register as a group in certain circumstances so that each member of the group will use the same registration number and will not be required to register separately. This rule will ease compliance by allowing certain related groups of investment plans to file a consolidated return.
To answer a question about the fact that there are conditions prescribed by regulation, essentially it is proposed that this rule apply to investment plans that meet four conditions: They have the same manager, they have the same reporting period, they have elected to have the manager file their returns for them and they have agreed to consolidated returns.
Clauses 83 and 84 are part of this. Clause 83 deals with making the election, and clause 84 allows for a cancellation of the group registration.
Clause 85 is linked with clause 74, discussed earlier, and together they amend the definition of "fiscal year" to facilitate compliance. This amendment requires investment plans that do business in an HST province and at least in one other province to have calendar years as their fiscal years for GST/HST purposes.
Senator Finley: Are there any other industry sectors or financial sectors or whatever that basically have fiscal years imposed on them; in other words, the definition of a fiscal year?
Mr. Kottachchi: For GST/HST purposes, no.
Senator Finley: This is the only industry, and it is a limited sector of that particular industry.
Mr. Kottachchi: That is correct.
The Chair: It is not entirely clear to me yet why you keep saying "operating in one province that is an HST province plus another province." It seems to be repeated over and over again.
Mr. Mercille: Essentially, if the financial institution was only operating in one province, purchasing input in the province and providing services in the province, they would pay their input at the rate of the province. Since financial institutions mainly provide exempt financial services. That means that they pay tax on their inputs, do not charge on their services but are not allowed to recover the tax they paid on their inputs. If they operate in only one province, it is easy for them because they pay their input at the rate of the province and there are no other consequences.
If you operate in two provinces and if these rules were not here, there would be an incentive to purchase inputs in a province with a low tax rate even if your clients are in a province with a high tax rate, because you do not charge tax to your clients. You only pay tax on your inputs. The rules are not in this bill. They are consequential here. The rules are already in the legislation, in the regulations and in proposed regulations. The rules are to level the playing field, to not create an incentive to purchase in a province in which the rate is low because, at the end of the day, there will be a formula that will adjust your final component, the provincial component of the HST, based on the location of your consumers.
The Chair: That was much clearer.
Mr. Kottachchi: I would like to add that when these rules were first announced in 1997 with the Atlantic harmonization, it was the industry that preferred a method like this because the alternative would have been for them to track each and every input and how it is going to be used in a particular province to see whether they are required to self-assess the tax if they bring something to a harmonized province. The businesses are required to self-assess tax if they bring from outside and in these cases you need tracking. Financial institutions would prefer not to have that kind of tracking where they operate in multiple jurisdictions.
Mr. Mercille: Clauses 86 and 87.
The Chair: Clause 85.
Mr. Mercille: This is the one that is linked to the calendar year.
The Chair: Fiscal year, yes.
Mr. Mercille: Clauses 86 and 87; this part includes two amendments to fix technical glitches in the legislation to allow financial institutions that qualify to be annual filers to opt out of a previously made election to be a quarterly or monthly filer.
The glitch was that the legislation provided for an election to be made under the legislation to have a more frequent reporting period, but once you made that choice there was no way to cancel it. Therefore, in the course of the consultation, industry suggested we fix that rule. That is what clauses 86 and 87 are doing.
Clause 88 is another housekeeping amendment related to the movement of the definition that I discussed earlier. When I say "housekeeping" it is because there are no policy consequences.
The Chair: They would not been referred to in the budget, they just happened to be things brought to your attention that need to be cleaned up.
Mr. Mercille: Usually it is a drafting exercise. When we do the drafting people note something that would make it easier to read the legislation. For example, the definitions for those sections could be put in the same place instead of in various places. Sometimes we see that there is a wrong cross-reference. We prepare the bills in a very short period of time.
The Chair: You have a drawer in your office and, as recommendations and suggestions come in, you keep putting them in the drawer until you see an opportunity to bring it forward.
Mr. Mercille: It is a little bit like that.
Clause 89 is of a housekeeping nature. There is a condition for a rebate that I will discuss in clause 90, and the condition has been moved to a different section for increased readability.
Clause 90 is an amendment to implement changes to expand an existing rebate of the provincial component of the HST to certain financial institutions that are investment plans and render services to clients that are outside the HST province, but they have paid HST on certain of their inputs. This is not for selected listed financial institutions. Even if your clients are all in the same province, it did not mean you may not have acquired inputs in another province and paid tax on it.
The amendment will allow the rebate of that provincial component of the tax to be claimed in respect of all supplies of property or services, and not just in respect of supply of management and administrative services as is the case currently. Right now, management and administrative services are the bulk of what investment plans are purchasing as inputs. If they were purchasing something else the rebate was not available for the rest. It was, again, an industry request. They suggested if you give it for that why not give it for all the HST paid if the clients are not in HST.
Clause 91 is the housekeeping amendment where the condition for that rebate has been moved. It is simply that. Clause 92, the rebate, I just discussed. This amendment will allow certain persons prescribed by regulation to claim their rebate in certain circumstances.
This is linked to what I discussed earlier when an investment plan has a province specific investment product that can only be purchased by investors in a particular province. I explained before that they could be treated as separate taxpayers and not as financial institutions that operate in both provinces.
For example, for this rebate, if your clients are all in a non-HST province and only persons in a non-HST province, in a particular province, can purchase that investment product but, if in the course of providing your service you have incurred HST in one of the HST provinces, the regulation provides in those circumstances that you will be eligible for the rebate.
These are technical amendments in the financial sector. You have an investment plan that has, for example, a number of products on offer. Let us say it is a mutual fund and they have a series. The first series can be purchased by everyone in Canada. As they have one product that everyone in Canada can purchase, they are by definition a selected listed financial institution; a financial institution that operates in both provinces. When you are a selected listed financial institution, you have to use the more complex method to account for tax.
Industry came to us and said they had an investment plan that has a product for all the provinces, but they also had a product that is just for the residents in a particular province. They asked if they could account for tax for just that product, as if they had an investment plan operating in a single province.
In that particular case, for the product that can only be purchased by consumers in a province, if they have paid HST on one of their inputs to provide that service they are entitled to the rebate.
Senator Finley: The word "rebate" rings up dollar signs in my mind. Is there an evaluation of what sort of dollar impact, positive or negative, this will have on Revenue Canada? Will this increase the number of dollars that will be rebated, or will it decrease them or is it revenue neutral?
Mr. Mercille: If you are talking about the bill in general, it will not have a significant impact on financial institutions. It is more a question of how you account for and not really your tax liability.
This particular amendment I just mentioned expands the rebate, so by definition there should be a cost to the government. It really expands the rebate to provide the right result so that if someone paid HST for consumers strictly located in a non-HST province, it is more in line with the rest of the HST scheme.
Senator Finley: I understand why you might be doing that. Have you done an evaluation?
Mr. Mercille: We do not have a specific evaluation, but since the rebate was already available for administrative and management services, which is the bulk of their expense, we believe that the cost is not significant. However, we do not have a number to give you.
The Chair: Thank you.
Mr. Mercille: Now I will talk about clauses 93, 94, and 95.
The bill also includes a few previously announced transitional rules related to the increase of the provincial component of the HST in Nova Scotia from 8 per cent to 10 per cent that could not be done by regulation. Most of the transitional rules to move from 8 per cent to 10 per cent in Nova Scotia on July 1, 2010 were done by regulation. A few could not be done by regulation.
The amendment ensured the imposition of the provincial component of the HST at the proper rate in Nova Scotia in certain cases for the fiscal year that straddled the July 1, 2010 implementation date. This followed a decision by Nova Scotia to increase the rate of the provincial component of the HST from 8 per cent to 10 per cent.
Essentially those rules are transitional and they adjust certain amounts to reflect the rate of only 8 per cent, based on the number of days in the fiscal year that straddled the implementation of the rate increase, based on the number of days in the fiscal year that are before July 1. In certain cases, a rate of 10 per cent would be charged for the full period instead of for the part of the period after July 1. It is a provincial decision to increase the provincial component of the HST.
Clause 96 has no effect on taxpayers. It confirms the authority under which certain GST/HST regulations are made. The amendment clarifies for greater certainty that certain GST/HST regulations that were made in the Jobs and Economic Growth Act — the first budget implementation bill of 2010 — are deemed to have been made under the Excise Tax Act because they relate to GST/HST. That was a request by the Department of Justice.
The Chair: Might there be some confusion out there?
Mr. Mercille: Yes, there was confusion. They are GST/HST related but they are made under the budget implementation bill. Are they made under the budget implementation bill or under the Excise Tax Act. This clarifies that they are made under the Excise Tax Act because they are related to the GST/HST.
The Chair: You have made quite a few more changes related to GST/HST under the budget implementation bill. Will there be another one of these?
Mr. Mercille: The difference is that, in this instance, we are clearly amending Part 9 of the Excise Tax Act for all the amendments that I proposed. In the part covering the Income Tax Act, as explained to you yesterday, they made changes to the income tax regulations in the budget implementation bill, which they do on a regular basis. That is fine for the Department of Justice because they are simply amending an existing regulation. I was told that in the case of this clause, we propose to create a new regulation. Creating a new regulation basically under a budget implementation bill is unusual, and it raises ambiguity for the Department of Justice.
The Chair: You might mention to the Department of Justice that if they did not put all this extra stuff in budget implementation bills other than what is in the budget, it would make things a lot easier for us. Could you pass that back to them?
Mr. Mercille: I am not the one making those decisions.
The Chair: They could just do one per year. That has been suggested.
[Translation]
Senator Hervieux-Payette: Are we talking about an act, or regulations? As the text is drafted, one reads "input tax credit allocation methods regulations." So, are we talking about an act or about regulations? Committees do not normally approve regulations. There is a whole approval process for those. Regulations are appended to acts. Explain to me why it is drafted in this way.
Mr. Mercille: In the first 2010 budget act —
Senator Hervieux-Payette: Bill C-38?
Mr. Mercille: I am talking about the one from 2010, but I do not remember its number. Amendments were made in respect of financial institutions. Those regulations were related to the amendments proposed in the bill. The regulations were introduced at the same time in order to avoid having two processes to achieve the same results. The regulations were included in a bill. Questions were raised at the Department of Justice not about the validity of the regulations, as they are valid, but regarding which law they were made under.
Senator Hervieux-Payette: I still do not understand why there are regulations in a piece of legislation. Normally, regulations are attached to an act. You have an enabling clause that allows you to make the regulations, and they follow another path within the government and are ultimately reviewed by the joint regulations committee.
I can understand that you are trying to bring order to all of this, however I would not want things to become more complicated afterwards. It seems to me that regulations are not included in acts. They come after an act. However, you are telling me that this was attached to an act, or another act?
Are we talking about the regulations or the act? This is referred to as "regulations." But are we talking about regulations? I find it rather bizarre that as parliamentarians we would start to make regulations, because this is not something we normally do. Perhaps you should also have this explained to you by the Department of Justice.
Mr. Mercille: My understanding is that the regulatory power is delegated by Parliament. Parliament has the right to make regulations if it wants to. Sometimes regulations related to an act are introduced in the same legislative vehicle in order to accelerate the passage of all of the regulations and set taxpayers' minds at ease.
Senator Hervieux-Payette: I understand. Mr. Chair, you will understand that the Standing Joint Committee for the Scrutiny of Regulations will not be reviewing the text, since, in any case, it is already here. Indeed, the way in which the budget is being passed, without any amendments, effectively blocks any intervention in respect of regulations. I am mentioning this because I feel it is important that we understand the exercise we are being made to undertake. Examining regulations that are not afterwards reviewed by the two Houses, by a committee enabled to do so, is not the normal way of doing things. By proceeding in this way, I understand that we are accelerating the process. However, sometimes departments take six or seven years to amend a law. In this case, you are going at the speed of light. This is the only regulation that will be adopted this quickly because we are jumping over all of the usual steps. The steps leading to the adoption of regulations are quite complex within the government. Maybe this is very good, but I do not like the way in which these regulations are being adopted.
[English]
Senator Callbeck: You have completed Part 2, have you? Clause 80 talks about sharing information about the unit holders. You mentioned that if they have 75 per cent of the addresses, they can determine the other 25 per cent based on the same ratios. Is that 75 per cent a figure that you just used or is that in regulation somewhere?
Mr. Mercille: That is an example I provided. This will be done on a case-by-case analysis by the Canada Revenue Agency. They will basically receive a submission by the exchange-traded funds that they had difficulty locating all their investors. I am proposing to use this alternative method. I use that because it is a simple example. It will be for the minister of revenue, through CRA, to decide whether the method is acceptable.
Senator Callbeck: In the bill, that is wide open for the minister. The minister will decide that when they have 25 per cent of the addresses, they can then appropriate the other 75 per cent based on that 25 per cent.
Mr. Mercille: There is discretion for the revenue minister in the course of his or her mandate to collect and administer tax.
Senator Callbeck: It is wide open. We are not putting anything in regulations or in legislation.
Mr. Kottachchi: No, we do not. Again, the Canada Revenue Agency acts on behalf of the revenue minister and understands the intent of the provisions. We are talking about the provincial component of the tax, so they have to ensure that the appropriate amount of tax is paid by the particular exchange-traded fund.
Senator Callbeck: How many times would you anticipate this happening in one year?
Mr. Kottachchi: It is very much an exception based on what we have seen to date. You have to recognize there are not many exchange-traded funds. There are only about 8 or 10 issuers in Canada.
The other reason is that the issuers or the fund managers, unlike traditional mutual funds, do not have the information of investors with them because they are handled by brokers and all the information is in the Canadian Depository for Securities, which is an exception to other types, such as traditional mutual funds, and there is a cost involved for these fund managers to obtain that information. In the case of exchange-traded funds, unlike traditional mutual funds, we require that that be done twice a year. As a result, the cost is more for exchange-traded funds than for traditional mutual funds. That is why the exception is made to make an application to the minister to obtain pre- approval to use a reasonable method.
Senator Callbeck: You say there are only about eight or ten issuers?
Mr. Kottachchi: Yes. There are perhaps 200 funds in Canada.
The Chair: Senator Callbeck, you had a list of points you hoped would be covered. Are you satisfied that Mr. Mercille and Mr. Kottachchi have touched on those points?
Senator Callbeck: Please give me a minute, Mr. Chair, to look at these.
The Chair: I will ask a question in the meantime and then will come back to Senator Callbeck.
Are these rules generic enough that we will not have to see legislation when a province withdraws from the Harmonized Sales Tax, like British Columbia is in the process of doing, or will we need a lot more legislation to allow that to happen?
Mr. Mercille: You already saw two amendments related to British Columbia. I believe it was in BIA 1. Do not quote me on that, but they already passed. It was to remove two references to British Columbia that were in the Excise Tax Act legislation. The rest of the rules to wind down the HST in B.C. will be done by regulation, and regulations were published in the Gazette, Part II, on October 10, I believe, with the bulk of the rules to wind down the HST in B.C. The only amendments left are to be done by regulations, and they relate to financial institutions.
The Chair: We will send Senator Hervieux-Payette to the Standing Joint Committee for the Scrutiny of Regulations to make sure that is all above board.
Senator Callbeck: I am happy to say that the witnesses have covered all my points. Thank you.
The Chair: Thank you very much. Seeing no other questions, I would like, on behalf of the Standing Senate Committee on National Finance, Mr. Mercille and Mr. Kottachchi, to thank you very much for being here and helping us through this rather technical section of Bill C-45.
We will now proceed with Part 3, which is headed "Federal-Provincial Fiscal Arrangements Act" and begins on page 170 of this over-400-page bill. Believe it or not, we are up to page 170, which is great.
From the Department of Finance, we welcome and thank for being here Kei Moray, Director of Intergovernmental Tax Policy, Evaluation and Research with the Department of Finance and Deanne Field, Chief of Federal-Provincial Taxation.
Kei Moray, Director, Intergovernmental Tax Policy, Evaluation and Research, Department of Finance Canada: I will give you an overview of Part 3 of the bill. It contains two clauses that amend the Federal-Provincial Fiscal Arrangements Act, and these amendments concern the sharing of taxes with provinces.
Clause 97 provides the authority for the government to make payments to provinces in respect of the tax on specified investment flow-through vehicles. When I say "payments to provinces," it is provinces and territories that are part of the tax collection agreements. The tax on specified investment flow-through entities was introduced by the government in 2006, and at that time the government indicated that it would impose the tax with a provincial component and make payments to the provinces and territories. This amendment only provides the authority for those payments to be made.
The Chair: Are we talking about HST?
Ms. Moray: No. This is the tax on specified investment flow-through vehicles, otherwise known as income trusts and partnerships. This was the tax that was introduced as part of the tax fairness plan in 2006.
The Chair: It does not ring large in my mind. I suppose it should. If you could explain that a little more, because we do not have the background on that legislation and those vehicles.
Ms. Moray: In October 2006, the government announced a tax fairness plan which contained a number of measures. One of the measures was to impose a tax on specified investment flow-through vehicles, which are publicly traded income trusts and partnerships. There is a more technical definition, and I am not an expert on that tax, but stated generally it is publicly traded income trusts and partnerships. To clarify, it is an income tax.
Prior to the introduction of this tax, the distributions were made from these trusts down to the investors, and the investors paid tax. There was an issue of tax not always being collected because sometimes the investors were non- taxable entities or foreigners. The government imposed this tax at the entity level in order to collect tax, and the tax is comparable to the corporate income tax.
When this tax was introduced, the government said it would impose the tax on behalf of the tax collection agreement provinces as well, and this amendment is providing the authority to make them payments in respect of the tax.
Senator Finley: Is this part of what we are dealing with now or has it been dealt with already? You are changing the tax collection point from, if you like, the end-user to the distributor; is that correct? You are shifting the responsibility for paying the tax — not collecting but paying the tax — from the end-user to the entity that supplies the service?
Ms. Moray: It is like an income tax. This is not this amendment. I am giving you background on this tax.
Senator Finley: That is why I was asking. Has this already gone?
Ms. Moray: Yes. This tax is already in place. It was announced in 2006, and it came into effect in 2007 under certain circumstances, but generally in 2011. All this amendment is doing is letting the government make payments to the provinces for their part of this tax. It is not new. It is not a policy change. It was in the original announcement, and now we are sort of putting the mechanism in place so we can pay.
Senator Finley: Five years later.
The Chair: You have been keeping this money that should have been going to the provinces for the past five years? I should not say "you." Sorry, but I did.
Ms. Moray: The way the SIF tax worked is that for SIFs that were publicly traded prior to the announcement, the tax is not effective until 2011. It was just for new publicly traded SIFs that they would pay tax between 2007 and 2011. Yes, to the extent that some money has been collected, it is being held. This will give authority to make the payments.
The Chair: We better pass this quickly. The provinces need some funds.
Senator Callbeck: I am wondering roughly how much money you are talking about.
Ms. Moray: As of the 2010 tax year, about $7 million.
Senator Callbeck: You said that is the 2010 tax year?
Ms. Moray: That is from 2007 to 2010.
Senator Callbeck: Will the federal government pay back to 2007 or back to 2011?
Ms. Moray: Once this is passed, then we will pay everything that is due to provinces.
Senator Callbeck: Back to 2007?
Ms. Moray: Yes.
The Chair: Have you told us about these two sections? Is there anything more we should know about?
Ms. Moray: No, not on clause 97.
Clause 98 does something similar to the previous clause. It allows us to make payments in respect of the tax on excess contributions to employee profit-sharing plans.
The Chair: We saw that yesterday.
Ms. Moray: That is right. That tax was introduced in Budget 2012 and is included in Part 1 of this bill. That is the tax. Again, the federal government has a provincial component in that tax, and this is just giving the authority so we can make payments in respect of that tax to provinces that are in the tax collection agreements.
The Chair: Colleagues will remember we had that discussion yesterday.
Ms. Moray: There is one other part to that clause, and it provides authority for the Minister of Finance to obtain information from the Minister of National Revenue in order to determine the amount of the payments of these shared taxes.
The Chair: That is the last little piece?
Ms. Moray: Yes. It is 4.4.
The Chair: You have explained this so well, Ms. Moray and Ms. Field, that senators do not have any other questions. We thank you for being here and helping us with these two sections. We understand why they are there now, and that was the purpose for our asking you to be here. Thank you.
Honourable senators, that concludes what our work plan had hoped to achieve, and we achieved it more rapidly than we thought, which is good. We thank you all for your cooperation. Parts 1, 2, and 3 have now been concluded. We will start on Tuesday morning — I do not think we meet on Monday, but rather a week from now, after our November 11 break — with Part 4. Remember when you are preparing yourself for Part 4 that there are parts of Part 4 that are being handled by other committees. You should try to prepare yourself for those divisions that we will be handling. When the other committees have done their study of the other divisions, they will give us a copy of their reports and we will invite them to tell us what is in there.
Senator Callbeck: Do we have a list of what this committee is covering in Part 4?
The Chair: Yes. I will see that that is circulated to everyone.
Senator Chaput: We need that.
The Chair: It is quite extensive. Four or five other committees are doing parts of this. I attended the Standing Senate Committee on Banking, Trade and Commerce with Senator Smith yesterday and they already started their work on some of the section revisions they are doing. We wanted to get a jump on things and understand what is happening.
Senator McInnis: Next Tuesday, we are starting Part 4?
The Chair: Yes. That is a week Tuesday. We are not doing Division 1. We will circulate to you which ones we are doing and which will be going to other committees. If you are disappointed that we will not be doing some that are going to other committees, you will have a chance to be briefed on those in due course.
[Translation]
Senator Chaput: Mr. Chair, do we still have the same question and answer document?
The Chair: Yes, I am told that we do.
Senator Chaput: Thank you. Fine.
(The committee adjourned.)